The quiet G2 coupling

I happened to read the paragraph below in Rabobank’s Global Daily today (3rd December):

Moreover, China is warning China-linked US businesses: you cannot ‘make a fortune in silence’, with Vice-foreign minister Xie Feng telling them to push the White House towards a ‘rational’ China policy and end ‘ideological’ conflicts over trade and tech. Many US firms of course will, and if you look at alleged Democratic attempts to drop human rights provisions on imports from Xinjiang in pending legislation, some US politicians are already receptive. However, this also risks making some other politicians warier of US business being in China, and there is an election in 2022. Or, as the WTA show, some firms may just act unilaterally.

Emphasis mine.

Then, I read that Janet Yellen wants some tariffs on Chinese goods lowered or dropped so as to lower inflationary pressures. See this.

We can list many other things: from the release of the Huawei CFO to dropping cases against Chinese academics, to the summit with Xi, to not pursuing the lab-leak theory (US is complicit), to having the summit and giving face to Xi (see today’s Nikkei Asia’s ‘China Up Close’), to USTR talking of recoupling, to the meetings in Zurich and on and on. Of course, there is always the Wall Street’s continued romance with China. See the incredible comment by Ray Dalio drawing a moral equivalence between his own country and China.

I do not know if I have left out any other thing. The current US administration is playing a very clever game here. It talks the tough talk on China but quietly walking it back, where it matters. But, it is rather clear that it does not endear America to China or that China would choose to coexist with America.

China is playing for G1. Whether it is militarising South China Sea or its Taiwan sorties, China has clearly signalled its intentions and its unilateralism. USA is playing for G2. That is the problem with American elites’ state of mind or state of capture.

For the rest of the world, the only hope is the American mid-term elections.


I read an article in Bloombergquint on Punjab’s new Power Purchase Agreement Bill. It makes a mockery of contracts that the government itself had signed. It is in contravention of Article 162 of the Constitution.  If there is a central law or a Supreme Court judgement, a state government cannot pass a law contrary to either of them. This Punjab PPA bill violates this article. It is a bad law, in that sense, according to the author.

The problem is that I cannot share the article with anyone who is not a subscriber. Even for fellow BQ subscribers, I can only send a link. They have to click and read.

I think BQ’s attitude is a classic case of how not to win friends (subscribers) and influence people.

It is hard to copy and paste or save even a single copy of BQ articles even as a subscriber.

If they do a survey of users – subscribers – my strong hunch is that they are putting off many rather than attracting paying customers to their site. It is a case of ‘penny wise and pound foolish’ approach. Also, it is reflective of how governments themselves make rules to complicate things.

What BQ has done is to show technology might – as governments show their rule-making might – to somehow block all possible ways of subscribers making a copy for themselves and sharing it with their readers.

Earlier, they used to make copying and pasting text lines difficult. ‘Print’ options did not exist. Third, we were blocked from saving a copy of the article.

Then, some articles could be read off the smartphone in Reader View and thus the full text was accessed via email.  Now, they can be proud that they have blocked it too. So, subscribers simply can visit their platform and read articles there. Nothing more.

Perhaps, one can go to the courts and decide if this is what a subscription entitles a user to. Print subscribers get to keep the newspaper. They are not asked to read and return it. This will be an interesting interpretation – whether I am merely a user of the site like we use a hotel room for rent.

I would guess that if I shared many articles from BQ, some of my friends might like them and decide that they should read more of it themselves and thus choose to subscribe. So, I am not sure if it even makes commercial sense for them to be doing this.

The attitude is similar to governments’ attitudes:

“I don’t care if I lose subscribers nor if I don’t gain subscribers; I will block every single free reader.”

Analogous to how bureaucracies think typically:

“I don’t care if I disrupt legitimate economic activity; I will try to prevent every single fraudulent or illegal economic activity.”

Classic Type I error, re-interpreted and re-applied by the bureaucracy and now by a so-called private sector entity.

Why blame governments then for lacking a bigger heart and for lacking an attitude of facilitating activity rather than blocking it?

If you get to read the article, it will make you depressed. This is regressive.

The experience is a double-whammy because the article is depressing and two, because of BQ’s technological prowess in being user-unfriendly.

Are fear and uncertainty the goals?

The ‘out of the blue’ arrival of Omicron and the ratcheting up of the threat level posed by that variant of Sars-Cov2 appear to defy explanation. Even before details of its spread and infectious prowess are available, people have talked of transmissability, locked down borders, especially to visitors arriving from Africa. South Africa discovered it but the variant did not neessarily originate there. For all we know, it might have been in circulation for several months. Fatalities have not gone up in South Africa. A message circulating on WhatsApp – featuring an imaginary conversation between South Africa and European nations – is a very thoughtful one. South Africa is being ‘punished’ for catching the ‘thief’!

Who gains from fear and uncertainty being kept alive all the time? There are obvious answers. But, we have to go beyond pharma. I don’t have all the answers but I am asking the questions. Fear and uncertainty will keep monetary policy loose for longer, postpone end of QE and delay the commencement of the normalisation of monetary policy in many countries. Not that it was ever going to happen in any meaningful manner. Whatever chances existed are being scuttled. Obvious beneficiaries are financial institutions, intemediaries and investors.

Asset prices will benefit because monetary policy will have an excuse to remain loose. But, fiscal policy is maxed out. So, payroll checks cannot be extended. Nor MSME loan guarantees. But, governments would be crippled if economy remains weak or gets weaker but asset markets thrive. That will be the fate of European governments who were maxed out long ago. Can the elites, with lots more wealth, mount a bid for power then? Long shot. But, besides pharma interests, etc., I am more interested in tring to think through these material prosperity and power shifts. My thinking is very nascent, however.

