If contemporary geopolitical strife were woven into a fictional tale, it would envelop all the qualities of a psychological drama befitting of the world of fantasy. In such dramas it is not uncommon for an author to develop a narrative that if executed well enough has the power to deceive you into believing the opposite of what is about to occur.
The minute by minute news cycle that we have become accustomed to – and seek out by routine – has in my view reduced our ability to think both critically and objectively. The instantaneous need for a response on what are often complex societal and economic issues leaves little time for considered analysis.
To begin with an example, Federal Reserve chairman Jerome Powell announced in January that the Federal Reserve would be ‘patient‘ in regards to further rate hikes, and would set about ending its balance sheet run off ‘at coming meetings‘.
Mainstream and alternative channels immediately interpreted this as the Fed backtracking on their policy to continue raising interest rates and rolling off assets from the balance sheet. These outlets encouraged people to believe that the Fed had ‘caved in‘ to concerns over a global economic slowdown and pressure from Donald Trump. It was apparently an unequivocal sign that not only had the Fed changed course and turned ‘dovish‘, they would also in the near future be cutting interest rates and firing up the 4th round of bond buying through quantitative easing.
The problem with this perspective is that it relies more on belief than it does tangible evidence. All that has been communicated from the Fed over the past couple of weeks is rhetoric, backed up by no specific actions or precise detail. Instead, analysts have leapt to assumptions on what they think the Fed are going to do next. They have taken ‘patient‘ to mean further hikes are indefinitely suspended.
Back in 2014 when IMF head Christine Lagarde first spoke of a ‘reset‘ of global monetary policies, one might have reasoned that until central banks actually performed a visible u-turn on accommodative policies that Lagarde’s words were not altogether trustworthy. Very few seriously believed that rates could go higher following the Great Financial Crisis.
Five years on from Lagarde’s proclamation, the Fed have raised interest rates nine times (seven under Donald Trump’s presidency) and run off over $400 billion in assets from their balance sheet.
Whilst the Bank of England initially cut interest rates following the EU referendum, this along with a depreciating pound worked to push up inflation which has since been met with two interest rate hikes inside eight months. The Bank of Canada have also been raising rates, whereas the European Central Bank have been on a more gradual path having just ceased their asset purchasing scheme.
Lagarde’s words, and those that were subsequently communicated by national central bank officials, were supported by concrete actions. What we have today is missives from the Fed. Until they actually administer rate cuts and re-inflate their balance sheet, what they say means very little. And so far they have expressed no direct assurances that they will meet a slowing economy with monetary accommodation.
What many are blase about is how the Fed would respond in the event of heightened inflation amidst an economic contraction. The automatic reaction, as it is in the UK, is that central banks will backstop any downturn. Read into their communications, however, and no such guarantees are forthcoming.
If central banks have one aspect in common, it is their mandate for 2% inflation. To this day they continue to promote the importance of this. After the fallout of the 2008 crisis, banks allowed inflation to exceed target without tightening. With inflation running at 3% in the U.S., the Fed were ramping up more QE.
The attitude in 2019 is very different. In short, inflation targeting matters again. Based on what banks are saying, they will not be prepared to meet a sustained rise in inflation with monetary easing. Especially not when the reasoning for such inflation would be attributed to decisions undertaken on a political rather than financial level. Notice also that central banks today regularly communicate the importance of being independent from political concerns.
It is a similar situation with the Bank of England. Earlier this month they cut their growth forecasts, raised the prospect of a future recession and implied that interest rates would probably only rise once over the next couple of years.
As with the Fed, this was translated as the BOE scrapping plans to further tighten policy amidst the spectre of Brexit. Uncertainty over the process had ‘backed the bank into a corner‘, and were the UK to exit the EU on World Trade Organisation terms, a swift response from the BOE in the shape of rate cuts and stimulus would be anticipated.
As ever, the reality of the situation is somewhat different. Rather than analysts hearing what they want to hear and fashioning it around their own particular brand of bias, it pays to listen to what central bank governors actually say. The BOE’s Mark Carney has said the same thing consistently for many months. In a ‘disorderly‘ Brexit, rates could do ‘either way‘, but Carney has openly spoken about how inflationary pressures generated from restricted supply chains would tend monetary policy towards further tightening.
