“What If Everything Goes Wrong At The Same Time… Don’t Worry, We Have Ben Bernanke To Guide Us Through”

By Michael Every of Rabobank

Noble and Ignoble Prizes

Yesterday saw widespread Russian missile attacks on Ukrainian cities. Some suggest this tit-for-tat for the Kerch bridge is to instil fear; others, that it is aimed at taking down Ukraine’s power supplies ahead of winter. If the latter, Europe could potentially see a flood of refugees looking for (expensive) heat and shelter: yesterday already saw Ukraine halt power exports to Europe. For Russia such actions would make its ‘prize’ in Ukraine more of a poisoned chalice, but Chechnya and Syria are two examples of the same kind of action. Meanwhile, Europe and the US are now to send air defense aid to Ukraine, so military escalation continues. Grain prices were up significantly yesterday, as markets realised the celebrated Black Sea supply deal may not hold, as we feared.

In the financial economy we saw particular volatility in Gilts. The BOE stepped in again but stepped away from hopes they were going to be doing a yield-friendly QE vs. more traditional Bagehot action. 10-year Gilt yields spiked 24bp, and that was 9bp lower than the peak sell-off, with 5-year Gilts up 19bp, and 2-year Gilts up 22bp. The next UK OBR public finances report will now be released on 31 October. Get your Halloween cliché headlines written now.

There was a sell-off in Bunds on suggestions Germany might agree to debt mutualisation to pay for energy subsidies during this economic war with Russia: 10-year Bund yields surged 15bp to 2.33%, with 2-years up only 4bp to 1.88%, bear steepening the curve. However, this rumor was subsequently denied by a German government source talking to Reuters. Yet consider that if Europe cannot agree on such fiscal measures in war-time, it likely never will. There is a message in that too for Europe.

This morning, US 10-year Treasury yields were up 7bp to 3.95% – that 4% bogeyman is just around the corner given current volatility levels, and 2-years were already at 4.30%, the highest since 2007.

In the real economy, the issue with barges on the Mississippi fortunately looks to be easing. Yet a key US rail union has rejected the pay deal agreed a few weeks ago, 56% of its members saying no to a 24% pay rise, a $5,000 bonus, and an additional paid day off. Back to the bargaining table the sides go, with rail strikes able to start from 14 November. If they do occur, expect the massive supply-side disruptions already covered recently.

In the EU we see a headline, ‘How Big Food Aims to Fill Europe’s Shelves in Gas Crisis’, noting: “The world’s biggest food companies are bracing for the next threat: a winter with too little gas to power their factories…In response, the foodmakers are pleading their case to policy makers, cutting back on energy use and converting gas-fired plants to oil to keep Europe’s shelves filled with staples like cereal, bread and yogurt – even if natural gas supplies dry up.” Food firms will be given priority during energy rationing, one would think: yet the issue is likely to be packaging. Big firms have stocked up on such key items, but small/mid-sized producers might not have been able to.

China’s People’s Daily says Covid Zero is “sustainable” and the country must stick with it because it’s key to stabilizing the economy. I suppose zero motion is stable. By contrast, Bloomberg’s Shuli Ren shills: “Behind closed doors, when and how to reopen the economy must be on top of Beijing’s agenda…. Local governments are going broke…. The highly contagious Omicron variant isn’t going away…. Assuming some rationality at the top, fast deteriorating finances will force Beijing’s hand.” If she’s right, inflation will pick up again; if she’s wrong, China’s economy won’t.

Also, the US is warning Hong Kong if Russian firms use it to circumvent sanctions, it could “threaten its status as a financial hub”.

In the surreal economy, the Nobel Prize committee showed either they don’t read this Daily (no!), or if they do, they do the opposite. After all, they just gave the Prize in Economics (jointly) to former Fed Chair Ben Bernanke.

Yes, Economics isn’t a real Noble Prize. Yes, there have been lots of previous stupid winners of even the real Prizes:

For Peace to Aung San Suu Kyi, for being pro-democracy – who then looked the other way over a genocide; to the EU, for being the EU; to Barack Obama, for something – who then carried out drone strikes on weddings, etc.; to Henry Kissinger – for blowing up South-East Asia, etc.

For Literature to Peter Handke – despite genocide denial (again); to Bob Dylan – for singing; to Mario Vargas Llosa – for being political in a way the committee liked; and never to Tolstoy while we was still alive.

For Economics to Friedman – for monetarism, just before it was tried and failed, and as he backed the dictator Pinochet in Chile; to Nordhaus – for saying if climate change gets too bad, we can spend more time indoors and GDP will be OK; to Krugman – for saying free trade always ends up with the best of all possible outcomes in the best of all possible worlds.         

However, to give a Nobel to Ben “Sub-prime is contained”/“high levels of private debt do not matter”/”banks intermediate between savers and borrowers”/“zero rates and QE” Bernanke for providing “a foundation for our modern understanding of why banks are needed, why they’re vulnerable, and what to do about it” –just as central banks try to undo the post-2008 policy error, and perhaps the post-1980 financialisation and zombification of the economy to boot– is either a slap in the face (“You might reshape the global economy, but you aren’t going to get a prize from us!”) or shows economics, or the Nobel committee, or both are past saving.

Putting it more succinctly, Matt Taibbi tweeted: “Giving Ben Bernanke the Nobel Prize in Economics may be the drunkest decision of all time.” Amen, Matt, Amen. And cheers to the Nobel Prize team.

The Nobel committee obviously won’t be giving out gongs to the ideas expressed in Bloomberg’s ‘What if Everything Goes Wrong at the Same Time?’, a theme I have been exploring all year: “2022 has been a terrible year for the world economy. War in Ukraine, lockdowns in China, and Federal Reserve tightening will take global growth down to 3.1%, way below expectations at the start of the year. The big question for finance chiefs gathering in Washington for the October meetings of the International Monetary Fund: could 2023 be worse? The unfortunate answer: yes, and maybe a lot worse…. Drawing on scenarios from Bloomberg Economics’ country teams and using a suite of models to calculate spillovers between countries, we estimate that if downside risks crystallize, global growth in 2023 could slide to -0.5%.” That’s as World Bank President Malpass warns of a potential global recession ahead.

The Bloomberg Economics team continues: “It is, of course, also possible to construct an upside scenario. An end to conflict in Ukraine or an unusually warm winter could spare Europe from recession, China might exit Covid lockdowns earlier or add more stimulus to offset the property slide than we expect, US labor markets might deliver the immaculate disinflation that the Fed is hoping for. Some combination of those positive surprises might cheer markets and lift global growth for the year above expectations.” So peace, sun, rationality, and immaculateness and we are all okay.

Yet as they conclude: ”the base case is for 2023 to be a year of lacklustre growth and still-high price pressure. And the lesson of the last few years is that things can always get worse.”

Don’t worry though – we have Ben Bernanke and other Nobel prize-winners to guide us through