Rabobank: Holy Liberal Policy Dilemma, Batman!

Rabobank: Holy Liberal Policy Dilemma, Batman!

By Michael Every of Rabobank

In secessu veritas”? Two ex-FOMC members, Dudley and Lacker, say the Fed should raise rates to “at least 3%,” and maybe 4%. I am sure they voted for this euthanasia of rentiers when still members. I am equally sure that isn’t going to happen (a 3-4% Fed Funds rate and rentier euthanizing). More so, because the Wall Street Journal reports President Biden will make his decision over the new Fed Chair appointment this week – and the White House has informed senators the choice will be made “imminently” – meaning it will probably happen the second I click “send”. The market still thinks it’s Powell: I suspect there is more of a chance of Brainard or Bostic than many suspect, and the former would certainly get markets talking about MMT again. (Less so the fact that she is married to a senior member of the National Security Council.) Regardless, rates are not going to 3-4%.

Whether they should is a different, normative question. The Wu Xia shadow real Fed Funds rate is currently -7.9%. The last time it was anywhere near that historic low, back in the 1970s, the nominal Fed Funds rate was double digit. Today, just a single digit looks punchy compared to the 2s-10s curve spread. Yet when the Fed looks at job openings outnumbering the unemployed, NFIB unfilled positions visually correlating to a projected US unemployment rate of below 2%, and Atlanta Fed job-switcher pay rises of 5.4% y/y, it worries, even if it can’t say so. The BOE’s Bailey can, however, and is “very uneasy about the inflation situation,” and the labor market. So, do ‘Build Back Better’ central banks euthanize the proletariat? If so, they risk taking the rentiers down with them – and then themselves. Fortunately, “helping” Joe Sixpack by keeping monetary policy loose also helps Joe Six-Penthouses. Hence the Fed’s Kashkari says nothing he’s seen indicates a shift in long-term inflation expectations, and the RBA’s last set of minutes underlined that rates won’t rise until both inflation and wage targets are met: “Winner, winner, chicken dinner”?

Except that chicken is costing a lot more, and the man who wanted to be Fed Chair, Larry Summers, warns if the Fed doesn’t deal with inflation then it “could result in the re-election of Donald Trump.” Holy liberal policy dilemma, Batman! Presumably this Emmanuel Goldstein socioeconomic projection is based on the obvious fact that President Biden’s/Democrats’ electoral support has collapsed to 2010 ‘Red Wave’ lows in opinion polls. So, “Loser, loser, NyQuil Boozer,” which the internet informs me is the opposite of a chicken dinner?

The White House is leaning on fiscal policy to win voters’ hearts, while stating the president is “all over price increases”: odd political messaging when more stimulus will surely mean more inflation. However, the CBO releases its estimate of the budgetary implications of the $1.8 trillion Build Back Better (BBB) bill Friday afternoon: reports suggest the administration is steeling itself for the CBO saying BBB does not “cost zero dollars,” likely reducing its odds of Congressional passage. As a result, media also report some Democrats are now discussing another $500bn round of stimulus checks despite the labor market apparently being on fire – but that likely won’t pass either.

That will put the onus squarely back on central banks: who will need to look at inflation and the labor market, and the collapse in the ‘time to buy a house/vehicle’ indices in the Michigan consumer sentiment survey to 1970’s recessionary lows, and hope that they don’t push us past a Trumping point in trying to use rates to deal with: 1) supply chains; and 2) workers finally getting a dash of mojo back.

Which brings us back to the Biden-Xi summit about to begin as I type. Bloomberg naturally echoes China’s Global Times in arguing the best outcome would be for the US to lower tariffs on Chinese products. After all, inflation is high, which strengthens the arm of the “because markets, can’t spell geopolitics” crowd. There is also the ‘green’ thing, which is working out so well in energy prices, as US coal hits the highest since 2009.

The problem, oh Norman Angells of our better nature, is that besides the fact that pre-Covid, US tariffs were seeing trade diversion towards Vietnam and India, opening the US up to imports is: 1) how you end up with long supply-chains that can be easily disrupted; and 2) ensure US workers lose their mojo again – after all, an import represents de facto importation of foreign labour. If Bloomberg and central banks believe more free trade is a better solution to dealing with goods and wage inflation than raising rates, i.e., the pre-GFC model, then they still risk pushing us towards a Trumping point.

Even their own governments don’t appear to agree with that view anymore. Yes, there is a clear case for free trade in some circumstances, e.g., if geopolitics isn’t an issue, and if wages are already equal, or are allowed to equalize over time; but, as China hawks argue, not if geopolitics is an issue, and, as Pettis, Klein, and Qin Hui all argue, not if wages don’t equalize, e.g., if the net importing economy consistently has a consumption share of GDP of around 70%, and the net exporting economy of around 40%. The EU is also grasping this – generating headlines such as ‘China accusing Brussels of threatening to upend global supply chains already close to breaking point after erecting “discriminatory” trade barriers to foreign firms’, as France has just pushed the EU for more state aid for chip production. (NB In the business press, it is never disrupting to supply chains when they become longer, only shorter; likewise, supply chain moves are a threat to the exporter, never a boon to the importer.)

Tellingly, Reuters reports that Biden is to tell Xi that China must “play by the rules of the road,” according to a senior US official. The problem is that there is no agreement on where that road even is –as China builds its Belt and Road, and the US may belatedly respond– and which side of the road one drives on: left or right? Also, have you seen how different nationalities drive? The official added this is an opportunity for President Biden to tell President Xi directly to do “what other responsible nations do,” citing China’s economic “coercion” and alleged human rights abuses; President Biden is focused on writing those rules “in a way that is favourable to our interests and our values and those of our allies and partners“; the talks must be “substantive and not symbolic“; and “This is not a meeting where we expect deliverables to be coming out.” So, does this move us towards a different kind of Trumping point, or is it clever expectations management ahead of an announcement of a state visit to watch the Olympics, a removal of US tariffs, and a mass order of Xinjiang solar panels? We shall soon find out.

Further West, UK PM BoJo has underlined for the West, it is either Russian gas or supporting Ukraine, that triggering Article 16 over Northern Ireland is “perfectly legitimate”, and a troika of ‘annoy the EU’ moves being Royal Dutch Shell dropping “Royal Dutch” and moving to London. France’s Macron has pledged to defend Ukraine, which is either big talk or a huge sign there is no real risk of a Russian move at present, as EU sanctions hit Belarus. In Germany, it appears Ukraine’s Naftogaz will be allowed to be part of the Nord Stream 2 certification process: does that suggest it can still be blocked at this late stage? If so, what happens with EU energy supplies? And/or does the EU now finally understand there is power in both monopoly and monopsony? That would be a Trumping point too.  

Tyler Durden
Tue, 11/16/2021 – 13:19

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