Germany was the issue at the IMF and G-20 meetings as all nations suffering economic headwinds delivered harsh criticism of Angela Merkel, Wolfgang Schaueble and, of course, Bundesbank President Jens Weidmann. It was Germany’s continued emphasis on budget restructuring and fiscal soundness that was holding back Europe and resulting in global economic challenges. France can’t grow because the Germans insists on the French authorities bringing their budget down to the prescribed 3 percent of the Maastricht Treaty. The peripheral nations are saddled with private and public sector debt that is not serviceable during times of economic stagnation.
In tomorrow’s London Telegraph, Ambrose Evans-Pritchard has an article about the move by Italian Beppe Grillo’s Five Star movement to petition for a consultative referendum on bringing back the Italian lira and leaving the euro currency. It is a consultative referendum and non-binding but it will rattle the walls of Italy’s elite Eurocrats. AEP’s article is full of interesting views but an important issue for Italy, France and Spain is that they are saddled with a currency that fits Germany but is problematic for the debt-plagued, zero-growth economies of the “periphery.” The economics of high debt is difficult to overcome without a weak currency and stepped up fiscal spending. “This is not a moral failing by Italy over recent years. It is a mechanical ‘denominator effect,’ the result of a rising debt burden on a shrinking base of nominal GDP.”
The problems of Europe are coming to the boil as the weak economy is giving rise to political groups that are anti-Brussels, anti-ECB and anti-euro. The Germans are pressing hard for control of European monetary and fiscal policy for they understand the GOLDEN RULE: He who has the GOLD makes the rules. If not authoritarian control Germany understands it now has increased leverage in the realm of global finances. All of those policy makers pressing Germany for increased fiscal spending only enhance Berlin’s bargaining position. It is Germany money that maintains the continued low yields on all European sovereign debt. Without a German guarantee Mario Draghi would be back at Goldman hosting roundtables.
***Stanley Fischer’s speech at the IMF this weekend revealed a great deal about the Yellen Fed. In the speech, delivered at the Per Jacobsson Foundation Lecture October 11, and titled, “The Federal Reserve and the Global Economy,” the Fed Vice-Chair emphasized the importance of the Fed’s role in the international economy. Interestingly, the speech occurred after the release of the September FOMC minutes, which sparked a sizable rally in the SPOOS and other equity markets.
The MINUTES revealed that the Fed discussed the strength of the DOLLAR and continued European economic weakness as possible headwinds for the U.S. economy, resulting in the FED remaining at sub-normal interest rates for a longer duration. Basically, forget the Summary Economic Projections and the DOT PLOTS: international economic data has some impact on the FOMC‘s policy. After reading Stanley Fischer’s speech, I have little doubt that Mr. Fischer was the force behind the Fed’s growing concern about the global economy. The basic rationale is this:
1. Financial linkages in the global system: U.S. residents’ ownership of foreign assets has risen to nearly $25 trillion (more than 140 percent of annual U.S. GDP). Total foreign investment in the U.S. by foreigners is larger at $30 TRILLION with U.S. Treasuries being a key component. My opinion is this: If the world wants to prevent a mass liquidation during times of economic stress the Fed has to help provide liquidity to keep the world financial system afloat;
2. If the world economy is struggling it behooves the Fed to help the struggling nations because global slowdowns hurt all economic actors. It is a classic feedback loop for Fischer. If the U.S. moves too quickly it could harm the Asians and Europeans and thus provide an adverse effect for the U.S. as its export markets suffer from lack of demand. Fischer makes this point and it is quite bothersome: “And if foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise.”
This is why the DUAL MANDATE is a problem. The Fed can never be wrong in its policy decisions because it can make a call based on such grandiose fundamentals as inflation and unemployment. (As we have just seen with Yellen’s decision to invoke the Labor Market Conditions Index and its dashboard of 19 variables.) The Fed can move the “goalposts” until the market exacts its price and now that Fischer throws the global economy into the mix there will always be a rationale for maintaining the present course of action. Further, Fischer states: “… what is the Federal Reserve’s responsibility to the global economy?”
Yes, Fischer says that the Fed must strive to keep its own house in order but be aware that its policies have external reverberations. The FED DOESN’T SET FOREIGN POLICY AND MANY TIMES ECONOMIC OUTCOMES HAVE INTERNATIONAL IMPACTS BUT IT IS NOT THE FED’S PURVIEW TO JUDGE THE CONSEQUENCES OF U.S. POLICY OUTCOMES AND MAKE DECISIONS TO AFFECT THOSE RESULTS. IF THE PRESIDENT AND CONGRESS INSTILL ECONOMIC SANCTIONS ON A BELLIGERENT NATION SHOULD THE FED SOFTEN THE IMPACT BY KEEPING U.S. RATES LOW?
3. Fischer’s summation: “Because the dollar is the primary international currency, we have, in the past, had to take action–particularly in times of global economic crisis–to maintain order in international capital markets, such as the central bank liquidity swap lines extended during the global financial crisis. In that case, we were acting in accordance with our own dual mandate, in the interest of the interest of the U.S. economy, by taking actions that also benefit the world economy.”
The dollar is not the Fed’s responsibility but that of the Treasury and that is just the beginning of the massive power grab by an non-elected policy board. This may have been Fischer’s speech to his international cohorts but it was probably the instigation for Rand Paul’s 2016 campaign. Is the world truly comfortable with the U.S. dollar and its exorbitant privilege, especially when U.S. policy has proven to lack exorbitant responsibility?