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The 15 August 2021 marked the 50-year anniversary of President Nixon taking the US off the “Gold Standard” - a monetary system whereby foreign central banks and governments could exchange their US dollar cash holdings into gold.


By breaking the link with gold, the US could expand its money supply without being constrained by how much bullion was held in reserves. Essentially, this move to a pure fiat money-based regime made it easier to issue more debt to finance growth. President Nixon would not have known it at the time, but that momentous event enabled the US authorities to swiftly deliver unprecedented fiscal and monetary stimulus to support the economy during the pandemic nearly 50 years later. This has led to a very different business cycle from the past in two key ways. First, the pandemic-led recession was brief. The National Bureau of Economic Research, the arbiter of timing business cycles, recently reported that the downturn lasted just two months (between March and April 2020), the shortest US recession from data that goes back to 1854.

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To put that in context, the previous recession that started during the Global Financial Crisis (GFC) in 2008 lasted 18 months. Second, the nature of the crisis was more akin to a natural disaster, rather than a ‘normal’ recession that was driven by Fed tightening and/or over-leverage that takes time to unwind. By opening up the economy from lockdowns, stimulus-boosted output growth recovered quickly: US real GDP grew 12.2% from a year ago in the second quarter, the fastest growth rate for over 70 years at least 1 Given the success of the vaccine rollout in the developed world, it appears that the impact on the broad global economy from this short, sharp recession has not led to persistent macro weakness. On the contrary, there has been a strong recovery in investment, limited bankruptcies/stress in credit markets and no significant rise in long-term unemployment. As such, the IMF left its latest July 2021 global GDP growth projection unchanged at 6.0% from its forecast in April, though revised up its 2022 estimate to 4.9% from 4.4%. The fiat currency regime has shown that policy makers have the flexibility to smooth financial stress by flooding the monetary system with liquidity using Quantitative Easing (QE or central bank asset purchases). For markets, this policy support, and the relief that there has not been structural economic damage, has lifted global stocks. The US S&P 500 equity benchmark index has now doubled from its low point in March 2020 in what is the quickest bull market doubling from a trough since World War II.

Then came 2022....How long and how are the markets going to react to the new challenges that face us today.................

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