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Musings Report 2017-52 12-30-17 Central Banks in 2018: From Coordination to Conflict
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Welcome to December's MUS (Margins of the Unfiltered Swamp)
The last Musings of the month is a free-form exploration of the reaches of the fecund swamp that is the source of the blog, Musings and my books.
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Central Banks in 2018: From Coordination to Conflict
The mere mention of "central banks" will likely turn off many readers who understandably have little interest in the convoluted policies and arcane mumbo-jumbo of modern-day economics, but bear with me for a few paragraphs while I make the case for something to happen in 2018 that will impact us all to some degree.
That something is the decay of the synchronized central bank stimulus policies that have pumped trillions of dollars, yuan, yen and euros into the global financial markets over the past nine years.
The primary central banks (US, China, Japan and the EU) have played a sort of relay game, passing the money-creating baton from one bank to the next, with each one doing the heavy lifting for extended periods of time. (There has been a lot of overlap in money creation as well.) All central banks cut interest rates to zero or near-zero in a coordinated campaign.
This team effort has been motivated by self-interest, of course; no one central bank can reflate the entire global economy, and yet reflating the entire global economy is the only way to reflate each nation/bloc's own economy, given the interconnectedness of the modern global economy.
But the threads of mutual self-interest are fraying. At this late stage in the credit cycle, the central banks must begin "tapering", i.e. diminishing and then ending their stimulus policies and eventually reducing their balance sheets by selling assets they bought in the stimulus phase (or simply stop replacing bonds they own that mature). They must also "normalize" interest rates, i.e. slowly return rates to their historic range.
The Federal Reserve was first out of the gate in launching quasi-unlimited bond purchases, and it was the first central bank to cease stimulus (quantitative easing) and raise interest rates. It has now signaled that it will begin selling assets (one way to do so is to simply stop replacing bonds that mature).
Those currencies/bonds that pay the highest interest (accounting for inflation, of course) will naturally attract global capital seeking a safe return above zero.
The net effect of this is that nations/blocs with near-zero yields will experience capital flight as money will flow to nations offering higher yields.
The coordination of the stimulus phase is giving way to nationalist self-interest in the tightening phase.
Those nations/blocs that need super-easy money and near-zero interest rates to keep their "growth" afloat will be drained of capital as mobile capital goes to wherever it can earn more yield.
There's a further complicating factor: the relative strength of each nation's currency. This matters because if one's currency appreciates, one's exports cost more, and one loses the competitive edge of a cheap currency.
So while higher interest rates attract capital, they also tend to strengthen one's currency, as the relative value of currency is set by supply and demand: the more demand there is for the currency, the higher it goes relative the field of competing currencies.
There is a third factor as well: central banks need to reduce their balance sheets and raise interest rates, so they have some "policy accommodation" available to counter the next (and inevitable) recession/financial crisis.
The US central bank has so far managed a hat-trick: it has raised interest rates a number of times, yet its currency, the US dollar, has lost over 15% of its value in 2017 compared to the Euro, which has gained 15+%.
There is a Darwinian twist to all this: any nation/bloc which manages to raise rates and end monetary stimulus without stifling its "recovery" or strengthening its currency to the point it hurts exports, and still be a global magnet for capital due to higher yields/rates, will have a substantial competitive advantage over its peers.
In effect, the self-interest that bound the central banks together in the stimulus phase reverses in the tightening/normalizing phase.
Thus I anticipate a slow decay of central bank coordination and a rise of conflict/competition, though this will of course be kept behind closed doors/out of the media.
This is one reason why I anticipate "unexpected" disruptions in the global economy in 2018, as the coordinated stimulus phase ends and the disruptive, messy, Darwinian phase of tightening/normalizing rates and balance sheets gathers momentum.
As a lagniappe, I present a chart of the VXX, the short-term volatility futures ETN. Since central banks have pursued synchronized policies, selling volatility (betting on declining volatility in global stock markets) has been a practically guaranteed way to mint money for the past year and a half.
But as central bank coordination gives way to competing goals and policies, volatility becomes much more likely at some point.
When the long trend of declining volatility reverses, those few who are long volatility will have a productive trade in hand.
Summary of the Blog This Past Week
The Hidden-in-Plain-Sight Mechanism of the Super-Wealthy: Money-Laundering 2.0 12/29/17
Is One Reason Why the Status Quo Disdains Bitcoin Is the "Wrong People Are Getting Rich"? 12/27/17
"Wealth Effect" = Widening Wealth Inequality 12/26/17
Christmas 2017: Why I'm Hopeful 12/24/17
From Left Field
The Most Influential Buildings of 2017 (via Maoxian) -- would you want to live or work in any of these buildings? Only the Apple HQ...
Opioids and the Crisis of the White Working Class -- long read, but covers all the bases...
Opioid abuse in the U.S. is so bad it’s lowering life expectancy. Why hasn’t the epidemic hit other countries? -- duh--only the US has a Sickcare cartel...
A Mind-Bending Translation of the New Testament: David Bentley Hart’s text recaptures the awkward, multivoiced power of the original.
Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin -- excellent summary of the global financial world's fragility, though he misses the boat on bitcoin...
The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (book)
Losing weight was simultaneously the hardest and easiest thing I have ever done. (via Maoxian)
WE’VE BEEN BURYING PEOPLE ALL WRONG: Could eco-friendly funerals save the planet?
Psychopolitics: Neoliberalism and New Technologies of Power by Byung-Chul Han – An examination of the internet age suggests that we should cultivate the heresies of secrets and silence
Korean-born German philosopher Byung-Chul Ha strikes again... Anyone who refuses to confess in public is anathematised. You tweet therefore you are; like and you too shall be liked; confess every last boring detail about yourself and you too shall be saved. “Neoliberalism is the capitalism of Like,” says Han.
‘Climate gentrification’ is coming to Miami’s real estate market -- never saw this phrase before...
The World Might Be Better Off Without College for Everyone -- stating the obvious...signaling (here's my diploma) no longer works...
The Places That May Never Recover From the Recession -- exurbs (suburbs far from job centers) that workers with stagnant wages can afford are not doing well...
"One never notices what has been done; one can only see what remains to be done." Marie Curie
Thanks for reading--
charles |
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