The idea that there is a comfortable degree of budgetary room for more active fiscal policy goes hand-in-hand with the assumption that a sustained bond correction (higher safe real interest rate) is not only unjustified based on fundamentals, but is also impossible. This comes as no surprise. On average throughout modern history, safe real interest rates have been lower than the GDP growth rate, making it easier to finance public deficits. Global, safe real interest rates have experienced a downward trend over the last 30 years. As a result, a powerful collective memory formed on the basis of the two assumptions mentioned above.

We would argue that both assumptions will ultimately prove complacent investors wrong: trapped in their comfort zone, few will see the reality. In particular, global, or ‘one size fits all’, policy recommendations no longer apply in a fragmented world regarding either safe real interest rates or fiscal spaces. While most so-called ‘fiscal spaces’ will turn out to be mirages or traps, we will try to identify certain situations that are more favourable to investors, even if they are limited in number.

Over the course of the journey towards a new regime, investors may realise that the idea of a perpetually low natural rate of interest (r*) was premature: it anchored expectations to fragile foundations and may prove higher than originally believed. This should become evident when the actions of so-called ‘hawkish’ central banks prove insufficient to have an impact within the new global framework.

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