Notes From Underground: How Do You Say Chutzpah in Chinese (Or G-7: Part II)

As I begin my further analysis of the unfolding political/economic factors facing the global markets I seek your indulgence and set the table by quoting from what I believe is one of the most significant chapters in western literature. Notes From Underground takes its title from the essay of the same name of by Fyodor Dostoyevsky. The tagline, 2+2=5, is a summation by Dostoyevsky to poke at the Rationalists of his day. But the chapter of note is from the novel The Brothers Karamazov titled, “The Grand Inquisitor.” The scene is set as the Grand Inquisitor has arrested the Christ figure for daring to upset the social order that the Church has created. The entire chapter is so moving but allow me to quote a small part:

“Receiving bread from us, they will see clearly that we take the bread made by their hands from them, to give it to them, without any miracle. They will see that we do not change the stones to bread, but in truth they will be more thankful for taking it from our hands than for the bread itself! For they will remember only too well that in old days,without our help, even the bread they made turned to stones in their hands, while since they have come back to us, the very stones have turned to bread in their hands. Too, too well will they know the value of complete submission! We shall show them that they are weak, that they are only pitiful children, but that childlike happiness is the sweetest of all. They will become timid and will look to us in fear, as chicks to the hen. They will marvel at us and will be awe-stricken before us, and will be proud at our being so powerful and clever that we have been able to subdue such a turbulent flock of thousands of millions.”

Yes, the Great Fyodor portrays well the concept of the Davos crowd as it leaves in awe of the miracles, mystery and authority promoted by the world’s self-anointed elites.

And now, the issues from the G-7 meeting, which will play out in the communique:

1. Expect a bow to the 500 articles of Larry Summers, who has spent the last two years pushing his plan for a fiscal stimulus package based on global wide infrastructure projects. In a hat tip to Kevin McCarthy, who called me to note that a massive fiscal stimulus program financed by central bank sovereign bond purchases is the consummate “helicopter money drop.” It’s free money not spent on flat screen TVs but massive projects controlled by policy makers so no fear of any type of Ricardian Equivalence effect where the possibility of the “dropped money” going into savings accounts. The Summers effort is based on seizing the opportunity of ultra-low interest to spend, spend, spend. It is widely held that monetary policy is a spent force and therefore fiscal stimulus is the key to preventing the onset of SECULAR STAGNATION. This is certainly a desired outcome for five members of the G-7 and I would expect that Germany gets singled out for their failure to correct their massive stockpile of foreign reserves from a robust current account and trade surplus.

2. There was a Bloomberg article today titled, “Draghi In QE Quandary After Draining Bond Market By $800 Billion.” The gist of the article is that the ECB will need to change the rules on bond purchases because as the balance sheet grows there is less product that meets the criteria established by Draghi and Company. As  Richard McGuire of Rabobank said: “Everything is on the table. Whenever they meet resistance, they get around it by adjusting the rules, adjusting the limits or targeting new asset classes.” This supports the case that monetary policy has broken all global markets turning everything into a relative value trade in which the value base is established by central bank fiat.

3. The Ghost of China present will be felt at the G-7  as Bloomberg News reported today, “China Said to Plan asking U.S. on Timing of Fed Rate Hike.” I never knew CHUTZPAH was a Chinese word but this is the finest example of it. The scheduled Strategic and Economic Dialogue (SED) is to take place in Beijing on June 6-7. The Chinese have been worried that a FED rate hike would push the dollar higher and thus affect the YUAN, and also have a negative impact on some of China’s largest customers. The Chinese maintain that “consulting on policy decisions would be in keeping with a pledge that both China and the U.S. made as members of the Group of 20. After a Shanghai meeting in February, G-20 finance chiefs pledged to consult closely and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty’ and minimize spillovers.”

It seems that the U.S. Treasury has signed onto a commitment that violates U.S. law if it is met. A move to fiscal stimulus prior to any change in monetary policy would placate Chinese concerns about  the possibility of an over strong DOLLAR. The Fed and Treasury better get their communications in sync for the Chinese have a problem about promises made.

