Top Bank Strategist; It Is No Longer Science-Fiction To Say We Need A Systemic Reset

By Michael Every of Rabobank

Today I combine the BOE, KISS, and Star Trek because: 1) we have so much inflation it takes two analogies to do the job of one; 2) it sums up the level of dignity the British central bank now holds; and 3) the cross-over sums up the confusion central banks and governments all face.

Oh, here’s a little song for everybody out there

The BOE try to take my returns away; But I don’t hear the rap that Bailey says

They try to tell us don’t go LDI long; That’s alright, we’re trillions strong

This is my market, it makes me proud; These are my traders, and this is my crowd

These are crazy, crazy, crazy, crazy nights; These are crazy, crazy, crazy, crazy nights

Sometimes days are so hard to survive, oh yeah; A million ways to bury LDI trades alive

Hey, the BOE slams down like a bad, bad dream; You’re levered up so tight, and can’t let off steam

They say they can break you again and again; But let my leverage ratio turn up to ten!

These are crazy, crazy, crazy, crazy nights; These are crazy, crazy, crazy, crazy nights

Oh, these are crazy, crazy, crazy, crazy nights; Come on, these are crazy, crazy, crazy, crazy nights

And they try to tell us LDI trades don’t belong; But that’s alright, we’re trillions strong

These are my returns, there are my crowd; We’ll increase vol volume, we love it LOUD

Yeah, BOE, nobody’s gonna change me; ‘Cos that’s who I am

These are crazy, crazy, crazy, crazy nights, oh yeah; These are crazy, crazy, crazy, crazy nights, etc.

Yet the KISS album I am thinking of is ‘Destroyer’ – either of the BOE’s reputation, if they break their “no QE after Friday” pledge, or of markets if they stick to it: “Beth, what can I do?” Nobody knows, as rumours and counter-rumours fly. The BOE is deemed to have sent a hospital pass to the government, telling them to change fiscal direction, but UK Chancellor Kwarteng just stated it will be the BOE to blame if markets tank as a result of them stepping back. Crazy, crazy nights.

Now to Star Trek: it is no longer science-fiction to say we need a systemic reset. In fact the BOE proves it. Nothing we have been doing for years works now we need to raise rates to deal with inflation –US PPI coming in hot again yesterday, CPI out today– due to the debt and leverage built up by not having inflation, not raising rates, and doing too much QE. Some argue central banks are hiking in error now: but when would they not be ‘hiking in error’ given those problems? Worse, QE was not an “asset swap” because the trillions created to “swap” for assets, pushing them up and making the rich richer, and pushing everyone down the risk curve, cannot be easily reversed by QT, as we now see.

Central banks can’t do what they want to do (rate hikes + QT) because of financial stability and political-science historical fact: a purist Austrian route into a downturn risks ending us up on one of the planets run by ‘space Nazis’ using leftover WW2 props from the movie studio next door.

Central banks can’t go back to what markets want them to do (rate cuts + QE) because EM economies, who we outsourced our industry to, and commodity producers, who we rely on given our failed energy policies, won’t accept QE fiat money for real goods and materials again at face value. If we go for that trick again we will end up with much weaker currencies –as JPY hits a new 24-year low of 146.8– much higher commodity prices, and much more strained supply chains. We would likely need rationing and price controls to match. Star Trek may be a moneyless economy where they print things from ‘replicators’, but the West is not. (The new ‘Star Trek’ series’ replicators now make useful things from human waste: an ironic scatological inversion in that the show’s producers have made what many old Star Trek fans see as human waste from useful things.)

In this Tholian web: the BOE is sticking to its guns – or is it? Everything is as clear as Harry Mudd, as the Telegraph claims “Truss is being blamed for the collapse of the debt-fuelled Jenga society that she was trying to replace” (with a larger debt-fuelled game of Jenga); the ECB’s Lagarde underlines the ECB has started, and will continue talks on reversing QE – as the Eurozone waits to be the next UK; and the Fed minutes say, “Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action” – as we also have the edifying sight of the following two Tweets:

October 11: “US TREASURY SECRETARY YELLEN: I’M NOT SEEING ANYTHING IN MARKETS THAT CAUSES ME TO BE CONCERNED”

October 12: “US TREASURY SECRETARY YELLEN: I’M CONCERNED ABOUT THE LOSS OF ADEQUATE LIQUIDITY IN TREASURIES”

So, Beth/Spock/Janet, what can we do? ‘Set phasers to LOUD’ is not going to help.

Central banks can’t yet do what *I* argue they will eventually have to (rate hikes + MMT) because of political-science fictions: “Nobody told us we were allowed to do that,” as a UK Labour MP said after the country went off gold in 1931 after suffering depression in the 1920s, then immediately reflating again. However, MMT won’t deal with the financial stability aspect of the current crisis. That requires a hypothetical policy even more radical: one markets would take as a Star Trek mirror universe where central bankers have ‘evil beards’, or a surreal one where Paul Stanley is Captain Kirk and Gene Simmons is Mr. Spock.

Central banks could hike rates *and* use MMT to boost productive state investment *and* use QE to forcibly unwind market positions alongside a resolution of failing funds/firms the way we used to before 2008, 1998, or 1987. That is to say, to resolve our current crisis the way 2008 should have been – and then follow up with much stricter regulations on leverage and financialisation: “Nobody told us we were allowed to do that.” How about lifeboats without bailouts; making small pension holders good on their sliver of assets –with minimal up-front inflation effects given nobody was going to access that money soon– but the rich holding the lion’s share get nothing? Maybe we will see this policy realised in the 24th century.

Yes, that idea means more state intervention now, but it also means more of a real market and real economy later. Yes, if a central bank operates on a financialised economy it risks doing huge damage to it, but: 1) that’s the point; and 2) Dr. McCoy needed to operate on dying aliens with different anatomies, not knowing what to snip out and what to keep – and we have anatomy files.

Bear Sterns doesn’t exist today, and life goes on; Lehman doesn’t exist either, and we are still here. Is the counter-argument that we would all be better off if absolutely everyone in finance had been bailed out in 2008, rather than just almost everyone? That is science-fiction given the pre-2008 and post-2008 systems both fail to allocate productive capital into the real economy, blow leveraged bubbles, and create inequality – and the latter even cheer-leads NFTs traded by those who want the whole financial system to collapse. If we do end up going back to QE, NFTs of Paul Stanley as Kirk might be ‘money’ soon: just hope someone in an EM will give you some dilithium crystals for it.

Meanwhile, if it is QT then we are all heading for trouble at crazy, crazy warp speed.