Peru’s new president has plunged it into instant political crisis

Pedro Castillo’s nomination of leftwing radicals for cabinet posts shows he is no mood to 

Michael Stott, Latin America editor

Peru’s president Pedro Castillo, right, with prime minister-designate Guido Bellido © Ernesto Arias/AP

Peru has suffered the world’s worst per capita death toll from coronavirus, experienced one of the deepest pandemic-induced recessions and been torn apart by a bitter election campaign.

To this unenviable cocktail, its new president has added a deep political crisis on his first full day in office.

Pedro Castillo, a primary school teacher and small farmer from a remote Andean village, had never held elected office before snatching a narrow victory in June’s presidential election.

The ultimate political outsider, his candidacy alarmed the wealthy but delighted the have-nots. 

Castillo’s slogan “No more poor people in a rich country” resonated among millions left behind by uneven economic growth in the world’s second-biggest copper exporter.

Castillo’s favourite props in a highly professional campaign that belied his humble origins were a large yellow pencil, symbolising education, and a trademark Stetson hat. 

He rode to vote on horseback.

But behind the modest school teacher with no political track record lurked Vladimir Cerrón, the Cuban-educated leader of the Marxist-Leninist party Free Peru, which adopted Castillo as its presidential candidate not long before the election.

Castillo was constantly questioned about how he might govern if he won: as a hard-left revolutionary or a consensus-seeking moderate? 

His responses were contradictory and confused.

The original Free Peru manifesto, pledging sweeping nationalisation, gave way to a vaguer and less radical programme. 

Cerrón disappeared from view during the election. 

Castillo stopped giving interviews, while moderating his stance and playing down the hardline views of Cerrón.

The devastation caused by coronavirus gave his campaign extra potency. 

Strict lockdowns crippled the economy but failed to contain infections. 

Hospitals were swamped. 

Almost 200,000 people have died so far from Covid-19 in a country of 32m, and economic output shrank 11.6 per cent last year.

Castillo won by the slimmest of margins, just 44,000 votes. 

His defeated conservative rival Keiko Fujimori fought the result for six weeks, alleging fraud, but international observers and Peruvian authorities concluded that the vote had been fair.

Peru’s mainstream left had sought to build bridges with Castillo prior to his inauguration on Wednesday. 

It hoped to put together a broad coalition to help the inexperienced new president win support for a moderate programme of change in the fragmented Congress, where he lacks a majority.

Thursday night’s chaotic events appear to have put paid to that initiative. 

Castillo’s decision to name Free Peru radicals to key posts outraged moderates and conservatives alike and set his administration on a collision course with the legislature.

Almost as soon as the names were announced, there was uproar. 

Peruvians from different parts of the political spectrum lined up to denounce the choices, with particular opprobrium reserved for prime minister-designate Guido Bellido because of his sympathies with a guerrilla movement whose war on the Peruvian state cost 70,000 lives. 

The foreign minister is a former Marxist rebel with close ties to Cuba.

Castillo must seek a vote of confidence from Peru’s unicameral Congress for his unconventional cabinet, and some legislators fear a trap. 

If they reject his choices twice, the president can dissolve Congress and call fresh elections. 

Since legislators cannot run for a second term, they would in effect be signing their own death warrant.

Congress, however, has a powerful weapon of its own. 

Legislators may remove a president from office for the ill-defined offence of “moral incapacity”, a device that has been used to trigger the ejection of two of Castillo’s predecessors.

Either way, serious political turbulence beckons. 

Investors who liked to say of Peru that “regardless of the crazy politics, the economy grows fine” are discovering that the politics matters after all.

After the exodus

Office re-entry is proving trickier than last year’s abrupt exit

As economies reopen employers face tough choices

Eight years ago Google’s then finance chief, Patrick Pichette, recalled being asked how many of the tech giant’s employees telecommuted. 

His answer was simple: “As few as possible.” 

Despite the fact that Google was busy churning out apps that enabled remote work, his comment was also unremarkable. 

From Silicon Valley and Wall Street to the Square Mile in London, La Défense in Paris, Potsdamer Platz in Berlin and Hong Kong’s Central, the world’s business districts welcomed millions of office grunts every workday. 

Congregating in one place was believed to spur productivity, innovation, camaraderie. 

It enabled bosses to keep a beady eye on their underlings. 

Work from home was something to be done only if it absolutely couldn’t be avoided.

In March 2020 it suddenly could not. 

The covid-19 pandemic forced governments around the world to impose strict lockdowns. 

Overnight, most of the world’s offices became off limits. 

To survive, companies everywhere embarked on a gigantic experiment in home-working. 

City workers swapped suits for jogging trousers and city-centre flats for the suburbs. 

In a corporate change of heart that typified the era, Google gave each employee globally $1,000 for home-office furniture, offered them virtual fitness videos and cooking lessons, and urged everyone to “take good care of yourselves and one another”.

As vaccination rates rise in the rich world the home-working experiment is being unwound (see chart 1). 

But the speed of the unwinding, and its scope, has become a matter of hot debate among chief executives, and between them and their staff. The strategies that emerge out of these debates will shape not just what happens in the next few months but also the longer-term future of office work.

One change is already obvious. 

The universal anti-remote-work mindset of yesteryear is gone, replaced by a range of attitudes that vary by industry and region. 

At one extreme, some companies now expect all workers to be back at their desks. 

At the other, certain firms are doing away with offices altogether. 

Most businesses fall somewhere in the middle.

The most ardent supporters of the status quo ante can be found on Wall Street. 

David Solomon, boss of Goldman Sachs, has called remote work an “aberration”. 

His opposite number at Morgan Stanley, James Gorman, recently quipped, “If you can go into a restaurant in New York City, you can come into the office.” 

Jamie Dimon, chief executive of JPMorgan Chase, has conceded that “people don’t like commuting, but so what?” 

The three bank bosses worry that remote workers are less engaged with the company, and potentially less productive.

Whether or not they agree with the Wall Street titans deep down, their counterparts in Europe see such intransigence as an opportunity to lure disaffected bankers who prefer greater flexibility. 

ubs, a Swiss lender, is reportedly about to allow two-thirds of its employees to pursue “hybrid” work, which combines some days at home and some at the office—in part as a recruitment tool. 

NatWest, a British bank, expects just one in eight workers back at the office full-time, with the rest on hybrid schedules or primarily home-working. 

People at Germany’s Deutsche Bank will work remotely up to 60% of the time. 