4. In a Financial Times article from Monday, the headline says much about the inconsistency in the British Brexit discussion: “Cameron to Face Pressure Over China Relations At G7 Summit.” It appears the Cameron will be challenged over his stance to make Britain China’s “best partner in the west.” The Japanese are miffed that Britain fails to deal with the aggressive China actions in the South China Sea. As the article noted, “Britain’s courtship of Beijing has caused irritation in Washington–last year the Obama administration warned of a ‘constant accommodation’ of China by London.”

Remember, it was the British who broke ranks with the U.S. and signed up to support Chinese efforts in the Asian Infrastructure Investment Bank (AIIB), which really upset plans for the U.S. efforts to contain Chinese economic influence. Further, George Osborne said in an FT interview during his visit to Xinjiang “… he wanted to take a bit of risk with the China relationship, pushing it so it really brings jobs and growth to our country.” This of course begs the ultimate question for Cameron/Osborne: Why are you so desirous of wrapping Britain in the rules and regulations that define Brussels and the EU. Full EU membership will limit the U.K.’S choices to act in its own interests. (For explanation, see Dostoyevsky above.)

***Chutzpah, ECB edition: In today’s FT, there was a headline that caused me to shake,rattle and roll my eyes: “ECB Warns of Populist Threat to Stability.” The article pulls from the semi-annual ECB report, Financial Stability Review, and gets deep into EU politics. “These rising political risks, at both the national and supranational levels, as well as the increasing support for political forces, which seem to be less reform orientated, may potentially lead to the delay of much-needed fiscal and structural reforms.” This is a tremendous act of arrogance by an non-elected entity which has vast power and influence. If a Fed Chair would have issued such a statement Congress would have demanded he/she to appear before the legislative body. As the balance sheet of the ECB expands, its influence seems to have no self-imposed restrictions on its demands. The voices from the German Constitutional Court on June 23 will be hearing from those in opposition to ECB policies as Draghi has now stepped on political toes. The AfD will be certain to respond. Back to Dostoyevsky.


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12 Responses to “Notes From Underground: How Do You Say Chutzpah in Chinese (Or G-7: Part II)”

  1. Kevin G. Waspi Says:

    I cannot pretend to stand in the same building, (much less the same room) in discussion on topics such as the “multiplier effect” in fiscal stimulus policy. However, I do acknowledge that “the science is NOT settled”, there is no guarantee of a multiplier greater than 1.0, even IF the result could be isolated and measured, a huge IF. Perhaps Professor Summers would like to tell us if he’s disagreeing with , or if he’s speaking as The Grand Inquisitor?
    “Enquiring minds want to know.”

  2. costaselgreco Says:

    Thought provoking articles yesterday and today Yra, thanks very much. A couple plus one questions from me:

    I can’t understand how higher interest rates and fiscal stimulus go together. Can you please shed some light on this potential combination that appears it might come on stream simultaneously? And of course, if you think talk of higher interest rates is just talk, please say so.

    Second question is: what effect if any do you think higher interest rates will have on oil? If there is a connection, well…the fed controls short term interest rates (I think!), so is it getting indirectly involved in geopolitics?

    Lastly, these Larry Summers fiscal programs being discussed, you say they are potentially selective so should I take that to imply that like monetary policy, the elites will fail here too? I mean, the projects could end up in very narrow hands as did monetary stimulation.

    Best regards,

    • yra Says:

      Costas–I think that fiscal stimulus with interest rates at basically zero will give the Fed ability to save some credibility.Because fiscal stimulus with employment at what the FOMC considers tight levels absolutely provides the opportunity–if that is what the Fed is looking to do.The oil is not an issue of the zirp environment because we know that oil dropped even with uber -low rates so i am skeptical of the connection when interest rates are at such abberation levels.I can’t say that the fiscal stimulus will fail because I think the effects of fiscal policy are much more powerful then monetary policy

  3. Paul Shust Says:

    Yra, a couple of questions.

