The Mixture of Freshwater and Saltwater Economics Creates a Global Tsunami
A Freshwater Storm in a Saltwater Teacup
The September 2012 Jackson Hole Summit of Central Bankers injected a further round of liquidity from the Saltwater School of Economics into the Global Economy. The Saltwater School is associated with Keynesian economic theory that is prevalent in the teachings of the American universities on the eastern seaboard; most notably Harvard and MIT. The current heads of the Federal Reserve, ECB and Bank of England have all studied at the doctoral level at MIT. They have therefore become immersed in this subject.The global liquidity injection that they have coordinated, known as Quantitative Easing, is series of "Salty" tributaries; that all have their source at MIT.
Flowing in the opposite direction, is a tide of Freshwater economic theory, from the Chicago School of Economics; which has its tributary in the Austrian School. The depth of the global recession has been filled with Saltwater Economics, but there are growing signs that Freshwater is being added to the mix. Unfortunately,these two solutions do not mix and will create financial market volatility.
Immediately after Jackson Hole, the Saltwater Quantitative Easing began flowing with greater volume. Chairman Bernanke followed up the summit with a new round of Unlimited Quantitative Easing. He took on board the advice of John Woodford; to formally apply a more formal economic definition and target for the application and removal of Quantitative Easing. Woodford also opined that the Fed should be more consensual and unanimous in its communication; so as not to frustrate the flow of liquidity.
All the Federal Reserve Governors appeared to be going with flow, some of them admittedly in dissent, until US Presidential politics interjected. The apparent success of Mitt Romeny in the televised debate and his avowed commitment to remove Chairman Bernanke, invigorated a pool of Freshwater individuals in the Fed; that has since become a torrent of abuse. These pools of Freshwater dissent have coalesced around the figures of Jeffrey Lacker, Charles Plosser, Richard Fisher and Esther George.
The Storm Spreads Across The Pond
The MIT alumni Mario Draghi and Mervyn King, enabled the osmosis of Saltwater liquidity to pass from the Fed to the ECB and Bank of England. In the Eurozone however, the process was met with an icy wall of Freshwater economics from the Bundesbank. The Freshwater appeared to be getting contaminated, when Axel Weber resigned in disgust from the ECB. The calm European waters have been fomented again; at the same time that the storm has been brewing in America. The European storm is not just an economic one; it is a legal and constitutional problem.
The ECB was created in the image of the Bundesbank. It therefore has no growth mandate, like the Fed; nor does it have the legal latitude to engage directly in government deficit monetization. Mario Draghi's commitment to unlimited sovereign debt purchases, to save the Eurozone, looks suspiciously like debt monetization to German central bankers. When the IMF, formerly an institution that overtly supported Chicago School orthodoxy, developed the taste for Saltwater under Christine Lagarde, Germany openly revolted. In its October 2012 Economic Outlook, the IMF opined the necessity to pursue growth policies in the face of slashed growth forecasts. Immediately, there was pressure on Germany to allow Spain and Greece more time to execute fiscal reform.
To a disciple of the Austrian School, unlimited ECB bond buying plus more time for indebted nations, is nothing more than back door deficit monetization. The national commercial banks buy their government's bonds; and the ECB enable this process, by lending to these commercial banks via their national central banks.Having gone along with Mario Draghi's conditional unlimited support for indebted sovereigns, Germany has now formed the opinion that it has been set up. Greece and Spain appear to wish to kick the can down the road; and get their debts monetized by the ECB. Indeed, Spain has suddenly become reluctant to request an official bailout with strict fiscal conditions attached.
The storm clouds are therefore gathering on both sides of the Atlantic; and are set to break in November, when the US Presidential Election result is known. If Obama is re-elected, the sun will shine once again on the Saltwaters. Europe however remains stormy, although it will be more becalmed by an Obama victory. If Romney wins, then a global storm will be unleashed after the initial euphoria rally.
- Lacker Says Fed Bond Buying Has Few Benefits and Risks Inflation - Bloomberg
Federal Reserve Bank of Richmond President Jeffrey Lacker said the Fed’s third round of bond buying will increase inflation risks and complicate the pull- back from record stimulus while not fueling economic growth.
- Plosser Says 2015 Fed Rate Outlook Risks Spurring Inflation - Businessweek
- Top German Economists Warn Greece Will Not Recover - SPIEGEL ONLINE
Several top German economic institutes on Thursday warned that German growth is slowing as the country continues to be hampered by the ongoing euro-zone debt crisis. And Greece, they say, will be unable to "free itself from its debt burden" and will