Move over Greenspan/Bernanke/Powell Put, time to look at Das Put?

March 25, 2019

Mint op-ed piece today:

A $5-billion, three-year dollar-rupee swap by the central bank with commercial banks to primarily increase “durable” liquidity in the system is bound to have multiple ripple effects. The first obvious outcome will be a definite increase in liquidity when RBI buys dollars and releases rupees in the market. Second, the surge of liquidity, combined with a downward pressure on premiums for near-term forward contracts, will influence interest rates in the economy. Third, RBI has often expressed its concern over rupee-dollar trades moving to the non-deliverable forward markets of Singapore, Dubai and London. This swap might draw some of that activity back to local markets. Fourth, the appreciation of the rupee since the forex swap announcement on 13 March—over 1% till 22 March—seems to indicate that India’s central bank now has a higher tolerance level for its rise against the dollar.

Despite these certain outcomes, the governor’s actions can be viewed through different lenses. In some ways, his adoption of this curious liquidity tool to increase systemic liquidity can also be seen as his way of ensuring that Indian markets do not search for new bottoms.

Till market closing on 22 March, the BSE Sensex had gained 1.7% since the swap was declared. Comparisons are being made with a market strategy adopted when Alan Greenspan was chairman of the US Federal Reserve, which came to be known as the “Greenspan put”; in simple words, players expected the Fed to intervene by easing its monetary policy every time markets hit a speed-breaker. This pretty much continued till the financial crisis erupted and forced a rethink of the Fed’s dominant tenets.

Scheduled this week, RBI’s swap will have one obvious outcome: higher dollar inflows as lower hedging costs encourage Indian companies to borrow more overseas and foreign portfolio investors find rising returns from rupee assets.

Too early to say whether there is Das Put or not. But then central bankers have pretty much boxed themselves into these put options. One is always pressurised to do something when financial markets begin to decline significantly….

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Italy joins China’s Belt and Road Initiative – here’s how it exposes cracks in Europe and the G7

March 25, 2019

Winnie King, Teaching Fellow at University of Bristol explains:

While the current Italian government has not been fully unified toward China, a severe economic downturn has made the world’s second largest economy look more appealing to it. Alberto Bradanini, Italy’s former ambassador to China, has stressed that Europe’s own indecision and inability to tackle trade deficits with China (of which Italy contributed approximately €176m, or an eighth of the EU’s total trade deficit) is a key motivator behind this decision.

Italy wants to enhance its “Made in Italy” brand through increasing trade – especially in the form of exports – to China. The BRI is seen as a vehicle to achieve this. Italy offers goods (in particular luxury goods and foodstuffs) that are attractive to China’s growing middle class and increasingly affluent population.

China is also interested in investing in Italian firms. More significant, however, are Italy’s key infrastructure assets. This would enhance the transport and trading network of the BRI, giving it strategic access to Europe. Less than 2% of Italy’s sea imports come from China so there are substantial prospects for growth in that area.

A deal between Genoa’s port authority and shipping firm China Communications Construction Company (CCCC) has already been approved by the Italian government. And the port city of Trieste hopes for something similar. This would offer China and the BRI a more direct route to move goods onto the European continent and an ideal hub for accessing new rail lines and transport networks to Germany, Austria, Slovenia and other regional economies. By giving China access to its ports, Italy is hoping for infrastructure investment from China’s Asian Infrastructure Investment Bank (AIIB) – something the Italian government is trying to link to its role in the BRI.

Interesting! The game of power ensures there are no permanent allies and enemies.

Italy’s status as a G7 country is a coup for the Chinese leadership and the legitimacy of the BRI. While the prospect of Italy’s participation underscores growing fault lines in the EU’s joint approach to China, China has also been effective at dividing and conquering EU member states by targeting them individually.

So Italy’s decision to join the BRI is significant. But four years ago we saw Italy, France and Germany join China’s AIIB, contrary to US wishes. Therefore, Italy is neither the first, nor will it be the last European economy that will “go rogue” and follow its own national interest with regard to China.

 

Bretton Woods at 75: History and current relevance

March 25, 2019

In July 2019, BW will mark its 75th anniversary.

Arminio Fraga, a former president of the Central Bank of Brazil (1999-2002) has a piece on its history and current relevance:

So, what can we say about Bretton Woods in a world in transition?

First, with the US less dominant and less willing to provide global economic and financial leadership, systemic instability is likely to increase. As the American economic historian Charles Kindleberger famously warned, this typically occurs in transitional moments when a global hegemon is absent. Some signs of this are already visible in trade and regional tensions, growing leverage, and rising nationalism.

