A superclassic crisis

Blame populists, not reformers, for Argentina’s latest fiasco

The economy has suffered from the legacy of the past and fear of the future

BEFORE HE BECAME president of Argentina in 2015, Mauricio Macri was president of a Buenos Aires football club, Boca Juniors. On September 1st the team faced its crosstown adversary, River Plate, in the superclásico, as contests between the sides are called. The two armies of fans at last had something to agree about. As they made their way to the stadium, Mr Macri’s government announced an emergency reimposition of currency controls. Almost everyone believes that the new policy marks the end, in effect, of his time in office. It also confirms the horrible reality that Argentina has once again become a financial outcast.

The controls limit the amount of dollars that Argentines can buy and force exporters to repatriate their earnings. They come shortly after the government said it would delay repayments of some of its short-term debt and seek an extension of longer-term liabilities.

Intended to prevent capital flight and stabilise the peso, the measures are the final humiliation for Mr Macri, a businessman who promised to revive the economy by scrapping controls and reforming a bloated public sector.

Foreign investors bought into his liberalising vision after the 2015 election, with Wall Street chiefs such as Jamie Dimon, boss of JPMorgan Chase, proclaiming that Argentina had come in from the cold. And when the financial markets became choppier, in 2018, the IMF backed him with $57bn, its largest-ever loan.

A year on, the position could hardly be worse. Inflation is over 50%. The peso has dropped by 30% in the past 12 months, and the country’s dollar bonds trade at less than half their face value.

Plenty of Argentines and some outsiders may conclude that Mr Macri’s agenda to liberalise the economy, and the IMF’s support, were misplaced. In fact much of the blame for Mr Macri’s failure lies with his populist predecessor, Cristina Fernández de Kirchner, who is running again in the upcoming elections as a vice-presidential candidate.

Ms Fernández left behind a gaping budget deficit, artificially low utility prices, statistics that were brazenly manipulated and ruinously high public spending. After years of such mismanagement it has become ever harder to persuade Argentines that prices and the currency will be stable. Their mistrust of their economic institutions is sadly self-vindicating. It makes investors unusually skittish. Who would trust a country with so little faith in itself?

Mr Macri and the IMF made mistakes. To avoid a public backlash Mr Macri decided to narrow the budget deficit gradually, testing the bond market’s patience rather than the electorate’s. In hindsight he should have balanced the books sooner. Perhaps the IMF should have made a smaller loan (coupled, presumably, with an earlier debt restructuring). But it hoped that a large bail-out would restore investor confidence, allowing Argentina to recover without spending all the money the fund had promised.

On top of the tactical errors by the government, what finally broke investors’ confidence was the spectre of populists returning to power. Alberto Fernández and his controversial running-mate, Ms Fernández (they are not related and he is more moderate than she), triumphed in a primary vote on August 11th and are almost certain to win October’s election. Investors’ fear of what the opposition would do led to panic and capital flight, and led the government to do some of those things itself, including delaying debt repayments and imposing currency controls.

Although Mr Fernández has drained Mr Macri of power, he has been reluctant to act as Argentina’s next leader himself. He has instead struck vague and contradictory positions. If he wins, Mr Fernández will not be formally inaugurated until December. Until then Argentina will face a damaging political vacuum.

The outgoing government is introducing measures, including price freezes and handouts, to try to protect the population from the shock rippling through the economy. But the situation is still dire, and the new man will still face the long-term problem that defeated Mr Macri: how to bring Argentina’s economy back in line with market realities. A large part of the electorate and the probable next president seem keen to dodge that question. Until it is confronted, decline and crisis will beckon.

Business in Hong Kong needs to stay strong

Beijing wants to make companies impose obedience to China on protesting employees

John Gapper

© Ingram Pinn/Financial Times

Li Ka-shing, the 91-year-old Hong Kong tycoon, is a veteran of communicating with symbols and allusions. So when his property company CK Asset Holdings acquires Greene King, the largest listed UK pub company, for £4.6bn, we should take note.

