The Economics Hub Newsletter: Week 3
Russia defaults, Global food crisis, Europe's energy crisis, Rupee free fall, and other article recommendations
Happy Saturday!
Welcome to another issue of The Economics Hub Newsletter! I hope you are well.
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Here’s what we cover this week. As per your interest and convenience, please click on the specific topic to jump directly to that section!
Ready? Let’s dive in!
Bank for International Settlements – Annual Economic Report 2022
The Global Housing Market is Starting to Wobble as Central Banks Hike Rates
Russia Defaults On Foreign Debt For The First Time In 104 Years
How Europe can cut natural gas imports from Russia significantly within a year
Millions Of Children Will Soon Need Aadhaar IDs To Access Their Right To A Nutritious Meal
A third of UK ‘buy now, pay later’ users say they can’t handle payments
SEC Chair Gensler Again Says Bitcoin Is Not a Security. What About Ethereum?
1. Bank for International Settlements – Annual Economic Report 2022
Much awaited Bank for International Settlements’ annual report is finally out! It covers a broad range of topics w.r.t inflation, economic growth, stress on the financial system, and more. The report echoes the fears of stagflation - the unpleasant combination of economic stagnation and inflation, in the coming months. It also foresees a regime change from a low-inflation economic framework to a high-inflation framework. As per the BIS, the key drivers of inflation are:
Unexpectedly strong economic rebound from the COVID-19 lockdowns
The War in Ukraine
Recent lockdowns in China due to its zero-covid policy
Higher commodity prices
Supply Chain Bottlenecks
In confronting these challenges, the clear priority for central banks is to restore low and stable inflation. In doing so, they should seek to minimise the hit to economic activity. Engineering a “soft landing” has historically been difficult, and the starting conditions today make it especially challenging, the BIS says. The worst-case scenario would be stubborn inflation pressures that prompt a stronger tightening. This could trigger a larger slowdown, including a recession, alongside financial stress – a stagflationary hard landing.
Furthermore, the report emphasized that this period of stagflation would be worse than the previous episodes of stagflation as the global economy is now more financially vulnerable, with high public and private debt levels and prevailing stretched asset prices. Therefore, “the key for central banks is to act quickly and decisively before inflation becomes entrenched,” said General Manager Agustín Carstens. “If it does, the costs of bringing it back under control will be higher. The longer-term benefits of preserving stability for households and businesses outweigh any short-term costs.”
The report is really informative and filled with lots of useful data-driven charts. You should really check the full report!
2. War Fuels Food Crisis by International Monetary Fund (IMF)
Global food prices rose 23 per cent in 2021, ending several years of relative price stability, in part because extreme weather hurt harvests and energy costs climbed. Then came Russia’s invasion of Ukraine in late February, sending prices to an all-time high by disrupting commodity flows from two of the world’s largest exporters of wheat and other staples. The two countries account for a quarter of global exports of wheat and a fifth of barley and maize, and more than half of sunflower oil. They provide about an eighth of all calories traded in the world.
Other factors for global food inflation are:
Climate change, as it threatens production across many of the world’s agricultural regions, with more drought, flooding, heat, and wildfires.
Inflation
Pandemic continues to disrupt supply chains
Rising costs of fertilizers, as they are essentially made from natural gas itself.
Protectionism, as countries are halting the international trade of agricultural commodities amid the fears of social unrest
You can read the report for more information regarding hunger levels, food insecurity, and undernourishment levels across countries.
3. The Global Housing Market is Starting to Wobble as Central Banks Hike Rates
From Toronto to Auckland, a slowdown in the housing market (the most interest-rate sensitive segment of the economy) is underway as interest rates in developed economies are set to climb rapidly, according to Goldman Sachs Research. Mortgage rates spiked sharply since last summer in the U.K., Canada, New Zealand and the U.S.; and given the likelihood of further rate hikes, borrowing costs for housing are likely to rise even further.
The economic slowdown with approaching stagflation, and rapid policy hikes by central banks have significantly affected the housing affordability of individuals and firms in developed markets. Goldman Sachs’ Housing Affordability Index, which captures the financial burden of taking a mortgage loan to buy a house, indicates affordability is low across most markets.
4. Russia Defaults On Foreign Debt For The First Time In 104 Years
Russia defaulted on its foreign-currency sovereign debt for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors. About $100mn (£81.5mn) worth of coupon payments on Russian government bonds came due on Sunday evening with no sign of payment, marking the end of a 30-day grace period during which the country sought to avoid a full default.
Russia has defaulted twice in its history. The first was in 1918, in the aftermath of the Bolshevik takeover when Lenin-led revolutionaries refused to pay out on tsarist bonds. The second was in 1998 when it restructured debts, but then it defaulted only on domestic borrowing.
However, this default is special because it was caused not due to unwillingness or means on Russia’s part. I mean, the country is flush with foreign currency thanks to its huge oil and gas revenues and has repeatedly said it wants to carry on servicing its debt. Instead, the coupon payments were impossible due to western countries’ financial sanctions on Russia, following its continued invasive attack on Ukraine since February.
It will impact Russia’s ratings, market access, borrowing capacity and financing costs in the coming years. Read the article for more information!
