Kiss Your Domestic Bias Goodbye, Central Bankers of the World … In a globalized world, managing domestic economic conditions requires having one eye focused abroad. For evidence, look no farther than the global monetary policy fallout from Britain’s June 23 vote to leave the European Union. – Bloomberg
Brexit reverberations continue to generate calls for more central banking coordination.
Just yesterday, we wrote about Mario Draghi’s demand for more centralization, HERE, and now we seen a Bloomberg article on the same subject.
A Federal Reserve official said U.S. monetary policy needs to take global events into account.
The examples all point in one direction: If you’re a central banker concerned with your own nation’s economy, you can’t afford to ignore the international context.
The article quotes Robert Kaplan, president of the Dallas Fed as saying in a Thursday interview, “… In order to serve the United States, we’ve got to be aware of, and up-to-date on, financial and economic conditions globally.”
Kaplan also said that globalization had tied together the fate of major economies and that the tumultuous market-fallout regarding Brexit was another sign of the necessity for this increased coordination.
“Is there contagion? What does Ireland do? What does Scotland do? What do other EU countries do?” Kaplan said. “It will take a significant amount of time to see how all that unfolds.”
The article makes it clear that Draghi’s comments on Tuesday were not casual ones.
Brexit is obviously being used as justification for more overt centralization. And this seems to include more coordination with governments as well.
Ultimately, the arguments point towards all sorts of financial consolidation sooner or later, including a worldwide central bank and a consolidated currency.
More overt coordination of monetary policy worldwide will also lead to increased volatility and market swings. This is the opposite of what central banks would argue will happen but historically speaking increased centralization always creates market difficulties.
Our perspective has always been that these difficulties are intended to take place because each market crisis allows participants to call for more centralization, which is the ultimate goal of central bankers and officials at the Bank for International Settlements.
Conclusion: As this centralization continues to take place, we would not be surprised to see coordination yield to additional, considerable market swings later in 2016. The remedy that central bankers are contemplating as a result of Brexit is one that traditionally aggravates volatility.