The deal followed weekend protests by an estimated 1.7m people in Hong Kong against China’s grip on the former UK colony. Mr Li, who has been excoriated in the People’s Daily for diversifying out of property in mainland China and Hong Kong into economies including the UK, is clearly unbowed.

The same cannot be said of Swire, the trading company established in Hong Kong by a Liverpool textile firm in 1870. Chinese pressure on Cathay Pacific, the airline it controls, over the role of employees in protests, last week forced the replacement of Rupert Hogg, Cathay’s chief executive.

Neither does it apply to auditors such as PwC, whose Hong Kong partners issued a contrite statement after Chinese outrage at employees of large accounting firms publicly backing the protests. Nor to the luxury companies Coach and Versace, which had to apologise for suggesting that Hong Kong is a country, and not a part of China.

“I aim to be strong enough to be respected, if not beloved,” declared John Samuel Swire, who brought his family’s firm to Shanghai and Hong Kong in the 19th century. But China’s use of multinationals to enforce party discipline on rebellious Hong Kongers is in danger of making them neither.

Companies such as Cathay Pacific, 70 per cent of whose flights overfly the mainland, feel unable to resist China’s intolerance of any challenge to sovereignty. But it is humiliating — one point of the open obeisance that China requires — and will hurt elsewhere.

The protests, which started in opposition to an ill-judged extradition law and have become a wider call for greater democracy and civil rights, are a turning point for businesses. Hong Kong’s “one country, two systems” offered both freedom and access to China; in future, they may have to choose.

“It is a very dangerous precedent, and shareholders may ask why they are kowtowing to Beijing,” says Willy Lam, a scholar at the Chinese University of Hong Kong. It is hard to proclaim a social conscience in one place and fail to stand up for staff in another.

China and its state media have made little effort to distinguish between violence and peaceful protest. The Global Times, an offshoot of the People’s Daily, last week relayed calls for the big four Hong Kong auditors to “fire employees found to have the wrong stance”. Deloitte showed some pluck by specifying that “we respect the right of individuals to peacefully express their views”.

Mr Li artfully straddled the line by placing advertisements in papers last week, signed “a Hong Kong citizen”. One included a line from a Tang dynasty poem about an empress who killed her children: “The melon of Huangtai cannot bear the picking again.”

That could be taken either as an admonishment against violence, or as a jab at China; the latter interpretation made Mr Li popular among protesters. He can afford ambiguity: having taken control in 1979 of Hutchison, Swire’s old rival, he has hedged his bets. Nearly half of the revenues of CK Hutchison Holdings, another Li family holding company, come from Europe.

It helps to be Chinese; history is an obstacle to defying China for groups such as Swire and HSBC, whose original prospectus promised a Hong Kong bank “run on sound Scottish banking principles”. A UK company that makes trouble is liable to be dismissed as colonialist, although rights such as freedom of assembly are in Hong Kong’s basic law.

China’s government and media are also practised at encouraging outcries on social media against foreign slights, and consumer boycotts. Liu Wen, a Chinese model, resigned as a brand ambassador for Coach last week after it labelled Taiwan and Hong Kong as countries on T-shirts. “I love my motherland and resolutely safeguard China’s sovereignty!” she wrote.

It is fair for companies to condemn violence and call for order and negotiations to settle the dispute. The outbreak of brutality among protesters at Hong Kong’s airport last week damaged the cause and increased the danger of China intervening by sending military police across the border.

But businesses have collective strength. David Webb, a Hong Kong corporate governance activist, says Cathay could have “called China’s bluff” after it threatened to block flights over the mainland. That might have deterred foreign investment in Hong Kong and scared the wealthy Chinese who keep family offices there.

Those with a big stake in Hong Kong’s future need to do more than fall meekly in line with China and become Beijing’s enforcers. John Slosar, Cathay chairman, was right to insist (before Merlin Swire, Swire’s chief executive, was reprimanded by China’s aviation regulator) that the airline “wouldn’t dream of telling [staff] what they have to think”.

