Raphael Stevens

Seventy years ago the Indian rupee was often found a long way from home. After India gained independence from Britain, the currency remained in use in sheikhdoms across the Arabian Sea. Until as late as 1970, some employed the Gulf rupee, a currency issued by India’s central bank.Today the picture is rather different. The rupee accounts for less than 2% of international-currency transactions, even though the Indian economy is the world’s fifth-largest. Narendra Modi, India’s prime minister, would like to see the currency span the globe once again. Speaking at the 90th anniversary of the Reserve Bank of India on April 1st, Mr Modi told the central bank’s policymakers to focus on making the rupee more accessible. Historically, however, national leaders have been a lot more likely to express enthusiasm for the idea of making their currency a global one than to enact the reforms required to do so.Although the American dollar is the undisputed king of currencies, there are many with a global role of their own. The euro, the British pound, the Swiss franc, and the dollars of Australia, Canada, Hong Kong and Singapore are all examples. These currencies are found in foreign reserves and private portfolios worldwide, and used for both trade and financial transactions. In theory, there is no reason why the rupee should not join the illustrious group.Having a widely used currency brings sizeable benefits. Demand from overseas investors lowers financing costs for domestic companies, which are no longer compelled to borrow in foreign currencies. Such demand also reduces exchange-rate risks for exporters and importers, who do not need to convert currencies so often when trading, and enables the government to reduce the size of its foreign-exchange reserves.Some of the foundation stones of an international currency are being laid in India. The country now has assets that foreigners want to buy, making the rupee a potential store of value overseas. In September JPMorgan Chase, a bank, announced that it would include Indian government bonds in its emerging-market index. Bloomberg, a data provider, took the same decision last month. The explosive performance of the country’s stocks, which are up by 37% in dollar terms over the past year, has piqued global interest.The rupee is also increasingly a unit of account and a medium of exchange for foreigners. Banks from 22 countries have been permitted to open special rupee-denominated accounts, without the usual exchange limits. In August India made its first rupee payment for oil, to the Abu Dhabi National Oil Company.Yet China shows how far India has to go. Although Chinese policymakers have been trying to make the yuan a global currency for more than a decade, it still accounts for less than 3% of international trades made via SWIFT, a payments network, outside the euro zone, despite the fact that China accounts for 17% of global GDP. Moreover, 80% of such international yuan transactions occur in Hong Kong. China’s relatively closed capital account, which prevents investments from flowing freely across its borders, is the main obstacle to wider use of its currency. India’s capital account is less closed than it once was, but is still far more sheltered than that of any of the countries with a global currency.Japan provides a better example. In 1970 it accounted for 7% of global GDP—more than the 4% it does now—and its companies were beginning to make a mark abroad. But the yen was a nonentity. That changed over the following decade: in 1970, 1% of Japan’s exports were invoiced in yen; by the early 1980s, 40% were. In 1989 the yen made up 28% of all foreign-exchange transactions. It still accounts for 16% today.To make the leap to global-currency status, Japan’s leaders had to transform the country’s economy. They allowed foreigners to hold a wide range of assets, deregulated big financial institutions, and peeled back controls on capital flows and interest rates. These changes disrupted Japan’s export-oriented economic model, and undermined the power of the country’s bureaucrats.Changes just as far-reaching—and uncomfortable—will be required for any country that now wants to join the top table. Few seem to have the stomach for them at present. Indeed, without American pressure and the threat of tariffs, Japan itself might not have made such reforms. America is not about to lean on India in the same way. The desire for change will have to come from within. ■Read more from Buttonwood, our columnist on financial markets: How the “Magnificent Seven” misleads (Mar 27th)How to trade an election (Mar 21st)The private-equity industry has a cash problem (Mar 14th)Also: How the Buttonwood column got its name More

