Will Trump’s fiscal stimulus lead to inflation?

Without a surge in monetary growth, fiscal policy alone doesn’t indicate inflation

John GreenwoodFinancial markets have reacted strongly to the election of US President Donald Trump. While equities in the US and elsewhere have risen strongly (reflecting expectations of stronger growth and therefore improved corporate earnings), bond prices have fallen (reflecting higher yields, in turn a result of higher inflation expectations). As debate continues around President Trump’s fiscal stimulus program, a key question has emerged: What role might his policies play in creating inflation?

A large fiscal deficit does not necessarily lead to inflation

Among the main drivers of higher inflation expectations, one is

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History rhymes: Comparing China today with 1920s Japan

China faces two main options in dealing with its economic distortions

John GreenwoodThe Chinese currency has been depreciating since January 2014, and the balance of payments has weakened. There has been a substantial decline in the current account surplus relative to gross domestic product (GDP) since 2010 and, more recently, persistent private sector capital outflows.

The question is: How long will the Chinese yuan continue to depreciate and how much will China’s exchange reserves decline?

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Global economy: How might economic recovery differ across developed and emerging economies?

2017 Investment Outlook series

John GreenwoodOver the past several years, both the developed and emerging worlds have been responding to the long shadow of the great recession of 2008 and 2009, and the cycles in each area have diverged.

The recovery of the developed economies has been hampered by two factors: the slow process of balance sheet repair, especially among the banks, and the differing consequences of the implementation of quantitative easing (QE). These factors have combined to create subpar growth, an agonizingly slow return to full employment, low wage growth and fractious electorates.

By contrast, the emerging economies implemented strong stimulus programs between 2008 and 2010. These proved so successful that some economies, including China, Brazil and Russia, had to reverse course and slam on the brakes in 2011 and 2012. As a result, between 2014 and 2016, they too experienced economic slowdowns, recessions, currency weakness and the pain of debt workouts.

For both developed and emerging economies, the outlook for 2017 will be closely correlated to how these differing problems are addressed.

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Why QE and negative rates aren’t helping the Japanese and eurozone economies

Central banks should focus on heightened purchasing power to be successful

John Greenwood

The Bank of Japan (BoJ) and the European Central Bank (ECB) have been less successful than the US Federal Reserve (Fed) and the Bank of England (BoE) in conducting quantitative easing (QE) — that is, buying financial assets in order to spur economic growth. I believe part of the reason is that the BoJ and ECB have been less focused on expanding purchasing power and more concentrated on lowering interest rates — even into negative levels.

Comparing successful and unsuccessful QE programs

In examining the QE deployed by major developed economies — the US, the eurozone, Japan and the UK — there are clear differences in the types of methods used. The QE operations conducted by the Fed and the BoE have largely been successful for three reasons:

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