Stagflation Becomes Stabflation
“I will also argue that constraints continue to bind policy, with a focus on the balance sheet and efforts to significantly reduce it from its current elevated level.” (Esther George)
Summary:
· Stagflation has become Stabflation.
· There are lies, damned lies and Fed balance sheet accounting policy.
· Supply side stimulus and structural economic reform are the cure for Stabflation.
· Rolling global credit events are rolling global central banks into their exclusive financial stability policymaking modes.
· The RBA signals that the next GFC will be triggered by either inflation or the central banks’ overreaction to it.
· Squeaky Bummers are Peaky (Rate Hike) Blinders.
· Lubik’s FTPL and GBC are this author’s MMMT.
· Kwasinomics becomes Keanononimcs in the form of a Kleptocracy to build a war chest for the guerrilla warfare, in opposition, of the Tories in Balkanised Britain.
· “Lizzo” indirectly Brexit U-Turns to join Macron’s Cosa Notre
· The IMF has given the green light for an attempted global economic soft landing through the “Macklem Doctrinaire” approach to “Friend Shoring”.
· Speaker Pelosi’s Bottom is now called Squeaker Pelosi’s Bottom.
Stabflation: When Financial Stability Policy replaces Monetary Policy ….
Currently, economists don’t have a buzzword for what is happening in the global economy. Perhaps this is because they don’t know what to do about it so they are sticking to tried and tested prescriptions, and buzzwords such as Stagflation.
Stabflation may come close to describing what is happening. This happens when inflation is not allowed to run its course but is nudged backward and forwards by well-intentioned central bankers and policymakers respectively. The central bankers want the inflation to end because their mandates demand this, and the policymakers want to mitigate its impact on their potential voters. Often, the policymakers and central bankers are acting at cross purposes.
Since central banks devolve their legitimacy from policymakers they must play along, whilst sabotaging the policies being made. The level of financial instability, created by the interaction of the two, ultimately, sets the limits and duration of the game. Businesses, consumers, and voters can only tolerate a certain level, of instability, before they say game over for the policymakers and the central bankers. Each has a different tolerance threshold. In practice, it is, therefore, difficult to satisfy all these competing thresholds.
The central banks don’t discriminate as the policymakers do. In practice, they apply a one size fits all monetary policy with disastrous consequences, for aggregate and, for those at the margins.
The latest Jackson Hole summit warned the central bank attendees of their limits. Currently, the elected policymakers in developed economies are being warned, by their electorates, of their own political mortality.
Central bankers are probing, to see if they can get away with some more monetary policy tightening, and policymakers are seeing how much inflation they can create with more fiscal stimulus.
The curious thing is that even though the policymakers, and central bankers, appear to be conflicted, they have aligned interest in the fact that their actions are making them both insolvent. Consequently, both must either decide to compromise with each other or be forced to compromise, through mass liquidations, by the markets.
A fitting compromise would be an accepted set of rules, and targets, for combined monetary and fiscal policy stimulus. All agree, in principle, that it is the supply side of the global economy that needs stimulating. All must, therefore, ultimately agree on the said rules of supply-side stimulus. The sooner the better for all concerned.
Behavioral finance students will, instinctively, know what this author means when he says that the Squeaky Bummers have become Peaky (Rate Hike) Blinders. This metamorphosis occurs when central bank monetary policy becomes financial stability policy. The process began at Jackson Hole, back in August, but it has taken longer to register with some central bankers. To help the transition, inflammatory headlines, and volatile price action, have become the daily staple diet.
Last week it was the UK, this week it is Credit Suisse. What links these credit events is that they are occurring in the financial sector rather than in the real economy. They are linked and they are contagious. Next week it will be something else in the financial realm. Eventually, the magnitude, and pace, of the arrival of headlines will overwhelm the resistance of the central banks to intervene.
· Central Bank insolvency is aligning with fiscal insolvency at a rapid pace in the global economy.
· The alignment of central bank and fiscal insolvency promotes the exclusive interest in financial stability policy.
(Source: the Author)
In fact, credit events will start arriving on a daily, even an hourly, basis. This is when central banks drop all pretenses, of following inflation and employment mandates, and elect to pursue the inherent self-interest of exclusive financial stability policymaking.
