Submitted by Michael Every of Rabobank
*I* Can, You Can't(illon)
The US bill imposing mandatory sanctions on Chinese individuals and entities who “materially contribute to the contravention of China’s obligations” to Hong Kong’s autonomy --and banks that do “significant transactions” with them-- which we learned yesterday was being delayed, has instead just been passed unanimously by the Senate. The House of Representatives is working on its own version; that gets reconciled with this bill; the final bill gets passed to President Trump, who either signs it or vetoes it - in which case it has a veto-proof majority anyway. This is the constitutional dynamic that has been described several times in the last 12 months for China-focused bills with serious consequences for not just international relations, but international business and finance. So far the results have not hit markets: but this bill cuts out the middleman and takes us straight to the biting sanctions.
Of course, that does not matter to markets at the moment. Neither does Texas and Florida pausing on re-opening as virus cases surge. Neither does the Fed telling US banks it expects them to see USD700bn in bad loans ahead, and ordering them to cap dividends and suspend buybacks until the end of Q3. (Yes, this is the Fed, not the PBOC, who have already ordered similar measures.) Stocks are up, Bloomberg tells me, because more stimulus is expected now that US re-opening is stalling. Bad news is good news - and good news is of course good news.
This dynamic is well known to regular readers. Less well-known is Richard Cantillon (1680–1734), the Irish-French economist. That’s no accident, as economists are not taught any economic history. Moreover, Cantillon’s ideas are so piercingly relevant that it’s more comfortable not to teach them. He was a mercantilist, and he bequeathed us the “Cantillon Effect”, which like all the best theories is very simple: when money gets printed, those closest to it within the institutional structure get to skim the cream, and those farthest away get none. You can dress this up in economic jargon like differential inflation rates as money supply expands, but the basic message is “It’s good to be the King”, in those days, or today, “*I* Can, You Can’t(illon)”
Is it any wonder we have soaring asset prices at a time of mass unemployment? No! Because money is cascading out of our institutional structure, some are at the front of the queue, others at the back. (And some are outside in the rain.) Our present "solutions" are our problems.
That the BOE Governor just stated the UK government nearly went broke in March when his job is to ensure that can never happen is pure Cantillon. So are the excerpts from two recent articles below, both of which are sadly true:
- The New York Times: “The Jobs We Need”
If income had kept pace with overall economic growth since 1970, Americans in the bottom 90% of the income distribution would be making an extra $12,000 per year, on average. In effect, every American worker in the bottom 90% of the income distribution is sending an annual check for $12,000 to a richer person in the top 10%.
- The Onion: “Study Finds Gap Widening Between Rich Pets And Poor Americans”
“Since the 1970s, economic growth has slowed for all but a tiny fraction of Americans and their pets, such that not only are the vast majority of luxury goods much more available to these purebred dogs, cats, and chinchillas than the average person, rich pets enjoy lavish lifestyles that many US citizens could only dream of.” The report concluded by suggesting that the most viable path to prosperity for low-income Americans was becoming a wealthy family’s pet. [NB That conclusion is not too far away from former Fed Chair Yellen’s thesis that if only poor people had more assets they would be less poor.]
Of course, one can accept the Cantillon effect exists but that it has no negative impact on the economy. For example, if institutional money gets channelled into infrastructure and industrial mercantilism, it’s pro-growth - as we see today in China. However, it’s still a paradigm with a half-life unless market forces also dictate where the funds flow, or unless China can keep finding new foreign markets to absorb its perpetual over-supply. Which brings us back to the US Hong Kong Accountability Bill: try selling more goods when not only are tariffs rising, but your banks are under US sanction.
The other problem we face is when the Cantillon effect lifts some boats by so much more than others. That’s Piketty and Marx territory: is it any wonder we are hearing allegations of “Marxists!” being levelled today?
Things are absolutely worse when Cantillon devolves from doing something productive, and not (re)distributing the gains, to one where it does nothing. I am thinking of the recent run of UK government projects that suck up funds but produce no high speed railways or COVID-19 contact-tracing apps. Is this just bureaucratic incompetence,…or is it actually the Cantillon effect? Somebody is still getting all that money. As one UK radio talk-show host joked yesterday, why can’t the government pay him millions NOT to produce a contact tracing app, as it would be far cheaper? Perhaps his joke is missing the real (politik) point – not just in the UK but in a swathe of countries, including the US.
Meanwhile the other key real politik --the US pushing China into a corner globally and saying “*I* can, you can’t”-- continues to play out. There is that latest Hong Kong bill, and the Wall Street Journal reports the US is considering getting the federal government involved in 5G, perhaps even ‘persuading’ key US firms to buy key European rivals, to ensure that there is a “not China” rival to embattled Huawei. This is unlikely to see Beijing respond well.
Similarly, Berlin is not going to respond well if the US also pushes Germany into a corner too by trying to kill off the Nord Stream 2 pipeline via sanctions, which Bloomberg states is now expected and for which EU retaliatory measures are being prepared - like removing German troops that protect US territory?
The institutional structure is *really* going to have to step up the liquidity support to keep markets smiling, if so. Indeed, those kind of twin shocks would require so much ‘institutional structural support’ that a whole lot more people might ask: “Why Can’t-illon we get some of that good stuff too?”