The Keynesian Put or “In the Long Run We Are All Dead”

Interest rates are near or below zero in many places around the world, and in some cases central banks are having a difficult time finding enough bonds to fill their buying programs. What’s a central banker to do if monetary policy is running out of steam? Pass the baton to politicians and let them increase fiscal spending to speed up the economy! This is the new solution receiving air time. The concept is called the Keynesian Put, a nod to the famous economist John Maynard Keynes who believed governments should increase spending in times of slack demand. It is also a reference to the so-called Greenspan Put, a central bank policy used to ease monetary conditions as markets wobble so as to avoid market unrest and the potential for recession, unemployment and disinflation. 

Trial balloons for the Keynesian Put are starting to fly around the world. Both U.S. presidential candidates are talking about increased fiscal spending to help the economy, the BOE has clearly passed the baton to the politicians since Brexit, Germany is relaxing its austerity enforcement in the EU, and Japan, who has built bridges to nowhere for a generation, is now pondering even more stimulus.

What does this mean for markets and investment portfolios? Central bank policy has traveled deep into the experimental phase, and outcomes are uncertain—nobody really knows how this will end. However, we do have a good idea that in the short term better roads, bridges, airports, hospitals, national defense and high speed internet service could be a good thing, and we generally know which industries will benefit the most. In the short term, large-scale spending can create jobs, plump corporate profits and improve the GDP. We can speculate that, in the long term, more deficit spending on top of already high debt levels should lead to higher taxes and inflation. However, we live in today’s world and not the long term, and as Keynes once noted, “In the long run we are all dead.” 

Source: Bank of American Merrill Lynch, Financial Times, The Economist