November 28th, 2014
in aa syndication
Age of Wisdom, Age of Foolishness (52)
“Thomas the Growth Engine is Running Out of Steam.”
Age of Wisdom, Age of Foolishness (51) “Culture Shocks” observed George Osborne’s strategy to create “Blue Labour”; by winning the traditional Northern “New Labour” vote with the creation of the “Northern Powerhouse”[i].
“Cheap Osborneby Train Set on Santa’s Northern Christmas List.”
Further progress was made on this journey last week, when Prime Minister Cameron announced the extension of the High Speed 2 (HS2) network extension to the “desolate” North via HS3[ii].
“Expensive Osborneby Train Set on Santa’s London Christmas List.”
To put the “Northern Powerhouse” strategy into perspective (in the shade), Boris Johnson announced plans for a new Crossrail link in London, which will cost three times as much as HS3[iii]; and continue to suck the power out of the “Northern Powerhouse” back to London. It should also frame him as “Defender of the Southern Faith”; and thus improve his attractiveness as a partner to the “Southern Powerhouse”, which is gaining steam, known as UKIP. Interestingly, half of the cost of the Crossrail link will be funded from Chancellor Osborne’s coffers; so London’s growth continues to be subsidised and funded at the national level. London therefore receives a greater fiscal stimulus than that for the North of England.
“Inflation Target Way Above the BOJ’s Reach.”
The acknowledged bear market in Crude, has prompted the BOJ to pretend that it may miss its 2% inflation target because energy prices are falling[iv]. The energy input inflation, in Yen terms from the weaker Yen versus the Dollar, has been the real delta; rather than the headline Crude price. The BOJ is therefore signalling that further Yen weakness may not be sufficient enough to compensate for the fall in the Crude price. This gives the BOJ an excuse to be even more aggressive in pursuing a weak Yen policy going forwards. Falling inflation, has become every central banker’s excuse for following an expansionary monetary policy agenda. Japanese policy makers have also begun to signal that the intended Sales Tax hike next year, will now be postponed[v]. Abe and the BOJ are now embarking on a more covert form of Yen depreciation; rather than the overt version which has cost them both dearly, by its failure to move the economic needle sufficiently to be deemed a success. As was noted in Age of Wisdom, Age of Foolishness (51) “Culture Shocks”, the Yen Carry Trade is back on; but this fact is not being advertised as vociferously as last time.
“Just What the Doctor Ordered.”
The ECB’s latest bank stress tests were characterised by their lack of stress. Christian Clausen, the President of the European Banking Federation (EBF), was the key to this stress-less process. In Age of Wisdom, Age of Foolishness (51) “Culture Shocks”, he was observed as the “Federal Champion” of the European banking system, signalling that the limit of bank regulatory restriction has now been reached[vi]. The EBF’s own rules, on what risk weightings to use for each asset class in the stress test, were therefore adopted. This produced a whitewash[vii], which covered all but the 24 obvious basket cases, mainly in Italy and Greece; who were already expected to fail. These said EBF risk weightings are due to be phased out in three years’ time[viii], because they are deemed to be far too generous in allowing the banks discretion in picking and choosing weighting values.
The latest stress test therefore was not a stress test, but rather an exercise in allowing the majority of the “Zombie” European banks off the hook, in terms of having to raise capital in a shaky equity market. This scenario, in which the weak banks are still allowed to operate, therefore makes more ECB remedial action and low interest rates an absolute certainty. It also means that shares in said banks are expensive; and are only supported by ECB largesse rather than economic fundamentals.
“EU Consensus Forming.”
The consensual tone of the stress tests confirmed the suspicion, first raised in Age of Wisdom, Age of Foolishness (50) “Hiding in Plain Sight”, that the EU would find another one of its infamous compromises; to prevent the Franco-Italian rebellion over fiscal austerity from getting out of control. This emerging consensus was underlined last week; when the EU opined that the national budgets, which had been presented for 2015, were compliant with the Stability Pact and all EU rules on budget deficits[ix].
“Get Some Saltwater in There.”
The Anglo-Saxon policy making elite, driven by the “Saltwater Apostles” from MIT, are not satisfied with the cosy polity of EU compromise however. The “Saltwater Apostles” would like to see something more Keynesian from Europe. In order to force this desired outcome, it is therefore necessary to frame public opinion. The Anglo-Saxon media machine is now busy broadcasting and publishing the narrative, that the Eurozone has a structural long-term unemployment problem similar to that in the United States[x].
