By Michael Every of Rabobank
The Means of (No) Production
Today is a Fed decision day. For the markets, the key question is “What more can they realistically do at this stage?” Indicative that there is still more to do is the fact that the virus has not stopped raging across the US, and indeed much of the world, even if it no longer deems major media coverage; that opening-ups are becoming locking-downs; that the most recent initial claims numbers were even more terrible than usual; and that, as things stand at time of writing, Congress is divided over the shape of the latest fiscal response package even though extended unemployment benefits have now stopped and the rental eviction moratorium expires at the end of the month. Moreover, the Fed already took the step of announcing a day before their meeting finishes that seven of their nine emergency lending programs will be extended to the end of the year. (When do they get extended into 2021?)
For a full preview of the upcoming meeting outcome, please see here from Philip Marey, but it seems too early for serious flagging of yield curve control, especially when yields are so low, or of negative rates, which are the final Rubicon for the Fed to cross. There certainly aren’t going to be any reasons for Treasuries to sell off on the meeting outcome, however. On the FX front, and against market chatter --not subscribed to here-- that any new Fed dovishness presages the beginning of the end of the USD as a reserve currency, we might see USD on the back foot, which would hardly be exceptional at the moment. Again, let’s reiterate the only reason other major central banks are not having to keep ‘double dipping’ as much as the Fed is doing are: 1) because their fiscal stimuli, like nationalised payrolls, have been in place for months – and yet which runs out in after the summer in the UK case, for example; and 2) because nobody else globally is demanding their currency like the USD.
The Fed today will be thinking about how to maintain as much consumption as possible going forwards and as much stock elevation as required. Might we even get an indication of some new macroeconomic (and maybe socio-economic?) variables that it will track, besides inflation and generic unemployment, so the market can get a grasp of just how long it will be staying on hold?
You will notice one thing missing above for the Fed to worry about: production. Which says a lot about where we stand today and why we stand there. Growing up when I did, and where I did, there was regular dinner-table discussion about ‘the means of production’ and who was and should be controlling them. I suspect many younger market players today could not even tell you which economist coined that key term. They probably have a really good funny picture of a dog or a cat or a heavily-edited ‘catfishing’ selfie though, so there’s that. Of course, the US economy is not coincidentally today all about consumption and not production of goods: “Let other countries *produce* stuff and we will just buy it,” was the ruling economic philosophy in the States from 1945 to 2016, after all. (Not before, and not necessarily in the future though, despite it trying to make a comeback as Trump stumbles.)
On one level this is a story that matters for the Fed, because with no production and lots of needed consumption you also need lots of debt – which we have, but which has logical limits for the household sector at least. It’s also a story for the FX market, because the US consuming and others producing is a weak USD story and also one of global business as usual. In which light, don’t overlook that the US firm Kodak just received a USD765m loan from the government to shift to producing chemicals needed for local production of generic medicines, a step taken to ensure that the US is no longer solely reliant on China and India for such inputs. Yes, that’s the first step on a long, long journey that the next US administration might prefer to talk about and not actually take. However, it also a sign that it’s not global business as usual, and that there are lots of potential USD stings in the tail – most so for those reliant on selling to them.
There is another level on which “the means of production” is relevant today – and that is because US tech giants are being called to testify to Congress against a backdrop of them becoming political footballs in an ever-more polarised society; something their many critics claim they help drive in various ways - have you seen the “Antisocial media” T-shirts?
In such a divided society --where “cultural Marxism” and “trained Marxist” are used as criticism and self-identification—it is ironic that most of these firms don’t actually produce anything, and certainly not in the US: one lets you search for other things; most of the others have no content unless the users provide it or produce it (in which case, mostly from abroad again). There is no “means of production” at all in that sense today. Yet clearly there is still vast power – and so an enormous ding-dong going on over who ‘controls’ them, and to what end.
However, if what these platforms say and how much concentrated power they have might generate some heat for the TV cameras, it would appear there is still little likelihood of any serious antitrust action being proposed by either the Republicans or the Democrats in Congress (despite Senator Hawley having just introduced legislation that would effectively kill targeted ads based on tracking your online activities).
Calls for moves against monopolies have been around in the US since its creation, flared in particular in the 1850s over land, and Congress passed major anti-trust laws to reshape the US economy in 1890, 1913, 1936, and 1950, as well as in the 1982. However, that strategy has dropped by the wayside since under the combination of a neoliberal view that monopolies can’t happen (ignoring evidence that they do) and that even if they do, which is inherently contradictory, they can be good for consumers. (Thanks to Milton Friedman – the man who argued the more ridiculous a theory’s basis is, the more important it is too.) Of course, now we also have the challenge of Chinese tech giants, which US titans will also lever in DC as reason to leave them untouched.
There is no room to repeat it here in full, but there is a strong set of arguments that monopolies of the means of production (in China, or anywhere) --and of the means of no production—are highly disinflationary and part and parcel of the “lower forever” rates view. High levels of profitability for just some are entirely consistent with far lower ones, and biting deflation, for many, many others.
As such, while we are listening to the Fed talk about what it needs to do, what Congress says it won’t need to do arguably gives us a clue as to what the Fed will ultimately be saying it needs to do when it is next surprised to the downside by structural low inflation.