In nearly every questionable case, when a politician like a central banker tells you that the economy is doing just swell, you’re safe to assume you’ve been lied to. Part of this is what modern “monetary” policy actually is, which is psychological manipulation meaning playing the role of a literal clown while putting on a happy face no matter the gravity of the underlying circumstances.
And the worse it gets, the more that politician will have to lie about it.
There are the rare exceptions. One of those is India and its policymakers at the Reserve Bank, the country’s central bank (RBI). While they may be politicians and Economists (not much difference these days), in this case they aren’t being deceitful when claiming the Indian economy is hanging in.
Even as global recession fears slam one place after another, India may sit the farthest from those. Industry is running on full blast, the country’s Industrial Production figure up a robust 12.3% year-over-year in July, benefiting in part from rebirth after prolonged COVID-inspired “emergency” measures. While the US was stuck in “technical recession”, real GDP over there rose at a better than 4% rate during the first quarter of the year – even after adjusting for nasty price increases.
This doesn’t mean India is on fire, booming its way past all its peers, only that in the global succession of one nation after another careening toward nasty contraction the Indians take up a spot nearer the back of that line. Compared to everyone else, it might as well be a boom.
Yet, the rupee.
The currency’s exchange value has absolutely plunged this year, hitting a record low of about 80 to the US$ in the middle of last month. Flummoxed, the Reserve Bank has taken steps to control the rupee’s “volatility.” Central bankers there won’t declare a target, or at what rate of descent they might be more comfortable in seeing, only that this degree of forced “devaluation” is unacceptable.
It is forced, too. There is no export “stimulus” intention behind the currency’s crash, as is so often said whenever one moves like India’s has this year. The orthodox textbook firmly declares how central banks or central governments decide what the exchange value should be, so if the value goes down, we’re supposed to believe it must be on purpose.
And it almost never is. With increasingly rare exception, the real issue is what’s on the other side of every single global currency. It’s not even the dollar, rather the eurodollar.
RBI authorities have complained India is being thrown into the same monetary group as others in far worse shape. This isn’t about currency exchange rates, either, rather what those exchange rates actually represent.
Here, too, the mainstream Economics textbook has it all wrong; at least severely outdated. If not determined export “stimulus”, then there must be an unfavorable interest rate differential, always supposedly going back to some central bank doing something somewhere. For the rupee, the book will have you blaming the Fed’s rate hikes.
Except, no, RBI is matching the Fed hike for hike. The former’s benchmark repo rate began much higher, too, and has since been raised from 4.00% in May to 5.40% earlier this month, well above fed funds. It is also widely expected that the Indians will hike another 50 bps at the next policy meeting, if not 60.
Why, then, is the rupee crashing? Unlike those at Western central banks, their counterparts in emerging markets have somewhat more latitude to be truthful. The common trait among the entire global cohort is to first take credit for any positive development, no matter how absurd, and then blame everything and everyone else for whatever goes wrong.
This, by the way, is a long-standing practice (forgive the digression). Here’s Milton Friedman in 1963 writing about the same thing happening in the twenties US:
“In years of prosperity, monetary policy is said to be a potent instrument, the skillful handling of which deserves credit for the favorable course of events; in years of adversity, monetary policy is said to have little leeway but is largely the consequence of other forces, and it was only the skillful handling of the exceedingly limited powers available that prevented conditions from being even worse.”
Again, in India’s current predicament, the latter is actually true. Adversity is external, a matter of eurodollar rather than anything the RBI did or did not do. At least these central bankers admit they’re just along for the monetary ride however it plays out – and it isn’t playing out well at all.
This is why, in the interest (pun intended) of attempting to be more than a spectator, the RBI instituted several possible countermeasures early in July. Among them, local banks have been exempted from meeting several regulatory thresholds, freed (temporarily) from reserve and liquidity requirements at least when adding new deposits qualified as non-residential external (NRE) or those classified as foreign currency non-resident-bank.
In other words, allowing banks to be more competitive in attracting foreign currency.
Shaktikanta Das, RBI’s current Governor, has led his institution to being more proactive in the exchange market itself, at least recently. You see these interventions given different terminology in different locations, my favorite being Brazil’s use of “contingent liabilities.” The Indians call theirs an umbrella, under which includes its cash stash of foreign exchange reserves along with, oh boy, “net forward assets.”
Like Brazil and certainly China, basically everyone else around the world, too (as we’ll see in a moment), India is both supplying and subsidizing dollars in its local money markets. What typically happens, and here is no different, officials initially try to respond to serious “outflows” by mobilizing their foreign currency reserves (usually selling Treasuries).
