The Ego/Self-System Part IV: Going Beyond

Why the Fed changed direction but the dollar did not

US currency buoyed by strong economy, relatively high rates and copycat policy moves

Richard Henderson, Eva Szalay and Robin Wigglesworth

Last week Zach Pandl threw in the towel. For months, Goldman Sachs’ top currency strategist had maintained a bearish forecast on the US dollar, in the expectation that the mix of global growth “would turn less dollar-friendly” this year as other economies rebounded.

But in a mea culpa last Friday he switched tack, saying the euro should continue to “grind lower” against a resurgent US currency.

Goldman’s co-head of global FX is not the only specialist on Wall Street to have been wrongfooted by the greenback’s renaissance, which has come in spite of an abrupt policy shift from the Federal Reserve.

Spooked by last year’s market turmoil, the US central bank made a U-turn in January, and in March went as far as shelving plans to raise interest rates at all this year. Few expect a change in tone at this week’s meeting on Wednesday.

The ebb and flow of global growth and monetary policy typically influences exchange rates, and normally such a shift would sap a currency of its vigour.

But the dollar has been resurgent — thanks, analysts say, to the resiliency of the US economy, still-high interest rates relative to the rest of the world and a scramble by other central banks to match the Fed’s sudden dovishness.

The DXY index, which measures the dollar’s strength against a basket of other major currencies, last week powered to its highest level since May 2017. The euro, its most-traded counterpart, has slipped to a two-year low.

“The dollar is the best house in a bad neighbourhood,” says Brad Bechtel, global head of FX for Jefferies. “It seems like the Fed was the first to shift and the rest of the world is trying to keep up.”

The most prominent move beyond US borders has been from the European Central Bank, which in March signalled that the prospect of higher rates remains a long way off, even as growth has showed signs of picking up. The ECB’s deposit rate still sits in negative territory, at minus 0.4 per cent, compared to the 2.5 per cent top band of the Fed’s short-term interest rate.

Some traders have been betting that the next move in interest rates from the Fed may be down rather than up, given weak inflation data. But with the economic growth rate coming in at a forecast-beating 3.2 per cent in the first three months of the year, analysts argue that this looks premature. Employment data due on Friday, they say, could ease concerns over an imminent cut in US rates, which remain the highest in the developed world.

“There’s no other currency anyone wants to buy — even if the Fed is on hold it’s still the highest yielding G10 currency,” says Kit Juckes, global head of FX strategy for Société Générale.

Derivatives markets reflect this. Investor bets on a weaker euro now stand at their highest level since December 2015, according to the latest data from the Commodity Futures Trading Commission. In contrast, positive bets on the dollar by fund managers now outstrip bearish ones by the biggest ratio since late 2016.

Plenty of analysts are continuing to question all this dollar optimism. Morgan Stanley’s chief currency strategist, for example, is sticking to his guns, with a prediction that by the end of the year, one euro will buy $1.20, marking a large decline for the dollar from the current exchange rate of $1.12.

Similarly, Goldman’s Mr Pandl might have revised his short term euro target to $1.10, but he kept his one-year prediction of $1.20 per euro untouched, arguing that a broader bounce in global growth should cap the greenback’s rise.

Ulrich Leuchtmann, a strategist with Commerzbank, points out that the squeeze the euro is facing on the back of the ECB’s dovish tack, was not seen in the dollar when the Fed first signalled a similar shift late last year — an anomaly that should spook investors, he argues. The current “dollar euphoria” is “excessive”, Mr Leuchtmann says.

For now, however, the resurgent US currency is posing a threat to emerging markets, many of which depend on dollar funding and remain sensitive to shifting exchange rates. The perennial weak links — Argentina and Turkey — have been particularly badly hit since the turn of the year. The Argentine peso and Turkish lira are now the worst performing major currencies of 2019, losing 13 per cent and 11 per cent, respectively, against the dollar.

A persistently strong greenback could also begin to weigh on the effervescent US stock market, where many big companies with international operations could see their foreign earnings translate into fewer dollars.

