By Michael Every of Rabobank
From Useful Idiots to Useless Idiots
As bullets fly, if you are someone who only responds to bullet points, try these two:
We may be on the verge of a replay of 2008 – but we can’t use the same central bank policy responses without creating massive inflation, global Arab Springs, and global chaos.
It took a special kind of thinking to get us into this mess, and an equally special kind of thinking is not helping extract us from it.
Before explaining in more detail, first a hat-tip for today’s title to an @andreapitzer tweet: “Noticing the rise of a new category of pundit: the useless idiot.” Her joke refers to the Leninist phrase “Useful idiot”, the definition of which is: “a political insult that describes a person who, through manipulation or not, is useful to a political cause that is not their own despite not fully realizing their role. This makes them “an idiot,” an unwitting and useful pawn of a propagandist.” If you didn’t know that the odds of you being one are exponentially higher than if you did.
For examples, try those who have run the West’s energy, foreign, trade, fiscal, and monetary policy. Too harsh? Well, how else did we end up in this crisis? Following the Ukraine war, the destruction of Nord Stream 1 and 2, and Gazprom cutting off gas supplies to Italy, such useful idiots are shifting…. but only to show that they are useless idiots.
The EU is to agree 5% power demand reductions in peak periods: how? Eenie-meenie-miney-moe? It may have enough energy for this winter – if no further pipelines its underfunded navies are now rushing to protect are sabotaged. But EU energy will not be cheap for many years. Germany’s fiscal largesse to prevent outright deindustrialisation, already dividing Europe, is going to require WW2-scale fiscal deficits for as long as WW2. That as Bloomberg reports Biden Officials Float Fuel Export Limit in Meeting With Refiners: great – let’s have a global shortage of fuel too!
Yet the IMF is advising tighter fiscal policy and cuts to social spending into a recession(!)
The UK government says its voters have been living in a “Fool’s paradise” and welcomes a new “age of austerity” - into a biting recession. History shows us that will likely play out.
As an anecdote of how much of an EM the UK now is, my cousin took a coach from Glasgow to London on Saturday because the trains were on strike (as was the postal service). The coach got as far as Newcastle before dumping the passengers with no explanation. He shared a taxi the rest of the 250 mile (472 km) journey; arrived in London to find street protests against government spending cuts, driven by insufficient energy supplies; and then all four of the bridges over the Thames leading to his accommodation closed by protestors saying the UK should stop using oil. Yesterday, another protestor poured urine and faeces over a memorial to a selfless WW2 pilot to protest executive private jets. And @lewis_goodall adds: ““Senior government source” quoted in today’s Times: “Nobody understands gilts, nobody understands the bond markets unless you’re in it. Certainly no MPs do. We are not running a hedge fund, we are running a government. We are thinking about the long term.”” Wrongly: but ‘long term’ does not seem to apply anywhere else.
The BOE were just forced to step in to save UK pension funds using leverage and derivatives to juice low returns following the GFC caused by funds using leverage and derivatives to juice returns. Even though central banks had made it abundantly clear they would raise rates, such trades sat there until a yield surge almost brought down the financial system (again).
Bullet dodged? Maybe. But WE ARE IN A WAR: lots of bullets are flying! The markets will test the BOE again. It will have to act again, in a ‘not QE and not MMT’ manner. It surely will not carry on with QT. That changes our political-economy, unless you are too useful an idiot to see it. And if the BOE acts, GBP will slump, which would be inflationary; and if it doesn’t act, markets will slump, and GBP could still follow.
This is not a British but a global problem everyone could see coming: how do you raise rates when there so much debt has been created by so many years of so low rates?
Is it any surprise that this weekend saw rumours a major investment bank is about to fail? Or that there is talk of European and US pension funds risk being dragged into exactly the same position as the UK, because none were aligned for rates to ever really rise, even as inflation shot up?