Governments benefit – not just from a control perspective. Apart from that serious risk, at a relatively more mundane plane, given debt levels, the need to keep nominal interest rates as low as possible – such that real rates can be as negative as possible – is very high. That is how debt levels and ratios were pared back substantially after the World War. Professor Olivier Blanchard’s textbook on Macroeconomics has an excellent table on it:


In fact, the United States’ debt reduction after WW II too was dramatic:

federal debt

The United States managed to maintain a positive g-r (real growth rate – real interest rate) for the most part since WW II:


Fear and uncertainty might be needed to keep real short rates low to negative.

Already, it has had the desired effect. See these headers from ‘Financial Times’:

Omicron 1

Omicron 2

But, I am not convinced that this is the whole story. It might be but I am looking for more angles.

Politically, which regions win and which regions lose? Somehow, I think that Europe is more vulnerable. Not so much as emerging economies. That is wrong. They may be very low on vaccination because of the hoarding tendencies of developed nations. But, they may achieve longer and durable success with herd immunity and normal precautions that people observe on their own. Many countries with very low vaccination rates have far better infection and death rates per capita than the European nations and North American nations that have vaccinated more people.

This story in Bloomberg gets it totally wrong:

omicron 3

This above story is available in BloombergQuint for subscribers.

Many countries that adopted ‘Zero Covid’ strategies had to eat humble pie. By shutting down borders, travel and locking down, one can only delay but not deny the virus. They were meant to be time-savers for capacity augmentation but not permanent disease-prevention measures. But, they threaten to become a habit and reflexive responses of many governments.  For example, see this news-item in ‘BusinessLine’. Unfortunate. In fact, Maharashtra has gone ahead and implemented several restrictive measures as of the evening of the 30th of November.

I think Europe is far more vulnerable to the economic slowdown that would result from lockdowns, travel bans and other restrictions arising out of the fear of Omicron. I have written a longish piece for the Vivekananda International Foundation and it is here.

Just as I completed this blog post, an email with ‘Breaking News’ from FT landed in my mailbox:


If it is indeed the case, then central bankers are doomed if they tighten and doomed if they don’t. In that sense, western economies could be the losers overall, except to some extent, that they would be able to ‘default’ on their loans through higher inflation and reduce debt levels. But, that would hurt pension funds, pensioners and old age people, in general. Wages have to keep up with inflation. Wages will have to rise and that will lead to higher prices and these economies will have a wage-price spiral. Bad news for their currencies and their economies, in general, notwithstanding technical debt reductions.

China will clealry be the winner. But, why are western agencies willing to play along, in that case?

Many open-ends still.

Mr. Garg on the farm laws

On the 21st November morning, I decided to revisit the blog post that S.C. Garg, the former Secretary, Dept. of Economic Affairs wrote last  year. At that time, I remember feeling that it was a very informative, exhaustive and well-written post. Actually, it is a paper. It runs into 26 pages.

What follows below are key extracts.

But, to give a summary of even the extracts, here they are:

(a) The dismantling of the APMC will do a lot of good, long-term. But, there are no safeguards nor regulation of the market place that is likely to emerge as an alternative to and outside the Mandis.

(b) Contract farming has not really been facilitated since land leasing is still not officially legalised.

(c) The Essential Commodities Act has not really been dismantled.

(d) He has also touched up on the two things that need to be done: removing restrictions on land leasing and on the sale of agricultural land.

How politically feasible both are – is not something that I can say.

The former – facilitating land leasing – would also require safeguards and a regulatory authority. The latter – sale of agricultural land – has perhaps been made more difficult by the Land Acquisition Act of 2013.

So, perhaps, withdrawing/repealing the legislation and addressing these in a manner that ensures buy-in from all sides is not a bad thing to happen?

Regardless of what one thinks of Mr. Garg as a bureaucrat, etc., I would say that his paper was very good – informative and educational.


(1) The origin of APMC

The first legislation to provide for regulation of agriculture markets was the Berar Cotton and Grain Market Act 1887 which empowered British Resident to declare any place in the assigned district a market for sale and purchase of agricultural produce and constitute a Committee to supervise the regulated markets. This law seeded the agriculture produce mandis and the agriculture produce mandi committees of today.

Independent India liked the approach of regulated APMCs.

The First Plan promoted the concept and encouraged more and more States to go in for such regulated agriculture produce markets. Second Plan rued that not sufficient progress has been made in this regard. The Second Plan, noting the rationale of the regulated agricultural produce markets encouraged States to set up such markets and laid targets for the expansion of such markets in the country.

APMCs, which are essentially spot wholesale marketplaces for agriculture produce, were designed to serve three broad functions:

First, create a marketplace for agricultural produce where sellers (the farmers) and buyers (government organisations, industries and traders) can transact with the assistance of market infrastructure and agents.

Second, regulate the contracts, practices and intermediary payments to create a fair and low-cost trading regime for farmers who, on account of being the weakling, were quite vulnerable to market abuse.

Third, generate resources for the government to invest in infrastructure to facilitate packaging, transportation, storage and marketing of farmers’ produce.

The APMCs development in the first 50 years seemed to serve all these objectives. Thousands of market yards were created all over the country over the first five decades of independence. APMC laws hard-coded contracts, commissions and other market practices to make these quite predictable and known to the farmers. The fees levied (popularly known as mandi fees) under the APMC laws generated substantial resources, which were administered by Marketing Boards to create market infrastructure. Indian farmers kept increasing marketable surplus which was then transacted in these APMCs all over the country. The APMCs successfully converted a totally disorganised wholesale agriculture produce marketing of the 1950s into a largely streamlined and organised agriculture produce marketing by the end of 20th century all over the country.

