HindeSight
www.hindecapital.comJan/Feb 2013
The Central Bank Revolution I – Well ‘Nominally’ So
Central Bank's Checklist ManifestoMoney Matters, Credit Matters MoreMarket MonetarismCentral Bank CAnnaBALismKnocking or Yell'en at hEaVen's DoorAbenomicsDevil InCARNEYate Himself Escape Velocity and Un-NEUTRAL MoneyHayek's Rule of Hyperinflation
HindeSight
02
www.hindecapital.comJan/Feb 13
“There have been three great inventions since the beginning of time: fire, the wheel, and central banking…”
Will Rogers
“Victorians heard with grave attention that the Bank Rate had been raised. They did not know what it meant.But they knew that it was an act of extreme wisdom.”
John Kenneth Galbraith
Central banks are the devil. They are like drug dealers except they administer regular doses of supposedly
legally
prescribed barbiturates to their addicts. The 'easy money' or 'credit' they create is an opiate and like alladdictions there is a payback for the addicts, one exacted only in loss of health, misery and death.The economic system is an addict, but that system is comprised of banks, corporations, non-profitorganisations, small businesses all of which are communities. And what comprises communities, us, humanbeings - individuals. We are the addicts.Popular economic academia understates
human action
in the economic equation of money. It is humanpreferences that determine our desire for goods and services and so in turn really determines the utility of money. Sadly the desire of the State to control money and administer it like a drug has left our economiesunproductive and incapable of standing on their own two feet.Our reliance on 'easy money' as facilitated by credit has become terminal. Like drug users we continue toattempt to find a heightened state of Nirvana. We continue to hark for the utopian days prior to the eruption of the post 2008 crisis, even though our well-being was fallacious and based on an illusion of wealth paid for bycredit -
a creditopia
. The abuse of credit is what defined the Great Financial crisis and one that still definesour economic system and one which will define a much worse crisis to come.Central bankers have begun a concerted effort to fight the global debt problem which has been stifling growthas tax revenues merely serve to finance debt servicing rather than addressing the repayment of principaloutstanding. Omnipotent governors, Bernanke, Carney, Draghi, Svensson and Iwata or Kuroda (either arelikely to replace Shirakawa) are to take a far more aggressive and activist role in pursuing a new framework for growth and inflation by seeking an alternative way to conduct monetary policy. It's called Nominal GDPLevel targeting and it is in our opinion as significant a moment as Volcker's appointment to the FederalReserve governorship in 1978.Many will recall Volcker's moment was to engineer a swift monetary contraction and deceleration of themoney velocity to try and reign in excessively high inflation and stabilise growth. It worked. Today we arewitnessing an ‘Inverse Volcker’ moment, whereby the opposite is likely true.The question remains are they all still ‘inflation nutters' as Mervyn King, the BoE Governor glibly referred tothose central bankers who focussed solely on inflation targets to the potential detriment of stable growth,employment and exchange rates.Are central bankers merely expanding the boundaries of monetary largesse by focusing on a broader mandateand merely evolving the singular variable approach of inflation targeting or have they finally found a solutionto eradicating boom bust business cycles? This is a question we need to answer as we are currently witnessinga
Central Bank Revolution
which could portend severe consequences for prices in our economies - and all theattendant misery that comes with very high inflation.Nominal GDP Level targeting advocates believe they have a plausible case for a change of mandate by centralbanks and one which is being gradually adopted, but we believe that like central banks they havemisdiagnosed the cause of the crisis by failing to examine the impact of credit creation in our global economy.
Money matters less credit matters more.
HindeSight
03
www.hindecapital.comJan/Feb 13
It is our contention that central banks feel they need to maintain the balance of credit in the system as itcurrently stands by adjusting the money supply and monetary velocity (MV) but by doing so they merelycircumvent the necessary adjustment in the economic system that comes about by market failure. If they don'tallow this failure then any attempt to influence MV will only lead to higher prices (P) at the expense of output(T) in the famous monetary equation MV=PT.
Central Bank's Checklist Manifesto
At Hinde Capital we have attempted to codify both our objective and subjective observations of asset classesover the years and have naturally migrated to a checklist routine to try to eliminate any behavioural biases thatlead to a misdiagnosis of events before an investment decision.This line of thought was reinforced ever more so when the team read Atul Gawande’s
The Checklist Manifesto – How to get things right ,
a masterful book for its narrative and practical application. Gawande, anacclaimed surgeon based in the US takes us on a journey of how the simple checklist helps individuals dealwith immensely complex situations, where risks can be calculated more often in lives lost – skyscraperconstruction, medicine and investment banking.First introduced into the US Air Force to assist pilots, the humble checklist in all its simplicity has helpedgenerations of pilots navigate the complexity of flying modern aeroplanes. Gawande himself has introducedthe concept into operating theatres and hospitals around the world with astounding success. One area of impact has been the reduction in the incidences of infection and loss of life from such infections. Anotherhuman impact has been reduction on the reliance on one omnipotent individual to make critical decisionswithout any conferring, when under extreme conditions of stress. The checklists enforce a back-up to thesurgeon and provide a team solution when confronted with an unusual event. This has been very empoweringfor individuals working at the periphery but who are still essential to a successful operation.When considering how to guide a system as complex as the global economy with so many independentcountries, and decision makers we often wonder what type of checklist a modern central bank would employtoday. At the US central bank, the Federal Reserve, there is no doubt they observe a vast array of variables totry and determine monetary policy that they believe will provide an optimal outcome for growth, stable pricesand employment levels. One need only have to look at the staff white papers, the St. Louis Fed researchanalytics and all the Federal Reserve board member communications to know there has to be a checklist of sorts.The immortal phrase – “this has never been a problem before” until it is, or “this was an unforeseen once in alifetime event” – is another phrase that has been used over and over in time immemorial as an excuse eitherfor ineptitude, incompetence, or malevolence. Checklists can enforce verification, and a discipline of higherperformance which can be applied as a solution to a genuine black swan. The crucial ingredient though is notonly a checklist but the
correct
checklist.We were infuriated with central banks in particular the Fed, whose omnipotent leaders, Greenspan and thenBernanke who claimed there was no housing bubble, that there was a productivity boom, that vendor-financing relationship of Asia and the US was born out of a savings glut and not an unstable equilibrium.They believed the business cycle growth of the first decade of the 21
st
century was a period of excellence –the goldilocks era of growth and stable low inflation, and employment was driving a period of deservedwealth as it had been engineered and steered by prudent monetary controls. But to any other observers withhalf an ounce of common sense it was evident that economies and markets were out of control. So what wentwrong?Right up until the implosion of equity markets in 2007 and 2008 Bernanke said there was no housing bubble,that inflation was benign, even though almost every asset price from equities to gold was trending in asuccession of levitating new highs. So what checklist were they looking at?
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