Call Centres or Casinos and why Hastie was not hasty

Philippines is discouraging the emergence of more call centres in Manila in the name of helping other regions grow. A great public policy study on how to come in the way of a good story.

Iceland is staring at the prospect of running out of ice. [Link]

Russia finetunes its tax collection mechanism. Some would pray that Indian Income Tax does not get wind of this. [Link]

Andy Xie’s thoughtful piece on what Hong Kong didn’t get right. Commentators take snapshots. Historians observe the flow of events over time.

Revisiting Chris Balding’s twitter handle becomes essential now. He points to this interesting thread.

Chris Balding’s twitter thread on why US and China are not engaged in a trade war but something else much bigger. Clarity.

Australian politician Hastie sounds the alarm not about China but about Australians themselves. It can apply to several other nations:

Right now our greatest vulnerability lies not in our infrastructure, but in our thinking. That intellectual failure makes us institutionally weak. If we don’t understand the challenge ahead for our civil society, in our parliaments, in our universities, in our private enterprises, in our charities — our little platoons — then choices will be made for us. Our sovereignty, our freedoms, will be diminished. [Link]

This is a good perspective on how and why Hastie wrote what he wrote.

Rather shallow stuff from Yasheng Huang on Huawei. Just wondering why.

Big, big rumour. Must remember to follow this.

Two good pieces from South China Morning Post’s Karen Yeung – one on China’s dollar shortage and the other on China’s social ills reaching a tipping point.

More on why China cannot afford to let the yuan slide too much:

According to analysts at Nomura, the amount of offshore dollar bonds issued by Chinese corporations has more than tripled since the end of 2014, rising to $841.6 billion at the end of June. [Link]

Financial fault lines in America

The headline for this story says it all: “Families go deep in debt to stay in the middle class.” The article appeared in Wall Street Journal. It features individual stories even as it presents macro statistics. It makes for heavy reading. One chart captures the failure of the monetary policy followed in America since 1990 and particularly since 2001 and since 2008.

Debt for top 10 and bottom 90

Unadjusted for inflation, home prices rose 188% from 1987 to 2017, average tuition at public four-year colleges rose 549% and health-care expenditures rose 276% from 1990 to 2017. Meanwhile, household income from 1987 to 2017, not adjusted for inflation, rose 135%. [Link]

What about household wealth?

The U.S. economy roughly doubled in size from 1989 through 2016, data from the U.S. Bureau of Economic Analysis show. Counted together, everyone got wealthier. But gains in assets owned were heavily skewed toward the highest earners, according to a Journal analysis of the Fed’s Survey of Consumer Finances.

The median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016, the latest available data. For households in the top 20%, median net worth more than doubled to $811,860. And for the top 1%, the increase was 178% to $11,206,000.

Put differently, the value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A third of the gain—$19 trillion—went to the wealthiest 1%, according to a Journal analysis of Fed data. [Link]

While such an article appeared in WSJ, the NYT published a rather strange article which lauded the Federal Rate’s interest rate cut as being sensitive to the poor, the marginalised and ethnic minorities! Stumped.

If anything, the chart shown here exposes the vacuity of such an article.

Similar in spirit to the article in Wall Street Journal featured here is an article in Financial Times on the rising bankruptcy among the retired folks in America.

The article is summed up in these words:

Baby boomers aged 65 and older are racking up far higher levels of debt than their parents, who were raised during the Great Depression, and a growing minority are finding themselves tipping over from desperate financial trouble into bankruptcy.

The culprits are vanishing pensions, soaring health-care costs and tens of thousands of dollars in unpaid student loans for themselves, their children and even their grandchildren. [Link]

This blogger knows when the American model of capitalism began to break.

It is not just American monetary policy that remains the source of the problem. Wall Street Journal has another well-researched piece on the problems with rating agencies. Issues that do not deserve their high rating still get them. What is funny or tragic, depending on your point of view, is this:

Moody’s, S&P and Fitch responded to increased competition by issuing higher ratings, according to two academics’ study of 2,488 securities rated between 2009 and 2014. One author, Colorado State University Finance Professor Sean Flynn, says “competition among credit-rating firms has, if anything, reduced the quality of credit ratings. [Link]

Inflated bond ratings are back, according to the header of the article. If competition does not lead to realistic bond ratings, then what is the way out? It is a challenge for researchers.