A big structural policy mistake, however, turned APMCs into a stranglehold around sellers (the farmers) neck over this period of five decades. This fundamental mistake was the total monopolistic nature of the APMC system.

Every APMC was legislated to have a physical market-yard and a market catchment area under the APMC laws.  This resulted in only one mandi/market for the agriculture produce of a defined market area. The agricultural produce grown in the market area was to be brought only to the designated market yard. The farmer got totally cornered over the years and was left with no choice. He had to bring his produce to only the designated mandi in the state.

The labour of the Committee and Task Force resulted in Model APMC Law 2003. Some states carried out these recommendations over the next decade. The progress was not considered satisfactory. A Group of State Agriculture Ministers, appointed by the Union Agriculture Ministry on direction of the Prime Minister, reviewed the progress in 2011-2012. The Group made its recommendations as well. Their main recommendation was that the Model APMC Act 2003 should be adopted by all States in its entirety.

The Model APMC Act 2003 and subsequent amendments in the model law diluted the monopoly of APMCs only a little bit. Market area for each APMC was sought to be increased to the entire state. Traders licences were to be converted into pan-state licences. These reforms were carried out by some states, but remained more in paper. As the regulatory regime and the fee structure remained same in every mandi, it made no difference for a farmer. The monopolistic character of APMCs remained unaffected even in the states where the model APMC Act 2003 was legislated.

The APMC reforms were initiated in 2003 did not address the principal flaw in the agriculture produce marketing- absence of competitive markets, one size fit all type of over regulation of markets implemented in a decentralised manner by organised vested interests, lack of standardisation and aggregation of farmers’ produce, leasing of land not being legally permitted and exclusion of processors and wholesalers on account of storage restrictions. These APMCs reforms, consequently, did not make much difference.

Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 promulgated on 5th June, 2020 strikes at the root of APMCs’ monopoly over wholesale agriculture produce trading. This Ordinance also virtually abolishes the system of mandi fees. The Ordinance is truly revolutionary in respect of these two fundamental deformities of agriculture produce trading systems in the country.

Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 promulgated on 5th June, 2020 strikes at the root of APMCs’ monopoly over wholesale agriculture produce trading. This Ordinance also virtually abolishes the system of mandi fees. The Ordinance is truly revolutionary in respect of these two fundamental deformities of agriculture produce trading systems in the country. The Ordinance does not directly dismantle APMC system (the APMCs continue to live as they are presently within the confines of their physical market yards), but has the potential of massively disrupting them indirectly.

As there is a distinct comparative advantage to set up shop outside the APMCs to trade in agricultural produce- both in terms of trading freedom as well as non-payment of mandi fees, it should be reasonable to expect that trading of the agricultural produce will soon commence outside APMC market yards. If counter-resistance does not come from state governments, trading in market yards of APMCs should become defunct over a period of time. To make sure that the APMCs do not become defunct, it is likely that the state governments would amend their APMC laws to abolish or drastically reduce mandi fees and permit the traders there to undertake intra-state and inter-state transactions as the Ordinance permits non-APMC traders.

The transition, however, will be extremely chaotic and may lead to undoing of the reforms unleashed by the Ordinance.

The Ordinance literally creates anarchy. There is no regulated marketing regime applicable to trade transactions undertaken under the Ordinance. There is no regulator either.

For physical trades, there is no requirement of such self-regulation as well. It can be argued that traders of non-agriculture produce are also implicitly permitted to do so. In respect of agricultural produce, there is quite an uneven relationship between farmers and traders.

Quite a chaotic ride lies ahead. In the long run, however, this reform is likely to do a lot of good.

(2) Contract farming

The 2003 APMC Model Act brought in contract farming. The law required a Sponsor to register him and the contract farming agreement with an APMC. The contract was prescribed by the government. The model law also provided that no title, rights, ownership or possession shall be transferred or alienated or vest in the sponsor. Model law exempted contract farming from the mandi tax.

The Ordinance excludes APMC’s jurisdiction from contract farming. It confers authority on the central government to issue directions for effective implementation of the provisions. It confers dispute settlement authority on the sub-divisional magistrates.

The contract farming as envisaged in the Ordinance is, in essence, continuation of the same artificial construct as has been the case for the last 17 years. It is also excessively regulated. The Ordinance unnecessarily provides for several things which are part of any normal contract and no law is required to restate such terms. This law is likely to meet the same fate what the contract farming provisions in the model APMC law of 2003.

(3) The MSP system

The MSP system has been fine-tuned over the years. The cost of cultivation got more scientifically determined and calculated. Organised formulae for building in farmers’ profit margins were devised. Governments brought more and more crops under the MSP system, though implementation of MSP for many crops could not take place on account of several issues and problems. Margins over cost also kept increasing over the years. The Government decided in 2017-18 to provide at least 50% profit over cost of cultivation for all the MSP crops.

The MSP system initiated in 1965 has got deeply entrenched in the system now, in some respects, turning into a system of vested interests.

PM-KISAN started in the financial year 2018-19 is the first direct benefit transfer scheme in agriculture as a means to protect farmers’ incomes in the face of very deep downfall in agriculture produce prices in 2018-19. The scheme provides Rs. 6000 per annum to about 9 crore farmers. The outlay of PM KISAN exceeds the total outlay of all other schemes of the Department of Agriculture and Farmers Welfare for the year 2020-21.

(4) ECA Reform as Part of Aatma Nirbhar Bharat

The Essential Commodities (Amendment) Ordinance 2020 promulgated on 15th June modifies the regulatory and control regime for foodstuffs.