According to RBI’s figures, sure enough the nation’s stock of “foreign currency” has plummeted. Going all the way back to the start of September 2021 (rings more than a few bells), reserves (I’m only counting currency reserves, omitting gold, SDRs, and other accounting miscellany) have declined from a peak of just less than $580 billion to now (second week of August) $509 billion. That’s nearly $70 billion gone, an enormous 12% drop in less than a year.
After having done that, in comes the “net forward assets”, the hidden, off-balance sheet derivatives which are meant to “shore up” what’s otherwise the world’s fourth-largest foreign reserve pile. If it smacks of desperation, that’s because it is and also a common trait among any uses of “contingent liabilities” or whatever euphemism might be tossed around.
It doesn’t ever work, at least not beyond the short run. In many ways, that’s all these programs are supposed to accomplish, (literally) buy a bit of time for conditions to normalize. Going all the way back to 1997 and 1998, the Asian Financial Crisis, powerless central bankers transform into Canute, commanding the eurodollar tide reverse to no avail.
On the contrary, case after case since has instead shown that the mere act of “contingent liability” interventions only makes the situation worse given time. These things are little more than the colloquial can-kicker, subsidizing today’s problem by promising to pay it back tomorrow. And when tomorrow comes, if the trouble isn’t gone, kicking the can further down the road becomes exponentially more expensive – therefore, in ’98, a eurodollar-spread monetary crisis which all-too-easily flashed across Asia, sparing few (China, though not Japan).
For India, they’ve achieved a modest bit of currency stability, as so often generates optimism in the immediate aftermath. The rupee is stable, or at least it hasn’t fallen further since mid-July (whether that’s because of RBI’s tactics is arguable, at best). It is, however, still right there at 80, meaning it hasn’t improved at all.
For currency reserves, after a very minor rise from mid-July, they’ve fallen again in the second week of August potentially signaling a renewed downdraft predictably in spite of “net forward assets” and being more attractive to NREs.
To explain this predicament, I’ll let Das and the RBI speak for themselves. In Das’s Governor Statement from August 5, he quite matter-of-fact stated, “EMEs are facing a rapid tightening of external financial conditions, capital outflows, currency depreciations and reserve losses simultaneously.”
From RBI’s August 3-5 policy meeting, the one where the repo rate was last hiked by fifty, its minutes reiterate:
“Both advanced economies (AEs) and emerging market economies (EMEs) witnessed weakening of their currencies against the US dollar. EMEs are experiencing capital outflows and reserve losses which are exacerbating risks to their growth and financial stability.”
Falling currencies equal reserve losses “exacerbating risks” to pretty much everything and everyone, even India which isn’t in nearly such bad shape as all the other EMEs, or in comparison to most AEs!
And reserve losses are, what? Not just “tightening of external financial conditions” which purposefully leaves open interpretation, instead we can hear the echo of a former Reserve Bank of India Governor’s desperate 2018 plea for relief from all these same issues. Dr. Urjit Patel had rather more blunted and succinctly classified India’s then-problem as, “…dollar funding has evaporated.”
But it’s not just a local monetary issue, or even for where currencies are rapidly dropping (like Europe). Here, too, India’s plight proves particularly instructive. Reserves fell fastest, the rupee dropped the sharpest around the beginning and middle of March 2022 before being slammed hard again early to mid-June.
You might recognize those periods for what we witnessed across global markets, especially anything related to US$ money. T-bill prices skyrocketed, as had J-bill prices (how’s that for global collateral money!). SOFR and US$ GC repo rates plummeted, a flight-to-safety shutting out riskier and collateral-deprived borrowers (in the US and surely way outside its border) reminiscent of all the worst parts of 2007 and 2008.
Patel’s terminology is far more appropriate than any others I’ve heard from textbook and mainstream sources. These are not “capital outflows”, rather eurodollar sources “evaporating”, the tide of dollar funding irreversibly plaguing whomever connected to the global reserve system – which, as a reminder, is all those RBI cited, meaning largely everyone.
Leaving central bankers worldwide as either bystanders or, should they choose to do something, make it all worse if only a little further down the road. Kicking that can gets harder and harder every time, costlier and costlier by the contingency. In this situation, that is the lie; officials out here can freely and acceptably acknowledge this isn’t their fault, before then covering up just how little they can do about it.
The last thing any detached, dispassionate observer would ever want to find out is deployment of contingent liabilities. Even if you care nothing of India, Brazil, or China’s distressed monetary dilemma, any one of them resorting to “net forward assets” or an equivalent is a sign that eurodollar evaporation has reached a systemically dangerous level.
And if India, Brazil, China and all EMEs are in that boat at the same time...
The whole world dragged kicking and screaming out into the deflationary seas by the global reserve tide we’re all told is commanded by the Fed or some government somewhere. Even when there’s some truth, still the lie. No, this is the eurodollar’s world and everyone has to deal with its too-frequent, unexplained deflationary destructiveness.
Including you and me.
