“SWIFTLY” Building Back A 1990s Better Inflation And Growth Story Than The 1970s And 1980s Models
In their haste, to get back to the 1970s, and 1980s commodity and inflation shocks, commentators, and analysts, seem to have forgotten the 1990s.
Summary:
· The 1990s global economic scenario is hiding in plain sight.
· Joining the dots from G20 Indonesia, to the Munich Security Conference, Russian Defenders of the Fatherland Day, and The State of the Union Address extends the multi-polar pattern.
· As went Saddam’s Iraq, so goes Putin’s Russia.
· Meaningless high spot commodity prices on screens are the reference point for meaningful discounts in the “constrained” physical markets.
· Macklem Doctrine is a catalyst for the long-term disinflationary economic growth forces unleashed from Ukraine.
More people seem to have forgotten the 1990s than currently claim to remember the 1970s and 1980s. This cognitive blindness is not shared by global policymakers. A 1990s scenario is hiding in plain sight, waiting to be proselytized by said policymakers and their associated media channels.
When the facts change, I change my mind Schopenhauer style ….
The last report observed that the FOMC is behind the global growth curve, and the ensuing combined fiscal and monetary policy stimulus, that this author calls Macklem Doctrine. This doctrine teaches that a supply-side stimulus is required to unblock supply chains, thereby, defeating inflation and the drift of global GDP into the hands of despots. Win, win, win.
This win, win, win solution requires a lose, lose, lose scenario. Current events, rippling out from Ukraine, are that scenario.
The incremental response of selective SWIFT sanctions, against Russia, is an event that pushes the Fed even further behind the global growth curve. The sanctions have caused a tightening of global US Dollar liquidity. Consequently, the Fed will have to engage in the same kind of swap transactions that it used when it was supplying global US Dollar liquidity at the onset of COVID-19. Commentators, from the financial sector, are now demanding that the Fed expands its balance sheet on which to float this global US Dollar lifeboat.
Political spin is now required, to go with this new monetary policy stimulus, to avoid exacerbating the currently associated inflationary connotations of this strategy. The platform for what this author calls Macklem Doctrine has, thus, arrived, “SWIFTLY”, as it transpires. Now the doctrine just needs some proselytizing.
Symbolically, and materially, the proselytizing has begun, in all but name, in Germany. The Germans are following an epiphany outlined by their great philosopher Schopenhauer. First, there was ridicule. Second, there was violent resistance. Finally, there was acceptance of reality.
The Germans, initially, had to sit through the embarrassing humiliation of having all their plans for a peaceful discussion to resolve strategic discord, at the Munich Security Conference, abbreviated by events in Ukraine.
The Germans, then, did themselves no favors, with their alleged allies, by following the first course of sanctions that preserved the integrity of the German economy through the continued supply of Russian hydrocarbons. The humiliation has been capped with an embarrassing German U-Turn on both sanctions and fiscal austerity.
Henceforth, Germany will embrace the self-evident, economic principles of Macklem Doctrine, and rearmament to the lowest NATO membership requirement threshold. Hopefully, this level of military preparedness will not prompt President Putin to reclaim Ostland!
President Biden has responded to the events in Ukraine in a way that matches the global fundamentals. These fundamentals are multi-polar in structure.
Casus belli is the new casus stimuli, for President Biden.
Build Back a Better Macklem Doctrine And Disinflationary Growth Will Come….
Following the series of dots, from the G20 Indonesia 2022 conference, through the Munich Security Conference, America has now placed a new dot in the emerging pattern. This latest addition enhances the multi-polar pattern under construction.
President Biden’s first State of the Union address was a recognition of American priorities in a multi-polar world. America is not leading the sanctions charge against Russia, it is complying with an agenda that is being jointly created.
In addition, the President is recycling, and re-positioning, his Build Back Better initiative in line with the multi-polar global fundamentals. Admitting that inflation is his domestic priority, POTUS believes that Build Back Better is a supply-side stimulus that is mission-critical for this objective.
