“It’s quiet out there — too quiet.”
That line appeared again and again in 1950s horse operas, and we Western kids practiced daily the eye-squinted and growled delivery. We also worked at whistling the call of the meadow lark, the way the Native-Americans in those oaters signaled each other before their attacks. In our games, the short straws were the cowboys; our Sioux and Cheyenne always won in thrilling slaughter.
It is August, traditionally void of news, but this is really quiet. Eerie quiet.
Europe has fallen silent. Even the European Union no-content boys in Brussels have paused posturing. Monti, Rajoy, Hollonde… so quiet you could hear a euro drop in the Rhine. Draghi at the ECB after his excursion into bluster has corked himself altogether. Today Ms. Merkel broke her speaking fast to announce foursquare support for Greece and how much she wants it to stay on the euro (she may be a master of Europe on the order of Metternich and Bismarck, or an all-time blockhead, the power of her purse pushing her forward beyond talent — and I can’t find anyone who knows which).
The still-sealed tomb of a Chinese emperor is noisier than China’s current leadership. Japan is an exercise in origami in which paper is folded until it disappears altogether. And here a Presidential campaign which would be improved by silence.
You hear a meadow lark out there, wherever you are, best keep your head down.
Formal governments are paralyzed, and markets and the “leaders” themselves all turn now for rescue to hybrid, un-elected star chambers: the central banks. The Fed, the ECB, the PBOC, and the BOJ.
When one speaks, even without doing a thing, markets shake. The shock is still rippling from Wednesday’s release of month-old Fed meeting minutes. They sound as though they’ll ease again in some form, but no one knows how, or when, or to what effect. Stocks and other “risk assets” usually take off on new presumption of Fed easing, but not this time. 10-year Treasury yields did fall back to the center of their May-August range, but hardly an exuberant response. Suspicion is building that any new Fed operation will just buy time until fiscal and economic reckoning. Meanwhile, federal tax revenue in 2012 is running 15.7% of GDP versus 24% spending, and versus 2007 revenue at 18.5%.
Everyone assumes the ECB is collecting final political approval for its own QE, trying to suppress borrowing costs for the euro-wrecks. However, neither the ECB nor any European authority has a solution to the stimulus-austerity conundrum, so long as all are bolted to the euro.
In the best-by-far English language China blog, www.mpettis.com, Dr. Pettis asserts that a new round of PBOC stimulus will signal panic, more credit and investment making things worse, and marking aversion to desperately needed re-balancing of China’s economy away from state industries and toward consumers.
Many expect the BOJ to print Japan out of deflation. That would make 23 years of expecting, still counting.
Those who meditate find clarity in silence, and so this August we have it. The convergence of expectations of all four major central banks — results beyond their means — says with considerable clarity what comes next. In varying ways and times, in all four regions — US, Europe, China, Japan — economic deterioration will force dealing with their actual headwinds. The toughest part: to sort those who can support their debt from those who cannot, and to proceed with their assisted default. One or more may temporarily embark on the last mirage of the central bank, to print enough to induce inflation, but the ensuing catastrophe would caution the others.
Here in the US we enjoy the improbable position of having the best chance to act of the four. Either now or soon, we will be the only one with positive GDP. We may be the only one still with the capacity to deal with our existing debt and budget gap. How we do it will be disorderly beyond imagining, but that’s how we do things.
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