The lesson of history is that fine-tuning monetary policy, with the intention of pre-empting the passage of the business cycle from expansion into recession phase, is an example of what King Solomon described as the futility of futilities. This lesson does not derive from a doom-premise of seven years of famine, following seven years of fat. Rather, there is the inability of even the most gifted policy makers to assess accurately, in real time, the current state of an economy, and where it is headed; and even if such an assessment could be made, there are no precision tools in the monetary tool box which could improve reliably the outcome.
Appetite for risk and monetary divergence: these are, arguably, the two most powerful forces determining currency dynamics. Alongside, there are a range of specific stories (political, geo-political, economic), particular to each money. We have seen these forces in action, during Winter 2018/19.
Marcel Proust wrote that “in the markets, an ill emperor is already dead and a besieged city already fallen”, and so it seems with postponement. The end phase of asset inflation, possibly delayed by a Powell put, will never take place. A China-US tariff war postponed means lasting economic peace between the two nations. A “no deal” Brexit postponed means it will never occur.
Executive Summary ECB independence is cosmetic; Berlin holds the reins of power. ECB Chief Draghi’s notorious boast of doing whatever it needs to save the euro was empty talk. Draghi at every stage made sure Berlin backed radical policy options. With Berlin holding the reins of European monetary power, officials in Frankfurt (ECB) do not…
Gold, a barbaric relic according to Keynes, (he meant this in the sense of “primitive”) rises in price when the forces of fiat money barbarism (in a wider sense of ferociousness, the antithesis of civilization), are strengthening.
The shrinking of the Fed’s balance sheet according to present program is not a fundamental source of asset market deflation. It can though become part of the bear narrative during days when speculative temperatures are falling.
Sometimes markets are very wrong in their immediate response to political or geo-political drama.
Neo-Keynesian doctrine has at its core the so-called Phillips curve, which in modern reformulated form describes an inverse relationship between unemployment and inflation. The discrediting of previous estimates of this relationship and contrived efforts of the new Keynesians to re-estimate continually means inflation peril in the future. The factors special to this cycle which have lowered observed inflation may well not apply in a future cycle. Thereafter, the re-estimated curve now current amongst central bank econometricians may well trigger in the next cycle monetary error in a severely inflationary direction.