In effect, President Biden has embraced and then re-positioned Macklem Doctrine as if it is his own. Henceforth, inflation should be viewed as a monetary policy tightening effect rather than a pro-cyclical fin de siècle economic signal.
President Biden’s mission is to defeat inflation first, and global tyranny and Climate Change in the process. There’s that win, win, win again.
Thirdly, in response to the trap being set for the FOMC, by the White House, this author expects “Supply-Side Janet Yellen” to start promoting her own pre-flagged solution, which is a fiscal stimulus aimed at unblocking supply chains.
(Source: the Author)
A previous report noted that President Biden’s support for the Fed independently fighting inflation was disingenuous. It was suggested that Treasury Secretary Yellen has embraced Supply-Side economics as a form of Keynesian demand-side political expediency. Her embrace will prompt a fiscal stimulus that is earmarked as supply-side and productivity-focused.
President Biden’s embrace of Macklem Doctrine was significantly predated by Yellen’s similar embrace. This author anticipated that Secretary Yellen would then start proselytizing her supply-side, inflation defeating, stimulus. Yellen recently did so.
According to Yellen, “it’s (Biden’s Repackaged Build Back Better Macklem Doctrine) an economic policy that aims to expand our nation’s economic potential through productivity-enhancing investments along with policies to encourage more people to join the labor market.” If Yellen successfully sells her supply-side stimulus, it will be hard for the Fed not to get onside with the mantra that inflation will start to come under control as the doctrine is executed.
The Biden administration’s message seems to be dissonant with the Fed’s current message.
When the facts change, I ignore them at first ….
Of all the developed market central banks, only the Fed is remaining in institutional denial of the magnitude of the global economic headwind, and ensuing changes, blowing from Ukraine.
The knee-jerk response and its headwind should not, however, be allowed to detract from the policymaker growth narrative under construction since the beginning of the year. In fact, the knee-jerk response should be seen as a necessary precursor to creating acceptance of the growth narrative.
Imprisoned, in its domestic twin mandate, the FOMC is focused on inflation to the exclusion of growth, until the latter shows up in the economic data. Oil prices at $110+/barrel may help the FOMC change its opinion. Rising oil prices have, historically, been more effective at killing economic growth than monetary policy tightening alone has.
Chicago Fed president Charles Evans has given a classic signal of the FOMC’s blinkered denial.
Evans expects the FOMC to embark on the pre-committed course of interest rate hikes shortly. In his latest guidance, Evans was, however, clear to distance himself from his blinkered colleagues and the consequences, for the US economy, of their potential folly. Evans believes that the FOMC will raise rates “more than I (he) thinks is essential”.
James Bullard no longer has credibility.
(Source: the Author)
St. Louis Fed president James Bullard has no choice other than to be blinkered. Ostensibly, the FOMC is following Bullard’s prescriptive course of action on inflation, so he has no choice other than to see it through. The US economy is humming, as far as he is concerned, therefore, he remains in a hurry to remove monetary policy accommodation.
There is, at least, some common ground, between the Fed and POTUS, about the importance of inflation. There is, currently, little common ground, between them, on how to deal with this priority. There is no sign, as yet, that the Fed fully accepts the premise that inflation is, effectively, a monetary policy tightening tool that destroys aggregate demand.
Long live King Thomas, or at least until the March FOMC meeting!
Famous last words: “If you can keep your head, and say Holy Cow, when all of those around you are losing theirs, and shouting Katie bar the door, you should be the Fed Chairman my son!”
(Source: the Author)
With the exception of Richmond Fed president Thomas Barkin, the FOMC is not prepared to accept that inflation could be destroying aggregate demand.
Barkin has transcended his colleagues, once again, with great dexterity, by translating the macro growth imperative into a micro initiative that meets the fundamentals on the ground in his District. He calls this initiative Investing in Rural America. It could easily be termed Macklem Doctrine in Rural America.