5. Russia Denies Defaulting on Foreign Debt
A follow-up on the previous news, Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment. As it tried to twist its way out, it announced last week that it would switch to servicing its $40 billion of outstanding sovereign debt in rubles, criticizing a “force-majeure” situation it said was artificially manufactured by the West.
According to the Finance Ministry, Russia sent the payments on its international bonds on May 20, but the money did not reach its final recipients as international clearance systems did not authorize the payment. “The fact that the funds have not been transferred to the recipients is not our problem,” Kremlin spokesman Dmitry Peskov told reporters.
“It’s a very, very rare thing, where a government that otherwise has the means is forced by an external government into default,” said Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP. “It’s going to be one of the big watershed defaults in history.”
6. Explainer: The free fall of the rupee
The Indian rupee hit an all-time low against the U.S. dollar this week weakening past the 79 rupees to a dollar mark and selling as low as 79.05 against the dollar on Wednesday. Many analysts expect the rupee to weaken further in the coming months and move past the 80 rupees to a dollar mark. The Indian currency has now lost more than 6% against the U.S. dollar since the beginning of 2022.
This is happening despite the Reserve Bank of India (RBI) intervening in the foreign exchange market by selling dollars from its foreign exchange reserves and buying rupees. The RBI sells dollars and buys rupees to ensure that enough dollars are circulating in the system and that the rupee doesn’t lose value at a fast clip. Let’s explore the major reasons why the Indian Rupee is in free fall:
US Federal Reserve raising its benchmark interest rates: The result is that foreign investors sell their assets to pull the capital away from India (and other EMEs) in an anticipation of higher risk-adjusted returns. For instance, the returns on US 10-year Treasuries have risen from around 0.5% in mid-2020 to over 3% now.
India’s higher import bill is due to the rise in global commodity prices. For instance, India imports around 86% of its oil needs.
Weaker growth projections in the short-to-medium term, resulting in fewer capital investments in India via the FDI route.
We do not have the capacity to export goods and services to increase our Forex reserves to offset the free-fall in the rupee against the dollar because the developed markets are expected to grow slowly or even get into a recession.
7. Here’s how the right to abortion is also an economic issue
For half of a century, women and pregnant people in the United States have relied on the right to abortion to make decisions about their lives, personal finance, health, and well-being. On June 24, the Supreme Court of the United States overturned Roe v. Wade in a 6-3 vote, unequivocally eliminating the constitutional right to abortion in the country and sending the decision to state legislatures. In many parts of the US, pregnant individuals and health workers seeking to provide abortion will be increasingly subject to criminal penalties for seeking access to abortion even in the early stages of pregnancy. The impacts of these criminal laws will be felt most acutely by marginalised individuals who have limited means to seek safe and legal services and who are already subject to greater criminalisation, including low-income women and women of colour.
This article by PBS, make a strong case for abortion access and its connection with economic security, especially for non-binary folks and women of colour. Unlike white women, these groups are already marginalized due to their identities and may not have the economic means, to travel to other states to undergo the procedure and may not even have the time off from work or financial wiggle room to consider that option. Read the article for more insights!
8. In Pictures: The economic case for abortion rights
This is a wonderful and simplified explanation of the relationship between abortion access and economic security for pregnant people. I cannot recommend it highly enough!
9. Podcast: The Crisis of Inflation with Lyn Alden
Lyn Alden is one of my favourite macroeconomists and investment strategist. I have been actively following her work since March 2021, and she rarely disappoints with her research and analysis. In this podcast with What Bitcoin Did host Peter McCormack, she extensively discusses the current macro landscape with looming stagflationary concerns while dedicating considerable time to explaining how the energy crisis is the major driver of inflation. She also talks about the following topics:
The various factors that led us to the current energy crisis
Cyclic patterns in commodity markets and why it led to underinvestment in energy infrastructure and thus reducing its supply
Alternate methods of energy production beyond coal and petroleum, such as geothermal, nuclear, solar and wind energy.
Sri Lanka, war and Human rights
Prospects for recession and stimulus checks
Current investment options, debt cycles and interest rates
You can consider reading the podcast notes if you prefer that method of consuming knowledge.
10. How Europe can cut natural gas imports from Russia significantly within a year
Europe’s reliance on imported natural gas from Russia has again been thrown into sharp relief by Russia’s invasion of Ukraine on 24 February. In 2021, the European Union imported 155 billion cubic metres of natural gas from Russia, accounting for around 45% of EU gas imports and close to 40% of its total gas consumption. Progress towards Europe’s net-zero ambitions will bring down its use and imports of gas over time, but today’s crisis raises the specific question about imports from Russia and what more can be done in the immediate future to bring them down. This International Energy Agency (IEA) report proposes a 10-Point Plan, a series of immediate actions that could be taken to reduce reliance on Russian gas while enhancing the near-term resilience of the EU gas network and minimising the hardships for vulnerable consumers.
The key actions recommended in the IEA’s 10-Point Plan include not signing any new gas contracts with Russia; maximising gas supplies from other sources; accelerating the deployment of solar and wind; making the most of existing low emissions energy sources, such as nuclear and renewables; and ramping up energy efficiency measures in homes and businesses.
