What explains the differences between rising stock markets and declining economic prospects?

July 10, 2020

Prof Robert Shiller in this Proj Synd piece:

The performance of stock markets, especially in the United States, during the coronavirus pandemic seems to defy logic. With cratering demand dragging down investment and employment, what could possibly be keeping share prices afloat?

The more economic fundamentals and market outcomes diverge, the deeper the mystery becomes, until one considers possible explanations based on crowd psychology, the virality of ideas, and the dynamics of narrative epidemics. After all, stock-market movements are driven largely by investors’ assessments of other investors’ evolving reaction to the news, rather than the news itself.

That is because most people have no way to evaluate the significance of economic or scientific news. Especially when mistrust of news media is high, they tend to rely on how people they know respond to news. This process of evaluation takes time, which is why stock markets do not respond to news suddenly and completely, as conventional theory would suggest. The news starts a new trend in markets, but it is sufficiently ambiguous that most smart money has difficulty profiting from it.

Central banks in parliaments: a text analysis of the parliamentary hearings of the Bank of England, the European Central Bank and the Federal Reserve

July 9, 2020

Nicolò Fraccaroli, Alessandro Giovannini and Jean-François Jamet in this ECB WP:

As the role of central banks expanded, demand for public scrutiny of their actions increased. This paper investigates whether parliamentary hearings, the main tool to hold central banks accountable, are fit for this purpose. Using text analysis, it detects the topics and sentiments in parliamentary hearings of the Bank of England, the European Central Bank and the Federal Reserve from 1999 to 2019.

It shows that, while central bank objectives play the most relevant role in determining the topic, unemployment is negatively associated with the focus of hearings on price stability. Sentiments are more negative when uncertainty is higher and when inflation is more distant from the central bank’s inflation aim.

These findings suggest that parliamentarians use hearings to scrutinise the performance of central banks in line with their objectives and economic developments, but also that uncertainty is associated with a higher perceived risk of under-performance of central banks.

It will be interesting to go through some of these hearings..

Plague, prorogation and the suspension of the courts in fifteenth-century England

July 9, 2020

Fascinating post by  Dr Simon Payling on History of Parliament Blog:

On Wednesday 6 June 1464, at the beginning of Trinity term, a small piece of theatre was played out in Westminster Hall. Three justices of the court of common pleas ordered everyone present to hear the King’s command. The seal of a royal writ, dated ten days earlier, was then broken and the writ read aloud: the King, absent in the north campaigning against the Lancastrians, had heard of the plague raging in London and Westminster and decided to suspend the court for the whole of Trinity term. This sensible precaution reminds us that, although no visitation of the plague to these shores approached the devastating mortality of the Black Death of 1349, plague remained a recurring and unwelcome visitor into the fifteenth century and beyond. Indeed, over that century, at least ten law terms were lost, in whole or part, to such court suspensions, most notably the successive terms of Easter and Trinity term 1479 when the visitation of the plague to London was particularly severe.


New Testament’s Matthew effect and modern finance: on the nexus between wealth inequality, financial development and financial technology

July 9, 2020

Jon Frost, Leonardo Gambacorta and Romina Gambacorta of BIS in this paper:

In the social sciences, the idea of the well endowed receiving further privilege, eg the rich getting richer, is often called the “Matthew effect” (New Testament Book of Matthew, 25:29). In economics, this effect is relevant particularly for wealth inequality. The effect could be amplified by financial development and technological advances that give investors access to better financial services or to assets with higher returns.

This paper analyses the role of financial development and financial technology in driving inequality in (returns to) wealth. Using micro data from the Survey on Household Income and Wealth (SHIW) conducted by the Bank of Italy for the period 1991-2016, we find evidence of the “Matthew effect” – a capacity of wealthy households to achieve higher returns than other households. With an instrumental variable approach, we find that financial development (number of bank branches) and financial technology (use of remote banking) both have a positive association with households’ financial wealth and financial returns. While households of all wealth deciles benefit from the effects of financial development and financial technology, these benefits are larger when moving towards the top of the wealth distribution. Still, the economic significance of this gap fell in the last part of the sample period, as remote banking became more widespread.


