Will Central Bankers Be The Next Unchosen People?
In his latest piece on popular delusions, SocGen's Dylan Grice conducts a much needed advance thought experiment looking at two specific things: on one hand he isolates the next inevitable social tension: that between "everyone" and the central bankers. Because if there is one specific reason why OccupyX never truly got off the ground is that deep down, the population knows that while bankers are to be despised for their "contributions" to society, they would never have the opportunity to do what they do absent the enabling stance of the "democratically" elected politicians, and more importantly, the deeds of those few academics stuck in a dark room, who daily decide the nominal fate of the world courtesy of money printing. Which means that in the inevitable progression of "marginalizing-then-brutalizing", when society finally cuts through all the noise and focuses on the one source of all that is wrong in the world, it will not be those residing at 200 West, but the tenants at the Marriner Eccles building: "Politicians can and will take back what they have previously given if and when it is deemed in their interests to do so. One way they do this is by using the time-tested political strategy known as “marginalise-then-brutalise”. Politicians start by identifying the obstacle to their objectives. For a government short of funds the objective is to raise more funds, and the obstacle is any group/sector which has them." Thus Mugabe “marginalised then brutalised” white farmers, while Hugo Chavez set his sights on private sector “profiteers” … for Hitler it was the Jews, for Philip IV of France it was the Knights Templar, for Diocletian it was the Christians, etc. How long before it is the central banks?" How long indeed? And whether it is with or without political prodding, once the central planning experiment fails, as it will, we would certainly not want to be in Bernanke's shoes...
As for the second part, Grice looks at the proverbial canary in the coalmine - Japan, where central banker tinkering is about to take the country to the next level in authoritarian tinkering, with disastrous results: "The notion that central banks are in control of events is a myth. It’s the other way around. Japan’s addiction to public sector spending is way beyond the boundaries of remedial ‘austerity’. Political pressure on the BoJ to crank the printing press into top gear will become irresistible. We see no alternative...the explosion in Japan’s debt/GDP ratio in the coming years is likely to make that seen in the past decade seem like a minor blip."
Back in May 2011 we first noted that following years of deflation, the only option before Japan is to do more of what it has done before, namely print. Sure enough, after a long delay, it made a "surprising" announcement doing just that.
Here is Grice's take:
The BoJ’s move to print money under political duress shows that in extremis there is no such thing as an independent central bank. Politicians can and will take back what they have previously given if and when it is deemed in their interests to do so.
Unfortunately for the central banks, long since having "betrayed" their independent mandate or two, this means that they themselves are about to be betrayed when the biggest experiment in central planning starts unwinding.
One way they do this is by using the time-tested political strategy known as “marginalise-then-brutalise”. Politicians start by identifying the obstacle to their objectives. For a government short of funds the objective is to raise more funds, and the obstacle is any group/sector which has them. The first step is to politically isolate the target, often by creating popular support for the idea that the target group/sector is to blame for whatever malaise is gripping the country. Step two proceeds when the target has been suitably emasculated and shorn of all defence against even the most brutal attack.
As Machiavelli observed five hundred years ago, “Men are so simple of mind, and so much dominated by their immediate needs, that a deceitful man will always find plenty who are ready to be deceived.” Thus Mugabe “marginalised then brutalised” white farmers, while Hugo Chavez set his sights on private sector “profiteers” … for Hitler it was the Jews, for Philip IV of France it was the Knights Templar, for Diocletian it was the Christians, etc.
How long before it is the central banks? How long before they’re being blamed for not doing enough to check the spike in government bond yields threatening the economy and jobs (even if that spike is caused by wayward government finances)? How long before the populist anger today directed against bankers is directed towards central banks for something like paying too much attention to inflation when x million people are out of work. Economists will provide camouflage for such populism. The cure will be worse than the disease, they will say.
