There’s lots of weird stuff going on in global financial markets at the moment. Last week’s statement by the U.S. Federal Reserve (sort of upgrading their view of the global economy, while slightly downgrading their view of the U.S. economy) threw many for a loop. The only central bank on a path towards tightening monetary policy eviscerated any chance of June rate increase, while the Fed Fund futures now price about a 50/50 chance of hike in December. That’s a 50/50 chance a full year after their first increase in 9 years, off of a zero interest rate bound. One and done?
The calls for fiscal policy to finally pick up the torch after nearly a decade of crisis monetary policy seem to be growing (El-Erian, Icahn and our friend Jay Pelosky on the TickerDistrict yesterday). Investors now question the continued effectiveness, and fear unintended short and long term consequences of QE, ZIRP & NIRP. Fiscal stimulus is always far more complicated than money printing as it more directly involves politics. And some have been saying for years that the reason we have such aggressive and long lasting monetary policy has been as a cover for politicians. But now there seems to be a growing consensus that in the low growth, highly indebted world that we live in, central bank action is losing its mojo, and fiscal stimulus is the only way forward.
But it’s not like there aren’t massive downsides to that policy either. When I hear calls for such a shift, I immediately think more debt. And debt started this whole crisis. And remember that it was China’s fiscal stimulus in 2009 that led to hundreds of billions of mal-investment and created a commodity super-bubble that’s burst has caused a good bit of financial instability the world over.
I by no means have any answers to these complicated problems, but I suspect a sort of financial reset (de-leveraging) in China, the sort that we saw in the U.S. and continues in Europe has to happen first, before governments in the rest of the world can move towards the sort of fiscal stimulus that will create real growth, not fake cities. It’s just shocking what a short term memory our powers that be, and investors have. Maybe Carl Icahn will be right sooner than later that our markets will have a day of reckoning if central bankers can’t forge a path back towards the traditional.
So I’m nervous that if we never address the initial issue of debt that got us into this mess that we run the risk of being too complacent as we add to it. I have Pearl Jam on my mind (and ringing in my ears, I saw them last night at MSG). Here’s a line from their song Nothingman that’s somewhat appropriate:
He who forgets, will be destined to remember.