It is not often that investors are treated to the wisdom of U.S. Treasury Secretary Jack Lew. I am sure that Mr. Lew is a fine man but he is an example of a political appointment serving in a role beyond his pay grade. If I had a question about my 1040-EZ form I would search him out but on global economics and politics I would hope he wouldn’t answer the phone at 3 a.m. In an well-staged leak of his prepared words to be delivered in Brisbane, Australia at the G-20 conclave this weekend, Secretary Lew warns Europe that it risks suffering a lost decade similar to Japan if it fails to undertake fiscal policies to stimulate growth. In a Financial Times article by Robin Harding, Secretary Lew is quoted at the World Affairs Council in Seattle as saying: “Resolute action by national authorities and other European bodies is needed to reduce the risk that the region could fall into a deeper slump. The world cannot afford a European lost decade.” Mr. Lew suggests the usual actions of monetary, fiscal and structural efforts to lift growth or what has become known as Abenomics three arrows.
The U.S. believes that the Japanese plan is now a prototype for all advanced countries but not every political and economic entity has the social cohesion of Japan. Europe certainly needs fiscal stimulus but what about the Maastricht Treaty and its covenants? As the creditor for Europe, Germany maintains that rules must be adhered to and the profligate shall not be rewarded. If the rules on fiscal thresholds are cast aside the possible result is the rise of anti-Brussels parties in Germany and certainly France. If it is monetary policy that is the sole engine of economic stimulus the result will be a depreciation of the EURO, which is contrary to previous G-20 communiques about nations not depreciating their currencies for competitive trade advantage. (Please see the last central bank meetings of Sweden, Japan, New Zealand, Australia). The ECB will be, in the words of Senator Chuck Schumer, “the only game in town.” If monetary policy is the main policy tool the EURO will have to depreciate and then Secretary Lew is left with a major dilemma.
In today’s pre-G-20 speech the Secretary lays forth the Obama administration’s main point for global growth: “The world is counting on the U.S. economy to drive the global recovery. But the global recovery cannot prosper broadly relying on the United States to be the importer of first and last resort, nor can it rely on the United States to grow fast enough to make up for weak growth in major world economies.”
This may be the U.S. policy but it runs into legal barriers in the EU, which Germany and others can utilize to stonewall policies they find inappropriate. The Japanese have made the global situation more difficult by embarking on massive QE with the result being immediate YEN depreciation. If many developed economies follow the BOJ model currencies will depreciate versus the DOLLAR and the Lew doctrine of everybody pulling their economic weight falls flat. If the U.S. dollar is the deemed the best of breed, America will become the receptacle of the world’s exports. Europe’s problems are a mosaic of bad policy and finger-pointing will not bring cooperation or resolution. Let the photo-ops begin!
***For the record, the EUR/CHF cross is hovering above its floor and trading at 1.2025. It has to be said: “Who is buying the Swiss to push it up against the euro when it is presumed that the Swiss National Bank will intervene to keep the Swiss Franc from appreciating through the floor?” Somebody is testing the resolve of the SNB and challenging President Thomas Jordan to create some policy to punish buyers of Swiss. If the EUR/CHF falls through the floor global currency markets are going to become very volatile.
The Swiss government has placed a large bet on being able to keep the Swiss franc from appreciating against the euro and other global currencies. Keep watch on the EURO SWISS INTEREST RATE CONTRACTS, which are 90-day interest rates (the symbol on CQG is QNZ4 for the December 2014 and QNU5 for September 2015), are both trading at a negative yield of 6 to 13 basis points. September 2015 is priced at 100.13. If the SNB moves to a more negative overnight rate these contracts should offer a good barometer and profitability.
Tags: ECB, EU, EUR/CHF, Euro, Europe, France, Germany, Jack Lew, Japan, QE, SNB, Thomas Jordan
November 12, 2014 at 11:21 pm |
Mr. Lew should confine his comments to suggesting the forgiveness of $100 million African debt to the IMF.
November 13, 2014 at 3:37 am |
Does the powerful Swiss reflect the possibilities resulting from the November 30 referendum on its gold backing? The media is telling us this proposal will be rejected and SNB is lobbying to have it defeated. But what happens if if surprisingly is approved? Will the SNB be able to maintain its EUR/CHF floor? Stay tuned. Only 17 days to go.
November 13, 2014 at 6:50 am |
asherz—there is probably some fact to that but if the authorities are to be believed the referendum will not pass but another issue may be the Hungarian government forcing those who are short swiss francs on a borrowing basis are being forced to move all borrowing into Forints—I think this buying back of Swiss was already done but maybe not
November 13, 2014 at 8:12 am |
The Swiss should vote ‘Yes’ then the Central Bank governors should call Yra to find out how the Gold backed Notes should be implemented. Looks like a win-win deal for everyone involved.
However, if you gave me a free bet on the vote I’d put it on ‘No’. Sadly the general population is no match for the propaganda these days especially when said propaganda promotes fear. Sure, many can spot the fear mongering but they’re the minority.
I’m still waiting for somebody high up in the Swiss government to enter the word ‘terrorists’ somehow, somewhere, in their Gold debate. Holding more Gold might make us more open to a terrorist attack etc. Yes it’s laughable but I’m sure somebody will try. The media would love that, they like stirring things up and a Gold + Terrorists story is right up their alley.
November 13, 2014 at 9:48 am |
“If the U.S. dollar is the deemed the best of breed, America will become the receptacle of the world’s exports. Europe’s problems are a mosaic of bad policy and finger-pointing will not bring cooperation or resolution.”