The Ordinance does not exclude agricultural commodities from the Schedule of the ECA-55. Nor does it delete Section 2 Sub-section 4 which confers jurisdiction on the central government to exercise the powers of ECA-55 over foodstuffs. The Ordinance modifies the circumstances in which the regulatory and control authority is exercised in case of foodstuffs and in case of specifying stock limits as the control mechanism some additional exclusions have been built in.

For exercising regulatory authority for fixing stock limits only, extraordinary price rise has been defined. Extraordinary price rise has been defined to mean 100% price rise in case of horticulture produce and 50% price rise in case of other crops over the price prevailing last year on the same day or five years’ average retail price whichever is low. 100% price rise year on year for onions and other horticulture produce is very common. Extraordinary price rise and natural calamity are quite loose concepts to prevent continuation of ECA-55 to foodstuffs.

(5) Essential Commodities Act needs to be Junked

Industrial commodities which were part of the ECA regime in the 1960s to 1980s are no longer part of ECA-55. These commodities have been removed from the Schedule of the ECA-55. This happened as the demand and supply situation of these industrial goods improved and there was no good reason for anyone to stock the commodities in anticipation of price rise.

The situation is the same for most agricultural commodities. There is no shortage of cereals in the country. In fact, we produce rice, wheat and maize in excess of our requirements and regularly export. Agriculture exports itself more than cover the imports of pulses and oilseeds, the demand supply gap of which has also come down sharply. The country now has about $500 billion of foreign currency reserves to be able to import any commodity needed for consumption. The shortages of 1940s to 1960s are long gone.

In fact, there is no need for ECA-55 to remain on the statute book any longer. Not only foodstuffs, the remaining 7 commodities in the ECA-55 Schedule need no controls. Like industrial goods, all the five items of agriculture should go out of ECA. Likewise, you don’t need any controls over petroleum products, fertilisers and masks. To deal with extraordinary situations in disasters, if need be, provisions of Disaster Management Act can be resorted to.

Essential Commodities Act 1955 needs to be simply scrapped.

(6) How do you increase operational holdings five times?

Two reforms are crucial to achieve this objective. First, remove all restrictions and prohibitions on land leasing. Second, remove all restrictions and prohibitions on sale of land.

These two measures, not the artificial constructs like contract farming provisions in the APMCs Act of 2003 or the new Ordinance- Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020, would usher in increasing average operational land holdings in India.

Farm laws repeal

Back in December 2020, I wrote in Mint:

Policymakers have to anticipate the grievances of losers and prepare mitigation strategies and responses in advance. In most cases, such preparation is about wider consultation, recognition of participation, and making space for co-ownership of the change. This is sound policymaking with risk management, for a setback in one field of policy reform could have a contagion effect on other reforms and governance in general.” [Link]

That said, can we put our hand to our hearts and say that the process doomed it? I don’t think so.

Dr. Ashok Gulati had written recently:

On a positive note, the tryst with the farm laws could provide important lessons for the BJP. The most important lesson being that the process of economic reforms has to be more consultative, more transparent and better communicated to the potential beneficiaries. It is this inclusiveness that lies at the heart of democratic functioning of India. It takes  time and humility to implement reforms, given the argumentative nature of the society. But do so ensures everybody wins. [Link]

But,  first, let us see what Dr. Ashok Gulati wrote in May 2020:

The government has surely shown a willingness to walk the right path and deserves compliments. The reforms, announced last week could be a harbinger of major change in agri-marketing, a 1991 moment of economic reforms for agriculture. But before one celebrates it, let us wait for the fine print to come. [Link]

This is what he wrote in December 2020:

… each farm household in Punjab got a subsidy of about Rs 1.22 lakh in 2019-20. This is the highest subsidy for a farm household in India. Let’s not forget that the average income of the Punjab farm household is the highest in India — in fact, almost two-and-a-half times that of an average farm household in the country… assess the real contribution of farmers/states to agriculture and incomes, the metric is the agri-GDP per ha of gross cropped area of the state in question. …..On that indicator, unfortunately, Punjab has the 11th rank amongst major agri-states….Can the Centre and the Punjab government join hands to find a sustainable solution to farmers’ incomes and also save depleting water, soil, and air? [Link]

Clearly, Dr. Gulati acknowledged the need to go into the details but he did not think that the process would derail the reform either in May or in December 2020.

Someone in an email group I am part of mentioned that the Electricity Reform Act of 2003 was passed after wide consultations. I agree. States too agreed that they would charge a minimum of 50 paise/kWh for farmers. Did that happen? Did consensus and consultation ensure implementation? States did not implement their pledge.

Second, the creation of the National Judicial Appointments Commission was unanimous. All political parties voted in favour of the abolition of the Collegium. The Supreme Court acted as the petitioner, judge, jury and executioner and killed the creation of NJAC.

Not many of us wrote about the lack of process in what the Supreme Court did then?

Third, the government offered to suspend the implementation of the laws for a year or year and a half and negotiate an agreement. Was it not a ‘better late than never’ process step? Why was it not taken up? So, what were the underlying motives then?

The best we can say about ‘process’ is this:

“In India, observation of the due process of law-making does not guarantee its success. But, perhaps, the absence of it makes it even less likely that it would succeed in being implemented.”

If we are thinking and talking about national interest, it behoves us to write as much about the lack of due process on the other side as we bemoan the lack of process on the part of the government and acknowledge that a democratic outcome was not respected even by the Supreme Court and that states have a very poor record of implementing even those measures that they were consulted on and that they had agreed upon.

