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- Arvind's Newsletter
1.There has been a lot of conjecture on the de-dollarisation of the global economy as much of China’s oil imports from Russia has been in renminbi, leading to its share of value of market rising. The following article by economist Tyler Cowen in Bloomberg, argues that de-dollarisation will be minimal and dollar will still rule the world. Excerpts from his article are provided below.
“How far is the talk of de-dollarization going to proceed? Probably not very. The US has the world’s deepest and most liquid financial markets, and they remain relatively open, in spite of some restrictions on Chinese investment in industries sensitive for national security. There are strong reasons to have a dominant currency in international markets, just as there are strong reasons for having a dominant currency in domestic transactions within the US. Liquidity for a currency begets further liquidity, whether at home or globally.
With the dollar estimated at 88% of all international transactions, the euro at 31% is only a modest competitor (since a transaction may involve two currencies, the total may exceed 100%). The euro, unlike the dollar, will never be tied to a single national government, and the European Union does not come close to the military might of the US.
The yuan is estimated at only 7% of that total of international transactions, and China seems unwilling to open up its capital markets, as that could lead to rapid capital outflows and possibly a financial crisis. But without open capital markets, the yuan is not a strong contender for a global reserve currency.
Economics can sometimes be complicated or hard to explain. When it comes the US dollar, it is neither. The dollar will retain its focal role, which is good for the US, and the reasons are simple and intuitive.”
2.EVs are closing the price gap with ICE (Fuel run) Vehicles.The price difference between battery-powered and fossil fuel-run passenger vehicles is narrowing fast, which industry executives expect will push more Indians to choose the greener option when they buy cars and SUVs.
The average price of an electric passenger vehicle was well over two times (137%) more as recently as in 2020 compared with a similar variant run on petrol. That gap has now reduced to 73%, according to data from automobile consultancy firm Jato Dynamics.
With the narrowing price gap, adoption is expected to increase. EV at around 60,000 units accounted for 1.1% of India’s total passenger vehicle sales in fiscal 2023, compared with 0.6% the previous year. This share is expected to increase to 3-4% by 2024-25 and 17% by 2030.
3.Comcast Corp, the world’s second-largest broadcasting and cable television company, has entered the Indian media and entertainment industry with an initial investment of ₹1,600 crore ($200 million) in Bodhi Tree Systems, an investment vehicle led by Uday Shankar and James Murdoch.The funds from NBC Universal’s investment in Bodhi Tree will be utilized to invest in Viacom18.
Read more at https://economictimes.indiatimes.com/epaper/delhicapital/2023/apr/16/sunet-bottomline/comcast-tests-inida-waters-with-bodhi-tree-stake-buy/articleshow/99524181.cms?
4.The complexity of older structures like the Great Wall of China, Chichén Itzá, and the Taj Mahal continue to captivate and fascinate visitors today, but it’s worth noting that “wonders” such as these are not a modern concept.
As far back as the 2nd century BCE, ancient guide books and poems were being written by Greeks that had toured the extent of Alexander the Great’s kingdoms, giving us the original “seven wonders of the world” from the Hellenistic world they knew at the time.
This graphic by Pranav Gavali looks at the original ancient seven wonders, including their modern-day locations and features, using data from Encyclopedia Britannica and Wikipedia
5.What I learnt from three banking crises. Long Read by Financial Times columnist Gillian Tett and author of AnthroVision.
Excerpts from her article are below
Her first big learning is that the level of transparency around the financial system has improved so radically now compared to Japan ’98 and GFC ’08 that the financial system has become more prone to contagion: “During the 1997-98 Japanese turmoil, I would meet government officials to swap notes, often over onigiri rice balls. But it was a fog: there was little hard information on the (then nascent) internet and the media community was in such an isolated bubble that the kisha (or press) club of Japanese journalists had different information from foreigners. To track the bank runs, I had to physically roam the pavements of Tokyo…
…CDS prices are now displayed online (which mattered enormously when Deutsche Bank wobbled). We can use YouTube on our phones, anywhere, to watch Jay Powell, chair of the US Federal Reserve, give a speech (which I recently did while driving through Colorado) or track fevered debates via social media about troubled lenders. Bank runs have become imbued with a tinge of reality TV.
This feels empowering for non-bankers. But it also fuels contagion risks. Take Silicon Valley Bank. One pivotal moment in its downfall occurred on Thursday 9 March when chief executive Greg Becker held a conference call with his biggest investors and depositors. “Greg told everyone we should not panic, because the bank will not fail if we all stick together,” one of SVB’s big depositors told me.
Similar conversations took place in Japan in 1997, physically, in smoke-filled rooms. But few customers knew. Not so in 2023: reports of Becker’s words leaked into the internet, fuelling a stampede. In a few hours, some $42bn — or a quarter of SVB’s funds — departed. Back in 1984, by way of comparison, it took depositors an entire week to withdraw half their funds from Continental Illinois — in person — when that giant lender failed.”
The bottomline Ms Tett says is that bank runs now happen breathtakingly fast i.e. in hours, not days and regulators (and even bankers) are simply not programmed to respond that fast: “Torsten Slok, an economist at Apollo, notes that “the share of [US] households using mobile banking or online banking increased from 39 per cent in 2013 to 66 per cent in 2021”.
Until now, the models used in finance do not seem to have taken account of the fact that consumer behaviour online might be different from that in the old-fashioned, physical banking world. But one striking feature about American banks, even before the March panic, was that consumers were moving money out of low-paying deposit accounts into better-yielding money market funds at a dramatically faster pace than at similar points before in history.”
The second big lesson Ms Tett says is that regulators and bankers need to shift their attention from credit risk (i.e. the risk of a borrower defaulting) to interest rate risk (i.e. the fact that AFTER a bank has made a fixed rate loan (or purchased a fixed coupon bond), interest rates rise and thereby render the loan (or bond) less valuable): “Take interest rate risks. These “flew under the supervisory system’s radar” in recent years, says Patrick Honohan, former central bank governor of Ireland; so much so that “the Fed’s recent bank stress tests used scenarios with little variation [and] none examined higher interest rates” — even amid a cycle of rising rates. Why? The events of 2008 left investors obsessively worried about credit risk, because of widespread mortgage defaults in that debacle. But interest rate risk was downplayed, probably because it had not caused problems since 1994.
The global financial crisis was similar: when I asked bankers at entities such as UBS in late 2008 why they had missed mortgage default risks in earlier years, they told me that their risk managers were too busy worrying about hedge funds and corporate loans instead. That was because a big hedge fund (Long-Term Capital Management) imploded in 1998 and the dotcom bubble burst in 2000, creating corporate loan losses. The past is not always a good guide to future risks.”
The third big lesson Ms Tett says is that whatever is considered the safest asset in a bull run is usually the likeliest trigger for the next banking crisis: “A third, associated, lesson is that items considered “safe” can be particularly dangerous because they seem easy to ignore. In the late 1990s, Japanese bankers told me that they made property loans because this seemed “safer” than corporate loans, because house prices always went up. Similarly, bankers…told me in 2008 that one reason why the dangers around repackaged subprime mortgage loans were ignored was that these instruments had supposedly safe triple-A credit ratings — so risk managers paid scant attention.
So, too, with SVB: its Achilles heel was its portfolio of long-term Treasury bonds that are supposed to be the safest asset of all; so much so that regulators have encouraged (if not forced) banks to buy them. Or as Jamie Dimon, head of JPMorgan, noted in his annual shareholders’ letter, “ironically banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements”. Rules to fix the last crisis — and create “safety” — sometimes create new risks.”