The last report discussed the fumbled attempts of the latest, and greatest, central banks to change the baton, from conventional monetary policymaking to unconventional financial stability policymaking.
This author has characterized the baton change in the immortal words of, the greatest football manager ever, Sir Alex Ferguson, as “Squeaky Bum Time”.
Some Bums are squeakier than others.
Secretary Yellen’s Bum squeaks in fear of another GFC delivered courtesy of the Fed.
As another example, possibly, the squeakiest Bum in the global macro community has suddenly squeaked that US money market interest rates are about right. Apparently, cash is no longer “trash”.
Bums seem to be squeaking all over the place right now.
When and Where Financial Stability Policy meets Monetary Policy ….
One could argue, with some justification, that the New York Fed is in the interface of financial stability policy and monetary policy. This would, perhaps, make the Squeaky Bum of the New York Fed president, the most important one in terms of extended forward squeaks. John Williams recently played a cautious tune when he squeaked.
Williams also squeaked that financial stability considerations are not even on his radar screen or in his decision-making process. This author notes, with some amusement, that such similar considerations were not in the Fed’s mind when it tightened before the GFC.
Whilst the Richmond Fed may not be the natural market interface, of financial stability and monetary policy, it can be viewed as the intellectual interface of the two. This locus was recently demonstrated, not by its president, but by one of its staffers.
An abstract piece of research, from the Richmond Fed’s Thomas A. Lubik, may have revealed the cover story for the concerted operation through which a fiscal stimulus will be applied, to stimulate the US economy and, simultaneously, revive the balance sheet of the Federal Reserve. A revived Fed balance sheet can then support reserve creation and the private expansion of credit.
In this concerted process, Federal credit is being created as the basis for private credit to be layered on top of. Federal debt gets monetized, on the Fed’s balance sheet, and then privatized through reserves in the banking system.
The GBC is an accounting identity. It is turned into an economic theory by making behavioral assumptions about the economic actors involved, namely investors and monetary and fiscal policymakers.2 The key word in the preceding paragraph is willing: Investors voluntarily purchase government debt — that is, they lend money to the fiscal authority — only if they expect to be repaid in terms of principal and interest due. The key determinant for this willingness is an expectation that the government will create enough fiscal resources in the future to cover such payments.
This idea is captured by the concept of an intertemporal GBC (IGBC), which is the "present-value" version of the GBC. More specifically, the IGBC stipulates that the value of outstanding government debt is the (discounted) sum of future surpluses. Investors willingly buy and hold outstanding government debt only if they expect the IGBC to be in force. In other words, outstanding debt has value today because it will be repaid by future revenue net of expenditures.
(Source: the Richmond Fed)
This cover story, for monetary inflation, in a time of price inflation, involves the great tautology of the Fiscal Theory of the Price Level (FTPL) and some, bizarre, derivative extraction known as the Government Budget Constraint (GBC). The tautology pulls off the Herculean task of squaring the conflicted circle of Monetarism with Keynesianism. This is achieved through the demonstrable fact that, when a financial crisis occurs, Monetarists and Keynesians become united by an aligned interest in financial stability. As FDR said, the only thing to fear is fear itself at these conjunctures.
The current theory, and theorists, have not, yet, been rewarded with Nobel Prizes for economics, but one senses that they should. This author believes that the creative fiction, behind the narrative thesis, rather than economics, would be more deserving of the award.
The theory assumes that the value of government debt today is the present value of future fiscal surpluses. The implication is that a fiscal stimulus always begets the economic growth that always yields a fiscal surplus. So, as the legendary Dick Cheney said, also, with no empirical proof, deficits don’t matter. All a government has to do is fiscally stimulate when the economy slows down. All the central bank has to do is monetize the Federal stimulus and transmit it to the banking sector.
This brings us to the Fed’s balance sheet.
· The Fed is now creating balance sheet assets “out of thin air” to cover its losses Ponzi Scheme style.
· The Fed will be unable to sustain its Ponzi Scheme balance sheet asset creation process for the latest signaled intended 125 Basis points of rate hikes.
(Source: the Author)
Currently, the Fed is sitting on big mark-to-market losses. It has also implied that it is happy to realize these losses by selling balance sheet assets to meet its quantitative tightening requirement. Applying the FTPL and GBC theses, Mr. Market apparently doesn’t believe that there will be a future fiscal surplus, hence, he has devalued US Treasury prices. But the thesis and abstraction assume, a priori, that there is always a bigger fiscal surplus.