Hong Kong was always a balancing act and its equilibrium requires financial and corporate independence, married to China’s market. Its business leaders should learn from Mr Li.

Pentagon warns of China’s growing influence in the Middle East

Top official cites fears that Beijing could leverage economic ties and steal sensitive technology

Aime Williams in Washington

China Merchants Port Holdings, a state-owned enterprise, is negotiating to take control of the Doraleh Container Terminal in Djibouti, one of the most strategically important locations in the Middle East region © AFP

A top Pentagon official has warned that China’s efforts to gain influence in the Middle East could undermine defence co-operation between the US and regional allies that grow too close to Beijing.

Defence officials are concerned about China’s “desire to erode US military advantages” in the Middle East, Michael Mulroy, the top Pentagon official for the region, told the Financial Times. He argued that Beijing could use investments in the Middle East for “economic leverage and coercion” and “intellectual property theft and acquisition”.

“Many investments are beneficial, but we’re concerned countries’ economic interests may blind them to the negative implications of some Chinese investments, including impact on joint defence co-operation with the United States,” said Mr Mulroy.

Beijing has long been investing in Middle Eastern countries through its $1tn Belt and Road infrastructure programme, through which it aims to finance roads, ports and power stations in some of the world’s poorest areas. Chinese companies are also competing with the US to sell weapons to Middle Eastern countries, according to the Pentagon.

China is one of the biggest trading partners of Iran and of Saudi Arabia, and has also forged close ties with the United Arab Emirates and Egypt.

As part of its push into the Middle East, Chinese companies have built ports in Israel, and invested in oil and petrochemical complexes in Saudi Arabia. Sinopec, the Chinese oil company, has several joint projects with Saudi state energy giant Saudi Aramco, including a large refinery in Yanbu.

The Suez Canal Economic Zone, launched by Egypt in 2015 to create an industrial and logistics hub around the Suez Canal, is another key Chinese investment. The canal is a vital shipping route connecting the Red Sea and the Mediterranean.

Djibouti, in the Horn of Africa, is home to a Chinese naval base, while China Merchants Port Holdings, a part state-owned enterprise, is negotiating to take control of the Doraleh Container Terminal in Djibouti, one of the most strategically located ports in the Middle East region.

Lisa Blaydes, professor of political science at Stanford University, said China had also sought to increase its investment in the reconstruction of Syria, at a time when political instability had deterred other investors.

“Chinese willingness to bring development dollars to countries emerging from conflict could give Beijing an upper hand in terms of regional influence,” said Ms Blaydes. “Yemen, with its strategic location along Gulf shipping lanes, provides a future potential Chinese target.”

Although Washington remained committed to helping partners in the region “fight terrorism” and “promote stability”, the US was prepared to make “hard decisions” to protect US technology, said Mr Mulroy.

One example of the lengths to which Washington has been willing to go to keep sensitive technology out of foreign hands is Turkey, which was removed from the F-35 fighter jet programme after it bought Russian weapons. The US had argued that the Russian S-400 system bought by Ankara would allow the Kremlin to gather intelligence on the advanced fighter jets if they remained in Turkey.

Jon Alterman, Middle East expert and the Center for Strategic and International Studies, said the US and China saw the Middle East in different terms, and that the Chinese did not want to “replace” the United States.

“The American vision of Middle East is based on cold war competition, where there are red countries and blue countries. But the Chinese map is full of grey areas, there are hedges and counter-hedges.”

Beijing has faced accusations that its Belt and Road Initiative can create debt traps for host countries. In April, China said it would commit to more sustainable financing standards following criticism that many BRI projects leave host countries mired in debt, with Beijing offering financing on terms that some states have struggled to maintain.

Whither Central Banking?

In an environment of secular stagnation in the developed economies, central bankers’ ingenuity in loosening monetary policy is exactly what is not needed. What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

Lawrence H. Summers , Anna Stansbury

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CAMBRIDGE – The world’s central bankers and the scholars who follow them are having their annual moment of reflection in Jackson Hole, Wyoming. But the theme of this year’s meeting, “Challenges for Monetary Policy,” may encourage an insular – and dangerous – complacency.

