Four years ago, as the economy was backing away from the abyss, and the G20 was busy working together to a) solve the crisis and b) promise that changes would be made to ensure it would never happen again, a fellow trader cautioned me to look out for signs the congeniality was coming to an end, for that would be the beginning of the end.
“It’s inevitable,” he said. “We will work together until the greater powers learn it is not in their best interest to continue. Then we will devolve into competitive devaluation and, yes, ‘beggar-thy-neighbor’ policies. Such policies will always be accompanied by denials that you are participating in such a scheme, as well as accusations that others are.”
Smart guy. Smarter than me, anyway.
A scan of today’s headlines highlights several pieces of such evidence. David Cameron calls for permanent austerity while the Bank of England says rate hikes are closer than we think. Meanwhile, the ECB, against the wishes of Germany, has just cut rates in hopes of stimulating a moribund economy, but even that is called “too little, too late” by the FT’s Martin Wolf. Here in the U.S., Dallas Fed president Richard Fisher says that that QE has outlived its effectiveness and the taper must end “soon,” just as it is becoming clear that a Yellen-led Fed will favor more bouts of stimulus. Emerging markets are in the middle of a drubbing. And, of course, Japan continues to print mercilessly.
What is going on here?
My view is that the common cause is dead, and has been replaced by self-interest. An interest rate and currency rebound in the U.K. would arguably do wonders for its flagship financial services sector. Germany, a nation of savers and productivity behemoths, could withstand a deflationary bout, but the periphery is still smarting from the crisis and remains quite vulnerable.
It is the same story in the U.S., where deficit hawks such as Fisher are being pitted against the big money interests terrified about a still-tenuous debt overhang. Meanwhile, Japan has bet the farm on stimulating a return to the glory days of underpriced exchange rates and hyper-productivity, seemingly ignorant of the fact that the its workforce has aged significantly since the 1980s.
We have entered the beggaring phase. According to my fellow trader friend, the next phase is “every man for himself.” Only then will we bottom out and move forward.