4Q 2020 Market and Economic Overview

The fourth-quarter 2020 report took the form of a technical paper on whether inflation would return after the pandemic. It identified recent developments as the context: growing government involvement in credit creation, the shift towards average inflation targeting and a historic expansion in broad money. It noted that the US was expected to run its biggest ever peacetime fiscal deficit in 2020 and that central bank asset purchases had been on a scale not seen before. The UK monetary base as a share of GDP had exceeded the level reached after the financial crisis, itself the highest since 1840.

The report distinguished between quantitative easing and debt monetisation, noting two features usually attributed to the latter: direct funding of the government by the central bank, and permanence. It said that only a few central banks had funded their governments directly during the crisis, citing Indonesia and the Philippines, and described the Bank of England's direct loan to the UK Treasury as a bridging arrangement. It noted that some central banks, including the US Federal Reserve, had abandoned quantitative limits on asset purchases.

The paper contrasted the 2020 response with quantitative easing after the financial crisis, when fiscal policy was being tightened and the money created remained largely within the financial sector. In 2020, large fiscal support and central bank purchases occurred together, and the money holdings of households and non-financial firms rose sharply. The report estimated that the rise in the money supply by the end of 2021 would be equivalent to around a third of the combined money holdings of households and non-financial companies in the UK and euro zone, and around a fifth in the US. It also noted that the link between money growth and inflation was not automatic.

The report went on to discuss the risks to inflation in different regions, including the roles of central bank independence and government debt levels, and the periods of high inflation in major economies in the late 1960s and 1970s.

Important information: This snapshot summarises MWC Group's market commentary for the period shown and is provided for general information only. It is not investment, tax or legal advice, a personal recommendation, or an offer or solicitation to buy or sell any investment, and it does not take account of your personal circumstances. Views and figures reflect conditions at the date of publication and may since have changed. Past performance is not a reliable indicator of future results. The value of investments and any income from them can fall as well as rise, and you may get back less than you invested. Exchange-rate movements can affect returns. Market data comes from third-party sources believed to be reliable, but its accuracy cannot be guaranteed. Please seek personal advice before making any investment decision. Issued by Manentia Wealth Consulting Group Limited (C80087), licensed by the Malta Financial Services Authority.