Noel Quinn, chief executive of hsbc, has described drifting back to pre-pandemic patterns as a “missed opportunity” and would like the Asia-centric bank’s staff to embrace hybrid arrangements.

Many technology ceos seem to share Mr Quinn’s sentiment. 

They fret that strict return-to-office mandates will put off restless software engineers. 

Dylan Field, co-founder of Figma, which helps firms create and test apps and websites, worries that employees will jump ship if the rules are too restrictive. 

Tech workers may indeed be getting more footloose, with quit rates seemingly higher and poaching more rampant than usual. 

Perhaps in recognition of this, in June Facebook said that all of the social-media giant’s full-time employees could apply for permanent remote work. 

Companies such as Spotify, a music-streamer, Square, a fintech firm, and Twitter have told many of their staff they can work remotely for ever if they please.

Corporate chimeras

Across regions and industries evidence suggests that people like the ability to work from home at least occasionally. 

A poll of 2,000 American adults by Prudential, an insurer, found that 87% of those who worked from home during the pandemic wanted to be able to continue doing so after restrictions ease. 

According to the same survey, 42% of remote workers said they would search for a new job if they were asked to return to the office full-time. 

Only one in five American employees say they would seldom or never want to work from home (see chart 2). 

In a recent poll of more than 10,000 European office workers, 79% said that they would back legislation prohibiting bosses from forcing people to work from the office.

Young workers, often seen as casualties of remote working, have warmed to flexible schedules. 

Members of Gen-z, now aged 16-21, were more likely than any other age group to cite personal choice rather than employers’ policies as the main reason for continuing to work remotely, according to a study by Morgan Stanley. 

At the same time, many workers of all ages are still keen to come to the office every now and again—not least to enjoy reliable air-conditioning during what is shaping up to be a scorching northern summer. 

Salesforce, a business-software giant itself implementing a work-from-anywhere model, found that although nearly half its employees are opting to stay home most of the time, four in five want to maintain a physical connection with the corporate office.

The public sector, often the largest employer in a country, faces similar considerations. 

Britain’s tax authority is offering all employees the right to work from home two days a week. 

In America the federal government predicts that many civil servants will want to maintain flexible schedules after the pandemic. 

Ireland, which wants 20% of its 300,000 public servants working remotely by the end of the year, is offering financial support to encourage them to relocate outside cities. 

It will create more than 400 remote-working hubs, allowing staff to work closer to home. Indonesia has set up a “work from Bali” scheme for civil servants to help revive the tropical island’s tourism industry.

All this suggests that hybrid arrangements will persist in most places (with the possible exception of Wall Street). 

They present their own challenges, however. 

They blur the lines between work and family life. 

Virtual meetings can be even more tedious than in-person ones; people who have admitted to Zoom fatigue include Eric Yuan, the video-conferencing app’s billionaire founder. 

And hybrid schedules make managing office space tricky, especially at a time when many companies, including hsbc, are planning to reduce their office footprint.

Given a choice, most Australian workers would prefer to work from home on Mondays and Fridays, according to ey, a consultancy. 

Even if managers’ suspicions that this is a thinly veiled effort to extend the weekend prove unfounded, that means that offices would be far busier on Wednesdays, the least popular choice for home-working, than at the start and end of the work week.

Some firms still intend to let people come in whenever they want. 

Others are getting inventive. 

Mr Field of Figma gives his staff a choice: work remotely full-time or, if you come in at least twice a week, get a desk in an office. 

Snowflake, a data-management firm, will let individual units decide how to organise themselves. 

Many companies, including giants such as Apple, have got around the problem by mandating days when employees are required to be present.

Normality bites

The sudden reconfiguring of work life is leading to friction. 

Workers who want more flexibility are finding themselves at odds with employers calling for a return to something closer to pre-pandemic normal. 

Some of Apple’s employees have criticised the tech giant’s requirement to work in-person three days a week as tonally “dismissive and invalidating”. 

The afl-cio, America’s biggest trade-union federation, is facing health-and-safety complaints from its own staff over its measures to bring workers back to the office in the absence of improved ventilation and amid fears of continued risk of infection while commuting on public transport.

Such disagreements are spilling over into boardrooms. 

Some shareholders, including big institutional investors, are keen to promote flexible working not only to retain talent but also to burnish companies’ environmental, social and governance (esg) credentials. 

s&p Global, an analytics firm, says that under its assessments, the ability to work from home is one measure of employees’ health and wellbeing, which can influence up to 5% of a firm’s esg score. 

This is roughly the same weighting attached to risk and crisis management for banks, or human-rights measures for miners. 

It may affect things like gender and racial diversity. 

Studies find that mothers are likelier than fathers to favour work from home. 

Research by Slack, a messaging app, found that only 3% of black knowledge-workers want to return to the office full-time in America, compared with 21% their white counterparts.

That is a lot for companies to ponder, even as they deal with short-term controversies, such as whether or not to bar unvaccinated workers from the office. 

Disruptive though it was, last year’s abrupt transition to remote work may, ironically, prove considerably smoother than the shift to whatever counts as normal in the post-pandemic era.  

Central Banking, Fast and Slow

As the global economy emerges from the COVID-19 shock, systemically important central banks are faced with the unenviable task of deciding when and how quickly to phase out extraordinary stimulus measures. While there is no easy answer, there are clear criteria for maintaining policy credibility.

Mohamed A. El-Erian

CAMBRIDGE – Economic-policy discussions in the eurozone, the United Kingdom, and the United States increasingly revolve around the question of when and how quickly central banks should pull back the uber-stimulus measures implemented last year in response to the COVID-19 pandemic.

There are no easy answers. 

Both parts of the question call for finely balanced judgment calls to account for uncertainties that remain in play. 

Policy changes by major central banks can have far-reaching implications for economic and financial well-being, affecting not just those directly involved but also the many countries that will end up “importing” the effects of the decisions.

A simple way to frame the debate is to think of a road trip. In the car are two groups that agree on three things: the “destination” is to achieve high, durable, inclusive, and sustainable economic growth; the route to get there is far from straight; and the car has good forward momentum.

After that, the two camps disagree. 

One group believes that much of the remaining journey will be uphill and is therefore not too worried about the curves along the way. 

It would prefer to keep its foot on the accelerator, pedal-to-the-metal, lest the vehicle decelerate or stall.

The other passengers anticipate a downhill journey with many treacherous curves. 

