Central banks and financialisation

This is my pet topic since the purpose of my co-authored book, ‘The Rise of Finance’ was to highlight how Finance has taken over the economy and how central banks have actively facilitated it.

Recently, I came across Ann Petitfor’s article in ‘Project Syndicate’ from the Global Daily of the Rabobank (22nd September 2021). From her article, I came across an article by Benjamin Braun. This is a very provocative extract:

The question is: What strategic vision guides how technocrats wield this formidable instrument of sovereign power? Who or what are central banks planning for?

The answer is, of course, the private financial system. And rather than a decentralized system coordinated by market prices, private finance itself has come increasingly to resemble a centrally planned system: global investment priorities are a function not of the decisions of millions of Hayekian speculators but of the business models of a few dozen, extremely large banks and asset managers. Banks invest in mortgages; asset managers in whichever firms are in market-capitalization-weighted indices; private equity firms in urban real estate; and venture capital firms in scalable rent-extraction models. This sector is highly concentrated at the top, where a few giant companies — banks, hedge funds, private equity funds — exercise considerable control over the direction of global capital flows. They are, in effect, the central planners of the wealth-owning class.

Rather than providing a corrective to the inefficiencies and inequities of this mode of capital allocation, central bank planning has long been geared towards expanding and stabilizing it. The 2008 financial crisis did not change this pattern of central bank-led financialization. The shadow bank system will not establish sufficiently liquid and standardized, pan-European repo or securitization markets on its own? The European Central Bank will help. The private system of securities settlement is inefficient and creates frictions in capital markets? The ECB will build a better, publicly operated system. Asset markets regularly seize up, threatening the expansion of the financial sector? Central banks will create backstops and dealer-of-last-resort facilities, thus effectively underwriting the ability of hedge and private equity funds to gobble up assets amidst economic disasters.

The upshot is that while central bank planning already exists, it is currently geared towards propping up a system in which the planning of investment is actually done by the private financial sector. This system is both deeply unjust and inefficient. Central banks have become the lenders of last resort for a manifestly unsustainable status quo.

I don’t know if his solutions would solve the problem or create fresh ones. But, that is how the world will keep swinging wildly from one extreme to the other.

As the Rabobank’s Daily (22nd September 2021) mentions, in capitalism, it is ‘man eats man’; in communism, it is the reverse.

Ann Petitfor’s article has some interesting extracts too:

Meanwhile, the Bank for International Settlements has tallied up the value of the extraordinary fiscal, monetary, and macroprudential measures that central banks have deployed since 2007 to shore up private financial markets and mitigate their adverse economic impacts. Notably, BIS economists find that central-bank programs to purchase private assets accounted for half of total purchases over this period. And as other researchers have shown, a significant share of these financial flows have gone to support fossil fuels and other carbon-intensive sectors….

… Given the precarious state of the biosphere, it is imperative that central banks’ activities be reoriented toward what Braun calls “public purpose,” and away from the task of sustaining private gains in capital markets….

….If we are going to avert both a political and a climate breakdown, we will need to transform the international monetary system so that it upholds democracy and the policy autonomy of nation-states. That means reintroducing capital controls, re-regulating global banking, re-nationalizing pensions, and restoring political and economic power to elected assemblies – not simply to their executives and to central bankers.

In the meantime, a former central banker flagged an interesting paper by Thomas Palley on the political economy of financialisation. I am yet to read it. You can find it here.

Not China’s Lehman moment and other links

From the newsletter, ‘Sinocism’ by Bill Bishop that he has made available for free for a day:

Evergrande the grande grey rhino stampeded over global markets. It is interesting how a mess people paying attention knew was coming for weeks if not longer suddenly explodes across markets.

I do not think it is China’s “Lehman moment”, but it is ugly and going to get uglier. There will be workouts (just don’t call it a bailout) but the lack of guidance from regulators seems to be spooking investors. As this newsletter has discussed several times, I would not be confident that the regulators have a full understanding of all the Evergrande liabilities and interconnections with other firms. Xu Jiayin has been masterful, at least until now, at obfuscating the full extent of Evergrande’s debts….

… The “advantage” of the PRC system in dealing with messes such as Evergrande is that regulators have significant powers to “persuade” other companies to help out, and a robust stability maintenance system to ensure that creditors, employees and apartment buyers will accept the best haircut on offer and not cause too much of a fuss. Yes there have been small protests, but if things play out as they have in other similar cases, protests will be allowed for a bit, as people need to vent, then organizers will be warned if not arrested, then the rest of the unhappy people will take what they are offered and “like it”, with no recourse. Equity owners and foreign creditors don’t really fit into that equation, they will likely get nothing.