Has Mr. Market missed something?
Currently, the Fed is “creating assets out of thin air”, on its balance sheet, to cover the losses. The Fed also alleges that it is shrinking its balance sheet to meet its quantitative tightening commitment.
So, the Fed is expanding and shrinking its balance sheet, simultaneously, on purpose? Unlikely. More likely, the Fed is lying.
The best way to lie is with opaque accounting.
The Fed’s balance sheet is shrinking in value. It is not clear if this value shrinkage is being driven by mark-to-market revaluation, maturing securities, or by sales of securities. The Fed’s balance sheet accounting is misleading because it does not itemize purchases, sales, maturities, and revaluations when attributing balance sheet valuation performance. In fact, there is no attribution at all. The SEC does not tolerate this kind of reporting, by asset managers, and/or listed companies, but the Fed gets away with it.
It is, therefore, difficult to understand what is really driving the value of the Fed’s balance sheet. It is, however, reasonable to assume that when interest rates are rising that the main value driver is the mark-to-market, and, also when interest rates are falling.
The author would say that that the mark-to-market valuation driver becomes an increasingly significant constraint on monetary policymaking as its delta gets bigger. It is also reasonable to say that this driver becomes more significant, as the Fed’s balance sheet gets bigger, with the acquisition of more securities.
This balance sheet valuation process is a financial stability policy barometer. As a loss gets bigger, monetary policymaking drifts towards financial stability policymaking. In financial crises, monetary policymaking becomes exclusively financial stability policymaking. This author would say that the spike in bond yields has accelerated this style drift.
Applying the logic, of the FTPL/GBC thesis, the value of the Fed’s balance sheet can never go down unless the US Treasury stops issuing debt. The “out of thin air assets” is a stepping stone, the intermediate stage, in a process, that will revalue the Fed’s balance sheet, higher, with a bigger theoretical fiscal surplus from a bigger notional fiscal stimulus.
The “out of thin air” balance sheet assets have a theoretical value that needs converting, into actual value, by replacing them with real US Treasury securities and then by cutting interest rates. The “out of thin air” assets will need replacing, with real interest-bearing securities, since they are book entry additions with no tax revenues to support their valuation.
· The Macklem Doctrine of America’s global imperative may make bigger fools out of the FOMC than the incoming inflation data.
· The Fed may embrace Macklem Doctrine when it sees the unrealized losses on its balance sheet from the recent spike in yields.
(Source: the Author)
Hence, the US economy has reached the predicted point at which a fiscal stimulus is needed, to create the assumed future fiscal surplus, that will give the US government’s debt a higher value. This stimulus can find a home, on the Fed’s balance sheet, thereby, liquifying the central bank and its revaluing of its balance sheet higher.
As luck would have it, President Biden has a multi-Trillion$ fiscal stimulus ready to go. This stimulus is for “Friend Shoring”, infrastructure, and wars with Russia and China.
· The interest in financial stability policy will enable the application of Modern Monetary Monopsony Theory (MMMT).
(Source: the Author)
Hence, now, it is time for the Monopsony, of the Fed’s balance sheet, to monetize the Biden Stimulus at a rate of interest that, is sustainable to the taxpayer and, can revalue the assets on the balance sheet at a profit.
In short, there is no such thing as a Government Budget Constraint (GBC). There is, in fact, an Unconstrained Fiscal Policy Stimulus (UFPS) and an Unconstrained Monetary Policy Stimulus (UMPS). Some would call this Modern Monetary Theory (MMT). This author has called it Modern Monetary Monopsony Theory (MMMT).
MMMT is being proved by observation of the Federal Reserve Bank and the Federal Government of the United States of America, in addition to a handful of developed market governments and their central banks, in these reports.
The cure for inflation is, apparently, more debt and the cure for recession is, also, apparently, more debt. The cure for the Fed’s balance sheet is, also, more debt. It’s win, win, win, hence, the author uses MMM to signify this Unholy Trinity of winners.
Being a central banker is easy. The difficult part is pretending to care about inflation and growth when all one really cares about is the story to be told when monetizing the next fiscal surplus.
Some Fed speakers have shown themselves to be quite adept at storytelling. They have also put their credibility on the line as a consequence.