These reforms have been in the works for fifteen years. States were given enough time and enough tools (model laws) to make these changes. They did not. Hence, the Centre acted in 2020. Further, it was an explicit promise in the election manifesto of the Congress Party.

Just a couple of days ago, Shankkar Aiyar had written a long piece as to what and how the BJP itself could have been more supportive of reforms. Well, the important thing is to have participation everywhere. That is what I had written in December 2020. Not that it would succeed always but it might fail a little less often than other approaches.

RBI decision made simpler

When a virus makes policy-making easier for RBI

4 min read. Updated: 30 Nov 2021, 12:42 AM IST

V. Anantha Nageswaran

The variant’s effects could be among the factors that’ll ease RBI’s trade-off of growth and inflation

The newly identified Omicron variant of the covid-causing Sars-Cov-2 virus is a rude shock to many of us who were fervently hoping that we could put the worst days of the pandemic, with its lockdown disruptions and health fears, firmly behind us. This might still be the case, but for now, the jury is out. However, to the extent that it dampens sentiment in financial markets, it might turn out to be a source of relief for the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which meets for three days starting on 6 December.

At the outset, there is no reason to change our view of India’s economic growth estimate of between 9% and 10% for the full financial year 2021-22 and the inflation outlook of around 5-5.5% for the same period. Between the last monetary policy meeting and this one, developments in the country’s real economy have been in the general direction of reduced contradictions faced by the central bank. To elaborate, RBI was beginning to face increasing tension between its objectives of accommodating economic growth and restraining inflation. To an extent, the trade-off between the two had lessened due to several developments.

One, international crude oil prices that were beginning to look like a threat have declined. Indian stock markets are a little less exuberant and may become even less so in the days ahead as they follow global markets in reacting to the uncertainties posed by the new variant of the covid virus.

Two, on its part, the Indian government lowered some fuel taxes and so did state governments. While that leaves some money at the margin in the hands of the people, it lowers inflation pressure too.

Three, international shipping rates that were soaring have declined a bit, and so have international prices of coal, iron ore and steel.

Four, internationally, a surge of covid infections in Europe and the likelihood of a harsh winter in the US and Europe, which could impact energy demand, have made economic growth prospects uncertain. American labour-market and consumption data appear good for now, but a recession is only one financial market crash away. In fact, the underlying situation in Europe is a lot more fragile than is commonly realized. Social, political and economic cohesion within the Eurozone may come under increasing strain from here onwards, especially if the new variant crashes economic activity in the region in 2022.

While, in theory, the reappointment of Jerome Powell as chair of the US Federal Reserve, quashing speculation on the appointment of Lael Brainard in his place, should not matter from a policy perspective in the long run, there is an issue of optics that should be taken into consideration. Specifically, Powell will be a wee bit less dovish than Brainard. But, should a re-appointed Powell signal adherence to the currently expected timeline for a Fed taper and end special bond purchases by mid-2022, and if US asset markets begin to correct consequently, it would solve a lot of problems and resolve trade-offs for India. Alternatively, in the light of the new variant, if the Fed were to postpone consideration of lowering its bond purchases, that too would ease the decision-making burden on the MPC of RBI.

Should the Fed’s tapering commence in December and be continued at the same pace in the New Year amid elevated uncertainties, financial markets are very likely to undergo a deeper correction. Such a stock market correction in the US, with its spillover effects on other markets and the real economy, will likely also ease supply-chain bottlenecks as aggregate demand would slow down in developed economies. Commodity prices, including the price of crude oil, will decline further. RBI will also have to worry about inflation less in that case.

However, in my view, the price of crude oil in the medium-term would begin to rise on account of the chaos likely to be associated with the world’s green transition. That is going to be costly, disruptive and possibly even futile. India should use lower oil prices to prepare itself for higher prices.

Further, if this scenario materializes, India’s export growth, which has been a success story so far this financial year, will also slow down. All else being equal, that will also act as a dampener on economic growth, further reducing the tension between a growth-friendly and inflation-fighting policy stance.

As far as household inflationary expectations are concerned, data from RBI surveys show that, on average, more than 50% of its survey participants expect year-ahead inflation to be over 10%, a figure well above RBI’s target. In this, households seem to be influenced by two things: an earlier experience, over five years, of nearly uninterrupted double-digit inflation between 2009 and 2014, and two, the current experience with food and fuel pump prices. One thing that our central bank has to watch for is the persistent increase in the proportion of respondents above 50%. Right now, it is a shade under the halfway mark. As long as the RBI survey indicates that it is not too far above 50%, it can be comfortable with its accommodative stance.

V. Anantha Nageswaran is visiting distinguished professor of economics at Krea University. These are the author’s personal views. [Link]

Cryptos, Constitution and Currency Competition

Thanks to my friend (Dr.) Samiran Chakraborty (he is the India Economist for Citibank), I became aware of this article. It describes in detail how a DAO – Decentralised Autonomous Organisation – mounted a bid for a rare copy of the US Constitution in a Sotheby’s auction. They converted their Ether – a cryptocurrency – into dollars and posted a bid. They did not win it. Kenneth Griffin of Citadel beat them to it. But, it has tremendous implications for what the future might hold. 

I had earlier seen the news story but not paid attention. It does raise many questions. If the decision-making has to be centralised, what is its advantage over fiat currency authorities? If a decision-making authority has to be centralised, then it does create a parallel power centre. If the contributors do not get any share of the asset and only can have a say on where it is housed for example – comical, actually – then the only way you make money on it is if it is sold for a higher price – who gets to decide that. Four, if so much real money can be raised by exchanging it for dollars, then the bigger they get, the bigger is their reach, influence and threat.

