Economic orthodoxy has been overturned in many areas during this cycle. However, the harsh austerity many governments inflicted on their electorates when the underlying global economy was weak is perhaps one of the more prominent examples. Its reversal, just as the economy seems to be finding its feet again, similarly flies against traditional economic practice. The lavish US government splurge of this year is landing on an economy that is already using much of its resources.
Over the short term, growth will rise. But the risk of onerous inflationary pressure increases with it. Populists around the world are agitating for more of the same – some with justification, some less so. With global growth picking up, the case for fiscal stimulus is getting weaker. And the bond markets are likely to penalise irresponsible budgets, as we have recently seen in Italy.
However, if the US stimulus translates into substantially higher inflation, there will be a more aggressive cycle of rising interest rates, with important implications for all corners of the world. Even though this is not our base case, it would make the next US and global recession more visible on the horizon.