Barry Eichengreen on Global Currencies

Barry Eichengreen's last book -- Money Beyond Borders: Global Currencies from Croesus to Crypto -- is great and worth reading, as almost anything he writes. This is specially the case, since it is his most ambitious work since Globalizing Capital: A History of the International Monetary System, first published in 1996. Other writings have been focused on much more narrow topics.

First, let me say two brief things before I even get to the book, that I just finished. This is NOT a thorough review, only just some impressions from reading without going into details. Second, Barry is incredibly generous intellectually and willing to discuss openly and to listen to people who he disagrees with, and that is not a minor matter in the current environment. He came to Kalamazoo College, and the University of Utah, when I invited him, and has a chapter in a book I edited two decades ago. He also debated with me on the cause of the collapse of Bretton Woods a few years back (video here; my paper here and his here in the same issue of ROPE, not ROKE). So, my critiques of the book are friendly critiques, mostly associated to the theoretical apparatus, since the book, like the earlier one, is incredibly rich in historical detail, and is a must read. 

My biggest issue with the book is that Barry treats the international monetary system, in analytical terms, as fundamentally a market equilibrium sustained by confidence, with states and geopolitics modifying that equilibrium. My view is that it is an institutionally constructed hierarchy sustained by state power, within which markets and confidence operate. For him, power largely follows successful international money. In my view, successful international money is to a considerable extent an expression of power. Barry gives too much causal priority to trade, confidence and network effects, and too little to the fiscal and military, I might say geopolitical, foundations of international money.

His historical sequence is, in an important sense, backwards. He tends to tell the story as one in which expanding commerce generates a demand for convenient, stable means of payment and particular currencies then emerge because traders converge on them. However, the monetary institutions that make those markets possible are already political constructions. The money of account, the enforceable debt contracts, the power to tax, and ultimately the hierarchy between different liabilities are constitutive of the monetary system rather than consequences of prior commercial development.

This is particularly important when it comes to the position of the dollar. Here the argument is somewhat circular.  The dollar is widely used because it is liquid and convenient, while it is liquid and convenient because it is widely used. My explanation puts considerably greater weight on the military, and geopolitical position of the United States. The dollar system was embedded in a political order organized by the United States after World War II, including alliances, security arrangements, international institutions, foreign lending and eventually the willingness of the United States to supply dollar liabilities to the rest of the world. Dollar hegemony cannot therefore be adequately separated from American hegemony.

His last chapter -- that is particularly gloomy -- emphasizes the importance of trade and confidence, and how these build network effects.  In a section titled "Trading Places," he gives considerable weight to the fall in the US share of global exports. But that historical fact that should cause trouble for his argument. The problem he describes, the fall in the US share of world trade and output has fallen enormously while the international position of the dollar has changed remarkably little. China is an even clearer counterexample. It is central to world trade and manufacturing but the renminbi remains a relatively minor international currency.

His invocation of the Triffin Dilemma is particularly problematic. The original Triffin dilemma was specific to Bretton Woods. The United States promised to convert official dollar holdings into gold at US$35 an ounce. International liquidity required supplying dollar liabilities to the rest of the world, but the accumulation of those liabilities relative to US gold reserves eventually undermined confidence in their convertibility. More importantly, the world does not even require a US current account deficit to obtain dollar liquidity. Dollars and dollar claims can be supplied through through many mechanisms. Banks and offshore or shadow banks can create dollar liquidity, as can capital outflows from the US, or the swap lines from the Fed discussed by Barry.

Perhaps, from my perspective, the weakest case is the notion that there will be a point at which the US fiscal position will become unsustainable. The United States can certainly default on Treasury obligations. Congress could refuse to raise the debt ceiling, or the executive could refuse payment. An institutional or constitutional crisis could prevent payment. But that would be a politically imposed default, not an inability to obtain dollars. That distinction is crucial.

A government promising to pay US$100 when it is the issuer of dollars is fundamentally different from one promising to pay US$100 worth of gold or 100 euros. In the first situation the government has a nominal payment capacity that it lacks in the other two. This means suggesting that rising debt ratios could ultimately make Treasury liabilities impossible to service, as Barry suggests, reproduces the conventional analogy between the federal government and a private borrower. Not that deficits and debt might not have consequences. But default and danger to the dollar position is not one. In fact, it is the ability to spend and borrow only in its own currency that is the foundation -- what Anthony Brewer called the Fiscal-Military State -- of the the international position of the dollar.

He concludes that the dangers of a less and less trustworthy American economy, and the fact that there is no alternative to the dollar, might lead to a collapse and de-globalization process akin to the 1930s. But one can take the exactly opposite conclusion. Key currency status is not simply a beauty contest in which investors periodically choose the currency inspiring the most confidence. If there is no alternative system capable of performing the same functions, these developments do not automatically culminate in abandonment of the dollar. Inertia should simply lead to the continuation of the status quo, even if Trump is erratic and creates unnecessary turbulence. In fact, the recurring phenomenon in crises has often been exactly the opposite as what he describes. Global instability increases demand for dollars, even when the crisis originates in the United States. 2008 is the obvious example.

Barry is extraordinarily knowledgeable about the institutional and historical evolution and functioning of the international monetary system. He knows that geopolitics and military power matter. He DOES have a section in the last chapter on that. So he does not neglect the subject. But then he concludes that: "the fate of the dollar will rest on the willingness of America's leaders to uphold the rule of law, respect the separation of powers, and honor the country's commitments to its foreign partners." It is subsidiary and dependent on the institutions that create confidence on the dollar. In other words, he tends to absorb all of the political and geopolitical facts into an essentially conventional analytical structure rather than allowing them to generate a rival theoretical interpretation. In a sense, the historical narrative is richer than the theory used to organize it.

Óscar Ugarteche (1949-2026)

 

At the Institute of Economics in México in 2018

I was traveling attending a conference in Rio, and didn't have time to write a post on the passing of my good friend Óscar Ugarteche. IDEAS published an obit here. I met Óscar at UNAM many years ago (way before that photo, btw). Later, when I worked at the Central Bank of Argentina, I invited him to speak there. His work was an important influence on my own understanding of sovereign debt and the international financial architecture.

Óscar's central insight was that sovereign-debt crises should not be understood simply as the result of irresponsible borrowing or excessive government spending. They form part of recurrent international credit cycles. Periods of abundant liquidity and low interest rates encourage lenders to expand credit aggressively. When interest rates rise, commodity prices fall, or capital flows reverse, countries that appeared solvent suddenly face an external constraint and may be forced into default. The debt cycle is therefore produced by creditors and the international monetary system as well as by debtors.

