Negotiating treacherous financial markets now requires more knowledge of semiotics than economics.
Twist and Shout Taper…
US Federal Reserve Chairman Ben Bernanke has introduced the term ‘taper’ to the lexicon of central banking, follows on from his reinvention of the ‘twist’. European Central Bank President Mario Draghi’s stated strategy is “whatever it takes”. Economic Commissioner Olli Rehn recently clarified that European policies were directed at ‘diluting’ not ‘breaking’ the link between banks and sovereigns.
Governor of the Australian central bank, Glenn Stevens’ even attempted ill-advised humour, trying to explain a very short policy tweet by the Reserve Bank that the official cash rate would remain unchanged at 2.75% per annum. The Governor’s comment that despite the brevity of the tweet the Board “deliberated for a very long time” at the meeting was interpreted by financial markets as meaning that the decision was close implying further rate cuts. The Australian dollar fell by one cent (1.10%) and market pundits rushed to change forecasts.
Subsequently, Deputy Governor Phil Lowe, trying to rescue the Governor, added that the Reserve Bank Board always deliberated for a long time, increasing the bewilderment of observers. TheFinancial Times drily noted that: “Central bankers … should never, ever attempt humour…”.
Sound and Fury…
Detailed textual analysis, deconstructing policy maker’s every word, in the manner of French semioticians Roland Barthes and Jacques Derrida, is now common. But the statements and the analysis are mainly “sound and fury, signifying nothing.”
The Fed’s unprecedented monetary expansion was always temporary. Confirmation that the measures would continue would admit to failure of policies designed to create a self-sustaining economic and financial recovery.
The Fed Chairman also has to manage constituencies within the Federal Reserve uncomfortable with the increased role of the US central bank and foreign nations concerned about the impact of US policies on their currencies and economies. Like ECB President Draghi facing an existential crisis of the Euro, Chairman Bernanke, in reality, had little choice.
On one view, Chairman Bernanke may have been careless and loose in his language. On another, he was deliberating testing the market reaction to the eventual end of central bank support.
Spoken about in the past tense by the US President, Ben Bernanke may also not actually be the Chairman of the Fed at the relevant decision time. The statements may have been made with the speaker’s place in history in mind.
The words, of course, also may not translate into actions. Chairman Bernanke has not halted purchases of Treasury bonds or increased interest rates. The Fed may be forced to delay tapering if worsening financial conditions hurt the economy. The ECB has not implemented purchases of government bonds.
For the most part, they were vague, highly conditional statements of intention to take unspecified actions, in a yet to be formulated way at some future date based on a consideration of circumstances at the relevant times, possibly!
Tapering the Damage of the Taper…
‘Taper’ lived up to at least one of its meanings: a long wick for use in lighting a fire.
Despite the confusion about meaning, the statements had a significant impact on prices and rates, leading to large real changes in wealth. The large amount of collateral damage confirms the observation of J.D. Salinger in The Catcher in the Rye: “All you have to do is say something nobody understands and they’ll do practically anything you want them to.”
With bond and equity market increasingly volatile, one Federal Reserve member chided markets for behaving like “feral hogs” that scenting weakness in policy makers’ intent try to break the central bank’s resolve. The member colourfully noted that he did not want to go from “wild turkey” to “cold turkey”, causing bemused non-American speakers to seek further semantic clarification.
With bond and equity market increasingly volatile, Fed officials have sought to calm unsettled markets, suggesting that the message has been “misinterpreted” or “misunderstood” causing financial markets to be “quite out of sync” with policy. Recognising the global economy’s monetary morphine addiction and also the difficult of reversing policy, US central banks officials have even suggested that existing measures could be continued or even increased, if necessary.
With interest rates of troubled European countries rising, ECB President Draghi and the Governor of Bank of England have sought to negate the Fed’s taper suggestions, providing guidance that the regime of low interest rates is likely to remain in place for some time.
