It almost seems to be a case of traders seeing exactly what they want to see instead of believing their “lying eyes.” Money rates in China have declined in the past few days as speculation abounds that the PBOC reduced the interest rate on its rollovers of the second part of the Medium Term Lending Facility (MLF). The PBOC had targeted specific institutions first with CNY500 billion which matured in December and were rolled. The second piece, CNY269.5 billion, was up for renewal this month.

The whispers about the rate of the renewal are intense because there is still a great deal of confusion about what the PBOC is trying to accomplish. Conventional wisdom still seems to believe that the central bank “cut rates” back in November, but then contradicted that “stance” by tearing apart repo financing. So, this thinking goes, if the PBOC reduced the rate on the MLF rollover then it will signal further rate cuts, and thus “stimulus”, for the wider financial system.

Part of the problem here is that the PBOC has been absent from money markets for 13 consecutive trading days. That has left “traders” speculating about what the PBOC will do in terms of policy this year as growth continues to falter, and lending is reduced.

These wishes for broad expansion are simply that, as the PBOC continues to openly reiterate its tact.

Vice-Governor Li Dongrong said in a short speech posted on the bank’s website that the bank will continue to pursue the government’s “prudent” monetary policy stance this year but will create an “appropriately neutral monetary environment”. The PBOC will also speed up interest rate reform and improve the yuan exchange rate formation mechanism, he said.

 

December credit data released earlier Thursday fell short of economist expectations, though domestic markets rallied on hopes that signs of dwindling capital inflows may finally push the central bank to cut the required deposit reserve ratio.

Li Dongrong’s speech should be enough so that the second paragraph quoted above never gets written – “dwindling capital inflows” is part of the intent of “reform.” Li is spelling out, yet again, that “targeted” monetarism is far different from the naked monetarism of the past. The PBOC is still engaging in reform which means it will not be giving these “markets” what they want.

These are serious considerations, however, in that there is more than a little danger about heading down this course. I don’t think the Chinese believe they have any choice at this point, seeing that both past broad flooding of “stimulus” brought nothing but empty waste produced from the bubble economy. The reform idea is an admission that waste (the “aggregate demand” theory) is a setback economically, bubbles are highly destabilizing, especially for China, and the broad global recovery, including the US, is not coming to fix all of it.

Reform at the PBOC is now matched by a Swiss National Bank that can no longer count on the same savior. The franc’s peg to the euro was an intentional imbalance that was believed costly but useful in bridging the gap between near-panic and normalcy. The SNB essentially held their nose over the peg, but in the end they also fully expected a broad global recovery to answer any shortfalls (or at least alleviate the intended unwinding).

Given the mess the removal of the franc’s peg has left, and that was not “unexpected” as surely the SNB knew the grave consequences, a second major central bank has judged the costs of maintaining the monetary status quo too high to continue to await the always-promised delivery of economic restoration. Another way of saying that is these two, anyway, have crossed a vital threshold where the costs of believing in the monetary illusion now outweigh the potential that someday the illusion just might become real.

As I said repeatedly, the Chinese are very much disbelieving of the American recovery story; better to try to deal with the bubbles now than continue to wait on the FOMC actually being right about something. Now the SNB has added to that list against the global recovery. After seven years of this you would think by now something would have gone right somewhere, though amazingly it took this long for the monolithic hold of orthodox economics to finally break free.

Bubbles are about rationalizations more than anything, a fact completely proven by the Chinese “traders.” The PBOC is practically spelling it out for them that there is nothing “good” coming, and certainly not a monetary position like that in 2012 or 2009, yet they continue to disbelieve, holding fast to the idea that the central bank will never abandon them. Now, as the Swiss essentially take the same position as the PBOC (in general terms) traders are shocked in disbelief, as if maintaining the peg were some sacred duty to prop up every single asset price. That was the prior theory and it is being unwound far short of the finish line. Unfortunately, the costs of taking on that task in this orthodox manner has piled up so high as to even convince the formerly committed to “reform.”

The message is simply intensifying and spreading – the recovery is not here, the world is moving in the “wrong” direction and monetary theory and practice has done nothing to change that after seven years and trillions upon trillions of wasted “stimulus” that doesn’t. As the list of doubters grows, the thinner the rationalizations become.