2021 in focus
Secretary Yellen’s fondness for a failed monetary regime
No doubt Secretary Yellen yearns for a future when inflation in the US ticks along
at 2 per cent per annum, the economy is at full employment and real interest
rates back to 3 per cent. That is the vision of the future she likely had when she
was the chief advocate in the Greenspan Fed (back in 1997) of putting the US on
the 2 per cent inflation standard.
‘Inflation watching’ and ‘FOMC watching’ will undoubtedly continue as key
short-term dynamic factors in the short-term course of global asset prices.
These activities, however, are borderline, or even fruitless, in terms of getting
the big picture right regarding the critical issues of monetary inflation over the
next half-decade and beyond. As of now, the imminent inflation story is most
likely over-cooked as regards sustained consumer price inflation. By contrast,
asset inflation remains intense. The balance of probabilities is that a bust of
present asset inflation will precede the sustained emergence of consumer price
inflation at high levels.
THE ROUTE TO AN ERA OF HIGH CONSUMER PRICE INFLATION
An era of high consumer price inflation, not just in the US but globally, most
likely lies ahead. Even so, we should be prepared for a probable lull in inflation
after a first spurt later this year. And a risk-scenario exists were a growth cycle
downturn starting in 2022 develops into a full-blown recession driven by savage
asset price deflation. The aftermath of that could be an extended period of
monetary repression rather than a resumed early march into an era of high
Dysfunctional long-term rate markets: next stop for 10-yr US is 1.25%, not 3.75%.
In global risk-on markets, many participants now regard the jitters of late last year, as a bad dream, which did not reflect actual or future reality.
The optimists now point to the looming US-China deal, Fed “easing”, and perhaps an “orderly” Brexit. Furthermore, data points this week in China and Europe have been “supportive” of the “green shoots” view.
All of this is unconvincing. A China-US deal is not the magic wand to restoring Chinese and European growth. There have been winners as well as losers, from tariffs.
We just do not know, whether the pause in rate rises by the Fed amounts to monetary easing. The stance of policy should not be measured by rate moves. It is premature to cheer any Brexit deal.
“If President Trump were seriously intent on tackling the currency manipulators in Tokyo, Berlin/Frankfurt, and yes, Beijing, his Administration would be arguing for a shift of monetary policies in those capitals. Radical monetary ease, including negative rates, is the core thrust of currency manipulation – responsible for the cheap euro, yen and yuan. There is absolutely no indication that Trump Administration officials are thinking in this way. Even if they were, the concern might be uppermost that asking Europe or Japan to tighten monetary policies could set off a global stock market crash, the opposite of what the Top Command wants.
“Meanwhile President Trump has been filling all the empty chairs on the Fed with neo-Keynesian economists or private equity barons – all of whom fully approve of the monetary policies, as now consensus in the global central bankers’ club. How can the US attack Europe and Japan for following versions of a monetary philosophy which it practices itself?”
“Markets are celebrating the apparent postponement of economic and political danger in three areas. First, the dominant view in the market-place appears to be that Fed Chief Powell has successfully postponed the transition of asset inflation into its dangerous end-phase of asset deflation and recession. Second, there is strong expectation that the immediate postponement of US- China tariff war will lead on to indefinite postponement. Third, the capitulation of the May government to the EU withdrawal terms and effective ruling out of a no-deal Brexit is being celebrated in the markets as meaning that no deal is now permanently off the table. All these hopes of indefinite postponement are likely to be dashed.”