With the vehicle gaining speed, this group would prefer to ease off the accelerator and avoid risking a sudden “economic handbrake turn,” as Andy Haldane, the Bank of England’s former chief economist, recently put it.

Whether you are an uphiller or a downhiller depends mainly on your assessment of three current issues: the labor market, the surge in inflation, and the risk of not being able to recover quickly in the event of a policy mistake.

The big labor-market puzzle is that, despite massive demand, the labor market is unable to match unemployed workers to jobs. 

The situation is particularly stark in the US. 

While Job Openings and Labor Turnover Survey data for April (the most recent available) show that there are a record number of job openings in the US – more than nine million – labor-force participation remains stubbornly low, and unemployment high, compared to pre-pandemic levels.

To explain this gap, some point to temporary and reversible factors such as school closures, enhanced unemployment insurance benefits, and insufficient childcare, whereas others worry about longer-term issues such as an altered propensity to work and skills mismatches. 

In any case, the labor market’s persistent malfunctioning – particularly employers’ struggle to find employees – is likely to lead to higher wage growth, a possibility that fuels concern about the second issue.

How “transitory” is today’s inflation? 

The pedal-to-the-metal camp has a surprisingly strong conviction that the current uptick in inflation will sharply reverse itself. 

As the year progresses, they expect base effects to wash out together with the supply and demand mismatches.

Others, including me, are not so sure, owing to the likelihood of persistent supply bottlenecks, changes in supply chains, and lasting inventory management challenges. 

We will probably need many more months of data before we can offer convincing assessments of these variables.

In the meantime, policymakers must be mindful of the risks associated with any given course of action – including inaction. 

In the face of such uncertainty, it is wise to ask not just what could go wrong but also what the consequences of a policy mistake would be. 

Under the current conditions, a wrong move could have far-reaching and lasting effects.

Those favoring a continuation of pedal-to-the-metal monetary policies argue that central bankers still have tools to overcome inflation should it persist. 

But as the downhillers are quick to point out, those tools have become increasingly ineffective and difficult to calibrate. 

As such, a central bank that falls behind may be forced to slam on the brakes, risking an economic recession and financial-market instability. 

The risk of inaction (or inertia) in this case may be larger than that of acting early.

In the current policy debate, this decision-making framework offers greatest clarity at the edges. 

For example, there is a compelling case for the US Federal Reserve to start easing its foot off the accelerator. 

Economic growth is buoyant, fiscal policy is also extremely expansionary, and businesses and households alike have significant accumulated savings that they will now be spending down. 

The conditions are now ripe for the Fed to start reducing – gradually and carefully – its bond-buying program from its current rate of $120 billion per month.

The European Central Bank, however, is in a different position. 

While eurozone growth is picking up, the level of fiscal support is not as strong as in the US, and the private-sector recovery is not as advanced.

The hardest case to call is the UK. 

With growth, fiscal support, and the private sector’s prospects more finely balanced, it is no wonder two highly respected central bankers, Haldane and BOE Governor Andrew Bailey, found themselves on opposite sides of the debate this month.

Other central bankers around the world may be tempted to think that they are simply spectators in all this. 

They are not. 

The Fed, the ECB, and the BOE are systemically important: their actions often have meaningful spillover effects (both positive and negative) on the global economy.

As such, central bankers elsewhere should be running their own scenario analyses and formulating appropriate response plans. 

There is nothing wrong with hoping that three systemically important central banks will get to their destination smoothly. 

But the journey is far from over, and the risk of someone slipping is not negligible.

Mohamed A. El-Erian, President of Queens’ College, University of Cambridge, is a former chairman of US President Barack Obama’s Global Development Council. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author of two New York Times bestsellers, including most recently The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

This is as good as it gets for the US economy

America has already been through a renaissance — it is unlikely to be reborn again

Ruchir Sharma 

Booms are often killed by complacency, which grips the US now © Victor J Blue/Bloomberg

Driven by the success of America’s vaccine rollout and massive government stimulus, the US economy is expected to grow as fast as 7 per cent this year and is currently leading the world recovery. 

The commentariat is talking up an “American Renaissance” in a nation that on Sunday marked its 245th Independence Day.

But there is a problem: America just went through an economic renaissance. 

It’s not likely to be reborn again.

A decade ago, in the wake of the 2008 financial crisis, Standard & Poor’s downgraded US government debt for the first time ever, triggering dire forecasts of American decline. 

Instead, the 2010s saw an expansion of American economic power, driven by its tech prowess and its relatively quick resolution of the debt crisis. 

The US share of global gross domestic product rose from a 2011 low of 21 per cent to 25 per cent last year. 

Average incomes started the decade 26 per cent higher in the US than in Europe and finished more than 60 per cent higher. 

The US income lead over Japan grew even more dramatically. 

By early 2020, despite talk of “despair” in the jobless middle classes, US consumer and small business confidence hit highs unsurpassed since the 1960s. 

As a financial superpower, the US reached even greater heights. 

Its share of global stock markets increased in the 2010s from 42 per cent to 58 per cent. 

The dollar emerged more dominant than ever, helping the US extend its lead over other developed nations. 

By late 2019, 75 per cent of all overseas loans to individuals and corporations were denominated in dollars, up from 60 per cent before the crisis of 2008. 

Six of every 10 countries used the dollar as their “anchor” — the currency against which they measure and stabilise the value of their own currency — near a record high. 

China’s efforts to challenge the dollar as the world’s favourite reserve currency also failed utterly during the 2010s.

After a comeback decade, America is unlikely to rise anew in the 2020s. 

As I argued at the start of the pandemic, booms that are potent are almost always followed by a long hangover. 

The US economy led the world in the 1960s, but in the 70s it worried about falling behind the oil-fuelled Soviet Union. 

In the 1980s it fretted over an ascendant Japan. 

The US came roaring back during the tech boom of the 1990s, but the 2000s were all about the rise of emerging markets led by China. 

Forecasts for another US surge rest in part on faith that it can keep extending its lead in technology. 

But the US internet giants already face challengers in emerging markets from Asia to Africa, where local entrepreneurs are building national and regional market leaders in ecommerce, e-banking and search. 

Europe is closing the innovation gap in fields such as robotics and AI, and European start-ups are attracting more private equity money than ever before. 

Booms are often killed by complacency, which grips the US now. 

Significant voices in both political parties have argued that America should continue to borrow and spend freely, thanks to the unrivalled status of the dollar as the world’s most wanted currency. 

