By Michal Every of Rabobank
Freedom isn't free
“Freedom Day!” The UK is officially removing Covid-19 restrictions - with the double-jabbed Health Secretary doing so suffering from Covid, and the Prime Minister and Chancellor in self-isolation. The latter two had initially not done so because --by complete chance-- both had been randomly selected in a new opt-out pilot scheme for essential public-sector workers. (The same odds art investors are prepared to embrace on the future price of $500,000 paintings by a totally-unrecognised artist.) For the rest of the UK, the ‘pingdemic’ of government messages telling people to self-isolate due to Covid contact is proving massively disruptive to businesses, as key staff suddenly don’t turn up to work when there are already labour shortages.
With Covid-19’s delta variant rampaging, where are we really on ‘Freedom Day’? There is furious debate, but the key data to watch are arguably from the UK and Israel, the two most vaccinated countries. In both, virus case numbers are surging: but vaccines can’t grant immunity, and what matters is serious illness and/or hospitalization. These are also rising among those who have not been vaccinated, and those who have; yet among the vaccinated, it appears to only be the very elderly and/or those with co-morbidity symptoms. In which case, massive lockdowns and many vaccines later, don’t we appear to still be where we were 18 months ago: facing a virus which hits certain demographics *very* hard, but which most others can survive with mild symptoms (if one overlooks the risks of ‘long Covid’)? That’s what some say: others disagree.
Do we open up and ‘do a Mel Gibson’, or keep lockdowns in place even longer to help the vulnerable? Presume herd immunity will develop alongside vaccines --not all of them: Malaysia has dropped Sinovac, and Thailand is pivoting to second doses of another vaccine instead-- or fear the next variant could be more aggressive, hit the young, and/or be vaccine-resistant? More furious debate for the markets to watch. Indeed, as the UK opens up, Israel is considering shutting down international travel for all but essential purposes; and both are rushing to vaccinate children even though delta appears to have no serious impact on them – presumably to reduce their super-spreader effect in schools; which can be passed on to the rest of the population; who are already vaccinated and/or remain vulnerable anyway?
I will conclude with the observation that while the war against Covid began at the start of 2020, and we are all heartily sick of it, wars can go a lot longer than people want them to, and end in defeat, as we just saw in Afghanistan.
Meanwhile, there are lots of other areas where freedom isn’t free. The White House says it is working with social media to ensure the ‘right message’ gets out on Covid: which is what happens during wars - except then it’s called propaganda. In all other circumstances this is constitutionally ‘wobbly’; but The Hill covers the trend of a 'Shadow State’ embracing corporate governance to escape constitutional limits’, arguing “The public is now required to discuss public controversies within the lines and limits set by corporate censors — with the guidance of the government.” Even in New Zealand, the PM proclaims “We will continue to be your single source of truth.” (Which Boris Johnson probably won’t try to say.) But none of this will impact on the broader framing of key political, economic, or market debates anywhere - honest.
Not that the debate has been honest until now anyway. For example, several central banks suggest they are tip-toeing tentatively towards tapering QE, hold on to your hats: and read ‘Quantitative Easing: how the world got hooked on magicked-up money’ from Ann Pettifor, which underlines how we are addicted to it to ensure the vast financial assets in the shadow banking system --to match our ‘shadow state’?-- never see a sustained dip in prices. (Indeed, word on the street is the RBA are going to U-turn their just-flagged de facto QE maturity taper as soon as next month’s meeting now more Covid lockdowns place 30% y/y house-price inflation under pressure.)
Pettifor argues the same Magic Money Tree perspective should be available for the real economy, which is a *moral* argument I have long stressed would become politically inevitable: ”Where is *my* QE?” is a debate now going on in some places. Notably, she concludes: “The only way to call time on QE, if that is what we truly want, is to deconstruct and then reconstruct, regulate and stabilise the whole financial system, so that the extraordinary privilege of credit creation is always balanced by a responsibility not to take undue risks. And if footloose capital responds by skipping across borders and away from oversight, then we may also need to look at controls on that front too. Only then will the world stand any chance of kicking the QE habit, address those dangerous imbalances and finally escape this grim shadowland of money.”
In other words, capital controls are required to remove QE, and for a true domestic and global rebalancing; which means a contraction in mirroring trade deficits; and yet presupposes each country has enough internal resources and productive capacity to be able to deglobalise without the supply-shock inflation we now see; which would be vastly exacerbated by any real-economy use of MMT. So even with MMT, freedom isn’t free if you don’t control your supply chains. Consider that as you consider what is and isn’t “transitory”.
On which note, Treasury Secretary Yellen took time out from talking about inflation and interest rates on Friday to tell the New York Times the Trump tariffs on China have hurt US consumers, and that “I think we should maintain economic integration in terms of trade and capital flows and technology where we can”. Treasury is as Treasury does – and it doesn’t usually listen to those who say that in a realpolitik world, freedom isn’t free trade or free markets. But is this statement a reversal of the Biden administration’s hawkish focus on China? It certainly does not sit with the White House push for “Made in America” stimulus, the labour vs. capital shtick, technology restrictions, rhetoric of “extreme competition”, and the geostrategic focus on the Quad, etc.
Specifically on capital flows, Friday also saw President Biden officially warn US firms based in Hong Kong who cannot read the news of the risks of legal conflicts and other general ‘bad things’ happening, alongside a token increase in sanctions on Chinese officials. Beijing responded by saying the national security restrictions it has imposed on Chinese IPOs in the US are not going to apply in Hong Kong, so US capital can flow there, just with no fees for Wall Street. Market commentators rightly see this as a victory for capital flows and Hong Kong; those with a realpolitik perspective fear the geostrategic logic is the US now either has to give China this win,…or --far less likely, but a fat tail-risk-- act on capital flows there too.
And let’s return to the post-Brexit UK where we began, which this week will see further developments over Northern Ireland and Britain’s freedom to eat British bangers without a trade crash bang wallop: sadly, this chilled-meats issue is unlikely to see both the EU and UK remain chilled – and more so with all governments under pressure over their Covid crisis management.
So what to make of this for markets? For now, a risk-off mood leaning towards the USD and long duration in bonds clearly prevails. Where next depends on what you think the world looks like at the end of this war, and how much freedom any asset class will actually have.