Angry Citizens Are Losing Patience With Monetary Frameworks That Enrich Those Closest To The Money Printer

By Benjamin Picton, senior strategist at Rabobank

Gift Wrapped

Today is the big day. I’m not talking about the release of the US PCE deflator or the OPEC+ meeting (though both are on the calendar and will be a big deal), but the annual event that is the Spotify Wrapped summary and associated ubiquitous social media posts. Consequently, we can look forward to learning that we spent the whole year listening to the same 3 artists as last year, which might just be the definitive symptom of the cruel descent into middle age.

While millennials are poised to again discover that TayTay was number 1, central bankers are equally surprised to learn that the imminent trajectory for policy rates is down (as it largely has been since Volcker). We had more Fed speak overnight from Raphael Bostic (a dove), who said that he is increasingly confident that inflation’s downward trajectory will continue. Conversely, Thomas Barkin adopted Bowman’s wrongthink of the day before by saying that the Fed needs to keep the option of further hikes on the table, and noted hawk Loretta Mester hedged her bets by suggesting the Fed has the luxury of waiting for more data.

Predictably, markets chose to accentuate the positive. The jubilation over Chris Waller’s dovishness on Tuesday carried into yesterday’s price action for bonds. The US 10-year yield fell another 6.5bps to 4.25% and 2-year yields fell almost 9bps to 4.65%. This was despite a substantial upgrade to Q3 GDP that saw real annualized growth revised up to 5.2% from the originally reported 5%. The core PCE index that accompanied the national accounts ticked a little lower to 2.3%, which perhaps helps to explain the move in yields.

Another likely influence was the deflationary CPI prints out of Spain and Germany yesterday. Spanish CPI fell to -0.4% m-o-m from 0.1% in October, while the German figure also fell to -0.4% from -0.1%, prompting bull-steepening in the Bund curve. That takes year-on-year headline CPI to 3.2% for both countries and follows on from the lower than expected October inflation figures out of Australia yesterday that confirmed deflation for some goods categories. Markets don’t need too much prodding to adopt a rates down narrative at the moment, so these European numbers look like they were just the ticket and there will probably be more to come today when France and Italy report their own CPI numbers for November.

So, inflation is lower and growth is higher. That sounds like the promised soft landing is imminent! Rate cuts soon then? The OECD says no, at least for Europe. In its Economic Outlook released yesterday the organisation said that European rates would remain elevated all the way through 2024 with the first cuts to come in 2025. On the bright side, they DID support our own forecast of a 4.35% peak in the Aussie cash rate and suggested that market pricing on a Fed rate cut by the middle of next year is on the money.

That’s our view too. We have a cut to Fed funds penciled in for June, with another two cuts expected to arrive in the final quarter of the year owing to the three consecutive quarters of negative GDP growth we are forecasting in the USA from Q4 ’23 onwards.

The Austrians among us should be encouraged by that forecast, tracking as it does the developments in the Fed balance sheet and broader measures of money supply. Suspiciously, the peak in inflation came shortly after the peak in the balance sheet, and the disinflationary trend has also followed balance sheet reduction.

Weirdly (for Keynesians), very low rates of unemployment seem to have been no impediment to disinflation occurring in the USA and elsewhere. It’s almost as if enlisting more people to produce goods and services (rather than paying them to sit at home and not produce) is actually helpful for fighting inflation rather than a hindrance. That’s particularly the case if the wages paid to those workers are an accurate reflection of the marginal product of labor (and therefore not inflationary).

We’re in the weeds here though, so it might be best to get back to the job at hand of analysing Spotify habits. Mine are humdrum, and heavily weighted to audiobooks and comedy shows like the ECB podcast. A highlight for me has been the excellent audiobook of Edward Chancellor’s ‘The Price of Time’ which revealed to me that the Emperor Augustus caused a general inflation and pump-primed the market for villas by repatriating the treasure of Egypt into Rome (we might call that an exogenous increase in the money supply).

Tiberius then raised interest rates and got prices under control by hoarding the treasure for his own purposes, before proceeding to cause a general inflation and accidentally inventing quantitative easing by lending the treasure out at zero to Roman patricians. This is the Cantillon Effect in action, and apparently it proved to be politically destabilising after the plebeians realised that the rich were getting richer and food was becoming a luxury. Sound familiar? Truly, there is nothing new under the sun.

Around the same time that this was all going on a Jewish carpenter in Jerusalem struck an early blow against financialization by flipping the tables of the money changers in the temple forecourt. Fast-forwarding to the modern day, discontented citizens in a number of countries are losing patience with monetary frameworks that enrich those closest to the spigot while debasing the coinage of the realm and repeatedly failing in their one main job of preventing economic calamity. Indeed, some would argue that they are more adept at seeding financial calamity. Perhaps that’s why Javier Milei has adopted Andrew Jackson’s views on central banking by seeking to abolish it?