Debt restructuring is necessary when the original payment schedule has become economically impossible, but the existing system is fragmented and biased. Bondholders, commercial banks, official creditors, multilateral institutions, and suppliers are treated through different forums, while multilateral institutions generally refuse to restructure their own claims. Collective-action clauses can limit holdouts within a particular bond issue, but they cannot coordinate all classes of creditors. Óscar therefore favored a comprehensive, multilateral sovereign-debt restructuring and arbitration mechanism capable of imposing comparable treatment and preventing vulture funds or individual creditors from benefiting from concessions made by everyone else.

 

His view of the IMF was correspondingly critical. He wrote a brief history of the IMF that is worth reading, but I think is only in Spanish. After the end of Bretton Woods, the Fund ceased to be principally an institution of international monetary stabilization and became, in his phrase, a kind of "policeman for the banks." It supplied finance and imposed adjustment so that private creditors could be repaid. Responsibility was placed almost entirely on debtor governments, while neither creditors nor the international financial conditions that produced the lending boom were held accountable. Conditionality imposed the costs on wages, public services, growth, and state capacity, while the United States remained largely exempt from the disciplines imposed on the Global South. His preferred alternative was to reduce the IMF's power, transfer stabilization functions to regional monetary funds, and create an independent international debt-arbitration framework.

 

He wrote the entry on "Sovereign Default" for the New Palgrave Dictionary of Economics. An interesting point that he discusses is the forgotten history of the Confederate external debt. While cases of defaulters that do not pay their debts are almost nonexistent, contrary to common belief about deadbeat countries, Óscar discussed in his entry the only  historical exception, which involved the unresolved debts of several former Confederate and Southern states, with Mississippi providing Óscar's principal example of outright and permanent debt repudiation.

 

In Óscar's account, the decisive role of the US government during the 1930s was to construct the legal and diplomatic conditions under which confederate debt could remain unpaid and eventually disappear. The federal government denied any responsibility for contracts entered into by individual states and claimed that it lacked the constitutional power to compel Mississippi and the other states to pay. The Eleventh Amendment also protected states from suits brought by foreign citizens. At the international level, the southern bloc in the Senate had repeatedly inserted reservations into arbitration treaties precisely because arbitration might reopen the repudiated Southern debts. Ugarteche says that in 1930 the United States prevented the creation of an international arbitration tribunal in Geneva for fear that the bonds would be brought before it. This left British bondholders without either access to the debtor states through diplomacy or a neutral international court.

 

Óscar's hypothesis is that after World War II, the United States effectively forgave Britain’s inter-Allied war debt, and British bondholders may in return have abandoned their claims against the American states. In other words, the power of the US made the enforcement of debt contracts impossible and then helped shape the postwar settlement in which the claims disappeared.

Argentina on the verge

The big question in the case of Argentina, as always is when it will explode. If the current developments are an indicator of anything, it should be sooner rather than later. Note that the fundamental problems regarding the possible crisis and default are associated to the external debt in dollars (one has to repeat this all the time). It does not mean that there weren't other problems with the Argentine economy, but the domestic issues do NOT lead to a default (yes, that means the fiscal problems).

In spite of all the criticism of the Fernández government, and some of that is certainly correct (but not the fact that they didn't do fiscal adjustment or not enough industrial policy; it's the reserves idiot!), the increase in debt happened all during the Macri administration (2015-2019). Milei's 'plan' was to make a fiscal adjustment and devalue the official exchange rate to close the gap between it and the parallel exchange rate (the blue). The notion was that fiscal adjustment would solve the inflationary problem, caused in this view by monetary emissions to cover the fiscal deficits. Regarding the devaluation the logic was that the official rate was incompatible with the market determined one, and, hence, this was inevitable.

Milei depreciated the official exchange rate by more than a 100 percent, to reduce the parallel market premium, and implemented a draconian fiscal adjustment, that he claims has led to a balanced budget. In reality his adjustment is a bit of a sham, an accounting gimmick. For example, the distributor of electricity, privatized in the 1990s, has stopped payments to the producers, and the government is negotiating the bill, which will not be zero, even though that is what they show in the balances. Many other cuts are unsustainable. In this case, even the IMF has suggested that the measures have gone too far, and might have severe social consequences. Note that fiscal adjustment and depreciation are the traditional IMF policy prescriptions.

As a result of his measures, inflation accelerated to more than 25 percent per month in December right after the depreciation, and as the exchange rate depreciation moderated, inflation has decelerated, remaining for now more or less at the same level as before Milei’s inauguration, which corresponds to an annualized rate of about 180 percent. However, in the last month inflation increased again, from 4.2 percent in May to 4.6 in June.

More importantly, the exchange rate premium has started to increase again, as the parallel exchange rate depreciates more than the official one, and reaching a gap of 60 percent, before falling back to somewhere in the 40 something percent.

Of course the devaluation only managed to accelerate inflation, and reduce real wages, and the blue continued to devalue, since the expectations that the government will be able to stabilize the exchange rate are minimal, given the lack of reserves. The central bank is now intervening in the foreign exchange markets to reduce the gap. But all hinges on the ability to obtain dollars. And that's why we are on the verge of a crisis. The IMF will probably not pony up more dollars, even if Trump gets elected, which seems to be Milei's bet. And now Argentina will have to start make significant payments servicing the debt. Default is imminent, and there is an increasing need to acknowledge that the Argentine debt is unsustainable.

The Biden administration should ignore the debt ceiling

The administration run excessive budget deficits, and accumulated too much debt in the face of successive economic crises. As a result, it was forced to compromise politically in order to avoid a catastrophic default, and the subsequent political crisis brought about chaos, and the collapse of the established institutions. Of course, this is not a cautionary tale about the United States. It is a description of the economic crisis that led to the French Revolution.

But in spite of the apocalyptical rhetoric in Washington nothing like this is even faintly possible in the case of the United States. Public debt in the US is in domestic currency, the safest financial asset, and not owed to foreign bankers or in foreign currency, which is not controlled by the administration. It is also not debt in an asset the administration does not control like gold, as it was the case in Ancien Régime France, or the US itself before the end of Bretton Woods. More importantly, political representation, and democratic control over the public purse provided the conditions to sustain expanding budgets and public debt in the American case. The debt reflects, for good or for bad, the democratic decisions of the people. The only reason public debt has become an issue is the existence, for arcane political reasons, of a debt ceiling.

