Submitted by Michael Every of Rabobank
In the face of yet more US protests/riots in defiance of curfews, US President Trump last night threatened to bring in the military to maintain control. How things change. We have moved on from an era in which an army was seen of little practical use, and defence budgets slashed; entered one where an army is accepted as needed at some point for looming national security threats, and defence budgets raised; just left one where an army was relied on to deliver logistical support during a county-wide virus lockdown; and are stumbling into one where an army is required to keep control of a liberal democracy. There are, of course, an army of commentators discussing this one way or the other: it’s Law & Order; its’s fascism; it’s about time; it’s the end of US global leadership (which has huge long-term implications for markets if true). US voters will get their say in November.
Yet on the latter point we have seen sympathy protests in the UK, Europe, and even as far away as New Zealand. That does not suggest people no longer care about the US, even if they abhor what has triggered these protests. Not caring would be to shrug, as the same protestors have done about many other major human rights abuses taking place globally - but quite the opposite is happening. Yes, we saw some heavy USD selling yesterday: but it is very unlikely tied to a market walk-away from the US due to this unrest, however serious it is. Indeed, while the USD was having a bad day US stocks still had a reasonably good one, showing US assets are not being dumped even as lock-down fears turn to burn-down and quarantine to curfew. Likewise nobody was running from US Treasuries, even if ‘risk on’ ironically meant 10-yer yields drifted up around 4bp at one point during the day.
In many respects the rise in stocks when the military are about to be called in is odd. True, one can argue this just a case of ***trigger warning for a certain section of the readership of this Daily*** Baron Rothschild’s infamous quote "the time to buy is when there's blood in the streets." However, those in markets know who is to ‘blame’ for stocks shrugging off riots; and economic weakness; and geopolitical risks – central banks. Their ongoing largesse ensures it is almost impossible to repress asset prices.
Unfortunately, as the US is now showing, this is a policy doomed to end in failure, just as it has on the inflation front.
For *years* our research team has been arguing about the dangers of socio-economic inequality caused by a globalised, financialised economy, with the US pursuing it most aggressively of all. We live in an asset-rich, income-poor world – and one where this was not decried, but celebrated by politicians, central bankers, and most of the financial press.
Moreover, every time the system looks like it is about to reset due to its own inherent contradictions and stupidities, and so asset prices move lower, central banks increase QE again --and now even outright monetise debt-- to ensure that this cannot happen. And markets cheer it on.
I am far from the first to say it, but this is socialism for the rich and raw capitalism for everyone else. As such, the results are obvious. Even during Covid-19, which is devastating the economy, pushing unemployment to depression levels, slashing incomes, destroying small businesses, and upending global supply chains, the rich and powerful have got vastly richer and more powerful in both nominal and relative terms. Heads they win; tails you lose. Until we all lose.
There is an emergent view, strongly supported by Turchin’s use of cliodynamics to quantitatively model how countries move from inclusive economic growth and social stability to civil breakdown, that at least one common denominator to both the Hong Kong protests and those in the US is a feeling of bitter disenfranchisement as glittering designer shops and media extolling them spring up next to unsung millions struggling to make ends meet. In that regard, the more QE we get from here, the worse things get in social and political terms. It will be a red flag to a bull, even if it is bullish for assets.
The only logical exception is if that QE becomes MMT and is spent on ordinary people by the government. The other alternative is raw capitalism for everyone, major trust-busting, and an epic asset-price reset: but that Austrian cure is probably going to kill the patient at this stage. On MMT, imagine if the USD2.1 trillion bailout package and USD3.8 trillion fiscal deficit now expected for 2020 were directed mostly into ordinary people’s pockets instead of special interests. Do you think we would be facing an economic slump, or an economic boom? Even the psychological recognition that the government was prepared to think and act like that would be extremely positive. (“A word about my personal philosophy. It is anchored in optimism. It must be, for optimism brings with it hope, a future with a purpose, and therefore, a will to fight for a better world.” ***Trigger warning for a certain section of the readership of this Daily*** Saul Alinsky)
Yes, if we were to see MMT really embraced then it changes domestic political dynamics; we can burn the economics textbooks – which we should be burning anyway; and it opens up a host of geopolitical problems, as has been explored here many times before. (See Moody’s latest downgrade of Indian sovereign debt rating, for example; and note the rumours that China is going to pause US agri purchases.) However, if the alternative is social breakdown and the army on the streets, which one looks more attractive? Sadly, perhaps still that status quo:
- US Republicans are already talking about dealing with the federal debt, as if that were possible, and many Democrats feel the same.
- The UK has had to disavow rumors of public-sector austerity ahead – but it’s coming if certain factions of the Tories get their way. Talk Radio is now asking how the debt will be dealt with.
- In Australia there is talk of a public-sector pay freeze and handing out AUD20,000 to new home buyers despite ‘tradies’ being so busy they don’t bother answering the phone: taxpayers need to ensure Aussie houses are more expensive as wages freeze or fall in other sectors. (The RBA flagged the worst downturn since the 1930s as it left rates on hold today, albeit “it is possible that the depth of the downturn will be less than earlier expected.”)
- Need I add that Europe and austerity usually go together like love and marriage? There is still no agreement from the Frugal Four on the proposed, mildly-expansionary EU budget.
As a final historical heuristic, and with 2020 elections looming in the US, note that historians see the 1968 riots were a significant contributing factor to the election of the socially-conservative Richard Nixon; and economic historians know this marked the start of the subsequent US economic policy shift towards the market-centred neoliberalism that has ended up with us all relying on QE.
Have we come full circle, or are we about to take things to the next level?