Albert Edwards Asks You To Spot The Difference (Hint: There Isn't One)
"I sometimes feel I am in a parallel universe. Maybe I am." - Albert Edwards
Why the stern condemnation from the SocGen strategist? Here's why:
Personally I am incredulous. I can believe the arch dove Bernanke might have wanted to keep blowing his bubbles but I am amazed that he got the rest of the Fed, or at least the majority, on his side. I am also amazed because the Fed has spent weeks setting the markets up for a taper. Even a $5bn taper, which would have meant absolutely nothing in terms of the effect on the markets and economy, would have been seen as following through with their previous statements instead of introducing a huge element of uncertainty as to their intentions. Their word is apparently not their bond if bonds don’t like their words!
When we first began writing about QE in 2002 in the wake of Ben's famous helicopter money speech, one of the things we said was that it would be extremely difficult for central banks to stop printing once they started along this road. My thoughts back then were that once they started they would end up buying the entire stock of government debt and then having to cancel it (ie QE turns into outright monetisation). Hence we laughed ourselves stupid at the then Bank of England Governor, Mervyn King's statement in January 2012 that "I have absolutely no doubt that when the time comes for us to reduce the size of the balance sheet that we’ll find that a whole lot easier than we did when expanding it…”. What a joker!
Let's go back to Dylan Grice's seminal writings on this topic and revisit his prescient thoughts. He said back in 2010 in his note Print baby, print, What's interesting is that central banks feel they have no choice. It's not that they're unaware of the risks (although there are profound behavioural biases working against them in their assessment of those risks). They’re printing money because they’re scared of what might happen if they don’t. This very real political dilemma is what is missing from the simplistic understanding of inflation as "always and everywhere a monetary phenomenon." It's like they're on a train which they know to be heading for a crash, but it is accelerating so rapidly they're scared to jump off.
Incidentally, this is exactly the train Rudolf von Havenstein found himself on as President of the Reichsbank during the German hyperinflation. According to Liaquat Ahamed's work on von Havenstein's dilemma, in his majestic book 'Lords of Finance’ - "were he to refuse to print the money necessary to finance the deficit, he risked causing a sharp rise in interest rates as the government scrambled to borrow from every source. The mass unemployment that would ensue, he believed, would bring on a domestic economic and political crisis, which in Germany's [then] fragile state might precipitate a real political convulsion." Plus ça change!
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