Our view remains that monetary policy has reached a critical point – the current toolkit is almost exhausted, with little obvious benefit from “unconventional” measures. As such, policymakers will soon need to give up (unlikely) or innovate further. The important point is that monetary stimulus does have limits; at some stage permanent increases in the money supply, or aggressively negative rates, will cause a loss of faith and for the real economy to abandon the currency.
This perhaps explains the current trend towards fiscal measures – this week in the UK, Chancellor Philip Hammond reaffirmed that he no longer sought to achieve a budget surplus by 2019, setting the stage for fiscal stimulus later this year.
Similar spending packages are likely in the US (whoever wins the election) and have already started in China and Japan. However, whilst fiscal spending might provide a short-term boon, it cannot address the long-term structural growth problems of the developed world.
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