Who would win in a fight: former president of the European Central Bank, Mario Draghi… or freshly anointed governor of the Bank of England, Andrew Bailey?
I asked a few colleagues and contacts which of the central bankers they reckoned could best the others in a gladiatorial battle royale a while back. After all, each “bankerismo” is tasked with maintaining confidence in their respective financial territories, and physical presence and persuasion is key.
Every word they say in public is parsed in minute detail by algorithms and human observers alike to detect hints at current worries and future policy announcements. There was a scandal late last year in the Bank of England where foreign exchange traders had been tapping into the Bank’s microphones just to hear Mark Carney’s speeches a fraction ahead of the official press releases to gain an advantage over the rest of the FX market.
The appearance of sweat on their brow during an address would no doubt lead to more risk being priced into the market. Perhaps, I wondered, the banker we view as being most likely to win in a fight reveals the banker which investors have the most confidence in to influence markets and achieve their objectives.
The dress of these elites is dissected by market observers looking for an advantage too, on top of everything else – the Financial Times wrote up a full breakdown on correlations between the ties Mario Draghi wore prior to his public announcements and if they signalled more or less money printing (spoiler: they didn’t).
This is all part of the “Cult of the Central Banker” which has arisen post-crisis, a fawning admiration for the unelected “printmaster general” for their contributions to the owners of assets society. This was illustrated copiously, in vomit-inducing detail, in Canadian publication Maclean’s, where one Leah Mclaren wrote:
Money is Mark Carney’s superpower—not just making it but managing it and safeguarding the systems within which it ebbs and flows and by extension forms the everyday lives of ordinary people everywhere… Mark Carney is a man who understands money the way the Pope understands God; which is to say, both intimately as well as in all its terrifying complexity…Carney’s power as a central banker is remarkable—the way it allows him to operate, unelected, at the tender spot where money and humanity intersect.
I apologise if you just became reacquainted with your breakfast, but I’m afraid these are horrors which investors must bear witness to, to realise just how far down this monetary rabbit hole we have fallen.
I do wonder what Carney is doing now – with Wimbledon having been cancelled, he won’t be able to watch the tennis with Jude Law again this year. But alas, he will be looking forward to his new part-time role as UN special envoy for climate action and a future career in Canadian politics ahead of him – despite his current salary of only $1 per annum.
But with the cult of the central banker now at something of an apogee, let’s fall right into the swing of things, cut to the chase, and ask: which central banker would win in a straight-up brawl?
The verdict that myself and most of those I asked came to was burly Draghi who was best equipped to survive over the lanky Jerome Powell from the Fed, the foppish Canadian Carney at Threadneedle Street, and the childlike Haruhiko Kuroda at the Bank of Japan. The pun was always that Draghi would do “whatever it takes” to best the others, just as he had said he would to save the euro during the sovereign debt crisis.
Mario Draghi is, alas, no longer in charge at the European Central Bank – it’s the self-described “owlish” lady Christine Lagarde. While at first blush she would appear to be at a significant advantage, she seems the type who might be carrying a Beretta in her purse, or have garotte wire woven into those Hermes scarves seen perpetually around her neck (though now I think of it, that might actually be a liability).
And Lagarde coming in was before Andrew Bailey replaced Carney. Bailey’s a pretty big guy – I reckon he can hurl the odd haymaker. Apparently he helped his wife evade a bear that had wandered into their Idaho home over the phone, while he was in the UK trying to prevent Northern Rock from collapsing (no, really). Perfect. They should really have a statue of him making that call installed on Threadneedle street: “Battling the Bear (market) upon Northern Rock” could be engraved on its pedestal, with Bailey clutching his phone in a defiantly heroic pose. City traders could pray before it in the morning before the market opens.
The reason I ask specifically about Draghi and Bailey at the beginning of this note is because the pair have resorted to a somewhat more banal form of conflict – to write competing articles for the FT. Draghi wrote in late March that in the face of coronavirus, governments should take truly unprecedented action to intervene in every level of the economy to prevent any failure, promoting an approach to “reach immediately into every crack in the economy”:
While different European countries have varying financial and industrial structures, the only effective way to reach immediately into every crack of the economy is to fully mobilise their entire financial systems: bond markets, mostly for large corporates, banking systems and in some countries even the postal system for everybody else. And it has to be done immediately, avoiding bureaucratic delays. Banks in particular extend across the entire economy and can create money instantly by allowing overdrafts or opening credit facilities.Â
Banks must rapidly lend funds at zero cost to companies prepared to save jobs. Since in this way they are becoming a vehicle for public policy, the capital they need to perform this task must be provided by the government in the form of state guarantees on all additional overdrafts or loans. Neither regulation nor collateral rules should stand in the way of creating all the space needed in bank balance sheets for this purpose. Furthermore, the cost of these guarantees should not be based on the credit risk of the company that receives them, but should be zero regardless of the cost of funding of the government that issues them.
In short: “money money money, out out out. We’ll figure out the regulations and if it’s all gone where it’s meant to later…”
Taking a somewhat more conservative approach, Bailey yesterday published his own piece in the FT, where he denied that the Bank of England would start performing what is known as “helicopter money”. This is where the central bank prints money to give to the government directly – a permanent expansion of the money supply.
While Draghi didn’t overtly call for helicopter money, it is something of the “next frontier” for central bank policy, and is a weapon that would suit the mission he describes. But Bailey decided to provide a technical rebuttal in the FT:
… the Monetary Policy Committee voted last month to increase the bank’s bond holdings by ÂŁ200bn to support the needs of the British people. Some external commentators are linking this move to fears that it that it may be using “monetary financing”, a permanent expansion of the central bank balance sheet with the aim of funding the government.
This type of reserve creation has been linked in other countries to runaway inflation. That is because it could undermine a central bank’s ability to control monetary conditions over the medium term. Using monetary financing would damage credibility on controlling inflation by eroding operational independence. It would also ultimately result in an unsustainable central bank balance sheet and is incompatible with the pursuit of an inflation target by an independent central bank.Â
You know what they say – you shouldn’t believe something until it’s been officially denied. But in this case, I think Bailey may have given the British saver some good news, albeit in the medium term – it’d be awfully hard to walk back now and say he’s changed his mind on helicopter money. That’s not to say there won’t be plenty of money printing going on in the form of quantitative easing and the like – but the helicopters with sacks of cash spilling out the sides are not here yet.
That’s not to say foreign central banks think the same way though. And to be clear, I think helicopter money is inevitable – but this may at least give us something of a reprieve in the meantime. Our fiat currency is destined to lose its value (and this will be reflected in a higher gold price)… but this most disastrous devaluation mechanism has yet to be deployed. I think Bailey wins this round, at least as far as the British saver is concerned.
And despite all the turmoil from the lockdowns and the market crash, the British saver has an ace up their sleeve. An ace which the Europeans, the Americans, the Japanese and the Chinese don’t have – though few realise it. An ace which may well prove to be absolutely vital in the “battle royale” of the currencies to come. I’ll show you what it is tomorrow – it’s pretty intuitive once you know what it is. And it’s incredible that so few have noticed it…
Back tomorrow,
Boaz Shoshan
Editor, Capital & Conflict
For charts and other financial/geopolitical content, follow me on Twitter: @FederalExcess.
Category: Market updates