Look, I understand why the Fed (and for that matter, important constituencies in the PBOC and ECB) want to keep playing the Coordination Game even when the writing is on the wall for a change in the game payoffs. It’s a much “nicer” game, where you’re baking a larger economic pie and everyone can be better off than they were before. Also (not to get too tinfoil hat-ish about all this), it’s the sort of game that academics and the Davos crowd love to play, as it allows them to gather in tony enclaves, congratulate each other on their intellectual prowess and service to mankind, and tut-tut about those pesky elections and benighted masses. Put in a less snarky way, the IMF and similar entities have an existential stake in promoting the Coordination Game. Not that there’s anything wrong with that.
But it’s no accident that everything, from exchange rates to commodity prices to global trade volumes, started to go off the rails in Q3 of 2014. That was the start of monetary policy divergence – a $10 word that means competition – as Yellen’s Fed announced an outright tightening bias and Draghi’s ECB went in the polar opposite direction with balance sheet expansion and negative rates. And I’m sorry to say it, but once you leave the cozy confines of the mutual coordination Nash equilibrium, you can never go back. Instead, it’s an inexorable one-way street to the other Nash equilibrium, mutual defection. It’s just math. And human nature. I wouldn’t want to bet against that combination.
The Golden Age, per the original Greek myth, was an era of unblemished cooperation and great deeds. The Silver Age, on the other hand, was a pretty miserable time to be alive. Not as warlike as the Bronze Age, and not the war of all against all as in the Iron Age, but the spirit of the age was one of strife and competition. It ends badly. But it’s not a hopeless time. It’s a time to protect oneself and one’s family for the harder times to come, and it’s also a time to plant the seeds that will flourish when this cycle ends. What’s required is seeing the world for what it is, not what we might wish it to be. That’s not easy, whether you’re a central banker or a small investor, but it’s never been more important.
W. Ben Hunt is chief risk officer at Salient Partners.