Christine Lagarde at the Council on Foreign Relations.
Last week saw a highly significant speech by Christine Lagarde, President of the ECB, at the Council on Foreign Relations’ C. Peter McColough Series on International Economics in New York. The full transcript of the speech can be found in the link at the bottom of this article, which I encourage everyone to read. The reason the speech was so astonishing was not so much its contents, which were stunning, but rather that it was delivered by such an important figure.
Those of you who follow geopolitics or are fully signed up members of “Fintwit” will be familiar with the thrust of the argument, but to paraphrase: Lagarde said that the world is fracturing into competing geopolitical blocs, centred around the US and China. This will put strains on existing global supply chains which will be disruptive and structurally inflationary. Adversaries of the West are implementing an alternative foreign exchange architecture to reduce their reliance on the existing (US controlled) system. In order to address vulnerabilities in key areas of supply, Western fiscal policy must be employed on the supply side and in key industries (e.g., defence). After a nod to not repeating the inflationary mistakes of the 1970’s came the killer line; “In this sense, insofar as geopolitics leads to a fragmentation of the global economy into competing blocs, this calls for greater policy cohesion. Not compromising independence, but recognising interdependence between policies, and how each can best achieve their objective if aligned behind a strategic goal.” To translate, going forward, monetary policy will need to accommodate whatever fiscal policy is deemed necessary to shore-up supply chains and national security. This is industrial policy writ large.
Lest this killer line left us in any doubt, Lagarde administered the coup de grâce in her post-match comments. “At the moment, there is absolutely no reason to change that 2% medium-term objective. Once we get there, once we are confident that it stays there, we can discuss.” Again, to translate; we are prepared to squeeze the life out of this economy until inflation comes down far enough that we don’t look as ridiculous as we do now, but once we’ve done it the rules are going to change. Why, once you are “confident that it stays there” would you need to “discuss”? In this future, expect credit rationing. Want to borrow to buy some nonsense crypto currency? 15%. A luxury flat? 10%. A new green energy project? 0%. A Vladimir Putin seeking missile -5%. Then pick an inflation rate that is roughly consistent with what makes this all hang together. Broadly speaking, this means a world of higher inflation and interest rates, unless it’s for investment that is deemed important to the cause in which case the ECB will have a blank cheque ready and waiting.
Despite all these important implications, the most important was that this not some Macron-style, hot-mic blunder. Lagarde was not shooting her mouth off or expressing a personal view. This was a very carefully scripted message. The world has changed. We face an existential threat to our vision of the world order, and we will do whatever it takes to face this down. In WWII, the question absolutely no one in the UK was asking was “Can we afford to build that Spitfire?”. This will have enormous consequences for investors in the coming decade.