Second, “Bretton Woods” should now be seen to include not only the original institutions, but also more recently established global forums and regional arrangements. These mechanisms of cooperation constitute a realistic practical response to current challenges.

Third, one must ask whether developing countries will continue trying to converge with more advanced economies, and whether the expanded Bretton Woods family of institutions can remain meaningful stewards of global progress. My answers tend toward yes to both, if one takes a long-term view. Developing countries will aim to emulate the earlier successes of the Asian Tigers and Eastern Europe. And countries will prefer dialogue and cooperation to the failures of those such as Venezuela and North Korea that opted out of the global system.

Lastly, this hopeful vision may now be under threat from the disturbing shift toward illiberal and populist political regimes around the world. But history shows that liberal politics and economic policies have undoubtedly delivered more progress and peace than any other system.

Seventy-five years ago, economic policymakers gathered at Bretton Woods to create a new financial order for the postwar world. Today, their successors can still draw on some of these achievements in designing a global economic governance system for the twenty-first century.

Hmm..

Reliving and retracing Francis Buchanan’s 200 year old journey to figure Southern India..

March 25, 2019

This is as good a project as any to understand economic and social history in Southern India. The lessons can obviously be applied elsewhere as well:

With the fall of Tipu Sultan in 1799, the East India Company consolidated their control over erstwhile Mysore. As part of the process, they appointed Francis Buchanan, a Scottish physician and geographer, to survey parts of southern India, for which he traversed through lengths and breadths of southern India collating information, statistics, oral-histories on a range of physical, political, cultural, social and economic subjects.

Buchanan did this journey from 24-Apr-1800 to 5-Jul-1801 with his team. They travelled a distance of some 4000 km with 20-25 kms everyday. They halted at some 300 locations. Later he prepared a 3 volume based on his journeys whose title says it all:

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How Russia’s central bank adopted inflation targeting and let its currency float?

March 22, 2019

Nice interview of Elvira Nabiullina, the governor of the Central Bank of Russia. She is also the first woman to head the central bank.

She discusses how Russia adopted IT in 2014 in wake of crisis and let its currency float as well:

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Building a gender inclusive economy: Case of Iceland..

March 22, 2019

Katrin Jakobsdóttir, Prime Minister of Iceland has an interesting article in IMF’s F&D (Mar-2019 theme is Women and Growth).

She writes on how Iceland has tried to make women participate in their workforce:

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Ancient Rome offers lessons on the importance of sustainable development

March 22, 2019

Interesting bit of history:

A changing climate reduced the empire’s resilience to a variety of shocks, including pandemics. Smallpox struck in the second century, and a virulent outbreak that may have been Ebola followed in the third. In the mid-sixth century, the Plague of Justinian—the first known incidence of bubonic plague—probably killed half of the empire’s population.

Recent evidence shows the role of climate change. The decade before the outbreak of plague saw some of Europe’s coldest temperatures in two millennia, brought about by a sequence of massive volcanic eruptions. This likely forced gerbils and marmots out of their natural habitats in central Asia, causing the bacteria-bearing fleas they carried to infect the black rat, whose population had exploded along Rome’s expansive network of trade routes.

To be sure, the fall of Rome had many fathers. It remains perhaps the most overdetermined event in human history. But it seems increasingly clear that the natural world impinging on the human world was a major culprit.

Weakened by these hostile forces of nature, the empire started to unravel in the third century. This was a period marked by persistent political instability, pressure on the frontiers, and a fiscal crisis compounded by currency debasement. After a genuine economic revival in the fourth century, the natural environment intervened once more—severe drought in Eurasia spurred the migrations of the Huns, whom Harper calls “climate refugees on horseback.” This started a domino effect of mass migration across the Roman frontier, ultimately leading to the collapse of the western empire in the fifth century. That was followed in the sixth century by the ugly trifecta of climate-change-induced crop failures, catastrophic plague, and ruinous war. It was during this period that Rome’s population fell to a mere 20,000—and the Roman forum became the campo vaccino , the cow field.

We may be far more wealthier compared to Romans but broad similarities cannot be ruled out:

The Roman Republic and the Roman Empire both fell because they failed the sustainable development test. There is a cautionary lesson for our own times in how that failure played out—a breakdown in time-honored social norms, entrenched political polarization driven by economic inequality, repudiation of the common good by elites, and environmental havoc leading to disease and disaster.

We should take this lesson to heart, especially as we hear history rhyming in ways that are eerie and disconcerting. This demonstrates the utmost urgency of achieving the Sustainable Development Goals, the global call to end poverty, protect the planet, and ensure peace and shared prosperity. The Roman experience offers a window into our possible future if we fail to act.