In the days after the fall of his crypto exchange, Sam Bankman-Fried opened a Google Doc and began to type. Beneath the title “probably bad ideas” he listed potential strategies, which included coming out as a Republican and arguing that “SBF died for our sins”. Mr Bankman-Fried ultimately decided against both, but there is one fiction he never let die. He has always claimed FTX was, in fact, solvent and could repay the $10.6bn it owed customers.Mr Bankman-Fried lost his empire in November 2022, but it was not until March 28th that he learned his fate: 25 years in prison. FTX’s customers-turned-creditors are still waiting. The bankruptcy is messy, extending to over 100 entities with assets lawyers say are “hopelessly” mingled. So it was surprising to possibly everybody except Mr Bankman-Fried himself when FTX told a court in January that it should be able to repay its 36,000 customers in full.FTX is good for the cash not because it was always solvent, but because administrators have clawed back assets that its last chief executive frittered away, argues John Ray III, the firm’s current boss. Rising crypto prices have also helped. Mr Ray’s team has located $7bn in assets, including luxury homes and private jets. They reckon that another $16.6bn flowed out of the company before its collapse—a third of which went to insiders and affiliates—and some of which may be clawed back.Mr Ray’s success in tracking down FTX’s cash has made claims on its estate a hot commodity. Imposters have pumped up their total value to $23.6qn (quintillion, that is). Although legitimate claims on FTX’s debt first traded at as low as one-tenth of their face value, reflecting expectations they would not be repaid, these certificates have almost entirely recovered their value. One customer is trying to regain $166m of claims in court, having sold them for a third of their face value.Mr Ray only has to repay, without interest, the dollar value of customers’ crypto accounts at the time FTX filed for Chapter 11 protection on November 11th 2022. By then, bitcoin tokens had lost a fifth of their value since Mr Bankman-Fried had barred withdrawals three days earlier. And crypto has since been on a tear. The price of solana tokens, FTX’s largest holding, has increased eleven-fold; bitcoin has more than tripled in value. This has led some creditors to sue for payment in tokens, rather than dollars. They claim the tokens are their property under FTX’s terms.Yet FTX does not have the tokens they seek. Mr Ray says there were only 105 bitcoins left on the exchange when he took over, against customer entitlements to nearly 100,000. In truth, customers seem to have made a lucky escape. Their repayment relies on FTX’s owners losing out on their $12bn claim, the federal government forgoing $43.5bn in fines and taxes, and Mr Ray being allowed to sell what remains. None of this would have happened if FTX really had been solvent. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

