By Michael Every of Rabobank
Oh-so Politico; Oh-so Socio
It’s a quiet day here so far in Asia and one of those monsoons where we are unlikely to see any sun: that damp, cool gloom and drip-drip-drip of rain is the perfect backdrop for a little British introspection and rumination rather than frenetic market headline chasing for once.
Yesterday I listed the major major policy shifts - appropriately Catch-22 - we have seen in the US under President Biden this year to date: massive fiscal stimulus, and paying people not to work in some cases; a bipartisan OK to US protectionism; a full employment pledge; talking about labor vs. capital; promising to move supply chains; proposed global corporate tax hikes; reversing 40-years of corporate-friendly anti anti-Trust actions - again Catch-22; talk of a Belt and Road rival; and the shift of monetary policy to address far broader socio-economic goals than inflation. I forgot to add industrial policy, which is clearly ascendant in semiconductors at least – but it can’t stop there given local demand will need to be found for all those chips.
However, perhaps the sine qua non of this new zeitgeist was an op-ed in the Financial Times recently arguing: “For sustainable financing to work, we will need central planning.”
While the FT may be printed on pink paper, it isn’t ‘pinko’, for those old enough to know what that means, and that it used to be a pejorative. Being British, it is certainly to the left of the rabidly Ayn Randian op-eds of the Wall Street Journal of years gone by: it generally offers a market-friendly but ‘been there, done that’ shrug at American ‘Atlas Shrugged’. Even so, one still needs to take a step back and realize that this is the FINANCIAL TIMES carrying an argument for CENTRAL PLANNING OF THE ECONOMY. And we all just, at last, shrugged?
Bear that in mind as the population of communist Cuba takes to the streets calling for "freedom." Then again, the population of even Western countries have taken to the streets calling for freedom this year.
1989 this is certainly not. Or at least not when walls are going up, not coming down; the CCP just celebrated 100 years with a lavish ceremony; there are cries that free speech is under attack in the West; and as the White House makes clear that a global struggle between authoritarianism and liberal democracies is underway, in a far more 1939 manner. To which many liberal democracies and most of the big businesses born, based, and not paying taxes there, just shrug.
Yet life goes on around us in markets regardless of the zeitgeist moving in a direction that, if appearing as the Ghost of Christmas Yet to Come 10-15 years ago, would have seen most Scrooges quivering in their slippers and nightgowns.
Trades and business are being done – and 24/7, and from home, and for digital ‘currencies’ and tokens with deliberately silly names and equally silly prices. Wall Street profits are expected to be bumper. The ECB is so worried about bank dividends soaring that after removing the cap on such pay-outs later this year it will take steps to ensure banks avoid doing so - which again muddies the waters between the free-will in free markets and centrally-determined determinism. Stocks are, obviously, at record highs: when are they not? So life finds a way.
However, there is little real life in some of these markets and market ‘prices’. As I asked someone a few months ago, what would they pay for a government bond of a functionally-bankrupt country that cannot print its own money, but knowing that its central bank is prepared to do whatever it takes to keep bond yields within a certain range? You know the answer: the going rate. What, I then asked, would they pay if the central bank decided not to buy the bonds? You also know the answer: far, far less. And how does the central bank decide, I asked? Politically. And how is a political decision made? Within a social context. One therefore buys an asset at value X based on a sociological, not econometric assumption.
In short, long before that FT op-ed or the US Overton Window shift, we had ‘free markets’: but built on the foundations of decisions made by unelected central-bank bureaucrats reflecting a broader social dynamic. We all took that as normal because we liked the decisions they were making – keeping rates low enough to allow all other assets to inflate,…and for silly-coin and really-silly-coin to become attractive alternative ‘stores of value’.
To be clear again, this is not a Randian op-ed – just an observation that any spluttering outrage one may have at the idea of a centrally-planned economy is a tad late to the party at this stage.
It is also a further attempt to underline that knowing where markets will trade from here has very little to do with econometrics, and little to do with economics: it has much more to do with political-economy. If you are you are trading ‘widgets’, and ‘widgets’ are politically useful – happy days! Your ‘free market’ will be too. However, if you are busy in the world of ‘gadgets’, and ‘gadgets’ are no longer useful – not so happy days: and if you complain about it, Atlas will shrug.
Arguably, where markets will trade has even more to do with the RIVAL political-economies of the US and China. On which, let me conclude with just one headline: the US is apparently mulling a digital trade deal with the Indo-Pacific excluding China: countries such as Canada, Chile, Japan, Malaysia, Australia, New Zealand, and Singapore would aim to set out common standards for the digital economy, including rules on the use of data, trade facilitation, and electronic customs arrangements. And where digital trade deals are made, real trade will likely follow, at least for digital hardware; and so, perhaps, may the use of some, not other, digital currencies.
This all sounds like a combination of free markets and - you guessed it! - emergent central planning. Are you, your supply chain, or your portfolio going to be on the right side of all the first, second, and third-order effects of such an emerging global widget/gadget divide?
Presumably the EU will want to do something different, and in French because “open strategic autonomy”. Vive la difference