Author: by Stephen Hill
Ben Bernanke has retired and Janet Yellen has knocked another $10 billion off the monthly QE bingeing allowance, now down to just $65 billion a month, and falling. Now the Bernanke Put gives way to the vagaries of the cyclical call. Or in other words, it’s closing time on the Great Gatsby party at the Fed, and now the cost of the damage must be paid.
The first drunks out the door, dubbed the Fragile Five by those that have seen it all before, are gentlemen from as far afield as Brazil, Turkey, India, Indonesia and South Africa, as they defend their currencies and raise interest rates, but to little avail. Yes, it was one helluva party while it lasted, costing $4 trillion in QE since 2008.
And the next crowd to depart, from Russia, Argentina, Ukraine and Thailand, aren’t in a much better state either come to think of it, as they leave banging doors and burping about capital controls, just after two earlier escapees, from Cyprus and Egypt, had already slammed their front doors shut. And three of these countries are now plagued by rising and intractable political protests, with death on the streets, which never looks good.
Meanwhile, over on the east side of town, the $24 trillion credit bubble in China is being eased down as well. Between the Fed and the even bigger Hall of the People, they are easing off on a scale that makes Japan’s 1980s binge look like a pre-theatre cocktail party.
And all this in a world where one-half is staring deflation in the eye, none more so than the eurozone, where Greece, Italy, Spain, Portugal, Holland, Estonia, Slovenia, Slovakia, Latvia and now France are in reverse gear, as are those who ill-advisedly pegged their own currencies to the fate of the dreadful euro – Denmark, Hungary and Bulgaria. Mario Draghi says he will do whatever it takes, which probably means keeping three sets of books at least, but he does nothing real, no doubt frozen in the baleful glare of the Bundesbank.
So the world’s two biggest economies, the US and China, are not about to haul the world out of the abyss, as they are both cutting stimulus in the face of mounting economic stagnation and deflation.
What will Yeller do now? Monetise the debt, by printing money which the government injects into the real economy, as opposed to the bond and stock markets? Or just nail interest rates to the floor, and risk ending up behind the curve if a revival does manage to get out of bed? Meanwhile, just watch when the yield on US 10-year Treasuries motors through 3 per cent.
It will probably take a tax cut and more doses of monetising QE in a concerted monetary and fiscal approach. That’s not about to happen under Obama, who doesn’t do economics, and is politically a dodo waiting for the end.
And what will China do? That’s the trillion dollar question.