Financial Times Watch (19 & 20 January): Central Banks Vs Davos Department.

Recession Watch (Central Banks (CBs) Vs the Davos Elite Department)

Let’s start with Recession Watch today, and what the Central Banks (CBs) are up to. The consensus over the last few weeks in the FT is that is that the Fed will either rise rates by 25 basis points (0.25%), or by more. In other words no one really knows, but the markets do seem to tend towards the former.

So let’s turn to the big capitalist shindig, the World Economic Foundation (WEF), that went down at Davos in Switzerland last week. There, two big Wall Street honchos, Dimon & Gorman, gave their two cents. Dimon, JPMorgan, believes that we are headed to 6% interest rates. He noted that lower inflation, on the back of low energy prices and China reopening, is temporary, and inflation will return. Meanwhile Gorman, Morgan Stanley, thinks we are heading for 4,4, and 4. Referring to a world were 4% inflation, unemployment and interest rates are normal. The impression I am left with from their comments is that if the Fed raises 25 points in February, they are taking the Gorman line. But if they continue with higher rate rises, they are still worried about inflation. This being the public line of the CBs at the moment.

Gillian Tett, chair of the FT editorial board, notes that, in her column: “Four is the new two on inflation for investors” on p.24, the majority at Davos are closer to the Gorman line. This is a line that Tett parroted just last week in her column, and Claire Jones the same a day later. Indeed it would appear, as Tett notes, that the financial elite are telling the CBs, and especially the Fed, that it is time to shift away from the 2% inflation target paradigm.

The reasoning for this potion Tett details in her column. It is a list that matches the trends I have been noticing in the FT every day. We have numerous sources of inflation: US China tensions and decarbonisation, more government intervention, protectionism, labour rising up and the war in Ukraine. Bluntly, the elite appear to fear that if the Fed continues to chase 2% inflation it will aggravate the above and create a deeper recession. Tett thinks that the Fed will have no choice but to relent and accept a structural change.

The critical point here is that the elite are now setting the CB agenda. Another example of what Tett calls a change in the “cultural zeitgeist”. I would refer to it as the capitalist elite reacting to the de-coupling from neoliberalism that we are seeing since Trump, but has escalated with Biden since the Ukraine conflict began. Indeed for Mark Byth, the CBs for the last 40 years were the “leaders of last resort” for the body politic. The elite in Davos though seem to be publicly stating what they want to see now.

Of course CBs whole remit is to protect the capitalist class as a whole. But maybe the former’s mission to smash worker power will have to be restrained for now. Indeed we could be entering the death-knell for CBs over the next decade.

Looking at some of the stories in the FT at the end of last week only highlights such fears.

First, in the US the libertarian wing of the Republican Party is gaining ground. Their goals to constrain Environmental, Social and Governance (ESG) rules for corporations (19 Jan, p. 11) doubling down on China and put a populist in the White House (20 Jan. p.4) who promotes protectionism would politicise the Fed quickly.

Second, the US China tensions are being further strained. Australia strengthened its relationship with the US in terms of security goals in the Pacific, and moved away from EU in the same move (19 Jan. p8). On Wall Street, despite China re-opening for business, US capital is not interested in investing in the Asian giant. Apparently they are constricted by US sanctions, and the fact that China is, wait for it: a communist state (19 Jan. p.14.). Though one of Xi’s right hand men was at Davos trying to convince the capitalist bosses that they are still open for business.

Nevertheless, and this is important for the Fed, global tensions have pushed China to circumvent US financial sanctions, and in effect the West’s central banks. This, as Credit Suisse analyst Zoltan Pozar notes on page 23 of Friday’s paper, is because Western sanctions are applied through Western banks. But more and more, China and the Brics+ nations are paying in other currencies. Which is going to be made a lot easier as CB digital currencies (CBDCs) proliferate through Asia. In addition, China, Russia and Saudi Arabia are sitting on growing surpluses of fluid capital not being re-cycled into Western financial institutions.

Ultimately this will destroy the CBs and US dollar hegemony. Namely because as less and less dollars flow through the Western economic system, less will be used in global trade and recycled back into traditional US reserve assets. A process that will end the US position as largest global debtor. A situation that the US has used to sustain dollar hegemony since the 1970s. See p.5 of this pdf to see how the US treasury-bill debt system works.