It's What Won't Be Said at Jackson Hole That Will Speak the Loudest
(AP Photo/Jose Luis Magana)
It's What Won't Be Said at Jackson Hole That Will Speak the Loudest
(AP Photo/Jose Luis Magana)
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At the end of every August, key central bankers from the US and around the world gather in Jackson Hole. This year, like last year, they’ll do so “virtually.” Before each annual gathering we will be told to listen closely to what these people are saying, so consequential each and every word.

And this year it will literally be a single word. Taper. Who cares?

Whether or not Federal Reserve Chairman Jay Powell says it, and he almost certainly will, what will actually speak the loudest ringing down from the mountains of Wyoming is everything that won’t be said. What will remain in silence isn’t just deafening, it is highly instructive.

These same authorities have not been silent on one aspect of LIBOR, having publicly waged war against LIBOR for reasons that have nothing whatsoever to do with its incredibly minor and trumped up “manipulation.” In the grand scheme of everything that has gone wrong, the decision to literally make federal cases out of own-rate opinion-making should’ve been somewhere very close to the bottom of any rational human’s list.

Declaring it criminal anyway, something called the Alternative Rates Reference Committee (ARRC), was convened beginning in 2014. Its sole task was to locate a suitable replacement.

What the panel came up with was so incredibly stupid, pardon me being blunt, but that word especially does apply here, that more than seven years after its first meeting SOFR remains an afterthought even though bank regulators the world ‘round have declared LIBOR’s date of death set for December 31, 2021. This year.

Scratch that. This was the old deadline, one that was pushed back (for all US$ LIBOR terms except the 1-week and 2-month maturities which almost no one ever uses) now to June 30, 2023. It is an eighteen-month reprieve so that the banking system can let some $200 trillion in global derivatives and financial products priced by LIBOR mature or expire, to roll off their books first.

While they do so, in the meantime any new positions or hedges are supposed to be priced to at least something other than LIBOR. They aren’t.

The delay shouldn’t have been necessary at all – if SOFR or any SOFR-derived pricing scheme had been developed by capable persons. Had the ARRC achieved its aim, or just come anywhere near its intent, the entire marketplace would happily roll from the old to the new without thinking anything about it, and would have already done so years ago.

It isn’t happening simply because the people claiming to be in charge have little to no idea what it is they claim to be in charge of. This is not a new development, but it has been more and more revealed by the past fourteen years.

Before them, everyone knows about August 15, 1971; or, at the very least, they’ve probably heard that something important happened regarding the introduction of a fiat money standard and then the consequences of it. The term, fiat money, is conventionally taken to mean something it hasn’t been. By and large, we’re supposed to think about it as if the government was set free to be able to print money no longer tethered to any commodity constraint nor public impediment (convertibility).

This, then, would presume that government’s central bank as the main engine behind reckless money printing and inflation as has been constantly asserted all the years since.

Neither of these are true.

How had inflationary currency already stricken the American economy if fiat money wouldn’t be unleashed until August 15, 1971? The answer is very easy in the fact that six years, by then, of serious inflation (which would only get worse) had meant other “money printing” unrelated to this later interpretation of events. Something else was already going on.

Nixon’s actual agenda had less to do with gold than many today are led to believe; he instead was counting on central planning control (wage and price boards) of the sort which made Mao Zedong red(der) with envy. The dollar’s gold convertibility was thrown in as an afterthought, a random dart thrown at the board – as evidenced by the fact no one involved in Nixon’s bold (and incredibly facetious) agenda had bothered to tell the Fed about this part of the plan.

Monetary policymakers had their own set of problems. At the end of July 1971, the FOMC Memorandum of Discussion recorded one such discussion which was characteristically too brief and left to table:

“A number of members were dissatisfied with the present procedure of placing main emphasis on rates of growth of the monetary aggregates or on levels of the Federal funds rate, and some had come to believe that the directive should emphasize member bank reserves–the one magnitude which the Desk could control more or less directly.”

In private, “monetary” policymakers were drawn into discussing a drastic change to material operations, core operations, in the way the central bank acted, as a central bank, because they figured out, six years of inflation, they were having trouble controlling or even influencing money aggregates. Or just plain money.

What do you do if you are, or claim to be, a central bank and you can no longer control or exert sufficient influence on money? Honestly, you’d have to conclude you were no longer a central bank. This is the actual deduction which would echo through fifty further years of history, all these QE’s later.

The Fed would have to take charge over only what it realistically could, bank reserves, already having been warned this probably wouldn’t be sufficient, either. The relationship between bank reserves and financial activities had likewise broken down, as had already the traditional correlation between all “base money” (as contained in something like M1) and economic aggregates like spending and prices.

To certain central bankers, the only way out of this Kafkaesque nightmare was to reinvent a central bank as something that is not a central bank. The Fed could only control what it could control, but if it could make the world believe that what it controlled was the only important part, then whether what it actually controlled was ever useful on a basic and technical level might not matter.

This expectations-based policy flipped everything upside down; the fiat money wasn’t printed by the Fed nor anyone in the government, and hadn’t been long before the system even approached August 1971. The idea, on the contrary, was that unable to understand let alone measure and control effective money, the Fed would, again, control what it would control (bank reserves and later the federal funds rate) which would then signal to banks who then sorted out the messy monetary details central bankers couldn’t make much sense of.

