Growing Agreement That the 2019 Boom Has Been Canceled
Though it wasn’t until the 20th century that man figured out how to fly, the physics, as it turns out, are pretty simple. For a given vessel’s weight it must produce enough lift. To achieve lift, the thing requires a combination of speed, shape, and area; as in, area over the wings intended to provide the platform to create and capture the upward force. The more speed, the less wing is needed.
And so, the challenge for the Wright Brothers as well as all who tried before them was purely mechanical. They needed only to engineer the necessary components, and to successfully, artfully combine them in order to satisfy what are natural laws.
The European Central Bank (ECB) created its main Forum on Central Banking in 2014. The event held annually in Sintra, Portugal, was obviously intended to rival (and in some ways complement) the Jackson Hole conference sponsored by the Kansas City branch of the Federal Reserve.
In the opening dinner speech of that very first conference, given by Christine Lagarde, the head of the IMF quoted Victor Hugo.
“Emergencies have always been necessary to progress. It was darkness which produced the lamp. It was fog that produced the compass. It was hunger that drove us to exploration. And it took a depression to teach us the real value of a job.”
If necessity is the mother of invention, as someone else once said, it still requires someone with the technical skill to reach any goal. Orville and Wilbur weren’t accidental participants in the history of aviation.
Lagarde’s introduction laid out what has been the agreed upon trajectory. This was 2014, remember, and by then it was considered a foregone conclusion that the world was settling back down to “normal.” In terms of monetary policies, the topic of both her speech as well as the conference as a whole, the IMF’s leader noted that things had changed by necessity.
She didn’t say it, but the emphasis behind her words was clear enough. The world was very different; or, more accurately, the world maybe didn’t work the way it was believed before 2008. It took a depression…
There was that little setback in between, in 2015 and 2016 where normalcy was interrupted by what Janet Yellen would call “transitory” factors. But by 2017, everything seemed to be back on schedule. Both the Fed’s and ECB’s flagship conferences of that year, Jackson Hole and Sintra, reflected that view. As Ben Bernanke wrote, approvingly, in October 2017:
“After ten years of concerted effort first to restore financial stability, then to achieve economic recovery through dramatic monetary interventions, central bankers in Europe and the United States believe that they see the light at the end of the tunnel. They are looking forward to an era of relative financial and economic stability in which the pressing economic issues will relate to growth, globalization, and distribution—issues that are the responsibility of other policymakers and not primarily the province of central bankers.”
In other words, back to 2005 though far more the wiser (Lagarde).
In 2017, globally synchronized growth was supposed to mean something; primarily, for a central banker, an inflationary environment that finally conformed to policy goals and targets. No more undershoots. If things were getting back to normal, as everyone believed, economic aggregates like CPI indices should confirm the signal(s). As usual, they weren’t doing that.
Something continues to be missing. As Lagarde noted half a decade ago, paraphrasing, it’s not like they haven’t tried everything. It sounds much better to say that when you think you are poised upon the verge of success. Should it all instead turn out the other way, then constant, often frenzied experimentation takes on a very different set of connotations.
Of all people, it is Paul Krugman who constantly hits upon this central theme. When Abenomics was announced in Japan later in 2012, and then QQE as one of the three “arrows” associated with it, Dr. Krugman was thrilled. Over the moon. Someone was finally listening to his liquidity trap paper, an academic treatment he wrote in 1999 attesting to irresponsibility as a key construction for inflation expectations.
In his view, which I wrote about not long ago, central banks must “credibly promise to be irresponsible” which means they have to signal to the general population they are about to go nuts and stay nuts. Economic agents could follow no other course than to act on these inflationary instincts, thereby lifting the aggregate economy and keeping it from falling back into the rut from which it just escaped (the work, in Krugman’s view, of fiscal policies).
The Bank of Japan’s QQE seemed to fit that bill. It was begun in April of 2013. By September of 2015, however, during that one “transitory” global setback, Krugman would tell an audience in Tokyo that he was “still really, really worried” about Abenomics. The problem, he said, was “momentum”; specifically, the lack of it despite by then two and nearly a half years of credible irresponsibility.
He would return to this theme the following month writing in his usual New York Times column.
“What Japan needs (and the rest of us may well be following the same path) is really aggressive policy, using fiscal and monetary policy to boost inflation, and setting the target high enough that it’s sustainable. It needs to hit escape velocity.”
We all know the laws of economic nature, that the economy does need to “hit escape velocity”, but where are the engineers capable of designing the craft to achieve it? The quoted paragraph, I think, diagrams this problem very well. What must be done, the last sentence, and how the mainstream, conventional view is devoid of the ideas in order to achieve it.
Aggressive fiscal and monetary policies? It’s all been done, and then done some more. Just ask Lagarde.
This was a central focus also of Ben Bernanke’s paper from October 2017. He was actually somewhat more concerned than the current cabal of central bankers has been about the sustainability of that year’s growth “momentum.” Using the same language as Krugman, Bernanke came close to that liquidity trap thesis round way of inflation expectations:
“If inflation expectations were to remain sticky near current levels, then the Fed would have to demonstrate its commitment to the higher target by intentionally overheating the economy for an extended period. It’s possible that sustained overheating could have beneficial effects—through hysteresis channels, for example—but it might also prove to be destabilizing and difficult to manage, particularly if inflation expectations became volatile.”
Overheating means achieving required momentum and sticking with it. They are, Krugman and Bernanke, essentially talking about the same thing in two supposedly very different places.