These Squeaky Bums don’t run ….
Cleveland Fed president Loretta Mester remains in simian denial of the growth and financial stability risks threatening the US economy. She still has “not seen the compelling evidence” nor has she heard anything to make her change her mind. Consequently, she cannot squeak the evil that would compel her to consider stopping monetary policy tightening. Neither does she feel compelled to cut interest rates next year.
The inaugural squeak of Fed newbie Governor Lisa D. Cook was never going to be loud enough to rock the boat. What was surprising was just how passively compliant Cook was. She set out her stall as one that sells risk management, with an emphasis on the dual mandate risks. Then she quickly jumped back, into line, with the summation that “inflation is too high, it must come down, and we will keep at it until the job is done.” It is, thus, difficult to know if Cook has a mind of her own. Clearly, she does not have a voice of her own at this point in her Fed career.
The Uni-mind, of the Fed Board of Governors, was clearly evident in the latest guidance from Christopher Waller. This guidance was surprisingly clear. Waller sees the lagged component, of dwelling inflation, that is over-represented, in the reported inflation data, holding back progress. He does, however, see dwelling inflation falling dramatically. Despite this, and the fact that he now believes that policy is restrictive, he intends to press on with tightening.
Waller is surprised by those who watch the dwelling inflation situation improve, rapidly, also seeing financial stability threats from a corresponding rapid deterioration in the housing market. He thinks that the financial markets are liquid and resilient, more so than before the GFC. He courts, and invites, disaster in the belief that he can pass this off as an inflation win when it occurs.
Clearly, Waller doesn’t trade the markets which is a good thing from, an insider dealing conflict perspective. It is a bad thing, however, because he clearly doesn’t understand what the recent volatility in US Treasuries and credit markets is saying about financial stability. He also, clearly, doesn’t understand that the Fed is insolvent, thereby, adding to the lack of liquidity and heightened volatility in global capital markets. One senses that Waller will learn all this quickly, in due course, as things unravel.
Chicago Fed president Charles Evans either can’t or won’t, see the lagged improvement, in dwelling inflation, of which Waller speaks. Consequently, Evans sees interest rates rising to between 4.5% and 4.75% in Q1/2023.
· Neel “Ex Culpa” Kashkari has lost his credibility.
(Source: the Author)
In the last report, Minneapolis Fed president Neel “Ex Culpa” Kashkari was observed to be hunkering down in his comfort zone. In this zone, he makes no apology for the recession, which is now highly likely, because monetary policy, which acts with a lag, will remain inertly tight for too long.
From his comfort zone, Kashkari recently stated that he “is not comfortable saying that we (the FOMC) are going to pause.” Furthermore, his “bar” to changing position is “very high”. Hence, the bar to a recession is very low, by inference.
This Squeaky Bum smells like victory ….
In Europe, the cloud of gas, from the Squeaky Bum, in Brussels, smells like a victory for the EU. As is the case, in the US, the central bank is doing its best to sabotage the victory. As is the case, in the US, both the central bank and the executive are insolvent, hence, their ultimate interest, in financial stability, is aligned.
· The ECB has signalled that its inflation mandate is making it insolvent.
· Villeroy has confirmed that inflation (and monetary policy) is everywhere and always will be a financial stability phenomenon.
· Christine Lagarde has embraced the ECB’s real financial stability mandate whilst remaining consistent with its sole inflation mandate.
(Source: the Author)
Squeaky EU Bums are counteracting the fragmentation risk, from energy inflation, and misguided ECB rate hikes. The EU intends to nudge fiscal union into reality, in response to the energy security threat, by issuing joint bonds to finance energy security initiatives. This is a double blessing, since it won’t, directly, nudge individual nation bond yields higher, thereby, leading to fragmentation.
In addition, there will be lots of, risk-free, EU bonds, which are not constrained by Stability Pact issuance limits, the proceeds, of which, will act as a fiscal stimulus.
The triple blessing is that the ECB will not have the same Capital Key limits, which preclude it from buying this new EU debt, as it has on buying individual sovereign nation debt.
The quadruple blessing is that the ECB can buy this risk-free EU debt to cover the current losses on its balance sheet from the spike in yields.
· The internally conflicted Eurozone will become a managed command economy for the duration of its structural transformation towards a Federal Republic.