So we have a big mess with a lot of people losing money but not one that is going to cause a systemic financial crisis inside the PRC. But as many analysts have been saying over the last few days, we should expect a bigger than expected slowdown in GDP growth. It is going to be an interesting year between now and the 20th Party Congress. [Link]

His comment on the Australia-UK-USA pact (AUKUS) on the nuclear submarines being made available to Australia appears reasonable to me:

PRC reaction has been fairly muted so far as it came right before the holiday, expect the condemnations to ramp up later this week. And expect there to be some sort of more aggressive outreach from the PRC to France and Macron specifically; PRC policymakers must be overjoyed by the rift between the US and France over this. [Link]

Kathrine Hille, writing for FT from Taipei, has a good piece on it.

China’s regulators have been talking to their friends (i.e., Wall Street) that China intends to allow the private sector to continue to play an important role in the economy. Here is a balancing perspective:

Didi Global Inc (DIDI.N) co-founder and President Jean Liu has told some close associates that she intends to step down, two sources familiar with the matter said, as the Chinese ride-hailing giant faces intense regulatory scrutiny following its New York listing earlier this year.

Liu, 43, has in recent weeks told some associates that she expected the government to eventually take control of Didi and appoint new management, said the two sources. [Link]

Rathin Roy shreds central banks’ green makeover

Extracts from his brilliant op.-ed., in ‘Business Standard’ today:

Green climate and other bonds, and fixed-income assets do offer an explicit and ex-ante guarantee of carbon neutrality. To the extent that these form part of sovereign issuance, their share in total borrowing could be used as a plausible metric. There are two problems with this. The first is that it detracts from the sovereign’s absolute power to receive fungible resources (whether tax or debt), which is an essential component of statecraft. Imagine war or pandemic finance being inhibited by the need to be carbon-neutral. Still, some progress can be made as the recent Indonesian Sukuk issue showed. The second is that green financing does not guarantee green procurement or utilisation that is at least carbon-neutral. If a green bond is used to finance a railway project but the steel and electricity used to produce and run the railway are dirty, and the railway is primarily used to transport mining output, then can it be said to be carbon-neutral?

I suspect that central banks, having proved themselves so roundly incompetent at avoiding financial sector bailouts and traumatised by the collapse of their theological anchor — that financial markets are always efficient allocators of resources — and faced with the reality that no amount of independence will protect them from the impact of a US taper tantrum or a Chinese mega move — have occupied themselves with climate change as a diversionary PR exercise to mask the reality that they have increasingly become subordinate to an unequalising and unjust global financial system.

This silly posturing by central banks is yet another consequence of what I have been arguing is the whole problem with how green is viewed in the world of finance — as the only way to stave off prudential risk and suffering to rich people as climate change threatens their lives. This yet again bypasses the central problem. As the world has carbonised, a minority of people have been consuming too much and a majority too little. Without convergence in consumption patterns, there will always be opportunities for carbon spillovers. Unless the negative externalities of the consumption of the affluent are recognised and discouraged, with green investments leapfrogging prosperity gaps in poorer geographies, the climate change issue will not be effectively addressed.

Klaus Schwab, founder of the World Economic Forum, recently spoke eloquently about the danger global warming posed to his grandchildren in 2050 but the danger to a kid in a Bombay slum is being inundated in the next monsoon, not sea levels rising in 2050. But significantly accelerating the prosperity of that child would involve greater sacrifice on part of Dr Schwab’s grandchild for “our common planet” to be sustainable. Convergence in consumption patterns will involve less green consumption by the grandchildren of the rich, and more, also green, consumption by the grandchildren of the poor. Merely providing recycling and wind energy opportunities for the rich to perpetuate their unequalising lifestyles is not going to do the trick. [Link]

Not only does he drive a truck through their green obsession but he also exposes their double standards on carbon emissions and with respect to global finance as well. Very well done!

What is common between Ford exiting India and grade inflation in ‘Ease of Doing Business’?

(1) Somehow, the exit of Ford from India taking a huge write-off is seen as the fault of or an indictment of the Indian government and the Indian consumer. Amazing logic.

There is no mention of potentially other equally compelling possibilities. That the company could have made many errors: pricing, hiring, market sensibility, etc.

This 4-minute video produced by ‘BusinessLine’ points out that they made a mistake with their first model itself that they produced in India. It contrasts it with the experience of Hyundai. 

The video is somewhat superficial but it should be seen as a good starting point for serious analysts to do their own homework instead of writing superficial commentary on what the exit of Ford means.

The video is here:

See this article as well:

https://www.thehindubusinessline.com/economy/logistics/kia-sonet-crosses-one-lakh-sales-in-less-than-12-months/article36447752.ece

(2) Also, I do recall many experts automatically concluding that when World Bank first announced that it was suspending its ‘Ease of Doing Business’ (EoDB) rankings pending some investigations (I don’t recall when was that), some experts concluded that it must be because of India’s ranking!! They had no idea or inkling of it and yet they wanted to believe that it must be India! That is because they wanted to believe that India could not have improved its rankings on EoDB. Such was their rigour. The 16-page report of the law firm that assisted the World Bank in its investigation is available here. Despite its careful legal language, the message is clear. The rankings for 2018 published on the 31st October 2017 ensured that China had not slipped from its ranking the year before.