This scenario has two intended consequences. Firstly, when the Fed ends its QE programme, it will still have the issue of structural unemployment and wealth inequality as the input for its next policy initiative. If the Fed is lucky, no one will have noticed that the wealth inequality has been extenuated by QE. Secondly, pressure will be brought to bear on the Eurozone, to embrace the recovery strategy of the Americans. America needs to turn the temporary increase in the money supply from QE, into something permanent that can be redistributed to the Middle Class.
Rather than allow Europe to experiment with QE, which simply leads to greater wealth inequality and asset bubbles, America would like a quantum leap; to fiscal expansion through capital investment, combined with a consumption stimulus through wealth redistribution. The American narrative clearly opines the risks of asset bubbles, through the continuation of Fed QE and the embracing of QE by the ECB[xi]. Draghi therefore faces resistance to QE, from both the Germans and the Americans; although for totally different reasons. The Germans wish him to support economic reform; and the Americans wish him to support a fiscal expansion, which is enabled by a permanent monetary expansion.
“Liberating Global Capital Flows.”
In order to apply real pressure, rather than pure rhetoric, Secretary Lew is already on record for threatening a currency war[xii] in Age of Wisdom, Age of Foolishness (50) “Hiding in Plain Sight”; against those mercantile nations with undervalued exchange rates and large current account surpluses. Last week, America turned up the heat by opining the risks to the Eurozone from capital flight, as a consequence of the ECB following a deliberate weak Euro policy[xiii].
“They’re creepy and they’re cookey.
The Statements are quite spooky.
Their policy is flukey.
Yel – lens F-O-M-C.”
Janet Yellen saw an opportunity to part amicably with the retiring “Stooges” on the FOMC; whom she has manipulated with great skill to execute the tactical policy moves that she wants. In true Yellen style, her apparent compromise with this cadre still serves her ulterior motives. The latest FOMC announcement was viewed by many as a compromise between the Hawks and Doves; which resulted in the formal ending of QE and a move to the data dependency which both parties can accept[xiv]. When viewed from the vantage point of the Treasury Department however, it plays directly to Secretary Lew’s strengths.
An ending of QE, with all the accompanying noises about “solid” job growth and benign inflation, puts a very strong bid in for the US Dollar. The capital flight from Emerging Markets, but more specifically the Eurozone, will put pressure on the mercantilists who the Treasury Department is focusing on to be more stimulative of their own economies. This bid for the US Dollar will also enable the permanent expansion of the US money supply and its redistribution to the Middle Class; at a later date when Yellen once again starts talking about wealth inequality and what the Fed should do about it.
Age of Wisdom, Age of Foolishness (37) “The Third Mandate”
The new economic bloc that was launched by the BRICS, at the Fortaleza Summit[xv], is another collateral damage victim of this new American strategy.
There are signs that mercantilist China has already got the point; and started to respond with alacrity. Immediately after the FOMC announcement, China signalled that it would be stimulating six areas of the domestic economy even further[xvi]; and that even the housing market is one of the six.
“A change you can believe in.”
Russia is on the canvas, as a result of sanctions over the situation in Ukraine.
“Ship it in Modi.”
Narendra Modi now finds himself having to reform protectionist investment laws, to attract much needed foreign capital[xvii].
Dilma Rousseff’s first act of re-election, was a bow to global market pressure[xviii] ;and then to allow a rise Brazilian interest rates to avoid further capital flight.
“When a union goes on strike
You must whip it.”
Mercantilist Germany however, has continued to chip away at the economic returns to labour; in order to keep its factories running. Age of Wisdom, Age of Foolishness (51) “Culture Shocks” opined that Germany’s real “Wirtschaftswunder” is driven by cheap labour. This model became fashionable during World War II, when the labour was foreign and free; and continued with what were euphemistically known as “Guest Workers” after the War.
The model was kept alive by European Monetary Union, because wage levels in the rest of the Eurozone were kept at parity with Germany’s by virtue of the single currency. Germany Inc is now relying upon non-unionised contracted labour to perpetuate the model; but the smaller unions are fighting back with crippling strikes.
