Monetary Policy 'Reset': From Rhetoric To Actuality

Authored by Steven Guinness,

A resurgence in nationalistic tendencies has been predominately associated with the advents of Brexit and Donald Trump’s presidency. But have these outcomes meant that we now neglect to give due consideration to the years that preceded the supposed breakdown of the ‘rules based global order‘?

It was in Davos at the 2013 World Economic Forum – three years before the UK voted to leave the European Union – that IMF head Christine Lagarde warned an audience of bankers and economists of the dangers of renewed protectionism:

If we look at openness, and we see that the situation is improving, you can be absolutely sure that nations will revert to their natural tendency of hiding behind their borders, of moving toward protectionism, of listening to vested interest and will forget about transcending those national priorities. It is not the way to go.

Of paramount importance, according to Lagarde, was the removal of barriers, particularly in terms of global trade. By observing the climate in the present day, trade has become a central pillar of geopolitical disorder in the manner of ‘Trump’s Trade War‘ with China and the potential for supply chains between the UK and the EU to be compromised in the wake of Brexit.

In 2014, Lagarde returned to Davos to speak to delegates about something she called ‘reset‘. Keep in mind at this point that the world was still over two years away from Brexit and Trump’s ascension to power. There had yet to be any discernible rise in what is today characterised throughout the media as ‘populism‘.

Sharing a platform with Bank of England governor Mark Carney and European Central Bank President Mario Draghi, Lagarde explained what this reset would entail in regards to monetary policy.

We see as necessary going forward a reset in the area of monetary policies. We believe that quantitative easing and the accommodating monetary policies that have been adopted should be continued up until such point that growth is well anchored in those economies.

Once it is well anchored then those accommodating policies have to be reformulated, have to move either back into their old territories or be more traditional, or be, maybe, of a different kind.

A further two facets to the ‘reset‘ would be the reform of the financial sector and regulatory environment via Basel III (which runs through the Bank for International Settlements), and structural reforms of global economies that would encompass product markets, service markets and emerging markets.

In an interview with Bloomberg during the 2014 World Economic Forum, Lagarde expanded on her definition of a ‘reset. Her message was clear: without cooperation between nations, the reset would most likely be fraught with instability and market turbulence. Governments would have to implement ‘growth friendly measures‘ in order to secure ‘jobs rich growth‘.

Behind national governments sit the central banks, who Lagarde said would begin a gradual process of reversing six years of ‘unconventional‘ monetary policy methods. This would later become widely known as ‘normalisation‘.

At the time of Lagarde’s interview, the Federal Reserve had just begun to taper their asset purchasing scheme (quantitative easing), which was introduced in the aftermath of Lehman Brothers collapsing. By the end of 2014, the Fed had ended the scheme entirely. A year later, in December 2015, they began to raise interest rates – the first rise in over a decade.

It was not until December 2016 – after Donald Trump was confirmed as the next President – that the Fed accelerated its programme of ‘normalising‘ rates. This has since expanded to the bank rolling off assets from its balance sheet – a process called ‘balance sheet normalisation‘.

Altogether, the Fed have raised rates seven times since the December 2016 hike, and so far have rolled off over $400 billion in assets from their balance sheet.

Outside of America, the Bank of England have also begun to raise rates amidst the UK preparing to leave the EU. The European Central Bank announced in December 2018 that as of the new year, they would cease their bond buying facility, having gradually tapered the programme over a two year period.

Nearly five years after Christine Lagarde first spoke of the need for a ‘reset‘ of global monetary policy, three of the most influential central banks in the world are all engaged in the practice, albeit at varying speeds.

What began as rhetoric has been reinforced with concrete actions. As much as Lagarde and the IMF may have warned against ‘a rising tide of inward-looking nationalism‘ (and continues to do so), there is no doubt that such mechanisms have assisted in the ‘reset‘ of monetary policies.

How so? It quickly becomes apparent when reading through central bank communications that of primary concern to them now is their mandate for 2% annual inflation. The Fed is raising rates in part under the proviso of containing ‘inflationary pressures‘, whilst the Bank of England’s two rate hikes since the original EU referendum have been motivated by inflation breaching the 2% level due to a sustained devaluation of sterling.

As you would expect, the IMF fully endorses the current trend of monetary policy. The communique from the thirty-eighth meeting of the International Monetary and Financial Committee in October 2018 stated that where inflation was ‘close to or above target‘, central banks should tighten policy.

I have argued in separate articles that the actions stemming from Brexit and Donald Trump – far from being to the detriment of globalists – do in fact work in their favour.

The ‘reset‘ of monetary policy works primarily as a vehicle for the International Monetary Fund and the Bank for International Settlements to position themselves as the beneficiaries of the inevitable economic downturn that will ensue.

As I will be exploring in an upcoming series of articles, the IMF are agitating to reform their quota subscriptions (the institution’s prime source of funding) and in turn the weighting of their Special Drawing Rights (SDR) basket of currencies.

Conditions in the global economy – namely rising trade protectionism that pits the United States and China into economic conflict – has put the world reserve status of the dollar in increased jeopardy. For the IMF to achieve their goals, the dominance of the dollar as the payment of choice throughout global trade must not only be jeopardized. It must ultimately be dismantled, so as to gradually move the world nearer to the globalist utopia of assimilating national currencies through the SDR with the aim of creating a digitised global currency.

I believe that China’s inclusion in the IMF’s SDR basket in 2016 – just weeks before Donald Trump was chosen as the next U.S. president – marked the next significant stage of this process.