Even though there is a debate about whether the economy needs an additional fiscal boost or not, nobody thinks seriously that the disruption caused by a default and interruption of government functions, with a shutdown, would be a good idea, particularly not during a pandemic. The economy is certainly not a full employment, and about five million workers that had jobs before the pandemic are unemployed. Inflation, although a concern, does not result from an economy close to full employment, but from the disruptions associated with the supply chain during the pandemic. Interest rates on public debt remain low, and there is no reason for austerity measures in the midst of a still uncertain recovery. In fact, most economists, and a good part of the public opinion, think that the visible decline in American economy results from lack of investment, not just on basic infrastructure, but also on the wellbeing of population. 

If there is a perception of a national crisis, it is not about a fiscal one, but one about declining hegemonic power, and about the rise of China (with the Sinophobic undertones noted by Tom Palley). The solution requires investment in the future, in the kinds of things that are both popular and part of the broader Biden agenda, boosting the safety net programs, and investing in green technologies, promoting cleaner economic growth. That these investments are necessary is not particularly controversial, given the size of the social crisis at home, and the global environmental crisis, let alone in the context of a pandemic crisis that seems will become endemic.*

The debt ceiling debate is purely a political instrument used by Republicans to preclude Democrats from implementing their budgetary priorities. This is not an economic crisis, it is a political crisis and requires a political solution. The most cited solution for the current crisis would be to mint a one trillion-dollar platinum coin, that would allow the Treasury to continue spending (e.g. Paul Krugman here). As Zachary Carter said in the Washington Post, only an absurd solution could save the US from an absurd problem. However, trust in the existent political institutions might be the best solution for the impasse. The Biden administration should simply declare that the debt ceiling is unconstitutional, move forward, and continue to make payments even if the debt ceiling is breached. Congress cannot enforce the debt ceiling, and the Treasury can continue to pay until the courts decide on the merits of the case. The issue should be decided by the courts.

There are two possible objections to this strategy. The first one is that an impasse may imply that the US would be technically in default, and that chaos would ensue. However, if the Treasury continues to pay, the worst consequences could be averted. As noted, everybody knows this is a political problem and there is no real question that the US cannot pay. The other concern is that the Supreme Court could presumably determine that the debt ceiling is constitutional after all. That is, to be clear, a possibility. However, it should also be clear that the Roberts court is strongly probusiness and that financial and corporate interests in general are against a default that would hurt the economy. But in the case the court decides to commit economic suicide for no good technical reason, this might still be the right move. Perhaps then there would be enough support to eliminate the debt ceiling through the legislative process, eliminating the filibuster.

* There is, of course, some debate within the Democratic Party, with Senators Manchin and Sinema probably precluding a larger fiscal package.

Debt default or negotiated solution?

An Argentinean default is neither new, nor a surprise, perhaps, even for a casual observer of the ups and downs of international bond markets. One may want to follow Oscar Wilde’s Victorian governess advice and omit the chapter on the fall of the peso as being ‘too sensational.’ But an Argentinean default now, after the Great Shutdown provoked by the coronavirus pandemic, would be the harbinger of a generalized sovereign debt crisis for emerging markets that would engulf the global economy, and make the recovery slower and more painful, including in the United States and other advanced economies. It may also undermine the US position in the global economy.

The Argentinean government’s debt restructuring proposal to the private creditors expired Friday, May 8th, with a limited number of adherents. In particular, large institutional investors did not accept the terms offered by Martín Guzmán, the finance minister, which would have implied a cut of about sixty percent of the principal, and a moratorium on payments for three years. This proposal, one might add, was for the most part designed before the coronavirus crisis, and the collapse of the global economy. The main preoccupation of the proposal was to put the external debt of the country on a sustainable basis, meaning in line with its ability to pay, which depends on its exports, the only secure source of dollars.

Black Rock, Fidelity, PIMCO and other investment funds that hold enough of Argentinean debt to preclude any rescheduling, want a cut of around forty percent, and have enough influence to hold out for a better deal (this guy here says Black Rock is the fourth branch of government). Since Argentina did not make a payment of interest of approximately US$ 500 million in April 22nd, today the country could be officially in default (grace period expires today, even if government extended negotiations). In the absence of a negotiated solution with the main bondholders the default is inevitable. The impasse is established, and the question is how can the stalemate be broken. Only the U.S. government holds the key for a negotiated solution.

The International Monetary Fund (IMF), the United States government, and other international creditor groups like the Club of Paris have been unusually supportive of Argentina. The IMF that had lent US$44 billion to Argentina between 2018 and 2019, has openly argued that the Argentinean debt is unsustainable, providing support for the rescheduling proposal. The U.S. government that has been a harsh critic of center left governments in the region, has had good rapport with the new government of Alberto Fernández, and his vice-president, the ex-president Cristina Fernández de Kirchner, with whom relations were considerably less friendly in the past.

As Jagdish Bhagwati famously implied with the notion of a Treasury-IMF-Wall-Street complex, the connections between the financial sector, the United States government and the multilateral organizations run deep. The current Treasury Secretary, Steve Mnuchin, as it is well-known, worked at Goldman Sachs, and he is the last of a long list of Wall Street connected government officials. Only the United States would have the clout to influence bondholders to come to the table with a reasonable counter offer. This would be of interest not only to Argentina, and its creditors, since a default would lead to years of litigious disputes that would only be sorted out by the courts, but for the United States and its global standing in the midst of the pandemic.

The collapse of international trade and of the price of commodities, the disappearance of remittances and revenues from tourism, coupled with the normal flight to safety will put other developing economies, that were not on the verge of collapse like Argentina, on unsustainable paths too. Most of these debts are denominated in dollars. The exorbitant privilege associated to the international position of the dollar comes with some requirements, as Charles Kindleberger famously noted. It requires acting as a global lender of last resort, providing counter-cyclical demand in times of distress. The U.S. is already doing some of these, with the Fed offering swap lines for central banks of a few countries, but it has blocked other initiatives like the expansion of the IMF’s Special Drawing Rights. Certainly not enough, and debatable whether it is enough even for domestic purposes (let alone other problems noted here, like the notion that the federal government would allow subnational units to go bankrupt)

Even more important in the context of the pandemic, particularly for the U.S. global standing, would be to allow countries that are indebted in dollars to default. These countries need the international reserve currency for the importation of essential medical equipment and pharmaceutical goods. The crisis has, if anything strengthened the position of the dollar in the short run, but there are dangers.

