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Audience

We are all Keynesians now (this time for real)

17/12/2019

2019 was marked by the decisions of the Fed, and then the ECB not to normalise their monetary policies. Amidst weak economic growth and inflation, the central banks reversed their previous course of exiting non-conventional policies. This is not a mere detail, as these programmes were originally meant to be temporary. Support for public spending via government bond purchases and business lending incentives are now part and parcel of our monetary institutions.

2019 was marked by the decisions of the Fed, and then the ECB not to normalise their monetary policies. Amidst weak economic growth and inflation, the central banks reversed their previous course of exiting non-conventional policies. This is not a mere detail, as these programmes were originally meant to be temporary. Support for public spending via government bond purchases and business lending incentives are now part and parcel of our monetary institutions. Many policy-makers and economists are now calling for looser fiscal restrictions in Europe in order to fund productive investment. These include Christine Lagarde, Emmanuel Macron, Laurence Boone* and Olivier Blanchard**.

So the prevailing economic doctrine in the Western world, inspired by classical economics, has been overtaken by events. Who could have imagined that bastions of orthodoxy would one day espouse ideas that have traditionally been the province of the radical left, like monetising public deficits, increasing spending and debt, and lowering interest rates and devaluing the currency? Everything Keynes laid out is now there in front of us. Times have indeed changed. Now the threat is from deflation, and stimulus policies can make sense in this context. This change in paradigm is noteworthy as it closes four decades of classical economic theory and demonstrates how flexible capitalism can be. Pragmatism is the watchword.

Some representatives of the classical school have taken offense at a shift that they regard as a dangerous precedent. Do they have to be reminded, for example, that the austerity policy conducted in France in the early 1930s despite an already-weak economy led to the Great Depression? An overvalued currency and high interest rates triggered a drop in consumption and investment. And the argument that banks will not survive such low interest rates looks simplistic. It is not so much low rates that are undermining bank profitability as tougher regulations and capital requirements against a backdrop of keen competition. 

*the OECD’s chief economist
** a professor at MIT and former IMF chief economist

Article by Florent Delorme, macroanalyst at M&G Investments.

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