Submitted by Michael Every of Rabobank
It's All Going to the Dogs (and Goats)
Friday’s April US payrolls report showed 20.5 million jobs lost when in an ordinary downturn 200,000 might be considered bad; the drop in March alone was larger than that seen during the worst of the global financial crisis. In short, we face a global future of mass unemployment (now 14.7% in the US and 13% in Canada) on top of mass debt, both public and private.
Last week the German Constitutional Court (GCC) ruled that it is superior to the European Court of Justice (ECJ), and that the ECB has three months to prove it is not exceeding its remit with its extraordinary monetary policy. Yesterday the President of the EU Commission von der Leyen threatened to sue Germany, stating the final word on EU law is always spoken by the ECJ. Guess which court ultimately hears the case? The ECJ. How is this going to play out if the GCC doesn’t back down? Very badly in the Eurozone periphery, to the benefit of Euroskeptics. How is it going to play out in Germany if the GCC is forced to back down? Badly in Germany, to the benefit of Euroskeptics. Given the ECJ won’t back down and the ECB has said it will ignore the GCC, and the GCC is not likely to blink either, we seem set for an institutional crisis over the scope and shape of the Eurozone financial market – albeit one that rumbles on rather than erupting immediately.
US Vice-President Mike Pence, titular head of the US virus task force, is self-isolating after figures close to the White House were diagnosed as positive for Covid.
Despite the bounce in oil prices, Saudi Arabia is slashing its budget by USD27bn, and is suspending its cost of living allowance for public employees, while VAT is to be tripled to 15%. Riyadh is also discussing if it can reduce the USD69.1bn price it already agreed for a 70% stake in Saudi Basic Industries. The US is also withdrawing both some troops and Patriot missile batteries from the Kingdom. In short, all is not well and socioeconomic, not to say geopolitical, tensions are likely to rise.
A new lockdown in Jilin and one new Covid case in Wuhan aside, the PBOC has recognised that after having ‘beaten the virus’ the Chinese economy is still so weak it requires “more powerful” monetary policies: its latest quarterly monetary policy report dropped the vow to “avoid excess liquidity flooding the economy."
That’s as bearish for CNY, and hence for EM FX and inflation prospects, as it is positive for some local assets.
China is apparently following up on its “economic coercion” against Australia for pushing for an international inquiry into the origins of Covid-19 by slapping huge tariffs on Aussie barley exports. In Australia, a federal parliamentary committee set up by a maverick Queensland MP intends to summon China’s ambassador to give evidence on the matter.
Meanwhile, Pulitzer Prize, Polk, and Peabody award-winning writer @Laurie_Garrett has claimed her White House sources allege its virus response ahead will be: 1) to obfuscate on death numbers to try to ease public concern; and 2) use Executive Orders to "create demand" for US-manufactured goods by outlawing products and mandating Americans purchase replacements. Yes, this is just an allegation. However, we have seen one recent Executive Order that prohibits the acquisition or installation in the US of certain electrical equipment originating in countries designated as “foreign adversaries”. It is also entirely consistent with the pattern we predicted years ago – that, logically, ultra-loose fiscal and monetary stimulus would go hand and hand with a ring-fencing that would lock the new liquidity up at home. It is extremely USD positive if true, and equally negative for major exporters like China…and Germany, who already has a lot on its plate at home.
Likewise, now that the multi-trillion corporate bailout has been agreed, serious Washington politicians are saying that not everyone can be saved and that spending must be pruned. Indeed, the Washington Post says one such plan, from the mind of Art “I had one bad idea and made a career out of it” Laffer, is that US citizens might be offered a one-time payment of USD10,000 upfront in exchange for curbing their future Social Security and retirement benefits. It would mean a huge fiscal upfront cost and then a vast decrease in future liabilities. It’s also a kind of pay-day lending scheme which would ensure Americans in most desperate need of cash upfront having to trade their future security for just a few months’ worth of food and rent: this which would do wonders for US socioeconomic stability and political polarisation, of course.
As we go to the dogs with mass unemployment and mass debt and me-first trade policies to try to get out of it, please recall that we are only doing so because of ideas about dogs…and goats. Contemporary economists are unwittingly beholden to the ideas of Joseph Townsend (1739–1816), a British medical doctor, geologist and vicar who preceded Malthus in his 1786 treatise “A Dissertation on the Poor Laws”; this claimed helping the poor is counter-productive as "it is only hunger which can spur and goad them on to labour…hunger is not only a peaceable, silent, unremitted pressure, but as the most natural motive to industry, it calls forth the most powerful exertions….Hunger will tame the fiercest animals, it will teach decency and civility, obedience and subjugation to the most brutish, the most obstinate, and the most perverse."
Most contemporary economists hopefully disagree with that rhetoric. However, Townsend also argued that supply and demand were “natural laws” and scientific. He even illustrated his argument with an analogy of the struggle for survival between goats and dogs on a remote Pacific island. Crucially, however, in his story the dogs and goats only get to this island because they are introduced by visiting sailors: there is nothing natural about this ecosystem at all! Indeed, trying to pretend supply and demand always transcended all social or cultural context is gibberish: how much do mothers charge their kids for breakfast? Why can’t we freely buy and sell our organs, or drugs? As Polanyi argued, society always pushes back against a “free market” that has been imposed on it. Yet this 18th century fantasy is the ideological bedrock on which we built the architecture of hyper-globalisation
Ironically, while some in markets would like to build the architecture of the post-globalisation world on a similar dog-eat-dog fiscal and labour-capital dynamic, they are all-too happy to have mountains of central-bank goat meat delivered to them to gorge on.
Hence stocks go up even as everything is going down in flames. There is nothing natural about that kind of ‘demand’ being supplied by the monetary authorities: and it’s an internal inconsistency that should really get the populace’s goat.