For interested readers, there are two more important references. In his characteristic understated style, Sajjid Chinoy had written a good article for ‘Indian Express’ on cryptos and implications for India, especially for macroeconomic policies. Monetary policy will be in danger of becoming impotent. He concludes on this ominous note but matter-of-factly:

The fate of economies to respond to shocks, at least in part, would be in the hands of private firms. This would present an existential threat to monetary policy as we know it.

A contrarian view to this comes from F.A. Hayek, the winner of the Swedish Riksbank Prize for Economics aka Nobel Prize for Economics. James Montier at the GMO writes here that Hayek had made a case for the denationalisation of money. It is a short book and you can download it from here. That is, he wanted competition between many different private currency issuers and he thought that it would keep the value of the money stable. It is a compelling argument, considering the excesses of paper money that have cumulatively crescendoed to the level of a bunch of other ‘thin air’ currency-holders assembling 41 million dollars.  More is yet to come. 

But, it is hard to resist nodding one’s head vigorously when one reads what Hayek wrote about the ‘evils’ of the currency issued by a central authority:

What we should have learned is that monetary policy is much more likely to be a cause than a cure of depressions, because it is much easier, by giving in to the clamour for cheap money, to cause those misdirections of production that make a later reaction inevitable, than to assist the economy in extricating itself from the consequences of overdeveloping in particular directions. The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process….

…. The belief that cheap money is always desirable and beneficial makes inevitable and irresistible the pressure on any political authority or monopolist known to be capable of making money cheap by issuing more of it. Yet loanable funds made artificially cheap by creating more money for lending them, not only help those to whom they are lent, though at the expense of others but for a while have a general stimulating effect on business activity. That at the same time such issues have the effect of destroying the steering mechanism of the market is not so easily seen. But supplies of such funds for additional purchases of goods produce a distortion of the structure of relative prices that draws resources into activities that cannot be lastingly maintained and thereby become the cause of an inevitable later reaction. These indirect and slow effects are, however, in their nature very much more difficult to recognize or understand than the immediate pleasant effects and particularly the benefits to those to whom the additional money goes in the first instance. [Link]

Regardless of one’s disagreement with Hayek on this, one has to marvel at his prescience at how monetary policy – since the Great Financial Crisis of 2008 – has come to resemble what I have captured above. His intellectual precocity is absolutely mind-boggling. 

One of the sections of the book is actually ‘Putting Private Token Money into Circulation’. In it, he describes the process by which it would happen and it is a remarkable foretelling of the rise in the value of Bitcoin and the emergence of other competing currencies:

These certificates or notes, and the equivalent book credits, would be made available to the public by short-term loans or sales against other currencies. The units would presumably, because of the option they offered, sell from the outset at a premium above the value of any one of the currencies in which they were redeemable. And, as these governmental currencies continued to depreciate in real terms, this premium would increase. The real value at the price at which the ducats were first sold would serve as the standard the issuer would have to try to keep constant. If the existing currencies continued to depreciate (and the availability of a stable alternative might indeed accelerate the process) the demand for the stable currency would rapidly increase and competing enterprises offering similar but differently named units would soon emerge.

The sale (over the counter or by auction) would initially be the chief form of issue of the new currency. After a regular market had established itself, it would normally be issued only in the course of ordinary banking business, i.e., through short-term loans.

Utterly brilliant. 

In another section, he explains why he is not that enthusiastic about the Gold Standard compared to the idea of privately issued competing currencies and also explains why he preferred fixed exchange rates. He finds the limited supply of gold and the absence of competition problematic. Concerning fixed exchange rates, his preference for it was in terms of the discipline imposed on a central currency authority. But, then, of course, it assumed discipline on the part of the anchor country. There is no such anchor country these days, esp. in the last twelve to thirteen years.

His clear pre-occupation and concern are that the value of money should be preserved and that a monopoly issuer has no interest in preserving its value and will only be interested in inflating it away. 

It is very hard not to admire this brilliant prescience. That said, I do have my concerns and before that, let us hear one of the interesting objections that James Montier, another original thinker, raises.

James Montier disagrees with Hayek for a very interesting reason:

We have a chartist view on the role of money – that is to say we believe money has worth because we are obliged by governments to pay our taxes in their choice of currency. Put another way, the government will accept its own money back at face value for the settlement of debt (my taxes). Currencies like dollars, pounds, euros, and yen have an issuer that promises to do something in the future – convert them into something else if we are talking about a gold-standard-like regime, or accept them back as payment for taxes if we are talking about a fiat system. The fact that the issuer promises to do something in the future is a liability on the issuer, ergo we can say that the currency is an asset for the holder. Bitcoin and its brethren simply cannot be described as financial assets: they have no attached liability.

My objections to Hayek’s proposals stem from several counts. He is not considering how chaotic and problematic at the transactional level this would be. It is all about the frustrations we have with national currencies when we travel abroad. Will prices of goods and services when denominated in different currencies converge or will they diverge? Setting the exchange rate between these national currencies and remembering them will be a huge transactional inconvenience.

Second, it would militate against scale. It would create many autonomous enclaves. It would actually take modern nation-states back to autonomous self-contained currency areas or sovereign areas. In a world of peace and cooperation, it would be alright. But, that is not human nature. Many small such currency areas could be easily defeated, destroyed and assimilated.

Third, nothing prevents the eventual emergence of one monopoly currency supplier after having eliminated all other currency issuers who fail to maintain the value of their currencies or their purchasing power. That can even be engineered. Once the competition is destroyed, nothing prevents the monopoly currency issuer from behaving like the state or becoming the state in itself. In any case, and that is my fourth point, that is how we have arrived at the current fiat paper money from a monopoly issuer.