USD above 7 CNY

This morning, as I type this, the USDCNY exchange rate is 7.0445. Bloomberg sends out a daily newsletter called ‘Bloomberg Opinion Today’. The remarkable convergence of the views stated therein tells me that reading all of them is a waste of time. For everything that happens, Donald Trump is to be blamed. Period. There are no shades of grey nor nuances. Whether Trump is being shrewd or smart or miscalculating or bumbling from one step to another or that he throws his rivals off-balance, these can be debated ad nauseam. We will not know until a good deal of time has passed. But, to provide no scope for alternative points of view speaks poorly of the platform.

America has labelled China a currency manipulator. Treasury department makes the call and it leads to some punitive actions. It is one of those unilateral measures that America takes, in many areas. Back in the early-2000s and even after 2008, Fed monetary policy stance could have been termed currency manipulation. In any case, China technically does not meet the criteria America has set out for currency manipulation and yet it was tagged. But, the punitive actions that have to follow have no sting because China does not have any US government contracts nor does it receive development funding. See this well-written news-story in Bloomberg.

George Magnus has a piece on it in Bloomberg. It says a lot but says nothing much that is new. The path of yuan from hereon will determine global currency arrangements. Possible. Methinks that the elections next year, the Federal Reserve policies and a possible bitter fight between an incumbent President fighting for re-election and the central bank in America will play a big role in the global confidence on the US dollar.

But, unfortunately for others and fortunately for America, there are many other factors that would play a big role in influencing the trajectory of the continued global role of the US dollar. All those factors underpin dollar’s strength because they undermine the claims of other currencies and countries to dethrone the US dollar.

For example, sample this comment from Magnus’ article:

A major Chinese investment bank recently suggested the industrial sector has lost about 5 million jobs in the last year, almost half of which are attributable to the trade war.  [Link]

Vladimir Putin who is widely hated by the mainstream English media has suddenly become quotable for them because Russia is coming good on its threat to diversify out of US dollar. Mildly interesting news but nothing more, for now.

Trump’s fights with the Federal Reserve on American monetary policy stance are more critical, as far as I am concerned, to the path and fate of the US dollar.

John Authers wrote, after the Federal Reserve Board Open Market Committee Meeting last week in which they cut the Federal Funds rate by 25 basis points, that Trump escalates the stakes in the trade war with China to force the hand of the Federal Reserve. I find the logic weird.

A far more reasonable proposition is that he wants monetary policy to help cushion the shock coming from his long-standing and long-running trade battle with China. He is anxious and he knows that market sentiment would sour as he escalates the fight with China. He wants the Federal Reserve on his side to cushion the impact on market sentiment.

Be that as it may, he is risking a big setback to global comfort with and confidence on the US dollar by haranguing the Chairperson of the Federal Reserve. Fed policy is already a slave to stock market gyrations. Trump’s tweets and angry comments are compounding the blows to the Fed’s already-battered credibility. That is the big threat to the US dollar. Not the path of China’s yuan.

If anything, China’s currency war games are a double-edged sword.

What a time we are living through

Almost back-to-back shootings in the US – in Texas and in Ohio in the weekend prompts the American President to condemn racism, bigotry and white supremacy. Is it or is it not a tad too late? WSJ article linked in line 1 says that it was the 251st mass-shooting in 2019.

From 2006 to 2016, the number of public mass shootings each year was relatively flat, with about four or a five a year, according to the AP/USA Today/Northeastern University Mass Murder Database. That number has risen in recent years, with seven public mass shootings in 2017 and 10 in 2018.

The Government of India has abrogated Article 370 of the Indian Constitution that conferred special status to the state of Jammu & Kashmir. Useful links to read/listen are here, here and here.

On the face of it, the BJP had done what it promised in its election manifestos both in 2014 and in 2019. Many Indians have questioned the special status for the state of Jammu & Kashmir in the past. After all, the decision integrates the state with the rest of India. Of course, the Government of India has also divided the state into two Union Territories.

