Notes From Underground: Are Central Banks the Grand Illusion?

This week I had the extreme pleasure of recording a Financial Repression Authority podcast with Zoltan Poszar (moderated by Richard Bonugli, of course). We covered the entire global scene from yield curves, petro dollars and the underlying basis to all fiat money transactions. It is worth a listen to learn that the fabricated, algo-driven headlines are not the contextual basis of major shifting sands in the global financial system. There is far more nuance locked underlying the moves by policy makers around the world.

We discussed the present value of the YEN/YUAN currency pair and its historical price relationship, which brings it back to the December 1993 level, which was right before the Chinese authorities devalued the currency by 50%. This comes at an interesting moment as the recent weakness of the YEN has generated concerns about the negative impact of high global energy prices on a Japanese economy heavily dependent of imports of oil and natural gas. Five weeks ago the YEN was anointed a critical safe haven asset and a repository of nervous funds.

Aiding the YEN weakness has been the most recent actions of BOJ Governor Kuroda in an effort to sustain Japan’s Yield Curve Control by keeping ten year JGB yields at 0.25% or lower. The ECB and Federal Reserve’s latest pronouncements about their asset purchase policies makes Japan an odd man out as they are still aiding a weaker YEN. Even former BOJ Governor Sakakibara said in a statement, “Current weak yen positive for economy, further weakening beyond 130 would cause problems.” These types of statements fall afoul of G-7/G-20 guidelines as monetary policy are not to be used to gain a trade advantage by competitively weakening a nation’s currency through keeping one’s interest rates low in the face of rising inflation. (YOU CAN STOP LAUGHING NOW.)

To add to the hypocrisy of global “agreements,” the Swiss central bank last week left its overnight rates at NEGATIVE 75 BASIS POINTS. It said in a statement the bank “is willing to intervene in the foreign exchange market as necessary, in order to counter upward pressure on the Swiss franc. In so doing, it takes the overall currency situation and the inflation rate differential with other countries into consideration.” The currency intervention by the SNB is always thought to be directed at the EURO but the SWISS and Japanese compete in many markets for high-tech, high-engineered goods, including pharmaceuticals. At the close of the first quarter, the CHF/YEN cross was the strongest the pair has been since August 1980.

Central bank interest rate policies are not one-dimensional and may be BEGGAR THY NEIGHBOR as well. While the SNB breaks no G-7 strictures (since it’s not a member), its regarded status makes its decisions critical for the underpinnings of an equitable global financial system. Oh well, Larry Fink proclaimed the end of GLOBALIZATION so everyone for themselves? Enjoy the Pozsar discussion as we tread into the SECOND QUARTER. Let’s do as suggested by Louis Gave: adapt, not forecast.

Click here to listen to the podcast.

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7 Responses to “Notes From Underground: Are Central Banks the Grand Illusion?”

  1. Norman Cerk Says:

    Ira, I really enjoy your notes and the occasional podcast. Have you ever thought about putting the podcast onto Apple podcasts where it would be easier to listen to without using YouTube? Thanks, Norman

    • Yra Says:

      Norman thank you—will take this up with Richard Bonugli at FRA and see if we can improve on the product—believe these FRA podcasts are a treasure trove and even more so in real time

  2. Asherz Says:

    The Begger thy neighbor currency devaluations in the 1930s and Smoot Hawley Tariff Act in 1930 all contributed to making the depression of the 30s “Great”. When the going gets tough, all men are at battle stations.

  3. LetUsHavePeace Says:

    There are two times in the last century in American tax history when nominal rates have not told the actual story. One is the 1950s, when the income tax rates for high income individuals were still at their nearly confiscatory levels that had been applied during WW 2; but the effective rates had fallen dramatically thanks to the invention of tax shelters, including ones using the leverage of non-recourse lending. The 1954 Tax Act was of immense importance.
    The other time nominal rates do not tell the actual story is Smoot Hawley. 1930 was not, when measured by historical standards, a period when U.S. tariffs were high, when measured against total imports. The collapse in world trade was not helped by the increase in rates, but that was a secondary cause. The primary one was the absolute catastrophe of the disappearance of all trade credit, thanks to bank failures and exchange controls. Roosevelt’s confiscation of gold and devaluation should be seen for what they were – an embargo against all further transfers of the one tangible form of international money.

    • Yra Says:

      Peace—wonderful add to the discussion and you make the case yet again why things are NEVER the same and digging reveals where in fact 2+2=5 as political issues obfuscate what models fail to detect—thank you

  4. The Bigman Says:

    Listened to the podcast with Zoltan Poszar. Very prescient as Russia last week pegged ruble to gold and will only accept rubles for oil and gas fulfilling the commodity as collateral prediction. One must wonder if this outcome was always part of Putin’s plan. The ruble is now back to the same level as the day of the invasion 80 to the dollar. Slovakia over the weekend announce that it will pay in rubles showing perhaps the first crack in the NATO resistance. Will Germany stay the course with discount chain Aldi’s raising food prices 20-50% today? China and India are benefitting from Russian discounted energy pricing. The main victim of these sanctions at this time appears to be the US dollar and its reserve status. Biden and Putin are playing chess- who do you bet on? When one weaponizes one’s currency, one better win and this doesn’t look like a win right now. How long before commodity backed rubles and rmb replace petrodollars and eurodollars? Ask the Slovaks.

  5. ARTHUR Says:

    From Marc Faber: According to the Taylor Rule the Fed fund rate should be currently at 9.81% and most certainly not at 0.25%.

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