A financial crisis in the middle of a pandemic could have enormous human consequences, and it could also create the conditions for an eventual reduced role for the dollar. The pandemic has exacerbated the dispute between the United States and China, and the latter has already expanded its global lending in renminbi for years. It is also trying to provide medical support for affected countries in the region, to reduce criticism about its role in the pandemic, and now has stepped in to provide medical support. Argentina too has received medical equipment from China. If the U.S. is perceived as unresponsive, it is not inconceivable that China, if it follows a more generous credit policy, could be favored by the crisis.

The best possible outcome would be a negotiated solution, which would probably fall somewhere in between the Argentinean government offer and what would make the big institutional investors not loose money in the short term. Somewhere between a forty and a sixty percent haircut. That would allow the Argentinean government to deal with what really matters, the pandemic, and perhaps expand its spending without fear of external consequences. The U.S. Treasury and the IMF should back more vocally such a solution. Time is running out.

What to expect from the incoming government in Argentina

The government in Argentina has less than two weeks at this point. It is too early to pass judgment. But we can look at the legacy of the Macri administration, and indicate a few things about the current strategy. A paper I have just received from Fabian Amico, that will soon be published in Circus, will be invaluable for my very brief comments here (the new issue of Circus and his paper will eventually be linked here, in Spanish).

The first thing that should be evident is that the 4 years of the Macri administration, that were supposed to restore economic growth, something that had faltered since 2011, essentially as a result of an external constraint, were a failure. Using IMF data, the average GDP growth in the period was -0.2 percent. Yep, negative. Amico uses a local activity index and the results are visibly not very different (his numbers give an overall decline of 1.7 percent for the whole period).

Macri's administration also lifted capital controls, paid the Vulture Funds more than US$ 9 billion, and open the doors to additional foreign borrowing. The Macri government had put all of their bets on the notion that growth would come from private investment and exports, rather than the combination of government spending and higher wages, which allows for higher consumption. Below you can see how well that worked out for them.

As it should be clear only exports grew (Amico calls, aptly, the Macri period an export-led stagnation one), and not as a result of the real devaluation, since they grew at about 2 percent per year, more or less in tandem with the growth of global GDP. So much for the notion that devaluation provides space for policy, and higher growth. The collapse of government consumption, and the fall in real wages were crucial to explain the poor performance. Investment followed the accelerator and collapses with the fall in GDP.

The real depreciation of the exchange rate, as is well-know, affects negatively the real wages, that fell approximately 30 percent during his government, and as I had noted back in 2015, that was the real objective of his government. In that sense, one can say that his government did achieve its main goal. The participation of wages in total income fell 8 percent, as shown below.

The worst mistake was the increase in foreign debt in foreign currency, of course, the currency crisis and the return of the IMF, which I've already discussed (here and here) so I'll not delve again into this.

The Fernández administration, and the new Finance Minister, Martín Guzmán, are doing what was expected, and what seems reasonable under the current circumstances. The increased the retentions, taxes on exports, mostly of the agribusiness sector, started to tax assets held abroad, and eliminated taxes on assets held domestically in pesos, which are measures to try to increase the reserves in dollars. This will certainly complemented with measures to alleviate hunger, and poverty, including the pensions of the elderly poor. They are most likely in negotiations with the IMF to avoid a default, and that is crucial for the success of the economic program.

As Fernández said, his administration inherited the chaos. But there are reasons for hope in the dark.

The return of populism or Argentina on the verge of collapse

The Argentinean primary elections, which are very peculiar and take place all at once with all parties, were last Sunday. The primaries made some sense when the Peronist party was all divided and that allowed the main candidate to proceed, but with the move of Cristina Kirchner to the vice-presidential spot next to Alberto Fernández, and the unification of a good part of Peronism (in particular Sergio Massa), the primaries become essentially an anticipated election. And Peronism won resoundingly, with 47 percent of the votes, considerably more than the 32 percent the neoliberal Mauricio Macri obtained.

After the election there was a run on the peso, with a depreciation of almost 30 percent, and no significant intervention from the Central Bank. To add to the problems, Macri, the incumbent president, blamed the run on the voters.  In his view, they basically do not know how to vote, and by bringing back the spectrum of populism, and the implication was default, they scared the markets. It's all about confidence.

There are many problems with his arguments, and the policies he proposed the following they, after he apologized (after all he still needs the votes of those that do not know how to vote in October, when the actual election takes place). First and foremost, the fact that the problems faced by this government are the result of their own decisions to increase significantly the amount of debt in foreign currency. As I noted before here, it doubled in this government, after having being significantly reduced in the previous one (and after the renegotiation of debt with 93 percent of bondholders in 2005 and 2010; I must insist that default was in 2002, before Kirchner, in spite of what the Wall Street Journal said recently).

Yes, it is true that by the time Macri was elected in 2015 the country had an external problem. Meaning that the current account was moderately negative, and there were no inflows of capital in a world awash in capital, and reserves were low. But most countries were able to attract flows with moderately higher rates than the international ones. I expected the depreciation and higher inflation in the beginning of Macri's government to bring down real wages. And fiscal adjustment was to be expected too, in order to increase unemployment and reduce the bargaining power of unions.

But he had space, after that, for borrowing in international markets in domestic currency, at higher interest rates, and in domestic markets, and he could have in the process obtained significant amount of dollars (locals buying high paying bonds in domestic currency) to prop up the reserves. That would have led to growth, possible stabilization of prices (with some appreciation of the currency), and accumulation of reserves, reducing the external vulnerability of the economy. The fact that they borrowed in dollars, allowed the depreciation of the currency, losing control of inflation, increased the obligations in foreign currency to a level that an agreement with the IMF was necessary, and that adjustment forced the recession (besides the contractionary effect of the devaluation) was unexpected, to say the least. It is almost impossible to fathom why he would pursue policies that would make his reelection very difficult.

To things should be said in this context. One is that the agreement with the IMF supposedly was in place to allow to maintain the exchange rate in the forty something level, and with that, perhaps, at least not accelerate inflation and help with reelection. A politicization of the IMF that the international organism should have resisted. Also, many people able to buy dollars at forty something (now that they are at around sixty) won significantly. So those that bet on a depreciation (and promoted capital flight) won. And financial markets certainly did. This government has many friends in the markets. The other is that the agreement with the IMF ties the hands of the next government. And in my view that's no accident.

