Authored by Michael Every via Rabobank,
We are apparently edging closer to a fresh round of US fiscal stimulus, with Treasury Secretary Mnuchin saying something in the range of USD1.5-2.2 trillion is “fair”. Talks with Nancy Pelosi are being extended to see if something can be ushered through. This might include a further round of cheques to households. If so, a set of tens of millions of envelopes with de facto cash in them may yet arrive before the tens of millions of envelopes with votes in them go the other way. That’s not quid pro quo if both sides of the US political divide are doing it,…right? It certainly gets libertarians and neoliberals shouting ‘treason’ as public debt soars yet again.
Ironically, this comes just after upbeat US data: ADP employment comfortably beat expectations to rise 749K, the Chicago PMI soared to 62.4, and pending home sales leaped 8.8% m/m to a record. Those low, low rates and high, high concerns about Covid are seeing a major, major shift in living patterns continue. Of course, revised Q2 GDP still collapsed -31.4% q/q annualised, and the last few days have also seen major US corporations announce a slew of job cuts – Disney for example firing 28,000. Not so many smiles there now.
Indeed, the evidence for a K-shaped recovery is still compelling. Those who are able to flee to the countryside and buy those lovely new homes and work remotely have never had it so good, in a way; those who have lost their jobs, don’t know how they will get a new job, and remain stranded have rarely ever had it so bad. You thought we had a polarized society before Covid? Now we won’t even have to physically interact with each other so much. Never the Twains shall meet. Literally. Sorry, Mr. Twain, but you can’t go and visit the other Mr Twain, because he’s on lockdown. This will do wonders for our politics, all over.
The USD has been on the back foot on these whispers of more stimulus, although that sits within the bigger picture of support stemming from the political risk associated with this particular election cycle. (As if the next will be magically better.) However, everyone is going to be playing the same stimulus game in different ways.
Indicatively, yesterday the ECB’s Lagarde said Europe --which has missed its 2% CPI target for the past seven years-- is considering adopting the Fed’s new strategy of allowing inflation to overshoot its target before acting as part of a strategic overhaul. “If credible, such a strategy can strengthen the capacity of monetary policy to stabilize the economy when faced with the lower bound. This is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates,” stated Lagarde.
Of course, this is not credible – and we should not take it as such. There is the little fact of those seven years of consecutive ECB failure even before new structural challenges emerged; that inflation expectations continue to descend; that Japan is decades into the same process and has had no success escaping deflation at all (today’s weak Tankan report won’t have helped); and --as we keep stressing-- that THIS IS ALL POLITICAL ECONOMY AND NOT ECONOMICS.
On which, a Tweet from Luttwak today refers to the French philosopher Benda (1867-1956) and his infamous 1927 book ‘La Trahison des Clercs’, known in the US as ‘The Treason of the Intellectuals’, and in the while the UK as ’The Great Betrayal’. It struck me as poignant.
Benda argued European intellectuals had lost the Classical World’s ability to reason dispassionately about political and military matters, instead becoming apologists for crass nationalism, warmongering and racism – which were all popular in the 1920’s given the failure of post-WW1 capitalism to deal with its deep-rooted socio-economic problems and massive war debts. Things got far worse less than a decade later, of course. As Benda bitterly --accurately--concluded: "And History will smile to think that this is the species for which Socrates and Jesus Christ died".
One can take Benda as a warning about the current breakdown of political norms and niceties; or a warning about rising populism and nationalism and warmongering – which we are hardly short of; or even of the risks to liberal democracy itself, which are increasingly front-page news even in the financial press. (On which note, please see our report ‘The World in 2030: Fragments of the Imagination’ on what things may look like a decade from now, which begins with an analysis of the looming breakdown Benda was pointing to in 1927.)
Yet equally look at central banks impotently talking as if they have control over an economic variable like inflation when they don’t; a variable which, in isolation, does not even matter much in the bigger picture - who *CARES* if CPI is 2% or 1.6% over a seven-year period if society is split in two?!; and who are displaying the ‘intellectual treason’ of not saying this out loud to those who set the parameters within which they operate at a time when society is under strain. It’s not just populists whose lack of Classical reasoning is dangerous: the Establishment is just as bad.
“Sorry, everyone. We can’t hit our inflation target without the following list of socio-economic reforms, no matter how controversial – and we recommend them. Anything else we do will be dangerously distorting to both markets and the fabric of the free society within which we live.”
Can you imagine the ECB or the Fed or the BOE saying this? Of course not. Ridiculous.
Yes, there is now overt central bank support for vanilla ‘fiscal stimulus’ – but just for the short term, and not within any kind of new structural framework that would make it effective.
Yet as I shared a few weeks ago, in the 1930’s, the Fed Chair was honest enough to say exactly that in public testimony. More recently, Greenspan happily shilled his way through calls for tax cuts for the rich and payroll tax hikes for working Joes. It was the complete opposite policy, and helped pave the path to where we are today, but he shilled for it nonetheless.
In short, if you look around you, and then don’t sleep well, look for those who have ‘treasonously’ lost the ability to reason; and find they are not all holders of, or pretenders to, elected office.