But easy money flowing out of the Fed is threatening to weaken the dollar and feeding the rise of zombies — companies which earn too little to make even interest payments on their debt. 

They barely existed in the US 20 years ago, but accounted for 6 per cent of listed companies by 2010, and almost 20 per cent by last year.

The federal government and corporations are now so deep in debt, it is hard to imagine how they can further boost the economy. 

In 2010, the US owed the rest of the world $2.5tn, a sum equal to 17 per cent of US GDP. 

By early last year, those liabilities had risen to $10tn and more than 50 per cent of GDP — a threshold that has often triggered currency crises in the past. 

Currently they are $14tn and 67 per cent of GDP. 

None of this means that American declinists, so wrong in the 2010s, will finally be proved right. 

China’s rising share in the global economy has come largely at the expense of Europe and Japan. 

Declinists, still convinced the US will soon be overtaken by China, overlook the fact that China has huge debt problems too. 

What is more likely is that the US will have a mediocre decade, weighed down by the excesses of its recent boom. 

Relative to other markets, US stocks are at a 100-year peak. 

Valuations that high reflect the new optimism: after a decade of unanticipated US success, many analysts now expect more of the same. 

Alas, this may be as good as it gets for America. 

The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’

Let’s all please stop calling dollars ‘fiat money’

Currencies are not memes that only have value because the governments say they do

Brendan Greeley 

          Ben Bernanke during an interview with 60 Minutes in 2009 © Reuters

Sometimes it’s possible to simplify something too much. 

More than a decade ago Ben Bernanke, then chair of the Federal Reserve’s Board of Governors, sat down for an interview with 60 Minutes, the television show that important Americans call when they have important things to say.

Bernanke was explaining how the Fed had responded to the financial crisis. 

When he got to the asset purchase programmes, the host asked whether the Fed was spending taxpayers’ money. 

“It’s not tax money,” Bernanke said. 

“The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. 

So to lend to a bank, we simply use the computer to mark up the size of the account that they have at the Fed.” 

The host asked him whether the Fed had been printing money. 

“Well,” said Bernanke, “effectively.” 

He wasn’t wrong, of course. 

He’s Ben Bernanke. 

You might disagree with his policy choices, but he certainly knows how money is created.

That quote from 60 Minutes, though, still comes up, often, more than a decade later. 

When Bernanke simplified what the Fed does, he confirmed for a lot of people the deeply mistaken idea that the Fed simply magics up dollars out of nothing and then, by fiat, says “There. That’s money.” 

There’s a problem with the word “fiat.” 

We use it to describe our current monetary system. 

Then we teach undergraduates that the word comes from the Italian for decree, or edict. 

We tell them that fiat money is a social convention. 

It has value because the government says it does, and everyone agrees. 

Cameron Winklevoss, co-founder of the crypto exchange Gemini, says that “all money is a meme.” 

That’s what he was taught at Harvard while he was doing the other thing he’s famous for.

This is unfortunately not at all how money works. 

The first description I could find of money as “fiat” comes from John Stuart Mill, the English philosopher, in Principles of Political Economy. 

Mill proposed a hypothetical: suppose a government began paying salaries in a paper money that couldn’t be converted on demand into silver or gold. 

The value of that money, he wrote, “would depend on the fiat of the authority”. 

Well, yeah. If the US Department of the Treasury were to print up carnival tickets, spend them into the economy and call them dollars, the value of those dollars would depend on the fiat of Congress. 

But that’s not what the Treasury does, and that’s not what a dollar is. 

If you live in the US, the dollars you use most often in your daily life are bank dollars. 

Your bank creates them when it loans you money, then deposits them in your account.

Bank dollars don’t have value just because your bank says they do. 

Your bank has regulators poking into its books, to make sure those loans are sound assets with decent returns. 

And your bank pays premiums to the Federal Deposit Insurance Corporation, to guarantee your deposits in case it fails anyway. 

If bank dollars are just a social convention — a meme — then your mortgage is just a meme, too.

Now, take the Fed. 

It’s just a special bank. 

Like Bernanke said, commercial banks have deposit accounts at the Fed. 

When the Fed lends them money, it marks up their accounts with dollars we call reserves. 

And, just like when the commercial banks lend you money, those reserves are a liability for the Fed. 

But there’s a crucial part of the process that didn’t make it into 60 Minutes: when the Fed marks up those accounts, it’s also buying assets. 

It swaps, one for one: reserves for assets. 

When we say the Fed is printing money, we imply that there was nothing, and now there is something. 

Ta da! 

But again, that’s not at all what happens. 

The Fed has to buy something. 

Usually it’s a Treasury bill, but in an emergency it can be a more questionable asset. 

Then the Fed credits back reserves. 

To believe those reserves are just a meme, you have to believe the assets are just a meme. 

But they aren’t. 

Don’t take my word for it. 

The Fed’s assets provide a return, every year, lean years and fat years, without fail.


Now let’s do the Department of the Treasury. 

It has an account at the Fed, too, but it cannot just magic dollars out of its account. 

The Treasury can put dollars in its account collecting taxes, or by selling Treasury bills. 

There is no fiat, no decree. 

There is no money printer, anywhere. 

It’s all transactions on a balance sheet, assets for liabilities. 

Now: you may believe that all those mortgages and credit card loans are meaningless assets. 

You may believe the US government will not be able to collect enough taxes to roll over those Treasury bills. 

If you are right, then yes, the dollar has no value. 

But we’re still not talking about trusting anyone’s fiat. 

We’re talking about credit analysis. 

So, please: let’s stop calling it fiat money. 

Let’s start calling it what it is: credit money.  

Lives v livelihoods

How to assess the costs and benefits of lockdowns

The policy will stay in governments’ toolkits. A growing body of research will guide its use

“To me, i say the cost of a human life is priceless, period,” said Andrew Cuomo, the governor of New York state. 

As they tried to slow the spread of covid-19 in the spring of 2020, politicians took actions that were unprecedented in their scale and scope. 

The dire warnings of the deaths to come if nothing was done, and the sight of overflowing Italian hospitals, were unfamiliar and terrifying. 

Before the crisis the notion of halting people’s day-to-day activity seemed so economically and politically costly as to be implausible. 

But once China and Italy imposed lockdowns, they became unavoidable elsewhere.

Much of the public debate over covid-19 has echoed Mr Cuomo’s refusal to think through the uncomfortable calculus between saving lives and the economy. 

To oversimplify just a little, the two sides of the lockdown debate hold diametrically opposed and equally unconvincing positions. 