Credit Suisse London analyst Neville Hill termed the Bank of England’s statement: “forward guidance on forward guidance”. Departing from previous practice, the Delphic ECB President Draghi indicated that the ECB intends to keep rates low for an extended period of time, although he refused to be drawn on exactly what extended meant.
With the benefit of hindsight, Chairman Bernanke may have been better off following the approach of British Prime Minister Clement Attlee. During the 1951 General Election, while walking to the polling station with his wife, Prime Minister Clement Attlee was asked by a reporter: “Have you anything to say to the nation prime minister?” Atlee responded: “No”.
The Pleasure of the Text…
The importance of central bankers and policy makers owes much to John Maynard Keynes and Milton Friedman, who in different ways advocated greater intervention in economic affairs. Friedman’s influential 1963 book The Monetary History of the United States 1867–1960, written with Anna Schwartz, argued that the Great Depression was exacerbated by a failure of the Federal Reserve to alleviate shortages of money triggering bank failures. By implication, financial and economic collapse could be avoided through a monetary solution.
Former Fed Chairman Alan Greenspan’s success in stabilising financial market conditions in 1987 by announcing the Fed’s willingness “to serve as a source of liquidity to support the economic and financial system” was crucial. It paved the way for the ‘Greenspan Put’, giving practical credibility to central bank activism.
Provision of guidance to markets also became commonplace. Alan Greenspan’s public statements full of ‘constructive ambiguity’ attracted financial analysts, journalists and linguists in equal numbers. The Maestro provided guidance to interpreting his pronouncements: “I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant”. He further clarified his position with unusual directness: “If I have made myself clear then you have misunderstood me”.
The reliance on guidance and actual actions of policy makers is troubling.
Firstly, it highlights the fragility of global economies and the financial system, now extremely reliant on government support.
Secondly, the need to ‘jawbone’ exposes the lack of potency of policy tools, which in some case may be approaching their limits of effectiveness or creating unintended side toxic effects, such as asset price bubbles.
Thirdly, it illustrates the difficulty of international policy co-ordination. The Fed announcement coincided with a decision by the Chinese central bank to tighten liquidity, exacerbating the market reaction. Given different domestic agendas, the risk of individual action becoming destabilising is high.
Fourthly, it creates uncertainty and volatility, undermining the policies themselves.
Fifthly, it points to the excessive influence of Governments on markets. Successful investing now requires anticipation of official policy actions, rather than traditional analysis of fundamental factors. In this environment, price signals are misleading, distorting resource and capital allocation.
Sixthly, the process is undemocratic. Unelected officials, with limited accountability, can by their words or actions trigger large changes in prices and rates, affecting millions of citizens and businesses, both domestically and in some case internationally. These policies can result in massive transfers in real wealth, redistributing employment, income, investments and savings between individuals in a country and between nations.
Seventhly, it undermines crucial trust in institutions and policy makers.
Reliance on aggressive policies to resuscitate the global economy always risked ‘blowback’. In its 2012/ 2013 annual report, the Bank for International Settlements, the banker to central banks, highlighted the problem:
“Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And, most of all, central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect.
“What central bank accommodation has done during the recovery is to borrow time – time for balance sheet repair, time for fiscal consolidation, and time for reforms to restore productivity growth.”
Regrettably, the purchased time may have not been used productively, creating new dangers for the global economy without having dealt with existing problems.
The global economy and financial system cannot escape the debt overhang and structural problems, at least without pain. Policy makers are now trapped between existing policies of decreasing efficacy with increasing toxic side effects and withdrawing these measures with uncertain consequences, potentially a complete collapse. The required balance sheet repair and simultaneous correction of public finances would result a sharp fall in aggregate demand exacerbating not solving the problem.
Given the current “sea of troubles”, the high stakes and limits to their power, central bankers unable to confront the reality, have lapsed into political ‘spin’ and word games.
Economist Brad DeLong may have been correct when he observed in 2008: “It is either our curse or our blessing that we live in the Republic of the Central Banker”.
© 2013 Satyajit Das
Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money