(Source: the Author)
All-in-all, this Ukraine war thing has not been such a bad deal for the European Project. A rational EU policymaker would play out the war, for as long as it takes, to achieve fiscal and economic union. And who could blame them?
Conversely, the Squeaky Bum at the Bundesbank is trying to deny the victory in Brussels. Bundesbank President Joachim Nagel fondly believes that the ECB’s balance sheet can be shrunk, despite the facts (a) that there will be loads of jointly issued EU bonds requiring a home, and (b) that rising fragmentation risk still needs countering. Just to emphasize, how out of touch he is, Nagel also believes that the labor market, in Germany, will strengthen and that the economy is not in recession. Christine Lagarde must be enjoying this deluded procrastination from her biggest critics. She may think that it is karma.
The Bum that squeaked Down Under is still squeaky ….
If any commercial entity had negative equity, assets would be insufficient to meet liabilities and therefore the company would not be a going concern. But central banks are not like commercial entities. Unlike a normal business, there are no going concern issues with a central bank in a country like Australia. Under the Reserve Bank Act, the government provides a guarantee against the liabilities of the Reserve Bank. Furthermore, since it has the ability to create money, the Bank can continue to meet its obligations as they become due and so it is not insolvent. The negative equity position will, therefore, not affect the ability of the Reserve Bank to do its job.
(Source: RBA Deputy Governor Michele Bullock)
The squeaky guidance, of the Reserve Bank of Australia (RBA), has modulated from lamenting its balance sheet losses to mitigating them.
It’s Squeaky Bum Time Down Under, Misheila!
The Jolly Swagman is not so jolly.
· The RBA is the latest “insolvent” developed central bank to call for assets, from a fiscal stimulus, in order, to monetize away its balance sheet’s unrealized losses and associated negative cash flows.
(Source: the Author)
This squeaky guidance had prepared the markets for a slower pace of rate hikes, possibly for longer, well in advance of the latest decision to raise interest rates by 25-basis points.
Despite the telegraphed squeaks, the bond market loved the latest RBA decision, because it had ignored the prior squeaking.
The precedent from the RBA, and the market reaction, had, thus, been set for the Fed to come to the Squeaky Bum party, fashionably late, when the global economy is on its arse.
The RBA sums up the financial instability situation succinctly, thus, in its recent Financial Stability Review: “Household income growth has not kept pace with inflation,” and “this has left households with less capacity to meet their rising housing costs -- loan payments or rent -- while maintaining their consumption and rate of saving.”
Rising inflation, and rising interest rates, both have the potential to trigger a financial crisis. Aggressive monetary policy tightening, by default, raises the probability of the said crisis.
The Fed’s late arrival may not save the Bank of England’s Bum from making further embarrassing noises, and toxic emissions, however.
“Keanonomics”: Preparing to fail ….
· “Weimar-on-Thames” style with an English accent UK economic policymaking seeks to nationalize the Bank of England “Kremlin-on-Thames” style with the same English accent.
(Source: the Author)
The not-so-green, and very unpleasant, land of “Kremlin-on-Thames” has moved from the levity, that “was builded there”, in this author’s reports, to the reality in the public domain.
“Kremlin-on-Thames” has transcended party lines, in the public domain, thereby dooming the current parties to failure and, hence, opening the way to an alternative. More on this alternative later. This author would say that there is an evidential nudge, ongoing in the public domain, to remove the current parties.
The author theorized that this symbiosis made both parties unelectable. He also theorized that it made British economic policy look Japanese. The Bank of England, ostensibly, funds the symbiotic relationship by buying Gilts.
(Source: the Author)
This author has discussed how both major UK political parties have a symbiotic relationship, in which both define and sustain each other, politically and financially. They can’t live with or, survive, without each other.
Brexit is a subject that unites both parties whilst appearing to divide them. This is because a significant minority of Britons wanted Brexit, even though the majority of UK MPs did not. It was the sheer opportunism, of Boris Johnson, that made this dilemma into a problem. Now, both parties must pretend to uphold a Hard Brexit whilst negotiating a Soft Brexit that is no different from EU membership in practice. It’s all about optics, rhetoric, and lots of lies. Both parties used to be very good in these disciplines. Recently, their powers have diminished. They have also been sussed out by those to whom they lie.
