Cold Turkey

by George Hatjoullis

Temperature’s rising
Fever is high
Can’t see no future
Can’t see no sky
My feet are so heavy
So is my head
I wish I was a baby
I wish I was dead
Cold turkey has got me on the run…


Going ‘cold turkey’ is a colloquial expression for an abrupt cessation of drug use once dependence is evident. The symptoms are unpleasant and the process may be dangerous to the user depending upon the drug, degree of dependence, and the health of the user. Central banks have been collectively administering a drug called ‘money’ to the global economy since 2008. It was a necessary action to stop a financial epidemic. Unfortunately, the drug distribution was not as even as intended and it seems to have benefitted financial assets rather more than economic activity. The latter remains subdued but positive. The former has moved into previously unknown territory. Moreover, owners of financial assets seem to be exhibiting signs of serious drug dependency. Every time any central banker speaks of ceasing to provide ever-increasing amounts of the drug they become anxious. If they speak of withdrawing supplies they start to exhibit the symptoms of ‘cold turkey’. This has alarmed the central bankers and they have delayed the withdrawal.

The behaviour of central bankers is quite odd. Their concern should be economic activity and specifically goods price inflation. It must be obvious even to this band of unimaginative bureaucrats that the drug fix is not having the desired effect. The drug is either not reaching the economy and/or not having the expected effect when it does. Yet they continue to administer it. Moreover, they assert, in the face of obvious evidence, that it is working and that they have even more potent versions to use if necessary. Well, they must say this I suppose. Imagine if they came out one day said, ” well that’s it, we got nothing”.

The supply of the drug is being absorbed entirely by the financial markets. This group cannot get enough and throws a hissy fit at the slightest suggestion the central bankers might be about to withdraw supplies. This section of the economy is not unimportant. A period of cold turkey for asset prices will knock on to economic activity. However, the longer this impasse continues the greater the dependency and the more dangerous becomes the cold turkey, both to the markets and the wider economy. The central bankers have collectively delayed the withdrawal in the hope that the economic body would return to robust health and be better placed to weather the financial market cold turkey. But the economic body remains less than robust (or so it seems). What to do?

In an ideal world the economic body would be given another drug, aka fiscal stimulus, to help it through financial market (and any economic) cold turkey. This would give central bankers the confidence to start withdrawal in earnest. Unfortunately, governments seem collectively unable/unwilling to provide this in sufficient quantity. The result is the monetary fix continues and the markets become ever more agitated if anyone says they are addicts, let alone actually tries to withdraw supplies.

Addiction does not fade with time. It strengthens and the cold turkey becomes more violent and dangerous. In the US, the Federal Reserve seems to grasp this and has begun an excruciatingly slow withdrawal. Not all Fed governors are of one opinion, though cumulatively there appears to be a growing consensus that it is time to accelerate this process.They are nervous, not of the direct consequences to the economy, but of the indirect consequences through financial market cold turkey.

Much of the resistance to Fed action is phrased in terms of ‘what the economy needs’. This is disingebuous. It does not need more stimulus. It is unable to use what it has. Withdrawal will have a limited direct effect. It may even help some (bank profits, pension deficits, pension income). The economy ‘needs’ fiscal stimulus and if the CBs wish to help they could finance this with helicopter money. But they will not. So they keep giving the market what it wants and we will continue to see headlines such as,¬†Federal Reserve risks markets shock with September move

Why should the Federal Reserve care?…because ‘cold turkey has got you on the run’.