Back to the financial crisises: too good not to post - Rabobank

FXStreet (Guatemala) - Michael Every, analysts at Rabobank offered a fantastic piece that was too good not to post.

Key Quotes:

"As the media pointed out gleefully yesterday, 10-21-2015 was Back to the Future Day, the date to which Marty McFly headed in his time-travelling DeLorean back in 1985 (or actually 1989, which is when the film was released: time-travel is complicated after all). Naturally, there was much good- natured conjecture about what the present looks like compared to what we had thought it might look like back then. However, that seems to over-look a more important point. One of the more enjoyable elements of the Back to the Future Trilogy, which still makes rewarding viewing even after all these years, is the intricate layering of repeated memes, or ‘time echoes’ where the same gag is seen over and over again in the various settings of 1885, 1955, 1985, and 2015. For those who have studied economic history (which very regrettably is something no university economics courses insist on anymore: after all, what could we ever learn from the past, right?!) the same thing is true.

For example, 1885 was smack bang in the middle of the Long Depression, a long, slow-burning down-turn regarded as the first truly international financial crisis. Notably, it followed a global period of excessive exuberance in equities, property, infrastructure investment and technology (like railways) driven by excitement over globalization, with further disruption when Germany forced an enormous debt onto France as reparations for the 1870 Franco-Prussian War. Overall, global supply found itself well ahead of global demand, markets crashed, and deflation followed after. “Hello, hello, anybody home? Think, McFly! Think!”

Then we have 1955: you know where 10-year US yields were sitting during this period of rapid growth, a rising middle class, drive-in movies and “I Love Lucy”? At just 2.88% in October 1955, not vastly above where we have been recently (and 2.02% today) even though the US economy was booming at the time. Moreover, less than a decade earlier, and so still very much at the back of the market’s mind, government bond yields were officially capped below the rate of inflation (so-called “financial repression”) in order to allow huge public debts run up during the war to be paid off. “Hello, hello, anybody home? Think, McFly! Think!”

And of course 1985 was in the middle of Reagaonomics, where government austerity, deep cuts in the top-rate income tax and the capital gains tax, slashing regulation, and shoulder pads arguably started the US off on the economic journey that brought it, and us, to where we are today, or something very 1885-ish. “Hello, hello, anybody home? Think, McFly! Think!”

Against that backdrop is it any wonder that on 10-21-2015 the Nikkei surged 1.9% because data were so bad (because of the 10-21-1885 problem) that the market expects something 10-21-1955 to be done about it? Elsewhere, interest rates were left at 14.25% in Brazil, 7.50% in Turkey, and 0.50% in Canada, which looks monetary policy from three very different time periods."
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