Both reject the idea of a trade-off between lives and livelihoods. 

Those who support lockdowns say that they have had few malign economic effects, because people were already so fearful that they avoided public spaces without needing to be told. 

They therefore credit the policy with saving lives but do not blame it for wrecking the economy. 

Those who hate lockdowns say the opposite: that they destroyed livelihoods but did little to prevent the virus spreading.

The reality lies between these two extremes. 

Lockdowns both damage the economy and save lives, and governments have had to strike a balance between the two. 

Were trillions of dollars of lost economic output an acceptable price to pay to have slowed transmission of the disease? 

Or, with around 10m people dead, should the authorities have clamped down even harder? 

Now that politicians are considering whether and when to lift existing restrictions, or whether to impose new ones, the answers to these questions are still crucial for policy today. 

Alongside vaccines, lockdowns remain an important way of coping with new variants and local outbreaks. 

In late June Sydney went into lockdown for two weeks; Indonesia, South Africa and parts of Russia have followed suit.

Countries have used a range of measures to restrict social mixing over the past year, from stopping people visiting bars and restaurants to ordering mask-wearing. 

The extent to which these strictures have constrained life has varied widely across countries and over time (see chart 1). 

A growing body of economic research now explores the trade-off between lives and livelihoods associated with such policies. 

Economists have also compared their estimates of the costs of lockdowns with those of the benefits. 

Whether the costs are worth incurring is a matter for debate not just among wonks, but also for society at large.

People who see no trade-off at all might start by pointing to a study of the Spanish flu outbreak in America in 1918-20 by Sergio Correia, Stephan Luck and Emil Verner, which suggested that cities that enacted social distancing earlier may have ended up with better economic outcomes, perhaps because business could resume once the pandemic was under control. 

But other economists have criticised the paper’s methodology. 

Cities with economies that were doing better before the pandemic, they say, happened to implement restrictions earlier. 

So it is unsurprising that they also fared better afterwards. (The authors of the original paper note that pre-existing trends are “a concern”, but that “our original conclusion that there is no obvious trade-off between ‘flattening the curve’ and economic activity is largely robust.”)

Another plank of the no-trade-off argument is the present-day experience of a handful of places. 

Countries such as Australia and New Zealand followed a strategy of eliminating the virus, by locking down when recorded infections rose even to very low levels and imposing tough border controls. 

“Covid-19 deaths per 1m population in oecd countries that opted for elimination...have been about 25 times lower than in other oecd countries that favoured mitigation,” while “gdp growth returned to pre-pandemic levels in early 2021 in the five countries that opted for elimination,” argues a recent paper in the Lancet. 

The lesson seems to be that elimination allows the economy to restart and people to move about without fear.

Something for nothing

But correlations do not tell you much. Such countries’ success so far may say more about good fortune than it does about enlightened policy. 

What was available to islands such as Australia, Iceland and New Zealand was not possible for most countries, which have land borders (and once the virus was spreading widely, eradication was almost impossible). 

Japan and South Korea have seen very low deaths from covid-19 and are also cited by the Lancet paper as having pursued elimination. 

But whether they did so or not is questionable; neither country imposed harsh lockdowns. 

Perhaps instead their experience with the sars epidemic in the early 2000s helped them escape relatively unscathed.

When you look at more comparable cases—countries that are close together, say, or different parts of the same country—the notion that there is no trade-off between lives and livelihoods becomes less credible. 

Research by Goldman Sachs, a bank, shows a remarkably consistent relationship between the severity of lockdowns and the hit to output: moving from France’s peak lockdown (strict) to Italy’s peak (extremely strict) is associated with a decline in gdp of about 3%. 

Countries in the euro area with more excess deaths as measured by The Economist are seeing a smaller hit to output: in Finland, which has had one of the smallest rises in excess deaths in the club, gdp per person will fall by 1% in 2019-21, according to the imf; but in Lithuania, the worst-performing member in terms of excess deaths, gdp per person will rise by more than 2%.

The experience across American states also hints at the existence of a trade-off. 

South Dakota, which imposed neither a lockdown nor mask-wearing, has done poorly in terms of deaths but its economy, on most measures, is faring better today than it was before the pandemic. 

Migration patterns also tell you something. 

There have been plenty of stories in recent months about people moving to Florida (a low-restriction state) and few about people going to Vermont (the state with the fewest deaths from covid-19 per person, after Hawaii), points out Tyler Cowen of George Mason University. 

Americans, at least, do not always believe that efforts to control covid-19 make life more worth living.

What if all these economic costs are the result not of government restrictions, though, but of personal choice? 

This too is argued by those who reject the idea of a trade-off. 

If they are correct, then the notion that simply lifting restrictions can boost the economy becomes a fantasy. 

People will go out and about only when cases are low; if infections start rising, then people will shut themselves away again.

A number of papers have bolstered this argument. 

The most influential, by Austan Goolsbee and Chad Syverson, two economists, analyses mobility along administrative boundaries in America, at a time when one government imposed restrictions but the other did not. 

It finds that people on either side of the border behaved similarly, suggesting that it was almost entirely personal choice, rather than government orders, which explains their decision to limit social contact; people may have taken fright when they heard of local deaths from the virus. 

Research by the imf draws similar conclusions.

There are reasons to think these findings overstate the power of voluntary behaviour, however. 

Sweden, which had long resisted imposing lockdowns, eventually did so when cases rose—an admission that they do make a difference. 

More recent research from Laurence Boone of the oecd, a rich-country think-tank, and Colombe Ladreit of Bocconi University uses slightly different measures from the imf and finds that government orders do rather a lot to explain behavioural change.

Moreover, the line between compulsion and voluntary actions is more blurred than most analysis assumes. 

People’s choices are influenced both by social pressure and by economics. 

Press conferences where public-health officials or prime ministers warn about the dangers of the virus do not count as “mandated” restrictions on movement; but by design they have a large effect on behaviour. 

And in the pandemic certain voluntary decisions had to be enabled by the government. 

Topped-up unemployment benefits and furlough schemes made it easier for people to choose not to go to work, for instance.

Put all this together and it seems clear that governments’ actions did indeed get people to stay at home, with costly consequences for the economy. 

But were the benefits worth the costs? 

Economic research on this question tries to resolve three uncertainties: over estimates of the costs of lockdowns; over their benefits; and, when weighing up the costs and benefits, over how to put a price on life—doing what Mr Cuomo refused to do.