“Lizzo” is taking the indirect Brexit U-Turn route to try to please everyone with a conflicted Brexit axe to grind.
Or perhaps “Lizzo” is working on her Brexit U-Turn already. Rumour has it that President Macron has a cunning plan to enlarge the EU without enlarging the EU. Macron wishes to create something called the “European Political Community”. This club is a de facto expansion of the EU. Hence Macron has made the club membership rules flexible enough to allow compliance with EU rules, without forcing a legal plebiscite on EU membership.
(Source: the Author)
In a previous report, this author discussed the potential for “Lizzo” to perform a Brexit U-Turn. This would be achieved by joining President Macron’s club for democracies whose voters distrust and despise the EU. Club membership still demands full compliance with EU rules and regulations, hence, de facto membership of the hated EU.
It would appear that “Lizzo” has submitted her application. The first initiation, of club membership, is to refer to President Macron as a friend. It remains unclear if this is because he is a friend of a friend or an enemy of an enemy, but it is clear that the rule of Omerta applies to membership in his Cosa Notre.
· The UK will become an austere economy with an ungovernable polity.
(Source: the Author)
Britons have taken to the streets to show their displeasure. Some provincials have gone even further and demanded to leave the Union. Britons don’t like Kwasinomics. Neither will they like the austerity that the short-lived experience of Kawsinomics precedes. If the austerity is enforced by international creditors, and the IMF, Britons will, doubtless, lust after the freedom that was once promised, by Boris Johnson, back when it all started to go wrong for them.
Facing imminent eviction, the Tories have decided to have one last roll of the dice and run around the Monopoly board of the UK economy. This is not greed. It is preparation for the fun and games to come.
It is, hence, time to jib all the property on the board and get ready to rinse those who land in the wrong places when it kicks off in the near future.
Kwasinomics has become Keanonomics, as the Tories prepare not to fail in what happens next.
What happens next is a game of civil war.
Nepotism, meets larceny, as ministerial appointments give an opportunity for the recipients to reward themselves, and make policies to reward their friends/allies in the process. The Tories are preparing for a subversive life in opposition. Hence, a scorched earth policy of transferring the economy into the private hands of their own, through legislated theft, is the last act of the current government. This grand theft will be camouflaged as the need for fiscal austerity. Austerity yields cash and operating assets that can be transferred into the hands of Tory friends, and family, through privatizations required to, allegedly, cut costs and seek efficiencies.
There are no free fish and chips to be had, unless you’re a Kleptocrat, despite what the politicians promise. Britons will have to pay their own way, one way, or another, through inflation, higher interest rates, and, then austerity and recession. The incoming Labour Party will inherit a hollowed-out economy that will take decades to rebuild, assuming that it can be rebuilt.
More likely, Britain will become Balkanised along regional, class, religious, economic, and ethnic lines. This is the fate of broad diverse inclusion when the included are broader, on aggregate than the current economic resources available. Britain’s diversity is broader than its current economic potential, hence there will be a fight over the resources. Brexit was, ostensibly, first blood in this latest domestic economic resource war.
As Kipling observed, it’s always about We and They. Most good Tories have been to schools that have lashings of Kipling on the syllabus, hence, it’s in their political DNA from prep school to grave.
Today, Suella Braverman who once was one of They, and is here for the same reasons, as They, wants to send They back. Before that, They were the Unions. Before that, They were Rivers of Blood. Before that, They were the Fenians. Before that They were the Anarchists. Before that They were the Chartists. Etc. etc. etc throughout history. There’s always a They. They define We, and our politicians.
Currently, the Tories are creating a war chest, through Kleptocracy, to fight a guerrilla campaign, while in opposition, in this, effective, civil war. The Tory foot soldiers may still have to pay the highest rate of tax, but hey that’s just the price of liberty at today’s rates.
More likely, what is left of Britain will hobble along, as a failed state, until America deems it necessary to intervene with a Marshall Plan.
As history rhymes, and repeats, it is apposite that there is another King Charles on the throne. Charles Rex III is both prescient and well-versed in his family history. Consequently, he has taken the axe to his family, and its expenses, now, rather than chance his fate with the angry mob when it all kicks off in Balkan Britain. Consequently, the monarchy has been downsized, commensurately, with the shrinking, fissile, rump of what remains of the Commonwealth and what will remain of the Union when the civil war has ended.
