The struggle for inflation is real and strategic
After the European Central Bank decided to initiate an asset purchasing program, President Mario Draghi reportedly elected to unwind with a game of chess on his iPad during the plane ride back to Rome.
According to Morgan Stanley's Marco Spaltro and Jim Caron, Draghi's choice for a game could not have been more fitting. In a new commentary, the two portfolio managers argue that diverging monetary policies and persistently low levels of inflation mean that central banks are now engaged in a global game of chess.
Moreover, they say, this particular match won't end in a stalemate. Despite concerns that central banks have no moves left, the pair contends that all roads lead to competitive currency devaluations.
Here's their extended analogy:
At the beginning of the game, the global economy is at an arbitrary point of equilibrium, similar to a chess board, with the pieces representing policy tools that are used to achieve one’s goal—growth and inflation—the king. Once a central bank makes an initial move to achieve a new equilibrium, it sets in motion a sequence of moves from other central banks, which we refer to as the opening repertoire. Suddenly, the game becomes unbalanced and requires more policy changes until a new equilibrium is achieved. …
In this game, central banks compete against each other by easing monetary policies in an attempt to meet their domestic, inflation-targeting mandates. Lack of coordination among central banks may mean that monetary policy remains lower for longer, leading to a semi-permanent low-yielding environment. At the end of the Global Chess Game, we are likely left with more central bank money, higher asset prices, low inflation and low yields.