IT'S all about demonstrating testosterone. That's the view of one US economist about US Federal Reserve chairperson Ben Bernanke's interest rate plans, which have spooked global markets. The fear is that a surge of testosterone at the Fed could spell overkill for the US economy - and hence for the world economy.
The surfeit of hormones at the Fed was highlighted in an article in the UK Telegraph by Ambrose Evans-Pritchard. The article quoted Diane Swonk, an economist at the US firm Mesirow Financial, as saying: "He (Bernanke) reintroduced testosterone to the inflation-fighting resolve of the Fed. This is a pure male thing. 'You think I'm a wimp? Take me on,' he (Bernanke) said to the markets."
Perhaps that's a tad sexist (for a change, from the male perspective). But Wonk just colourfully expressed the fear of overkill that's plaguing the markets.
Ambrose-Pritchard's article describes the Fed as a "hyperactive" institution, run by "a chatterbox novice" who "risks sinking the global economy by tightening too hard - supposedly to curb prices, in reality to combat his fatal reputation as an easy money ideologue".
Dangers of overkill
The article made the point that Bernanke should be well aware of the dangers of overkill. It had been he who wrote an important paper in 1995 - Inside the Black Box: The Credit Channel of Monetary Policy Transmission - which had described how inflation lagged the cycle, flashing amber long after the real danger had switched to recession.
And it was Bernanke - a scholar of the Depression - who had blamed the Fed for crushing the US banking system in the early 1930s by starving it of funds.
Evans-Pritchard said Bernanke was counting on a soft-landing for the housing boom, the central pillar of the US consumer economy. In Evans-Pritchard's view, the Fed's rosy assumptions were looking shakier by the day.
The article, though interesting and amusing, is too filled with gloom and doom for my liking. For now, at least, one has to trust that Bernanke is right about the soft landing that's in store for the US and the global economy. Yet Bernanke has introduced uncertainty into the picture, as people aren't sure of how far he is prepared to go to show his anti-inflation credentials. And markets don't like uncertainty.
Curb the pessimism
One thing looks sure, though. Whether it's going to be soft or hard, a landing is taking place in the US. The question is whether the rest of the world will be able to withstand the slowdown in the US, and what effect it will have on commodity prices and other economies.
Bloomberg writers Rich Miller and Simon Kennedy wrote that the world economy might be better placed than at any time this decade to weather a US slowdown. Strength from Japan, China and Europe would help to offset slower growth in the US. The pessimism might be overdone, Miller and Kennedy said.
Curb the pessimism, I say, but make no mistake: the cycle is turning and this has ramifications for emerging markets such as SA. Small wonder, then, that the rand has depreciated beyond the key R7/$ level. The rand was last at that level on May 11 2004.
At the start of the year, the rand briefly went below R6 to the dollar, prompting some economists to predict further strength and possibly even an interest rate cut. How wrong they have turned out to be. But one economist who must be smiling as the rand slides is Merrill Lynch's Nazmeera Moola.
Spot-on predictions
Moola, who won the award for economist of the year last year for her spot-on predictions, said earlier this year that the cycle would turn this year. She said the rand would correct by the fourth quarter of this year, to around R7.30/$. She said this would push inflation up and get the Reserve Bank to hike rates by 150-200 basis points. This is her base case scenario.
An alternative scenario, she said, would be for global liquidity to remain supportive of emerging markets and for bigger imbalances to build up in the SA economy. That would lead to "an accident" down the road, when the inevitable correction happened.
If Moola's predictions turn out to be right, with the rand moving to R7.30 and the central bank raising rates by a maximum of 200 basis points, SA will come off lightly. Yes, some will be hurt by the rate rises but it won't be a big drama.
However, I assume her relatively rosy scenario doesn't incorporate overkill in the US. Bernanke remains the wild card for the whole world.