It seems that for forever, the Fed and Central Banks around the world have had a magic wand. Forever means about 30 years.

Whether ironic or not, this time encompasses the working career of almost everyone involved in capital markets nowadays. When Volker’s interminable battle against the demon -inflation- was silently victorious, most people didn't notice; and there was no bell-ringing.

For several decades, the magic wand was accompanied by fiscal discipline and the recognition that long-standing policies were no longer functional. In the U.S., it was called free markets and deregulation, but it happened at the same time in other countries under different names. The early days of Deng Xiaoping’s, “Great Leap Forward,” in retrospect, involved the same verbs, adjectives and adverbs. What they have in common is the shift away from dogmatic policy to the pursuit of opportunity. Tens, if not hundreds, of millions of Chinese marched from economic exile into economic prosperity.

Socialists, Capitalists, Communists, Republicans, Tories, and the Labour Party, were elegantly accompanied by the magic wand of apparently ever-declining interest rates and the benevolent mathematics that followed suite. Greenspan and company didn’t have to be articulate. They could mumble because they still had ammunition; and the financial system was largely corralled by riding herd on the worldwide commercial banking system.

Race forward a few decades and look at Japan. Interest rates couldn’t go any lower so they increased the purchases of JGBs. Not many years later the Fed and emerging market Central Banks are doing exactly what the Japanese have done - increasing demand by buying the bonds themselves. QE 1, 2, 3 have been effective, but they have consequences. Look at the Japanese economy for the past 25 years. While they can keep buying, they can’t lower interest rates. So the reversal of interest rates will have the same mathematical effect that the decline in interest rates had earlier.

We’ve seen it in the last few weeks and potentially there will be much more to come. What’s left in the Fed’s bag of magic tricks? Talking. Nowadays you see the Fed’s presidents on TV all the time. They are holding press conferences and trying to be articulate, when over the years they always preferred to obfuscate rather than be transparent. The missing ingredient, in the Western world at least, is confidence in “Authority’s” ability to reinstate a sense of opportunity. If leaders as diverse as Volker and Deng Xiaoping could do it three decades ago, why can’t today’s generation rise to the occasion? The ping-pong of gladiatorial politics is missing the point. What a different world. The magic wand of enlightened leadership is lying on the ground ready to be picked up.

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