Chancellor Merkel’s response has been to try and change the law[xix]; by forcing the smaller unions to accept wage bargains achieved by their bigger brothers. Hitler banned trade unions altogether, so Merkel is not without precedent; and has some way to go before optimising the labour market model under the cover of economic reform. The big union brothers are in effect an arm of Germany Inc in any case; so that the wage bargains achieved by them will always lag output prices and hence inflation. Germany is therefore vitiating against the spirit of wealth inequality which underlies the next move in Fed policy.
As was stated in Age of Wisdom, Age of Foolishness (51) “Culture Shocks”, Germany is also vitiating against the very principles of Europe by destroying the social equity of its citizens. It is inevitable therefore that the subversive Fascist undertones, of the current “Germanification” of the Eurozone, will be more overtly criticised going forward. The clash of cultures, being provoked by American self-interest, is going to be fun to watch.
“The Writing is on the Wall.”
(Age of Wisdom, Age of Foolishness (24) “The Short Good Friday”)
For those readers who have been following the writing on the granite walls of the Georgia Guidestones, since this monument was introduced as a guide for the perplexed in Age of Wisdom, Age of Foolishness (24) “The Short Good Friday”[xx], an update is now required. First however, it may be useful to familiarise with the ten commandments again:
- Maintain humanity under 500,000,000 in perpetual balance with nature.
- Guide reproduction wisely — improving fitness and diversity.
- Unite humanity with a living new language.
- Rule passion — faith — tradition — and all things with tempered reason.
- Protect people and nations with fair laws and just courts.
- Let all nations rule internally resolving external disputes in a world court.
- Avoid petty laws and useless officials.
- Balance personal rights with social duties.
- Prize truth — beauty — love — seeking harmony with the infinite.
- Be not a cancer on the earth — Leave room for nature — Leave room for nature.
Since the rebirth of the Titan Hank Paulson[xxi] in Age of Wisdom, Age of Foolishness (45) “Worlds In Motion” and Mark Carney’s verbal wandering off-piste in Age of Wisdom, Age of Foolishness (50) “Hiding in Plain Sight” into the realms of climate change , this monument has moved from the middle-ground to the foreground of the composition.
“Onto the Black Run.”
Looking through this monolithic prism, the current crisis in the Middle East and even the recent Ebola outbreak can be framed.
“The Trend is Not Mankind’s Friend.”
The latest update comes from the corollary of a study performed by NASA[xxii] last spring and a recent study by the World Wildlife Fund (WWF)[xxiii]. The NASA study involved something called Human Nature Dynamics (HANDY)[xxiv]. The study involves the analysis of the competition for resources amongst groups in human societies. It was recently updated by the World Wildlife Fund (WWF)[xxv]; which found that in the last forty years more than half the world’s wildlife species have vanished.
The author J.D. Alt[xxvi] has observed that the trend in the wildlife species conforms to that found in the NASA study. Furthermore, the human trend-line has entered the overshooting phase; where the lumpen mass of humanity is in the unsustainable population zone of the graph, before it inverts and then tapers away into extinction.
“Arrived and Departed Way Before His Time.”
Global warming is inextricably linked to population growth. The National Bureau of Economic Research (NBER) has recently published a report entitled Climate and Conflict [xxvii], which supports the analysis of NASA and the WWF. The NBER meta-analysis directly links global and civil unrest with temperature and rainfall change. In the words of the researchers:
“We find that deviations from moderate temperatures and precipitation patterns systematically increase the risk of conflict, often substantially, with average effects that are highly statistically significant.”
As a guide, the study found that a 1°C rise in temperature could cause civil unrest in Africa to increase by as much as 20%. The United Nations Panel on Climate Change (UNPCC) is expected to opine on this subject in more detail on the record next week. The UNPCC target to limit global warming to within 2°C of the industrial age, is clearly not some arbitrary number.
Having dealt with the Credit Crunch, policy makers are stumbling towards an even greater existential threat. Viewed dispassionately, through the granite prism of the Guidestones, things are not as they should be. Also viewed dispassionately through this prism, getting to where they should be is the immediate challenge facing policy makers. Sales of and searches for the work of T.R. Malthus may soon be booming. There will of course be those betting on technology to save mankind and their P&L’s; but this is also a massive wager on the policy makers’ ability to engineer conflicts that remain local rather than global.