In addition, to Investing in Rural America, Barkin is an accomplished student and essayist on the microeconomic nuances of the labor market, rather than just the headline payroll data. His latest essay is entitled Breaking Down the Labour Shortage.
Barkin finds that the lower-paid service sector has been the most destabilized by the COVID-19 pandemic. The tightness, in this sector, has been caused by genuine pandemic restrictions, but also by exits to safer more rewarding work opportunities.
Tightness in manufacturing, and high-skilled services, is not leading to runaway compensation. On the contrary, greater productivity-enhancing strategies, in addition to non-compensation benefits, are being deployed by employers.
Barkin remains loath to make any sweeping assumptions, or conclusions, that would radically affect monetary policy settings right now. He remains vigilant, curious, and studious. Whilst he does not say it, directly, his essay infers that the current labor market, and US economy, are not the same as those in the 1970s and 1980s. By logical extension, therefore, the monetary policy response should not be the same.
Perspicaciously, Barkin also has his staffers researching the latest SWIFT system changes impacts on the US Dollar’s global reserve status. The initial take is that the US Dollar will be challenged, but not necessarily dethroned, because there still is nothing else as resilient and relatively less volatile now or in the near future.
Atlanta Fed president Raphael Bostic is feeling the headwind breeze, of aggregate demand destruction, a little, but not enough to make him pause for consideration. He has, therefore, called for 25-basis points incremental rate hikes, going forward, unless the inflation data prompts the requirement for 50-basis points increments.
New York Fed president John Williams is creating flexibility, in order, to deal with the growth headwind from Ukraine. This response will, however, be delayed as Williams believes that the US economy has enough momentum to deal with the growth headwind for now, thereby, avoiding Stagflation. Williams sees rising energy prices as “a tax” on consumption. It is, therefore, unlikely that he would wish to tax the consumer, even further, with higher interest rates if consumption weakens significantly.
Hence, according to Powell, rather than rushing back to neutral, the FOMC will grope around until the incoming inflation data, and Mr. Market says that it has done enough. The question now is whether the FOMC will follow the assumed sequential rate hike course, or periodically pause along the way. At the first pause, the assumption that it will end its rate hike process sooner will then be imputed into the yield curve also.
· America is pivoting towards a strategic reset with China.
(Source: the author)
Chairman Powell acknowledged, to the Senate, that there is a global macro trend toward multi-polarity. He believes that, after observing the reaction to Russian aggression, China will accelerate its efforts to create an alternative global trading and financial system to the current one. Indeed, one day, if and when he has time to reflect, President Putin may conclude that he was the lab rat, for Chinese observation; especially when he observes the terms of trade for his commodity sales and sanctions evasion via China.
Based on Powell’s testimony, it is, hence, inconceivable that the Fed’s two mandates will not be affected by this new global multi-polarity very soon.
Assuming that COVID-19 originated in China there, already, is a very strong, existing, precedent for the Fed’s dual mandate settings to be strongly connected to developments at the global source. At some stage, in the future, therefore, the Fed will need to make monetary policy within the context of this evolving global multi-polarity.
When the facts change, we stimulate ….
With so much skin in the game, it is not surprising that the Europeans have been the first to embrace Macklem Doctrine in actions rather than just fine words. Being energy-poor is the mother of invention.
The headwinds from Ukraine have also created a strategic change in German political and economic strategy. Henceforth, the Germans will embark on an ambitious fiscal expansion that will coincide with military spending up to the minimum NATO membership threshold level. The EU is confidently expected to follow the German example, thereby, expanding fiscal stimulus across the Eurozone.
The previous report noted that Japanese Prime Minister Kishida was an early adopter of Macklem Doctrine. This early adoption now prompts him to seek a new Bank of Japan Governor who will work with the government “to defeat deflation”. Evidently, Macklem Doctrine in Japan will be enabled by a politically controlled central bank with an expanding balance sheet.