Reserve Bank of NZ begins to build teams for money and payment futurists

July 9, 2020

I had written on how RBNZ is looking to recruit money futurists.

The central bank has moved further and appointed chiefs of these new departments:

Two appointments to senior leadership roles in the Reserve Bank’s Money Group show the Bank’s commitment to developing and preparing for the future of physical and electronic payments, Assistant Governor Christian Hawkesby says.

Ian Woolford has been appointed the Reserve Bank’s Head of Money and Cash, and Steve Gordon will head a new Payment Services Department.

Mr Hawkesby says both new roles stem from growth and developments within the Reserve Bank’s Banking Department.

“Two major strategic projects – the Payment Systems Replacement, and the Future of Cash – have resulted in new responsibilities and considerable advancements in thinking and future direction for physical and electronic payments,” he says.

“Te Pūtea Matua, the Reserve Bank of New Zealand, is the steward of the cash system and operates New Zealand’s payment settlement system. Dedicated oversight and leadership of these critical areas is needed so New Zealand can be at the leading edge of work on the future of cash – physical and digital.”

Mr Hawkesby says both leaders have proven track records for delivering large complex changes, and will bring strong thought leadership and stakeholder experience to the new roles.


The ‘Money Group’ within the Reserve Bank comprises the departments that connect the full cycle of monetary policy, from policy formulation to implementation across the Reserve Bank’s balance sheet. These include the Money and Cash Department, Economics Department, the Financial Markets Department, Payment Services Department.

Keep watching what RBNZ does in this space. I will not be surprised if they innovate and pioneer this field too.

How the 1991 reforms changed our lives and who gets the credit?

July 8, 2020

Puja Mehra’s podcast Everyday Economics is rolling on.

The new podcast is with Mr. Jairam Ramesh who discusses 1991 reforms and also tells us how Indian political economy works or does not work.

One may agree/disagree with Mr. Jairam Ramesh but the conversation is quite interesting. How different political actors come together both by choice and reluctance. Indian political economy becomes even more interesting given the scale of diversity..

Evolution of Monetary policy framework in India: Mid-1980s to today

July 8, 2020

Prof Pami Dua in a recent paper in Indian Economic Review:

In 2016, the monetary policy framework moved towards flexible inflation targeting and a six member Monetary Policy Committee (MPC) was constituted for setting the policy rate. With this step towards modernization of the monetary policy process, India joined the set of countries that have adopted inflation targeting as their monetary policy framework. The Consumer Price Index (CPI combined) inflation target was set by the Government of India at 4% with ± 2% tolerance band for the period from August 5, 2016 to March 31, 2021.

In this backdrop, the paper reviews the evolution of monetary policy frameworks in India since the mid-1980s. It also describes the monetary policy transmission process and its limitations in terms of lags and rigidities. It highlights the importance of unconventional monetary policy measures in supplementing conventional tools especially during the easing cycle. Further, it examines the voting pattern of the MPC in India and compares this with that of various developed and emerging economies. The synchronization of cuts in the policy rate by MPCs of various countries during the global slowdown in 2019 and the COVID-19 pandemic in the early 2020s is also analysed.


Comparing the financial centres of Tokyo, Singapore, and Hong Kong in FX Markets

July 8, 2020

Washimi Kazuaki and Kadogawa Yoichi of BOJ in this research article:

In recent years, turnovers of Foreign Exchange (FX) trading in Singapore and Hong Kong SAR have outweighed those of Japan, and the gap between the two cities and Japan continues to stretch. The two cities consolidate trading of G10 currencies by institutional investors and others by advancing electronic trading.

