By Michael Every of Rabobank
Man of La Manchin(a)
“To dream the impossible dream; To fight the unbeatable foe; To bear with unbearable sorrow; To run where the brave dare not go
To right the unrightable wrong; To love pure and chaste from afar; To try when your arms are too weary; To reach the unreachable star
This is my quest to follow that star; No matter how hopeless, no matter how far; To fight for the right; Without question or pause; To be willing to march; Into hell for a heavenly cause
And I know if I'll only be true; To this glorious quest; That my heart will lie peaceful and calm; When I'm laid to my rest
And the world will be better for this; That one man, scorned and covered with scars; Still strove with his last ounce of courage; To reach the unreachable star; The fight the unbeatable foe; To dream the impossible dream!”
That seems to be the mood music at the White House; and the IMF; and the World Bank; and the Fed, and in fact most central banks. All of them are busy building back better-ly. Ambitious global tax plans are on the table to wipe tax havens off them; US spending plans are being pushed; and Treasury Secretary Yellen is talking about “labor vs. capital”: perhaps she will soon add “M > C > MP > C+ > M+” to underline how the economy actually works, which none of the neoclassical models at the Treasury or the Fed do?
Regardless, US yields are heading lower, the US dollar is heading down, and US stocks are heading up, in a continuation of their own long-running impossible dream. Let me tell you a tall tale: perhaps just one man is ultimately responsible for that right now - US Democrat Senator Joe Manchin. He appears on what some might see as an anti-quixotic quest that may stop the White House from tilting at any windmills (or solar panels or broader “infrastructure”).
Senator Manchin yesterday reaffirmed via a Washington Post op-ed that he will not back proposed changes to the Senate filibuster rule ("I have said it before and will say it again to remove any shred of doubt: There is no circumstance in which I will vote to eliminate or weaken the filibuster") or support "shortcutting the legislative process through budget reconciliation." Both of those statements, if not negotiating positions, will prove to be giants obstructing the path of President Biden’s domestic agenda. It doesn’t mean nothing will get done – but it means nothing like what some people were recently thinking was going to get done now will.
If so, as stocks and bonds ebulliently suggest, there is still a white knight to save us, however: those plodding Sancho Panzas turned would-be dashing Dons, our central banks. It is they who will continue to chase their own impossible dream of saving the world via yield curve manipulation and junk asset purchases without lancing price-discovery and capitalism at the same time. On a related note, Fed Chair Powell spoke yesterday against a backdrop of supply-chain stresses that mean Americans can’t get ketchup to go with their fries,…and explained he isn’t worried about inflation, but infections. As I keep repeating, this stance is only logically consistent if one really *is* thinking about labour vs. capital: but Fed policy cannot deal with that populist ‘red’ issue any more than it can with a popular red condiment. It’s all fiscal and political-economy, which seems a dream too far at the moment.
Some might think it remarkable that the fate of the US economy, and hence the world economy, can really turn on the actions of just one man. Welcome to the absurdity of real life. As Cervantes noted: “When life itself seems lunatic, who knows where madness lies? Perhaps to be too practical is madness. To surrender dreams — this may be madness. Too much sanity may be madness — and maddest of all: to see life as it is, and not as it should be!” At least Manchin was elected. By contrast, who elected central banks? (On which, what happens if the US, or anywhere, elects an administration which wants to move away from a green economy when their “independent” central bank has pledged to support the transition towards one? Has anyone thought about that, or are we all too busy singing from the same hymn sheet to suppose it could ever happen?)
Of course, there is still US bipartisan support for one epic struggle: China. The Senate is finalising “The Strategic Competition Act”, which mandates initiatives to counteract Beijing: the need to "prioritize the military investments necessary to achieve US political objectives in the Indo-Pacific”; increased funding for other militaries in Asia; expanding the scope of the Committee on Foreign Investment in the United States; calling for an enhanced partnership with Taiwan; and that Washington must encourage allies to do more about Beijing's "aggressive and assertive behavior”. How many Euro Panzas will join this quest though?
Please don’t think this kind of chivalrous rhetoric is only heard in DC. A senior Russian military official yesterday stated the start of major military action in Eastern Ukraine would mark the beginning of the end for the country(!); and a Russian friend gave me an (unconfirmed) report that a TV channel he was watching last night had talking heads suggesting it was necessary to set off a nuclear bomb in the ocean to send a signal to the US --which is about to send naval vessels to the Black Sea-- that they need to back off. One *hopes* this is all quixotic: markets certainly believe that to be the case, and so continue to rally on the new meme of --a lack of-- windmills.
Indeed, let’s not worry: German Chancellor Merkel spoke to President Putin yesterday and apparently told him she wanted to see immediate de-escalation…or else she might not sell Russia any German cars; or buy Russian vaccine; or complete Nord-Stream 2 and tie the German economy into Russian gas supplies. Isn’t realpolitik a German word originally?
“Destiny guides our fortunes more favourably than we could have expected. Look there, Sancho Panza, my friend, and see those thirty or so wild giants, with whom I intend to do battle and kill each and all of them, so with their stolen booty we can begin to enrich ourselves. This is noble, righteous warfare, for it is wonderfully useful to God to have such an evil race wiped from the face of the earth."
"What giants?" asked Sancho Panza.
"The ones you can see over there," answered his master, "with the huge arms, some of which are very nearly two leagues long."
"Now look, your grace," said Sancho, "what you see over there aren't giants, but windmills, and what seems to be arms are just their sails, that go around in the wind and turn the millstone."
"Obviously," replied Don Quixote, "you don't know much about adventures.”
Or labour vs. capital; or realpolitik. But Happy Friday!