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Song of the Week - Tool - Fear Inoculum
Table of Contents
Central Banks Whistling past Graveyards
Economic Calendar
US Employment
China and Taiwan
Crypto Macro
Price Action
Ethereum
Conclusion
1. Central Banks Whistling past Graveyards
In the west, if you were to say that someone is “whistling past a graveyard,” you would be saying that they are entering a dangerous or risky situation without displaying any understanding of the potential negative consequences.
Well, for the last 4 or 5 years, central bankers in the west have been whistling past the obvious graveyard that is the consequence of their actions. And over the past several days they are suddenly changing their tune. We saw Powell turn even more Hawkish in his remarks at Jackson Hole last week. We also saw officials at the ECB and BoE suddenly turn hawkish as well and start to talk about the dire consequences they’re going to have to face.
These aren’t new consequences. Nor is this information I am sharing new in any way shape or form. Whats new is that the central banks have suddenly started acknowledging it for the first time. It wasn’t that long ago that Christine Lagarde (the head of the ECB) was stating that they could simply wait for inflation to go down. The west has been printing money on and off (some never stopped) since the late 2000’s in order to tamp down a recession. While they succeeded in the short term with their goal of lessening the impact of the recession in 2007, they ignored the other half of that equation. If you print money today, someone has to pay for it tomorrow. Much the same how if you borrow money today, you will eventually have to pay it back and on the day that you do pay it back, you will have less money than you otherwise would. This logic is clear to an individual and to a household, but central banks have essentially been pretending as if the same thing would not happen to them, nor to the economies they run.
And yet suddenly we hear quotes from the Federal Reserve, European Central Bank and Bank of England that the fight against inflation will involve a slowdown in the economy and employment. Very obvious and clear statements, yet why the sudden change? Why change tune now? Other than the Bank of Japan, all central banks are suddenly taking a sober turn towards expected austerity. Is it simply that they are all taking their cues from Jerome Powell and the Federal Reserve? A significant portion of all ForEx transactions include the USD as one of the currency pairs.
The Fed’s path has an enormous influence on exchange rates; the dollar is on one side of almost 90% of currency transactions. As key exporters, Asian countries are susceptible to the ebbs and flows of economic cycles, something American monetary policy greatly shapes.
The above quote is out of date, this was true in the 2010’s, but this has likely dropped to the mid ~70%’s or so by the end of this year. The above quote is for the 2019 figure of ForEx transactions. According to the IMF, Central Bank ForEx reserves of US Dollars dropped significantly by the end of 2020, and that trend has likely continued as the BRICS sphere emerged this year and forced settlement of many transactions to shift away from the dollar and the euro. At some point we should get some form of statistical update on what percentage of ForEx transactions involve the USD; I’m really tired of seeing people blindly quote the 2019 figure. However, even if the above figure is wrong, the thought behind it is correct. Maybe instead of 88% of all transactions involving the dollar, it’s 75%. The point is that all of the major western currencies have to follow the US’s lead in some sense in order to not disrupt their own commerce. Otherwise they can experience inflation simply because a majority of their imports are settled in US dollars and they can’t afford to lose value against the dollar because that creates de facto inflation for their imports, as is happening in Japan
I suspect that behind closed doors ahead of the Jackson Hole Symposium the real discussions were had amongst central bankers about what the Federal Reserve is planning. And the west’s lackey’s in Europe decided to get on message to avoid having to abruptly change their message at a later point. Is this long term messaging? No, it’s not, and it’s not part of a coherent plan either. This is still just posturing. The need for liquidity in the treasury markets that spurred all of this money printing in the first place is governments spending money they don’t have. Powell can say that he is going to tighten the money supply further and that US growth will be muted, and job growth may stall, but he’s leaving something much larger unsaid. The US treasury will struggle to pay back the mountain of debt piled on top of it, and the US legislature will struggle to spend the money they have already and continue to commit themselves to spend. Yes, everybody knows that the economy will struggle, but is anyone yet considering that the sovereign governments themselves will struggle to function as they want to without similarly sacrificing?
Central Banks may have stopped whistling by one graveyard, but there is a far larger graveyard they still blithely whistle by.
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