Monday, September 9, 2013

An AEP Twofer

Ambrose Evans-Pritchard is out with an article entitled “The IMF knows that the Fed is playing with fire in emerging markets.”  It is not one of his better efforts.

It would have been bad enough if he just stuck to economics and monetary policy; on such subjects, while he often provides good analysis, his policy prescriptions are some version of “my market manipulation is smarter than your market manipulation.”

So he does plenty of that here.  However, he doesn’t stop with economics.  He decides to weigh in on Syria – he manages to connect monetary policy to the farce being proposed in Washington.

I will begin as he does, with a look at the economics, starting with the title.  Wouldn’t it be more appropriate to have not limited the subject to merely the emerging markets?  Isn’t the Fed and every other major central bank playing with fire that could consume us all, emerged or emerging?  The intervention by central banks over the last several years is unprecedented, and no one has been able to rationally explain a way out.

He cites the IMF’s Christine Lagarde:

"Very negative spillover effects on the emerging market economies could very much backfire on other economies. So to assume that the domestic economy is totally isolated, that a country is an island, would not be the right approach," she told CNBC at the Ambrosetti Forum on Lake Como, which I have been attending.

"Without necessarily changing the mandate, without reviewing the terms of references, and maybe without even acknowledging it, I cannot believe that central bankers do not take into account what's happening elsewhere in the world," she said.

Ambrose adds: “The IMF is right, but is anybody listening at the Fed?”

Let’s pretend to live in their world – a world where it is appropriate to manipulate markets via coercive, government-enabled means.  What Lagarde is saying, and AEP is endorsing, is that she knows better the risks to the US economy of the Fed’s policies than do members of the Fed itself – with its thousands of economists and detailed analysis on many aspects of banking and finance within the United States.

Even if one lives in that world, can that really make any sense?

Further, each central bank – developing or developed – has more control over its own currency than any outside bank does.  No one required Brazil, China, or India to counter the effects of Federal Reserve policy – thus now not having to suffer the after-effects of that choice.

The central banks of these emerging market countries make choices that make sense for them within the context of both global and domestic considerations.  Like all choices in life, each one comes with consequences. 

For the most part, these countries want to take action to keep their respective currencies as weak if not weaker than the US dollar.  They do this to support mercantilist policies – to the detriment of consumers in the home market.  That such a strategy comes with consequences is not the fault of the Fed or the ECB.

One suspects that the Fed is acting for "bad motives" rather than "good motives", by which I mean that it is starting to tighten because of growing (and understandable) alarm about speculative excess, or because the Fed is worried as an institution that it cannot easily extract itself from QE if it waits until 2014 (the Mishkin thesis), not because the US economy is genuinely healthy.

Of course there is speculative excess – how can there not be in a world flush with zero-percent interest rates?  The Fed cannot extricate itself from QE in 2014 or otherwise (I have no idea what “the Mishkin thesis” is, nor do I care to look it up).  One of many truths taught by the Austrians is that, once an artificial expansion of the monetary base is begun, the only way to continue the path of increasing artificial economic activity is to continue the stimulus in ever-increasing amounts.

There can be no so-called “taper” without recession or depression.  There can be no shrinking of the balance sheet without depression.  The only twist to this, on which I am not clear about the possibilities, is that much of the new digits are held as excess reserves: could this be withdrawn without consequence to the larger economy?  Mathematically, it would seem the answer should be “yes.”  However, my gut tells me that if this was true, the Fed would have done it already or never taken this approach in the first place.  So my gut concludes that, even in the face of excess reserves, the Fed cannot taper and cannot reduce the balance sheet.

So far, typical Ambrose: nothing particularly “deep-end” from this piece.  But here is where Ambrose decides that Syria now comes into play on monetary policy:

Of course, one might say the Brics deserve to be taken down a peg or two, since they seem determined to collude in Assad's chemical weapons attack, blocking any punitive measure at the UN…

Why for that matter is Germany – which started the ball rolling with Mustard gas in 1915, and therefore should have a special responsibility – so unwilling to go along EU partners in any way?

So much nonsense in 33 words:

1)      France was the first to use gas, and that was in August 1914.  That it didn’t work very well is immaterial: this wasn’t because France wanted it to be ineffective!  The intent of France was to gas the enemy.
2)      Whenever a bogeyman is needed, one can bet money that the Germans will quickly be trotted out.
3)      Let him without sin cast the first stone: why is US moral leadership unquestioned on this?  Any conference involving countries that have used weapons of mass destruction against non-combatant civilians would have as one of its keynote speakers the government of the United States.  We don’t have to go back to 1915 for examples.
4)      What EU partners is Germany snuffing?  The British Parliament voted no.  France is getting cold feet.

So if the Brics come pleading for mercy as Fed tapering sets off a faster pace of capital flight, they cannot expect a very friendly response from Washington.

Economic policy as weapon.  Only the man-on-the-street suffers, and Ambrose is OK with that.

As mentioned, at least on the economic stuff Ambrose normally offers good analysis, sadly always followed with misguided prescriptions.  Normally we don’t get geo-political commentary from Ambrose.  It is easy to understand why.

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