June 28, 2013

The Beginning of the End of Financial Totalitarianism?

The king of Qatar recently resigned from his post. According to the people with knowledge of the politics of the region, his health was in a very weak state, rendering the effectiveness of his actions meager. He declined in favor of his 33 year old son, who according to people in touch with the politics of the region has a very pro-western stance. Much like the abdication of the Qatari royal, the markets recently witnessed the initial steps leading up to the abdication of our monetary dictator. His actions were increasingly perceived as ineffective. Each decree carried less and less weight.

After our MIT-trained monetary autocrat came out with the latest decree --that the Fed will very likely begin to withdraw the cash injections into the economy-- the markets reacted, although not exactly in the way our beloved leader wished. The old status quo, whereby the movements in the financial world were a direct consequence of the latest ruling of the monetary dictator, was shattered. A new normal, one in which the fundamentals of supply and demand matter more in determining what has value and what does not has begun. It is a foreign feeling, really, to be forced to having to rely on such arcane skills such as fundamental analysis to be able to decide what to do with your money.

Of course this is not a binary world. The regime change from autocracy to democracy (or in the case of free markets, to the rule of supply and demand) does happen overnight. Just ask the Libyans. Kaddafi's departure marked the beginning of a convulsion-ridden, unstable stage in Libyia's search for an institutionalized democratic government. It is always better to hand over power peacefully, Qatari style. Like Bernanke, Sheik Hamad Bin Khalifa Al Thani saw that his powers where waning and declined in favor to his son, knowing that this was the smart thing to do. Clinging to power would have just exacerbated the fact that his actions were becoming less and less important. The decision to choose Sheik Tamim bin Hamad Al Thani --a westernized, pro-American royal-- as the new guy in charge of Qatar, has somewhat pleased the international community. But the most important thing is that the handover has been smooth.

Like Qatar's smooth transition, our monetary dictatorship succession is also in process. The absence of the current dictator in one of the most important monetary policy conferences (the Jackson Hole summit) was a delicately crafted signal of the disengagement of our autocrat. The hints given by president Obama confirmed the clear intention of our beloved monetary commander in chief to hand over the baton very soon. The likeliest successor? Janet Yellen, a revolutionary comrade with a proven pedigree, resolute steadfastness and the true traits of a leader. How revolutionary you may ask? Perhaps this anecdote (taken from the WSJ) might shed some light:
During the mid-1990s, then-Fed chairman Alan Greenspan asked her to take the lead in an internal Fed debate about whether to adopt a formal inflation target. Her preparation impressed others. "She does her homework," said Mr. Broaddus, her chief adversary in the debate.

During the discussion Ms. Yellen challenged Mr. Greenspan, who was rarely confronted, to define his views of price stability, according to Fed transcripts and people there. Later, as the economy strengthened, she worried about the booming stock market and also urged Mr. Greenspan to raise short-term interest rates to head off inflation—advice he declined, according to Mr. Meyer, her colleague at the time.
The question of what is the revolutionary style of Doctor Yellen is beyond the point. What is important here  is that the succession is in full gear and that there is so far evidence it will be smooth. Like Qatar's monarchy, it seems our monetary dictator will be removed without market coup, and that, is pretty good news.