Then it will be game on for the Britain Project, with its 1990s Tony Blair DNA. This game is already happening in the high street shops that are selling out of 1990s fashion.
(Source: the Author)
All that remains, to be decided, is who pays the most and who pays the least. Political parties who think that they know the answer to this question are deluded. Inflation, high interest rates, and then recession, and austerity have to run their course. Some lucky politician, who hangs in there, and makes no promises, will clear up when things have run their course. This author suspects that, by the time things have run their course, the Britain Project will be ready to nudge its way into Number 10 Downing Street unopposed.
It is only a matter of time before the UK Chancellor calls the IMF for assistance, assuming that he has not done so already.
The IMF looks more approachable these days.
IMF loves supply-side fiscal stimulus ….
The last report also suggested that the global central banking response would be coordinated, with supply-side policies, by the Bank for International Settlements (BIS). This coordinated response would come under the broad heading of Macklem Doctrine.
(Source: the Author)
This author’s thesis, for the year, has been that supply-side fiscal stimulus will be framed as the solution to the global Stagflation problem. The supply of fiscal debt that comes will, also, find its way onto central bank balance sheets, to cover their losses, with real cash flows which form the monetary basis to inject reserves into the commercial banking system for private credit growth.
· Macklem Doctrine (GHOS Protocol) will roll out in global venues soon and run for three years if successful.
(Source: the Author)
The author’s thesis also believes that the imminent global fiscal stimulus will be consistent with the US “Friend Shoring” imperative. To coordinate and referee disputes, the author suspects that the Bank for International Settlements (BIS) will act as the global governance compliance officer. This process is envisaged to run for three years and be regulated by BIS official Tiff Macklem, who also doubles as Bank of Canada Governor in his spare time. The author refers to the process and rules as “Macklem Doctrine”.
Recently, the IMF has moved its position from tough anti-inflation Hawk to concerned economic growth Dove. Apparently, the Fund is open to supporting a fiscal stimulus that is aimed at unblocking supply chain inflation drivers. The green light is, hence, flashing for an attempted global economic soft landing and the initiation of “Macklem Doctrine”.
The Fed is in no hurry to pivot, alongside the IMF, however, and is, thereby, abandoning the global economy to its fate.
The Fed faces a dilemma, that is reflected in public opinion and perception.
Split the difference …
According to Harris, American sentiment is split between inflation and recession as the main economic threats.
This split does not imbue the Fed with confidence that the inflation battle is won.
These Bums ain’t squeakin’ ….
With domestic sentiment split, the Fed has decided to press on with monetary policy tightening. This tightening may not, however, be as aggressive going forward.
San Francisco Fed president Mary Daly remains all talk, but this may not, necessarily, translate into the same consummate action. Daly calls inflation a “toxin”, and a “corrosive disease”, on the one hand. On the other hand, she elevates the Congressional full employment mandate, to parity with the inflation mandate, in her latest guidance. In her view: “An inclusive economy goes both ways: It doesn’t mean just jobs, it means jobs and price stability.” Ultimately, she must be judged on her actions, and their outcomes, and not her guidance. This judgment may conclude that she is a vector that spreads the corrosive diseases which she refers to.
· The Fed is a month behind the Jackson Hole 2022 curve, and effectively more than 40 years behind the Cairo and Sim 2020 curve.
(Source: the Author)
Daly may have problems. She has avoided the Jackson Hole constraints on monetary policy of which the host Kansas City Fed president Esher George warned.
Unfortunately, Daly may not be able to ignore the constraints being created by her own research team. Her team has already begun to analyze, and quantify, the supply-side and demand-side driven components of inflation. Since they have found that the “corrosive toxin” of inflation, on its own, is an economic headwind, Daly may have to temper her enthusiasm for aggressively treating the patient with rate hikes.
This Bum ain’t squeakin’ it’s barkin’ ….
The last report questioned the Fed’s continued belief that the demand for credit is driving inflation rather than vice versa. Were it to be accepted, that inflation is driving the demand for credit, the basis for continued aggressive rate hikes would be thin.
Richmond Fed president Thomas Barkin appears to be having one of those Damascene epiphanies that Keynes used to have before he changed his mind. This author believes that this epiphany is, in fact, the late epiphany of what Esther George was trying to focus attention on at Jackson Hole.