Instead of dismissing Carney’s warnings, I remain of the belief that they should be taken seriously. Far from being ‘hamstrung‘ in their attempts to normalise policy, the vulnerability of sterling in relation to Brexit is dangerous in the sense that a prolonged currency devaluation will open up an avenue for the BOE to tighten rates.
In both the UK and the U.S., inflation is now running below the central bank mandated target of 2%. Actions stemming from Brexit and Donald Trump risk a subsequent rise in inflation, which in my estimation will be met with the opposite policy response to what a majority of analysts are anticipating.
The latest development on Brexit is that campaigners for wanting to remain in the European Union are organising a final ‘Put It to the People‘ march in a drive to secure a second referendum.
In a recent article, I warned that as alternatives to Theresa May’s Brexit deal are gradually whittled away, it becomes ever more likely that it will come down to a choice between extending article 50 and backing a second vote, or allowing the UK to leave the EU with no deal. I also warned that the perception of a second referendum appearing less likely following a withdrawn amendment calling for another vote was premature.
To further accentuate the psychodrama at work here, this latest march will take place just six days before the UK is due to leave the EU on March 29th. It is being promoted as the last chance for parliament to back a referendum on the Brexit withdrawal agreement.
The stop-start nature of what has been a gradual formulation for a second vote follows the same pattern as the ‘trade war‘ between the U.S. and China. How many times have we seen markets bounce on rumour and hearsay that talks are progressing, only for those same markets to dive hours later on news that talks have stalled or broken down? Optimism turns to pessimism and vice versa. But rarely is it built upon factual evidence.
In a typical fictional setting, the current stance of Brexit would be seen as the nail-biting finale designed to keep readers and viewers alike engrossed in the drama. Will parliament avert a no deal? Will May ‘run down the clock‘ resulting in the UK leaving at the end of March with no agreement? Will the government collapse? Will there be a general election?
Of more interest to me is the timing of this ‘Put It to the People’ march. Taking place on March 23rd, it suggests that an amendment calling for a second referendum will not be tabled in parliament beforehand. Instead, it will likely not be utilised until its passage can be assured with a parliamentary majority, even if that means waiting until mere days before the UK is due to leave.
A referendum has long been heralded as a mechanism to ‘take no deal off the table‘. Yet prominent proponents of a ‘people’s vote‘ have been openly advocating for a ‘hard‘ Brexit option on the ballot paper.
The gradual build up of concurrent geopolitical stress points is not a coincidence. On both sides of the Atlantic central banks have been positioned as being at an inflexion point. Will they or won’t they cut rates? How long before they start buying up assets again to shore up the financial system?
This is not 2008. Back then central banks took sole custody of the global economy to prevent a wholesale collapse of the financial system. Now, as the rise of nationalist and populist sentiment gains ground, banks have begun to reverse their accommodative measures. This is a fact that few seemed to have picked up on.
The two most prominent issues – Brexit and Donald Trump’s ‘protectionism‘ – are adjoined in the sense that at their core is global trade. Restricting the supply of goods and services is a path towards the devaluation of currency and higher inflation.
I have presented evidence for this on numerous occasions, but globalists are actively calling for major institutional reforms of international organisations. To achieve further consolidation of powers, and in so doing take the world a step nearer to their utopia of a ‘new world order‘, recurring crises are an essential variable. Major societal changes cannot be implemented without the onset of chaos. History bears this out. The current ‘rules based global order‘ is not designed to survive in its present incarnation. Weaknesses are inherently built into globalist systems. As the adage goes, the old must make way for the new.
If this is true, then why would central banks want to take ownership of the fallout from Brexit and Trump by reversing monetary tightening? They have already suggested that they will not backstop economic instability that stems from the political sphere, particularly if it proves to be inflationary.
The agenda of internationalists is made clear through their own communications. Their goals remain constant, unyielding. Which is why I take the narrative of central banks backtracking as misdirection, designed to distract people from their motive of allowing the geopolitical scapegoats of nationalism and protectionism to jeopardise the ‘recovery‘ and in the process the ‘global order‘.
Because, ultimately, globalism would be the beneficiary to such an outcome.