Simply put, tweaking inflation targets, communications strategies, or even balance sheets is not an adequate response to the challenges now confronting the major economies. Rather, ten years of below-target inflation throughout the developed world, with 30 more expected by the market, and the utter failure of the Bank of Japan’s extensive efforts to raise inflation suggest that what was previously treated as axiomatic is in fact false: central banks cannot always set inflation rates through monetary policy.

Europe and Japan are currently caught in what might be called a monetary black hole – a liquidity trap in which there is minimal scope for expansionary monetary policy. The United States is one recession away from a similar fate, given that, as the figure below illustrates, there will not be nearly sufficient room to cut interest rates when the next downturn comes. And with ten-year rates in the range of 1.5% and forward real rates negative, the scope for quantitative easing and forward guidance to provide incremental stimulus is very limited – even assuming that these tools are effective (which we doubt).

These developments seem to lend further support to the concept of secular stagnation; indeed, the issue is much more profound than is generally appreciated. Relative to what was expected when one of us (Summers) sought to resurrect the concept in 2013, deficits and national debt levels are far higher, nominal and real interest rates are far lower, and yet nominal GDP growth has been far slower. This suggests some set of forces operating to reduce aggregate demand, whose effect has only been partly attenuated by fiscal policies.

Conventional policy discussions are rooted in the (by now old) New Keynesian tradition of viewing macroeconomic problems as a reflection of frictions that slow convergence to a classical market-clearing equilibrium. The idea is that the combination of low inflation, a declining neutral real interest rate, and an effective lower bound on nominal interest rates may preclude the restoration of full employment.

According to this view, anything that can be done to reduce real interest rates is constructive, and with sufficient interest-rate flexibility, secular stagnation can be overcome. With the immediate problem being excessive real rates, looking first to central banks and monetary policies for a solution is natural.

We are increasingly skeptical that matters are so straightforward. The near-universal tendency among central bankers has been to interpret the coincidence of very low real interest rates and nonaccelerating inflation as evidence that the neutral real interest rate has declined and to use conventional monetary policy frameworks with an altered neutral real rate.

But more ominous explanations are possible. There are strong reasons to believe that the capacity of lower interest rates to stimulate the economy has been attenuated – or even gone into reverse.

The share of interest-sensitive durable-goods sectors in GDP has decreased. The importance of target saving effects has grown as interest rates have fallen, while the negative effect of reductions in interest rates on disposable income has increased as government debts have risen.

Declining interest rates in the current environment undermine financial intermediaries’ capital position and hence their lending capacity. As the economic cycle has globalized, the exchange-rate channel has become less important for monetary policy. With real interest rates negative, it is doubtful that the cost of capital is an important constraint on investment.

To take the most ominous case first, with interest-rate reductions having both positive and negative effects on demand, it may be that there is no real interest rate consistent with full resource utilization. Interest-rate reductions beyond a certain point may constrain rather than increase demand. In this case, not only will monetary policy be unable to achieve full employment, it will also be unable to increase inflation. If demand consistently falls short of capacity, the Phillips curve implies that inflation will tend to fall rather than rise.

Even if interest-rate cuts at all points proximately increase demand, there are substantial grounds for concern if this effect is weak. It may be that any short-run demand benefit is offset by the adverse effects of lower rates on subsequent performance. This could happen for macroeconomic or microeconomic reasons.

From a macro perspective, low interest rates promote leverage and asset bubbles by reducing borrowing costs and discount factors, and encouraging investors to reach for yield. Almost every account of the 2008 financial crisis assigns at least some role to the consequences of the very low interest rates that prevailed in the early 2000s. More broadly, students of bubbles, from the economic historian Charles Kindleberger onward, always emphasize the role of easy money and overly ample liquidity.