    1 – How does Summers’ plan help the debt/GDP ratio at all? Borrow $1 in hopes that you get $0.50 back in taxes?
    2 – You don’t believe that Treasury would sign onto something in violation of US law? The Chinese dictate Fed policy as witnessed by every Fed decision since December.
    3 – You seem to think that the Fed’s actions are any different. Witness Yellen’s failure to comply with subpoenas from Congress. We are increasingly behold to unelected officials who can now dictate monetary policy but in this case now dictate where capital is allocated via helicopter money.

    There is ZERO foresight into any of these policies. They behave as though they are trying to manage quarterly forecasts at a public company. Sad.


    • yra Says:

      Paul—the idea of any threat to the debt/GDP ratio will be tossed aside as other nations expand theirs to meet some needs—Japan is the template in the mind of the fiscal stimulus crowd—austerity is not for those .and again the bashing of Germany will continue which is why Germany leaving the EU would unleash the forces of fiscal stimulus but would result in the destruction of the world’s financial system

  4. Asherz Says:

    Yra- So much grist for the mill, kudos.
    1) Summers’ “spend, spend, spend” in fiscal policy leading to “debt, debt, debt,” which is “no problema” in the ZIRP age. This reminds one of the boiling frog anecdote. The water is cold but the flame underneath the pot is quite visible.
    2) The Ricardo Equivalence has also been seen in banks’ reserves being held at the Fed and getting paid interest no less. It demonstrates the theoretical stupidity of QEs and their promoters.
    3) Resistance causing adjusting of the rules- reminds one of Lucy snatching the football every time Charlie Brown is about to kick. Makes the economic analyst obsolete and leaves the long term investor in a quandary.
    4) There is another element to figuring out the G-7 and China. You have the Chinese financial gurus who may exhibit Chutzpah at times (but still are in the game-and it doesn’t hurt to ask) on the one hand, and Chinese generals whose geopolitical actions going in a different direction who have no trouble making up their own rules. The latter may ultimately affect the decisions of the former.
    5) Did Britain’s decision on AIIB participation come about on Obama’s early act upon entering the Oval Office, returning the bust of Churchill to the Brits and the message it sent (some daylight between the two nations)?
    5) The chairpersons of the FED, BOE, ECB and BOJ have combined to wear the garb of the Grand Inquisitor as you eloquently point out. It brings to mind Erich Fromm’s “Escape From Freedom”; that message becoming so much more relevant in the United States of 2016. Be afraid. Or as Art Cashin is wont to say, “Stay Wary, Alert and Very, Very Nimble.”

    • yra Says:

      Asherz—thanks and I also am a great fan of Erich Frommsescape from freedom.The eastern European social market thinkers and their Marxism with a human face taught me a great deal–hence my partnership was named Praxis

  5. Trader 1 Says:

    Yra – I understand your point that the L. Summers massive infrastructure projects could be agreed to at G-7.

    1) How could this ever be passed by Congress and implemented in the USA during the Presidential Election Cycle?

    2) Or would it just end up being a verbal agreement with no action?

    • yra Says:

      Trader–yes they will agree and it will give ABE and others cover and Obama then will come home and push for something in response to they are all joining in as money policy is run out of power

    • Joe Stoutenburgh Says:

      Larry Summers has been fiddling this same tune for a while, knowing it won’t pass Congress without cuts elsewhere, which Obama won’t agree to. Larry is auditioning to be Treasury Secretary in a Clinton administration.

      • yra Says:

        Joe—I disagree for he could have had that job with Obama –I believe that he wants the FED job which he thought he had until Lizzie warren and a few others would not allow it

  6. pittrader1988 Says:

    I love all the hysteria about Brexit. It sounds like global warming. 600 economists and religious leaders can’t be wrong can they? Too much groupthink today.

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