Thanks to Ian Verrender at the ABC:
Donald Trump has been right all along. The system really has been rigged.
For as the US electoral pantomime played out last week, beamed into a billion lounge rooms across the globe, the real power play moved on in earnest behind closed doors.
While votes were tallied in booths across the states and territories, America’s central bank, the US Federal Reserve, began the arduous task of counting out billions more greenbacks to pump into the economy.
Across the Atlantic, a similar meeting was underway in Threadneedle Street London, home of the Bank of England.
And a few days earlier, the Reserve Bank made an historic decision at its Martin Place headquarters in Sydney.
To insulate the developed world’s biggest economies from the forces of the free market and ensure that, whatever dangers are lurking in the real economy, there’ll be minimal impact on the prices of stocks, bonds and, of course, real estate.
Rain, hail or shine, the financial markets and property boom must go on.
The prospect of political gridlock in Washington — a nice guy in the White House prevented from achieving anything meaningful by a potentially hostile Senate — had Wall Street in ecstasy.
The idea of a steady hand prevented from doing anything meaningful saw stocks and bonds bid higher by frenzied traders in one of the best-performing weeks this year.
All this as a resurgent coronavirus saw new global cases hit a record on Friday with a sharp spike in American hospitalisations.
It coincided with tightened UK lockdowns that once again are threatening to send the economy into reverse with an expected 11 per cent contraction this year.
How to rig the market and not go to jail
On Thursday night, Jerome Powell and his fellow Federal Reserve board members decided to keep American interest rates on hold.
Given they already sit at zero, that didn’t really come as a surprise.
And, as expected, it proclaimed that it would continue its quantitative easing program, upping the amount of cash it would pump into the system to $US120 billion ($165 billion) a month.
The Bank of England’s Andrew Bailey, in his very own “whatever it takes” moment, threw in another 150 billion pounds ($271 billion).
Once considered radical and experimental, quantitative easing has become de rigueur these days.
Everybody’s doing it, even our very own Reserve Bank of Australia, which dipped its toes into the water in April but took the plunge big time last Tuesday, pledging to spend $100 billion over the next six months.
In less polite circles, it’s called money printing.
Originally, the idea was that lower rates would encourage firms to borrow and invest, which would then lead to more jobs and an economic recovery.
Some does trickle down into the real economy. But mostly, it’s all about rigging markets.
It works like this.
Central banks create their own cash and then wade into money markets to snap up the IOUs or bonds their governments have issued to finance their deficits and debt.
That huge extra demand drives bond prices higher, and bond yields — interest rates — down.
Lower interest rates make stocks more attractive.
They also depress your currency (more on that later) because foreign investors scour the globe in search of the highest government bond yield they can find.
And low rates keep house prices buoyant.
So, in one simple swoop, you can pump up asset markets across your economy and weaken your currency, which makes you more competitive
Sure, debt levels go crazy but, hey, it’s all about today.
The problem is, that having laid the foundations for stock, bond and housing price bubbles, the world’s central banks now are scared witless about them bursting.
And so, on they go, adding ever more fuel to the fire.
Central bank splurge
This graph gives you an idea of the extent to which central banks have gone over the past decade to ensure real estate and investment portfolios not just stayed afloat but forever head north.
It has been terrific for anyone with assets. For those trying to save to buy assets, it hasn’t been such a great time.
Wages growth has been anaemic and there’s no point sticking your savings in the bank.
Not surprisingly, the wealth divide grew into a chasm and now a canyon.
That little blip in 2009, during the depths of the global financial crisis, looked far more dramatic at the time and had huge numbers of analysts concerned about how this could ever be unwound.
How on earth could the major central banks ever sell all that government debt back into the markets without creating mayhem?
The answer, even from the experts, largely was: “Dunno”. Or: “Maybe they’ll just write it off.”
Since then, it’s quadrupled to $US24 trillion ($34 trillion).
And with interest rates at zero, it has become the weapon of choice in controlling the economy.
Now, no-one bothers to even ask that question.
And as for the potential market fallout should the tap ever be turned off, or even down, let’s not go there.
My currency is weaker than yours!
Not so long ago, politicians used to boast about the strength of their currency.
Back in the 1970s and right through until the early 1990s, a weak currency could inflict near-fatal wounds on a government.
It was considered a global assessment of a country’s economic health, and it is easy to imagine Donald Trump boasting about the strength of the almighty greenback.
There were times the RBA would buy Australian dollars using its foreign currency reserves to “support” the currency when it was under attack.
Not any more.
Since the turn of the century, almost every major trading nation has attempted to massage or even muscle its currency lower in an effort to gain a trading advantage.
A weaker currency makes exports cheaper and imports more expensive.
It builds a protective wall around your domestic industry and makes your exporters rich.
Rather than sell their currency, as they did in the old days, central banks now use quantitative easing to manipulate currency markets.
They snap up their government’s bonds in the money markets.
We’ve shunned the practice until now. And it has cost us dearly.
As the resources boom kicked into full swing during the noughties, the Australian dollar soared to within a whisker of $US1.10.
The economic purists down at the RBA argued at the time that the strong currency was a way of distributing the benefits of the resources boom to ordinary Australians.
Everyone could afford to buy what were once prohibitively expensive imported goods.
In any case, they argued, we were too small a nation to try and fight a currency war.
They were right.
But their inaction decimated our industries, many of which were forced to shift offshore or simply shut down.
Workers were displaced, particularly on the east coast as the economy was hollowed out.
Last Tuesday, the RBA finally pulled on the boots and ran onto a heavily tilted field.
They’ll be buying government bonds with a five- to 10-year maturity specifically to weaken the Aussie dollar.
The game may be rigged.
But if everyone is doing it and you’re sitting on the sidelines, you’ve got no chance of winning.
And if it all blows up, everyone will lose.
If everyone is doing it and you sit it out then you lose anyway as the currency inflates and industry departs.
The way out is to go further in. Print more explicitly for government and the people so that eventually wage inflation returns, drives up interest rates, deflates asset prices and deleverages all.