The immediate fate of the global business cycle and asset prices is now caught in an epic monetary policy brawl between the central banks of the US, China and Europe.
In the blue corner is the FOMC which has a muted if steady recovery in its gloves and wants to hike interest rates. It knows that as it does so it can deflate lots of input costs in its own economy and deliver a windfall of income to its households via falling commodity prices. Its weak spot is that its consumers are still punch drunk and are not able to spend this windfall fast enough to offset the deflation.
In the red corner is the PBOC which has a troubled structural adjustment in its care. It’s glide path to slower and less commodity intensive growth is now too steep. Its industrial, investment and export economy (which relies upon US consumers) is failing faster than its consumer and productivity return can be strengthened. It has run out of bubbles to blow to accelerate that spending and so has turned to currency devaluation lest its head hit the canvas in an outright “hard landing”.
