Tuesday, August 28, 2012
TMM don't think we are going to get any major new direction in markets until next week, which really isn't that surprising a view as Jackson Hole and the European "6th of September" event are so well flagged. However we still smile at how easily the market can switch from panic to subservient minion
"Please take a seat Mr Panic, Mr Crisis is busy at the moment but will see you in September. Could I get you a coffee while you wait"?
"Err. ok yes please. Oh is that a magazine on China on the coffee table?"
"Yes, and please feel free to leaf through the "Fiscal Cliff Weekly" or perhaps "The Australian Mining Review", you may find them an interesting distraction"
"Oooh yes .. err sorry .. Why am I here?
Indeed Dr. Aghi sure is busy - ECB'S DRAGHI WON'T BE ATTENDING JACKSON HOLE FORUM, *DRAGHI NOT ATTENDING DUE TO WORK LOAD IN THE COMING DAYS - TMM are hoping that the work load involves fixing the decals to his model of a European rescue package rather just not being arsed to go to a forum where everyone will just tell him how to do his job.
Meanwhile the US is getting even more embroiled in a debate as to by how far the Republicans are going to win without noticing the absurdity of some of their "And I'll tell ya something else" policies being drawn up on a napkin at 2am. The latest being for a return to the Gold Standard. We've all heard the rants from semi-literate candidates complaining that "the government is manipulating prices" and that "we should privatise money". But TMM thought they were the preserve of the loony right, because we cannot for the life of us understand why anyone would want to return to the days of pro-cyclical monetary and fiscal policy. You know - the sort that tends to blow up emerging market countries and Peripheral Europe, amongst other things.
It's not like the development of economic policymaking over the last 80yrs was dreamed up purely to depreciate the dollar. In fact, despite all the FX volatility of the past 30yrs, the real trade weighted dollar exchange rate sits only 15% below its pre-1971 delinkage from Gold, a level it fell to by 1973 in the post-Bretton Woods adjustment.
The presence of the US's elastic money supply has greatly dampened economic volatility, something that would be greatly amplified by the necessity of pro-cyclical fiscal and monetary policy within the rigidities of a Gold Standard. It is thus far from obvious that the current ability of countries like the US and UK have suffered from having such an economic policy framework.
Those making the calls for a return to the Gold Standard clearly haven't read their history well enough to recall that *all* economic entities suffered from the frequent and severe depressions and financial panics resulting from the lack of a lender of last resort and elastic currency. For all its failings, the study of economics has shown that counter-cyclical economic policies are the most successful way of a) maintaining stable but low inflation [there is a good deal of evidence that low but positive inflation is optimal] and (b) reducing economic and financial volatility. Such a framework is clearly not sufficient, as the excesses of the financial sector over the past decade or so demonstrate, but it is a good place to start, rather than throwing out the hard-won policy lessons of the past 80 years.
Indeed, where countries have gone wrong in the past decade it is because they have run pro-cyclical policies of the sort a gold standard would imply. In the case of the UK, running too loose fiscal policy. In the US, running too-loose monetary policy in the 2003-2005 period, and too-tight monetary policy since 2006 and in Peripheral Europe where (a bit of an over-generalisation) both fiscal *and* monetary policy were too loose in the run up to the crisis, and now both are too tight.
And this is where TMM strongly agree with John Taylor. Where policy has departed from rule-based prescriptions, problems have developed. But then what can you expect from the bass player of Duran Duran.