Investment Desk Bulletin

11 October 2016

The Paradox of Thrift

IDB 11 10 16

By Pau Morilla-Giner

In this week's IDB, The Paradox of Thrift, we take a look at the US Presidential election; ask why bond Bears keep being disappointed and consider why an expansion of government borrowing and spending may be needed to avoid economic stagnation.

- With Election Day in the US approaching, we look at the policy differences of the candidates. On trade and tax policies, Clinton and Trump hold very different positions. While Clinton supports the enforcement of existing trade relationships, Trump advocates introducing trade tariffs, and taking a more protectionist stance, they both reject The Trans-Pacific Partnership (TPP). On taxes, Clinton pledges to raise taxes on the wealthy and apply an exit tax on corporate tax inversions, whilst Trump wants to cut the top rate of personal income tax and slash corporation tax. Both candidates are proposing to increase spending on infrastructure, which should provide a positive impulse for growth.

- Bonds Bears have been frustrated in recent years with persistently lower bond yields. We believe this trend will continue for four key reasons; the savings of an aging population will maintain demand for income, productivity gains remain elusive, further monetary policy easing should be expected and low yields are necessary to allow balance sheet repair.

- The Paradox of Thrift theory suggests that when households and corporates try to save during an economic downturn, the negative impact this causes on growth and incomes paradoxically reduces overall savings.

Since the financial crisis, monetary policy has improved liquidity conditions, but it has done little to expand credit and boost growth because demand from private borrowers has been low. To escape this negative cycle, it is increasingly clear that monetary policy alone will not be enough to promote growth and that it will be necessary for the public sector to borrow and spend in order to avoid economic stagnation, while the private sector saves.

Please click here to view the presentation.