Rabobank: MMT-rump

Submitted by Michael Every of Rabobank

Another day, another trillion dollars.

After noting for the nth time yesterday that not all currencies are equal, and that the Eurodollar system–that is to say, offshore USD liquidity–remains a structural issue regardless of the recent introduction of (too small) Fed swap lines with (too few) central banks, it’s not surprising that we saw movement on that Front. Indeed, the Fed introduced a new repo facility for any central banks that with an account with the Federal Reserve Bank of New York, who can now swap their holdings of US Treasuries held on account for good ol’ USD cash. The key takeaways from this move are as follow:

1. The stress on USD liquidity is real and isn’t going away despite the alphabetti spaghetti of Fed channels to try to get USD from A (them) to B (everyone);
2. It means country C (and let’s just say ‘C’ is particularly apt in this instance) doesn’t have to sell US Treasuries to gain access to USD, alleviating the risks of a move higher in Treasury yields should this need to happen on scale in what are currently far from normal market conditions;  
3. However, it is not actually going to solve any real problems if country C (or D or E) are short of USD, as those USD are still gone once they have been used to pay for imports or settle USD debts; yet
4. The fact that the universe of foreign central banks being offered this facility is now anyone, not G-10, speaks volumes about the structural issues relating to the global role of the USD; and hence
5. This is net structurally positive for USD even while it looks negative.

In short, the Fed might, in its navel-gazing kind of way, only care about smooth functioning of the US Treasury market; yet this is still a step towards one of the only logical end-points of having USD as de facto global currency – the Fed as not just US but de facto global central bank. Don’t like that? Well, the other end-points are that the system collapses due to a lack of USD and/or USD being far too high for all involved, which will make what happened in Q1 look like a picnic; or that the system lasts in some places lucky enough for the Fed to look up from its navel at, which will be similar globally if not as bad.

One might not want to recognise any of this from a small, technical change in Fed policy, but it’s not hard to join the dots and project them forward. The only question is how far those dot-plots extend into the future. (As I have said before, if unsustainable systems didn’t ultimately change, we would probably all be Romans.)

On which front, in the US we yesterday had the President once again flipping between his two different characters – Dr.. Donald and Mr. Trump, the former this time urging people and businesses to take the virus seriously and promising a very difficult few weeks ahead as the range of virus deaths has been shunted up to 100,000-240,000.

Yet we also had Mr. Trump tweeting: “With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4”

Yes, it’s election season; and yes, it’s odd that the US last elected a real estate developer who in office has refused to develop any real estate; and it would need to pass Congress. However, when we already had a USD1 trillion deficit; then added USD2.2 trillion in a virus-fighting package; and are planning a UD600bn top up; why not go the whole hog and actually do something stimulatory and much needed like USD2 trillion on infrastructure rather than just trying to lean against the huge negative impact of the virus?

What fiscal deficits! USD5.8 trillion is being bandied around in the way USD580bn was two years ago. And yet, as Trump implies, what fiscal deficits? Rates are zero and are unlikely to be anything other than zero for a looooong time. The Fed will see to that. There is enormous domestic demand for some decent US infrastructure. And there is enormous global USD demand. In short, this is potentially about as clear an argument as one is going to see put forward by a politician for MMT – or here MMT-rump. As another aside, I had many conversations with colleagues when Trump was first elected, and the conclusion was always that if there was ever a US president prepared to use a crisis to go MMT, it was T: nobody even once went ‘Mmm’ about that prospect. Would you want to be a Democratic candidate running against spending USD2 trillion on infrastructure in a weak economy? Good luck with that!

Yes, once again we are dot-plotting here. But when a structural break of this size is presented, one should be paying attention. Particularly as while the rest of the world might be hearing USD2 trillion and licking its lips, I am sure that MMT will be M(MAGA)MT in the US case: buy American, use American, hire American. In which case, the bulk of that liquidity is going to be for domestic not global reflation – or at least that will be the aim.

Of course, if the US does this, expect other countries to go the same route. Today’s Tankan survey was bad but not as bad as had been feared for large firms: perhaps it was covering the period before the Olympics got cancelled – or perhaps PM Abe announcing USD554bn, 10% of GDP, in fiscal stimulus is helping? Of course, for those wanting to follow the US and Japan this will mean either having to run current account surpluses to protect their currencies while doing so, which means more protectionism, or watch their currencies collapse, which likely means more US protectionism and less USD flow: the Fed is going to be oh-so busy in coming years, even if rates are not going to be doing anything at all.

Elsewhere, in China we saw a further attempt to say all is well post-virus with the Caixin PMI suggesting we are now above 50 – when actually the report merely said things had stabilized. In Australia we saw the virus in action today: the mind virus of the housing bubble and its associated “The Block” mentality. Building approvals soared 19.9% m/m in February and CoreLogic house prices went up 0.7% m/m in March, even as everyone is locked down in their homes. Indicative of just how obsessed – and I mean obsessed – Australia is with housing, CoreLogic actually has a day-to-day house price index, so once can track how much “wealthier” one has become each morning. As MMT pointed out decades ago, if businesses won’t invest in capital stock, or the state in new infrastructure, and you still pump in liquidity, you just elevate asset prices. Look how well that has worked out. Fortunately, the latest RBA minutes show that they have finally woken up: a recession is expected; and policy is now to anchor both rates and 3-year yields for as long as needed while waiting for the government to do more on the fiscal front. Might that even include infrastructure at some point?