In other words, Hayek sets great store by the institution of market competition to be able to overcome human frailties. But, even the institution of competition is a human creation and human frailty can indeed undermine that. Recent experience with many of these tokens and how wildly they have fluctuated in value is an indication of what lies in store. Competition between these token currencies will be anything but orderly.

But, when all is said and done, to an extent, what Hayek envisioned has happened. A token currency emerged – Bitcoin. In its wake, several other wannabe tokens have emerged. They are beginning to challenge fiat money. Competition is yet to emerge. These are very early days. We may get to see the world of competing national currencies that he envisaged. But, it will be interesting to see if such a world – once it emerges – will be the best of all worlds as he envisaged with spontaneous and natural adjustments rather than imposed or orchestrated. I doubt that. Regardless of that, the path and the process to get there will be extremely chaotic, disorderly and even violent.

Postscript: Do not miss out on reading the last two pages of the note (‘White Paper’) by James Montier. Here is the link, again.

STCMA – 22nd November 2021

(1) Three articles/research notes that would be of use in planning your Asset Allocation: This is a simple and neat analysis.

Charts on inflation, especially of wage growth, which is a key driver of inflation in the developed world, are useful.

When Bubble Meets Trouble

Hussman has some terrific charts and historical information to contextualise the extent of extreme valuation in the markets today.

(2) Two pollution related pieces particularly because of the rains in Chennai and in the South wreaking havoc and the haze and smog that have returned to Delhi for their annual visit.

Mridula Ramesh points out that Chennai’s floods will eventually affect investments locating there as no one would wish to see their factories flooded and out of commission every year. Important point.

Shankkar Aiyar is frustrated with the lack of action for over two decades on pollution in Indian cities. Long-time spent in commuting is a multiple hazard. Time, productivity, possiblity of disease due to exposure to pathogens and to foul air. As he puts it, horizontal and vertical construction limits have to go. Again, that too has been pending for a long time. State governments are resisting.

(3) I am writing a detailed review of Prof. Joseph Henrich’ ‘The WEIRDest people in the world’ since I finished it a few days ago. It is an important book even if it is labourious reading. It could have been 50% shorter and that would have made it doubly enjoyable and stimulating. Nonetheless, the article by Aris Roussinos is an important read. The article touches upon how complex societies collapse and there is a brief discussion on it in the book by Prof. Henrich. Do not fail to read some of the comments under the book, especially the comment below. It is SPOT ON:

Perhaps the funniest thing about this comments section is that a considered, researched piece of deep analysis like this, which is really talking about civilisational cycles over centuries, is immediately greeted with a chorus of ‘so what’s the solution, pessimist?’
This kind of solutionism – the notion that every ‘problem’ can be ‘solved’ by us, now, today – seems to be very much a part of the creaking modern edifice. How do you ‘solve’ a civilisational cycle? What would make you imagine that you can sort everything out to your liking? What if we just have to live through it? What if tryig to ‘solve’ the world is part of what is knocking it sideways?

While on the subject of Aris Roussinos, again, I don’t recall blogging about the review of his book, ‘The surrogate warfare’ published in March 2021. These are his key paragarphs, of course, quoting from the book:

“the globalised conflict is transnational in nature and disregards the state-centric norms, conventions, and laws put in place in the nineteenth century to limit war.” We have entered an era of “everywhere conflicts” where “the authority of the state in the twenty-first century is the weakest it has been since the Peace of Westphalia in 1648.” ….

Social media is not just a novel add-on to the modern way of war: it is a weapon that actively shapes the war itself, turning those sharing it into participants themselves….. Perhaps no state actors have understood these new dynamics as well as Erdogan’s Turkey and  Putin’s Russia….

Instead of the claimed depoliticisation of liberal technocracy, every aspect of life now functions as a source of conflict. There is no objective truth or reality, just warring narratives dismantling the political contract between people and their governments, “unable to contain the multiplicity of opinions, narratives, and messages being exchanged in an unconstrained cyber sphere.” [Link]

This is consistent with Mr. Ajit Doval told the police officers at the IPS Academy about ten days ago (ht: Aravindan Neelakandan).

(4) Ashley Rindsberg who wrote a brilliantly scathing book on ‘New York Times’ has two interesting articles. One on how NYT, in particular, suppressed the lab-leak theory and the other on the 1619 project that NYT supported, nurtured and shepherded before abandoning it under the sheer weight of its contradictions. About a month ago, he had an interview with ‘Sunday Guardian’. I don’t know if I had blogged on it. If not, I am making amends. It is well worth a read.

(5) This article mentions the internal power struggles in China. Several articles in ‘Nikkei Asia’ have done that. It should not be a surprise, after all.

(6) A friend reminded me to read this article in ‘Nikkei Asia’ on the possibilities of China invading Taiwan sooner. I did. It is well-written.

(7) From ‘Hindustan Times’: Lithuania allows Taiwan to open a representative office in its capital Vilnius.

(8) A very good thread from Matt Ridley on the lab-leak theory.

Mackinder for the 21st century

Brilliant insights by former Ambassador Prabhat Shukla. This is the link:

If it does not work, you can download it from here: You can download it from here.

My take-aways:

(1) What the Neville Chamberlain government did with respect to Poland – a guarantee of independence that even astonished Churchill, as you write – gives me some hope that things might turn around unexpectedly for the better.

(2) That ties in with what he writes towards the end – citing Mackinder, of course. That democracies do not do strategic thinking unless forced to. 

(3) The question is which of the big countries are thinking of dealing with China the way Britain did with Germany after the First World War? Would that be a useful and/or relevant template?

