Government-backed loans are the new QE

Deficits are also increasingly taking away government stimulus, as we saw in the UK turnaround.

What remains to stimulate? Something of a viral interview with Mark Napier went viral this week, and the investment boom article title doesn’t really do it justice.

He argues that governments are increasingly turning to loan guarantees. By backing loans to the private sector, it leaves only contingent liabilities off government balance sheets but allows them to leverage huge amounts of money into the economy.

“Within the European Union since February 2020: 40% of all new loans in Germany are state-guaranteed. In France it is 70% of all new loans and in Italy it is over 100% because they are migrating old maturities loans to new government-guaranteed schemes. Just recently, Germany developed a huge new guarantee program to cover the impact of the energy crisis.”

The programs run directly counter to the goal of raising central bank interest rates. Higher interest rates are holding back credit growth, but government-backed lending is spurring it on more Borrow. He steps on the gas and the brakes at the same time.

He names Great Britain, the euro zone and Japan as particularly bad actors.

Napier believes this will lead to a higher inflation paradigm as governments try to blow off the debt burden. He also sees a boom in government-sponsored investments in homehoring or friendshoring.

A good example might be the CHIPS Act in the US, which provides $52 billion in subsidies and loan guarantees for semiconductor construction in the United States. He thinks we’re going to see 15 years of government-led investment.

What he fears is that these investments will be misdirected, generating large outlays but no lasting benefits.

“When the British government did this in the 1950s and 60s, they invested a lot of capital in coal mining, car production and the Concorde. Turns out the UK had no future in any of those industries, so it was so wasted and we ended up with high unemployment… First comes the seemingly harmless part, that of a boom in capital investment and high nominal GDP growth is driven. Lots of people will like that. Only much later, when we get high inflation and high unemployment, when the extent of misallocated capital manifests itself in a high misery index.”

For now, that’s good news, he argues, and that there will be some big winners.

“The big problems we have – energy, climate change, defence, inequality, our dependence on manufacturing from China – will all be solved through massive investment.”

It’s an interesting framework to keep an eye on.

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