My Two Strikes on the New Normal

New Normal is the present and future, because governments cannot manage countries without growth, not even China. Now the expectations of voters are such that they do not accept slowdowns, sell them uncertainty and sacrifice has become impossible, they must try everything for everything, otherwise they lose consensus, the governance of the world is weak.

The "economic machine cycle" is no longer acceptable, the central banks have become extremely politicized and interconnected. My > Two strikes > start right here:

First issue is the economic policy mix, Europe does NOT make fiscal policy; while Japan, USA, China do it, the former is unable to address a common fiscal policy project. Japan has a 5% deficit like the USA, China 6-7% and Europe is stuck at 3% (real much less because Germany is at break-even) and the only way to stay afloat is to make QEs extensively, depreciating the Euro (as has been happening for several years now, especially since the beginning of the year) and then encouraging an export race that will irritate the U.S. a lot. But Europe only has monetary leverage, the U.S. and China run on an average 6% deficit.

Probably the USA will charge us for this approach.

A Europe that does not intend to make deficits, that prefers to maintain the accounts and push exports with a weak currency facilitated by the QE is a move that will not work for a long time because sooner or later the other economies will impose trade tariffs. An economy that has a 5% deficit (USA) against one that has a 2-3% deficit (Euro) is heavily penalized because the demand of the former runs as a result of the strength of its currency compared to the deliberately weakened one, so it imports considerably, the others freeze demand but increase exports and cause significant budget gaps in the USA and huge surpluses in Europe (see Germany with current account surplus of 8% of GDP, numbers that not even China and Japan in their golden age did). So it will come to that in a couple of years. to this scenario I attribute a 70% probability.

Other important risk factors could be the financial crises, although there is nothing serious on the horizon for the moment: banks are solid except in rare cases, companies are very indebted but money costs nothing, the problem of mortgages is not present, student loans are regionalized, credit cards are not a problem. I attribute 20% probability to this scenario.

The only possible black swan to which I attribute a 10% probability is China meltdown.

Chapter "US-China trade negotiations": the agreement is not supposed to be done, Trump wants to do it, the Chinese will not accommodate him; the turning points concern the change of industrial policy that the US expects from China. By now the Chinese have become more rigid and the Americans too, the thing has become public and no one can take back the word. But it will not be a big problem, the trade agreement is an uncertainty but its absence does not do so much damage, the quarterly companies are still good, crying babies complain because the world of finance no longer wants to tolerate falls and keeps everything anesthetized because the hunger for returns is insatiable since the rates are negative, people have money and do not know where to put them.

The real challenge is inflation; the ingredient that is really missing to ensure the growth of an economy. The New Normal has completely eliminated the problem but also the benefit of inflation, which, in small quantities, if it is not monetary, is a sign of the growth of demand in a country, not in terms of the quantity of goods sold in a country, but, much more significantly, the money spent to buy goods and services within an economy. The reason why today we no longer have non-monetary inflation in a country is because the level of full employment is first of all much farther than expected (see Europe, Japan, USA), and then because I argue that the process of digitalization and technological globalization has impacted and will impact in an extremely significant way on wages, compressing them and helping to reduce the demand for workers in companies. This is certainly a more articulated and complex issue, but I believe that the basis on which it is based is appropriate if we want to know why inflation is currently so widely insignificant.

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