WHEN THE MUSIC STOPS, LUCK RUNS OUT
EDU DDA June 20, 2024
Summary: China’s top central banker acknowledged his institution is undertaking radical reform. This is not a good sign, instead a critical signal that the music has indeed stopped where it matters, if only to start playing a different song in a different venue. Once central banks shift to “communication” you know it is over, not for them but for the real power and money in the world. The consequences are enormous and are going to be with us for a very long time.
Where did M3 go? When it was yanked from the Fed’s catalog in early 2006, the usual critics complained the dirty scoundrels at the Great Monetary Authority were merely trying to hide their money printing. At the time the broadest measure of money supply, its removal was seen by detractors as a blatant abandonment of monetary principles.
It was, but not at all like what they were thinking. As with so many instances, when someone show you who they really are, believe them.
The Fed at that moment almost two decades was confessing to how it wasn’t a central bank. It could no longer even perform its first function which is to monitor monetary conditions. In furtherance of Alan Greenspan’s many utterances, they were saying they didn’t know where to begin.
After all, what was in M3 that forced the Fed’s hand? Repo. Eurodollars. The many monetary formats most heavily associated with global eurodollar money. Two huge clues in one press release hijacked by critics who know as much about money as those at the Fed.
Banks, not central banks. The real power and authority in the world lie with the former, yet all eyes are purposeful drawn to the latter as the sole source of everything. Central bankers themselves have become shamans, replete with all the necessary symbols to awe their unwitting audience which has little or no experience therefore no means to falsify the various displays.
Why else do you think Jay Powell trots out before the cameras with all the impressive accoutrements of a religious ritual? That is no accident.
Time and again, we find throughout recent history how central banks are only ever able to seemingly live up to their lofty reputations when the banking system is functioning. As banks are making credit, only then can central banks take credit. The irony is that central banks originally were created solely for the purpose of backstopping that system when it inevitably goes wrong.
Nowadays, “central banks” can’t even do that much, thus the near-constant need for new and more creative “tools” among the current phase of central bankers. As Ben Bernanke finally admitted only after leaving behind global wreckage from his tenure, “monetary” policy is 98% talk – the rest, he said, was action but the true purpose behind any action is solely to supplement the talking.
Government ministries and reserve managers also fall into the trap. The Japanese provided us with a timely illustration not even two months ago when after painting themselves into a corner the Finance Ministry finally launched a “historic” intervention…only to see it completely bypassed in a matter of a couple weeks.
They tossed ¥10 trillion (yes, trillion) down the drain only to prove yet again how little power they hold. After a very short time, JPY went right back down and as of right now the yen is at a new low anyway. Merely delaying the inevitable, an absolutely perfect example of just what I’m talking about.
We’re told the powerful are officed in governments. The actual power comes from the global bank cartel. My favorite 1992 quote from The New York Times is timeless for these reasons:
Our problem, one of them, is the Great Moderation. To this very day, no mainstream source is quite sure where it came from, how it came about, or what kept it going. Again, in the absence of useful knowledge Economists and central bankers have substituted superstition. Alan Greenspan from the early nineties would admit the Fed was no central bank and so had to alter its own operations to adjust for a change it wasn’t any part of.
Fittingly, he did this just the year prior to the NYT article.
That eurodollar evolution may have left the old central bank model behind, but it also created a vacuum in terms of Economics and awareness. Suddenly a Great Moderation shows up, and without anyone being aware of the eurodollar’s supremacy, central bankers filled the void with an enormous assist from the financial media (not to mention the vast majority of public who understandably find the idea of an enlightened and proficient technocratic institution comforting).
Of course it was going to get out hand to the point of becoming downright stupid. Alan Greenspan’s briefcase once upon a time had its own standing webpage at CNNMoney, an example of the kind of downright worship that came to be the primary form of “monetary policy.” Sadly, this one has stuck around even after it has been repeatedly falsified.
The very researchers who coined the term “Great Moderation” unwittingly described the answer they were seeking. They just didn’t know where – or how – to better look for it. They very presciently wrote in 2002:
What Stock and Watson realized was that there had been a curious absence of monetary disruptions of the kind, size, and severity which had plagued modern industrial economies from nearly their beginning. Moreover, the reason why no one was able to fit these pieces together is itself a critical indictment of the entire enterprise of Economics – the monetary system is unusually calm and steady for reasons people can’t identify at the same time the same people whose job is supposedly money can’t even track nor even define what it is.
The money they couldn’t track and the reason for the unusually quiet monetary conditions necessary for the moderation were the exactly the same. And it also neatly answered why neither group could provide any useful answers.
Thus, it sounded somewhat plausible the Fed’s “new” approach targeting one single short-term interest rate could somehow have filled that gap. The very idea is actually ridiculous when you stop and think about it for more than a few seconds. Yet, the rain dance ruled how many societies who were just unaware of weather and climate science. The earth remained at the center of the solar system for millennia. Why not interest rate targeting?
The crisis is 2007 and 2008 should have introduced some science. For one thing, Stock and Watson’s warning proved to be true. Once the eurodollar broke down the “quiescence of the past fifteen years” suddenly disappeared leaving the world’s central banks to sink with the monetary system and economy at the expense of tens of millions of jobs not to mention the entire trajectory of the planet from then on.
Where was Greenspan’s briefcase when we needed it?
It was lost in the furor over subprime mortgages and quantitative easing(s). A big reason why the shamans had lasted as long as they would was because they were very good at what they did – putting on the right kind of show. Snake oil never sold itself.
