By Michael Every of Rabobank
Why Oh Weimar?
Yesterday, we were treated to a double-whammy of US economic pontificating. First we had Fed Chair Powell go through his “transitory” shtick for Congress for the second day in a row: as with all shtick, it’s better the first time you see it.
This time round he was pressed harder on why the Fed is still piling in so much monetary support when headline inflation is so high. Powell replied the latter was due to “opening up” and is “unique” in history. Which, even allowing for Covid, shows like most central bankers, and economists, he reads no economic history. Such inflation has occurred in the past in many countries, and there is no shortage of supply of interesting comparative examples if one recognizes the problem for what it is - supply-chain shock, and then demand-shock related, not the easier sounding “opening up”.
Straight off the top of my head, how about when France seized the Ruhr from Weimar Germany in 1923, resulting in a loss of critical German industry, and a general strike by its industrial work-force, whom the German government continued to pay to do nothing out of national sympathy? Note how that ended up in terms of hyperinflation. Of course, one must also stress that the post-WW1 Weimar Papiermark was hardly the equivalent of the global reserve US Dollar today, and Germany’s huge, unpayable post-war debt was in a foreign currency – gold. As such, the likelihood of the US repeating this experience like-for-like is minimal; but that does not mean some of the underlying lessons are not applicable in terms of the kind of problems that can appear, at least as one of a series of heuristics for policy-makers to keep at hand.
But back to Powell: “So we’re really trying to understand the base case and also the risks,” he reassured, while adding the second-hand argument that inflation is about second-hand cars and not anything we have ever seen before.
Meanwhile, the Union Pacific rail network is so congested around Chicago they are refusing to haul ocean shipping containers from West Coast US ports; LA-Long Beach port metrics were already slipping again, with more vessel bunching, longer dwell times, and chassis-street dwell; and the Cass Freight index of intra-US shipping expenditures was up 56.4% y/y in June, the highest since records began in 1990, and 45.3% from January 2020 to look past Covid. So while the Fed is trying to understand the risks, why oh Weimar can’t they see this is not as simple as just “opening up”? Don’t just sit there – read something!
Then we had Treasury Secretary Yellen with a shot-gun of market-related headlines, some of which suggested we might need to close down again:
“It’s not certain Amazon is covered by the global tax deal” she is pushing and is “very hopeful holdouts will join” - in order to perhaps not tax Amazon;
“Want to make sure inflation remains under control”- which is Fed- not Treasury-speak;
“Continues to see return to full employment in 2022”- which runs against the low inflation argument unless all the jobs are badly paid ones – such as drones in Sector G warehouses for certain large web-based firms, for example;
“Will have several more months of rapid inflation” – so “transitory” is now into Q4 at least? Again, this is Fed-speak;
“Inflation expectations still look well contained” Again with the inflation and the Fed-speak;
“Don’t see the same dangers in housing as in 2000s” but “worried about housing affordability.” So it isn’t a bubble – it’s just the US, which has nothing but land, can no longer produce housing at a price Americans can afford it, despite the lowest interest rates in mankind’s history;
“See world where interest rates remain at moderate level” – which is surely higher than now, so rates are going up - and is ultra-Fed-speak. I refer readers to the Treasury website, where ‘Interest Rates - Frequently Asked Questions’ states: “Treasury does not project future interest rates and neither endorses nor discourages work by other researchers in their attempts to project rates”;
“Drop in yields shows inflation remains under control” – which is market-focused Fed-speak. And questionable. Long yields are capable of plunging, and curves of flattening, on the view that supply-side inflation is surging and US wages aren’t, and hence demand destruction is being wreaked on the economy, which any “moderate” rate hikes will only make worse;
“Have to worry about Covid outbreaks in parts of the country” and “Covid shutdowns could happen in US” – which may prove to be true,…but which is surely a sure way to ensure businesses aren’t sure, don’t re-open, and so employment does not recover, so more government stimulus is needed through the bottleneck of over-strained supply chains, and the Fed’s puzzle over inflationary “opening up” continues;
“Have been in touch with Chinese counterparts” – which is interesting considering the headlines are also that: 1) Yellen is continuing the official policy of not having regular US-China economic dialogue; and 2) China just refused to meet with the US Deputy Secretary of State; and
“Fed has done a good job, declines to comment on Powell” – which in the current zeitgeist can be read in many different ways. Yellen wasn’t opening up any more than that, but added she would be talking to President Biden about Powell. Note the ex-Fed Chair Treasury Secretary now out-ranks the Fed Chair, who does not get any say on who sits at Treasury. There is another structural change for you, and for markets.
Meanwhile, from the giant US to tiny NZ, the same kind of structural issues appear. With Kiwi Q2 CPI leaping 1.3% q/q and 3.3% y/y vs. 0.7% and 2.7% expected, to say nothing of those pesky central-bank mandated house prices, pressure is building on the RBNZ to do something beyond its recent tapering of QE. Yet again, we see monetary policy having to fight broader and deeper issues, with the likes of NZD as potential collateral damage.