gilles Moec Profile picture
Jul 8, 2020 11 tweets 2 min read Read on X
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

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More from @MoecGilles

Feb 22, 2021
The Euro area is facing contagion from the US bond market reacting to the Biden plan in the form of higher real rates. Now, some overheating in the US may be in the ECB’s interest if it triggers some Euro depreciation 1/6
What happens if the Fed opts for “quick tapering” and US 10y yields go to 3% by 2022? In our model this would take the Euro down 10% against the dollar after 1y relative to the ECB’s baseline. That could bring EA inflation to 1.9% in 2023 from 1.4% in baseline 2/6
BUT it works only if the ECB is active in fighting “market-led tightening in financing conditions”. First because Euro will weaken only if the IR spread widens, and second because the impact of lower Fx on inflation will be lost if the output gap is too big 3/6
Read 6 tweets
Sep 23, 2020
Fabio Panetta’s speech could well be the beginning of the ECB’s response to the Fed’s Average Inflation Targeting - assuming it is embraced by the rest of the Governing Council 1/9
The Fed’s move is based on the notion that it is easier to allow inflation to overshoot in the future amid decent cyclical conditions than to lift infla amid bad cyclical conditions. A pledge to overshoot tomorrow is thus credible and could lift inflation expectations today 2/9
A drawback of AIT is that it can send a signal of powerlessness today, or even justify a certain immobilism in the short run: “since I promised something for the future, don’t ask me to do more today” 3/9
Read 9 tweets
Sep 7, 2020
It’s a swoosh! The global data flow continues to point upward but the pace of normalisation is slowing down. See for instance the deceleration in US private payroll growth and retreat in Euro area PMIs (although still in expansion territory 1/8
This calls for policy support beyond the emergency packages. The French recovery plan participates to this. But at the same time we are surprised by fiscally disciplinarian noises emerging here and there 2/8
The UK is breaking ranks with a debate heating up on tax hikes next year already. We interpret this as the concerns in some segments of the UK government about the status of the UK in international markets post hard Brexit 3/8
Read 8 tweets
Jul 21, 2020
It’s always pleasing to see the British Eurosceptic press defeated again: habemus RRF deal! Rumours of the EU’s death were exaggerated as usual 😊 1/8
Now, on substance, the signals are very positive. The taboo of debt mutualisation is broken. Financial solidarity that does not saddle recipients with more debt is an important political moment 2/8
However, with the grants reduced, and the inherently slow disbursement schedule, the RRF is no macroeconomic game-changer 3/8
Read 8 tweets
Jun 30, 2020
Assuming our economies continue to normalise fairly swiftly (which in Europe remains the likely scenario) fiscal policy should shift from emergency “carpet bombing” offsetting the collapse in supply to long-haul demand management 1/11
However industries/businesses were not equal in the face of the lockdown and some of them will need specific protection for long. This is triggering a debate on over-protection/zombification. We think however that sectoral support is part of demand management. 2/11
The new long term part-time unemployement scheme unveiled in France will offer up to 2 years relief to badly hit firms through up to 40% working time reduction subsidized to the tune of 80-85% by the government. More than 25% of their employees pay would be socialised 3/11
Read 11 tweets
Jun 23, 2020
A 1% decline in GDP triggers a 6% rise in the non-performing loans ratio. This matters for the public debt trajectory given the size of the loan guarantees offered to deal with the pandemic in some countries 1/9
In the case of Italy, the impact of the ongoing recession would be consistent with 13% of loans turning “delinquent”. With an average guarantee of 80% if all the envelope is used, this could add another 2.5% of GDP to the deficit 2/9
But more fundamentally, this would add to the risk of a premature fiscal consolidation being ultimately counterproductive 3/9
Read 9 tweets

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