This week’s Outside the Box is a little bit different. I’m going to start with a selection from Mohamed El-Erian’s latest note. Mohamed himself is soft-spoken and calm, and I tell you that because the piece that follows is as close to capitals, underlining, and bolding with lots of exclamation points as Mohamed can get. He continues to get more concerned about the direction of central bank policy around the world and its unknown and unintended potential consequences. I will just cut and paste part of Mohamed’s essay into this introduction.
I want to follow up with a presentation by Kevin Wilson at Blue Water Capital on Japan. Basically, this piece illustrates the potential problems created by the current philosophical direction that the Bank of Japan is taking in their country. Essentially, Kevin is talking about the policy failure of Abenomics and the unintended consequences of negative interest rate policies (NIRP). A major economic disruption in Japan would have significant effects on the global economy. His summary sentence?
Given Japan's massive debt and demographic headwinds, the oncoming recession may trigger an endgame that would involve a possible depression and eventual default and devaluation.
That speculation sounds a lot like what I was writing in Endgame and Code Red. While I see a little bit different outcome than Kevin does (in terms of what a default might look like), I think he has properly highlighted the concerns we should all have.
Now let’s look at Mohammed’s note:
Forced out of their mysterious anonymity and highly technical orientation, central banks have been dramatically thrust into the limelight as they have become single-handedly responsible for the fate of the global economy. Responding to one emergency after the other, they have set aside their conventional approaches and instead evolved into serial policy experimenters.
Often, and very counter-intuitively for such tradition-obsessed institutions, they have been forced to make things up on the spot. Repeatedly, they have been compelled to resort to untested policy instruments. And, with their expectations for better outcomes often disappointed, many have felt (and still feel) the need to venture ever deeper into unknown and unfamiliar policy terrains and roles.
For those accustomed to the conventional operation of economies and financial systems, all this constitutes nothing less than an unthinkable transfiguration for central banks. Yet the structural breaks have not stopped there.
What central banks have been experiencing is part of a significantly broader change whose effects will be felt by all of us, our children, and, most likely, their children, too. It is a change that speaks to much bigger and consequential evolutions in the global economy, in the functioning of markets, and in the financial landscape. And the implications go well beyond economics and finance, extending also to national politics, regional and global negotiations, and geopolitics.
Understanding the unplanned and, for them and many others, uncomfortable conversion of central banks from largely invisible institutions to the only policy game in town, provides us with a unique perspective on the much larger changes impacting our world. It speaks to the how, why, and so what by: