Global markets surged after the Democrats secured the U.S. Senate. With both houses now under their control, investors reacted in Pavlovian fashion, anticipating greater monetary stimulus alongside a more expansive fiscal agenda. We’ve said it before (and many times before that) but how more expansive can any of this get? Sovereign borrowing is close to free while annual deficits dip over the horizon. The former, increasingly, begat the latter, with no obvious mechanism to bring this process back to a state that could even notionally be described as prudent.
In the old days (pre 2008), governments knew that if spending ran out of control, bond markets would fire a shot across their metaphorical bows by demanding higher yields. No such discipline is imposed today. Governments and their central bank accomplices deploy Quantitative Easing, thus capturing the rate setting mechanism. This is an extraordinary privilege which means it will, of course, be royally abused by administrations light on income and heavy on commitments.
One day, this chicanery will, like the emperor with no clothes, be revealed for the fraud that it is. In the meantime, we’ll keep deploying capital in enterprises we believe are capable of being held indefinitely.