Jackson Hole was all about the constraints on monetary policymaking. In his latest guidance, Barkin retraced his footsteps, to Jackson Hole, and began to expound on one hand, and the other, about the supply side of the US economy.
On the one hand, inflation may return to its disinflationary long-term trend. On the other hand, inflation may remain unanchored.
Evidently, and suddenly, Barkin is less certain about what either of his hands says. He is also cognizant of the fact that monetary policy acts with a lag, indiscriminately, on both the supply and demand side. Consequently, he has become less militant in favor of continued aggressive rate hikes.
Barkin is not alone in his meandering on the supply side of the economy. America’s main commercial river artery is meandering in the same direction.
Climate and environmental factors have slowed the flow of the Mississippi river, to a trickle, and lowered its level to a new low watermark. Transportation along the river has been disrupted, thereby, causing substitution by less effective, and more expensive, road and rail transport alternatives. To a one-eyed Fed Hawk, the loss in productivity, and rise in prices, are inflationary, thereby, requiring tighter monetary policy. To another one-eyed Fed Dove, this is a growth headwind that requires easier monetary policy. Clearly, a nuanced supply-side response would be optimal.
· In essence, supply-side growth stimulus is the whole objective of central bank financial stability policy, pretending to be monetary policy, going forwards.
· Don’t fight the Fed’s great balance sheet rotation, track it with a “Hypergrowth Phase” demand-side to supply-side portfolio rotation instead.
· The great rotation, from demand side to supply side assets, market call was initiated by Augustin Carstens at Jackson Hole.
(Source: the Author)
Previously, this author has advocated for a supply-side targeted monetary policy stimulus, whereby, the Fed uses its balance sheet to target solutions for stimulus. This may happen, but not yet on this current Fed’s watch.
New Bums that squeak may not bite as hard or for as long ….
Newbie Fed Governor Philip N. Jefferson has begun his career on the constraining baseline drawn by Esther George at Jackson Hole. His inaugural gubernatorial speech was inconclusive about the disinflationary disruption from technology, hitherto, seen in the economy and, hence, presumably the irrational exuberance that it spawned for a previous Fed Chairman. One may, therefore, assume that Jefferson is in favor of continued monetary policy tightening. How much, and for how long, is uncertain.
The JOLTED Bum squeaks ….
The recent Employment Situation report, allegedly, showed strength. The JOLTS data that preceded it showed weakness, however.
Going forward, the squeaks from the labor market will get louder and with them, the constraints on the Fed will get tighter.
So far, these squeaks are falling on deaf ears.
There is nothing wrong with the acuity of Madam Speaker, though.
Squeaker Pelosi’s Bottom stinks of WEED ….
Readers will, by now, be familiar with the concept of Speaker Pelosi’s Bottom. This is a combined leading global macro/technical indicator of stock market action. It is predicated on the principle of insider dealing. In the spirit of the Squeaky Bottom thesis, in this report, the sobriquet applied will now be called Squeaker Pelosi’s Bottom, going forward.
She’s, allegedly, already been at it again.
This time, Madam Squeaker allegedly made a killing in WEED.
For this author, it’s not about the allegations, ethics, or insider trading. It’s about key signals. The key signals which emanate from Squeaker Pelosi’s Bottom reek of Alpha. They also reek of fiscal stimulus and associated legislation. As discussed previously, the US economy and the Fed’s balance sheet need this stimulus.
The Fed creates deferred assets to account for losses. But how are the Fed's expenses (deferred assets) "removed" as stipulated in their accounting manual?
"A debit balance in the Accrued Remittances to Treasury / Deferred Asset account 240-925 represents the amount of net earnings that a Reserve Bank will need to realize before remittances to Treasury resume. In this case, the Bank will not make a remittance to Treasury on the first Wednesday in January.
On the January year-end closing date designated by the Board, the previous year's income, expense, and other capital account balances except for capital paid in and surplus are removed from the balance sheet. The amounts removed should be final data for the year as determined by the Reserve Bank and should agree dollar for dollar with the results for the year, which are reported elsewhere, such as in the annual CASPR reports and the reports on income from services."
https://www.federalreserve.gov/aboutthefed/chapter-6-reporting-requirements.htm