The measures he announced to counter the crisis (see this FT story), essentially "increases in the minimum wage, loans for small and medium-sized businesses, student grants, subsidies for poor families with children and a floor for income tax, as well as a freeze on petrol prices" (the later freeze was, apparently, now eliminated) will not have an economic, and most likely also not an electoral effect. FT is correct, it's too little too late. Not only the size of the measures is small, but also the inflationary and contractionary effects of this massive depreciation will dwarf any possible benefit of a moderate stimulus.

So Fernández is the virtual new president, and Cristina his vice-president. And the left of center is most likely back in power in Argentina. The notion that the left was done in the region has been exaggerated. As I noted more than three years ago here it was a stretch to think that most people wanted a return of neoliberal policies in the region. I noted that Brazil was divided, and I think still is, with significant resistance to Bolsonaro, and that Macri had only won by a very a narrow margin. Note that the return of the left in Argentina comes with significantly less degrees of freedom than in 2003. Not only there's an IMF agreement that would need to be renegotiated (and they must do it to avoid a default), but also the international scenario is much less favorable. But my take is that the new government will be able to avoid default, and restore some degree of coherence to economic management, allowing for lower inflation, and moderate rates of growth (on the low end, but at least growth) and reduction of unemployment and poverty. More on that in another post the near future.

Argentina, Financial Times and the next default

It's been a while since I wrote about Argentina. In all fairness, because it is difficult given all the mistakes of the last few years since Macri's victory. I discussed the prospects of what to expect back then. Since then I posted here and here on the supposed improvement in 2017, and the beginning of the still unfolding crisis in 2018. And this could simply be an "I told you so post," since I did warn about most things that would happen. But there are important and interesting news about Argentina, now that there is at least some clarity about who will run against Macri this year.

Cristina Kirchner finally announced she's running for the vice-presidency, and that her husband's chief of staff (when Néstor was president), Alberto Fernández, will be at the top of the ticket. Some have suggested that this is a great move that will allow to unify Peronism, which might lead to victory in the election later this year. As a response, the editorial board of the Financial Times (FT) published a piece in which it suggests that given the low popularity of Macri's austerity measures backed by the International Monetary Fund (IMF) policies, that a return of Peronism, would be possible, but a huge mistake for Argentina.

There are many problems in FT's analysis. FT's piece suggests that "Mr. Macri's austerity programme is broadly on track to deliver long term gains for Argentina." There is a fundamental misconception in their argument. Argentina's problems are not fiscal, caused by excessive government spending, but external caused by excessive borrowing in foreign currency. Mr. Macri took over in 2015 with foreign debt at around 70 billion dollars, and proceeded to more than double it to approximately 160 billion dollars, as shown in the figure below (elaborated by Juan Matías De Lucchi, for a paper we co-authored in Spanish and that should be published soon). Foreign denominated debt is now higher than it was before the 2002 default, if smaller as a share of GDP (red line).

Note that while Macri inherited a situation of high inflation, significant fiscal deficits (those are in domestic currency), and an external constraint, mostly associated to an energetic external deficit (that one in foreign currency), the external debt situation was deemed sustainable by everybody back then. Note that inflation was ultimately the result of a sequence of small devaluations, and significant wage resistance during the years of Kirchnerism, and that the external constraint resulted from an inability to diversify exports, and particularly of reducing import necessities in the energy sector. The fiscal situation was not problematic, and there was no problem with financing domestic spending, and no serious inflationary pressures coming from the Central Bank financing the Treasury.

The Macri government established those propositions. His team, stacked with very 'serious' mainstream economists like Federico Sturzenegger, who argued that increase in the domestic energy price bills would have no inflationary impact, believed that inflation could be solved in a simple way by stopping the financing of the Treasury. Inflation was in Monetarist fashion a question of too much money. They also believed, to some extent, that a devaluation would solve external problems if it happened. But they expected a surge in foreign investment that would lead to growth and also put pressure for the appreciation of the peso. Of course, the outcome of their liberalization of the foreign exchange market, and their Monetarist experiment led to higher inflation and depreciation.* Fiscal adjustment and the firing of many government workers led to a recession, and higher unemployment. That was the macroeconomic package of the government, even before the IMF.**

Note that there was no need at that point to borrow in international markets in foreign currency. The current account deficit was manageable, foreign debt obligations were relatively low, and the capital flight caused by the liberalization of the foreign exchange market could had been stopped, to some extent, with a hike in the interest rate. Of course they should have been more careful about the liberalization of the external accounts, but that was probably too much to ask from this government of financial operators with deep ties to Wall Street and international financial markets (and a president with accounts in tax havens, documented in the Panama papers).

Macri's government renegotiated the debt with the vultures, the final step for Argentina to re-enter financial markets, under conditions that were excessively generous, one might add. And note that the external debt had already been significantly reduced by the successful renegotiation of the Kirchners with 93 percent of debt holders (and the Macristas talked about a heavy inheritance!). Minor increases in the rate of interest in the US, which in most places led to minor depreciations, coped with interest rates that at times were negative in real terms, led to massive flight. But the government continued to borrow in foreign currency, when almost every country in the periphery has been able to borrow in domestic currency.

That of course was no mistake. This government has promoted a massive increase in foreign debt to finance large amounts of capital flight. The IMF has essentially validated this model, by allowing the government to use the loan to contain the exchange rate. This government has created conditions for a huge amount of dollars to be purchased by essentially their friends in financial markets. It is a financial racket. This is obviously not sustainable, and a relative safe position has been turned into a possible default soon. Not surprisingly the specter of Peronism haunts Argentina.

* On some level the government wanted higher inflation, in order to reduce real wages, something I noted back in 2015. They also wanted a recession, to help reduce the bargaining power of workers.

** As I often say, our elites don't need the IMF, they carry the orthodox gene in their economic DNA.

A brief comment on the Argentinian Crisis

This was faster than even I expected (for my views on what Macri meant as soon as he was elected see this and for a more recent assessment go to this post). Let me first say that I don't think is quite like the 2001/02 crisis. It is unlikely that there will be a default anytime soon. The level of reserves is at about US$ 56 billion, and the IMF is happy to finance the very Neoliberal government of Macri (because the IMF has changed a lot, remember?).