The report also deals with what was done to Azerbaijan’s rankings and that of Saudi Arabia (relative to Jordan) in 2020. 

In a normal record, it is hard to see how Kristalina Georgieva could continue in her position. But, we don’t live in a normal world.

Paul Romer’s tweet is worth reading (ht: Karan Bhasin):

Perhaps it is also easier to understand why I decided to get myself fired as Chief Economist rather than to keep working in a position where I reported to Kristalina Georgieva. [Link]

He has linked his podcast in that tweet. I have not heard it fully. Here is a short news-report from France24.com.

The question posed by ‘Zerohedge’ is one for the times:

Which leave us with just one question… is there any institution left that is not corrupt? (ok, and one more question: is every elite in China’s pocket?) [Link]

China crackdown or is cracking down – some links

(1) From a FT article uploaded just few hours ago:

(a) One China-based professional said that while “there is an enormous amount of fraudulent activity that takes place”, the crackdown would probably extend to “anyone who ‘misinterprets’ economic data”. “Which means basically disagreeing with Beijing’s interpretation of the data . . . Those of us who try to be a bit more objective or a bit more cynical, I think we’re all worried about what the implications are. It’s just too early to say,” he said, requesting anonymity.

(b) What excess return is she talking about? Look at long-term average annual return from MSCI-China index and compare them to India’s. The former was a pittance.

Here is the data from MSCI China Index (USD gross) Fact Sheet and MSCI India (USD gross) Fact Sheet at the end of August 2021:

Annualised return from MSCI China Index (since Dec. 31, 1992): 2.18% (vs. MSCI EM: 7.75%)

Annualised return from MSCI India Index (since May 31, 1994): 8.34% (vs. MSCI EM: 6.30%)

Charlene Chu, a China expert with Autonomous Research, said foreign investors were struggling to understand what the changes ultimately meant for the returns of the average Chinese company. “There used to be a time when the average return from a Chinese company might be multiples above that in other economies, and it obviously made total sense that you needed to be in China,” Chu said.

The uncertainty hovering over China now includes threats of tougher regulation, higher tax rates, greater charitable giving and government influencing business decisions. “All of that just leads to the fundamental question of what happens to that excess return that you used to be able to get as an investor in China, and how much is that disappearing or eroding in this new environment,” Chu said.

 
 
A briefer version of this story appeared in Bloomberg on Aug. 28, 2021
 
(2) 

Tencent Holdings Ltd. is set to lose its place among the world’s 10 largest companies by market value, leaving no Chinese names in the list as Beijing’s regulatory crackdown continues to wreak havoc on the stock market. 

Hong Kong-listed shares of the internet giant fell as much as 1.9% Thursday before paring some of that loss, with its market capitalization standing at about $552 billion as of 11:55 a.m. local time. That’s just below the value of U.S. chipmaker Nvidia Corp., according to data compiled by Bloomberg.

This would mark the first time that a Chinese company isn’t among the world’s 10 largest since 2017, Bloomberg-compiled data show.

 
(That, indeed, is a neat inflection point. There have been many inflection points. But, this is an important one).
 
 

(3) 

The announcement of more government scrutiny of Macau casinos has sent shockwaves through related markets. Casino shares in Hong Kong and the U.S. slumped after Macau announced plans Tuesday to boost “direct supervising” of gambling companies to better monitor their operations, among other proposals. China had already been clamping down on gambling activity in Macau over concerns that the high-stakes betting can sometimes be an illicit channel for currency outflows and money laundering.

 

Stock Slump A group of stocks focusing on the Macau/China gaming market, which includes Wynn Macau Ltd. and Sands China Ltd., plunged 23% on Wednesday, the most ever. The gauge has fallen for six straight days and is now trading at the lowest since January 2016.

China gaming index


Source: https://www.bloombergquint.com/markets/these-charts-show-impact-of-china-s-casino-crackdown-on-macau

(4) 

(Bloomberg) — When investors started calling early Wednesday morning after China moved to tighten its grip on the world’s biggest gambling hub, the junket operator had just one thing to say: sell.  “There is no hope in Macau,” the executive said in an interview, declining to be named on concern there could be fallout for their business, which facilitates loans for bettors in Macau.

Besides appointing government representatives to “supervise” companies, the authorities want to boost local shareholdings in casino operators, according to a document up for public consultation. Another proposed rule says that companies will need “official approval” before distributing profits such as dividends. While few details were provided in Tuesday’s announcement, the overall approach indicates a level of scrutiny — and, potentially interference — not previously seen in Macau, already subject to years-long clampdowns on money laundering and illicit currency flows.