From a micro perspective, low rates undermine financial intermediaries’ health by reducing their profitability, impede the efficient allocation of capital by enabling even the weakest firms to meet debt-service obligations, and may also inhibit competition by favoring incumbent firms.

There is something unhealthy about an economy in which corporations can profitably borrow and invest even if the project in question pays a zero return.

These considerations suggest that reducing interest rates may not be merely insufficient, but actually counterproductive, as a response to secular stagnation.

This formulation of the secular stagnation view is closely related to the economist Thomas Palley’s recent critique of “zero lower bound economics”: negative interest rates may not remedy Keynesian unemployment. More generally, in moving toward the secular stagnation view, we have come to agree with the point long stressed by writers in the post-Keynesian (or, perhaps more accurately, original Keynesian) tradition: the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand.

If reducing rates will be insufficient or counterproductive, central bankers’ ingenuity in loosening monetary policy in an environment of secular stagnation is exactly what is not needed. What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

Instead of more old New Keynesian economics, we hope, but do not expect, that this year’s gathering in Jackson Hole will bring forth a new Old Keynesian economics.

Anna Stansbury is a PhD candidate in Economics at Harvard University.

Lawrence H. Summers, US Secretary of the Treasury (1999-2001) and Director of the US National Economic Council (2009-2010), is a former president of Harvard University, where he is currently University Professor.

How Many Steps Should You Take a Day?

By Kim Tingley


Humans, once in constant motion as hunters and gatherers, are moving less than ever. At first, this trend seemed like progress: Transferring our heavy and dangerous work to animals, then machines, enabled more people to live longer. As recently as the 1950s, doctors considered exercise dangerous for people over age 40; for heart disease, which was then killing a record number of Americans, they prescribed bed rest. This was partly based on their concept of what “exercise” was: Early physiologists conducted studies on their (typically young, male) graduate students or on military servicemen — and in order to become more fit than they already were, these subjects needed to work out hard. “The mantra was, You have to go to a gym, you have to do high-intensity physical activity,” says Abby C. King, a professor of health research and policy and medicine at Stanford University: “this sort of ‘no pain, no gain’ phenomenon.”

That notion began to change with the 1968 publication of “Aerobics,” by Kenneth Cooper, an Air Force physician, who argued that anyone could take measures to prevent heart disease with regular “aerobic” exercise, like swimming or jogging, that increases heart rate and oxygen uptake, “improving the overall condition of the body” and thereby “building a bulwark against many forms of illness and disease.” But it was hard to tease apart whether physical activity made people healthier or whether healthier people were more likely to be active. In a landmark study published in 1989, Cooper and colleagues tried to address this problem by considering subjects’ physical fitness, a metric determined by assessing performance on a treadmill test. Theirs is believed to be the first long-term study of men and women to show that the higher a person’s fitness level, the lower their risk of mortality, especially from cardiovascular disease and cancer. But physical fitness, they noted, is not the same as physical activity, the amount of movement a person gets in the course of their daily life. The only way researchers could learn about the latter was by asking people to describe their behavior — a much less precise method than measuring their cardiovascular capacity in a lab.

Not having an objective way of measuring how much activity people were doing made it difficult to observe the full range of that activity’s health benefits. Until 2008, the federal government usually offered physical-activity recommendations as part of its official dietary guidelines, as a way of balancing energy intake with expenditure. But by that year, when the United States Department of Health and Human Services issued its first set of physical-activity guidelines, there was ample evidence that the more “moderate” to “vigorous” activity people reported doing, like brisk walking or raking leaves, the lower their risk of diabetes, certain cancers and cardiovascular disease. Now the department includes Alzheimer’s disease, depression, anxiety and insomnia and recommends that adults get at least 150 minutes of moderate-to-vigorous exercise a week.

Such a broad goal was necessary largely because activity that takes place at a lower intensity for less than 10 minutes had been nearly impossible to study. “We never asked about light-intensity physical activity, because we realized it’s poorly reported,” says I-Min Lee, a professor of medicine at Harvard Medical School. “Putzing around your house, picking up after yourself, doing a little bit of light gardening — how well do people remember that?”