Additionally, a number of treasury departments of overseas financial/non-financial firms are attracted to the two cities, contributing to the increasing trading of Asian currencies in tandem with expanding goods and services trades between China and the ASEAN countries.

this juncture, FX trading related to capital account transactions is relatively small in Asia partly due to capital control measures. However, in the medium to long term, capital account transactions could increase, which would positively affect FX trading.

Thinking ahead on post-COVID-19, receiving such capital flows would positively impact on revitalizing the Tokyo FX market, thereby developing Japan’s overall financial markets including capital markets.

Graph 1 in the article shows how Singapore overtook Japan in FX activity in 2008 and HK in 2013. The differences have been widening..

Webinar: Ancient Indian Antecedents to Economic Thought

July 8, 2020

Prof Satish Deodhar of IIMA to speak on the topic on 11 July 2020 at 4 PM.

Interested folks can register here.

Ukraine Central Bank moves from one crisis to another

July 8, 2020

One was thinking that during the pandemic phase, governments will let central banks function fairly autonomously. After all, the governments are caught up with several problems of their own and have little time to interfere in central bank affairs. Moreover, as most central banks are following highly easy monetary policies, the governments would be happy as they often intervene when central banks are following tight policies.

Given this, the case of National Bank of Ukraine (NBU) which is the country’s central bank is one of those exceptions.

NBU’s Governor Yakiv Smoli resigned amidst high drama last week on 1 July 2020. His resignation letter stated: “For a long time, the National Bank of Ukraine has been under systematic political pressure. This makes it impossible for me, as the Governor, to effectively carry out my duties as the head of the National Bank of Ukraine and interact with other government agencies”.

On 3-July, Ukrainian Parliament approved his resignation with 286 members voting in favor in a 450 member Parliament. Smoli defended his tenure in the Parliament saying he along with members of the NBU Board “have been a shield that has protected our technocratic and apolitical institution from the influence of political forces.” However, he was forced to resign due to relentless pressure from numerous court cases, public protests outside homes of Board officials etc. He added that his resignation does not imply NBU has lost its independence.  His resignation was a mark of protest that the red line between central bank and government is about to be crossed.

The Smoli resignation becomes even more intriguing as the Parliament noted his commendable performance in keeping inflation at 5% whereas it was highest in the world in 2015 at 272%! They also noted that macroeconomic and financial conditions have been stable. The question is why did he resign and allowed to go despite doing reasonably well in his short 2-year tenure?

Infact, none of this is really a surprise for those watching Ukraine central bank. This blog has written several times on the Ukraine central bank.

The story starts much earlier in Dec-2016. A Ukraine based bank named PrivatBank ran into trouble leading to government nationalizing the bank. NBU was in the centre of the the nationalization as the central bank’s investigation showed that the bank was under trouble due to fraud in the bank. Ukraine’s oligarch Ihor Kolomoyskyi who owned the bank was accused of the fraud worth USD 5.5 billion.  His assets were frozen in Kolomoyskyi appealed against the Nationalisation in the court. In an interesting twist, in 2019 the Court ruled that Nationalisaiton of PrivatBank was illegal. People accuse Kolomoyskyi of influencing the judiciary.

In all this, Kolomoyskyi ran a vicious campaign accusing NBU of cooking the books. He using his financial muscle organised political and people’s protests against the central bank. So much so, the predecessor to Governor Smoli – Valeria Gontareva – had to also resign amidst serious public protests. Gontareva was appointed as the Governor during the nationalization, she was seen as key to the decision.  Gontareva received coffins outside her home as threats!  Even after her resignation, she was personally attacked in London and her home in Ukraine was burnt.

The home arson act led the Board of NBU to term it as Terror and an attempt to “intimidate reformers, past and present, and to paralyze our activities, to silence us”.  

The NBU added it will not be silent. The central bank has shown a lot of courage amidst constant pressure from several parties. In 2019, they developed a webportal named Storm (http://storm.bank.gov.ua/en/) which has a dashboard which shows pressure points on the central bank and is updated every day. As of 6-Jul-2020 (at date of writing this article), the central bank is dealing with 32 political declarations, 14 oligarch declarations. 39 court decisions and 9 lawsuits! Central banks usually have dashboards on inflation, growth, financial stability and so on. This dashboard is totally of a different kind!