The new rules could go even further and effectively turn the casino companies into Chinese state-owned entities, a smaller junket operator fretted. The executive didn’t want to be identified, concerned about the ramifications for their business. 

“We’ve suffered a terrible business situation during Covid and the government asked us not to cut any employees, increasing our burden,” said the junket executive advising investors to sell. “Our business focus will continue to shift away from Macau.” 

 

(5) This one is not quite in the same league as all of the above but an excellent case study on the law of unintended consequences in public policy:

China’s biggest cities have suspended land auctions after new central government rules failed to rein in prices, in a setback for President Xi Jinping’s campaign to reduce social inequality. The rules were introduced as part of Xi’s efforts to promote “common prosperity” by cracking down on the high property costs borne by middle-class families, and were intended to reduce demand and runaway house prices. But they had the opposite effect, serving to drive up red-hot real estate costs.

Regulations outlined by the natural resources ministry in February stipulated that 22 cities, including Beijing and Shanghai, should sell more land this year than had been sold on average between 2016 and 2020. The municipalities would have to offload the land in three large-scale auctions in 2021. Authorities felt that the cities’ previous practice of holding dozens of auctions merely whetted developers’ appetites. Property developers that had missed out at one auction could reset their sights on the next one, officials argued, leading to a cascade of high winning bids and ultimately higher apartment prices.

But it did not work out as intended, and the auctions scheduled for July and August were suspended. Government advisers warned that developers’ behaviour would not change unless annual property supply was increased.

“The authorities were too idealistic. They didn’t expect market forces to go against their will.” (classic line)

There is too much at stake,” he said. “The central government can’t expect to control everything.” (another classic line)

(6) 

Sept 12 (Reuters) – Beijing wants to break up Alipay, the hugely popular payments app owned by Jack Ma’s Ant Group, and create a separate app for the company’s highly profitable loans business, the Financial Times reported on Sunday.

The plan will also see Ant turn over the user data that underpins its lending decisions to a new credit scoring joint-venture, which will be partly state-owned, the newspaper reported, citing two people familiar with the process.

State-backed firms are set to take a sizeable stake in Ant’s credit-scoring joint venture for the first time, three people told Reuters last week.

 
 
(7) Re-presenting the story on the systemic risk posed by Evergrande debt woes:
 


************************************
Given the above, no surprises about this:
 

The survey conducted at the peak of the second wave of the pandemic showed 44% of the respondents across the United States, UK, Japan, and Singapore said they were planning additional or first-time investments in India.
Amongst new investors, nearly two-thirds are planning investments in India within the next two years, it showed.
Utilities, particularly energy infrastructure, got 57% votes in terms of sectors that will see new investments while financial services at 49% and healthcare at 48% were other highly ranked sectors.

 
 
We should also applaud the Indian government for doing the following three things:
 
(a) Quietly upping the game on vaccinations
(b) Putting an end to the uncertainty on retrospective taxation
(c) Announcing the telecom sector reforms
 
Also, two other things (one an act of omission) and another one is almost an act of commission deserve to be mentioned but recognition can wait.
 
(i) Did India really import any foreign vaccine? I guess not. I am not 100% sure it is true. But, if true, that speaks for skilful political economy handling by the Government, MEA in particular.
 
(ii) Getting to the final lap on AIR INDIA privatisation
 
Last but one word:
 
Anurag Behar’s (Azim Premji Foundation) interview with Karan Thapar about rural vaccinations appears rather bizarre considering the several headlines I have seen on the progress India has made with respect to rural vaccination.
 
See here (15th September) and here (13th August).
 
Last word:
 
India needs to get its primary and secondary schools open ASAP, like yesterday. It is a massive insidious anti-India thing to do – to keep them shut. Impact on potential growth in the medium to long-run is likely enormous and significant.

Wall Street: China’s strength and America’s Achilles heel

China’s strategic ambitions and America’s exposed Achilles heel

4 min read . Updated: 14 Sep 2021, 01:04 AM IST

V. Anantha Nageswaran

Beijing could forge a ‘third way’ for the world while the US seems reluctant to fix its shortcomings

(This blurb is not quite correct – the Editors made the wrong conclusion – I am actually sceptical as you can see from the last two paragraphs)

There was exciting breaking news on Friday morning of a conversation that American President Joe Biden had with Chinese President Xi Jinping. Closely following it was a request made by American businesses to their president, asking him to remove trade barriers against China. American business is keen to placate China.

Despite repeated failures, Americans believe that those who become acquainted with their way of life, with their capitalism, will surely want more of it and in perpetuity. Hence, it is a matter of time before all other societies, civilizations and cultures abandon theirs and clamour for all things American, including US-style capitalism, its democracy and culture. Samuel Huntington had asserted in his 1996 book, The Clash of Civilisations, that modernization was not the same as Westernization, or for that matter Americanization. Many other cultures may prefer to modernize without Westernizing themselves. Evidently, neither Washington DC nor New York has read his book.

