People are holding their breath. Fed Chairman Ben Bernanke is to speak in Jackson Hole on Friday. QE3 or not to be, that’s the question. There isn’t a soul in the markets that can shrug off even a single syllable of what he’ll say. And if his answer isn’t a clear and solid yes—with details on how much, by what mechanisms, and until when—market participants, analysts, bloggers, and TV economists will parse his speech down to the last iota and look for commas that they haven’t seen before, and they’ll interpret it and reinterpret it ad infinitum until the desired outcome has been established, namely more QE—regardless of what he says. Headlines have been stirring the excitement. My blood pressure is up, my nails are bitten down to the quick. I haven’t slept in days. I’m ready. Oh dear Ben, I’m praying, let us have more QE.
ECB President Mario Draghi had his moments recently, but his outfit isn’t an omnipotent institution like the Fed, not yet at least. It has been designed as a curiously emasculated place, subject to its treaty-imposed single mandate of price stability and language that precludes any kind of QE. But these aren’t times for normal interpretations, and so the treaties have proven ineffectual in keeping the printing press unplugged. But what’s hampering the ECB in living out its wildest dreams à la Fed? Strong opposition from the Bundesbank. While it only has one vote within the ECB, same as Cyprus, it has a bully pulpit, and it has turned up the megaphone.
Investors are also watching the Bank of Japan, which buys just about anything, including equities, to keep them from crashing further. The Bank of China is now expected to prevent a hard landing, or a soft landing, or any kind of landing, though China’s landing gear is out, and the flaps are extended all the way. There are other central banks we keep an eye on. They all coordinate their moves and hobnob at shindigs, like the one in Jackson Hole, and they whip us into a frenzy with their words. Central planning at its best.
And so we have become watchers of central banks, and we bet on their pronouncements rather than invest in what we think might work economically. Meanwhile, the Fed is pulling, or perhaps pushing, on a variety of strings to accomplish its goals, whatever they may be. It’s setting prices and yields, it’s causing capital to be shifted in the wrong directions, it’s propping up banks. And it works. Central planning has been successful in the past as well.
For example, among the famous German car makers there was, you might recall, VEB Sachsenring Automobilwerke Zwickau. It produced one model, the Trabant. This was in East Germany under the communist regime. It was the best-selling car of all times in East Germany. And just about the only one. It was even exported to other east-bloc countries. Designed in the 1950s and produced without major updates for 30 years, it sold over 3 million units by 1989! Today, 32,997 “Trabbis” are still registered in Germany. Its two-stroke engine, if it runs at all, leaves a toxic cloud of oily smog behind. Despite its tiny size and nearly imperceptible acceleration, it gets a lousy fuel economy. It’s slow, uncomfortable, unsafe, malodorous… one of the worst cars ever built. The proud product of central planning.
But rather than create decrepit manufacturers that build things that belch oily smoke, modern central planning has created monsters with ominous acronyms… TBTF, ZIRP, NIRP. And like the central planners in charge of the Trabbi, they have mastered the art of repression, but this time its financial repression—so the government and banks can borrow at near zero cost, and below the rate of inflation, while demolishing whole classes of investors and savers, or worse, inducing them in their desperation to chase after the next bubble, only to be blown up.
Ray of hope: the Trabbi has become a collectors’ item of sorts, admired for its failings and showered with derision. Prices have soared from zero after Reunification to well, not a whole lot more. And people take them out for drives on sunny Sundays and gingerly coax them down side streets and country roads. Just don’t get on the autobahn.