“There is a window of opportunity for strong nominal growth capable of eroding debt”

TO As the holiday season approaches, the threat of Covid-19 has resurfaced in financial markets with the discovery of the new Omicron variant, the effects of which on the global economy could be recessive and inflationary. It is in any case the fear which animated Friday, November 26 the financial markets, in a very strong reaction to the diffusion of this news.

While it is still too early to know what the consequences of the variant will be, central bankers see, for the time being, a gradual return to lethargic inflation and sluggish growth in the global economy.

Driven by ever lower interest rate policies, the debt has continued to grow. This cocktail – concocted for too long by central banks – is as euphoric for financial markets as it is depressing for households who see their wages stagnate, collateral victims of this sluggish growth under monetary infusion.

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By excluding the new Covid-19 threat, investors are considering a different scenario. They are therefore anticipating a little more stubborn inflation and more rapid and more numerous hikes in key rates than what the central banks expect.

More disappointments than satisfactions

So far, bond investors have not really wanted or been able to compete with the monetary authorities. It takes a lot of energy, courage and deep pockets today to fight against this “financial repression” which forces private funds to finance deficits and public debt against a remuneration so low that it is. sometimes negative. The market economy is in dire need of a more orthodox monetary policy.

Investors anticipate slightly more stubborn inflation and faster and more key rate hikes than central banks expect

How could interest rates regain their economic significance to allow the entrepreneur to recover his compass and the economic system, its ability to allocate resources optimally?

A broader consensus on inflation that is durably higher than the central banks’ objectives (set between 2% and 2.5%) should end up favoring the adjustment of interest rates. Gold – good news! -, a paradigm shift is taking place in the United States, where the scarcity of available labor puts the American employee in a position of strength in negotiations on remuneration.

This should feed inflation and put it durably beyond central bankers’ targets after decades of wage resignation that fueled the deflationary mood of consumers. Statistical surveys on consumer sentiment tend to show that consumers are less and less reluctant, in order to equip themselves, to take action despite the sometimes sharp price increases of certain capital goods.

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The potential return of a price-wage loop is approaching, as is the time for monetary policy normalization. Still, a rise in inflation and interest rates without positive growth would bring more setbacks than satisfaction.

Higher inflation and interest rates

But here too, there are many good surprises and several factors fuel the prospect of sustained growth in the medium term. American household support programs have generated considerable available savings and a wealth effect since the start of the pandemic. The reopening of the global economy and the imminent end of the current shortages will unleash even more economic growth.

Record corporate profitability will encourage investment. Real interest rates, which have become very negative under the effect of financial repression, also encourage investment and may even rise sharply before becoming a brake or even an obstacle. The Chinese economy, whose cycle is out of step with the American cycle (the United States is in monetary and fiscal expansion while China is currently implementing restrictive monetary and fiscal policies which are slowing down activity), could also take the relay as the engine of global growth, when the time comes.

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Barring a major impact from the new Omicron variant, there is therefore a window of opportunity during which growth appears to be able to cope with higher inflation and interest rates. A first for a long time, which paves the way for strong nominal growth capable of eroding debt.

An opportunity for central banks

Full normalization of monetary policy is not for tomorrow, however. The addiction of the economy and the financial markets to unlimited liquidity is such that the detoxification will be long and prone to relapses. But the possible resilience of the current growth cycle creates an opportunity for central banks to regain future room for maneuver on rates by adjusting their necessary rise as closely as possible.

This task would be made easier if governments simultaneously put in place the conditions favoring the productivity of enterprises by aiming, in the first place, at economic efficiency. We would then approach a situation where the economy could, for a time at least, recover its capacity to create wealth for the greatest number, whereas the predominance of monetary policies has concentrated it to the point of caricature. .

Obviously, this prospect could be undermined by the new variant. The question then arises of the support measures to be taken and their financing when the states’ financial leeway is limited after a year of health crisis and central banks have to face inflation.

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