Thread by @MoecGilles

The pandemic acceleration/stimulus debate loop has started again in the US. Real-time data is starting to reflect a relapse in activity. Pumping up more pent-up household demand may not be the solution though 1/11

The HEROES act passed by the House in May legislates for an even more generous “check” to households (4800 USD for a family of 4 instead of 3400). D.Trump signalled openness to make it even bigger 2/11

Still, as of May, total household income was already 3.8% > the pre-pandemic level. The drop in labour income is more than offset by the rise in transfers (even if many families fall through the safety net) 3/11

The logic behind another boost to income may be to trigger such a huge “pent-up” demand that the rebound upon supply normalisation would be so massive that “animal spirits” would be rekindled 4/11

But of course if said normalisation is delayed by the US pandemic surge, the government is inflating its deficit without much to show in terms of GDP impact. And the risk is rising that the income boost is spent on paying back debt 5/11

Long-haul demand support - with a focus on public investment - would be a better allocation of government resources IMHO 6/11

This creates an issue for the Fed as well. Government borrowing balloons with a low return in terms of GDP support. QE would need to be constantly recalibrated to take into account the new supply of risk-free paper. 7/11

Not surprising then that the Fed staff is briefing the FOMC on yield control. This may be better suited to the current configuration. Corollary of course is that the Fed would accept to lose control of the size of its balance sheet 8/11

Yield control implies a readiness to “buy everything”. This option is not open to the ECB though, as Philip Lane reminded everyone last week. 9/11

Full weekly musings here axa-im.com/content/-/asse… 10/11

And Poscast version here. Soundtrack by David Bowie. smartlink.ausha.co/macrocast/15 11/11