Friday, September 17, 2021

My latest column analyses the Canadian election campaign.

Trudeau has taken a gamble in calling an early election

On 20th September, Canadians go to the polls, in an election that no one much wanted, except for incumbent Prime Minister Justin Trudeau of the Liberal Party. At the helm of a minority government since 2019, Trudeau called an election two years early, in the hopes of capitalizing on Canada’s successful vaccination campaign to entice the voters into returning his government with a majority.

The snap election, in the midst of a burgeoning fourth wave of the still ongoing COVID19 pandemic, has been much criticized, but, according to Canadian law, the head of state, Governor General Mary Simon, did not have any choice but to grant Trudeau’s dissolution request and drop the election writ. This was even despite Trudeau’s minority government not having been defeated in a confidence vote, and therefore still enjoying the confidence of the House of Commons.

As your columnist has noted on previous occasions, Canada’s brand of the Westminster model gives almost unlimited power to an incumbent prime minister, much more than the power enjoyed by his or her counterpart in the United Kingdom or in India. The prime minister not only appoints the head of state but members of the Supreme Court, as well as filling any vacancies in the Senate, the unelected upper house of Parliament. This would be akin to a Prime Minister of India appointing the President, appointing members of the Rajya Sabha, as well as the Supreme Court. Likewise, in the U.K. and India, an incumbent prime minister has only limited ability to change the normal electoral calendar — which in India is decided by the Election Commission and in the U.K. is governed by the Fixed-Term Parliament Act. Canada, in theory, also has a fixed term law, but it is essentially toothless, and, in effect, only puts an upper limit on the lifespan of a government, rather than preventing a prime minister from opportunistically calling an early election midway through the government’s mandate.

If the polls are to be believed, Trudeau’s gamble is not likely to pay off, as the Liberals are running neck-and-neck with the main opposition, the Conservative Party, led by Erin O’Toole, its new leader. At the time of filing, it appears to be a coin toss whether the Liberals or Conservatives will win the election, which will almost certainly be a minority. A minority government would be vindication for O’Toole, who became party leader after a fractious leadership battle and that too in the midst of the pandemic. For Trudeau, it would be a major defeat, given that he had called an election for the self-evident purpose of winning a majority. His leadership would most certainly be in doubt and the knives within his party would certainly be out for calling the gamble of calling a premature election and then losing the bet.

The election is also a test for Jagmeet Singh, leader of the New Democratic Party (NDP), a social democratic party that stands to the left of the Liberals. The NDP perennially run third, or sometimes even fourth, behind the Quebec separatist Bloc Quebecois, and have never sniffed victory, although Singh did play a pivotal role in keeping Trudeau’s minority government afloat the past two years. More interesting, perhaps, is the rise of the People’s Party of Canada (PPC), a conservative party that stands to the right of the Conservatives. The party was founded by Maxime Bernier, a former Conservative, who lost a bitter leadership contest with O’Toole, and then left the party to start his own. Canada has not, until now, had a viable right wing party, and, while under Canada’s first-past-the-post electoral system, the PPC, like the left wing Greens, are unlikely to win more than a handful of seats, at best, they could become increasingly important going forward, especially if they are able to pull the Conservatives back to the right and away from the crowded centre that they share with the governing Liberals. Likewise, if the Greens eat into the NDP’s votes, that might induce Singh to pivot further to the left.

For an election that Trudeau had described as “pivotal”, in an attempt to sell it to voters, the campaign has been singularly devoid of substance, with little daylight between the solidly centrist positions of the two main parties. Trudeau had attempted to create a wedge issue with his support for mandatory vaccination for federal employees and in other areas under federal jurisdiction, in the hopes of baiting O’Toole, whose party has its share of “anti-vaxxers”; likewise, Trudeau has raised the bogeyman of a putative privatization of Canada’s socialized healthcare system were the Conservatives to win. It is unclear how many, if any, of the undecided voters may be swayed by either of these issues. (Note: The Alberta crisis, with Conservative Premier Jason Kenney declaring a state of emergency, admitting he had mishandled the COVID19 pandemic, which may also hurt the federal Tories, occurred after this piece was filed.)

Looked at from India’s vantage point, given the frictions with Trudeau over his public comments on the farmer protests in India, and the memory of his disastrously failed India visit in 2018, which your columnist had elsewhere described as a “slow-moving train wreck”, New Delhi mandarins are unlikely to be terribly disappointed if Trudeau is shown the door. Having said that, O’Toole does not enjoy the close personal relationship and obvious chemistry that Prime Minister Narendra Modi enjoys with the previous prime minister, the Conservative Stephen Harper, and is himself new in the job. Don’t expect any major shift in the moribund Canada-India bilateral relationship, no matter the outcome of the election no one wanted.

