“Rate Cuts *And* QT?”

By Michael Every of Rabobank

It was a quiet day yesterday with Asia out, reflected in the fact that Bloomberg had ‘TikTok Restrictions Are Irking US College Students’ as one of its daybreak headlines before replacing it with US warnings to China over the latter’s aid to the Russian war effort. Of course, as just shown, there are far more important things to discuss than a lack of TikTok:

• In economics, the Wall Street Journal’s Timiraos (whispering again?) has noticed that if China opens up and stimulates, it complicates the inflation picture for central banks.

• In politics, a key FBI figure in ‘Russiagate’ has been arrested for colluding with a Russian; and

• In political-economy, there was discussion over a recent statement by the Fed’s Waller that appears to suggest the FOMC may carry out QT even when rates are being cut. If true, this severs the traditional link between the direction of rates and QE/QT.

Why is this political-economy not monetary economics? Because the Fed would be deliberately trying to steepen the yield curve to help the real economy while not blowing asset bubbles. That is as political as economy can get: a deliberate choice of one sector over another. In this case, of labor and production over capital – as even the Wall Street Journal today warns ‘US Weapons Industry Unprepared for a China Conflict, Report Says’. Let me also add that this is also completely compatible with the view repeated here over much of 2022: that rates can rise, and QE continue, in a form, in order to achieve the same real economy > financial economy effect.

Of course, that’s the opposite of the last 40-plus years of unofficial official policy, and so of the market’s current assumptions about the near future. The fact that this was relegated far behind the news that the Fed is, as Philip Marey already projected, now likely to switch to 25bp hikes, should not really be a surprise: markets see what suits markets best. However, it doesn’t mean they are right to ignore such things. Especially when we see not only ‘Bretton Woods 3!” fist-pumping, but the Financial Times at Davos asking, ‘The Era of Markets Ended in 2019: What Comes Next?’, and Wolfgang Munchau noting, ‘As globalisation fragments, politics is again reigning supreme over economics.’

Coincidentally, @michaelxpettis yesterday underlined something key: that economics is always political rather than neutral – but we deliberately choose not to see it, because of vested power interests.

Linking back to those college students, how is it possible that in an era in which all Western disciplines, even knitting, are seeing calls for “decolonisation”, that economics appears to be untouched, even when shifting geopolitical and political-economy sands are so very evident? After all, if there is one ‘science’ that is both political, directly vested in institutional power structures, and linked to the worst of Western excesses, it is modern, neoclassical economics.

It’s no coincidence that in learning economics today you don’t need to learn any economic history or the Classical Economists.

Do I even need to mention Marx, and his labor vs. capital? Or his analysis that economies are based on a flow of Money > Commodity > Commodity transformed by Means of Production > Commodity-plus > Money-plus that includes banks/credit and “real” vs. “fictitious” capital in a way central banks’ DSGE models still don’t? Indeed, try to adapt a modern model to encompass political economy and see if doesn’t end up looking close to the one Marx provides in Das Kapital.

Even a market-favored Classical Economist like Smith was a moral philosopher: what he said about “The Invisible Hand” bears no correlation to the reductive manner in which it is employed today. He actually says it leads capitalists to patriotically only invest at home. Ricardo –free trade’s intellectual father– shoots it down himself in also saying it doesn’t work with free movement of capital: he therefore assumes no free movement of capital. Both views gets censored by the few universities who ‘bullet point’ Smith and Riccardo summaries, while avoiding Marx. So does the fact that Riccardo’s brother worked in a bank issuing letters of credit, so the more free trade done, the more money he made. In that respect, Classical Riccardo was classically neoclassical and neoliberal.

With the emergence of neoclassical economics under Walras and Jevons, et al., political-economy was jettisoned and replaced with ‘equilibrium’ maths and ‘logical’ twaddle – as well as the historical record that the worst parts of Classical economics carried over into the neoclassical were the linked to Western imperialism: free trade (and colonialism) were spread by the British literally at gun point. In fact, as Adam Tooze underlined this week in a reference to Slobodian’s ‘Globalists’ this week, neoliberal, neoclassical economics, partially emerged from the collapse of the Habsburg Empire post-WWI, where: “Austrian economists of the 1920s saw the democratic nation-state as a threat to the free flow of resources that had been previously secured by Imperial power. A new political economy was required to encase the economy and insulate it from democratic national sovereignty.” In short, it was an excuse to keep political-economy vested-interest power structures in place before voters could get a say and redistribute any capital.  

It also goes without saying that a later economic giant like Keynes was a political-economist, before he got ‘synthesized’ into silly maths and illogic too. So was Hayek. So was Schumpeter, who produced the epic ‘History of Economic Analysis’ going all the way back to the ancient Greeks; moreover, he later rejected neoliberalism and embraced corporatism, backing a Catholic doctrine of Quadragesimo anno that replaces markets-as-god with the view that God likes self-restraint in markets. Friedmann was a political-economist, wearing a better mask, with far worse logic. Minsky was a political-economist, if you read between the lines, because he had read and understood the better parts of Marx. Krugman is a political-economist not wearing a mask at all.

Somehow, the US college students irked about less access to the inanities of TikTok in days full of curriculum decolonisation have so far not turned their sights fully on economics; ironically, it’s no joke to say US economics departments are perhaps the only ones where self-described Marxists are not heavily over-represented: which perhaps then says something about power and vested interests? However, in the real world, real questions are being asked, about the real economy, and require real solutions. And really soon. (And it would be nice if all the key players, like the Fed and the Treasury, were lined up the same way for once while doing so.)

The key lesson is that economics is politics, and politics is economics; and geopolitics is geoeconomics, and geoeconomic is geopolitics. The key fiscal and monetary policy decisions that are going to be made ahead are not happening in a (geo)political vacuum, but in a (geo)political maelstrom. To presume they will look like those of the recent past, i.e., Fed rate cuts and QE, presumes the world still looks like that of the recent past. If it doesn’t, why not a (geo)political/(geo)economic risk of rate cuts and QT ahead, or rate hikes and QE?

“Because markets”? You make my point for me!