We don’t expect you to talk, we expect you not to tighten Mr. Central Banker ….
As the ECB’s monetary policy transmission mechanism faces a new challenge, the traditional verbal response mechanism has been deployed. Ollie “Rehnfeld” Rehn, as usual in times of crisis, is the first ECB Governing Council member to respond first.
“Rehnfeld” has formally, called for a halt to all attempts to normalize monetary policy until the Ukraine situation has some clarity attached to it. This clarity could be a long time in the making. Indeed, it could be the prelude to yet another existential threat that needs an economic stimulus.
“Rehnfeld’s” colleague, Governing Council member Mario Centeno has a name for the scenario with the highest probability of unfolding from the Ukraine crisis. This name is Stagflation.
Bank of England Deputy Governors Sir Jon Cunliffe and Silvana Tenreyo have acknowledged that the fallout from the Ukraine conflict will blow back on the UK economy. This blowback will be felt as an inflationary tailwind and a growth headwind. Monetary Policy settings pre-Ukraine crisis are, therefore, no longer appropriate. What the new settings should remain a mystery to them right now.
The U.K.’s National Institute for Economic and Social Research (NIESR) estimates that the Ukraine fallout hit to the global economy could be $ 1 trillion. When such massive numbers start to get thrown around, as commonplace, attention to inflation will soon switch to growth.
Bank of Japan board member Junko Nakagawa sees evidence of rising fuel and energy prices, from the Ukraine crisis, stripping aggregate demand away from consumption. Consequently, he sees no reason to tighten monetary policy to combat inflation
Fondly remembering Operation Desert Storm through the frame of Macklem Doctrine ….
The Old New World Order, as opined by George H. W. Bush, has been shaken and stirred by China and Russia. The Order, and its members, however, still have a few tricks up their sleeves which are more than capable of serving a traditional cold dish of revenge to dictators.
Those riveted to spiking oil and commodity futures prices, on their screens, should remember that the complete opposite occurs in the real world in times of crisis. President Putin is starting to resemble Saddam Hussein. It is no surprise that many of the current Russian Oligarchs learned their trade in the 1990s. A return to this status quo would not overly concern them. Russian assets and presidents change, in times of crisis, but the oligarchy structure remains. In fact, it can be reasonably argued that the oligarchy structure is enhanced by said changes.
Putin’s Russia, like Saddam’s Iraq, will be forced to sell/barter its hydrocarbons, and commodities at a significant discount to middle-men who then resell them to legitimate industrial refiners and wholesalers. The Ukraine invasion, thus, becomes the beginning of a transition phase for Russian statehood. This time around, however, there really are WMD’s! President Putin’s current multi-pole may, then, be subsumed into the remaining global poles.
The disinflationary invisible hand is already waving. As an example, Shell, having divested from Russia, now buys Russian crude, via Trafigura, at a massive discount to spot. Shell still has the valuable, and captive, audience of all those vehicle drivers and gas consumers in its downstream operations.
Spot commodity prices, on screens, henceforth, become the starting point for the discussion of discounts for physical delivery. Ironically, the more “encumbered” the physical delivery the greater the discount to spot demanded. Hence, the wheels of the global economy still turn. Russian crude didn’t disappear, it just started to find a new discounted way to market.
The latest US employment situation report showed that wage pressures have abated as workers have returned to the job market. The rising participation rate has created competition for jobs and capped wages.
If it can see beyond, its blinkers, the FOMC may have noted these tangible disinflationary signals. The supply-side remains constrained, but, the increasing supply of labor and discounted raw materials, clearly, have a disinflationary vector. Macklem Doctrine is at work, already.
A new fiscal stimulus aimed at unblocking supply chains and labor markets, is, thus, leaning on a door that is already opening. The FOMC does not have to tighten monetary policy since r* has already started to regain its declining long-term trajectory. The FOMC doesn’t need to be aggressive.