The economy with Macri has not performed very well, as expected. Inflation has remained high, since the depreciation of the peso has persisted, and that was no accident. It allowed to erode real wages, which I noted from the beginning was part of their goals. Also, the rate of growth has been lackluster, and if the IMF is to be believed real GDP growth in his first two years was on average at around 0.5 percent. Again, I don't think that has been a central concern (even if they suggest the opposite). Note that again a relatively low rate of growth (as per Okun's Law) leads to slow job growth (formal unemployment is above Cristina Kirchner), and less wages pressures. In Argentina, economic policy is truly geared towards containing wage resistance, when you get a Neoliberal administration.

Macri's policies are essentially the same as the Neoliberal policies of Menem (and his finance minister Domingo Cavallo, who is back, and defending Macri), minus the fixed exchange rate system. The notion was that a flexible exchange rate with inflation targeting would basically provide the same price stability as Convertibility in the 1990s, without the balance of payments problems that led to the 2001-02 debacle. Btw, this idea that one could use either a very rigid or a very flexible exchange rate regime (but nothing in between, and certainly not capital controls) was really the exchange rate policy of the Washington Consensus and was made famous by Stan Fischer as the Bipolar Consensus.*

So Macri liberalized the foreign exchange market, further liberalized imports, in crucial sectors where there was a significant repressed consumption by the middle and upper classes, like electronics, and that led to a significant increase in imports, not matched by increases in exports (even with the depreciation of the peso; as it turns the depreciation of the currency is inflationary, and by reducing real wages, contractionary, but it does not increase exports by a lot, which depend on foreigners incomes for the most part; who could have foreseen such an effect!), and they resort to foreign borrowing to close the gap. Again using IMF numbers, that are estimated for 2017 (and I should note and not very reliable since inflation data is also not very good. A bit enervating given how much the opposition to the Kirchners complained about the quality of inflation data, and the notion that would not happen with them) we get the following picture for the current account (CA).

Clearly the external situation has worsened significantly. Don't get me wrong, I don't think the recent run on the peso has been caused directly by the CA position. This is more like the long term problem. If you liberalize imports, and the patterns of consumption are such that imports explode, but your pattern of specialization is the production of commodities, and you solve this by borrowing in foreign currency, it cannot end up very well. And it won't. Btw, yes I did say back in 2016 that foreign debt driven growth was dangerous and eventually unsustainable at the time that Moody's was upgrading Argentina. So what caused the recent run on the peso, you ask. Not sure, to be frank.

The Fed in the US has been signaling higher rates (and they went up a bit), and that causes trouble for sure. And the Macri team, which has some from the Menem/de la Rúa Neoliberal Era (like Sturzenegger at the Central Bank), is not very competent (not sure why FT thinks they are pragmatic and in between the Neoliberals of Menem and the 'heterodox' of the Kirchners), and kept interest rate really low (for distributive reasons alluded above) allowing for depreciation. At any rate, the turbulence might be temporary, but the issue is not, and Argentina is headed for more problems.

* On this John Williamson, and his views on competitive exchange rates, did not reflect well what the consensus in Washington (meaning the IMF, World Bank and the US Treasury) really thought.

PS: If you read Spanish, you must check this short piece by Fabián Amico and Mariano de Miguel (h/t Edurado Crespo). Best I've read so far.

PS2: Forgot this one by Claudio Scaletta in Página/12, also worth reading, as everything Claudio writes.

Argeo Quiñones and Ian Seda on the crisis in Puerto Rico

Argeo Quiñones-Pérez and Ian Seda-Irizarry discuss the crisis in this piece. They correctly point out the neocolonialist solution being imposed by the US administration. I find the imposition of a Fiscal Control Board (FCB) particularly problematic. Back when Argentina defaulted in 2002, Rudi Dornbusch had suggested something similar. At that time I sent the letter below to the Financial Times that had published his proposal.

LETTERS TO THE EDITOR:
Mystery of about-turn on Argentina 

Financial Times, Mar 12, 2002
From Matias Vernengo. 

Sir, Back in February 1997, Professor Rudiger Dornbusch said: "Argentina is on the go - (it) is the only country in the world today that enjoys both price stability and vigorous growth." The reasons were associated, according to Prof Dornbusch, with hard money and pro-market reforms. Argentina's policies then were an example to Brazil, Mexico and other developing countries. Now, Prof Dornbusch together with Prof Ricardo Caballero tells us that this exemplary economy was not so ("Argentina cannot be trusted", March 8). Prof Dornbusch should clarify what transformed this successful liberalisation experience into a catastrophe, or explain why he changed his mind. Also, it must be noted that suggesting a foreign board of central bankers to control monetary policy, and another foreign board to verify fiscal performance, is tantamount to suggesting colonisation of Argentina by foreign agents. The question then is whether Argentina should be returned to Spain. Or does Prof Dornbusch have another suggestion? 

Matias Vernengo,
Assistant Professor,
Kalamazoo College,
Kalamazoo, MI 49006, US

Note that the problems, both of Puerto Rico and Argentina, are related to debt in foreign currency, and, hence, to balance of payments issues, rather than fiscal per se. In addition, note that Argentina was quasi-dollarized by Convertibility, while Puerto Rico is effectively dollarized. Btw, the new government in Argentina wants to be re-colonized by Spain (the finance minister apologized to Spanish investors recently; see here).

The hope of some on the left, in Puerto Rico, was that, with a Bernie victory in the primaries there, the movement for decolonization could gain some force. Alas, Hillary won the primary.

A more detailed discussion of the crisis by the same authors is available here in their paper "Wealth Extraction, Governmental Servitude, and Social Disintegration in Colonial Puerto Rico."

Eileen Appelbaum on the Argentine Technical Default

By Eileen Appelbaum There is no way to construe as fair the United States court ruling that Argentina cannot pay 93 percent of its creditors, unless it first pays a small group of hedge funds. It's not fair to the 93 percent of bondholders who negotiated a restructuring of Argentina’s debt in 2005 and 2010 with reduced payments. What gives Judge Thomas Griesa the right to take them hostage in order to force payment to the "vulture funds" that still demand full payment? It's not fair to the government of Argentina, which cannot pay the vulture funds without facing demands from other creditors to be paid in full, a move which would open the country up to many billions of dollars of claims that it cannot possibly pay. Although the news media reports that Argentina has defaulted to the restructured bondholders, this is not clear. The government did make the latest $539 million payment to these bondholders, but Judge Griesa is not allowing the New York bank that received this money to pay the bondholders. Griesa is defaulting, not Argentina. This is unprecedented and wrong. Read rest here. For all the entries in the NYTimes debate go here, including the entry by Alan Cibils.

