Submitted by Rabobank strategist Michael Every
The ECB: a legend in its own mind. Draghi recently emphasized that although GDP growth was not looking good now, better times lay ahead – because Chinese fiscal and monetary stimulus will kick in. I know the neoliberal Davos consensus Draghi champions is a big fan of outsourcing, but isn’t it taking things a bit too far when the central bank of the world’s richest region leaves much-needed stimulus to a far poorer country with a political-economy anathema to it? If Brexit goes badly wrong will Draghi be on the phone to the PBOC straight away in that case?
Yesterday the ECB also proudly Tweeted its own economic research showing **drumroll** that QE helped reduce inequality.
ECB asset purchases have reduced inequality in the eurozone, our research shows. They have especially benefited low-income households, which suffer the most from unemployment. Full Research Bulletin here https://t.co/MlMQO2BXxK pic.twitter.com/4DtpcOsqms— European Central Bank (@ecb) January 30, 2019
That’s right, reduce. The central claims are: (1) by lowering unemployment at the lower end of the socio-economic ladder, QE put money in people’s pockets; (2) higher stock prices didn’t have any influence on wealth inequality; and (3) higher house prices helped to reduce inequality.
I can hear the stunned silence. That’s wonderfully convenient for the ECB, and for Davos Man, as the 2019 WEF started by warning of the need to look after “the losers of globalisation” and to refocus its moral mission - and then failed to provide a single proposal for how we do that, again, switching the topic to climate change and hoping we wouldn’t notice because it’s so serious a topic. Yet now there is a cure for global inequality – more QE!
At first reading I thought that these ECB results were the kind of start-with-your-conclusion-and-work-backwards, pick-and-mix, pseudo-scientific gibberish that I have come to expect from the same central bank economic research teams who didn’t see the GFC coming, expect to have to do QE after the GFC, didn’t see the new normal coming, didn’t see populism coming, and now don’t understand that QT (in the US) causes a market meltdown. However, I was too generous.
It’s not that the ECB can’t prove QE helped reduce unemployment; or that the jobs created are widely accepted as being low paid; or that the ECB’s survey data covers just four of the Eurozone’s diverse members; or that it is insane to argue nobody gets richer from rising equities; or that rising house prices, and rents, must mean inequality for those who don’t own houses. It’s because on closer examination, the authors are not Useful Idiots. They are shills.
The give-away is that at the end of the accompanying video explaining why the ECB has reduced inequality there are two piles of graphic money. The smaller one, lower-income households, grows. (Yay!) The larger one, richer households, shrinks as if the rich are getting less money in some kind of tax redistribution mechanism. (Yay!) That is objectively not true. Yet it’s what they want viewers to see. That is the kind of spin you’d associate with a populist politician. As my colleague Christian Lawrence quipped after I shared the video with him, “Next the ECB will be telling us negative interest rates help the homeless.”
We were not the only ones to feel that way. The responses on Twitter were a flood of very angry rebuttals. Indeed, I don’t think the ECB realises just what a stupid mistake it has made. It is never a good thing to be spotted as a shill: crowds tend to get angry. Worse, the ECB have made a (false) economic case that QE helps inequality, when actually it exacerbates it. That means when we do more QE people will be expecting to see greater equality and will get the opposite – again, the crowd will get nasty. The ECB have also opened the door to those same angry populists to say “If your QE can reduce inequality slightly, imagine what our kind of QE could do!” – and what intellectual defence could the ECB mount? “You can’t do that – it’s…too effective(?)”
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Meanwhile, the Fed did what every cynic must have known in their heart of hearts that the Fed would do: totally capitulate. Not only is it now “patient” whereas in October the economy was overheating --and unemployment is lower now than it was then, and wage growth higher-- but it is willing to be “flexible“ over the pace at which is reduces its balance sheet, and to expand the same balance sheet if things go wrong. Considering that our house view is that we are likely to see a US recession in 2020, we can start the clock until rate cuts, not rate hikes, and towards more QE and a larger Fed balance sheet, not a smaller one. Luckily, of course, the ECB have just laid out the intellectual ground for the Fed to claim that they will be reducing inequality by doing so. I can smell the pitchforks and burning torches from here.
In short, our global institutions, like central banks, are in serious trouble even before we have to deal with a trade war, Hard Brexit, geopolitical risk, the May EU elections, or the next US recession, any of which could happen. Populism is rising, and the Establishment has no idea what to do. Epic market volatility is assured.
Naturally, markets love it today though. More drugs, what’s not to like! Stocks up, bond yields down, and the USD down – for now. Because don’t think this means good things for the rest of the world. That Chinese stimulus had better arrive soon. What used to be capitalism is waiting patiently for what is still closer to communism than the used-to-be capitalists will admit.