By Michael Every of Rabobank
Dream a little dream for me
Janet Yellen, now officially named as Biden’s nominee for Treasury Secretary, joined Twitter yesterday. (She was hardly going to turn up on Parler.) “We face great challenges as a country right now,” she tweeted. “To recover, we must restore the American dream – a society where each person can rise to their potential and dream even bigger for their children. As Treasury Secretary, I will work every day towards rebuilding that dream for all.” Pass the motherhood and apple pie, please.
What is the American Dream, exactly? Like America, it has changed over the years. Once, it was all Puritans dreaming of being able to live their own religious truth far from the controls of Europe; the “pursuit of happiness” was written into the Declaration of Independence along with life and liberty; in the 19th century, the Dream for European immigrants was political freedom and the absence of stifling aristocracy; then the opportunities of the Frontier; then chasing free money in the form of Californian gold; by 1931, in the teeth of the Great Depression, it was that "life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement" regardless of social class or circumstances of birth”; and to Martin Luther King, Jr. in the 1960s, it was spreading those opportunities to *all* US citizens. In 2020 some now argue: “If anyone can be said to embody the American Dream, it's Kim Kardashian West.”
What part of the American Dream is Yellen offering to recover? Presumably not the gold rush, or Bitcoin, but one could see that as a possible side-effect if you are in that camp: will she ever say “There will never be a fiscal crisis in my lifetime”?
What about the Pursuit of Happiness? But from the Treasury? Unlikely. Or religious or political liberty? Wrong portfolio. More seriously, how about socioeconomic mobility, which has been withering in the US? Or good middle-class jobs, which have also been withering? If so, it would be useful to get some details soon of exactly how this will be done, and against the backdrop of the current Congress, not a dream one.
Perhaps owning one’s own home? That is often seen as a key part of the American Dream. Yet didn’t we try that in the early 2000s – and how did that end up? Wouldn’t that today require much lower house prices, or much higher wages, neither of which Yellen did much to cheerlead while at the Fed? (Not that anyone else has either, to be fair.) Lower rates have surely done all they can for their part on housing affordability, and yet rates have trended in the same direction as the American Dream for many people.
A true return of the American Dream would be bearish for bonds and bullish for the USD - unless everyone else globally is also living that Dream of middle-class jobs and wage inflation and higher rates. They aren’t – which is everyone looks to America in the first place. Even the new RCEP, for example, is a mainly a collection of net exporters who mainly net export to the US (or Europe). Let’s also recall the last Fed tightening cycle and the 2013 Taper Tantrum: they were more of a global nightmare, weren’t they? The rest of the world is keen on keeping up with Keeping up with Kardashians, but not on Keeping up with the Keynesians when they raise rates. As J. G. Ballard said decades ago,
“The American Dream has run out of gas. The car has stopped. It no longer supplies the world with its images, its dreams, its fantasies. No more. It's over. It supplies the world with its nightmares now: the Kennedy assassination, Watergate, Vietnam.”
One might say the same about Fed tightening cycles: they may be over (and they are a US nightmare).
Of course, one of the reasons people still talk about the American Dream is because there aren’t many global alternatives. True, Canada and Australia and New Zealand all offer their own versions, but on a small scale with exclusive entry requirements too sometimes. But is there a British Dream other than “Brexit means Brexit”, or a good cup of tea, or pubs reopening? And is there an official European Dream other than ‘more Europe’? What about the Chinese Dream talked of since 2013? This seems to have many interpretations, but one is “a collectivist dream, for which everybody, with hard work, determination, and bravery, cooperate to make China (not the individual) a great nation.” Not really the same kind of global message as in the US – though of global significance.
Indeed, Australia just experienced a very “determined” message from the Global Times via an editorial titled ‘China's goodwill futile with evil Australia’, which following a spat over China’s use of what was seen as offensive imagery of an Australian soldier, states: “Australia's evil acts toward China have made Chinese society not only surprised, but also disgusted. Many Chinese people feel as if they have swallowed a fly when hearing about Australia….How arrogant and shameless the Morrison government is!...Australia treats China's goodwill with evil. It is not worthy to argue with it. If it does not want to do business with China, so be it. Its politics, military and culture should stay far away from China - let's assume the two countries are not on the same planet. As a warhound of the US, Australia should restrain its arrogance. Particularly, its warships must not come to China's coastal areas to flex muscles, or else it will swallow the bitter pills.”)
The RBA also failed to mention any of this backdrop at its on-hold meeting today, focusing instead on vaccine and recovery hopes. That said, it added: “For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2-3% target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. Given the outlook, the Board is not expecting to increase the cash rate for at least 3 years.” So how are we going to recover that Aussie dream of a tight labour market and wage growth and good middle-class jobs, to say nothing of affordable homes (as CoreLogic house prices jumped 0.7% m/m in November)?
Markets continue to stay in their own little dream-world through all of this; or they are living the dream. Are they right to do so? For now, perhaps. Longer term, dream on!
That’s the thing about dreams. Eventually you wake up. And sometimes in a cold sweat.