Two weeks ago the Federal Reserve Bank of Kansas City held its 42nd Economic Policy Symposium in Jackson Hole, Wyoming.
Among the gathering of central bankers was Bank for International Settlements General Manager Agustin Carstens, who used his platform to warn of how the rise of protectionism risks destabilising the global economy:
- After decades of setting rules to liberalise trade, we are seeing moves to rip up
- After decades of increasing international cooperation, we are seeing increasing international confrontation. This is reflected in the United Kingdom’s vote for Brexit, nationalist movements in Europe, the shift in US trade policy and the current tariff tit-for-tat.
This narrative employed by Carstens is not new, but warnings of what could transpire in the face of a trade war between America and China are becoming more specific.
- Reversing globalisation puts at risk the real economic gains that have come about through closer trade and investment links. This could increase prices, raise unemployment and crimp growth.
- Seeking to turn back the clock and to retreat to a simpler world of local production may undermine the market discipline that helped curb inflation.
As discussed through this blog, the rise of supposed nationalist outbreaks like Brexit and Donald Trump are linked by two common factors – trade and inflation. The ‘Trump Tariffs‘ on China threaten to compromise global supply chains and make the cost of importing / exporting goods more expensive, meaning an inevitable rise in the cost of purchasing these goods. In tandem, the possibility of no trade agreement being reached between the UK and the EU before Britain drops out of the union next year has grown in stature, a scenario that would also serve to raise prices.
Central banks have long communicated that they cannot ‘stand still‘ amidst changes to the economic outlook. Many continue to believe that should a trade war escalate through the actions of the Trump administration and over Brexit, banks will lower interest rates and support the economy with more quantitative easing. The problem with that theory is that BIS General Manager Carstens is communicating otherwise:
- Tariffs could push up US prices, possibly requiring monetary policy to react through more rapid increases in interest rates. Such a response would widen the interest rate premium to the rest of the world and could drive the dollar higher.
Carstens goes on to say that ‘trade tensions can weaken currencies‘, and how strength in the U.S. dollar could ‘tempt authorities to impose even higher tariffs or even additional protectionist policies.’ A stronger dollar makes the cost of exporting goods more expensive, something which Donald Trump has spoken out against.
Carstens then asks:
- Can the first salvoes in a currency war be long in coming?
In terms of currencies, pound sterling has seen a steep devaluation over the past five months, all of which has been attributed to Brexit. Emerging market currencies have been depreciating at a time when the Federal Reserve continue to withdraw dollar liquidity from the market through their balance sheet reduction scheme.
- The dollar remains dominant in trade transactions or bank loans for
working capital, and in international banking or securities markets more generally.
- Dollar appreciation can reduce credit supply and demand and tighten financial conditions for many emerging market firms, hurting employment and investment.
How long before emerging markets begin to look beyond the U.S. dollar as the currency of choice for trade? Flight from the dollar would put its world reserve status in jeopardy. Such an eventuality would lead to a currency war that Carstens appears to be telegraphing:
- Trade skirmishes can easily escalate into currency wars, although I hope that they
- Any dollar shortage among non-US banks could cripple international trade.
It was in 2014 at the World Economic Forum in Davos that IMF head Christine Lagarde spoke about the prospect of a ‘global economic reset‘. In Lagarde’s own words:
- We see as necessary going forward a reset in the area of monetary policies. We believe that quantitative easing and the accommodating monetary policies that have been adopted should be continued up until such point that growth is well anchored in those economies.
- Reset in the sense that once it is well anchored, then those accommodating monetary policies have to be reformulated.
Lagarde also spoke about the ‘necessity of structural reforms‘ to the financial system as part of a ‘reset‘. To achieve this would require global cooperation and a reaffirmation of the whole concept of globalisation, and the ceding of more sovereignty to the intentional level.
In 2018, the opposite is occurring. Protectionism is threatening to break apart the ‘rules based global order‘ that was founded in the wake of the second world war, something which Agustin Carstens says ‘could set off a succession of negative consequences.’
- In the long term, protectionism will bring not gain, but only pain. Not just for the United States, but for us all.
A large proportion of alternative outlets perceive that central banks are ‘losing control‘ of the global monetary system, and are ‘panicking‘ at the prospect of a systemic collapse. This is wishful thinking: the actions of banks today have been well choreographed, communicated many months in advance. There is no evidence of them acting out of panic. In the face of sustained conflict between protectionism and globalism, banks are tightening policy and gradually fermenting the conditions for a downturn. When it occurs, ask yourself where the fingers of blame will be pointed.
The die has been cast on the scapegoats of Trump and other nationalist uprisings, and crucially they are providing central banks with the passage to escape from a decade of monetary easing. Trillions of dollars in quantitative easing have kept the financial system artificially afloat. Simple mathematics dictates that removing this accommodation will cause an eventual collapse. To suggest that banks are not aware of what they are doing is naive.
Rather than striving to prevent a downturn, I believe that central banks not only desire it, but require it as part of a process of further centralising the world economic system.
As I have written before, out of conflict comes consolidation. The adage of ‘order out of chaos‘ has its roots in institutions such as the Trilateral Commission. The ‘global economic reset‘ cannot occur without the onset of conflict. Times of peace do not provide for radical change. And because the ramifications of today’s conflict (from an economic standpoint at least) will be inflationary, central banks will have every excuse to continue raising interest rates and ‘normalising‘ policy – to the detriment of economies worldwide.
- President Donald Trump has threatened to pull the United States out of the World Trade Organisation and is ready to impose more tariffs on China.
- “If they don’t shape up, I would withdraw from the WTO,” Mr Trump said in an interview.
- In an interview with Bloomberg, Mr Trump was asked to confirm whether he would move ahead with a plan to impose tariffs on $200bn (£154bn) in Chinese imports next week. He said it was “not totally wrong”.
- British consumers increased their borrowing at the weakest pace in nearly three years last month, and foreign holdings of British government debt fell by a record amount, Bank of England data showed on Thursday.
- Foreign investors’ holdings of UK gilts fell by 17.2 billion pounds in July, up sharply from 1.4 billion pounds in June and the highest since records began in July 1982, driven in part by a large volume of maturing bonds.
- Central banks and sovereign wealth funds are likely to sell up to £100bn of UK bonds and precipitate a balance of payments crisis if Brexit talks break down in acrimony, Bank of America has warned clients.
- The US bank said selling on this scale would send sterling cascading down to lows not seen since the mid-1980s, with a risk of cliff-edge falls if the exchange rate breaks below $1.10 against the dollar.
- Meat, vegetable and dairy prices are set to rise “at least” 5% in the coming months because of the UK’s extreme weather this year, research suggests.
- Consultancy CEBR said 2018’s big freeze and heatwave would end up costing consumers about £7 extra per month.
- But the Centre for Economics and Business Research (CEBR) explained that these increases can take up to 18 months to fully have an effect on shoppers.
- UK shop prices have risen for the first time in five years, according to the latest data from the British Retail Consortium (BRC).
- It said shop prices increased by 0.1% in August, breaking a cycle of 63 months when prices fell.
- It comes after food inflation jumped to a seven-month high of 1.9% after the recent heatwave, which hit crop yields.
- The peso is down more than 45 percent against the greenback this year, exacerbating pre-existing fears over the country’s weakening economy while inflation is running at 25.4 percent this year.
- On Thursday, the central bank hiked rates by 15 percentage points to 60 percent from 45 percent and promised not to lower them at least until December.