Back To The Yellen Future
By Michael Every of Rabobank
Ill Communication / Back to the Yellen Future
Yesterday was the Martin Luther King, Jr. Day holiday in the US, making for quiet markets. Let’s reflect on some of the wise words of that great man: “People fail to get along because they fear each other; they fear each other because they don’t know each other; they don’t know each other because they have not communicated with each other.”
Today is President Trump’s last full day in office, which may or may not make for quiet politics. A slew of presidential pardons are expected: will it include WikiLeaks Julian Assange, or Edward Snowden? Five Nobel Prize winners signed a letter pleading for that to happen for Assange at the end of December, but the suggestions are this may not happen today. Apparently Trump won’t be pardoning himself or his family, however.
Staying on communication, the talk is all about the talk Yellen is going to give about the future. No, not after-dinner to bankers for USD250,000, but rather her testimony as Treasury Secretary-designate in front of the Senate, which has of course already been partly leaked to the press. “Economists don’t always agree, but I think there is a consensus now: Without further action, we risk a longer, more painful recession now – and long-term scarring of the economy later,” Yellen will say.
We can agree economists don’t agree because they do not communicate with each other. The neoclassical school that runs central banks doesn’t even acknowledge heterodox schools such as the Austrian or the Post-Keynesian (i.e., MMT). But Back to the Yellen Future:
“Over the next few months, we are going to need more aid to distribute the vaccine; to reopen schools; to help states keep firefighters and teachers on the job,” Yellen will say. “We’ll need more funding to make sure unemployment insurance checks still go out; and to help families who are at risk of going hungry or losing the roof over their heads.” All of this naturally falls under the proposed USD1.9 trillion stimulus package and related executive actions already on the table.
“Neither the President-elect, nor I, propose this relief package without an appreciation for the country’s debt burden,” Yellen will add, underlining that she is not from the post-Keynesian/MMT camp. “But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.” Yet if helping people who have been struggling for a long time is the goal then USD1.9 trillion is nowhere near enough.
In terms of tone, however, this still places the US in the opposite fiscal direction to other markets. In the UK, the Chancellor is again considering higher wealth taxes, or corporate taxes, or an on-line sales tax to try to deal with the pile of pandemic debt that he has run up – despite the BOE having already bought all this debt(!) The neoclassical advisors to the Chancellor don’t get that because they don’t communicate with anyone outside their thought bubble; or do, and fear the politics of where it leads. Likewise in Europe, the “Rubicon-crossing” Covid package drawn up last year is surely too small for an economy that has since gone into extended lockdown again. Yet despite the ECB buying bonds like mad, there is zero political will to recognize that this opens up un-Germanic fiscal/monetary parameters.
Back to the Yellen Future II: One wonders who Yellen has been communicating with to now be so proactive fiscally. As Fed chair she raised rates when the bond market (2s-10s spread) and voices like ours were saying it would end in tears, and most so for the people who have been struggling for a long time. The latter didn’t stop Fed Yellen declaring “I feel confident about the fundamentals driving the US economy, the health of US households, and domestic spending” at a time when nearly 16m people were unemployed or significantly underemployed. Notably, Yellen is also on record saying the national debt and the size of fiscal deficits are a sustainability concern in the long run; and she is a member of the advisory boards for both ‘Fix the Debt’ and the Committee for a Responsible Federal Budget, which advocate for cuts to Social Security and Medicare. Perhaps Covid has communicated a new reality to her?
So to the second part of her testimony, where Yellen will reiterate she wants the market to set exchange rates. Underlining again how poor communication and/or understanding is, the media reported verbatim that her stance means she is in favour of a strong dollar because she will add that “the US doesn’t seek a weaker currency to gain competitive advantage”. As noted yesterday, this overlooks the fact the USD has been going down for months knowing Yellen would be Treasury Secretary and say this kind of thing. Indeed, as Bloomberg reports, USD shorts have doubled down since hearing the US dollar policy will be “market based”. If Yellen really wants a strong USD then she is proving as deft a reader of markets as she was with the 2s-10s curve. (Relax: current Fed Chair Powell was even worse.)
Strategically, the ways we *will* get a stronger USD are if:
- US fiscal spending prompts a sustainable recovery, allowing the Fed to raise rates without the 2s-10s spread screaming out “It’s a trap!” (and good luck EM if so);
- If this fiscal stimulus is too small and the US slips into deflation, pushing real rates higher;
- If the rest of the world suddenly sees a burst of inflation and won’t raise rates to match;
- If the rest of the world, by keeping fiscal policy too tight, ends up with a deeper relative downturn than the US, requiring even more aggressive monetary policy and/or risk-off worries out of EM back into USD; and also
- If anything geopolitical happens to see a USD short squeeze.
Anyway, back to the future of another day of illness (the global pandemic) and ill communication about markets.
Tue, 01/19/2021 – 09:00