Increasingly, though, there were hints that such activity might be more critical than previously thought, especially as societies became more sedentary. On average, adults in Western countries spend nine to 11 hours per day sitting, and a growing body of research shows that among people who do similar amounts of moderate to vigorous activity, those who sit longer have more adverse outcomes. “What are the people who sit less doing during the time when the longer-sitters are sitting?” says Kenneth E. Powell, a former epidemiologist with the Centers for Disease Control and Prevention. “That difference must be what we’ve now called lighter physical activity.”

Over the last decade, that activity suddenly became measurable in real time with the advent of iPhones and wearable fitness trackers, many of which track “steps.” There’s no evidence that steps are better for health than other kinds of light-intensity activity; they just happen to be a movement people make often that is also detectable. But these same qualities make them uniquely relevant to researchers: Because so many people are able to easily count their steps, it’s important to understand the effect of steps, per se, on health.
In May, Lee and colleagues published, in JAMA Internal Medicine, one of the first studies to examine the relationship between steps and mortality, inspired partly by a workplace exercise competition she had entered that used Fitbits. Many of her colleagues, she noticed, felt discouraged by a popular goal of 10,000 steps. But that figure, she learned, most likely comes from the word for pedometers sold in Japan since the 1960s, manpo-kei, which translates to “10,000 steps meter” — a number apparently chosen in part because the Japanese character for it looks like a walking man. How many steps, Lee wondered, did people actually need to take to see health benefits?
To find out, she recruited more than 16,000 female volunteers, whose average age was 72, to wear accelerometers during their waking hours for a week. Then she followed up with them after about four years to see if they were still living. She found that increasing your average step count by even a small amount reduced your risk of mortality — and that, among the older women in her study, those benefits plateaued at about 7,500 steps per day. The least-active women averaged about 2,700 steps per day; those who averaged just 1,700 more than that, a difference of about a mile, were 41 percent less likely to die of any cause.

Lee’s study measured steps per minute, and found that only the total number of steps, not how quickly the women took them, seemed to matter. But devices can’t yet tell how steps are taken within each minute. “One of the big questions is: Does every step count?” says David Bassett, a co-author on Lee’s study and a professor of exercise physiology at the University of Tennessee. “Does it matter whether you’re doing continuous walking at a certain pace? Or do these intermittent steps that you accumulate when you’re sweeping the kitchen or preparing a meal or making the bed — do they count equally for health benefit?”

It’s possible to imagine a day when doctors can prescribe an optimal step “dose” for individual patients, who could then measure their progress in real time. But even if they could, it’s still unclear how valuable steps are compared with other movements. For instance, focusing on steps might mean that both researchers and the public ignore activities that are equally vital but trickier to capture, like strength training. In terms of being able to track how much cumulative muscle strength you’ve used on a given day by hoisting a toddler or a bag of groceries, says Kathleen Janz, a professor of health and human physiology at the University of Iowa, “We don’t have an app for that.”

Supposing a device could differentiate the subtlest movements, it still wouldn’t explain their health impact. The ubiquity of smartphones and wearable step counters has offered researchers access to anonymous data about the behavior of millions of technology users “in the wild,” King says. But while the number and diversity of those subjects can reveal patterns previously too subtle to see — she and co-authors reported in Nature in 2017 that the walkability of a city has a greater impact on the physical activity of women than men — the devices’ very objectivity prevents them from revealing potentially relevant subjective information. A step counter can’t detect the context in which those steps were taken (strolling with a friend, say, versus running for a train), which researchers believe may also influence their health benefit.

Context is also crucial to understanding why people move; step-trackers alone can’t reveal whether being able to count steps in particular actually encourages, or discourages, people to take more of them. And motivation, unique to each person, may be the most essential aspect of physical activity to decode, and the least possible to quantify. “People who are very inactive, they get benefits from adding just a little bit more,” Powell says. “That has been a hard message to get across, because people like to know how much.”

Kim Tingley is a contributing writer for the magazine.