Notice what’s missing from either form. You can read a lot of Krugman and a lot of Bernanke and it’s always the same things. The only “real” pieces of their policies come from the fiscal sector because what each’s central bank template offers is nothing more than expectations manipulation. Here’s one from Krugman:
“If that’s the reality, even a credible promise to be irresponsible might do nothing: if nobody believes that inflation will rise, it won’t. The only way to be at all sure of raising inflation is to accompany a changed monetary regime with a burst of fiscal stimulus.”
Money needs no agent for redistribution, it does that all on its own. So, how can a credible promise to be irresponsible from a central bank leave no one to believe there will be inflation? By definition, it couldn’t have been a credible promise, else very different result. Why might it not be credible?
Every central bank’s dirty little secret in this modern age of pop psychology Economics is money. Not a single central banker anywhere in the world has any idea how to define what is being used as currency right now today in the real economy. And if you can’t define money, you certainly aren’t going to be able to use it in some policy format.
Real economic agents don’t care what’s in the textbooks. They do what they must, and what they must is this eurodollar system. The world economy requires what it supplies.
Monetary policy has no money in it, which is why all these officials have to keep experimenting with different ways to make you think otherwise. We’ve been treated to a decade-long puppet show, one that grows in scale with added special effects and more focused attention to visual details, but still a puppet show nonetheless.
The big work of the global economy remains; momentum. As Dr. Krugman said, “it needs to hit escape velocity.” It hasn’t yet becausesomething keeps holding it all back.
We know this because every few years the same process repeats. The global economy appears to be heading toward recovery and normalcy but it’s always a false dawn - everywhere. It gets knocked backward again every time by “overseas turmoil.”
In 2010 and the first half of 2011, people talked about recovery and it seemed, to many, a foregone conclusion. Then in the second half of 2011 a “European” crisis and Bernanke’s first false dawn in 2012 (which wrecked Asia and EM momentum). By 2014, normalcy and recovery on the horizon, only to suffer Yellen’s transitory 2015 and 2016. Then 2017’s globally synchronized growth, which only fell apart in 2018 and now in 2019 spells globally synchronized downturn, maybe worse.
Last week, two very important monetary indications flashed in very different ways under very different circumstances. Over in Europe, 1-week Euribor reached a record low. Euribor is an unsecured interbank lending rate, an interest cost for banks to lend euros to one another for one week at a time. The record rate? Minus 38 basis points.
The ECB as late as December was still figuring forward 2017’s economic “boom” and thus was projecting rate hikes for 2019. Some of the other tenors of Euribor were acting as if that was going to happen. When that all fell apart earlier this year, those rates began to backtrack, only now the front-end stuff is plunging as banks dump them on money markets.
They have so many bank reserves in euros that they have no idea what to do with them, even as the ECB penalizes institutions who hold them (deposit account) and passes along that punishment into these interbank places.
In the domestic US$ system, the effective federal funds (EFF) rate last month pushed above IOER which Federal Reserve officials intended to act as a ceiling. Then last Friday, the last trading day of the quarter, EFF was driven two more bps overhead IOER, a total of 3 above this “ceiling.” It was an unprecedented act.
But that’s just monetary policy tightening, the combination of rate hikes and QT, they say. Except, though EFF is at an extreme here in 2019, this is a pattern we’ve seen before (confirmed by repo rates, swap spreads, etc.) This pattern repeats, too. The last time it was observed? 2015. Before that? 2011 and 2012.
The world economy really doesn’t need euro-denominated interbank funding so all those trillions created by the ECB as a byproduct of its puppet show sit idle at ridiculously negative interest rates. The world really does need US$ funding because there is a continued shortage of it, which creates all sorts of repeated “anomalies” in that system.
And when these two sets of seemingly competing dynamics appear in concert, those are the specific times when the path toward recovery and normalcy disappears back into the false dawns, never enough economic momentum.
This is a very different monetary reality, and one which authorities at least have been forced to recognize if only on occasion. In 2005, during the rapid global money buildup of the pre-crisis period, it was Ben Bernanke who proposed a “global savings glut” to try to explain what even to him sure looked like something going on out there in the world beyond the US borders. From the orthodox convention of a closed system, the eurodollar might as well be global savings for all he can he tell.
In 2017, though, Bernanke noted somewhat optimistically (because he doesn’t understand) how this phenomenon may have reversed, writing “… there is some evidence that the global savings glut may be moderating.” This was one reason to expect higher interest rates across the world consistent with the inflation and recovery of globally synchronized growth, which, as we know in 2019, isn’t happening.
In Bernanke’s view, the global savings glut was huge before 2008 and now it “may be moderating.” Or, the eurodollar once was overabundant and now there isn’t enough to properly go around.
If central banks don’t do money, and they don’t, how can they credibly promise anything? And if they can’t really credibly promise anything, how do you avoid becoming Japan? Even Paul Krugman sees the parallels.
The answer isn’t for them to catch up to 21st century (really 1970’s) monetary reality and then plug in what they normally do to that system; we don’t need the Fed or ECB “printing eurodollars.” That’s the last thing we would want. Rather, we just need for them to get out of the way, to stop announcing to the world every few years at these lavish conferences how they need to be congratulated for their highly melodramatic playacting.
Third rate theater just isn’t going to deliver on economic momentum.
A steady, reliable global money platform substantially reduces the drag on the economic system, letting it all on its own build up speed and momentum, only then taking flight.
They don’t know why, but increasingly global authorities are in agreement that the scheduled takeoff in 2019 has been canceled.
