Thread by @izakaminska

**Big** multipolar drop from ECB's Christine Lagarde this afternoon signalling the potential suspension of independent-minded cbanks in favour of aligned interdependence focused on national security objectives (i.e. potential transition to a war economy) ecb.europa.eu/press/key/date…

Here are some key quotes: 1/ "We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values"

Translation (IMHO) "there's a war coming, and you're either with us or against us."

2/ "first, we may see more instability as global supply elasticity wanes; and second, we could see more multipolarity as geopolitical tensions continue to mount."

MY translation: this is going to be inflationary and there may even be temporary supply-side disruptions.

3/ "Today the US is completely dependent on imports for at least 14 critical minerals & Europe depends on China for 98% of its rare earth supply. Supply disruptions on these fronts could affect critical sectors in the economy such as the auto industry & its transition to EV… twitter.com/i/web/status/1…

Translation: dollar hegemony has kinda allowed this to happen.

4/ "These changes also suggest that a second shift in the central bank landscape is taking place: we may see the world becoming more multipolar."

5/ "New trade patterns may also lead to new alliances. One study finds that alliances can increase the share of a currency in the partner’s reserve holdings by roughly 30 percentage points."

6/ "All this could create an opportunity for certain countries seeking to reduce their dependency on Western payment systems and currency frameworks – be that for reasons of political preference, financial dependencies, or because of the use of financial sanctions in the past… twitter.com/i/web/status/1…

Translation: We acknowledge that sanctions may have eroded dollar neutrality and undermined confidence in the property rights that back the dollar system.

7/ "These developments do not point to any imminent loss of dominance for the US dollar or the euro. So far, the data do not show substantial changes in the use of international currencies. But they do suggest that international currency status should no longer be taken for… twitter.com/i/web/status/1…

Translation: Don't panic just yet, but do panic a little bit.

8/ "We have clear examples of what not to do when faced with a sudden increase in volatility." twitter.com/i/web/status/1…

9/ "...if faced with persistent supply shocks, independent central banks can and will go ahead with ensuring price stability. But this can be achieved at a lower cost if other policies are cooperative and help replenish supply capacity."

Translation: Central bank independence is probably going to be counterproductive at this point and aligned cbanks would be better off supporting each other out when needed (a la @Kathleen_Tyson_ 's daisy chain theory perhaps?)

10/ "if fiscal and structural policies focus on removing supply constraints created by the new geopolitics – such as securing resilient supply chains or diversifying energy production – we could then see a virtuous circle of lower volatility, lower inflation, higher investment,… twitter.com/i/web/status/1…

11/ "But if fiscal policy instead focuses mainly on supporting incomes to offset cost pressures (in excess of temporary and targeted responses to sudden large shocks), that will tend to raise inflation, increase borrowing costs and lower investment in new supply."

Translation: we have one shot not to become the USSR circa 1990, and we need to focus on throwing every remaining bit of capital we have at achieving energy and manufacturing independence.

12/ "In this sense, insofar as geopolitics leads to a fragmentation of the global economy into competing blocs, this calls for greater policy cohesion. Not compromising independence, but recognising interdependence between policies, and how each can best achieve their objective… twitter.com/i/web/status/1…

Translation: we can't depend on the private sector to achieve the realignment so we're going to manage the economy centrally in a coordinated way to achieve escape velocity.

13/ "There is another benefit, too: achieving the right policy framework will not only determine how our economies fare at home, but also how they are viewed globally in a context of greater “system competition”."

Translation: We're heading into a new space race type situation - and we're hoping we (the west) can innovate our way out of the problem more quickly than the competition.

14/ "Although 50-60% of foreign-held US short-term assets are in the hands of governments with strong ties to the United States – meaning they are unlikely to be divested for geopolitical reasons – the single most important factor influencing international currency usage remains… twitter.com/i/web/status/1…

Translation: That means about 40-50% of US short-term assets are in the hands of governments which have a huge bearing on "the fundamentals" (i.e. commodities).

15/ "To put it bluntly, we need to complete the European capital markets union. This will be pivotal in determining whether the euro remains among the leading global currencies or others take its place."

Translation: If we can't get capital moving harmoniously through Europe we don't stand a chance in creating broader cohesion.

16/ "Central banks also have an important role to play here – even as protagonists."

Translation: central banks will become strategic capital allocators in their own right, and not just through swap lines.

17/ "How central banks navigate the digital era – such as innovating their payment systems and issuing digital currencies – will also be critical for which currencies ultimately rise and fall. This is an important reason why the ECB is exploring in depth how a digital euro could… twitter.com/i/web/status/1…

Translation: We won't be able to compete or economise enough in terms strategically focused capital allocation unless we (at least temporarily) resort to the same sort of lengths authoritarian regimes are prepared to go to. Notably CBDCs.

18/ "The time to think about how to respond to changing geopolitics is not when fragmentation is upon us, but before. Because, if I may paraphrase Ernest Hemingway, fragmentation can happen in two ways: gradually, and then suddenly."

Translation: We've probably been planning and/or been aware of this for a while, and we're finally prepared to come clean about it. Hence why the comments follow those of Larry Summers at the weekend:

https://twitter.com/LHSummers/status/1647576849021644800?s=20

To conclude: We may be entering a new economic paradigm where markets become a little less free -- but only as a means to an end in which we can ultimately all be free again. (This differentiates us from those we are competing with, whose objective we believe is authoritarianism… twitter.com/i/web/status/1…