Accordingly, while the BOE now has to do more on rates, Bloomberg and @CGasparino suggest a growing split within the FOMC. The latter notes: “@federalreserve officials getting increasingly worried about "financial stability" as opposed to inflation as higher rates begin to crush bonds, several big investors tell me. Fed growing worried about possible "Lehman Moment" w a 4% FF rate as Bonds and derivatives tied to them crash, given the enormous debt issued in just the past 3 years at super low rates. A Fed watcher told me the UK intervention was not "a one off" and the same systemic risk could happen here, which might cause the Fed to pause.”
However, while Fed Deputy Governor Brainard is watching financial market stability outside the US, and Daly does not want to ‘do too much’, their message is still that US inflation is the priority given the PCE deflator numbers on Friday, and initial claims numbers Thursday. Indeed, Brainard stated: “Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target.. .For these reasons, we are committed to avoiding pulling back prematurely.”
So, CNBC can scream ‘The Fed is breaking things’ – Here’s what has Wall Street on edge as risks rise around the world’ – but that does not mean that things can’t and won’t break.
Importantly, even if the Fed wanted to pivot now, it perhaps couldn’t. We see a domestic wage-price spiral underway; and there is a battle over the global financial architecture.
Friday, President Putin gave a vitriolic speech obviously a call to arms against a colonialist, racist, apartheid, perverted hypocrite West in a hybrid war against Russia; claim there is no rules-based order; that the US has created a “precedent” for use of nukes; the West is stealing Ukraine’s grain; blew up Nord Stream; and a new global alliance will rise up against it. Frankly, if you haven’t read at least a summary of it you are edging towards useless idiot territory. You don’t think it matters that the leader who just lost the key city of Lyman to Ukraine, who is facing calls to use tactical nukes there, and who can act on energy, commodities, and in the ‘grey zone’, just railed against “Anglo-Saxon” global financial hegemony in woke fashion, while simultaneously extoling Russian fascist Ivan Ilyin? After all, Putin just said:
“People cannot be fed with printed dollars and euros. You can't feed them with those pieces of paper, and the virtual, inflated capitalisation of western social media companies can't heat their homes… you can't feed anyone with paper – you need food; and you can't heat anyone’s home with these inflated capitalisations – you need energy.”
The West ‘benefitted from WW1 and WW2(!)’, and “in order to free itself from the latest web of challenges, they need to dismantle Russia,” or
“They will try to trigger a collapse of the entire system, and blame everything on that, or, God forbid, decide to use the old formula of economic growth through war.” That collapse may now loom – but from trying to correct the problems previously created. The talk of millenarian expectations of a looming war vs. Russia are a real worry.
“The battlefield to which destiny and history have called us is a battlefield for our people, for the great historical Russia… We must protect them against enslavement and monstrous experiments that are designed to cripple their minds and souls.” In short, they are in this to the bitter end. It remains to be seen who is with them in that struggle.
If you feel the painful (part) truths about the West above outweigh the Big Lie that Russia is a champion of human dignity and freedom offering a true global alternative, then you are a useful idiot. Sadly, that seems to include good minds on the Left and Right so sick of neoliberalism that they are prepared to swallow anything that isn’t it.
As Russia rails against “paper dollars and euros” and extolls the strength of commodities, can the West slash rates or do endless QE to bail out the tiny elite who own most financial assets, and in doing so prove Moscow right in the eyes of the rest of the world?
As I put it before, the US choice is hedge funds or hegemony. The latter means higher rates, and things blow up in markets. The former means lower rates, and things blow up physically.
Meanwhile, useful not-idiots are trying to repair some of the damage. ‘The dangerous depletion of US weapons’ again underlines the US and West are not prepared for the kind of global confrontation Russia just flagged. Forget spending 2% or 3-4% of GDP on defence: what about the factories to make the military goods needed on scale?
Relatedly, ‘Senators propose China ‘Grand Strategy’ commission to guide US policy’. It seems the machinery of state is finally swinging behind this geopolitical rivalry, and away from Wall Street and “because markets”.
To conclude, isn’t it amazing that just as a proposed ban on stock trading in Congress moves closer to actualisation, following one at the Fed, that both Congress and the Fed are prepared to take actions ostensibly far healthier for the long-run good of the country, even if they are deleterious for stocks? Or am I an idiot for thinking that?
