What has been a building theme for some time, central bank intervention in the markets, is going to go into overdrive in 2013, with the brewing currency war among the major central banks as each tries to devalue its way to prosperity. But don’t blame central bankers (at least not completely). Political leaders deserve a big dollop of the blame as well.
The unappreciated spark to this currency-war trend is something noted today by Opinion page columnist Dan Henniger: “A reality has become too obvious for the world’s dazed inhabitants not to notice: The greatest threat to the upward arc of human progress is the collapse of public policy making. That is the biggest cliff of all.”
In Japan, they’ve elected the seventh prime minister in six years. In Europe, they’ve raised kicking the can to an art form. In the U.S., the fiscal cliff debate shows how deadlocked, and ineffective, the government has become. In the wake of this, central bankers are stepping into the breach.
Now, this isn’t necessarily a bad thing — for equities. Indeed, stocks have had quite a nice run since Fed Chairman Ben Bernanke launched his big quantitative easing program in March 2009. So long as the whole intricate Rube Goldberg machine doesn’t collapse, all this central bank pumping should be good for stocks. Indeed Wells Capital’s Jim Paulsen, one of the biggest bulls out there, sees the S&P 500 hitting a lofty, and record, 1700 in 2013.
In Japan, the new prime minister, Shinzo Abe, was put into office on a platform that was primarily based upon forcing the Bank of Japan to ramp up its stimulus efforts, indeed to run what amounts to unlimited easing until inflation hits a certain point (2%, in this case).
Not only is Abe pressing his thumb down on the BofJ, he’s also appointed a finance minister, former prime minister Taro Aso, who will be ready to spend all those freshly printed yen, as Dennis Gartman noted this morning:
With Mr. Abe pushing for aggressive fiscal spending and an aggressive Bank of Japan and with Mr. Aso at the helm of the Ministry of Finance…to which the Bank of Japan must report…it is certain the the bank will be forced to create yen that shall be spent aggressively and perhaps even shockingly over the course of the next several months.
It isn’t very different in Europe, where the Byzantine eurocrats seem able only to keep the euro crisis from spiraling out of control. In a long newspaper interview, Germany’s Jens Weidmann, president of the Deutsche Bundesbank, said “I find it strange that politicians, who should be leading the way and making the decisions, wish to file in behind us and be guided by us.”
Henninger gave a quick “no comment” to the fiscal cliff drama, but that is the best illustration of the failure of public policy: the United States, the world’s largest economy, is being brought to the brink because its political class can’t do two basic things: pass a budget and set tax tables. In the wake of that, the central bank is acting despite the misgivings of its leadership.
Bernanke has been cajoling, imploring, and warning D.C. about the dangers of inaction all year. He has been adamant about the fact that Fed policy can’t make up for political failures. But with D.C. unable to get past itself, the Fed is filling the vacuum as best it can.
As the world’s most important central bank, the Fed is leading the way on this one, and with Bernanke adopting an essentially unlimited stimulus program, other banks are following. Until the political class, however, gets its act together, it’s hard to see how or why the emphasis on monetary policy will wane.
Writing “come together” on the side of coffee cups is a nice gesture, but it’s going to take a lot more from voters to prod the squabbling politicians across the continents, and until then, central banks are going to be very active.
http://blogs.wsj.com/marketbeat/2012/12/27/a-story-about-central-banks-currency-wars-and-politicians/
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