Monday, September 6, 2021

My latest Mint column, on how dollar hegemony threatens emerging markets, revising the old Triffin Paradox.

As the last instalment of this column observed (“The dangers of continuing with unconventional policies”, 20 August), there is a rising drumbeat of debate about the unwinding of US “unconventional monetary policies” — in particular, large scale asset purchases, more commonly called “quantitative easing” — as well as the eventual normalization of the policy interest rate to above the near-zero level at which it has been stuck since the global financial crisis.

The topic came up for discussion during the recent (virtual) Jackson Hole meeting of the US Federal Reserve, where Fed chief, Jerome Powell, sent the markets his strongest signals yet that the US central banks is preparing to wind down its asset purchases, at present a staggering $120 billion per month. In a much-watched speech, Powell asserted that “substantial further progress” has been made on the Fed’s twin goals of keeping inflation on a low and stable path and the economy moving closer to full employment.

The minutes of  a recent Federal Open Mark Committee (FOMC) meeting, which sets Fed policy, and which met before the Jackson Hole event, suggests a broad-based consensus amongst committee members that QE should start winding down later this year, although it is expected that the Fed will continue to hold an elevated stock of bonds even as the inflow of additional purchases tapers and eventually comes to a stop.

It is noteworthy that, in Powell’s remarks, he sharply distinguished the tapering of QE from interest rate normalization, noting that a much more “stringent test ” would apply to the latter operation. The significance of this important distinction should not be passed over lightly.

Readers will recall well the 2013 “taper tantrum” crisis, on which your columnist has dilated on, and which created a panic in global financial markets — especially, emerging economy stock, bond, and currency markets — after then Fed chief, Ben Bernanke, rather loosely remarked that the Fed was planning to begin dialling down its asset purchases, without being terribly clear on his likely forward guidance on a glide path for interest rate normalization.

Speaking on the possibility of Fed tapering in an interview to the Financial Times (“Emerging economies cannot afford ‘taper tantrum’ repeat, says IMF’s Gopinath”, 29 August), International Monetary Fund chief economist, Indian-born, American economist Gita Gopinath, warned that emerging economies could not “afford” a repetition of the 2013 taper crisis. She told the FT: “[Emerging markets] are facing much harder headwinds….They are getting hit in many different ways, which is why they just cannot afford a situation where you have some sort of a tantrum of financial markets originating from the major central banks.”

The danger that Gopinath and others have pointed out is that higher or stickier than expected inflation in the US will  likely prompt the Fed to more aggressively ramp up interest rates as part of an accelerated normalization of monetary policy.

The danger scenario for emerging economies, especially heavily indebted ones, would be the twin blows of rising debt service costs on their dollar-denominated debts as well as the likely outflow of a large quantum of capital funds enticed by the now higher returns to be earned in dollars, to say nothing of the safe haven value of the dollar in times of economic volatility. Indeed, this is exactly what spooked the markets, and hobbled many key emerging economies, including India, back in 2013.

If such a “double whammy” scenario, as Gopinath terms it, returns today on the back of Fed tightening, the IMF estimates that $4.5 trillion of global gross domestic product could be wiped out by 2025. What is worse, the hit will likely falling disproportionately on low income developing and middle income emerging economies, according to former IMF chief economist, Maurice Obstfeld, also speaking to the FT. The fact that these economic shock waves would emanate in the context of a pandemic crisis that is worsening in many parts of the still largely un-vaccinated developing world might just make this the perfect storm.

In an unusually candid (as well as rather canny) comment, Gopinath observed that one of the difficulties at the time of Bernanke’s 2013 remarks that touched off the taper crisis was his announcement on QE tapering got “mixed up” with market expectation of more rapid interest rate normalization. This confusion may, indeed, have abetted the seriousness of the 2013 crisis, as it created greater uncertainty, with many more “carry trade” and other speculative investors in the emerging markets bolting for the door at the same time. She noted that, this time around, “super clear communication” is the need of the hour, and suggested that Powell is doing a good job. The implied criticism of Bernanke’s poor communication in 2013 is the understated inference.

Some perspective may be useful. As I noted in one of my earliest columns in this newspaper (“Illusions bred by a reserve currency”, 17 July 2014), reliance on a single global reserve currency, the US dollar — whether de jure, under Bretton Woods, or de facto, as at present — creates a peculiar dilemma, noted in the 1960s by economist Robert Triffin: the short term, domestically driven goals of the reserve currency economy may diverge from long term needs of the global economy. Inevitably, the hegemonic large country, which provides the reserve currency as a global public good, will privilege itself, at the expense of the rest of the world. The “Triffin paradox” is still with us.