To sum up, the saga of Ukraine central bank has upped the friction game between central banks and governments. The central bank’s fight is not limited to government but with courts, oligarches and even public.

The Government has appointed Kateryna Rozhkova one of the Deputy Governors as the Acting Governor of the Central Bank. Smoli was also appointed as the Acting Governor after the resignation of Gontareva and then confirmed as the full-time Governor. It has to be seen whether Rozhkova will also be confirmed as a full-time Governor. In normal times, Rozhkova could have picked the adline from Hero Scooters and say “why should boys have all the fun”! But these are highly tough times. He onareob is that of a fire-fighter who has to fight multiple fires with a single hosepipe with hardly any water to extinguish the fires.


Gontareva responds to Smoli’s resignation

Why Japanese Businesses Are So Good at Surviving Crises

July 7, 2020

Dina Gerdeman has a nice piece in HBSWK:

On March 11, 2011, a 9.1-magnitude earthquake triggered a powerful tsunami, generating waves higher than 125 feet that ravaged the coast of Japan, particularly the Tohoku region of Honshu, the largest and most populous island in the country.

Nearly 16,000 people were killed, hundreds of thousands displaced, and millions left without electricity and water. Railways and roads were destroyed, and 383,000 buildings damaged—including a nuclear power plant that suffered a meltdown of three reactors, prompting widespread evacuations.

In lessons for today’s businesses deeply hit by pandemic and seismic culture shifts, it’s important to recognize that many of the Japanese companies in the Tohoku region continue to operate today, despite facing serious financial setbacks from the disaster. How did these businesses manage not only to survive, but thrive?

One reason, says Harvard Business School professor Hirotaka Takeuchi, was their dedication to responding to the needs of employees and the community first, all with the moral purpose of serving the common good. Less important for these companies, he says, was pursuing layoffs and other cost-cutting measures in the face of a crippled economy.

“Many Japanese companies are not that popular with Wall Street types because they are not as focused on gaining superior profitability and maximizing shareholder value,” he says. “They talk consistently instead about creating lasting changes in society.”

Their reward for thinking beyond profits? These businesses tend to live a long time. In fact, on a global map, Japan stands out for corporate longevity; 40 percent of companies that have remained in existence more than 300 years are located in the country, according to Takeuchi’s research.

Based on interviews by Takeuchi (pdf) and his HBS students, who have studied businesses rebuilding in Japan for nine years, here’s a snapshot look at how the leaders of four companies jumped into action soon after the tsunami devastated the area.


Will Universities Learn from the current crisis?

July 7, 2020

Prof Ken Rogoff in this piece writes how he saw video learning will reshape univ learning 40 years ago but this did not happen. Will the current crisis change things?

When I was a graduate student 40 years ago, I was convinced that video learning (the technology of the day) would reshape university teaching. After all, I thought, why shouldn’t students around the world have access to the best lecturers and materials, particularly given that on-campus lectures to 200 students or more offer extremely limited scope for personal interaction anyway?

To be sure, in-class teaching would still have an important role to play. Professors would still curate materials and answer questions. And I did not envisage recorded lectures substituting for smaller classes (although taped materials can of course work in that setting, too). But while it is thrilling to watch a great class in person, surely a good taped lecture is better than a mediocre in-person one.

Fast forward four decades, however, and progress has been limited. One likely reason is university governance: faculty run these institutions, and few are inclined to go down a path that would reduce demand for their services. Professors are no doubt also worried that taped classes would make it harder for their graduate students to find jobs. And graduate students, with their energy and fresh ideas, are key drivers of research.

Demographic shifts have long been putting downward pressure on college enrollments. Even if faculty in some fields (such as computer science) still see robust demand, for many others, declining student numbers surely amplifies resistance to labor-saving new technologies.