The cure v the disease

Start with the costs. 

The huge collateral damage of lockdowns is becoming clear. 

Global unemployment has spiked. 

Hundreds of millions of children have missed school, often for months. 

Families have been kept apart. 

And much of the damage is still to come. 

A recent paper by Francesco Bianchi, Giada Bianchi and Dongho Song suggests that the rise in American unemployment in 2020 will lead to 800,000 additional deaths over the next 15 years, a not inconsiderable share of American deaths from covid-19 that have been plausibly averted by lockdowns. 

A new paper published by America’s National Bureau of Economic Research (nber) expects that in poor countries, where the population is relatively young, the economic contraction associated with lockdowns could potentially lead to 1.76 children’s lives being lost for every covid-19 fatality averted, probably because wellbeing suffers as incomes decline.

Research is more divided over the second uncertainty: the benefit of lockdowns, or the extent to which they reduce the spread of, and deaths from, covid-19. 

The fact that, time and again, the imposition of a lockdown in a country was followed a few weeks later by declining cases and deaths might appear to settle the debate. 

That said, another recent nber paper failed to find that countries or American states that were quick to implement shelter-in-place policies had fewer excess deaths than places which were slower to act. 

A paper published in the Proceedings of the National Academy of Sciences, a scientific journal, by Christopher Berry of the University of Chicago and colleagues, cannot find “effects of [shelter-in-place] policies on disease spread or deaths”, but does find “small, delayed effects on unemployment”.

Is the price right?

Running through all this is the final uncertainty, over putting a price on life. 

That practice might seem cold-hearted but is necessary for lots of public policies. 

How much should governments pay to make sure that bridges don’t collapse? 

How should families be compensated for the wrongful death of a relative? 

There are different ways to calculate the value of a statistical life (vsl). 

Some estimates are derived from the extra compensation that people accept in order to take certain risks (say, the amount of extra pay for those doing dangerous jobs); others from surveys.

Cost-benefit analyses have become something of a cottage industry during the pandemic, and their conclusions vary wildly. 

One paper by a team at Yale University and Imperial College, London, finds that social distancing, by preventing some deaths, provides benefits to rich countries in the region of 20% of gdp—a huge figure that plausibly exceeds even the gloomiest estimates of the collateral damage of lockdowns. 

But research by David Miles, also of Imperial College, and colleagues finds that the costs of Britain’s lockdown between March and June 2020 were vastly greater than their estimates of the benefits in terms of lives saved.

An important reason for the big differences in cost-benefit calculations is disagreement over the vsl. 

Many rely on a blanket estimate that applies to all ages equally, which American regulatory agencies deem is about $11m. 

At the other extreme Mr Miles follows convention in Britain, which says that the value of one quality-adjusted life-year (qaly) is equal to £30,000 (which seems close to a vsl of around £300,000, or $417,000, given how many years of life the typical person dying of covid-19 loses). 

The lower the monetary value you place on lives, the less good lockdowns do by saving them.

The appropriate way to value a change in the risk of death or life expectancy is subject to debate. Mr Miles’s number does, however, look low. 

In Britain the government’s “end-of-life” guidance allows treatments that are expected to increase life expectancy by one qaly to cost up to £50,000, points out Adrian Kent of Cambridge University in a recent paper, and allows a threshold of up to £300,000 per qaly for treating rare diseases. 

But it may be equally problematic to use the American benchmark of $11m for covid-19, which disproportionately affects the elderly. 

Because older people have fewer expected years left than the average person, researchers may choose to use lower estimates of the vsl.

The best attempt at weighing up these competing valuations is a recent paper by Lisa Robinson of Harvard University and colleagues, which assesses what happens to the results of three influential cost-benefit studies of lockdowns when estimates of the vsl are altered (see chart 2). 

Adjusting for age can sharply reduce the net benefits of lockdowns, and can even lead to a result where “the policy no longer appears cost-beneficial”. 

Given that these models do not take into account the harder-to-measure costs of lockdowns—how to price the damage caused by someone not being able to attend a family Christmas, say, or a friend’s funeral?—the question of whether they were worth it starts to look like more of a toss-up.

Once you open the door to making adjustments, things become more complicated still. 

Research on risk perception finds that uncertainty and dread over an especially bad outcome, especially one that involves more suffering before death, mean that people may be willing to pay far more to avoid dying from it. 

People appear to value not dying from cancer far more than not dying in a road accident, for instance. 

Many went to extraordinary lengths to avoid contracting covid-19, suggesting that they place enormous value on not dying from that disease. 

Some evidence suggests that the vsl might need to be increased by a factor of two or more, writes James Hammitt, also of Harvard, in a recent paper. 

That adjustment could make lockdowns look very worthwhile.

The malleability of cost-benefit analysis itself hints at the true answer of whether or not lockdowns were worth it. 

The benefit of a saved life is not a given but emerges from changing social norms and perceptions. 

What may have seemed worthwhile at the height of the pandemic may look different with the benefit of hindsight. 

Judgments over whether or not lockdowns made sense will be shaped by how society and politics evolve over the coming years—whether there is a backlash against the people who imposed lockdowns, whether they are feted, or whether the world moves on.

The Perils of Paradigm Economics

As the world seeks to recover from the COVID-19 crisis, simplistic political and economic ideologies that serve as identity markers will not lead to effective policymaking. But something in human psychology makes many crave them nonetheless.

Andrés Velasco

LONDON – “The era of big government is over,” then-US President Bill Clinton proclaimed in 1996. 

But President Joe Biden’s multi-trillion-dollar spending plans are suggesting precisely the opposite. 

Behind the politicians stand the policy gurus, eager to put their names on – as the fashionable phrase goes – a new “policy paradigm.”

Paradigm-peddlers have not yet settled on a single label for the post-pandemic era, but frothy ideas abound. 

Countries should “build back better,” but only after a “great reset.” 

Economic growth used to be a pretty good thing on its own; these days, it is unmentionable in polite company unless it is “inclusive, equitable, and sustainable.” (I can see why, but must all three adjectives always be strung together?)

True, the pandemic revealed plenty of social and economic weaknesses that governments should have been busy fixing a long time ago. 

Weak state capacities, grossly insufficient health infrastructure, threadbare social safety nets, and malfunctioning labor markets – the list is long, and it applies to most developing economies and a surprising number of rich countries, too. 

There is nothing like a crisis to rouse slumbering policymakers and shove aside veto players who impede change.