*For other NK posts on the situation, see here, here, here, here, here, here, & here.

Per S&P & Bloomberg, Argentina Defaults... So What Now?

From a matter of fact point of view, even though Argentina has made the payments to bondholders, Judge Griesa's decision precludes them (the bondholders) from receiving payment, and so Argentina is technically in default (Argentine Finance Minister, Kicillof called it: "default Griesa. Griefault." This is NOT like in 2002 the result of lack of funds, but direct consequence from a judicial decision backed by the US Supreme Court. From Bloomberg:

Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds. The South American country failed to get the $539 million payment to bondholders after a U.S. judge ruled that the money couldn’t be distributed unless a group of hedge funds holding defaulted debt also got paid. Argentina, in default for the second time in 13 years, has about $200 billion in foreign-currency debt, including $30 billion of restructured bonds, according to S&P. Argentina and the hedge funds, led by billionaire Paul Singer’s Elliott Management Corp., failed to reach agreement in talks today in New York, according to the court-appointed mediator in the case, Daniel Pollack. In a press conference after the talks ended, Argentine Economy Minister Axel Kicillof described the group of creditors as “vulture funds” and said the country wouldn’t sign an accord under “extortion.”

Read rest here.

And for recent NK posts on the situation, see here, here, here, here, here, and here.

More on Argentina and the Vulture Funds and the sanctity of contracts

So the Argentine government decided to negotiate with the Vulture Funds to avoid a default, which is eminent if no agreement is reached, well, basically today. This is not necessarily bad news, given the potential consequences of a default. It is also one of the frustrating results of the decision of the very Conservative (and pro-bussiness) Roberts Supreme Court. To preside over the negotiations Judge Griesa chose a Wall Street lawyer (who boasts in his CV to have sued Elliot Spitzer for exceeding his authority in investigating Wall Street fraudsters). Argentina is trying to pay today to the ones that renegotiated, but whether that will happen is still not clear (apparently without success).

Note that the consequences of the default could be dire indeed. It would put more pressure on the exchange rate, lead to further depreciation that would be both inflationary, and contractionary, since it would basically reduce real wages. The economy would be forced to continue to grow at very low levels, as it has done since 2011, to avoid a current account crisis. In part, the problem exists even if Argentina does NOT default. Meaning the current account is already close to its limit and the reserves are not sufficiently high (around US$ 28 billions or so), and that's the reason the government has tried to finish negotiations with creditors that did not enter the previous debt reschedulings, including the Paris Club.

The notion is, arguably, that in a world with significant amounts of liquidity, and the chance that low rates of interest in international markets will continue for a while, access to international financial markets would be a reasonable solution for the Argentinean current account constraint. In fact, Brazil has financed a larger current account deficit with little or no problem (maybe the rate of interest is too high, and could be lower, but that's another discussion).

This does not necessarily mean that the Kirchner government has backtracked on previous policies, at least not completely. Reducing foreign indebtedness, after the default and the renegotiation, was the rational choice, and the commodity boom basically provided the policy space for it and for the accumulation of reserves. But borrowing in international markets, when the current account and reserves do not allow for continuous growth, might be fine too if borrowing is done on a sustainable basis. In other words, if the Argentinean government manages exports and imports (import substitution here plays a role as much as export promotion) to allow for the service of debt.

Also, renegotiation of debts (and default might be just a phase in a renegotiation process) are common, and do not show that (as some angry and, quite frankly, not very informed readers suggest in comments on posts on the default, not just in this blog) Argentina is a "deadbeat country and nobody should ever lend to them again." Note that defaults are actually quite common in history.

For example, Cipolla (1982) describes the bankruptcy of the banking houses of a developed country associated to the default of a developing and 'deadbeat' country. What countries are these, you ask. England and Italy, and of course England is the deadbeat one. According to Cipolla (1982: pp. 7-8):

“The large companies of the dominant economy (Florence), which operate in the underdeveloped country (England), have a vital interest in securing the local raw material (wool) for the home market. By logic of events they are led to grant increasingly larger credits to the local rulers, on whose benevolence the licenses for the export of raw material ultimately depend. The rulers of the underdeveloped country, however, instead of using the credit to finance productive investment, squander the funds in war expense and are soon forced to declare bankruptcy.”

So in the mid-fourtenth century the banking houses of Bardi and Peruzzi were brought down by the sovereign default in England and, hence, Florence, more accurately than Italy, was hit by the default. And there are several other countries that would now be considered developed (e.g. Germany) that defaulted before, without being excluded forever from financial markets.

Most countries that default do pay eventually, just at a new rate with extended periods. Renegotiations are normal, and the basis for them is the ability to repay, since it would be better for creditors to receive something. Note also, that creditors (as a whole, not an individual creditor per se) seldom make losses, and that is why all countries after a shorter or longer spell come back to international financial markets. The reason is not difficult to understand, since developing countries pay risk premiums well above the safe assets (Treasury bonds), the advantage of holding developing country debt even for a short while is sufficient for compensating default risks. And besides most savvy investors try to get out before the default (or in the case of Vultures, enter afterwards, to buy debt at the bottom, and make a kill in the courts; it is a good business model, if nothing else).

Changing the terms of contracts, which is basically what a default and renegotiation does, is not new and not the privilege of debtors. In fact, when the credit card company sends a "change of terms notice" to their cardholders, increasing fees or directly the interest rate, it is basically renegotiating unilaterally your contracts. So that is a normal market practice, and Argentina is not violating the sanctity of contracts, and is at least trying to honor its debts, as it has done for the last two hundred years.

Finally, beyond Argentina the consequences of the Robert's Court for international financial markets have been well summarized by UNCTAD, namely:

• First, by removing financial incentives for creditors to participate in orderly debt workouts, the rulings will make future debt restructuring even more difficult, in particular for outstanding bonds without a Collective Action Clause, the actual amount of which is unknown but is likely to be large.
• Second, obligating third-party financial institutions to provide information about assets of sovereign borrowers will have a significant impact on the international financial system as it forces financial service institutions to provide confidential information on the sovereign borrower's global financial transactions to facilitate the enforcement of debt contracts for the creditors.
• Third, the ruling will erode sovereign immunity.

