Law of unintended consequences - the world today lacks all the necessary things

The main thrust of the forecasts for the second quarter of the year is that the current intense efforts of policymakers to simultaneously address three major generational challenges: inequality, green transition and infrastructure, will come at a high price in the form of inflation, the higher marginal cost of capital, and the awareness that they need to be prioritized separately.

The dramatic shift in economics and politics since the pandemic is that, to a greater or lesser extent, governments around the world have recognized that we have entered an era of endless fiscal stimulus. This is in stark contrast to the "austerity" second decade of the XNUMXst century, when most governments and central banks deceived themselves that it was possible to normalize the fiscal deficit and monetary policy. In short, the days of believing that the economy can recover from credit creation by manipulating the price of money and relying on the banking system and focusing solely on financial stability are over. The monetary heroin nearly killed the real economy, driving up the prices of financial assets. After years of neglect, the real economy now needs the right dose of steroids. This means that we are in the process of a sharp retreat of policy makers from financial stability in favor of social stability. Monetary policy is now an ordinary tool of the phenomenon described as "Fiscal domination".

About the Author

Steen Jakobsen, Chief Economist and CIO Saxo Bank. Djoined Saxo in 2000. As a CIO, he focuses on developing asset allocation strategies and analyzing the overall macroeconomic and political situation. As head of the SaxoStrats team, Saxo Bank's internal team of experts, he is responsible for all research, including quarterly forecasts, and was the founder of Saxo Bank's outrageous forecasts. Before joining Saxo Bank he cooperated with Swiss Bank Corp, Citibank, Chase Manhattan, UBS and was the global head of trade, currency and options in Christiania (currently Nordea). Jakobsen's approach to trading and investing is thought-provoking and is not afraid to oppose consensus. This often causes debate among the global market community. Every day, Jakobsen and his team conduct research in various asset classes, covering major macroeconomic changes, market movements, political events and central bank policies. With over 30 years of experience, Jakobsen regularly appears as a guest at CNBC and Bloomberg News.

Fiscal domination is a response to attacks on democracy as a result of the inequality that has been growing for several decades and has violated the social contract. The Covid-19 pandemic was the last straw to shed the cup in the form of an ever weaker paradigm to date, as the reaction to it exacerbated the trend "K-shaped", which has occurred in every economic recovery since the 80s, in which the richest and highest-earners took the lion's share of the profits. In the context of the current recovery, policymakers will focus most of their efforts and incentives on rewarding the lower half of the economic letter K, trying to reverse the shape to mirror itself and fill the gap. This has important ramifications for both society and markets.

We can call it the Social Stability Paradigm: it is a model for saving democracy - this is especially true of the United States, where K-shaped distortions are the greatest of any developed country. In short, the new mantra is to print and spend as much money as possible while interest rates and inflation are low. It sounds very simple at first, but you should consider the consequences of this new policy, especially unintended consequences, such as the risk of galloping inflation.

Age has its advantages sometimes, as no one under the age of 50 can remember what it is like to live in an inflationary environment; any professional investor under the age of XNUMX will probably not remember it either.

I was young at that time and I still remember Danish car-free Sundays during the OPEC crisis, how hard my parents had to pay off their 18% interest-bearing mortgages, and (this was more about the United States than Denmark) as the government constantly he raised wages and devalued the currency. And on top of that, the income tax! The marginal tax rate in the United States was 70% until Reagan's reforms in the early 80s, when inflation subsided and public debt was devalued by inflation. During the same period in Sweden, this rate reached an unimaginable level of 102% (Astrid Lindgren).

Password "We stand on the edge of the abyss" turned into an appeal to action.

The 70s also marked the end of the Bretton Woods system, which began to collapse in 1971, when Nixon completely freed the US dollar exchange rate associated with with gold. This triggered a global shift towards a US dollar-dominated fiat money system that was overvalued. The 70s inflation ended in the early 80s when CEO Volcker raised interest rates drastically. At present, no central bank would be willing to do so, as it would immediately trigger a major reset in asset prices and the real economy, which can only survive at zero or near-zero interest rates. So the market will have to do it for them. Here is our most important message for investors: today you live in a different world than the one you have known so far.

The ability of low interest rates to support the real economy declined many years ago, despite allowing asset prices to soar. Today, inequality is becoming a dangerous political problem as an increasing proportion of society is lagging behind. Asset inflation will no longer be the main target, if only because now everything that has cash flow or even a distant promise to provide it (e.g. tech startups with no revenues, etc.) is valued at infinite value due to the zero denominator.

There is no turning back

To ensure social stability, the focus must now be on increasing labor income (wages, redistributive benefits) over capital. Over time, this will mean higher wage inflation and lower equity gains.

Property, plant and equipment will outperform intangible assets, positive convexity assets (assets that benefit from increased profitability and global resource demand) will win, and we end up in the final round of pretending that we can solve a productivity crisis / solvency by generating more debt.

Increasing supply constraints and excessive government demand for essential resources, driven by an agenda to tackle generational climate challenges and inequality, are the cryptocurrency of this "free market".

Then there will be slightly higher interest rates, greater volatility, but also the best macroeconomic environment in my life.

Soon there will be an epilogue to the unfortunate model of dragging and pretending so far, and to make sure we bang away, governments fired helicopter engines to throw money off them, deceiving themselves that there would be no unintended consequences.

The king is dead "Monetary policy" - long live the fiscal king.