{"text":[[{"start":5,"text":"The writer is a professor of economics at Harvard University and was first deputy managing director and chief economist of the IMF"}],[{"start":12.75,"text":"The disconnect between the historic disruption to energy supplies — with the Strait of Hormuz closed and Brent crude hovering around $100 a barrel — and the S&P 500 reaching new records is stark. AI optimism and strong earnings are clearly providing a strong tailwind. Even so, risk is mostly being disregarded as the Wall Street fear gauge, the Vix, has barely increased relative to its historical average. "}],[{"start":37.75,"text":"Many attribute this to the belief that “Trump always chickens out”, the so-called Taco trade that rules out worst-case scenarios. But stock market highs could also reflect what I call the Bliss trade: a belief in resilience underwritten by “big lasting state support”. Such a belief is consistent with government actions over the past several years, actions that have driven public debt levels ever higher and expanded central bank balance sheets. Global public debt is now projected to reach 100 per cent of GDP by 2029. "}],[{"start":68.6,"text":"During the pandemic, the balance sheets of households and firms were not just rescued but boosted by very large government support that averaged 25 per cent of GDP for advanced economies, including assistance in the form of equity injections, loans and government guarantees to companies. This boost has buoyed consumer and business finances for several years."}],[{"start":90.35,"text":"When Russia’s invasion of Ukraine set off an energy crisis, governments in Europe spent 2.5 per cent of GDP in energy support in the form of broad-based price-suppressing measures when it would have required only 0.9 per cent of GDP to fully compensate the bottom 40 per cent of households for the entire rise in energy costs. Germany, Italy and Spain have all reactivated price-distorting taxes and subsidies to insulate people from the current energy price surge. "}],[{"start":120.35,"text":"There are plenty of good reasons for the state to provide support in a crisis. However, the past several years of government support have gone against sound fiscal advice by being large and lasting instead of targeted and temporary. "}],[{"start":135.2,"text":"The Bliss trade is reflected in the divergence between the prices of stocks and government bonds. While equity markets have held up surprisingly well, government bonds have suffered even as long-run inflation expectations have stayed mostly anchored. Since the start of the Iran conflict, long-term government bond yields have risen across major economies including the US, Europe and Japan. "}],[{"start":158.14999999999998,"text":"This divergence has become a pattern over the past several years. Term premia on 10-year US treasury yields are now close to 100 basis points higher than they were before the pandemic, driving up the interest rate bill. "}],[{"start":172.14999999999998,"text":"The urge to rush to the rescue, regardless of merit, was recently evident in President Donald Trump’s attempts to bail out the US budget carrier Spirit Airlines as he mused “I’d love to be able to save an airline”. While the bailout ultimately did not go through, it does not take much imagination to predict that in a real crisis, government support in the US would be excessive. "}],[{"start":195.45,"text":"Moreover, while Taco is idiosyncratic and dependent on the psychology of the US president, Bliss is structural. Research shows that political parties of all stripes, from socialists to conservatives, all now favour higher government spending, and fiscal restraint has few champions. In the US, both Democrats and Republicans are responsible for the large increase in debt. We should therefore expect little political pushback against fiscal splurges if a crisis were to unfold. The IMF predicts that in a severe scenario, the Iran conflict could cause global growth to fall to 2 per cent (instead of the reference forecast of 3.1 per cent) and global debt could rise past 120 per cent of GDP. "}],[{"start":238.85,"text":"The Bliss trade is fragile, however. Markets, increasingly driven by retail investors, may be pricing in state insurance that governments can no longer afford to provide. As compared to before the pandemic, the scope to deliver on fiscal largesse is limited. "}],[{"start":255.65,"text":"Even in advanced economies, the sensitivity of borrowing costs to debt issuance has increased, which then spills over into emerging and developing economy borrowing costs. Even as bond prices have declined, markets may be too sanguine about the consequences of rising debt on fiscal health."}],[{"start":274.05,"text":"Policymakers would do well to use this period in which stock markets seem disconnected from heightened risk to craft a new playbook for crisis support that is both fiscally sustainable and supportive of long-term growth. The experiences of the pandemic and Ukraine war provide a valuable lesson in what that should look like: support targeted to the vulnerable; bailouts only to companies that are liquidity constrained but otherwise viable — and whose failure poses systemic risks; and co-ordinated fiscal and monetary policy so they do not work at cross-purposes. "}],[{"start":307.15000000000003,"text":"If a new course is not charted, governments constrained by fiscal space may rely on heterodox measures, including broad-based price controls, financial repression, nationalisations, and pressure on central banks to absorb fiscal risk. None of this would be good for the economy with synchronised sell-offs across stocks and bonds as markets realise that the backstop they were counting on is no longer there. "}],[{"start":338.25,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1778639779_8645.mp3"}