In typical US fashion, Lew carries his backpack of hubris to the world stage, pointing his inexperienced finger at everyone but himself and who he represents. You’re right, the US will be the receptacle of failed fiat currencies, and for currencies running from the wars caused by overreaching US energy policies. BTW, it’s not because our consumers have more money in their pocket (govt/tax inflation will more than offset the rise in the dollar), but because the flawed Bretton Woods system and over-levered speculative money has caused a sovereign debt crisis that the establishment in Brussels, Tokyo, and the US will never acknowledge or admit for fear of losing their jobs, perks, and power.
Instead of educatng the masses on the true problems, financial pundits and major media use their propaganda tactics to confuse and distract the masses for their own selfish needs. What ever happened to ethics and integrity?
November 13, 2014 at 10:23 am |
Oh, how could I forget – what do you think will happen to interest rates when “America becomes the receptacle of the world’s exports”? What happens to the balance sheets at the Fed, govt’s, and households with too much debt? What happens to the confidence in buyers of our debt when they realize we have no intention of paying anything off? Can you say KABOOM?
Anyone that believes they can escape the consequences of popping the largest asset bubble ever created by foolish men, is filled with more hubris and is more psychotic than Dimon, Grant, Dudley, and Moynihan, Holder, Gen. Alexander, Judge Owen & Preska, Obama, Reed, Pelosi, Feinstein, Bush’s, Clinton’s, Graham, and McCain combined.
November 13, 2014 at 11:21 am |
Well said in both posts.
November 13, 2014 at 10:26 am |
Blacklisted—you have a solid view of the world–not know why you were blacklisted.Brussels ride’s Germany’s coattails “on a streetcar named desire” while the fools in Washington watch from On The Waterfront from across the pond
November 13, 2014 at 11:11 am |
Based on the President’s “net nuetrality” ambitions, we all will be blacklisted soon. It’s humerous what desperate people will do who don’t want the truth revealed.
November 13, 2014 at 10:45 am |
Yra- Great post.
To me, the economic ignorance of central bank and government officials is mind boggling. They choose all the easy fixes (ZIRP, QE, etc.) and refuse to implement the hard decisions (work off debt load, fix infrastructure, fix tax code, fix TBTF, etc.).
IMO, the easy fixes are bound to fail.
As I have said many times (and no one has listened), you cannot fight a huge bubble, by creating a massive bubble, and expect things to turn out better this time. I guess it’s possible…,,,but a real long shot.
Once the rockets go up, who knows where they come down…. that’s not my department says Wernher Von Braun.
November 13, 2014 at 11:24 am |
It’s not so much economic ignorance, as it is unchecked ambition, laziness, and the unwillingness to champion something that is detrimental to their lifestyle. We are living in the midst of what eventually causes all govt’s to fail. The sad part is we have not advanced enough to put aside our biases and prejudices and proactively reform the system, instead choosing to let the uncertain outcome of revolution define it for us. Who knows, maybe one great man with children and grandchildren that he cares about will step forward and give it a go, instead of thinking his life will be worth living after an uncontrolled reset.
November 13, 2014 at 11:40 am
Blacklisted: Yes, it is more nefarious than economic ignorance. The authorities know exactly what they want to do. If that pipsqueak Gruber teaches the uninitiated anything, it’s that ethics and good consciousness no longer exists within public institutions. Readers of this blog understand there are no doubt several Jonathan Gruber’s involved in central banking worldwide.
No “one man” exists, offspring or none. There will be war before the music stops and only when the system collapses under its excess obligations, to each and to each other, will a new system replace the runaway fiat. Regarding families, if one wonders, he only question is which generation will live through it?
November 13, 2014 at 11:29 am |
Shocked writes *To me, the economic ignorance of central bank and government officials is mind boggling. They choose all the easy fixes*
Absolutely agree. Expediency is proof that there is nothing “independent” about Central Banks. At least since Martin and Volcker. (and the former DB Pres who used to bang his fist exclaiming “we vill not print money!”)The monetary authorities are wholly owned subsidiaries of any sovereign’s political class.
November 13, 2014 at 11:39 am |
Shocked—nice line and as for me the central banks are Poisoning
Pigeons in the Park
November 14, 2014 at 12:59 pm |
Yra- Your point on Japan’s stagnation being used as the model by many for world growth going forward but missing the very obvious (others less obvious and several unknown) differences in circumstances is so typical of the economics profession which has embraced historicism in an extremely complex field of study. It’s doomed to fail over and over again! And to Blacklisted and Shocked points, this data blinded approach and the resulting hubris and ignorance is the true threat going forward and providing massive risk to global markets. Now, just for the timing of the “KABOOM”…maybe I can borrow the CB’s crystal ball, LOL! (CB’s forecasting is so terrible it almost isn’t funny).
November 14, 2014 at 1:59 pm |
The escalation of the soveriegn debt crisis and war/civil unrest cycles in 2016-2020, and the desperate responses in Brussels, Tokyo, and DC will be a good tell (so would a $USD >95).
November 14, 2014 at 3:13 pm
These things tend to turn for reasons most really can’t identify before hand as critical, but rather the best one can seem to do is identify unstable systems, those rot with time inconsistency, and try and benefit when the veil is lifted IMO. And this is no easy task. But, your list certainly seem to be heightened risks. DXY>=105 would be a pretty good signal that US equity markets could stop their aggressive gains, but it would probably signal massive outflows from other countries and the fruition of many of the issues you are pointing to around the world. So these things are likely to occur in secession rather than all at once. Let’s not forget about Pettis’s views on Global Rebalancing (of which China is key), this would seem to have a role to play as things play out and we may need to look to a new monetary system to get the world back on track. On that note, I don’t like being a pessimist, optimist, or a realist (I would contend none can comprehend what is truly “real” and thus it breeds stubbornness), but I am rather a probabilist when it comes to risking capital who is quick to cut loses and try again later when wrong. 2+2=5, the motto of Notes, is fitting.