But perhaps the biggest obstacle is the high cost of producing high-quality taped lectures that satisfy students as much as in-person classes. Producing even a single lecture for mass consumption is a risky and time-consuming proposition. And because recorded lectures are so easily cloned, it may be difficult to charge a high enough price to cover the costs. A plethora of education startups (including many in and around the Boston area, where I live) are trying to solve these problems, but so far have not had a major impact on the system.

It therefore seems reasonable to ask whether the United States government should take on the costs of creating basic pre-taped or online college lecture materials in certain fields. (The same could be done for adult education courses.) In particular, introductory online course materials in apolitical subjects such as mathematics, computer science, physics, and accounting should be prime candidates for federal funding.

Many other academic disciplines, certainly including my own field of economics, also have great online potential. Democratic US presidential candidate Joe Biden now supports making college free, which thrills some professors. But, rather than expanding the existing US university system, wouldn’t federal funding for online learning be a fairer and more efficient way forward, especially given that it can help adults of all ages?

Revisiting the economic thought of Prof K.N.Raj

July 7, 2020

Good friend Prof Aex Thomas of APU makes a case for studying works of KN Raj and History of Economic Thought in general:

In economics, there are classic texts which are frequently mentioned but seldom read. The subfield of history of economic thought (HET hereafter) is one arena where these path-breaking texts are systematically studied. A close study of the classic works of Adam Smith, Karl Marx, Alfred Marshall, and John Maynard Keynes will make it abundantly clear that economic ideas do not evolve in a linear manner whatsoever, and that the work of Smith cannot be viewed as an inferior version of Marshall’s as is generally believed. While there exists some interest in systematically studying the works of Smith, Ricardo, Marx, and Keynes, the same cannot be said for the work of Indian economists such as B. R. Ambedkar, Krishna Bharadwaj, Kanta Ranadive, and V. K. R. V. Rao, to name a few. It is in this spirit that I wish to engage with the work of K. N. Raj.

More power to likes of Alex for furthering the cause of studying works of Indian economists..

Why Hong Kong will remain an international financial centre, despite new security law

July 7, 2020

Fair bit of articles being written on the ongoing crisis in Hong Kong leading to the island city losing its premium status as an international fin centre.

Horace Yeung (University of Leicester) and Flora Huang (University of Derby) in this piece do not agree with this premise:

While we cannot underestimate some individuals’ fears that they may be arbitrarily detained under the new national security law, there is also evidence that the law will curb the social unrest that has been detrimental to business in Hong Kong. Crucially, our research supports the idea that Hong Kong’s legal system remains stronger than China’s for international business activity. This will ensure it has a competitive edge over China for the time being.

Under Article 8 of the Basic Law of Hong Kong, which serves as the city’s de facto constitution, Hong Kong has a common law system that it inherited from the UK. In this kind of legal system, judges have the ability to make laws in the form of case law, which is determined by rulings on legal precedents. This makes Hong Kong’s legal system much stronger than China’s civil law system, where vast numbers of laws have been written in recent decades but have not necessarily been tried, tested and applied yet.

The ability of judges to make new laws in a common law system means that any issues arising from rapidly evolving financial markets can be dealt with more efficiently. And there is also research showing that common law countries tend to be more responsive to investors’ interests. Hence, in Hong Kong’s new pitch book to the global financial industry, it emphasises the city’s “common law system familiar to international investors”.

Research shows that a robust legal system is of paramount importance to financial development. It makes investors feel more comfortable and thereby expands the size of financial markets.

In our research, we’ve found that Hong Kong’s economic success since the 1997 handover can be attributed to the “one country, two systems” principle. We argue this is due to its common law system and because Hong Kong has been able to maintain an independent set of company and financial laws from the ones in China.


How Hyderabad transformed into a modern city post the outbreak of plague in early 20th century

July 7, 2020

There are fair bit of articles on how Mumbai (and other cities) transformed post the plague of 1890s.