“Overall, the past week has been dominated by higher US equity prices and . . . a dollar outperformance story. In our view, this week should see a test of that new trend,” says Jordan Rochester, an FX strategist at Nomura.

Balancing Growth and Structural Adjustment in China

Fiscal and monetary expansion may be out of fashion among China’s mainstream economists, who insist that structural adjustment must be the priority. But it could go a long way toward bolstering China’s economic performance in 2019, without impeding structural reform.

Yu Yongding


BEIJING – After a disappointing performance in 2018, China’s economy appears to be stabilizing. In the first quarter of 2019, GDP growth, at 6.4% year-on-year, matched that of the previous quarter. But growth in industrial production exceeded expectations, expanding by 6.5% year on year (and by 8.5% in March). Even exports growth was positive, albeit weak, despite the ongoing trade war with the United States.

Moreover, fixed-asset investment (FAI) grew by 6.3% – 0.2 percentage points higher than in the previous quarter. Investment in real estate grew the fastest (11.8%), followed by manufacturing (4.6%) and infrastructure (4.4%). Growth in both real-estate and infrastructure investment was stronger not only sequentially, but also year on year. As usual, consumption growth was stable. All of this has inspired confidence that the Chinese economy can reach its indicative growth target of 6-6.5% for 2019.

Most Chinese economists seem quite comfortable with this targeted range. One explanation is that China’s potential growth rate is 6-6.5 %, and a target should be set accordingly. Another is that a lower growth rate would give the economy more room for structural adjustment.

From 1978 to 2008, China averaged an impressive 9.5% annual growth rate. Then the global financial crisis struck, causing growth to plummet from 9.7% in the third quarter of 2008 to 6.6% in the second quarter of 2009. A CN¥4 trillion ($640 billion) stimulus package, introduced in November 2008, soon brought about a powerful rebound, with GDP growth reaching 12.1% in the first quarter of 2010. But, since then, China’s economy has been on a continuous downward slide, partly because the government withdrew its stimulus. Last year, China’s GDP grew by 6.6%. Nevertheless, it is difficult to separate cyclical elements and external shocks from the long-term trend and to conclude that China’s potential growth rate really is between 6-6.5%.

Many Chinese economists cite long-term supply-side structural factors – such as demographic aging, environmental degradation, and a lack of progress on reform – to argue that China has simply entered a new stage of development, characterized by significantly lower potential growth rates.

This may be true – everyone in China agrees that 9-10% annual growth rates are a thing of the past – but there is no clear indication of how much China’s growth potential has actually declined. Long-term supply-side structural factors do not explain, for example, why the growth rate fell from 12.1% in the first quarter of 2010 to 7.4% in the third quarter of 2013.

Not only are there missing links on the causality chain between long-term structural factors and actual economic performance; it is unclear how long those factors would take to constrain GDP growth to a particular level. In fact, 20 years ago, the same long-term factors were used to warn of a possible fall in Chinese GDP growth.

Because of the complexity of China’s growth trajectory, many economists seem to base their assessments of potential on performance. After every drop in China’s GDP growth since the second quarter of 2012 – when growth fell below 8% – economists have emerged to declare that performance was in line with potential.

To be sure, there are various estimates of China’s potential growth rate, ranging from 5% to 8%. But it is difficult to determine which is reliable. For one thing, there is reason to believe that most estimates fail to discount cyclical factors adequately when calculating the long-term trend.

The danger here lies in the fact that excessively low growth targets, based on excessively low estimates of potential growth, lead to lower actual growth. For an economy the size of China’s, a difference of even one percentage point has a huge impact on welfare.

Many economists would counter that a conservative growth target is useful – or even necessary – to create space for structural adjustment. But this claim is unconvincing. Reducing China’s excessive reliance on real-estate investment – one of the economy’s most serious structural problems – does not necessarily require a reduction in FAI growth, let alone GDP growth. Nor is slower GDP growth a prerequisite for improving financial stability.