In other words, reduces the chances of debt renegotiations, and of sovereign governments to manage its international reserves, reducing policy space. The question here is not if or whether Argentina should pay, which it was already doing, but at what cost, and who would benefit. The Robert's Court went with Wall Street, and that's no surprise. Interestingly this might hurt even Wall Street. Oh well.

Reference:
Cipolla, C. (1982), The Monetary Policy of Fourteenth-Century Florence. Berkeley: University of California Press.

Mark Weisbrot - Who Shot Argentina?

By Mark Weisbrot

When Cristina Kirchner first ran for president of Argentina in 2007, she had a campaign commercial with adorable young children answering the question, “What is the IMF (International Monetary Fund)?” They offered cute little ridiculous answers like “The IMF is a place where there are many animals,” and the punch line from the narrator was: “We have succeeded in making it so that your children and grandchildren won’t know what the IMF is.” To this day, there is no love lost between the IMF and Argentina, since the fund presided over Argentina’s terrible economic collapse of 1998-2002, as well as numerous failed policies in the years prior. But when the U.S. Court of Appeals for the Second Circuit ruled in favor of vulture funds trying to collect the full value of Argentine debt that they had bought for 20 cents on the dollar, even the IMF was against the decision.

Read rest here, and for another piece by Weisbrot, see here, and for posts on the issue by Matias, see here & here

Mark Weisbrot - The Debt Vultures' Fell Swoop

By Mark Weisbrot

Last week, the United States Supreme Court decided not to review a ruling in the Second Circuit Court of Appeals whose effect is that Argentina must pay “holdout” creditors who refused to participate in debt restructuring agreements that Argentina reached with the majority of bondholders following the 2001 default on its sovereign debt. Argentina’s lawyers warned that the court’s decision created “a serious and imminent risk” that the country would again be forced to default. But the ruling also has profound and disturbing implications for the functioning of the international financial system, and even the United States would most likely be adversely affected. Parties as diverse as the International Monetary Fund and leading religious organizations wanted the Supreme Court to overturn the decision, and briefs supporting this position were filed by the governments of France, Brazil and Mexico, as well as by the Nobel Prize-winning economist Joseph E. Stiglitz. The I.M.F. — which has had mostly sour relations with Argentina since its involvement in that country’s 1998-2002 recession — was also planning to file a brief on Argentina’s side to the Supreme Court, but was blocked by the American government from doing so. This action may have influenced the court’s decision not to hear the case.

Read rest here, and for recent posts on the topic by Matías, see here & here

Supreme Court Sides with Vulture Funds in the case of Argentina

Very briefly, since I've to go teach (more later today this week). The Supreme Court has sided with the Vulture Funds and denied Argentina's appeal judge's Griesa's infamous decision requiring it to pay the last holders of bonds on which it had defaulted (almost 93% had already renegotiated, after Argentina's agreement with the Paris Club). The problems this will cause transcend Argentina, and are a blow for any debt renegotiation worldwide. Who will accept a renegotiation knowing that the Supreme Court can decide that some have to be paid according to the original agreements?

In the case of Argentina, the efforts to finalize the renegotiation with debtors, that culminated with the Paris Club agreement, and which intended to normalize the relation with international capital markets, and allow a reentry of the country into those markets on a more favorable footing are gone. A very likely outcome will be a technical default, that is, for lack of payment even though the Central Bank does have funds to pay.

On an interesting note, 'liberal' judges Breyer and Kagan voted with the conservative majority, and only Ginsburg dissented (Sotomayor did not vote).

There is no public debt problem in the United States

Jamie Galbraith's clearly shows that fears of an American default are exaggerated.  He says:

Let's suppose that the Treasury actually says to the People's Bank of China, sorry, we can't write a check to you right now. Well, in the case of the People's Bank of China, the bond that they hold would become a defaulted bond, but it would still be there. And the Treasury would still recognize its obligation on that bond and would presumably be willing to pay accrued interest on it. The Treasury would probably say, it's going to be a few days while we resolve this, and the People's Bank of China would, in my view, probably do nothing. If I were sitting in the position of a foreign holder of U.S. Treasury securities in that situation, the last thing I would want would be a panic. I would want this problem to go away.

And by the way, Standard & Poor's doesn't matter also.

More on Center-Periphery cycles

As Matías pointed out in a previous post, Yilmaz Akyüz describes the stylized post-Bretton Woods boom and bust cycle nicely. From the perspective of the developing world, low interest rates in the US lead to an inflow of capital, currency appreciation, and often times a commodity price bubble. As the current account worsens, a trigger event causes a sharp withdrawal of capital (which often results in a debt crisis). Reductions in the level of income then adjust the balance of payments. From the perspective of the US, this has been associated with debt driven consumption cycles.

But the post-Bretton Woods US is only the most recent protagonist in what was originally a British drama. Throughout the 19th century, the British, often responding to rising commodity prices, pulled "gold from the moon" by manipulating the Bank of England discount rate. From the Baring Crisis of the 1890's to the 1860's cotton boom in Egypt, to the US boom of the 1830's, to the first Latin American debt crisis in the 1820's, the British were able to direct the international flow of capital and thus the fates of peripheral countries. The cycle is astoundingly similar. Long periods of disinflation in the center, associated with capital inflows and commodity booms in the periphery. Peripheral exchange rates appreciate, a large external account deficit opens, and the whole process is ended with a sharp increase in interest rates by the central bank in the core.

The example of the US in the late 1830's is particularly ironic as it learned some harsh lessons in the school of international financial hegemony that it now conducts. Long term capital began to flow into the US after during the British recovery of 1833-34. It was associated with a rapid increase in commodity prices, particularly cotton. As the dollar appreciated against the pound, a large trade deficit emerged, as Americans bought British manufactured goods. A decline in the British bank rate in 1835 further increased the mania. By 1836 the Bank of England increased it's discount rate, causing commodity prices to collapse and throwing the US into recession. High real interest rates then resulted in a wave of US state defaults not unlike the Latin American defaults of decade earlier (notably Andrew Jackson had paid of the federal debt with revenues from land sales - else we might have had a full on sovereign default!).

All of which is to say that the cycle is not new. Even prior to the classical gold standard, the center has conducted the orchestra, while the periphery faces strongly asymmetric adjustments. It is however ironic that a country that used to be in a minor chair position now conducts. The difference of course is that as the 19th century came to a close and international competition mounted, the British turned inwards, increasing trade with countries within the Empire (as pointed out in DeCecco's fantastic book "The International Gold Standard: Money and Empire").