Nearly a year ago, yours truly wrote in these pages (bit.ly/3BX8Fd0) that the best insurance against China’s success was Beijing. In a similar vein, it can be said that the biggest threat to America’s superpower status are American elites and their interests. None exemplifies this better than Wall Street. Non-financial businesses in America are not too far behind. There are many memorable lines in an essay that Cai Xia wrote and was released by the Hoover Institution (hvr.co/3A5M7q0) to coincide with the centenary celebrations of the Chinese Communist Party. One of them is this: “China must deceive the West by hiding its long-term strategic goals, pretending to be weak and harmless, in order to take advantage of Western markets, technology, capital, and talent, while waiting for the opportunity to strike back and win the ultimate war. This was an ancient strategy that Chinese kings and emperors had used many times in the past.” This is what “Hide your strength and bide your time” meant. China appears to think the time has come. It began to act like it from 2008 onwards, and for that, it must thank Wall Street. It remains China’s trump card. Generally, American business, it seems, does not get it (or perhaps care).

Thus, while geopolitically, China seems to have a measure of the US, it has simultaneously embarked on another part of its game plan. That is to move towards ‘common prosperity’. In other words, growing the economic pie is now done. Redistributing the pie is Beijing’s new policy objective.

Along with that, the cultural vestiges of capitalism would also be purged. China tolerated the visible manifestations of American culture as long as it felt that the economic benefits outweighed the costs. With US capitalists and policymakers showing neither the willingness nor stomach to reform their capitalism, China has correctly concluded that it must act before it is too late. Hence its recent restrictions on gaming and entertainment shows.

On Sunday, friends in the neighbourhood were approvingly citing China’s restrictions on teens spending time on gaming to three hours per week. They felt that children in other places would be walking around like zombies in their adult years, given how badly screen time fries their brains, whereas Chinese children would grow up to be healthy and intellectually active adults. Whether or not there is natural parental hyperbole here, Beijing’s recent edicts on private tuitions to be offered as a not-for-profit activity and its restrictions on gaming have touched a chord in India, and may even be welcome. The fact that they are seen as the right thing to do offers us confirmation that, given a long rope, capitalists are seen as ready to hang society first. In the Indian context, readers should recall an article I wrote two weeks ago in this space on packaged food labelling in India (bit.ly/391dfdF).

We can think of the pursuit of ‘common prosperity’ and the purging of uglier elements of capitalism as a ‘third way’. Countries went the communist route and failed. Countries went the capitalist route and are now busy self-destructing with their addiction to free money. But there exists a third route. Use capitalism to create prosperity and then switch to socialism to share the spoils. China’s is thus a great experiment whose outcome can show the path (or not) to the rest of the world.

So, is the timing right? China thinks so, but there are reasons to doubt it. There is a debt overhang. China could not entirely avoid the temptation of debt to drive economic growth post-2005. Growth will be needed to service and repay debt. Of course, China can renege officially on debt repayments, but we don’t know how that would play out for household finances, even if resistance is ruled out or suppressed. Second, will its war on cultural degradation not rob Chinese entrepreneurs of creativity and imagination? Third, given these two risks to the strategy that China is pursuing, are its answers to growth to be found in making the South China Sea its own sea? In forcefully re-integrating Taiwan with the mainland and in the expansion of its Belt and Road Initiative?

Interesting times lie ahead, but also troubling times, given the emasculation of the American will.

V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views. [Link]

Seven reasons why the green mandate for central banks is a bad idea

Asking central banks to factor in the impact of climate change on potential growth, re-calibrate potential growth estimates and set monetary policy accordingly is dangerous. Such a thinking needs to be rejected totally and immediately. The argument is that climate change impact means lower potential growth, necessitates a re-assessment of when the economy is operating above potential and hence the need for earlier-than-otherwise monetary policy tightening or normalisation.

This is fraught with danger. It risks stoking political and other tensions. Technically, both estimates of potential growth and climate-change induced impact on weather, rainfall and other patterns are subject to a wide range or band of uncertainty. The devil is in the fine-print and in the footnotes.

By now, we know that many scientists are not pursuing the agenda of science but simply agendas. The pandemic has given us enough proof. Journals have not thought twice about putting their centuries-old reputation on line for short-term gains. Climate change is religion. It is no longer science. To divine the truth or even get closer to it will take herculean intellectual effort and the most open of all open minds to correctly gauge the costs and benefits of action as well as inaction.

After ascertaining those costs and benefits, a political judgement needs to be made in going ahead with a particular course of action (or, inaction). In making those judgements, policymakers need to be cognisant of the uncertainty around the estimates of potential growth, uncertainty with respect to the impact of climate change and the horizon over which such impacts play out.