The fact is that Article 370 begins as follows:

Temporary provisions with respect to the State of Jammu and Kashmir

Also, Article 370 (1) (3) states the following:

(3) Notwithstanding anything in the foregoing provisions of this article, the President may, by public notification, declare that this article shall cease to be operative or shall be operative only with such exceptions and modifications and from such date as he may specify:
Provided that the recommendation of the Constituent Assembly of the State referred to in clause (2) shall be necessary before the President issues such a notification.[16]

There is no constituent assembly in J&K. The Government of India in the past has substituted it with the words, ‘Legislative Assembly’ and since the Legislative Assembly in J&K has been suspended, the recommendation of the Governor of J&K has been deemed sufficient.

A friend raised the question of whether Article 370 has indeed been abrogated. The Government of India appears to have done it indirectly (?) through amendment to Article 367 of the Constitution of India. But, in the gazette notification published in ‘Economic Times’ should clause 4(c) have come before clause 4(b)? See here.

The Presidential order issued on August 5, 2019 extends the Constitution of India, in its entirety, with all its amendments, to the state of J&K. Thus, it effectively neutralises Article 370. There is no direct reference to Article 370. However, the Presidential order, by superseding the Constitution Order 1954, directly abrogates Article 35A since that Article was inserted as per the Constitution Order of 1954, as per the Wikipedia entry.

It is interesting that the Wikipedia article mentions that the President of India has issued a series of orders since 1950 under clause (1) of Article 370. There have been at least fifty such orders extending the applicability of the Constitution of India to the state of J&K.

But, a few questions will remain for which no clear answer will emerge for a long time: the timing of this decision (why now?), the long-term consequence of this decision in the state of J&K, Pakistani reaction, the impact of incidences of terrorism in the state and in India and the legal admissibility of the decision if someone chooses to challenge it in the Supreme Court.

The Chinese yuan has weakened to over CNY7.00 per US dollar. This is seen as China’s retaliation to the latest round of tariffs levied by the American President. President Trump calls it a major violation.

If China uses the yuan as a lever against the American trade war, two questions arise: will capital not flee China somehow?

Second, has America (acting in concert or not, with the UK?) the Hong Kong lever? See here and here.

In the meantime, late in July, News that Huawei helped build the mobile phone network in North Korea, carried by the Washington Post, was cited by CNN here. A very long article from the Wall Street Journal published in May 2019 on how Huawei grew and the methods it followed is well worth a read.

This Reuters article on the 5G fight also published in May is well worth a read, for how Australia blew the whistle on Huawei. Two points from the article are worth noting:

The United States and its allies were derelict in not developing a 5G supplier, former Australian Prime Minister Malcolm Turnbull said in a speech in London in March. “With the benefit of hindsight it beggars belief that the countries which pioneered wireless technology – the United States, the UK, Germany, Japan and with wifi, Australia have got to the point where none of them are able to present to one of their own telcos a national, or a Five Eyes, champion in 5G,” he said.

What is 5G all about?

5G isn’t only about faster data. The upgrade will see an exponential spike in the number of connections between the billions of devices, from smart fridges to driverless cars, that are expected to run on the 5G network. “It’s not just that there will be more people with multiple devices, but it will be machines talking to machines, devices talking to devices – all enabled by 5G,” said Burgess, the Australian Signals Directorate chief, in his March address.

This configuration of 5G networks means there are many more points of entry for a hostile power or group to conduct cyber warfare against the critical infrastructure of a target nation or community. That threat is magnified if an adversary has supplied equipment in the network, U.S. officials say.

Lastly, Japan and South Korea are bickering more bitterly than they did before.

In short, my article in Mint published on July 26 appears to have been timed well, by sheer coincidence.

Who provides traction for populism?

Daron Acemoglu and James Robinson have an interesting piece in ‘Project Syndicate’ on the forces that contribute to the victory of populists.