In my view, because no one is sure what exactly China’s potential growth rate is, the best strategy is to try to achieve as high a growth rate as possible, so long as it doesn’t worsen inflation and hinder structural adjustment.

True, the first quarter of 2019 yielded better-than-expected results. But the higher rate of FAI growth was to a large extent driven by a strong increase in real-estate investment, which is likely to weaken sooner or later, owing to the government’s commitment to cooling China’s “real-estate fever.” And, given enduring trade tensions with the US, China’s export performance for the rest of 2019 is highly uncertain.

To compensate for declining real-estate investment and weakening exports, China must maintain reasonable growth in infrastructure investment. To that end, the government should pursue higher spending (taking advantage of a strong fiscal position), supported by accommodative monetary policy (amid very low inflation).

Fiscal and monetary expansion may be out of fashion among China’s mainstream economists, who insist that structural adjustment must be the priority. But it could go a long way toward bolstering China’s economic performance in 2019, without impeding structural reform. The challenge is to strike the right balance.

Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.

domingo, junio 02, 2019



What Does It Mean to Be Indian?

As India goes to the polls, questions of governance and identity are at stake.

By Allison Fedirka

Over the course of six weeks, Indian voters are going to the polls to elect their next prime minister. It’s the first general election since 2014, when current Prime Minister Narendra Modi and his Bharatiya Janata Party uprooted the Indian National Congress, which had dominated Indian politics since independence in 1947. Observers see the election as a test of Modi’s staying power, his ambitious reforms and efforts to centralize power. At the heart of these elections, however, are questions over how to define India’s national identity for generations to come.


India is the world’s largest democracy, and its size and diversity present a number of governing challenges. Over its centuries of existence, its leaders have taken different approaches to managing the country’s diversity, which is illustrated in its myriad linguistic-cultural groups, each of which has its own history. The Constitution recognizes 22 languages, but there are thousands more spoken across the country. The most common – and often most effective – approach involved a decentralized federation, where the country’s leader solicited tributes from autonomous kingdoms, local authorities, or, in modern India, states and union territories. Rarely has a leader with centralized power managed to rule India, and certainly not for long. But in recent years, the idea of a more centralized model has re-emerged, especially with the rise of Narendra Modi.

In choosing between the INC and the BJP, Indians are also choosing between these governance models. The INC and its leader, Rahul Gandhi, advocate a decentralized government that relies heavily on public spending and cooperation between central, state and local governments. It is through this model that the INC believes it can best accommodate the competing interests and demands of India’s diverse population. The INC’s vision for India’s national identity binds these diverse groups together through a secular model. The BJP, on the other hand, seeks to centralize power and project it nationwide. To do so, the party needs to cultivate a single national identity that the entire population will subscribe to. The INC’s electoral tagline – do we choose inclusion or exclusion? – is applicable to both parties but with significantly different interpretations. The verdict is still out, but in the meantime, it’s worth exploring how India’s socio-political realities led to the rise of these divergent paths.
The Roots of Hindu Nationalism
Unsurprisingly, these competing models emerged in colonial India’s response to British imperialism and the subsequent independence movement. Clashes between colonizers and local populations were commonplace throughout the 1800s and, by the end of the century, were complemented by an intellectual rejection of colonialism. India’s thought leaders started movements across the country to reform and modernize the interpretation of Hindu texts and practices, a period that became known as the Hindu Renaissance. This was, in large part, a rejection of the imperialist rationale that Western practices were superior to local ones. These movements sought to present Hinduism and other local practices as defining features of the region, different from but equal to European ones. From this emerged the Indian National Congress, India’s first political party and one of the largest to this day.

