Hocus Pocus - True Sinews

We are in danger of being blinded by semiotics and so losing sight of substance. We are so convinced that the medium IS the message that we have forgotten to seek for the meaning it is supposed to convey. We have given in to the quack doctors and their unscientific theories of humours in the body economic. We are now so anxious to keep the patient’s temperature minutely regulated that we have neglected to do anything about the malarial parasite which had earlier given him a fever and now has him shivering through a chill.

Daily we seek for auguries with which to inform our every action and if our High Priests do not dip their gory hands deep into the reeking livers of their sacrificial victims, they do scan the financial arcana entrained in the shifting arithmetical difference which exists between the accidental phantoms of the yield curves of two subsets of loosely-related securities, the ordinary and the index-linked Treasuries. In so doing, not only do they succumb to the false god of Expectations – a deity principally distinguished by never being right about anything important – they also forget that those same curves and differences are subject to a whole host of entangled influences, among them the actions of the historically violent interventions of the omen-seekers themselves.

But the 5-year, 5-year forward implied break-even inflation rate – for it is this of which we speak – is a market phenomenon and orthodox economics believes in the unimpeachable rationality of markets. At least until AFTER the event, of course, when our masters must do ‘whatever it takes’, regardless of law or custom, to mop up the toxic spillage from the irrationality they previously encouraged in those same markets’ earlier. If, therefore, the market speaks, its message MUST be obeyed.

Just over a week ago, the ever ludicrous UK Guardian ran a headline which screamed ‘Global economic fears prompt high street gloom’ which essentially asked us to believe that young mums in Bridlington were swapping to own-brand baked beans because the Brazil real was plunging and that the fall in Taiwanese export orders had teenagers in Teesside holding off from topping up their smart phones. But is it really any less risible when some ECB talking head starts agonising over the ‘de-anchored inflation expectations’ being heralded by a quasi-random dip in the 5y5y and starts militating to buy another half a trillion in securities as a response?

Similarly, it is all too easy to giggle at Li Keqiang’s earnest declaration that his sprawling fiefdom would show a measure of ‘growth’ of a precise 6.53% per annum rate over the course of the next several years, but was he really opening himself up to any greater ridicule than that to which so many central bankers expose themselves when they scurry from one media appearance to another, vaunting they will use all ‘weapons in the armoury’ simply to ensure that a statistical echo of a synthetic basket of frequently purchased goods and services should rise at an arbitrarily small percentage each and every year and thus restore prosperity to all mankind?

Seven billion of us each make multiple economic choices every day, each of them exerting a minuscule but nevertheless cumulatively important influence on the prices, not just of the goods explicitly involved in our exchanges, but also on those in the vast array of their competitors, substitutes, precursors, and complementary factors. Amid this unfathomable whirl, once every 30 days, a highly subjective, quasi-static sampling of a privileged subset of this uncountable profusion of transactions is taken by the temple guardians. When they have finished clicking their abacuses back and forth over their findings, we are then asked to believe that if the unit average has not increased by at least 0.165 of a percent – or, worse, if we suspect that people are starting to believe, despite all our protestations to the contrary, that it might not continue to do so in the coming months – the very pillars of our civilization start to teeter. This is truly madness!

As for the mystical 2% level to which that monthly increment compounds up over the course of a year, the estimable Bill White relates how it (or, more precisely, its predecessor) was effectively plucked out of thin air some thirty-odd years ago by a couple of his colleagues as they travelled to a parliamentary hearing at which they would make the then-radical, anti-inflationary case for the central bank at which they worked to be given a measure of functional independence.

Little could they have imagined the import of their actions for on such a slender thread of happenstance now dangles the fate of the world, albeit one since thickly embroidered with three decades of abstruse mathematical theorising, a goodly part of that under the aegis of the MIT crowd which has come to dominate the Fed and the ECB among others.

No matter that we protest that ‘deflation’ in the sense of falling prices, is a good thing, that it means we do less labour in the sweat of our brows for each hunk of bread we eat. No matter that we can point to many historical instances when falling prices were seen as a sign of, not a threat to, increased prosperity. No matter that the undeniable evidence of malign side-effects has built to the point that the ECB, for one, has recently resorted to special pleading; bleating on the one hand about how, when low rates allow yet more under-travelled roads and echoingly empty art galleries to be laid down, savers will finally have their due reward in the form of some sort of ill-defined social dividend and, on the other, about how it simply isn’t true that the nasty politicians don’t undertake the necessary reforms when the central bank sets the cost of their inaction at zero.

It may well be that the technological wonders wrought by members of the oil industry, together with the vanishing ‘shoe leather’ costs of searching out the best deals anywhere on the globe in the Age of the App and the re-orientation of much productive capacity away from the wastefulness of the late Boom, have given many hard-pressed families a little budgetary breathing space. But, be warned, if we plebs start to expect that the continuation of such a bounty is theirs by right, we must be monetarily disabused of the notion forthwith, no matter what extremes our due chastisement may involve.

Carved above the portals of the sancta sanctorum in Frankfurt and London and Washington and elsewhere, in letters of flaming brass, is the terrifying injunction: ‘Thou shalt have no other gods before me nor shall thy prices rise less than 2% per annum for I, the Lord thy God, am a jealous God, visiting the excess liquidity of the fathers upon the thrifty unto the third and fourth generation of them that hate me.’

Who has the temerity to argue with a divine commandment?

THE ABOVE IS AN EXTRACT FROM WORK WHICH APPEARS AS THE BIWEEKLY ‘MIDWEEK MACRO MUSINGS‘, OFFERED ALONGSIDE THE FULL IN-DEPTH MONTHLY, ‘MONEY, MACRO & MARKETS‘, PUBLISHED BY HINDESIGHT LETTERS.

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