So, change is in the air, and in many cases it will require a more muscular (though not always larger) state. 

But does this – and, more importantly, should it – add up to a new paradigm?

Harvard University’s Dani Rodrik was right to argue recently that we should beware of economists bearing policy paradigms. 

Such frameworks are supposed to organize thinking, but more often than not they substitute for it.

Consider a paradigm that the pandemic is supposed to have killed: neoliberalism. 

Neoliberal once meant a particular approach to free-market economics. 

Applying the description to leaders like Margaret Thatcher and Ronald Reagan made some sense. 

But in current parlance, the term also applies to former UK Prime Minister Tony Blair, former German Chancellor Gerhard Schröder, and the social democrats who have governed Chile for 24 of the last 30 years – in fact, to anyone who thinks markets have some role to play in human affairs.

Through repeated, careless use, neoliberal has now become one of those words that, as George Orwell said, “are strictly meaningless, in the sense that they not only do not point to any discoverable object, but are hardly even expected to do so by the reader.”

But meaningless is not the same as useless. 

If a speaker at an academic seminar, policy conference, or cocktail party tars someone as a neoliberal, two messages are immediately clear: the speaker is good, and the target is bad, unconcerned with the plight of the downtrodden. 

Tarring someone with this particular epithet is virtue-signaling par excellence. 

It marks the speaker as a member of a progressive tribe concerned about the world’s poor.

The right has its own ideological identity markers. 

In the debate about Obamacare and health insurance in the United States, or about vouchers for school funding anywhere, anyone claiming to support “freedom of choice” is not just making a point, but also sending a signal.

Both freedom and choice have multiple meanings that philosophers have been debating at least since classical Greek times: freedom to or freedom from? 

Choice to do what? 

Is someone with little money or education really “free to choose,” as the Nobel laureate economist Milton Friedman used to say? 

In fact, today’s freedom-of-choice advocates probably do not want to pursue those ancient and endless debates; they are simply signaling their membership in the ideological free-market tribe.

How do such identities come about? 

In William Golding’s 1954 novel Lord of the Flies, middle-class English schoolchildren stranded on a deserted island quickly turn into bloodthirsty monsters who maim and kill. 

The novel, written in the shadow of World War II, the Korean War, and the threat of impending nuclear holocaust, painted a bleak picture of human nature. 

Readers could be forgiven for thinking that it was too bleak.

But in the same year that Lord of the Flies was published, the social psychologist Muzafer Sherif took a group of 11-year-old boys to a summer camp in Oklahoma. 

Sherif separated them into two groups – the “Rattlers” and the “Eagles” – and each began to develop songs, rituals, and the markers of a shared identity. 

Soon enough, they were burning each other’s flags and conducting raids with stone-filled socks as weapons. 

It was Lord of the Flies in an Oklahoma state park.

“[The] experiences shared by people result in a sense of identity differentiating themselves as a unit,” said Sherif, when explaining what he had witnessed. 

“The mere awareness of other groups within the range of our designs generates a process of comparison between ‘us’ and the others.” 

Moreover, he said, “This tendency seems to be one of the fundamental facts in the psychology of judgment.”

As the world seeks to ensure recovery from the COVID-19 crisis, simplistic political and economic ideologies will not lead to effective policymaking. 

Rodrik rightly pines for economic thinking that is unbeholden to cliché or to narrow identity politics. 

As he says, “The right answer to any policy question in economics is, ‘It depends.’” Circumstances matter, and the devil is in the details.

I want the same thing as Rodrik, but you can’t always get what you want. 

Because nowadays (at least outside Trumpian circles) identities based on race or religion are unacceptable, ideologies have become the last refuge of the identity-seeking and politically savvy scoundrel, and new economic paradigms the weapon of choice.

Slogans such as “No to austerity!” or “Yes to a living wage” fit on a banner and lend themselves to chants. 

Statements like, “The appropriate policy depends on the price elasticity of factor supplies,” not so much.

In the old joke, a man walks into a psychiatrist’s office and says, “Doctor, my brother’s crazy! He thinks he’s a chicken.” 

The doctor says, “Why don’t you bring him to me?” 

And the man replies, “I would, but I need the eggs.”

Political ideologies can be crazy, and those who peddle them often behave like chickens. 

But how we crave those eggs.

Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.  

Markets enjoy blessed relief now the heavy storms have passed

Investors are on the lookout for inflation signals now a calmer mood is upon us following the turmoil of 2020

Katie Martin 

After the crisis in the economy caused by the pandemic, markets are now far less volatile © FT montage; Bloomberg; Dreamstime

Financial markets are, right now, intensely dull. 

That is bad news if, say, you are a journalist newly tasked with writing a weekly column on the subject. 

Just for the sake of argument.

For most other people, however, it is a blessed relief. 

In March 2020, when the pandemic really hit and markets were in meltdown, people outside of the tight financial community were much more focused on keeping themselves and their families safe, and procuring tinned food, than fretting about equity valuations.

But that volatility has a real-world impact, as the Bank of England recently reminded us in a blog post. 

“Financial markets reflect changes in the economy. 

But sometimes they amplify them too,” the central bank said. 

In other words, markets can make bad situations worse, jacking up costs of financing for anyone trying to raise new debt or equity. 

To illustrate the point, the blog casts us back to the events of spring last year when markets were forced to swallow an enormous wave of economic disruption from global lockdowns in one gulp. 

The price of risky assets, unsurprisingly, collapsed. 

Several structural and technical issues in trading and fund management quickly made that collapse self-reinforcing.

Derivatives market participants were frequently required to post much larger chunks of collateral to counterparties — demands that reached a crescendo around the middle of March 2020. 

This triggered more selling. 

More thought on how collateral requests are calculated, with an eye on reducing the impact of vicious cycles stemming from them, might be a worthwhile exercise, the blog suggests.

It is reassuring, in a way, that nothing even remotely close to typical levels of volatility are in play now

In addition, many funds were forced in to liquidations. 

Funds, especially those focused on corporate bonds, received a surge in redemption requests. 

Meeting those requests quickly as promised was tough for funds with hard-to-sell underlying assets. 

At the peak, net outflows hit 5 per cent of assets under management for corporate bond funds in March, the biggest wave of requests since the global financial crisis. 

Again, for those funds, the only answer was: sell bonds, fast.

Leveraged bets by hedge funds, highly lucrative in the good times but quickly heavily damaging in bad, also hurt, as did intense stress among banks that facilitate trading across a range of asset classes.