Then World War I broke out. The British imposed conscription and new taxes in India to support the war effort. By the end of the war, India had suffered inflation, crop failures and flu epidemics that affected people across all social segments. During the war, India’s Muslims had been sympathetic to the Ottoman Empire, one of the Central Powers aligned against Britain and its allies. The INC used this as an opening to align Muslims with Hindus in its anti-imperialist, pro-independence cause. But by the 1920s, the INC had become more explicitly associated with Hindu nationalist groups, the movement of Ottoman sympathizers was in decline, and Muslims gradually became alienated from the party. As the Hindu-Muslim political alliance waned and calls for independence grew, the INC began building a coalition across socio-economic classes. The party’s efforts eventually paid off. India gained its independence in 1947, though not without significant bloodshed and further division of Hindu and Muslim groups during Partition, which created modern-day India and Pakistan and reconstituted the religious makeup of India.

When the INC came to power in an independent India, it adhered to a secularist ideology. The Indian notion of secularism differs from the Western version. While the West views secularism as the separation of religion and state, in India, secularism mandates equal treatment by the state of all religious groups. Religious demographics are carefully enumerated; minorities are identified, and a certain number of jobs and services are reserved for them to help ensure this equality. The composition of ethnic and religious groups differs widely across India’s states, and so the INC’s decentralized approach relies on local governments to implement policies that best suit their constituencies.

Not all members of the INC favored this approach, however. Spin-off groups that advocated a more centralized approach emerged. When Muslim groups left the INC, one faction established the Muslim League. Advocates of Hindu nationalism left the party to form various organizations and political parties, including Rashtriya Swayamsevak Sangh, which pursed armed resistance to British rule, and Hindu Mahasabha, a right-wing political group. In the 1940s, another spin-off group envisioned a united India held together by a shared Hindu identity; that group evolved into what is today the BJP.
The Rise and Future of the BJP
The word “Hindu” did not exist until the arrival of foreigners, including Persians and Europeans. In its early use, it described not a religion but rather the non-Turkic peoples who lived east of the Indus River. As Westerners became more familiar with the region, the word was used to describe South Asian religious trends.

In the modern concept of Hindu nationalism, a Hindu is anyone who resides in India and considers India to be the motherland. The man responsible for developing and popularizing this version of Hindu nationalism was Vinayak Damodar Savarkar, a self-proclaimed atheist and leading member of Hindu Mahasabha. For Savarkar, “Hindu” described a political and cultural identity rather than a religious one. His definition of “Hindutva” (meaning “Hinduness”) as the practice of the Hindu culture allowed for the inclusion of Buddhists, Jains and Sikhs along with Hindus, though it excluded Muslims and Christians. He imagined a nation (“Rashtra”) founded upon Hindutva; Hindu Rashtra thus set the foundation for modern Hindu nationalism.

It took nearly a century of careful management of Hindu nationalism and capitalization on the INC’s weaknesses for the BJP to finally gain power. In the mid-1970s, the BJP’s predecessor briefly gained popularity among the electorate only to quickly lose it again to the INC. The party relaunched as the Bharatiya Janata Party, centralized power within its own framework and reintroduced Hindutva to its rhetoric and policies. Those efforts increased the party’s popularity among the middle and upper classes. By the mid-1990s, the BJP had caught up with the INC, which had left unanswered the calls for Hindutva, lost favor among its Muslim backers and grown weaker because of infighting.

The BJP’s ascent culminated in Modi’s 2014 election victory. High inflation, unemployment and corruption had left voters disillusioned with the INC. The BJP courted disgruntled local INC supporters and castes and sub-castes previously excluded from the power structure. The party hoped to take advantage of groups that felt ignored under a system they saw as going out of its way to protect minorities at the cost of majorities, while also emphasizing its Hindutva platform to gain even more enthusiastic support from its base.


Despite the BJP’s electoral success, the notion of a non-religious, inclusive national identity based on a shared, ostensibly Hindu past is highly controversial. Regardless of its origin, Hinduism (and its derivations) is now largely considered a religion, making the jump from religious to socio-political identity extremely difficult. The caste system is still alive and well in India and while there are legal measures in place to mitigate its use, many individuals still closely associate with their own caste. It’s still hard to get broad buy-in for an identity that remains exclusive and caste-based, especially when minorities have at times suffered at the hands of the Hindu majority and when this ideology has historically excluded Muslims and Christians. Indeed, Modi’s government has increasingly centralized power and pursued Hindutva based on exclusive policies. Historical sites have been rechristened with Hindu names, the BJP has developed ties to local proselytist Hindu groups, and the government supports a widely protested citizenship law that streamlines immigration approval for Hindus, leaving other groups on the fringes of society.