There are some important differences between our economy and that of ancient Rome, of course. Ours is vastly wealthier, healthier, more inclusive, and more resilient. The Romans did not have the ability to eliminate all forms of material deprivation, even though they could and should have better handled the inequalities arising from their own experience with globalization. We have it within our power to do both.

We also have it within our power to solve the problem of climate change, by far the greatest challenge of our generation. The Romans were very much at the mercy of nature. Their activity was not the driving force behind the shifting climate, so they could do little to slow or stop its march. But since human activity is causing climate change today, it can be fixed by changing our behavior—delivering a zero-carbon energy system over the next three decades.

The bottom line is that sustainable development is of enduring importance—whether we are talking about 130 BCE, 530, or 2030.

Canada’s new $10 bill delivers a history lesson: How Viola Desmond led the fight against racism..

March 22, 2019

Nice bit in IMF’s recent edition of F&D:

A successful black businesswoman is jailed, convicted, and fined for refusing to leave a whites-only area of a movie theater in 1946. Local Baptist church leaders step in to lend assistance. An appeal proceeds through the court system, but ultimately proves unsuccessful. Sixty years on, a government apology and posthumous pardon attempt to right the wrong.

A page torn from a history book recording events from the southern United States? Not quite.

While reminiscent of incidents that occurred much farther south in the early part of the 20th century, the episode transpired in Nova Scotia, one of the maritime provinces on the east coast of Canada.

Viola Desmond and her court case became an inspiration for the pursuit of racial equality across Canada. A testament to an oft neglected but marked moment in Canadian history, her likeness now appears on Canada’s $10 banknote.

….

When Desmond purchased her ticket at the movie theater that day in 1946, she received admission to the balcony—the seating generally reserved for nonwhite customers. But being nearsighted, and unaware of the policy, she went to sit in the floor section to be closer to the screen. A ticket taker noted her ticket was for upstairs seating, so she returned to the ticket counter to purchase a floor seat. Denied the purchase and realizing that her request was refused because of her race, she decided to sit on the main floor anyway. The police were called, and she was forcibly removed from the theater, injuring her hip, before she spent 12 hours in jail and paid the $20 fine.

While no laws existed in Nova Scotia to enforce segregation at the time, no court in the province had ruled on the legality of discriminatory policies in hotels, theaters, or restaurants. The tax on the balcony price of 20 cents was 2 cents; the tax on the floor price of 40 cents was 3 cents. In the end, Desmond was convicted of depriving the government of a penny in tax.

“In 1946, Viola Desmond took a courageous stand against injustice that helped inspire a movement for equality and social justice in Canada,” said Jennifer O’Connell, parliamentary secretary to the minister of finance, who spoke at the $10 banknote event. “More than 70 years later, we honor her as the first Canadian woman to appear on a [regularly circulating] banknote and hope her story inspires the next generation of Canadians to follow in her footsteps.”

Superb. The new vertical note also looks quite trendy:

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Interview of Deirdre McCloskey

March 22, 2019

This interview of Prof McCloskey appeared a month earlier:

She says liberalism should not be adopted selectively but comprehensively:

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Eastern Carribean central bank to launch blockchain-based digital currency..

March 20, 2019

ECCB conducts monetary policy for eight island economies:

 Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, Saint Lucia, and St Vincent and the Grenadines.

Apart from Sweden, ECCB is now looking to issue its own digital currency:

The Eastern Caribbean Central Bank (ECCB) and the Barbados-based fintech company, Bitt Inc. (Bitt) have signed a contract to conduct a blockchain-issued Central Bank Digital Currency (CBDC) pilot within the Eastern Caribbean Currency Union (ECCU).

The watershed contract was signed on 21 February at the ECCB’s Headquarters in Basseterre, St Kitts and Nevis.

This ECCB CBDC pilot is the first of its kind and will involve a securely minted and issued digital version of the EC dollar (DXCD). The digital EC dollar will be distributed and used by Licensed Financial Institutions and Non-Bank Financial Institutions in the ECCU. The DXCD will be used for financial transactions between consumers and merchants, including peer-to-peer transactions, all using smart devices. For example, an individual in St Kitts and Nevis will be able to send DXCD securely from his/her smartphone to a friend in Grenada in seconds – and at no cost to either party.

The Governor of the ECCB, Timothy N. J. Antoine, emphasised that in contrast to previous CBDC research and experimentsthe ECCB is going a step further.

