A switch to fiscal stimulus globally will finally bring four decades of disinflationary policy to a close as governments take on the burden of delivering economic growth from central banks, says Stephen Jones, CIO at Kames Capital.

The coronavirus that has swept across the globe has caused some of the most extreme falls in asset prices seen since the 2008 crisis, with central banks taking co-ordinated action to try and offset the expected downturn in global economic activity.

However, with central bank policy now effectively at its limits and in no state to provide the kind of impact needed to stem the crisis sparked by the coronavirus, Jones says it is time for fiscal policy to do the heavy lifting.

"Recent years saw central banks desperate to normalise monetary policy, but no major economy, not even the US, succeeded," he says.

"Now those that will probably enter recession will do so on near zero or negative policy interest rates, an unusual situation in the extreme. While economies have a natural desire to grow and life will eventually get back to normal, the challenge will be in limiting the damage done in the interim. Fiscal policy will need to play a powerful role."

Jones says this shift to fiscal stimulus rather than monetary will bring to a close an era of record-breaking returns for fixed income, which has left some US$15 trillion of debt now paying a negative yield.

"The post-GFC era has been characterised by stubbornly low inflation; in truth, this was a feature pre-GFC. Recognising this, even after years of quantitative easing (QE), major central banks are already in the process of changing their mandates to allow them to turn a blind eye to periods of higher than target price rises," he says.

"Fully implemented, this will end the multi-decade disinflationary regime begun by Paul Volcker, a regime which has helped fuel a glorious bond bull market."

Without this now widely expected policy shift, Jones says bonds were "never likely to come to much harm", a trend that has again been evident in recent days as the crisis worsened.

However, now governments are committing to huge spending programmes to combat the fallout from the coronavirus as best they can, Jones says bond markets are firmly in the crosshairs.

"As fiscal policy takes centre stage, the current crisis will deliver the necessary regime shift," he says.

"Central banks were granted operational independence when it became clear that politicians couldn't be trusted with all the macro-economic levers.

"But a full focus on fiscal policy, out of necessity, returns control to politicians. In time, bond investors will come to regret the genie they've let out the bottle."

The implications of this shift, adds Jones, will be longstanding.

"Handouts, tax cuts and ramped up public spending will administer a much-needed sugar rush to the world economy that could deliver the ‘V' shaped recovery some still expect, restarting the equity bull market," he says.

"But it took a long time for the full fallout from the GFC however to be evident. As we move through the virus crisis, it will be years, not weeks before we understand how the world has been changed."

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A switch to fiscal stimulus globally will finally bring four decades of disinflationary policy to a close as governments take on the burden of delivering economic growth from central banks, says Stephen Jones, CIO at Kames Capital.

The coronavirus that has swept across the globe has caused some of the most extreme falls in asset prices seen since the 2008 crisis, with central banks taking co-ordinated action to try and offset the expected downturn in global economic activity.

However, with central bank policy now effectively at its limits and in no state to provide the kind of impact needed to stem the crisis sparked by the coronavirus, Jones says it is time for fiscal policy to do the heavy lifting.

"Recent years saw central banks desperate to normalise monetary policy, but no major economy, not even the US, succeeded," he says.

"Now those that will probably enter recession will do so on near zero or negative policy interest rates, an unusual situation in the extreme. While economies have a natural desire to grow and life will eventually get back to normal, the challenge will be in limiting the damage done in the interim. Fiscal policy will need to play a powerful role."

Jones says this shift to fiscal stimulus rather than monetary will bring to a close an era of record-breaking returns for fixed income, which has left some US$15 trillion of debt now paying a negative yield.

"The post-GFC era has been characterised by stubbornly low inflation; in truth, this was a feature pre-GFC. Recognising this, even after years of quantitative easing (QE), major central banks are already in the process of changing their mandates to allow them to turn a blind eye to periods of higher than target price rises," he says.

"Fully implemented, this will end the multi-decade disinflationary regime begun by Paul Volcker, a regime which has helped fuel a glorious bond bull market."

Without this now widely expected policy shift, Jones says bonds were "never likely to come to much harm", a trend that has again been evident in recent days as the crisis worsened.

However, now governments are committing to huge spending programmes to combat the fallout from the coronavirus as best they can, Jones says bond markets are firmly in the crosshairs.

"As fiscal policy takes centre stage, the current crisis will deliver the necessary regime shift," he says.

"Central banks were granted operational independence when it became clear that politicians couldn't be trusted with all the macro-economic levers.

"But a full focus on fiscal policy, out of necessity, returns control to politicians. In time, bond investors will come to regret the genie they've let out the bottle."

The implications of this shift, adds Jones, will be longstanding.

"Handouts, tax cuts and ramped up public spending will administer a much-needed sugar rush to the world economy that could deliver the ‘V' shaped recovery some still expect, restarting the equity bull market," he says.

"But it took a long time for the full fallout from the GFC however to be evident. As we move through the virus crisis, it will be years, not weeks before we understand how the world has been changed."