Second, macroeconomics textbooks tell us that monetary policy and fiscal policies are short-term business cycle (or, economic cycle) management tools. Long-run aggregate supply (LRAS) curve is vertical. In other words, the LRAS curve is not shifted to the right by cyclical policy tools such as monetary policy and fiscal policy. Nor should it be managed by these tools. They are a function of many factors – education, skills, geography, war, pestilence and yes, climate.

Therefore, to ask central banks to take cognisance of climate change induced impact on potential growth goes against the canons of macroeconomic management. If it is indeed established beyond reasonable doubt that there is need for policy action, then that is in the realm of elected governments subject to public accountability. It is not a subject matter of self-appointed experts.

Third, self-appointed experts have dictated policy actions by governments with respect to Covid. The consequences are yet unfolding. One tragedy is the shutdown of schools – not just in India but in many parts of the world. The impact it would have on potential growth in the medium to long-run is relatively easier to estimate than that of the climate change impact. Yet, there has been no clamour for central banks to tighten policy because schools have been shut down. Why is there so much haste to incorporate climate change induced impact on potential growth when the timelines for the damage (if they are established beyond reasonable doubt) is well beyond 30 to 50 years?

Further, scientists’ recommended actions to deal with Covid and policymakers’ unquestioning acceptance of those have meant that many other health issues and complications have been given short shrift. It is almost as though policymakers have accepted that avoiding or eliminating only Covid-related hospitalisation and deaths are the goals of public policy and that any other health complication (physical and psychological) and fatalities are acceptable. For instance, quarantine policies were explicitly recommended to be avoided both by WHO and the Johns Hopkins University based institutions just a few months before the pandemic ‘officially’ broke out. Coincidence isn’t it that these conferences or seminars were held in September and October 2019?. Anyway, we will let that pass.

The point is that public policy can and should consider experts’ views as only one of the many inputs that need to go into ultimate decision-making. Provided, such experts declare in an affidavit the extent of their knowledge and ignorance. In other words, they must confess to what they know for a fact and what they are assuming, the model parameters they use; the basis for such parameter values they assume and how the conclusions change if parameters change and the degree of confidence they attach to their model’s conclusions and estimates.

This applies as much to climate-change induced economic impact as it does to dealing with the pandemic. We know that such a transparent approach on the part of experts has been honoured more in breach than in observance in the last twenty months. Possibly longer. It would be a monumental folly to repeat the same mistake with respect to incorporating climate change impact into macroeconomic policy-making without these safeguards being put in place against the misjudgement (and hubris) of so-called experts.

Fourth, it is well known in economics that actions taken or avoided have opportunity costs. In other words, there are trade-offs. Resources devoted to mitigating climate change or interest rates adjusted in response to the estimated impact of climate change on potential growth entail costs elsewhere. Developing countries have other pressing needs such as infectious diseases such as malaria, basic sanitation and hygiene and provision of clean water. There needs to be debates and examination of the consequences of such needs going unmet or only partially met and the sequencing of policy priorities before action is taken with respect to climate change.  Such prioritisation needs to be subject to public scrutiny. These decisions cannot and should not be left to unaccountable and unelected ‘experts’ whether they are scientists or central bankers.

Branko Milanovic was spot on here:

There is here a very important lesson for all climate change activists. They need, as I have many times insisted, to think much more seriously about the trade off between economic growth and climate change control. [Link]

Fifth, macroeconomics treats investment in machinery and equipment as an aggregate demand component. That is not very intellectually persuasive. If governments and/or the private sector make investments to mitigate the effect of climate change and if such investments boost actual economic growth in the near-term, then central banks would be wrong to conclude that the economy is overheating because the it would exceed the potential growth estimate that has been lowered due to them accommodating climate change in their models. That would be a big folly.

Sixth, there are geopolitical considerations as well. Developed countries are asking developing countries to bear the growth consequences of their actions that have warmed up the planet. There is no agreed mechanism for developed countries to compensate developing countries for their economic growth costs and the resultant impact on the poor due to actions taken to mitigate climate change. Even if such mechanisms are agreed upon, there has to be enforcement mechanisms with consequences and penalties on developed nations for any failure to honour such commitment. Right now, it is a one-way street. Developed countries are seeking to block funding of projects that developing countries need. Countries that have made their fortunes selling crude oil to the world have now climbed on to the moral high ground. They are preaching clean energy and blocking funding and investments even as they continue to export oil and gas. This is protectionism of a different sort. It is also the equivalent of, to borrow from the title of the book by Ha-Joon Chang, kicking away the ladder.

Finally, if developed countries wish to show that they mean what they say, let their central banks decisively move away from their liquidity and low interest rate policy. These policies contribute to inequality, to the rise of cryptos and block-chain technologies that consume a lot of energy. Let them walk their talk first. In the meantime, developing countries should focus on restoring economic growth and sustaining it.