Taken together, these steps could reduce the European Union’s imports of Russian gas by more than 50 billion cubic metres, or over one-third, within a year, the IEA estimates. This takes into account the need for additional refilling of European gas storage facilities in 2022.
Please read the IEA’s report for detailed analysis, estimation and explanations!
11. Millions Of Children Will Soon Need Aadhaar IDs To Access Their Right To A Nutritious Meal
In a move that experts said would jeopardise access of the poorest children and women to nutrition, the union government has made it mandatory for beneficiaries of its supplementary nutrition programme—which provides children up to the age of six, pregnant women and lactating mothers with free nutritious food—to have Aadhaar numbers so they are registered on India’s national identity database. Earlier, in November 2021, the government threatened state governments that it would curtail financial support for the scheme, restricting it to only beneficiaries verified through Aadhaar.
A union government decision to cut funding to states that do not ensure children and mothers getting free food have Aadhaar IDs could cause millions of poor families to lose key sources of nutrition. The move violates a Supreme Court order that no subsidy or service may be denied for want of an Aadhaar number. India’s national nutrition mission provides free food to 79 million children aged six months to six years and 15 million pregnant, lactating women. Only 23% of children under five have Aadhaar cards.
Strangely enough, the Indian government’s fact-checking agency called this report “fake” while providing no explanation for the same. This Twitter thread debunks this government’s claim. Please check it out!
12. Credit Card Spends Tough All-Time High
The latest data from the Reserve Bank of India (RBI) showed that 7.68 crore credit card holders spent an all-time high of ₹1.14 trillion in May, a sign that the retail economy is growing strong. Credit card spends grew 118% year-on-year and 8% month-on-month on the back of strong e-commerce spending and high-value spending on travel and tourism and discretionary purchases, according to RBI data. The market share of credit card spending is illustrated below:
13. A third of UK ‘buy now, pay later’ users say they can’t handle payments
Buy Now Pay Later (BNPL) schemes let consumers finance payments for items such as clothes and furniture on credit with no interest or charges – unless they fail to pay back on time, at which point some firms impose late fees. Typically, the cost is split into weekly, fortnightly or monthly instalments. The late fees are generally incredibly high. As per Guardian, almost a third of UK shoppers who use buy now, pay later credit say repayments on the loans have become “unmanageable”, with the cost-of-living crisis pushing them into a debt spiral.
Even from an Indian perspective, this is a little concerning as our country witnessed an exponential rise of credit-based payment systems such as BNPL in the last two years. For instance, the Indian BNPL industry soared by a staggering 569% in 2020 and 637% in 2021. Mumbai-based HDFC Securities predicted that “pay later” merchandise value would grow 74% every year to make it a $56 billion market by March 2026. I hope consumers are well-aware of late fees, terms and conditions, their financial ability to pay back the amount and any other additional charges levied on these products so that they do not fall into a debt spiral.
14. Think Outside the Portfolio by Nick Maggiulli
The major stock market indices across the world have fallen more than 20% as we enter a scary period of stagflation. Even the bond market and cryptocurrencies have suffered in the current bear market driven by multiple economic and non-economic factors. With all this market turmoil, you might be wondering: what should I do with my portfolio? Nick rather emphasizes the idea of “What should I do outside of my portfolio?” Because, in the grand scheme of things, your investment portfolio is just one part of your financial picture. There are many other levers that you can pull if you want to improve your finances. However, those levers will be dependent on where you currently are in your financial journey. For the accumulators, who have the ability to earn and save, he recommends:
Buying more financial assets at these cheaper valuations
Learning new skills to increase your future earnings potential
Improving your non-financial life to re-assess your priorities everywhere else in life
For the retirees, he recommends:
Work Part-Time
Lower Your Spending
Be Flexible with your retirement financial planning
15. SEC Chair Gensler Again Says Bitcoin Is Not a Security. What About Ethereum?
Securities and Exchange Commission Chairman Gary Gensler today reaffirmed the SEC's view that Bitcoin is a commodity but refrained from extending the label to any other cryptocurrencies in an interview with CNBC. He singled out Bitcoin as an example of a crypto asset that should be regulated under the Commodity Futures Trading Commission (CFTC). He believes all other crypto-currencies have attributes of “a security.”
The regulatory framework surrounding cryptocurrencies and digital assets has centred on the interpretation of which ones function as securities, like stocks, and which ones operate as commodities, like gold. Such interpretations have far-reaching implications because financial instruments that are securities can only be legally sold to the public if the issuer registers with the SEC and adheres to a strict disclosure regime.
A section of Bitcoin’s community celebrated this statement as it signals regulatory bodies’ softer approach to Bitcoin as a financial asset as compared to other cryptocurrencies. Let’s not forget how the SEC legally sued Ripped in December 2020 on the grounds of whether its native token XRP is security.
That’s all for this week, and thank you so much for making it this far! I hope you had lots of takeaways. Please subscribe if you haven’t yet and kindly tell your friends to do the same - it would mean a lot to me!
Well written brother......keep it up!!