Author Lewis Carroll wrote in Alice’s Adventures in Wonderland: “If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?” Well, that is the world we are living in right now, and the central bankers are making sure that everything is nonsense: Up is down, down is up, fair is foul, and foul is fair. These are the smartest men in the room? It would be preferable to pick a dozen random names from the Yellow Pages and have them dictate monetary policy than the folks in Washington, Frankfurt, or Tokyo.
QE Trumps QT
Liberty Nation recently reported that the Fed quietly purchased $14 billion worth of US debt last month, potentially signaling that the Eccles Building was about to light the spark that ignites the fourth round of quantitative easing. Perhaps it was a blip on the radar. Maybe the Fed just wanted to hold Treasurys. It could be that monetary policymakers have a fetish for printing presses.
Well, the Fed is expected to buy another $20 billion in bonds between September 16 and October 11. This would be just the second set of purchases in five years when it ended QE3 and began to gradually tighten. Is it time to stop worrying and love QE (again)?
The news comes just days after the European Central Bank (ECB) officially relaunched QE to resuscitate the eurozone economy that has been on life support since the Great Recession. To celebrate his next-to-last meeting, ECB President Mario Draghi not only revived QE to the tune of $22.1 billion a month, but he also deepened interest rates into subzero territory. The deposit rate that banks pay to park excess reserves was reduced by ten basis points to -0.5%.
In an unsexy policy maneuver, the ECB adjusted its long-term refinancing operations and introduced a tiered system that exempts financial institutions from negative rates.
The latest asset-buying push is likely to be open-ended QE, meaning that these acquisitions, as well as negative rates, will perpetually occur to accommodate growth in the anemic eurozone. Carsten Brzeski, the chief economist at ING Germany, said it best in an interview with MarketWatch: The outgoing Draghi’s legacy has shifted from “whatever it takes” to “as long as it takes.”
The remainder of September should be fascinating in the world of central banking because the power players are having their monthly powwows. Rumor has it that they will take their cues from the ECB and the Fed.
This week, the Federal Open Market Committee (FOMC) meets and markets overwhelmingly believe Fed Chair Jerome Powell will pull the trigger on a quarter-point rate cut, lowering the target range to between 1.75% and 2.00%. The Swiss National Bank (SNB) will determine if it should reduce rates to cap the franc’s ascent to the heavens. The Bank of Japan (BOJ) has been unsure if it should ease further as the world’s third-largest economy faces a possible recession and an unpopular national sales tax hike. Will the Reserve Bank of New Zealand (RBNZ) shock markets again and deepen rate cuts? Banxico – Mexico’s central bank – could also cut rates because of low inflation.
Who’s on First?
Did central banks take the training wheels off a bit too soon and cause little Jimmy to scrape his knee?
What is remarkable is that governments around the world have collectively spent trillions of tax dollars, and central banks have unleashed unconventional stimulus tools since the financial crisis. Yet, all they have to show for it is a deflating boom, an inevitable monumental bust, and a t-shirt that reads, “I survived the Great Recession and all I got for it was a lousy shirt.” The question to ask is: What now?
During the next downturn, governments will once again pass stimulus spending bills and central banks will facilitate the deficit-financed outlays by monetizing the debt. But central banks cannot possibly do more than what they are doing now during the boom phase of the business cycle. How much lower can rates go? How much more money printing can be done? How much bigger will the balance sheet be? Will central banks adopt the BOJ approach and become the top shareholder of domestic stock?
Surely, the madness must be stopped somehow! To quote Carroll again, “Why, sometimes I’ve believed as many as six impossible things before breakfast.”
Indeed, whether it is the Fed or the ECB, they will need to pull out magic fairy dust from their pant pockets because they have pre-emptively fired all their bullets. Really, the only thing that is left is Powell, incoming ECB chief Christine Lagarde, and BOJ Governor Haruhiko Kuroda to dance the Charleston in order to distract investors from hitting the sell button.
Currency War – What Is It Good For?
What makes this all truly terrifying is that it could be the start of a currency war, a depreciating race to the bottom.
President Donald Trump has long complained on Twitter that the Fed should emulate other central banks and debase the surprisingly strong dollar, a move that would make American exports cheaper. Although these institutions claim that targeting the foreign exchange rate is not in their purview, their actions have a tremendous impact on how currencies are traded in the open market. So, if the Fed weakens the greenback, then others will follow suit.
We still have time before the asteroid smashes into the planet and triggers a mini-ice age, so enjoy the global warming while you can. The next economic collapse will not be pretty. Well, at least the cockroaches will survive. Perhaps they can pay off the 100-year bonds when they mature.