They cite Jean-Claude Juncker and that is rather dangerous elitist thinking, totally self-absorbed:

In Europe, Jean-Claude Juncker, while serving as prime minister of Luxembourg, once described the European Council’s decision-making as follows: “We decree something, then float it and wait some time to see what happens. If no clamor occurs … because most people do not grasp what had been decided, we continue – step by step, until the point of no return is reached.” Such elitist logic is intrinsically vulnerable to populism.

Their conclusions appear very reasonable:

To defeat populism, then, one must address all the factors that make it a viable strategy. That starts with recognizing that populism can emerge only when there are real social and economic problems to give it electoral traction. It also means being honest about the fact that there are competing and contested visions of citizenship, which should be debated, not ignored.

Somewhat connected to this but not very directly is the blog post by Chris Dillow on the adverse impact of neo-liberalism on productivity. It might take a few days to go through all the links in that post!

Any case, fat chance that elites will heed their (Acemoglu and Robinson’s) message. Check out my previous post on the so-called open letter of China experts in America.

The failed gambit on China

Professor Aaron Friedberg flags this brilliant post on the failed China gambit by America. T. Greer who authored this post has written rather eloquently.

But, that has not stopped some so-called China experts from writing an open letter in ‘Washington Post’ blaming Donald Trump. John Pomfret cites the open letter in his piece in which he takes exception to their thesis.

Read this particular point from the John Pomfret article:

Campbell also had another observation that was unusual for a former official in a Democratic administration: “President Trump has basically received and gotten more Chinese leverage,” he said, “… by this brutal approach than we got by treating China as a partner and with deep respect.”

He concludes on this note:

But the Trump administration is the first one in decades to tell China that the status quo is broken. What China watchers should be doing is building on that insight, and not returning to promises of a kinder, gentler policy that wouldn’t have worked in the 1940s and won’t work today.

Pomfret’s article in Washington Post has many links to all the promises that China had walked back on.

Check out this story in sciencemag.org on how the National Institute of Health found out about research scholars in America (of Asian origin, mostly) hiding their collaboration with institutions in China.

Public Private Partnership or Patronage

My friends cum coauthors – Gulzar Natarajan and T.V. Somanathan have a joint piece – based on many of Gulzar’s readings on the situation in the UK – has many layers and nuances: from a very broad picture, ideological debate about capitalism, market economy vs. state-led growth to micro level skills in negotiating PPPs (assuming public interest is the goal or objective) and all the layers in between, it can be a good case study in economics class-rooms, public policy schools and in business schools too.

If so much debt had been built up and the monies paid out as dividends with very little real asset investment whereas the still-public Scottish Water has had a far stellar record of public service, then the question of whether the saving in terms of public deficit and deficit is really worth it, arises.

How do we even evaluate the efficacy? From the standpoint of the economy, what should be the yardstick to look at? Public debt or overall debt? Or, should one also take into account assets created with the debt?

Therefore, should good, old-fashioned financial ratios with respect to the balance sheets of corporations be deployed to evaluate whether the country is doing something right, but by reckoning these figures at the national level (including public and private sectors) rather than looking at them in isolation?

Is predatory capitalism – which is what many of the privatised utilities have practised – better than state-ownership?

Or, can it be tolerated if performance metrics in terms of provision of public services and public goods show ‘substantial’ improvement? How does one define them?

Should privatised services have different agreements between the Government and the new private owner than purely private-sector originating enterprises? – a bit like what the British government tried with China in respect of Hong Kong?

In other words, should the government continue to be co-owner of the delivery, hold itself jointly accountable and, consequently, incorporate the accountability parameters in the PPP agreement?

In the light of their piece, this edit should be of interest.

More broadly, I wonder, particularly in the case of the UK, whether the ‘ripping off’ of the public by the privatised utilities and railroads is part of the same phenomenon that had seen the big four audit firms in a big credibility crisis. I have not followed the story closely except to read the headlines. The FT has to be commended on their meticulous coverage of the crisis with audit firms in the UK.

But, without independent and verifiable and reliable accounts and their certification, arms-length capitalism has no future. Arms-around or crony capitalism has limitations. Socialism is tried, tested and failed. The world is staring down the barrel, in my view.

Thus, in global economic and political leadership, the world is confronting a big vacuum.