State guaranteed loans are the new QE
Deficits are also increasingly reducing government stimulus, as we saw in the UK U-turn.
What’s left to stimulate? something viral interview with Mark Napier made the rounds this week and the title of the capex boom article doesn’t quite do it justice.
According to him, governments are increasingly turning to loan guarantees. By supporting lending to the private sector, it only leaves contingent liabilities off the government’s balance sheet, but allows them to pump huge sums of money into the economy.
“Within the European Union since February 2020: of all new loans in Germany, 40% are guaranteed by the state. In France it is 70% of all new loans, and in Italy it is more than 100% as they migrate old maturing credit to new government guaranteed schemes.Just recently Germany introduced a huge new guarantee scheme to cover the effects of the energy crisis.
The programs run directly counter to central banks’ goal of raising rates. Higher rates dampen loan growth, but government-backed loans boost After loan. It hits the gas and the brakes at the same time.
He singles out the UK, Eurozone and Japan as particularly bad performers.
Napier believes this will result in a higher inflation paradigm as governments try to inflate debt burdens. He also sees a boom in government-backed investments for homehoring or friendhoring.
A good example might be the CHIPS Act in the United States, which provides $52 billion in grants and loan guarantees for building semiconductors in the United States. He believes we will see 15 years of government-led investments.
What he fears is that these investments will be misdirected, creating high expenses but no lasting benefit.
“When the British government did this in the 1950s and 1960s, they put a lot of capital into coal mining, car production and the Concorde. future in any of these industries, so it was wasted and we ended up with high unemployment… First comes the seemingly benign part, which is driven by a boom in capital investment and strong growth in the Nominal GDP. A lot of people will like that. It’s not until much later, when we have high inflation and high unemployment, when the scale of misallocated capital translates into a high misery index.”
For now, this is good news, he argues, and there will be big winners.
“The big problems we have – energy, climate change, defence, inequality, our dependence on Chinese production – will all be solved by massive investment.”
It’s an interesting setting to keep in mind.