This is by no means some academic lament. The eurodollar’s decay is still creating more problems and not just in terms of lost economic output or the inverse of the Great Moderation, meaning how the last fifteen (plus) years having been filled only with bad luck the mainstream still can’t identify. One by one, connected banking systems have been tuned down then largely turned off.
As that leaves gaping holes in economic potential, it has further exposed other central banks – in this case, China’s. This is no small transformation. I wrote about this in late February and over the past few days my suspicions have been confirmed.
We’re left with the very real possibility China’s banks have indeed checked out; they’re done. That would be all the more remarkable given the biggest ones are state-owned. What must be their issues that they defy their direct overlords? Something that would be enough to keep Xi at bay; maybe something Japan-y circa ’89.
It isn’t a problem with transmission at all. The transition from a central bank into a psychology signaler is more than enough to transmit what potentially is a real game-changer, and not just for China. The big question all throughout the past few years, is why the economy can’t even get back to pre-pandemic not-nearly-good-enough levels.
Over the last several years, for obvious – and familiar – reasons there has been a debate about the PBOC’s “transmission mechanism” the same as what had very quietly, only privately transpired at the Fed and ECB in the aftermath of 2008. “Monetary” policies once thought perfectly effective if only ever at signaling and psychology suddenly no longer seemed to work very well at all.
Once the banks stopped, the central bank “magic” disappeared with them.
The smallest silver lining from China succumbing to the monetary system deficit is that it provides yet more proof of how it actually works. When Chinese banks were steadily expanding their own balance sheets for the globalized world of the eurodollar era, the PBOC was treated as the top-notch technocrat. Revered, even by other central bankers. For a long time, China’s was the envy of the world.
It couldn’t last, however, because Chinese banking and credit would never have been able to fill that gaping global gap left over in the aftermath of the Great not-Recession.
China’s banks kept creating credit, the PBOC kept taking credit, yet the economy slowly decelerated and ground down anyway, as more and more of what banks were doing was left to the most unproductive outlets starting with the country’s real estate bubble. That was obviously, or it should have been obvious, not a close enough substitute, though maybe there really was no other option at that time.
Once the banks rolled out of that because it wasn’t working, and because of Xi’s mandate (19th Party Congress), suddenly the PBOC’s “transmission” becomes an issue. The pandemic and its aftermath have simply brought it front and center unlike the coward Economists in the West who continue to bow to the Fed’s various soothsayers.
This does not mean China’s Economists are somehow better. Even though they realize the PBOC is being forced to evolve it’s not going to be in an actually useful direction. What Pan Gongsheng, the top Chinese central banker, said in his speech yesterday was that credit growth wasn’t going to come back and that radical reform is coming to the institution.
In operational terms, this appears to mean stepping back from the MLF and continuing to develop a corridor system like Europe’s to better control what aims to be policy focus on a single short-term rate – yep, interest rate targeting in the absence of direct monetary influence. The MLF is, as the “M” in its name implies, medium-term (1-year). While China already does have the levers for a corridor – the SLF at the top then the deposit rate on excess reserves as the intended floor – it is nowhere near as robust as it would need to be.
But for what purpose?
For the last decade since it was first introduced in 2014, the MLF has performed as both central policy signal and as policymakers’ main lever for what they call liquidity. From what Pan shared yesterday, that will change to where bond buying (and he was clear this did not mean QE, as some of the more hyperbolic takes have been claiming) will be the primary means of introducing bank reserves (“liquidity”) leaving this other ST rate as the key mode for the real policy transformation.
It is going to be more purely and thoroughly communication from here on.
Fifth, we will enhance the transparency of monetary policy and improve the policy communication mechanism which is reliable, regular, and institutionalized so as to ensure effective policy communication and expectation guidance. An important feature of the modern monetary policy framework is that central banks can communicate with the market and the public about policy considerations and prospects in a transparent, clear, and timely manner. Enhanced transparency will make policies more understandable and authoritative, and the market will hence have a stable expectation for the policy trend in the future and adjust its decision-making accordingly. In this way, monetary policy adjustments will achieve multiplier effects.
The PBOC intends for 98% BS like every other Western central bank. Ben Bernanke’s big reform was also “transparency” which he finally achieved in 2012 with an inflation target along with improved “communication” starting the press conference ritual. The guy was a terrible central banker, but he absolutely knew how to sell that incompetence.
The purpose isn’t really to enhance stability at all; as we’ve seen through repeated experience (those actually paying attention) the more central banks are forced to “communicate” their policies the less stability there ends up being. Again, Stock and Watson nailed that one, it just wasn’t luck.
Why this really matters is not just confirming suspicions about radical reform, more so why the need for it. As I wrote in February, this fully verifies how China’s banks are done. They’re out. The world is going to be forced to change because of this, and it doesn’t seem many are prepared or even realize what’s being done here.
The PBOC in banks’ absence has no choice but to become a puppeteer trying desperately to signal to markets and economic participants in the vain hope those can make up for the lack of pliable, dynamic intermediation full-running banks provide. All they had to do was examine the economies of the West to turn them off the idea.
No wonder CNY is sinking. And JPY. Brazil’s real. Won. Dong. Etc.
China’s luck just ran out. Or, more accurately, they’ve just admitted it. Jay Powell is ready to don his costume again to try to make it rain. Pan Gongsheng is going to borrow it once he’s done.
It’s the banks have all the money. Central banks are stuck trying to run with style. And we get stuck paying the bills.
