If the current state of the world economy is marked by stark cognitive dissonance, if what is not sustainable cannot be sustained, then what comes next?
This is interesting, if inconclusive. I must dissent, however, from the suggestion of modification of central bank independence. Maybe, in a world where monetary and fiscal policies are managed objectively from a center-left perspective. But in a Bessant-Walsh world, any Treasury-Fed collaboration is likely to serve the Kochs and the Trumps and set us up for worse crises to come.
Two observations from outside the developed-economy frame.
First, the "Four Horsemen" being debated here have been the operating mode of large emerging markets for decades, not a heterodox option newly considered. India in particular has run on negative real returns to savers, partial capital controls, fiscal dominance, and intermittent targeted price controls in the energy sector continuously since the 1970s. The Borio passage reads, from this side, less as the IMF/BIS pragmatically updating theory and more as them finally writing down what EMs were already doing while paying the developmental cost of being told it was unsound.
The harder question is whether the political economy of financial repression that worked in EMs, a Cantillon distribution of pain falling on savers without a politically loud voice, survives transplantation to economies where the middle class has more saving sensitivity and more electoral reach.
Second, the missing variable in this frame is energy. Financial repression at 3% inflation is sustainable only as long as energy prices don't shock you outside that envelope. India's import bill moves roughly $1.5 billion per dollar-per-barrel per year; a Hormuz event reprices the entire macro stack in weeks. In a polycrisis world, the Four Horsemen rest on a fifth assumption, bounded energy price variance, that the current geopolitical map is actively dismantling. Huh!
With my ear to the ground to test for signs of forward thought and planning, I hear nothing. Perhaps the most that can be hoped for are groupings of countries (or their Treasuries) reaching out to each other to discuss frameworks for such (or other) measures. Carney's "middle powers"? Singapore? Australia?
Theres a wonderful irony buried in this piece that deserves drawing out. Gopinath herself co-authored the integrated policy framework that rationalised heterodox tools for emerging markets. Capital controls, FX intervention, macroprudential regulation, all the things the Washington consensus had previously anathematised were rehabilitated under the logic that "practice has moved ahead of theory." What she's now warning about is the same toolkit migrating to advanced economies, which would collapse the last intellectual distinction the IMF maintains between how rich and poor countries are allowed to manage their balance sheets.
The cognitive dissonance point is really about option pricing. Markets have been treating government crisis intervention as a free put, a backstop with no cost to the holder. Financial repression is what happens when that put gets exercised permanantly and the cost gets distributed through negative real rates rather than through the fisc. Gopinath knows this, she helped design the framework that made it thinkable, her concern is that once markets reprice the put as a standing feature rather than an emergency facility the entire fixed income architecture has to adjust simultaneosly. Thats the syncronised sell-off she fears.
The emerging market precedent is more instructive than it first appears. India and Brazil have been running soft financial repression for decades with captive domestic bond markets absorbing the cost. The open question is whether advanced economy sovereign debt markets, which are orders of magnitude larger and far more interconnected through derivatives and repo chains, can absorb the same treatment without a disorderly unwind. Scale changes the physics.
The IPF rehabilitation was conditioned on EM-specific frictions: shallow markets, dollar liabilities, weak institutions. Migrating the toolkit upward dissolves that conditionality, which hints the theoretical scaffolding was post-hoc all along. Her "fiscally sustainable" framing concedes the put was never free, just unpriced. Who absorbs the premium retroactively is the only open variable: bondholders via repression, taxpayers via consolidation, or beneficiaries via targeting.
Gopinath's heterodox shopping list of price controls, financial repression, nationalisations, and central bank fiscal absorption is doing real work in the framing. The relevant question for the tech stack is whether hyperscaler capex commitments and energy-grid buildouts already operate inside that quasi-public-utility space. If the next fiscal stress event forces a choice between backstopping cloud commits and backstopping social spending, the political economy of compute starts to look more like regulated infrastructure than venture-funded experiment.
Your framing tracks a pattern https://thesynthesisai.substack.com/p/the-rewiring covers: sophisticated new functions get built from the oldest existing parts under new control architecture. If compute joins utility class, the playbook is just the old PUC apparatus applied to a new asset. Who writes the rate base becomes the live political fight.
The Australian variant of this is the eastern gas market intervention. The AEMO redesign and ADGSM tweaks now look a lot like managed price administration, even though Treasury won't call it that. The Productivity Commission's resistance is fascinating: defending a textbook market frame in conditions that have stopped behaving textbookishly since 2022.
My suggestion is public expropriation of the commanding heights of the economy, immediate capital flight controls, followed by show trials of all designated enemies of the people.
Agree fully; but macroprudential tools are too timid. We need CB-treasury coordination and a dose of financial repression! More importantly, need to wean financial markets of their «liquidity dependence», ref. Acharya & Rajan.
This is great thinking in the "ivory tower" sense, but people need to make concrete decisions to protect themselves against the adverse winds of economic downturn. AT published earlier that 50% of the growth in the US stock market is from 5 corporations. AI is causing a huge distortion, and the "K" shaped growth in the US economy seems very real. It seems to me that a prudent person who has adequate assets is going to hedge now against a major downturn. Anyone who has extended family members at risk of losing a job or of incurring major financial stressors is going to lay away cash. There is nothing optimistic in today's discussions. Also of concern is the birth rate in the US and other advanced countries: Why would any couple want to have a child when the economic prospects are so uncertain? The other concern is that the Trump administration is every bit as out of touch with "regular people" as they accused the Biden administration of being.