“This is not an academic exercise. Not only will the digital EC Dollar be the world’s first digital legal tender currency to be issued by a central bank on blockchain but this pilot is also a live CBDC deployment with a view to an eventual phased public rollout. The pilot is part of the ECCB’s Strategic Plan 2017-2021 which aims to help reduce cash usage within the ECCU by 50 per cent, promote greater financial sector stability, and expedite the growth and development of our member countries. It would be a game-changer for the way we do business”.

CEO of Bitt Inc., Rawdon Adams, said, “I thank the ECCB for choosing Bitt. Our mission is the practical application of cutting edge technology to solve persistent financial problems. It is about a successful currency union building on its impressive record of financial stability, development and integration to deliver a quantum improvement to the lives of all its 630,000 citizens. Enhancing economic growth and the quality of life of ordinary people is the aim.”

The ECCB is now poised to embark on the DXCD pilot from March 2019. The pilot will be executed in two phases: development and testing, for about twelve months, followed by rollout and implementation in pilot countries for about six months. As part of pilot implementation, the ECCB will ramp up its sensitisation and education initiatives to facilitate active public engagement throughout all member countries.

The ECCB is being technically supported on this Project by Pinaka Consulting Ltd. 

The Governor in a later speech explained the motivation:

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Brazil central bank seeks formal autonomy to do its job…

March 20, 2019

Brazil’s new right-wing President Jair Bolsonaro had promised central bank autonomy in 100 days, if elected. Now after being elected, the talks are on to give the central bank formal autonomy. They have also appointed a new Governor – Campos Neto.

Appointed by Economy Minister Paulo Guedes in November, Campos Neto did not take office until late in February because he had to be questioned by the Senate in order to have his appointment approved. In the ceremony of transfer of position, he said he is proud to work with Guedes. “The meetings in Leblon [during the electoral campaign] will not be forgotten. We are really in a well-tuned orchestra being led by conductor Paulo Guedes,” he said.

Campos Neto pointed out he will work to have the Central Bank fulfill its two main missions: to preserve the purchasing power of the country’s currency through low inflation and solidity in the financial system. Next week, the president of the Central Bank will chair the first meeting of the Monetary Policy Committee (Copom), the agency that sets the Selic, Brazil’s benchmark interest rate, currently fixed at 6.5 percent a year.

In the first address, Campos Neto also said that the government will seek to expand the funds raised by major projects in the private enterprise, increase the access to the financial system, improve the population’s financial education, stimulate everybody’s participation in the market, and boost savings.

The autonomy of the Brazilian Central Bank is currently being considered by Congress. The idea is to prevent the president from interfering in the monetary policy, with the institution free to make decisions on interest and take the measures as it sees fit.

Hmm..

Hold those hagiographies of Mario Draghi as ECB chief

March 19, 2019

V Anantha Nageshwaran in his new piece cautions against praising Mario Draghi, who would soon retire as ECB head:

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Kazakhstan will get rid of the Russian language on their money

March 19, 2019

Nice bit on currency and language which has a long history:

The Kazakh authorities have changed the design of coins and banknotes of the national currency — tenge. Now they will not be inscriptions in Russian language. The corresponding decree of the President Nursultan Nazarbayev published on the website of the legal information system “Adilet”.

“The text used in the design of banknotes and coins, issued in the state language. In the design of investment and collection coins allowed the use of inscriptions in foreign languages”, — the document says.

While Russian language can be used in the design of investment and collection coins, issued by the National Bank of Kazakhstan.

The old rules allowed the use of Russian along with Kazakh in the design of banknotes and coins.

Russian has the status official, but not a state language in Kazakhstan, and in accordance with the Constitution, can be used in public organizations. The authorities have carried out a policy of “trilingualism”, encouraging the population to study, in addition to Kazakh, Russian and English.

In 2016, President Nursultan Nazarbaev demanded significant to dismiss officials who refuse to talk to people in Russian. However, in February last year, he said that the authorities — the Parliament and the government should go in its work in the Kazakh language.

 

The rage called Modern Monetary Theory (MMT)

March 19, 2019

My piece in moneycontrol on MMT.

How failing banks paved Hitler’s path to power: Financial crisis and right-wing extremism in Germany, 1931-33

March 19, 2019

Sebastian Doerr, José-Luis Peydró and Hans-Joachim Voth in their research:

The 10 greatest cricket world cup matches….

March 19, 2019

ESPNcricnfo.com has been running a series of 10 best world cup matches. Here they go:

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RIP Prof Alan Krueger

March 19, 2019

Really sad to receive the news. Prof Alan Kruger passed away at just 58.

His paper on minimum wages is legendary and was on future Nobel lists for many economists. That he took how own life adds so much more to the tragedy.

