By Michael Every of Rabobank
A step closer...but towards what?
The Fed came, the Fed saw, and the Fed did what we all knew it was going to do: be extremely dovish. Fed-watcher Philip Marey titled his note ‘Pussyfooting’, in that there was not even advanced notice of any advanced notice towards tapering QE. The Financial Times --which got the US Secretary of Defence’s comments regarding his position on the UK deployment of its two aircraft carriers in the South China Sea massively wrong this week-- instead runs with the headline “Fed moves closer to decision on ‘tapering’ massive stimulus”. I contend the only accurate part of that headline is the ‘tapering’ - if one is using the apostrophes in a sarcastic manner. However, there clearly was a “move closer” by the Fed: the question is towards what?
Fed Chair Powell made clear that further “substantial progress” required for tapering is towards maximum employment - not about inflation. That is an enormous de facto shift in its mandate. Imagine if the Covid situation were to get much worse again, hypothetically, and further lockdowns imposed, with further pay-outs for people to stay at home. Against groaning supply chains, we would have high unemployment *and* higher inflation: and the Fed pumping QE in regardless. Perhaps tapering wouldn’t help: but how does QE if yet-higher supply-side inflation becomes even more demand-destructive, and/or finally shifts inflation psychology?
The Fed also introduced a new standing repo facility of $500bn (nowhere near enough if it is ever really needed, but which can and certainly will be increased then) at 0.25%, establishing a RP-RRP corridor alongside the reverse repo rate of 0.05%. That is a technical move but: 1) does look like prep for a future crisis; and 2) I can think of other central banks that have traditionally operated RP-RRP corridors, and with far more political focus on employment than inflation.
Indeed, my long-running Kaleckian thesis is that as globalization made most economies far more alike --initially in a happy way to allude to Tolstoy-- this also meant them meeting in the middle in socio-economic structure (“Brazilification”), rather than the bottom rising to the standards of the top; that would mean eventual crisis; and permanent reliance on low-rates and QE; and a mutation in central-banking away from rates and closer to highly-politicised liquidity management; and which ultimately will make each economy unhappy in its own way.
As an example, in the US the only thing that matters apart from the Fed doing nothing is politics. There we have more fiscal stimulus headlines flying around: yes to a bipartisan $1.2 trillion on infrastructure(?); no to $3.5 trillion on everything else(?) We also have the White House proposing a further increase in Made in America spending from the federal government: today will see the domestic content threshold raised to 60% from 55%, and increased in phases to 75% by 2029. (At which point, federal spending may be vastly larger, according to the current budget projections.) This is designed to give supply chains time to adapt – if they have any ability to right now.
Similarly, the Chinese-state crackdown-driven market sell-off has been temporarily calmed by state regulators calling in state-run Chinese banks and having a state word with them. “What this shows is that there isn’t an intention to unilaterally destroy business models and businesses which are fundamentally aligned to the party’s priorities for China’s development”, says one analyst quoted on Bloomberg, and a slew of others agree the best thing to do is just invest where Beijing wants you to. The same kind of argument is being heard in Europe and elsewhere re: Green Transitions, etc.; and, at the micro level, in the UK a government app will reward users who swap junk food for fruit and vegetables – which may or may not launch a British chav-stronomic revolution. Of course, we also have the meta race towards CBDCs, central-bank digital coins, which will necessarily open a Pandora’s Box of financial, economic, and political Panopticons that can cut banks out of the loop entirely if needs be.
Some readers may recall that last year I published a report bewailing that while markets are happy with our central-bankism --“Where is this month’s QE?”-- we no longer have an overarching political-economy framework to support why/how we are where we are. In short, there is no agreement on the underlying “-ism” at work. Most people making rational investment decisions in capital markets think this is “capitalism” – and perhaps it is, as the always-worth-reading Branko Milanovic argues. However, allow me to repeat a very basic “-ism” taxonomy: Capitalism is private ownership of capital for private goals; communism is state ownership of capital for state goals; fascism/corporatism is private ownership of capital for state goals. Maybe we need a new one – but that would involve awkward Cantillon Effect questions, and some might not like the answers they are given. In the meantime, QE is billions of global reasons a month not to talk about this.
But do take a moment to ponder the above in-between those you logically spend going short the US Dollar or long the US curve post-Fed, and/or as you follow the investment opportunities regulators tell you to follow “because markets”. Those kind of thoughts tell you what kind of capital markets we will eventually have if the political-economy “moves closer” to being something new while we did not bothering to define anything that is happening beyond end-quarter results.
Yet one also has to understand that if one does ask those questions, one may come to see that the answers vary by geography. Indeed, as Chinese regulators try to calm markets, the Wall Street Journal also reports: “China’s government is planning to introduce new laws in Hong Kong and Macau that could bar foreign entities and individuals in the cities from complying with sanctions against China, according to people familiar with the discussions…The introduction of the law in the two Chinese territories, especially in the financial hub of Hong Kong, could leave many companies and their employees caught in the middle as China and the US clash over the future of the former British colony.” New stringent data laws also kick in in Hong Kong from September 1 as well.
Trying to follow two clashing sets of state regulators offering the mandated way to the best returns under “free-market capitalism” sounds like it might be problematic: but does this ironically mean we get even more QE (and even fewer key questions)?