Getting inequality backwards, hedonic pricing and other links

I just read this piece by Lisa Abramovicz in Bloomberg written some two weeks ago. She approvingly cites a HSBC economist who has it exactly backwards:

As Steven Major of HSBC Holdings Plc put it in a note last week: “Investors should make sure it is not just chatter about the taper that they pay attention to. Rising economic inequality matters to bonds because it is one of the longer-run structural drivers that has contributed to rates being so low.” [Link]

Rates being so low has contributed to inequality and not the other way around. Lisa cites the work by Mian, Sufi and Straub without mentioning that their work did not blame the Fed for creating the very situation that they decry. Lisa provides the missing link. That is the good part.

(2) I read a rather interesting article from WSJ in 2005 on hedonic pricing. I wish I had discovered it earlier. It is great material for classrooms. See here.

(3) But, this blog post by economist Alan Cole argues that, post-Covid, quality adjustments might be operating in reverse. Of course, he argues that he is not making the case for monetary policy tightening. Well, the inflation rate is already at 5%. Monetary policy needs no extra reason to tighten, if the Federal Reserve wished to. But, they won’t because they cannot, without bringing down the House of cards.

(4) As Democrats scramble to find ways to tax Americans to finance their USD3.5 trillion infrastructure spending package (everything goes in the name of infrastructure), this Wall Street Journal article makes a case not to tax stock buybacks. While that is not persuasive, at least the journalist makes a case for higher tax on capital gains:

Politicians wanting to raise revenue and strike a blow against wealth inequality might have found the path of least resistance by trying to do so at the expense of some of the best paid people in America, but there is a simpler way: just raise taxes on capital gains or on high incomes even more than planned. [Link]

(5) This video from mruniversity.com on the causes of inflation is amusing. The video is silent on why QE has not generated inflation in the West. It takes the example of Peru! When it plots money supply of Peru, which measure of money supply it is using?

Cricketers in conversation

I just finished listening to the conversations between Dinesh Karthik and Jasprit Bumrah and Dinesh Karthik and Rohit Sharma. You can find them here and here. I found the conversations interesting and even endearing. They were intelligent conversations. The guys were level-headed. Their responses did not put us off. There was not a lot of ego but more of self-awareness. Dinesh Karthik had come well prepared. There was a good blend of personal and professional questions. The personal questions were not too intrusive nor invasive. The two cricketers were comfortable with Dinesh.

Bumrah’s response as to what he adjusted between the WTC Match against NZ in which he disappointed and the England Test series in which he is doing better is one for all of us to listen to and internalise or remind ourselves of, from time to time. It is between 13:10 and 15:08. 

I agree with Bumrah about bowlers and batsmen. What has made Test cricket so interesting to watch is that among all formats today, it is the one that tests the batsman’s mettle because bowlers are not short-changed by short boundaries, field placement restrictions and excessive wide-calling. Otherwise, cricket has become entertainment in other formats. Test cricket is entertaining but it is also a battle of wills and skills. The human struggle to get the better of oneself and the opponent is what makes it engrossing and captivating. One has to grind it out to succeed in real life, more often. You cannot always hit your way out of trouble with flamboyance where even bad shots fetch six runs. It happens but all too rarely in real life. Test cricket approximates real life much more than T-20 does. A T-20 match is a substitute for watching a masala movie.

Rohit Sharma came across as a thoughtful man with a life and interests beyond cricket. He is talking of doing his bit to save the oceans and the rhinos. As I had written in an earlier blog post on the fourth test match, I watched Rohit’s innings with admiration and envy. His century was all the sweeter to him and to us because it was a triumph of will over impulses. Something that Rahul Dravid personified. Talent is something that you are blessed with but attitude is what you cultivate. It is great to see a fellow human being exhibit self-discipline which Rohit did. All strength to him.

Read the thoughtful piece by Anand Sridharan published today. As Anand writes, Rohit is sorted and so it seems Jasprit Bumrah is. Augurs well for the team in that sense. 

A 50-year wait that ended

India won at the Oval Cricket grounds in 2021. It won there last in 1971. It is now Kia Oval. It was just Oval, Surrey. It drew a Test match at the Old Trafford in 1971, thanks to the rains. It will now play the last Test match at Emirates Old Trafford, starting Friday. These are signs of the globalisation of the world that is waning, in any case.

Well, it need not have been a 50-year wait for India to register a second victory at the Oval cricket grounds. It could have happened in 1979 itself but for one umpire named David Constant who was consistent in giving controversial decisions in favour of English cricketers and against India. He got G.R. Viswanath dismissed for a bump ball catch and declared Venkatraghavan run out. India made a mistake in sending Kapil Dev ahead of Viswanath. The former wasted eight precious balls. Calmer minds would have decided better. But, that was then. That was an epic chase of 438 that fell short by 9 runs. That series did mark a renaissance of Indian cricket for India had salvaged a very honourable draw after being asked to follow on at Lord’s. Viswanath and Vengsarkar scored very good centuries in the second innings.

