By Michael Every of Rabobank
Sic Transit Gloria Mundi in Latin, ‘Thus passes worldly glory’ in English, used to be said at papal coronation ceremonies. Today what is passing is the glorious promise that world inflation was transitory. The Fed’s Bostic is the first major central banker to openly admit that “Transitory is a dirty word.” Speaking with a glass jar labelled “transitory” at his side and depositing $1 each time he used the “swear word”, he underlined “It is becoming increasingly clear that the feature of this episode that has animated price pressures --mainly the intense and widespread supply-chain disruptions-- will not be brief. By this definition, then, the forces are not transitory.” We get US inflation today, where the market is looking for a 0.3% m/m print, 5.3% y/y, and 0.2% core, 4.0% y/y, meaning negative real average earnings growth yet again.
The NFIB SME survey, which dipped again yesterday, likewise argued: “Small business owners are doing their best to meet the needs of customers, but are unable to hire workers or receive the needed supplies and inventories. The outlook for economic policy is not encouraging to owners, as lawmakers shift to talks about tax increases and additional regulations.” The report showed a record 51% of all small businesses reporting job openings they can’t fill, and a net 42% raising wages to help offset the shortage, which is a 48-year record high reading.
Does this imply a more hawkish stance is therefore needed from central banks? That remains to be seen: but we certainly saw a bearish US curve flattening yesterday, with 2-year yields up and 10-year yields down. That also says “Sic Transit Gloria Mundi” --or ‘policy error!’-- regarding potential rate responses to a supply-side shock to inflation/the labor force that if *not* matched by at least some wage inflation means either businesses shutting down for lack of workers, or demand shutting down for those businesses.
The Fed and Treasury may be busy elsewhere too, as the NFIB fret. It’s no longer ‘Quarles in Charge’ of our days and our nights and our wrongs and our rights within banking, with the deregulatory Fed Vice Chair for Supervision stepping down. At the same time, Treasury Secretary Yellen insists the IRS needs to step up, inspecting all transactions over $600: wouldn’t a central-bank digital currency make it easier, he asked, recognizing a Trojan horse when he sees one? Yellen also admitted in an interview that the $600 mark is not where tax evasion is happening. That’s in the Pandora Papers which, just as I expected, are fading from public view as rapidly as all the other piles of steaming elite malfeasance elephant-dung in the room.
Which leads us to the IMF’s Chief Executive Georgieva keeping her job despite being accused of rigging “Doing Business” indicators in favor of China while running the World Bank. This outcome is seen as yet another US foreign policy humiliation, with the Europeans siding with Beijing: indeed, for the EU, key principals were at stake - ensuring a European runs the IMF despite their declining world power; and doing the opposite of whatever the Americans want. This is as awkward an outcome as possible for the Fund given Georgieva still has to work with Yellen, who clearly wanted her gone given she would not even take her calls. It’s even worse given the World Bank has a second investigation into this matter ahead, which will re-open the wound (unless that is rigged too). The FT bewails this outcome besmirches the IMF’s credibility, which does looks transitory. It also underlines the fact that our global acronyms (WHO, WTO, IMF, etc.) are all now part of a US-China (and EU!) tug-of-war.
The IMF is meanwhile downgrading its global growth forecast, and warning of inflation and supply-chain disruptions. In typical IMF fashion, this would have been a great observation six months ago: today, it’s the last guy to join an angry crowd right at the back and ‘bravely’ say “Yeah!” Worse, the Fund is only downgrading its world GDP for 2021 from 6.0% to 5.9% despite energy and food prices leaping in the last few months, and Evergrande tumbling, hitting 30% of China’s GDP (as Chinese car sales were -17.3% y/y in September, and Chinese coal prices hit another record high, promising even higher electricity prices). For 2022, the IMF thinks things are the same now as they were in July, so is sticking with 4.9% GDP growth. The Fund also says:
“This is a time for careful policy calibration….Policymakers are now confronted with a challenging trade-off: They must continue to provide near-term support to the global economy, even as they must simultaneously try to avoid the build-up of medium-term financial-stability risks.” So, what to do, oh tax-exempt wise ones?
“Policymakers will need action plans that guard against unintended consequences.” Since when has any authority ever been able to do that, and how would they be able to start now?
“Monetary and fiscal policy support should be more targeted and tailored to country-specific circumstances, given the varying pace of the recovery across countries.” So you are all on your own, people. Smoke ‘em if you got ‘em!
“Central banks will need to provide clear guidance about their future approach to monetary policy, aiming to avoid an unwarranted or abrupt tightening of financial conditions. Monetary authorities should remain vigilant, and if price pressures turn out to be more persistent than anticipated, act decisively to avoid an unmooring of inflation expectations. Fiscal support can appropriately shift toward more targeted measures and be tailored to country-specific characteristics.” So, raise rates *and* loosen fiscal policy to compensate at a time of massive public debt build-ups?
“Policymakers should take early action and tighten selected macroprudential tools to target pockets of elevated vulnerabilities. This is critical for addressing the potential unintended consequences of their unprecedented measures, given the possible need for prolonged policy support to ensure a sustainable recovery.” So, deflate the housing and stock bubbles you deliberately blew, and your economies rely on – see Chinese property and car sales for how that is working out; and
“Policymakers in emerging and frontier markets should, where possible, begin to rebuild fiscal buffers and implement structural reforms.” So, tighten fiscal policy if you are poor, while loosening it if you are rich. Literally, smoke ‘em if you got ‘em. And Build Back Better, of course. Don’t forget to perform that mantra too.
Of course, this miasma of internally-contradictory econo-technobabble is the best we are going to get given the neoclassical IMF will not, cannot point out that structural supply-side problems require structural supply-side solutions – and these involve more resilience, spare capacity and/or, localization; which means massive geopolitical disruption; and, on the other side, higher inflation and rates, and less globalization - and so less need for an IMF. Sic Transit Gloria IMFundi.