Is Ben Bernanke about to start a civil war?
No, no, heavens no. He’s about to start something much better -- a world war!
So claims John Taylor of currency hedge fund FX Concepts. He insists in a recent note to clients, highlighted this week by FTAlphaville, that the Federal Reserve’s lurch toward another round of quantitative easing will set the world into a full-fledged trade war, by further devaluing the dollar and forcing everyone else to adjust.
That’s plausible enough and surely won't be lots of fun. Also plausible is Taylor’s contention that stock investors are simply putting their heads in the sand and hoping all the looming bad news will somehow fail to materialize.<!-- more -->
Less easy to square with reality is Taylor’s decision to liken the current period to the so-called Sitzkrieg – the nerve-wracking half-year-plus lull between Germany’s takeover of Poland in September 1939 and its invasion of France and the low countries the next spring.
Sure, stock market bears surely hear an echo in that people appear to be willfully ignoring an approaching disaster. But Taylor goes well beyond that parallel in this passage:
A war has just begun. Didn’t Bernanke and the Fed announce in late August at Jackson Hole (and multiple times since then) that the US was going to enter QE2 and debase its currency setting off a currency war.
Bernanke, like Hitler seven decades ago, had been warning everyone who would listen for years. On November 21, 2002 he said that he would debase the US dollar if the American economy looked as though it would go through the same lost decades that the Japanese have recently endured. Now, it is clear that he has been true to his word and the currency war has begun.
There is no phrase that tickles the tongue quite like “Bernanke, like Hitler,” is there.
In this crackpot view, Bernanke’s speech that day -- bearing the blatantly demagogic title “Deflation: Making Sure ‘It’ Doesn't Happen Here” -- is the modern day equivalent of Mein Kampf, in which Hitler pledged to either take over the world and enslave its inhabitants, or die in the effort and leave the whole thing in flames. In the event he nearly succeeded in the latter.
You might think that’s about as idiotic and bombastic as Taylor can get, but you’d be wrong. He goes on to drop a line about the Fed having “thrown a rock through the world’s plate glass window,” in what could be read as a reference to Kristallnacht, the 1938 terror attack that killed 91 German Jews. It so happens that Bernanke is Jewish, but then you probably weren't about to call Taylor politically correct anyway.
And inevitably, back to the war trope:
This war will not be fought for territory, but for markets and wealth, and when tariff walls are raised the destruction of livelihoods and property will be almost as dramatic as in the old fashioned shooting wars.
Yes, just so. By some estimates, 60 million people were killed in World War II, and millions more were maimed and left homeless. Entire regions were essentially burned to the ground, and even those who muddled through were often unable to play the steepening trade.
But yes, this is spot on, a big drop in the stock market and a slowdown in global trade flows “will be almost as dramatic.” There's no overstatement there.