The Banking Executive Magazine - Septmber Issue 2021

Pandexit from an Economic Perspective budgetary assistance has varied from country to country, and is much greater in the United States than in Europe, for example. But govern- ment debt has risen sharply every- where, and is now at unprecedented levels in countries like Italy and Japan. Against this background, the BIS has identified two dangerous downside scenarios. The first is essentially epi- demiological: new coronavirus vari- ants may emerge, necessitating further lockdowns and fiscal support, which might be infeasible for some governments. But in my view, further lockdowns will prove to be politi- cally impossible. So, if new virus mu- tations spread rapidly, we will need to muddle through as best we can, and hope that vaccinations minimize additional deaths. The second downside scenario, which I regard as much more plausi- ble, is that current price pressures in- tensify and inflation rises further, eventually requiring a monetary re- sponse. US consumer price inflation was 5.4% in the year 2021 to July. The Baltic Dry Index, which tracks shipping rates for dry commodities, is up by about 170% this year. And supply constraints are emerging in many regions. The official line from the US Federal Reserve and other central banks is that this inflationary surge is transi- tory. But as the French adage has it, “rien ne dure comme le provisoire” (nothing lasts like the temporary). If the current central bank consensus is wrong, as former US Treasury Secre- tary Larry Summers and others be- lieve it to be, there could be trouble ahead. Monetary tightening during Pandexit will have more than usually serious consequences. Because central banks have hoovered up so much government debt, the average matu- rity of government bonds has effec- tively shortened, so public-sector balance sheets are more sensitive than usual to changes in short-term interest rates. Governments will not be happy with their countries’ central bankers for tightening policy, be- cause this could have direct fiscal consequences. In addition, monetary tightening in the developed world, especially the US, will be highly undesirable for emerging markets. Most are still struggling to control the pandemic and have much lower COVID-19 vaccination rates than Europe or North America, notwithstanding re- cent welcome signs that rich coun- tries are now more willing to share their vaccine stocks. Sources: Project Syndicate and WUAB Research Department the BANKING EXECUTIVE 10 ISSUE 153 SEPTEMBER 2021