I am reading a book on the golden year of Indian cricket that was 1971. The book mentions how Ray Illingworth, the English captain got a very special treatment from the English umpires in the series. They did their best to support an Ashes-winning captain Illingworth from being humiliated by a ‘rag-tag bobtail outfit’. Ok. Back to 2021.

India owed its victory at the Oval Test principally to three characters: Rohit Sharma, Jasprit Bumrah and Shardul Thakur. There were supporting roles for others such as Pujara, Rohit, Umesh Yadav and Jadeja. Jadeja, more than his two wickets, helped seamers find reverse swing by landing the ball on the rough and roughing it up further. Yes, Pant’s wicket-keeping is of a high quality and his 50 too was responsible. KL Rahul chipped in with a useful 40+ as well in the second innings. Rahul is still looking to poke his bat at too many balls landing on the fourth or the fifth stump. One can call it a team effort, thus. But, clearly, it was about three players.

Jasprit Bumrah deserved far more than the two wickets shown against him in the second innings. I watched (on television) the six-over post-lunch spell. It was terrific stuff. Rahane should have pouched that catch he dropped off Overton (am I correct?) and Root barely survived against him. In contrast, Umesh Yadav’s figures flattered his bowling. He seemed to fade away in the first innings and was pretty much ineffective in the second except with the second new ball, somewhat. Siraj will be a far more lethal bowler, if he adds a bit more variety to his repertoire of skills with the cricket ball and also allows his mind to work rather than his heart. He was keen to celebrate a catch before he had completed it and hurt a precious asset in the process, thankfully. No lasting damage, I suppose.

I would be amiss if I did not mention the role played by Moeen Ali and Haseeb Hameed. Moeen Ali gave away nearly 5 runs per over in the second innings. Dropped a catch (am I correct?) and wasted two reviews. More than made up for Ravichandran Ashwin’s absence for India, in a way. Did not score enough runs in the first innings and did not negotiate Jadeja in the second.

For the record, I am not very impressed with Haseeb Hameed. He is almost a strokeless wonder. The wagon-wheel after his 50 showed no runs in front of the wicket in the V-arc. He has no drive to speak of. Just check out his strike rate in the two hours before lunch on day 5. He sapped all momentum from England’s innings and played a small part in the run out of David Malan although the latter had a bigger share of the blame. If England’s bench of reserves talent were overflowing, then Haseeb Hameed would not have gotten a look-in.

India under-bowled Thakur in the second innings, perhaps as did England with Moeen Ali. But, then, Shardul is perhaps an overrated bowler and an under-rated batsman, relatively speaking. His strokes were quite cultured, clean and confident. His second innings batting performance ranks much higher than his first outing in this match, in my book.

I think Rohit winning the ‘Man-of-the-match’ award was appropriate. It was a very good innings. Cliched but true that it was mind over matter. He looked well set for a double hundred. He was surprised by how quickly the new ball died on him. It was a tame dismissal; one that he did not deserve. He deserved to be dismissed by a far better delivery.

Rahane needs a rest and a visit back to the drawing board. A nice bloke and a quiet strong leader, I think. Under-rated as much the incumbent might be overrated, although I must admit that his bowling changes and field placements on day 5 impressed. We must get Hanuma Vihari in for the fifth Test in place of Rahane. Pujara might be coming into a better form and his batting in the second innings was quite purposeful.

Kohli is at least getting starts but not converting them. If this continues for another series, more questions will correctly be asked. His winning the match takes the sting out of the criticism against him for not picking Ashwin. It is unfortunate. Human tendency is to judge ex-ante actions based on ex-post outcomes. It was a bad decision. He was bailed out by Rohit, Shardul and Jasprit and the English team. Not picking Ashwin was a mistake and it would be a tragedy if this success emboldens him to shut the off-spinner from the fifth test. Either he would be incurring a big Karmic debt or that Ashwin is paying back a big Karmic debt. We will not know.

If I were the Indian team management, I would drop either Siraj or Umesh Yadav and Rahane and bring in Vihari and Ashwin for the final test starting on the 10th September.

This Indian team is not in the same league as the all-conquering Australian teams under Ian Chappell, Steve Waugh or even Ricky Ponting or that of the West Indies team under Clive Lloyd. It is playing in an era when all other teams are nowhere near their best. Too much cricket and too many tired legs and arms. So, Shane Warne was far too generous to the Indian team in his post-match comments on Sky Sports.

England competed against India and won in terms of not converting situations and opportunities into unassailable positions. Many commentators felt that England should have gotten a lead of more than 99. Well, from 63 for 5, that was a fair achievement on their part. Their problem was that their bowlers were more tired than Indian batters were determined on day 4.

India is up 2-1 and it is fair to say that it should have been 3-1 rather than 2-2 given the wash-out on day 5 at Trent Bridge. So, congratulations to them overall.