My promising student Aasha Eapen (who writes a blog as well) points me to this article on Hyderabad fortunes turning post the plague in 1911.


Central banker Musical Chairs at the London Bullion Market Association: Fed exits, Banque de France joins

July 6, 2020

Interesting article by Ronan Munly in Bullionstar. It reminds you how little the central banking world has changed from Liaquat Ahmed’s Lords of Finance world of 1920s:

For a group famous for its caution in appearing associated with and endorsing gold, Western central bankers seem to have made an exception when it comes to sitting on the board of directors of the world’s largest bullion bank gold cartel, the London Bullion Market Association (LBMA). But maybe that’s the point. Because, if central banks and their proxies are close to the action in the gold market, they will be able to control their interests, as well as influence and control others.

Which may explain why news just in reveals that Isabelle Strauss-Kahn, former Market Operations director of the Banque de France (BdF), and formerly at the World Bank and Bank for International Settlements (BIS), is being appointed to the Board of the LBMA as an “Independent” non-executive director, with effect from 1st July. The Banque de France market operations role also included Strauss-Kahn being in charge of the French central bank’s gold and FX reserve management.

Dark intriguing club of elite central bankers…

Managing groundwater in India: rationing the commons

July 6, 2020

Nicholas Ryan and Anant Sudarshan in the new NBER WP:

Common resources may be managed with inefficient policies for the sake of equity. We study how rationing the commons shapes the efficiency and equity of resource use, in the context of agricultural groundwater use in Rajasthan, India. We find that rationing binds on input use, such that farmers, despite trivial prices for water extraction, use roughly the socially optimal amount of water on average. The rationing regime is still grossly inefficient, because it misallocates water across farmers, lowering productivity. Pigouvian reform would increase agricultural surplus by 12% of household income, yet fall well short of a Pareto improvement over rationing.


Business in Time of Spanish Influenza: Economic activity declines with and without lockdowns

July 6, 2020

Howard Bodenhorn of Clemson Univ in this NBER paper:

Mandated shutdowns of nonessential businesses during the COVID-19 crisis brought into sharp relief the tradeoff between public health and a healthy economy. This paper documents the short-run effects of shutdowns during the Spanish flu pandemic of 1918, which provides a useful counterpoint to choices made in 2020.

The 1918 closures were shorter and less sweeping, in part because the US was at war and the Wilson administration was unwilling to let public safety jeopardize the war’s prosecution. The result was widespread sickness, which pushed some businesses to shutdown voluntarily; others operated shorthanded.

Using hand-coded, high-frequency data (mostly weekly) this study reports three principal results.

First, retail sales declined during the three waves of the pandemic; manufacturing activity slowed, but by less than retail.

Second, worker absenteeism due to either sickness or fear of contracting the flu reduced output in several key sectors and industries that were not ordered closed by as much as 10 to 20% in weeks of high excess mortality. Output declines were the result of labor-supply rather than demand shocks.

And, third, mandated closures are not associated with increases in the number or aggregate dollar value of business failures, but the number and aggregate dollar value of business failures increased modestly in weeks of high excess mortality.

The results highlight that the tradeoff between mandated closures and economic activity is not the only relevant tradeoff facing public health authorities. Economic activity also declines, sometimes sharply, during periods of unusually high influenza-related illness and excess mortality even absent mandated business closures.


Analysing fiscal conditions of India’s States..

July 6, 2020

Sangita Misra, Kirti Gupta and Pushpa Trivedi in this RBI research paper analyse fiscal conditions of India’s states pre-covid:

Recognising the increasing precedence of fiscal shocks leading to a deterioration in states’ debt due to the realisation of contingent liabilities, this study assesses the debt sustainability of Indian states by employing both conventional debt and augmented debt, obtained by incorporating information on states’ guarantees and their likely fallout on states’ budgets.

