Central banks head for currency wars as growth policies fail

Economic growth

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Deflation Jul13The world’s central bankers would have been sacked long ago if they were CEOs running companies.  They would also have been voted out, if they were elected officials. Not only have they failed to achieve their promised objectives – constant growth and 2% inflation – they have kept failing to achieve them since the Crisis began in 2008.

But they are neither CEOs or elected officials.  So instead, they cling on to office, becoming more discredited with every year that passes. Even the IMF is now warning that:

“Advanced economies are facing the triple threat of low growth, low inflation, and high public debt. This combination of factors could create downward spirals where economic activity and prices decline—leading to increases in the ratio of debt to GDP—and further, self-defeating attempts to reduce debt.”

Much of the IMF’s analysis could easily have come from the blog – with just one exception. It, like central bankers themselves, is still too proud to admit that demographics drive the world’s economies – not central bankers:

  • Central banks revelled in the idea they were geniuses during the Boomer-led SuperCycle
  • Like UK Finance Minister, Gordon Brown, they claimed to have conquered the cycle of “boom and bust”
  • But their economic models were so out of date, they couldn’t even forecast the subprime crash
  • Yet its inevitability was obvious even to the blog, long before it happened, as documented in “The Crystal Blog

Finally, however, 8 years later,  the voice of common sense is starting to be heard.  As the World Bank’s country director for Indonesia told the Financial Times:

No country becomes rich after it gets old.  The rate at which you grow [with] a whole bunch of old people on your back is much lower than the rate of growth at which you can grow when people are active, are educated, are healthy.

Nobel Prize-winner, Prof Joseph Stiglitz has also argued the need for change:

“It should have been apparent that most central banks’ pre-crisis models – both the formal models and the mental models that guide policymakers’ thinking – were badly wrong. None predicted the crisis; and in very few of these economies has a semblance of full employment been restored. The ECB famously raised interest rates twice in 2011, just as the euro crisis was worsening and unemployment was increasing to double-digit levels, bringing deflation ever closer.

“They continue to use the old discredited models, perhaps slightly modified. In these models, the interest rate is the key policy tool, to be dialled up and down to ensure good economic performance. If a positive interest rate doesn’t suffice, then a negative interest rate should do the trick….If central banks continue to use the wrong models, they will continue to do the wrong thing.

But central bankers can’t be sacked by shareholders or voted out by the electorate.  And now they are starting to cover up for their own mistakes by blaming each other.  Thus as the Wall Street Journal headlined over the weekend:

“U.S. chides five economic powers over policies
U.S. officials are increasingly concerned other countries aren’t doing enough to boost demand at home, relying too heavily on exports to bolster growth. Counting on cheap currencies as a shortcut to boosting exports can create risks across the global economy, as nations fight to stay ahead of their competitors”.

This would be sound advice, if it wasn’t for the awkward fact that the US Federal Reserve is currently relying on a devaluation of the US$ to support the US economy.  Just as in Japan and Europe, the Fed’s optimism about its policies creating the magical 2% inflation and a return to SuperCycle growth have just been proved wrong again:

But still, they refuse to recognise the economic impact of  demographic change.  Instead central bankers are now starting to fight amongst themselves.  Each wants a lower value for their currency – even though common sense says this is impossible – and is also irrelevant to meeting the challenge of ageing populations.

So we continue to move through the Cycle of Deflation, as the chart shows.  We are heading, if nothing changes, towards major currency wars.  And it is no surprise that populist politicians such as likely Republican Presidential candidate, Donald Trump, are now starting to argue for trade protectionism to preserve jobs.

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 58%
Naphtha Europe, down 53%. “Naphtha prices rise to fresh 2016 highs on Brent crude”
Benzene Europe, down 53%. “Both benzene and oil initially moved lower due to uncertainty deriving from the decisions expected from the Bank of Japan and the US Federal Reserve”
PTA China, down 39%. “Buyers could book PTA cargoes earlier in the May/June period due to the upcoming preparations for the G20 meetings in China from July onwards, when producers in the entire polyester chain are expected to reduce operating rates.”
HDPE US export, down 27%. “Continuous weak buying interest weighed on the market sentiment in China.”
¥:$, down 4%
S&P 500 stock market index, up 5%

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