The Fed should buy recession insurance…

March 18, 2019

Brad DeLong in this article says Fed should buy recession insurance:

…if the next downturn is looming, North Atlantic central banks do not have the policy room to fight it effectively. Should a recession arrive, the US Federal Reserve would ideally be able to cut interest rates by five percentage points, as is customary in such situations. But with short-term safe interest rates currently at 2.4%, it cannot. And with euro and yen interest rates still around zero, the European Central Bank and the Bank of Japan would be unable to help much, either. 

Looking ahead, therefore, the big risk is not that inflation will start spiraling upward, with the Fed unable to raise interest rates fast enough to stabilize the economy. Rather, it is the downside risk that a year from now, the North Atlantic will be in recession, governments will not provide enough fiscal stimulus, and the Fed won’t be able to reduce interest rates enough – leaving it nearly helpless to even try to stabilize the economy.

The logical response to such an asymmetric risk is – or ought to be – to buy insurance to cover it. Worryingly, however, the Fed is not taking out any policy insurance at all against a possible recession, despite having at least three possible options from which to choose.

Three options are: raise policy rates today, cut interest rates today to try to compensate for its inability to reduce rates enough in a future downturn and leave interest rates unchanged for now. It is doing the third option but is not explaining what happens if a recession occurs.

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Changing gears: about cycling and the future of banking

March 18, 2019

Frank Elderson, Executive Director of Supervision at Dutch Central Bank in this speech connects cycling and banking regulation:

When I took up this job as chief supervisor for the Dutch banking sector, summer last year, I realized again how much better shape the Dutch banks are in, than the last time I was actively involved in prudential banking supervision.

You see, I was leading the DNB team responsible for supervising ABN Amro back in 2006. I remember going to the Zuidas by bike, parking it right in front of that huge entrance of the ABN Amro building – which wasn’t allowed by the way. That solitary black bicycle, against the sheer backdrop of one of the tallest sky-scrapers of Amsterdam at that time, in a way that bicycle formed an early example of transparent supervision: since everybody knew it was my bike, every time they saw it they knew the supervisor was in the building.

Of course, it’s a story with a tragic undertone. The years 2006 and 2007 have a fateful ring to them. We were witnessing the tearing apart of the largest bank in the Netherlands. Less than a year after the consortium took over ABN Amro, on a sunny day people were leaving the Lehman head offices
carrying cardboard boxes. The rest is history.

How totally different to the picture we observe today! Today I see a banking sector that has weathered the storm, and has emerged stronger. Smaller perhaps, but more resilient, more focused and better capitalized.

Hmm.. It is quite transparent really, Usually, the banks do not want any sign whatsoever of a regulator parking their vehicles at their offices . It could lead to a signal that bank is under trouble and build expecations for a run..

Then he points to three challenges ahead for banks and their supervisors:

  • Anti-Money Laundering and Countering Financing of Terrorism
  • restoring trust in banking sector
  • forward looking risk management

He concludes by looking at ECB’s Single Supervisory mechanism:

Of course, and this is perhaps one of the greatest changes of all over the past twelve years, we are not going about this alone. Today, if you are entering your head offices, you may see not one bicycle, but two. Or a whole lot, if an on-site inspection is taking place. (Actually, this is a figure of speech. We have not yet completely succeeded in transferring our love for cycling to all our good colleagues within the SSM.)

Because I am talking about the SSM of course. I think the SSM has been a great improvement in the way we exercise supervision. If I only think back at the situation we were in, back in 2012, when the European Council’s decision about the banking union was taken. And in November 2013 the SSM was
formally established.It is hard to believe how much progress we’ve made in just a few years.

Many highly qualified staff had to be recruited. A complete supervisory framework had to be designed and be made operational, incorporating the best elements of each nation’s approach to supervision. And a close collaborative relationship with national supervisory authorities developed. It was an
astounding achievement, and the ECB deserves much credit for this.

We are now in a transitional phase. A phase in which the banking union is steadily taking shape, and the SSM is consolidating into a truly harmonized European supervisor. Based on past experience, I look forward to this new phase with confidence and I am eager to take part in it. That’s how we are continuing, safeguarding a sound banking sector in the interest of depositors and a prosperous economy.

Only one last thing: I would love to see more supervisors taking the bicycle when moving around in Frankfurt…

Typical Dutch ending..

131 CAs debunk allegations of India’s ‘shambolic economic statistics’

March 18, 2019

One would imagine another set of economists debunking claims by 108 economists that state of Indian macro data is not in order.

But, the debunk has come from Chartered economists!

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