After studying the anthropology of purity for a lifetime, i.e. the pure/impure dialectic, desecration/reconsecration, order/disorder, transgression/restoration of the rule, fascination/disgust, the English scholar Mary Douglas (author of Purity and Danger, published in 1966 and in the meantime which has become one of the fundamental texts of anthropology of our time) arrives at two important conclusions.
The first is that pure and impure are not founding concepts only in primitive or superstitious societies, but in all human societies, including ours. The second is that medical and dietary rules, important components of the pure/impure dialectic, shape the body and the altar (the physical and the spiritual projection) on top of each other in an inextricable interweaving. Think of the relationship with water, where since the Neolithic we see the intertwining of the sacred of purification and the profane of cleanliness in the cult of rivers, lakes, sources on the one hand and in their practical use on the other.
There is therefore a thread that links the Probatic Pool in Jerusalem to the ritual washings in the Ganges to get to the hydrotherapy applied by Dr. Kellogg (the one of the cereals) in his sanitarium in Battle Creek, the first example of a modern wellness centre, of course, but rigorously inspired by the health principles of the Seventh-day Adventist Church. In the relationship with food, fasting becomes purification of the body and spirit and restoration of an original condition of balance and order. Here too much of what we consider very modern is actually ancient. Between the Gnostic and Cathar sects that ate only yellow and orange vegetable foods because they had captured more light and more sun (and therefore more order, as opposed to the disorder of darkness and flesh) and certain contemporary veganism there is clearly a line of continuity. The pure/impure dialectic helps to read the psychology of central bankers and policy makers in general.
Raising and lowering rates is the normality of life, but inflating the monetary base is impure. Running government deficits is impure. Having public deficits financed by the central bank (helicopter money) is supremely impure because it violates both the fiscal taboo and the monetary taboo. Fiscal impurity is the condition in which the West has been dragging itself since the XNUMXs. Historically, public deficits were created only in times of war. When peace arrived, order was quickly restored by canceling the debt with inflation or with restructuring or consolidation.
The almost half century of deficits that we carry on our shoulders is the historical exception, not the rule, but we are almost used to it. The impure monetary, on the contrary, is a recent fact. It dates back to the end of 2008 and we live it with a sense of guilt that becomes even more painful as we see the global economy returning to a healthy, at least apparent, situation. Prior to 2008, the Fed's balance sheet had been stable at $0.8 trillion for time immemorial. Today it is 4.5 trillion. It's like going from 80 kilos in eight years, the ideal weight of a lifetime, to 450 kilos. The fact that the same thing happened in Europe, more or less in the same proportions, is not much consolation. Either you practice a gigantic liposuction with extraordinary public finance measures or you go on a diet.
The emergency is over, the world is growing, the next recession, which we hope is very distant, is in any case ever closer and we can't face it by putting on another half ton if we haven't lost weight in the meantime. And so here is the official announcement (or rather the official pre-announcement) contained in the FOMC minutes published on Wednesday evening. The majority of participants, the minutes say verbatim, see the start of the budget reduction in the current year. Without too much emphasis but with determination and well in advance of the estimates circulating in the market, the FOMC announces Quantitative tightening, or rather Quantitative easing in reverse.
In Qe the Fed bought securities, in Qt it will not sell them on the market directly, but when the securities expire it will not replace them with new ones. The difference is only psychological, but psychology still has its importance. By how much will the monetary base decrease and over how long? Let's make some assumptions. In her important speech on August 26, 2016 (which we advise everyone to keep on their desks) Yellen suggests the answer to the first question.
In past recessions, he says, the Fed has cut rates on average by about 5 percentage points. This time, however, we think that we will only be able to raise rates up to 3 percent. How are we going to cut by 3 points starting from 5 without adopting negative rates? The Fed's econometric model, continues Yellen, tells us that two trillion dollars worth of bond purchases (new Qe) will be needed to create the effect of a two-point rate cut. Yellen stops there, but it is not difficult to go it alone and calculate at two trillion the minimum amount of securities that the Fed will want to take off its balance sheet before the next recession, in order to have the space to buy them back on the market when the the moment. In practice, the Fed will try to deflate from 4.5 to 2.5 trillion.
As for timing, if the Fed simply doesn't roll over maturing bonds, the target will be met in 2022. If a recession hits us sooner, we'll get negative rates. Let's do two more accounts. Rates will reach 3 per cent, according to the programme, in 2019. The 3 per cent effect due to Quantitative tightening will have to be added to 2 per cent and we will reach 5 per cent by 2022. Two trillion over 60 months would mean 33 billion a month of Qt. To 5 must be added the further increase that the Fed reserves the right to make once the fiscal measures (taxes and infrastructure) are approved and a reasonable estimate could add another half point.
Are the markets ready for a perceived rate of 5.50 percent? Of course, we will not get there in a few days and in the presence of any difficulty the countdown will be interrupted. After the Qe calidarium there was a very long tepidarium from the tapering and the first rise so suffered. However, let us not exaggerate in cradling ourselves in the gradualness of these measures. Let's just think about the road we've made since last July to today. In eight months we have gone from talking about aggressive helicopter money to forecasting Quantitative tightening by the end of the year.
No one in the world, last July, would have foreseen this outcome. Of course, it will be said, this is a Fed that has no desire to help Trump and that she has suddenly hardened, albeit with style and a smile on her lips, after her victory. It is a Fed who will go home in January and who therefore tries to shoot all of his cartridges right away. From February (assuming there is no obstruction by the Senate) there will be a new governor more aligned with the executive, but Qt's long-term plan will have already been set and it will be politically difficult for him to change it. We will see.
The problem is that this aggressiveness from the Fed is manifesting itself at a time when the US economy is not shining. Don't be deceived by the explosion in employment, due to the sense of confidence that the elections have transmitted to businesses. Also look at the sales of cars and houses, which are clearly slowing down. Many more hirings that don't carry over consumption and investments mean less profits in the long run.
Now it's true that the world appears under control and that there's no recession in sight, but wearing pink-tinted glasses, as the market is doing right now, is as wrong as wearing tinted lenses. The world should always be looked at through transparent and colorless lenses. In short, the world is fine, but without exaggerating.