All of this warrants “further investigation” the blog says, if we are to avoid similar grim situations with potential real-world effects in future. 

Last time around, only the heavy-handed intervention of central banks stopped the rot.

March 2020 was an extreme example of stress, for sure. 

Still, with that period etched in such recent memory, it is reassuring, in a way, that nothing even remotely close to typical levels of volatility is in play now. 

This keeps financing costs strikingly low and gives the global economy the breathing space it needs to recover from the shock of the pandemic.

How quiet is it? 

Absolute Strategy Research points out that the S&P 500 benchmark index of US stocks has been squashed into ever narrowing trading ranges in recent weeks. 

It moved more than 1 per cent in either direction in a single day only twice in the whole of June. 

Even then, it dropped and then jumped by a similar degree on consecutive days, so it was roughly a wash. 

New highs are close to a daily occurrence, but they arrive in tiny increments.

In currencies, the tone is similarly sleepy. 

“It is not uncharitable to suggest [major currency] ranges for the year have been paltry”, wrote Deutsche Bank macro strategist Alan Ruskin.

“It is still plausible that the euro might record its narrowest annual range against the dollar since the fall of Bretton Woods,” he said. 

The common European currency is probably on track for “a similar ignominious record” against the yen. 

Even typically livelier trades, like the Australian dollar against the yen, are also in a deep slumber.

And all this before the traditional summer lull kicks in.

Even cryptocurrencies, generally a reliable source of loopy unpredictability, are asleep. 

After a dramatic halving in the price of bitcoin earlier this year, prices have settled into a tight range around $33,000 a pop. 

Some true believers say the second Crypto Winter has set in, similar to the long slow period after the last milder boom and bust in 2017.

That, of course, could change with a single tweet from Elon Musk. 

But back in the world of more established asset classes, barring a serious inflation shock or Delta variant curveball, upbeat stability seems to be the outlook for the coming months. 

In part, says Karen Ward, chief market strategist for Europe at JPMorgan Asset Management, that is because of the faith among investors in central banks’ willingness to cushion shocks. 

“Also, we are still in a holding pattern,” she said. The big question around how long inflation sticks around, and how pronounced it proves to be, will take months to answer. 

“The data are not going to add any information on that story” any time soon, she said. 

“It could be the end of the year before we know.”

Enjoy the silence. 

It is “kinda dull”, as one commenter put it to Bank of America’s analysts. 

“But you don’t sell a dull market.”


The return of the carry trade

Interest-rate rises in some big emerging markets will entice foreign capital

If you like a central bank that responds to inflation surprises by—and here’s a retro touch—raising interest rates, then the Banco de México might be the one for you. 

On June 24th it surprised the markets by increasing its benchmark rate from 4% to 4.25%. 

Although it said in its statement that much of the recent rise in inflation was “transitory”, the scale and persistence of inflation was worrying enough to warrant higher interest rates.

Mexico is no outlier. 

Brazil’s central bank has pushed up interest rates to 4.25% from a low of 2% in March. 

Russia has raised its main rate to 5.5% in three separate moves. 

These countries belong to the high-yielders, a group of biggish emerging-market economies, where interest rates are some distance from the rich-world norm of zero. 

All three believe a lot of today’s inflation will fade. 

But none is taking any chances.

Scan the central banks’ statements, and a clear concern emerges: keeping expectations of inflation in check. 

This is in part, or even mostly, about exchange rates. 

Higher interest rates keep domestic savings onshore in the local currency. 

They also entice capital from yield-starved foreigners. 

This is called the carry trade—and it is coming back.

High interest rates are now so rare in large economies that where they occur they require explanations. 

Latin America has a history of inflation. It is hard to get people to trust a currency when memories of betrayal linger. 

A related explanation is high public debt. 

Brazil’s burden is nearing 100% of gdp. 

Fiscal incontinence in developing countries often leads to inflation. 

High yields are needed to compensate for that risk. 

But such explanations only get you so far. 

Though Poland has suffered an episode of hyperinflation in living memory, it is a low-yielder. 

Turkey’s yields are high even though its public-debt burden is well below the emerging-market average.

High yields are in the end a reflection of a lack of domestic savings, says Gene Frieda of pimco, a fixed-income fund manager. 

A telltale sign is a country’s current-account balance. 

As a matter of accounting, a deficit means that domestic savings are not sufficient to cover investment. 

Foreign capital is needed and high yields are the lure. 

Much of emerging Asia runs a surplus on its current account and has high domestic savings—and thus low yields. 

Poland and the Czech Republic, both low-yielders, were able to reliably augment their domestic savings with eu grants and direct investment from Western European firms. 

Russia, which has high yields and a current-account surplus, looks like an exception. 

But the surplus reflects its ultra-conservative monetary and fiscal policies, says Mr Frieda. 

The net effect is to raise yields and lower gdp growth but strengthen the balance of payments. 

Russia’s rulers accept this to avoid being beholden to foreign capital.

That brings us to the carry trade. 

Policymakers in emerging markets are galled by the vagaries of capital flows. 

But carry traders are their friends. 

The inflation expectations that central bankers bang on about are entwined with the exchange rate. 

A weakening currency can be a sign of anxiety about inflation. 

And in the past year, currency weakness has also been a source of emerging-market inflation, says Gabriel Sterne of Oxford Economics, a consultancy. 

So when a central bank raises interest rates, it is in part because it wants a stronger currency to curb import costs. 

This might be the quickest way to bring inflation down.

For their part, carry traders like a yield curve that is steep—meaning five- or ten-year bond yields are a lot higher than short-term interest rates. 

A steep curve captures expectations of future rises in policy rates. 

Traders also hope to bet on an appreciating currency. 

Factors other than interest rates then come into play. 

One is valuation. 

If a currency has fallen a long way recently, it has greater scope to rise again. 

Another is a country’s terms of trade, the prices of its exports relative to imports. 

Oil exporters are in favour now because of high oil prices. 

Carry traders must be mindful of influences that could blow up a currency. 

Turkey has attractively high yields, but its erratic monetary policy creates a minefield.

Brazil, Mexico and Russia are at the leading edge of a new trend. 

Economists at JPMorgan Chase, a bank, reckon that Chile, Colombia and Peru will soon be raising rates. 

South Africa will join them before the year is out. 

The Banco de México and company are not going to hang out a sign saying “carry traders welcome”. 

But they might as well put one up. 

The more their currencies rise, the less work they have to do.