The study uses the standard indicator-based approach and an empirical panel data framework for the post-Fiscal Responsibility Legislation (FRL) period 2004-05 to 2017-18. Results indicate that states’ debt is just about sustainable with some potential signs of unsustainability. Guarantees given by states, if invoked, could certainly pose a potential risk to debt sustainability for Indian states.

The clear policy implications that emerge from the paper include the need to revisit and review states’ FRLs with the inclusion of debt as a medium-term anchor, coupled with greater transparency with regard to contingent liabilities/ off-budget borrowings. The paper does not cover the COVID-19 pandemic period and its impact on state finances.

The impact of Covid-19 on State finances is a different story altogether…

Late Soviet America

July 3, 2020

Prof Harold James in this damning Proj Synd piece:

Like the Soviet Union in its final years, the United States is reeling from catastrophic failures of leadership and long-suppressed socioeconomic tensions that have finally boiled over. For the rest of the world, the most important development is that the hegemony of the US dollar may finally be coming to an end.


In fact, many aspects of America’s current annus horribilis recall the final years of the Soviet Union, starting with the intensification of social and political conflict. In the Soviet case, long-suppressed ethnic rivalries and competing national aspirations quickly bubbled to the surface, pushing the entire country toward violence, secession, and disintegration. In the US, Trump’s response to nationwide protests against racism, police brutality, and inequality has been to stoke further the country’s historic racial divide. And, like statues of Lenin during the collapse of the Soviet empire, statues of Confederate leaders are being toppled just about everywhere.

Another parallel concerns the economy. The Soviet Union had a large, complicated planning and resource-allocation apparatus that attracted the society’s best-educated people, only to consign them to unproductive and frequently destructive tasks. The US has Wall Street. To be sure, America’s vast financial-services sector is not the equivalent of Gosplan (the Soviet State Planning Commission), but it does frequently extract value rather than create it, and thus will inevitably be part of any debate about the allocation of resources.

Up until the moment the Soviet system collapsed, very few thought it could actually happen. In assessing the state of the American system, it is important to remember that economists are not very good at prediction. The entire discipline relies on extrapolating from contemporary conditions on the assumption that the underlying fundamentals of what is being analyzed will not change. Knowing full well that this is an unrealistic and absurd assumption, economists often emulate medieval theologians by dressing up their prognoses in arcane language and jargon. One doesn’t need to know Latin to invoke ceteris paribus (“other things being equal”) as the premise of one’s forecasts.

US Dollar hegemony is under question mark:

Given this standard practice, we should pay close attention to long-run counter-intuitive forecasts that actually are borne out. In the late 1960s, the economist Robert A. Mundell made three predictions: that the Soviet Union would disintegrate; that Europe would adopt a single currency; and that the dollar would retain its status as the dominant international currency. Considering that the par-value system (gold standard) collapsed soon thereafter, triggering a depreciation of the dollar, these looked like wild predictions. But Mundell turned out to be right on all three counts.

But the circumstances to which the dollar owes its longstanding hegemony are now changing. The COVID-19 pandemic is driving a more digitalized form of globalization. While the cross-border movement of people and goods plummets, information is flowing like never before, ushering in an increasingly weightless economy.

Moreover, for the past three and a half years, the Trump administration has been inviting an eventual backlash against its weaponization of the dollar for political ends. Financial and secondary sanctions were highly effective in their original form, when they were directed against small, isolated bad actors like North Korea. But their more extensive deployment against Iran, Russia, and Chinese companies has proved counterproductive. Not only Russia and China but also Europe have quickly taken steps to develop alternative mechanisms for international payments and settlement.

Non-state digital payments systems are also undergoing , particularly in places where the state is weak, distrusted, or otherwise lacking credibility. The payments revolution will likely occur fastest in poor countries, such as in Africa or some former Soviet republics. New digital technologies already offer these societies the means to move from poverty and institutional underdevelopment to institutional complexity and the chance of innovation and prosperity.


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