Oh dear. It’s the proverbial Catch-22 for Mark Carney, Mario Draghi, Haruhiko Kuroda and Janet Yellen. Declare victory in the war on deflation and end QE too soon, and you get yourself a bond market crash.
Keep fighting the bad fight, throwing bad money after bad, and you gradually erode confidence until that point where trust vanishes. Then you get a crisis of an entirely different (and worse) sort. The trust vanishing point. Where do you think it is?
When will your average Briton, sitting comfortably in their armchair in their equally comfortable sitting room, look at Mark Carney testifying to Parliament about the need for more QE and lower rates and mutter to themselves, “This man has no idea what he’s doing”?
At some level, all money is based on confidence and trust. That’s why it takes a real calamity to cause a currency/monetary crisis. You have to do something extraordinary to get people to lose confidence in money.
But give credit where it’s due
The financial authoritarians have done everything in their power to make people lose confidence in their product of paper money. €1 trillion in bond purchases by the European Central Bank with no appreciable benefit to the economy? Check! A relentless assault on Japanese government bond yields by the Bank of Japan? Check!
Would you want to be Carney today? The British pound surged overnight (again) on a weaker than expected US survey of services activity. Ever since Brexit, Carney has been there to talk down the pound just as it’s showing signs of strength. Will he do it again? And will investors listen?
The trouble for Carney and the Bank of England is it looks like they’ve overreacted to the initial surveys post-Brexit. There was a July confidence swoon. And then you saw an August surge. We’re now right back where we should be: wondering what Brexit looks like and what it means for the pound and the UK long term.
For the record, I’m of the belief that nearly everyone is now too sanguine about how far the pound could fall in the next few years. It wouldn’t even necessarily be a bad thing. But the pound below parity against the greenback? There are only a few people who even seen that as possible.
I’ll come back to that tomorrow. I’m having lunch with a well-known member of the “gold scene” in London. I’ll ask him what he thinks. Gold, by the way, rallied overnight on the weaker US dollar. A data-driven Federal Reserve is a lot less likely to hike US interest rates when it meets on 20 and 21 September.
Physical gold has a storage cost
This, plus the fact that it doesn’t pay a yield, has always counted against it in the eyes of those who see gold as an asset class or investment, and not, simply, as an alternative currency. But it’s a strange world we live in. Getting stranger by the minute.
Bonds with negative yields don’t have a yield either. Well, they do. Just not the kind that pays you. Yet it’s cash that boggles the mind. People insist on possessing it, despite the warnings and admonitions of experts. Some people are even paying to store it, despite (or because of) low or negative interest rates on deposits at banks.
“It’s a sign the world is getting used to negative interest rates when what once seemed bizarre starts looking like the norm,” reports Bloomberg. “Consider Switzerland, where more and more companies are taking out insurance policies to protect their cash hoards from theft or damage.”
A triple whammy!
Earn no interest on cash (whammy!). Pay to store it in a non-bank vault (whammy!). And then pay to have it insured against theft or damage (but not inflation, devaluation, or confiscation). Whammy!
The Swiss National Bank is one of five banks with official negative interest rates. The others are in Denmark, the EU, Japan, and Sweden. Each has gone negative for various reasons. But none has succeeded in coercing savers and ordinary people to part with cash.
For that reason, I’m convinced we’re close to the end of QE as we know it. When savers and investors are putting piles of cash in vaults, it shows that QE is an unqualified failure. Central bankers can only lower the price of money. They can’t create growth. They can’t allocate capital. They don’t produce anything valuable. Lately, all they really do is destroy.
The one commodity they must not destroy – or they will suffer a bitter harvest – is trust. When trust in money as we know it goes, a lot of things (like social order and civilisation) go with it. In the vacuum you have either chaos or… the authoritarian state coming out from behind the shadows to assert itself.
But I don’t want to ruin my lunch or your day by going down that route.
Category: Geopolitics