In academic terms, this meant monetary policy had been taken out of official hands, changed from “rules based” to “discretionary” largely by default. Alan Greenspan much later admitted to it because, he said, there was no other choice. Speaking at Stanford University in September 1997, the “maestro” said:

“Policy rules, at least in a general way, presume some understanding of how economic forces work. Moreover, in effect, they anticipate that key causal connections observed in the past will remain fixed over time, or evolve only very slowly…Another premise behind many rule-based policy prescriptions, however, is that our knowledge of the full workings of the system is quite limited, so that attempts to improve on the results of policy rules will, on average, only make matters worse.”

Thus, the Great Inflation and what the FOMC was actually talking about in 1971; following their traditional monetary rules had made matters worse because, in truth, no one had any idea what banks were doing in effective money. Not that the Fed had printed the money, or kept rates in the wrong place, rather because the private, now-global monetary system was already its own fiat consisting of these very, very different formats (eurodollars, repo, derivatives like currency swaps, etc.)

Greenspan would further clarify how, “by late 1982, M1 was de-emphasized and policy decisions per force became more discretionary” which only at first had incorporated the broader M2 aggregate as one factor among many others then advising central bank positions. And that was only until the late eighties, maybe early nineties when it had become very clear M2 (specifically its calculated velocity) no longer helped much at all, either, obsoleted by an expanding assortment of “financial products” (as Greenspan would say in 2000).

But – and there was always this “but” lurking in the shadows – by letting the banking system act as the monetary engine, the fiat money printer, and assuming it could be controlled or at minimum predictably influenced by “discretionary” expectations policy, the dangerous downside was logically obvious the entire time.

What happens if the fiat conjured by private global banks ends up going awry, really awry? Not just inflation, too much as in the seventies, but possible, shockingly maybe inevitably too little.

For those in America, the Japanese had already begun to answer that question during this same period. Let’s go back to Mr. Greenspan, this time in December 2002 with both the dot-com burst and Japan’s Lost Decade already in his rearview:

“Moreover, the tie between money and prices can be altered by dysfunctional financial intermediation, as we have witnessed in Japan. Thus, recent experience understandably has stimulated policymakers worldwide to refocus on deflation and its consequences, decades after dismissing it as a possibility so remote that it no longer warranted serious attention.”

And what Greenspan alleged proved to be true; in the sense that policymakers around the world begin to treat the deflation threat seriously even though they had come to believe it long ago eradicated (inflation fighting was their sole position after the Great Inflation).

Yet, what had been decided in those few years between the Japanese introduction of QE and the first signs of the first Global Financial Crisis was that the Fed still would only control what it could control but do so by projecting even more confidence and more forcefully asserting its own “toolkit”; the public which might wonder what tools actually in it meant to be thoroughly assuaged by clear language and the self-assured use of it.

Thus, discretionary monetary policy of the sort being practiced now influencing the entire “taper” debate and discussion isn’t actually about “fiat” money insofar as most people are led to understand it. On the contrary, the entire taper decision is really about these much more fundamental imbalances which remain unsolved as unanswered more than fifty years later.

And that brings us back to SOFR and LIBOR. The latter still is, right now, the eurodollar money rate. It is the interest cost at which specific banks operating in the offshore dollar market believe they could borrow today on an overnight unsecured basis – knowing already this might be beyond the influence of the Federal Reserve as it has been repeatedly since August 9, 2007.

I wrote a couple years ago about how the LIBOR “scandal” was a ruse, and why it was a ruse:

“A totally independent money rate [LIBOR] linked specifically to the global offshore dollar markets that don’t officially exist, and certainly don’t fall under the Fed’s regulatory mandates which stop at the US border. No wonder it sounds like a personal vendetta, LIBOR shows directly how the monetary situation worldwide is far, far more complicated. Central bankers want and need you to believe everything is so simple. How they’ve got it all covered and it’s all so easy. The LIBOR scandal was the perfect excuse to act.”

While that may make some sense in the delusional demands placed upon policymakers by their default discretionary monetary policy, it was still a ridiculous idea to impose SOFR as LIBOR’s alternative regardless of any reasons for demanding the switch.

In deciding on the path of expectations and discretion, the central bank, out of necessity, abandoned monetary competence having already ceded it to the global eurodollar system also by necessity (someone had to solve Triffin’s Paradox, and it wasn’t going to be Treasury or the Fed). They didn’t know what they didn’t know, but then presumed they wouldn’t have to know.

But to bury LIBOR and really this revealing truth behind, to get “discretionary” policy somewhere back on track, this required policymakers to first conjure up some technical competence.

Instead, SOFR. Painful irony, no?

At Jackson Hole 2021, the agenda is purportedly chocked full of discussions on “inequality”, the event’s title is, after all, officially Macroeconomic Policy In An Even Economy. Undoubtedly there will be riveting presentations as to how Economists might explain this unevenness in a way which doesn’t acknowledge any of these fifty years of facts; as I proposed at the top, it’s what won’t be said which will speak the loudest.

This simply means there’ll be any number of theories which blame you and me (R*) for all this that’s seriously wrong. Fiat truly isn’t our fault, nor is it that no one seems to know its real placement.

At the same time, the financial media only cares – while telling you it’s the only thing you should care - whether or not Jay Powell’s virtual head lets slip the word taper even as those things being tapered are the same bank reserves that so dismayed his predecessors half a century years ago. The current Fed is likely to begin scaling back on these accounting fictions solely because those are the only things that can be controlled.

Whether or not they are actual, useful money is a question that previous generations of policymakers at least bothered to ask. Fearing the answer, they simply stopped asking and began pretending. Thus, Jackson Hole and its hype. 


Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

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