India’s weight in world affairs is growing. It is already the world’s seventh-largest economy, with growth rates outpacing most countries. It plays a key strategic role in containing China, protecting oil and trade flows in the Indian Ocean, and supporting stability in both Central and South Asia. If India wants to capitalize on its position, it must find a way to act as a cohesive entity. For most of its existence, this has meant following a decentralized, secular approach to governance. Only very recently has the country experimented with a centralized approach that promotes a single national identity. These elections may not determine which of the two options will win in the end, but they show that whoever wins the debate will ultimately shape how India will govern itself and present itself to the rest of the world.


The federal minimum wage is becoming irrelevant

A patchwork approach to setting a floor on pay has its advantages

IT IS NORMAL for America’s federal minimum wage to go through periods of declining influence.

It is fixed in cash terms, meaning it bites hardest whenever Congress raises it, then declines in relevance as earnings grow. Between 1998 and 2006, for example, the federal minimum stayed constant at $5.15 per hour, while average wages grew by around 30%.

What is unusual about the last decade is that another force is also causing the federal pay floor to be left behind: state and local governments. According to the University of California Berkeley’s Labour Centre, a research hub, 44 cities and counties apply their own minimum wages today, compared to just five before 2012. At the start of 2019, 20 states raised their pay floors.

A new analysis from Ernie Tedeschi of Evercore ISI, a consultancy, quantifies just how much more assertive state and city governments have become. During the early 2000s, with the federal floor flat, they raised their minimum wages, but not by enough to keep up with the broader labour market. As a result the share of hours worked at minimum pay—either federal, state or local, and excluding tipped or salaried workers—fell, from 5% in 1998 to a little over 2%.

But since 2009, despite wage growth and a flat federal minimum, the share of hours worked at some minimum wage has stayed constant, at around 5%. The explanation is growing intervention outside Washington. In 2010 state and local minimum wages were binding for around 40% of hours worked at some pay floor. In 2019 that share is fully 91%.

Meanwhile, as rich cities have raised their minimum wages dramatically, their minimum-wage workers have, as a group, been climbing up the nation’s income distribution. The average pay of minimum-wage workers—a group which now varies a lot by place—has risen to 57% of the national median wage, Mr Tedeschi finds. That is up sharply from between 39% and 44% for the entire period between 1994 and 2015.

There are advantages to the emerging patchwork of policies. The risks of raising the minimum wage are lower in rich places. Local governments might fine-tune their wage floors to economic conditions. By contrast the federal minimum wage is a blunt instrument. It cannot take into account geographical differences in productivity, economic conditions, or the bargaining power of workers.

Nonetheless, some Democrats want to restore the prominence of the federal minimum wage, by boosting it to $15. Senator Bernie Sanders introduced a bill earlier this year that would do just that by 2024, but it has yet to gather enough support from Democrats to pass even in the House of Representatives (it would have no hope in the Republican-controlled Senate). A different proposal from Terri Sewell, a Democratic congresswoman, would allow the federal minimum wage to vary regionally with the cost of living. But it has met resistance from those on the left who do not want the lower wage floors for workers in Southern states and rural counties that regional adjustments would bring.

Republican scepticism of government meddling makes it likely that the federal minimum wage will be left to wither for a few more years. For workers in places that are seeing minimum-wage increases, this may not matter much (so long as their employers do not skip town). The rest will be left to fend for themselves. If they are lucky, the hot labour-market will force their employers to fork out for higher wages anyway. They might then ask what purpose there is for a federal minimum wage that is so low as to be completely irrelevant.