This is interesting, if inconclusive. I must dissent, however, from the suggestion of modification of central bank independence. Maybe, in a world where monetary and fiscal policies are managed objectively from a center-left perspective. But in a Bessant-Walsh world, any Treasury-Fed collaboration is likely to serve the Kochs and the Trumps and set us up for worse crises to come.
Two observations from outside the developed-economy frame.
First, the "Four Horsemen" being debated here have been the operating mode of large emerging markets for decades, not a heterodox option newly considered. India in particular has run on negative real returns to savers, partial capital controls, fiscal dominance, and intermittent targeted price controls in the energy sector continuously since the 1970s. The Borio passage reads, from this side, less as the IMF/BIS pragmatically updating theory and more as them finally writing down what EMs were already doing while paying the developmental cost of being told it was unsound.
The harder question is whether the political economy of financial repression that worked in EMs, a Cantillon distribution of pain falling on savers without a politically loud voice, survives transplantation to economies where the middle class has more saving sensitivity and more electoral reach.
Second, the missing variable in this frame is energy. Financial repression at 3% inflation is sustainable only as long as energy prices don't shock you outside that envelope. India's import bill moves roughly $1.5 billion per dollar-per-barrel per year; a Hormuz event reprices the entire macro stack in weeks. In a polycrisis world, the Four Horsemen rest on a fifth assumption, bounded energy price variance, that the current geopolitical map is actively dismantling. Huh!
With my ear to the ground to test for signs of forward thought and planning, I hear nothing. Perhaps the most that can be hoped for are groupings of countries (or their Treasuries) reaching out to each other to discuss frameworks for such (or other) measures. Carney's "middle powers"? Singapore? Australia?
Wow, as clear an expose as is possible. Those in the progressive camp should shout it from the roofs. We need to be heard ex ante, not ex post.
Theres a wonderful irony buried in this piece that deserves drawing out. Gopinath herself co-authored the integrated policy framework that rationalised heterodox tools for emerging markets. Capital controls, FX intervention, macroprudential regulation, all the things the Washington consensus had previously anathematised were rehabilitated under the logic that "practice has moved ahead of theory." What she's now warning about is the same toolkit migrating to advanced economies, which would collapse the last intellectual distinction the IMF maintains between how rich and poor countries are allowed to manage their balance sheets.
The cognitive dissonance point is really about option pricing. Markets have been treating government crisis intervention as a free put, a backstop with no cost to the holder. Financial repression is what happens when that put gets exercised permanantly and the cost gets distributed through negative real rates rather than through the fisc. Gopinath knows this, she helped design the framework that made it thinkable, her concern is that once markets reprice the put as a standing feature rather than an emergency facility the entire fixed income architecture has to adjust simultaneosly. Thats the syncronised sell-off she fears.
The emerging market precedent is more instructive than it first appears. India and Brazil have been running soft financial repression for decades with captive domestic bond markets absorbing the cost. The open question is whether advanced economy sovereign debt markets, which are orders of magnitude larger and far more interconnected through derivatives and repo chains, can absorb the same treatment without a disorderly unwind. Scale changes the physics.
The IPF rehabilitation was conditioned on EM-specific frictions: shallow markets, dollar liabilities, weak institutions. Migrating the toolkit upward dissolves that conditionality, which hints the theoretical scaffolding was post-hoc all along. Her "fiscally sustainable" framing concedes the put was never free, just unpriced. Who absorbs the premium retroactively is the only open variable: bondholders via repression, taxpayers via consolidation, or beneficiaries via targeting.
Gopinath's heterodox shopping list of price controls, financial repression, nationalisations, and central bank fiscal absorption is doing real work in the framing. The relevant question for the tech stack is whether hyperscaler capex commitments and energy-grid buildouts already operate inside that quasi-public-utility space. If the next fiscal stress event forces a choice between backstopping cloud commits and backstopping social spending, the political economy of compute starts to look more like regulated infrastructure than venture-funded experiment.
Your framing tracks a pattern https://thesynthesisai.substack.com/p/the-rewiring covers: sophisticated new functions get built from the oldest existing parts under new control architecture. If compute joins utility class, the playbook is just the old PUC apparatus applied to a new asset. Who writes the rate base becomes the live political fight.
The Australian variant of this is the eastern gas market intervention. The AEMO redesign and ADGSM tweaks now look a lot like managed price administration, even though Treasury won't call it that. The Productivity Commission's resistance is fascinating: defending a textbook market frame in conditions that have stopped behaving textbookishly since 2022.
My suggestion is public expropriation of the commanding heights of the economy, immediate capital flight controls, followed by show trials of all designated enemies of the people.
Kidding.
Unless...
Agree fully; but macroprudential tools are too timid. We need CB-treasury coordination and a dose of financial repression! More importantly, need to wean financial markets of their «liquidity dependence», ref. Acharya & Rajan.
This is great thinking in the "ivory tower" sense, but people need to make concrete decisions to protect themselves against the adverse winds of economic downturn. AT published earlier that 50% of the growth in the US stock market is from 5 corporations. AI is causing a huge distortion, and the "K" shaped growth in the US economy seems very real. It seems to me that a prudent person who has adequate assets is going to hedge now against a major downturn. Anyone who has extended family members at risk of losing a job or of incurring major financial stressors is going to lay away cash. There is nothing optimistic in today's discussions. Also of concern is the birth rate in the US and other advanced countries: Why would any couple want to have a child when the economic prospects are so uncertain? The other concern is that the Trump administration is every bit as out of touch with "regular people" as they accused the Biden administration of being.
So much talk about heterodox approaches... I wonder if this guy's proposed solution(s) are maybe too heterodox.... https://squirrelbrain77.substack.com/p/basic-law-of-the-commonwealth