At this point, almost everyone in global markets is familiar with the notion of higher-for-longer interest rates. Soon, they are likely to meet another concept as important for understanding central-bank policy: less-for-longer quantitative tightening (QT). This phrase describes how the Federal Reserve intends to continue reducing its assets to undo its huge bond purchases during the covid-19 pandemic. It hopes that a less-for-longer approach will ultimately leave it with a smaller balance-sheet than would otherwise be the case.This may all seem quite technical. Indeed, in one metaphor much liked by Fed officials, tracking QT should be as interesting as watching paint dry. But the very dullness—if it remains that way—has crucial implications, because it would help to make balance-sheet expansion and contraction a staple in central banks’ tool kits for staving off financial crises. Although other monetary authorities are also in the midst of QT, the Fed plays a dominant role in this experiment as the central bank for the world’s biggest economy.Chart: The EconomistThe Fed has already reduced its assets by about 16% to $7.5trn since the start of this round of QT in mid-2022—a slightly bigger reduction than its previous attempt at QT from 2017 to 2019 in the wake of the global financial crisis of 2007-09 (see chart). Yet its balance-sheet remains about 80% larger than in early 2020. Shrinking it further would give the Fed more scope to expand it again by purchasing bonds (often described as printing money) when the next financial maelstrom arrives. Managing to do so without crashing markets would also help answer critics who view quantitative easing (QE) as a cause of high inflation and bubbly asset prices.No one, including Fed officials, knows precisely the right size for the central bank’s holdings. The crucial measure is not the assets on its balance-sheet but its liabilities—specifically, the reserves held by commercial banks, which rise as a counterpart to the central bank’s bond purchases during QE. The Fed’s goal is to return banks to “ample” reserves, down from their “abundant” level today. Before the pandemic, such reserves came to about 10% of their assets. Now, they are about 15%. Given increased needs for liquidity, in part owing to stricter financial regulation, economists at Goldman Sachs, a bank, think a good level would be about 12%. This would imply that the Fed may want to shrink its balance-sheet by another $500bn.Without any fixed target, the Fed is allowing itself to be guided by market signals. In particular, it is watching whether overnight financing rates for banks trade above the rate that it pays on their reserve balances. This would be an indication that liquidity conditions have become much tighter. Money-market ructions in the autumn of 2019, including surging short-term financing costs, led the Fed to bring its previous round of QT to a screeching halt. This time, it has avoided such instability.Having got this far, officials now want to slow their asset reduction, betting that doing so will minimise the risk of market disruption and thus, over a longer period, maximise their balance-sheet shrinkage. With Jerome Powell, the Fed’s chairman, promising last month to start “fairly soon”, a fair conjecture is that the Fed will lay out plans for tapering QT after its next meeting on May 1st and begin to do so in June. Currently, the Fed is not selling securities but letting up to $95bn roll off its balance-sheet each month. A tapered QT may see it aim for a roll-off of roughly half as much.The corollary of less-for-longer QT is that the Fed will probably continue to reduce its assets for the rest of this year, which means it may be shrinking its balance-sheet (ie, monetary tightening) at the same time as it cuts interest rates (ie, monetary loosening). Although that may sound contradictory, investors should in theory price in much of the impact of tapered QT as soon as the Fed announces it.In any case, the big picture is just how few ripples the central bank’s balance-sheet reduction has caused so far—a contrast with both the turbulence of 2019 and the “taper tantrum” of 2013, when the Fed first discussed plans for trimming asset purchases. “People are getting more used to thinking about balance-sheet tools, and the Fed is more used to communicating them,” says William English, a former Fed economist. Watching paint dry is boring. But a well-painted wall can be lovely. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Winners of the Nobel prize in economics tend to sprinkle their papers with equations. Daniel Kahneman, who died on March 27th, populated his best-known work with characters and conundrums. Early readers encountered a schoolchild with an IQ of 150 in a city where the average was 100. Later they pondered the unfortunate Mr Tees, who arrived at the airport 30 minutes after his flight’s scheduled departure, and must have felt even worse when he discovered the plane had left 25 minutes late. In the 1970s readers had to evaluate ways to fight a disease that threatened to kill 600 people. In 1983 they were asked to guess the job of Linda, an outspoken, single 31-year-old philosophy graduate.Kahneman used such vignettes to expose the seductive mental shortcuts that can warp people’s thoughts and decisions. Many people, for example, think it more likely that Linda is a feminist bank-teller than a bank-teller of any kind. Presented with two responses to the disease, most choose one that saves 200 people for certain, over a chancier alternative that has a one-third chance of saving everyone and a two-thirds chance of saving no one. But if the choice is reframed, the decision is often different. Choose the first option, after all, and 400 people die for sure. Choose the second and nobody dies with a one-third probability.Teasing questions came easily to Kahneman, even in his sleep, according to “The Undoing Project”, a book by Michael Lewis. Some sprang from his teaching, which was not confined to ivory towers. He once explained the idea of “regression to the mean” to flight instructors in Israel’s air force. The reason pilots tended to improve after a sloppy manoeuvre was not because the instructor screamed at them, but because the chances of an improvement are higher if the prior performance was unusually bad.Kahneman was a harsh grader of his own incorrigible self, attentive to his own lapses. One of his early hit papers exposed the kind of methodological muddles to which he himself was vulnerable, such as the misplaced confidence that an outlier, like a child with an IQ of 150, would not skew even a small sample.Kahneman also had a lifelong—and life-preserving—interest in gossip. His childhood, as the son of Lithuanian Jews living a comfortable but edgy pre-war existence in Paris, was full of talk about other people, he once wrote. Jews in Europe had to “assess others, all the time,” a friend of his told Mr Lewis. “Who is dangerous? Who is not dangerous?…People were basically dependent on their psychological judgment.”Gossip was both a source of his work and an intended target. His bestselling book, “Thinking Fast and Slow”, was written not for decision-makers, but for “critics and gossipers”. Decision-makers were often too “cognitively busy” to notice their own biases. Pilots could be corrected by observant co-pilots and overconfident bosses might be chastened by whispers around the water-cooler, especially if the whisperers had read Kahneman’s book.To spread psychological insight, Kahneman once tried to add a course on judgment to Israel’s school curriculum. He expected the project would take a year or two. It took eight, by which time the ministry of education had lost enthusiasm; a humbling example of what he and Amos Tversky, his frequent co-author, called the “planning fallacy”. He had more success inveigling psychological wisdom into the well-guarded realm of economics, which had clung to a thin but tidy model of human decision-making.How did he do it? One answer is that he teamed up with Tversky, whose elegant mind was as ruthlessly tidy as his desk. They incorporated the cognitive illusions they had discovered into a model called “prospect theory”. According to this theory, people’s well-being responds to changes in wealth, more than levels. The changes are judged relative to a neutral reference point. That point is not always obvious and can be recast: a bonus can disappoint if it is smaller than expected. In pursuit of gains, people are risk averse. They will take a sure win of $450 over a 50% chance of winning $1,000. But people gamble to avoid losses, which loom larger than gains of an equivalent size.Prospect theory translated this model of decision-making from vignettes into the language of algebra and geometry. That made it palatable to economists. Indeed, the discipline began to claim this sort of thing as its own. Applications of psychology “came to be called behavioural economics”, lamented Kahneman, “and many psychologists discovered that the name of their trade had changed even if its content had not.”The cold-hand fallacyEven as economics was rebranding psychology, Kahneman revived an older economic tradition: “hedonimeters”, gauges of pleasure and pain that Francis Edgeworth, a 19th-century economist, had imagined. Kahneman’s hedonimeter simply asked people to rate their feelings moment-to-moment on a scale. He found that people’s ratings were often at odds with what they later recalled. Their “remembering” selves put undue weight on the end of an experience and its best or worst moment, neglecting its duration. People would rather keep their hand in painfully cold water for 90 seconds than for a minute, if the final 30 seconds were a little less cold than the preceding 60. Likewise, people sign up for hectic tourist itineraries because they look forward to looking back on them, not because they much enjoy them at the time.The implications of this discovery extend into philosophy. Which self counts? Despite its manifest flaws, the curatorial self, artfully arranging unrepresentative memories into a life story, is dear to people. “I am my remembering self,” Kahneman wrote, “and the experiencing self, who does my living, is like a stranger to me.” Now his experiencing self has done its living. And it is up to the many people he touched to do the remembering for him. ■Read more from Free exchange, our column on economics:How India could become an Asian tiger (Mar 27th)Why “Freakonomics” failed to transform economics (Mar 21st)How NIMBYs increase carbon emissions (Mar 14th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