(4) He is right to touch upon why the Soviet Union ended up proving Mackinder wrong – with its lack of economic clout and technological progress except in a few areas. China has those areas better covered.

(5) His suggestion on the France-India-Russia axis is very interesting. It will be dramatic if India were to take some initiative on this. But, not sure if Russia would be visibly enthusiastic. 

(6) He is right that Japan would make it a better Quad. But, I am a bit concerned about the new Japanese PM abandoning Abenomics. Does it mean he would repudiate everything that Shinzo Abe did, including overtures to Russia, to resolve the pending issues? But, then again, Russia might not be keen to do so since, for now, it is comfortable being seen leaning towards China. It is quite puzzling that America is so hellbent on pushing Russia into China’s orbit and keeping it there!

(7) It was new and educational for me to learn of the strategic importance of Xinjiang and also the compensating check that Djibouti affords China against choking Malacca.

How much worse could I make it?

‘Project Syndicate’ typically features mostly ‘Left-Liberal’ commentators with a token presence of some conservative commentators. It is a good platform for interventionists, activists and anti-Right and for people full of certitude – political and economic – commentators, for the most part, with occasional and rare exceptions (I will make an exception for Yanis Varoufakis). If you are not convinced, try this piece by James K. Galbraith. It is not substance abuse but abuse without substance.

There are five commentaries on the chairmanship of the Federal Reserve Board that is coming up for renewal. Should Powell be re-appointed? Bradford de Long, Simon Johnson (former Chief Economist of the World Bank) and Joseph Stiglitz (the man who has boxed himself into the Left corner) make astonishing cases for replacing Powell with Brainard.

The case that Bradford de Long makes is that Powell would tighten monetary policy. The case he makes is that Bernanke tightened monetary policy prematurely! I must have been vacationing in Mars. I missed that completely. It is as ridiculous as it can get. Now, make no mistake. I am no fan of Powell nor do I hate him. He meant well. You could make that out from his speeches as a member of the FOMC. He was worried about excessive risk-taking that Fed policies caused and rightly so. If the Democrats care about financialisation and want to do something about it, the place to start is with monetary policy. But, they cannot. The horse had long ago left the barn. Even if Powell wants to tighten policy, he cannot. He can try for a quarter or two at most. Last time, he could do it for a few quarters and then the whole apple-cart appeared to tumble down. He had to back off by end-2018 and start reversing. His wiggle room to raise rates is far less now. So, he is a victim of circumstances and policy setting that successive Fed chairpersons have created. It is hard to choose the worst between Greenspan, Bernanke and Yellen.

Then, we have Simon Johnson asking for the impossible:

Central banks around the world, including the Fed, deserve credit for their actions during the COVID-19 crisis, but that is now in the rear-view mirror. The most important macroeconomic task now is careful management of the recovery. That includes a full, equitable recovery of the job market at higher wage levels, without creating excessively high inflation (which undermines everyone’s purchasing power). Getting this right will require careful analysis of the relevant economic indicators, appropriate leadership of the Fed’s professional staff, and persistent and effective persuasion of other top officials. [Link]

Yes, indeed, pigs can and must fly.

Then, we have the card-carrying captain of the Left brigade, Joseph Stiglitz:

Powell is not the man for the moment. For starters, he supported former President Donald Trump’s deregulatory agenda, risking the world’s financial health. And even now, he is reluctant to address climate risk, even though other central bankers around the world are declaring it the defining issue of the coming decades. Powell would say that climate issues are not included in the Fed’s mandate, but he would be wrong. Part of the Fed’s mandate is to ensure financial stability, and there is no greater threat to that than climate change.  [Link]

The competition between Bradford de Long, Simon Johnson and Joseph Stiglitz is so intense but Stiglitz beats his rivals comfortably and by a very wide margin with his piece for climate activism by the Federal Reserve. That settles it. The Swedish Riksbank Committee that awards the annual prizes in economics (called the ‘Nobel’ Prize for Economics) must be embarrassed. Well, on second thoughts, don’t count on it.

Mr. Stiglitz writes the following:

 The Fed, too, is supposed to be independent, but Powell and Greenspan, as they followed their party’s de-regulatory agenda, made clear that that also was not the case.

Wait a second:

Carter ends his book with a devastating critique of US President Bill Clinton’s administration, which, at every opportunity, “transferred power from the government to the financial markets,” building financial boom and bust into the system. “The economic problem for humanity,” he writes, “is no longer a problem of production but of distribution-inequality.” [Link]

That was from the review of three biographies by Robert Skidelsky. Three authors have written biographies of Veblen, Keynes and Albert Hirschman respectively. Zachary D. Carter has written about Keynes.

Willem Buiter and John Taylor side-step the personnel issue. John Taylor wants rates to go up now because his rule says so and Willem Buiter writes about the need for central banks to become fully fiscal (my words) during the next crisis. He might as well have called for a merger of all ‘advanced country’ central banks into their respective Finance Ministries or Treasury Departments. You can read their pieces here and here.

In reality, there would not have been much of a difference between a reappointed Powell and Ms. Brainard on the future trajectory of monetary policy in America. But, by explicitly making a ‘loose monetary policy’ case for the personnel change, M/s Johnson, de Long and Stiglitz have done immense disservice to their favourite candidate and, consequently, to the American currency, if she were to replace Jay Powell.

The newly-elected Republican Sen.-Elect Ed Durr in New Jersey on @SaveJersey live when asked about the contention of ‘The Atlantic’ magazine that he did not know how to govern in the New Jersey legislature: “How much worse could I make it?”

Well, with respect to the Federal Reserve, the three gentlemen who have made an embarrassing case for Ms. Brainard have shown us that they could make it a lot worse.