By Michael Every of Rabobank
Can You See the Light Speed?
Things are in flux at the moment on multiple fronts. However, as long flagged here, there are only two logical future end-points we travel towards. Either:
‘Star Trek’, where we live as one united planet, in spandex, with a global government that can successfully deal with the inequality within countries and between countries; or
‘Star Wars’, where we are all ‘goodies’ and ‘baddies’ at loggerheads.
So which is it? Well, don’t we have a new Space Race with national security overtones? (Remember “Spaaaaaaace Foooooorce”)? Do we see more Enterprises or Death Stars being built? And haven’t they stopped making Star Trek movies, while the Star Trek TV they are making seems to think it is Star Wars?
Yes, we have details of the next proposed Biden fiscal package. The total bill over the next few years is $3 trillion, with a mixture of infrastructure, social, and green spending. However, even as this says ‘Live Long and Prosper’ it is also saying ‘May the Force be With US’. Because the US economy cannot be expected to lift all global boats anymore. Buy American will have to be a part of this deal or its planned tranches won’t pass.
And yes, the EU –which sees itself as Vulcan, even if its critics say it is Ferengi on trade– agreed a bilateral investment deal with China designed to build a Star Trek future. Yet both the US and EU just imposed sanctions on Chinese officials over actions in Xinjiang yesterday, in the EU’s case, quite symbolic ones – and the response from China was a massive display of diplomatic firepower: Beijing has placed counter-sanctions on the EU Council’s Political and Security Committee, five sitting Members of the European Parliament, and EU China think tanks and academics. Politico was already reporting the CAI was on thin ice as it was seen as a drag on President Macron’s re-election chances. Now MEP Guy Verhofstadt is tweeting: ‘China just killed the EU-China Investment Agreement by sanctioning the people criticizing labour/genocide in Xinjiang. How could we ever trust them to improve human rights situation of the Uyghurs if they simply call it “fake news”?’; Dutch PM Rutte decries “China’s move is a completely unjustified response to the measures taken under the EU human rights sanctions regime. This will be taken up further in a European context.”; and even the German Foreign Minister called China’s move “completely incomprehensible.” In short, there appears are high chance the CAI collapses: and if it does, that very likely puts EU-China relations into a downwards spiral; German exports to China too(?); and the EU into even more of a strategic flux.
Of course, markets don’t care. Indeed, they are shrugging at a potential collapse in EU-China relations because apparently “all that matters is tariffs”. Sadly, for all their sci-fi tech and flashing screens, markets therefore also aren’t too plugged in. If bilateral relations collapse, then trade can easily collapse with or without tariffs. So can capital flows.
Perhaps markets can afford to be so blasé because both the Star Trek and Star Wars scenarios have one thing in common: easy money. Apart from an initial transaction to pay Han Solo and the lack of a Jedi credit card leading to the future career path of Darth Vader, there doesn’t appear to be any money or budgetary constraint in Star Wars. You want a new Death Star? Have several. In Star Trek the same is true for Enterprises. Indeed, I am not sure if there is any actual enterprise –apart from among the Ferengi– as Captain Kirk clearly states in Star Trek IV that they don’t use money, and we know they can create food out of thin air in the cafeteria. (Implying no jobs for chefs.)
So regardless of the future path ahead we can expect no changes on the central bank front; but there are still huge problems even so. Both MMT and Yield Curve Control still appear as logically inevitable as they seem to be in both Star Trek and Wars. Consider that as bond yields zap across screens like so many laser or phasers. Indeed, it’s clear markets will try to push them higher to test the limits of what they system can do. They *want* to hear Scottie saying “She cannae take it!” or Han shout “Punch it, Chewie!” in order to get the jump to bubblicious Warp Speed/Light Speed that YCC then entails in their minds.
Yet two linked developments are as obvious as Kirk’s wig and as inevitable as another lightsabre. The first is that central banks are not going to be fans of alternative digital ‘money’. That is the overlooked political-economy in economy. Fed Chair Powell spoke about Bitcoin yesterday and was hardly enthused. The more popular it gets in actual usage, as opposed to hoarding, the less enthused he will be.
The second is that governments and central banks are going to try to micromanage this mega liquidity. At the highest level, this will be towards either Star Trek (Green) or Star Wars (national security) goals. That’s a strategic investment theme one cannot ignore in years to come. At the lowest level it will be trying to ensure the economy does not *solely* produce asset bubbles. You can’t have Five-Year Missions to explore strange new worlds if everyone is day-trading stonks, and all the young kids want to be YouTubers, not astronauts; likewise, you can’t defend your country from ‘the baddies’ with over-priced sea-view property (with open plan kitchen/dining-areas).
On the latter note, recall the Reserve Bank of New Zealand recently had house prices added to its inflation-fighting mandate; and NZ has just seen its government also introduce measures to cool housing:
A NZD3.8bn fund to unlock more land for housing development – which won’t make any difference, as housing developers only build when prices are high;
Government first home grants available to more people – which will also push prices up further;
The extension of the period in which profits on the sale of investment property are taxed to 10 years from five – which won’t bother people if prices are rising 20% y/y; and
Phasing out the ability of investors to claim mortgage interest as a tax-deductible expense.
Set phasing to stun! This is revolutionary stuff in that part of the world. Australians, with their own mega housing bubble and asleep-at-the-wheel regulators, are sitting up in a cold sweat and saying: ”I felt a great disturbance in the Force. As if millions of speculators cried out in terror, and were suddenly silenced. I fear something terrible has happened.” Kiwi yields and NZD are likely to remain lower on the back of that trend. And who is to say where will be next to see similar measures under either a Wars or Trek future?
Can you see the light speed?