U.S. Treasury Secretary Janet Yellen was scheduled to arrive in China on Thursday ahead of four full days of meetings with Chinese officials.
Her itinerary includes meetings with senior officials in the southern city of Guangzhou as well as China’s capital of Beijing.
Yellen plans to discuss China’s industrial overcapacity, among other topics, according to the Treasury.

U.S. Treasury Secretary Janet Yellen, center, waits with others to receive Chinese President Xi Jinping at the San Francisco International Airport on Nov. 14, 2023, ahead of Xi’s meeting with U.S. President Joe Biden.
Bloomberg | Bloomberg | Getty Images

BEIJING — U.S. Treasury Secretary Janet Yellen was scheduled to arrive in China on Thursday ahead of four full days of meetings with Chinese officials.
It’s her second trip to the country since the summer, as the U.S. and China seek to increase high-level communication in an otherwise tense relationship. U.S. Secretary of State Antony Blinken is also due to visit China again later this year.

“I think our expectation is that we will at senior levels, and increasingly at all levels, continue to have ongoing and deepening dialogue. We went for too long with too little communication, and misunderstandings developed,” Yellen told reporters ahead of her arrival in China.
Her trip will cover the southern city of Guangzhou — the capital of China’s export-heavy province of Guangdong — and the national capital of Beijing, according to a press release.
Here’s her full itinerary of meetings:

Friday, April 5 — meet with Vice Premier He Lifeng, Guangdong Governor Wang Weizhong, economic experts and AmCham China business representatives
Saturday, April 6 — continue meetings with Vice Premier He Lifeng
Sunday, April 7 — meet with Premier Li Qiang, Finance Minister Lan Fo’an, Beijing mayor Yin Yong, leading Chinese economists and Peking University students and professors
Monday, April 8 — meet with former Vice Premier Liu He, People’s Bank of China Governor Pan Gongsheng

What will they talk about?

According to the Treasury, Yellen will discuss “unfair trade practices and underscoring the global economic consequences of Chinese industrial overcapacity.”
China has faced growing global scrutiny over how the country’s emphasis on building up its manufacturing capabilities, including the use of subsidies and policy support to do so, has helped Chinese companies to sell products such as solar panels at far lower prices than manufacturers in other countries.

In March, European Union Chamber of Commerce President Jens Eskelund said trade tensions between the EU and China will likely escalate as a result.

Guangdong is by far the top province in China by value of exports, according to Wind Information.
The province exported nearly 5.4 trillion yuan ($750 billion) in manufactured products last year, with equipment accounting for two thirds, according to Tu Gaokun, director of Guangdong’s industry and information technology department.
He told reporters last week the province was “committed” to improving productivity, and noted how it aimed to build up sectors such as new energy storage, biomanufacturing and commercial aviation.

Tackling ‘illicit finance’

During her meetings in China, Yellen will also “work to expand bilateral cooperation on countering illicit finance, which can drive important progress on shared efforts against criminal activity such as drug trafficking and fraud,” the Treasury said.
It added that Yellen would discuss work on bolstering financial stability, addressing climate change and resolving debt distress in developing nations.
The trip will mark Yellen’s third meeting with Vice Premier He Lifeng, whom the Treasury secretary is also set to meet later this month at the International Monetary Fund and World Bank Group spring meetings in Washington, D.C.
He Lifeng is also director of the office of the Central Commission for Financial and Economic Affairs, a role formerly held by Liu. More