By Jeffrey P. Snider
This week has already seen a "shocking" move from the PBOC that essentially disqualified almost half of repo collateral from usable status. That amounts to a massive tightening in a manner that is wholly unfamiliar to economists that remain fixated on simple variables like interest rates. The response to the move, especially with further economic data from China, is as if it never happened.
"It [inflation at a 5-year low] will likely convince policymakers to ease their policy stance further and we continue to expect a RRR [bank reserve requirement ratio] cut in the near term, most likely this month," he told Reuters.
Last month, the country's central bank unexpectedly cut interest rates for the first time in more than two years to spur activity.
The first paragraph is this very denial; while the second misreads what happened totally. Again, the PBOC is engaged in a stepped process of removing full monentarism from its presence and thus its toolkit. But they cannot simply go from A to B; instead they are taking a measured approach to figure out stress points (as best as they may be able).
After the February/March yuan occurrence, they went back and began to fortify the "good" parts of the financial system in anticipation of the next step in "reform." In that context, this assumed "rate cut for the first time in two years" makes perfect sense in that it was preparing and targeting the "good" parts of the system in anticipation of what was about to follow it (the ignored tightening). With the next step in the "reform" process currently taking place, that means there will be no broad PBOC "stimulus" because that is exactly the expectation and reality they are trying very hard to erase.
European stocks were largely shielded from the Greek fallout, recovering from the previous day's selloff after a similar rebound in Chinese shares prompted by hopes that weak inflation will bring more monetary policy easing in China.
Hunter S. Thompson once wrote, famously now, that "Myths and legends die hard in America. We love them for the extra dimension they provide, the illusion of near-infinite possibility to erase the narrow confines of most men's reality." That seems to be applicable not to just America and not just to the dreary nature (in his view) of industrial economic life, but to financialism that has spread all across the globe. The second part of that quote, less well-known, is perhaps far more relevant to central bank mythology that dies hard globally.
Weird heroes and mould-breaking champions exist as living proof to those who need it that the tyranny of 'the rat race' is not yet final.
For our purposes here, we can reword Mr. Thompson's formulation into, "Weird heroes and mould-breaking central bankers exist as living proof to those 'markets' who need it that the tyranny of 'free market forces' is not yet final." Central banks used to be the best friend risk ever had, "protecting" them from the real markets that actually contain serious downsides, so you can understand why it is exceedingly difficult, not unlike a breakup of a long-term relationship, for so many to accept its end. With all the huge and massive warnings and difficulties right now, better for some to live out the dreamlike bliss of that next and fully expected all-encompassing monetary fix.
That's what the fear is, expressed in this almost delirious whimsy, that central banks will always step in for growth or whatever. These people look at free markets not as salvation and a new start to actual growth and opportunity, but as the abyss of destruction of the status quo. Better to rule in stagnation than serve in broad success.