Perry Merhling, the monetary economist, coined the phrase "Forget the G7, watch the C5" during the early post-GFC period. He was focusing on policy coordination among the Fed, BOE, ECB, SNB, and BOJ. His view of focusing on central bank behavior was critical a decade ago and is still relevant, but there is a new emphasis on fiscal policy, back to a focus on the G7. G7 coordination on tax and spend policies is having more relevance for investors during the reflation. "Don't forget the G7 when looking at the C5."
Since the last financial crisis, we have moved from a strong emphasis on monetary policy and less discussion of active fiscal policy to an emphasis on fiscal policy with monetary policy accommodating the needs of finance ministers. The coordination, or lack of coordination, between the G7 and C7 is now the focus of investors. It will be critical for the inflation path as well as growth.
Call it war-time fiscal and debt policy with monetary coordination to reduce the cost of financing. This policy coordination is not a bank liquidity problem (the GFC), but a government funding problem. At one extreme is the US with large deficits and monetary coordination to support fiscal spending versus a mix with the ECB and eurozone where coordination is less defined. US money supply has grown over 24% YOY versus 9.5% for the ECB and just over 9% for the BOJ. Many other countries have spent less but increased equity, loans, and guarantees. There is large difference between developed economies and emerging economies which will impact relative country growth rates. Investors have to look at the combination of fiscal and monetary policy to answer growth and financial asset return potential.
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