Re-read the above as many as times as needed just so in a year or two when populist vigilanteeism breaks through the heavily guaraded barricades at Marriner Eccles and Liberty 33 and demands blood, and the media says that "nobody could have possibly foreseen this", one will be able to say wrong - it was foreseen long, long ago. But alas, as Grice says, the cost of fixing a broken system is too high for the high shamans of the lie to admit they were wrong all along, and instead will take the entire system to the point of breaking and beyond, which is where we are now.
So where should one look for the next steps? Why japan of course.
...Japan is the leading indicator. Today the BoJ is increasingly seen as a part of the problem. It’s not trying hard enough to boost economic growth, say the critics. It’s fighting the wrong battle, they add. One hundred and forty Japanese parliamentarians from across the party spectrum have formed an “anti-deflation league” to actively lobby it into more aggressive action and the effort seems to have worked. Despite protestations of the folly of such a policy only a few months ago, the BoJ has now upped its “asset purchase” scheme to something like 25% of expected 2012 JGB issuance.
At the regular BoE press conferences, Sir Mervyn King frequently defends the BoE’s actions in terms of its remit. The logical implication is that if the remit changes (e.g. they are to target a 5% inflation rate), so would its actions. Indeed, how could it be otherwise? But the logic of that is that there is no such thing as a truly independent central bank. Or if you like, central banks are ultimately constrained by the will of politicians. And if politicians really want their central bank to do something, the central bank will have no choice but to do it. In recent decades politicians have asked very little of their central banks, who in any case have been happy to run with excessively loose policy. But with the economy, or at least, government balance sheets, now in tatters, politicians’ demands are going to grow. And if these demands are not met, central banks will be marginalised then brutalised. I believe it’s already happening in Japan [where] the fiscal situation is so desperate the politicians there will soon really need the BoJ to start buying its bonds.
Don't worry - Kyle Bass is right, and the situation in Japan is indeed unsustainable.
The first chart above shows that Japan should be running a primary surplus of around 3% of GDP to prevent its debt/GDP ratio rising further. Note that this is a generous estimate because I’m using trend GDP growth to estimate revenue growth potential, and this is considerably higher than trend tax revenue growth, which has been falling much more rapidly over the same period. The current primary balance is around 7% in deficit. That means fiscal correction required is 10% of GDP.
That’s roughly the size of the adjustment Greece is expected to make by the troika, but by no one else because it’s beyond the boundaries of political feasibility. If Greece does manage to somehow pull this off it will still have a debt/GDP ratio of 120%, which the IMF has arbitrarily declared to be the ratio which is “sustainable” (Veneroso suspects this was done to make Italy look good, and we think he’s right). If Japan was to pull off similar heroics, its reward would be debt/GDP stabilisation at current levels of around 200%.
But anyway, there is currently little sign of any such appetite. The following chart shows the fiscal correction required to stabilise debt/GDP in trillions of yen (10% of GDP is around ¥50 trillion). Total non-discretionary expenditure is just over ¥50 trillion. It’s a staggering amount of money to find, just to stop your ca.200% debt/GDP ratio going higher. The proposed doubling of the consumption tax is intended to be phased in by 2015. Even if this is actually passed, and there are no second order effects on other parts of the budget, the measure is likely to raise only ¥10 trillion p.a. It’s a bit like crashing into a wall at 180mph rather than 200mph.
But the biggest catalyst by far? The much anticipated shift in demographics has happened, and the public pension fund is now no longer buying Japanese Government Bonds.
...And as the fund becomes a net seller, the BoJ has upped its “asset purchases”, right on cue and under political pressure. That may just be a coincidence …. or it might be the first step on the long road to an inflation crisis. On existing policies and at current parameters, the explosion in Japan’s debt/GDP ratio in the coming years is likely to make that seen in the past decade seem like a minor blip. I for one bet the BoJ ups its purchases far more from here.
We for two agree, and since the chart above can only be described as exponential, as is the entire consolidated global central bank balance sheet, and since in a world of finite resources, exponential means unsustainable, the can kicking will soon end. First slowly, then very fast.