Debt Ceiling Deal: What's In, What's Out of The Bill to Avert Us Default

Economic

Summary:

The White House and Republican leaders in Congress were mounting an intensive push Sunday to consolidate support around a tentative agreement to raise the nation’s borrowing limit, their urgent task made complicated by members of both parties voicing concerns over different provisions.

The details of the deal between President Joe Biden and House Speaker Kevin McCarthy were released Sunday in the form of a 99-page bill that would suspend the nation’s debt limit through 2025 to avoid a federal default while limiting government spending.

The Democratic president and Republican speaker are trying to win over lawmakers to the plan in time to avert a default that would shake the global economy. But Congress will be scrutinizing and debating the legislation, which also includes provisions to fund medical care for veterans, change work requirements for some recipients of government aid and streamline environmental reviews for energy projects.

McCarthy said the House will vote on the legislation Wednesday, giving the Senate time to consider it before June 5, the date when Treasury Secretary Janet Yellen said the United States could default on its debt obligations if lawmakers did not act in time.

Some hardline conservatives have expressed early concerns that the compromise does not cut future deficits enough, while Democrats have been worried about proposed changes to work requirements in programs such as food stamps.

With the details of the deal now clear, here’s what’s in and out:

TWO-YEAR DEBT LIMIT SUSPENSION, SPENDING LIMITST

he agreement would keep nondefense spending roughly flat in the 2024 fiscal year and increase it by 1% the following year, as well as suspend the debt limit until January 2025 -- past the next presidential election.

For the next fiscal year, the bill matches Biden’s proposed defense budget of $886 billion and allots $704 billion for nondefense spending.

The bill also requires Congress to approve 12 annual spending bills or face a snapback to spending limits from the previous year, which would mean a 1% cut.

The legislation aims to limit federal budget growth to 1% for the next six years, but that provision would not be enforceable starting in 2025.

Overall, the White House estimates that the plan would reduce government spending by at least $1 trillion, but official calculations have not yet been released.

VETERANS CARE

The agreement would fully fund medical care for veterans at the levels included in Biden’s proposed 2024 budget blueprint, including a fund dedicated to veterans who have been exposed to toxic substances or environmental hazards. Biden sought $20.3 billion for the toxic exposure fund in his budget.

UNSPENT COVID MONEY

The agreement would rescind about $30 billion in unspent coronavirus relief money that Congress approved through previous bills. It claws back unobligated money from dozens of federal programs that received aid during the pandemic, including rental assistance, small business loans and broadband for rural areas.

The legislation protects pandemic funding for veterans’ medical care, housing assistance, the Indian Health Service, and some $5 billion for a program focused on rapidly developing the next generation of COVID-19 vaccines and treatments.

IRS FUNDING

Republicans targeted money that the IRS was allotted last year to crack down on tax fraud. The bill bites into some IRS funding, rescinding $1.4 billion.

WORK REQUIREMENTS

The agreement would expand work requirements for the Supplemental Nutrition Assistance Program, formerly known as food stamps — a longtime Republican priority. But the changes are pared down from the House-passed debt ceiling bill.

Work requirements already exist for most able-bodied adults between the ages of 18 and 49. The bill would phase in higher age limits, bringing the maximum age to 54 by 2025. But the provision expires, bringing the maximum age back down to age 49 five years later, in 2030.

Democrats also won some new expanded benefits for veterans, homeless people and young people aging out of foster care. That would also expire in 2030, according to the agreement.

The agreement would also make it slightly harder for states to waive work requirements for SNAP for certain individuals. Current law allows states to issue some exemptions to the work rules on a discretionary basis, but limits how many people can be exempted. The agreement would lower the number of exemptions that a state can issue and curb states’ ability to carry over the number of exemptions they can hand out from month to month.

The agreement would also make changes to the Temporary Assistance to Needy Families program, which gives cash aid to families with children. While not going as far as the House bill had proposed, the deal would make adjustments to a credit that allows states to require fewer recipients to work, updating and readjusting the credit to make it harder for states to avoid.

SPEEDING UP ENERGY PROJECTS

The deal puts in place changes in the National Environmental Policy Act for the first time in nearly four decades that would designate “a single lead agency” to develop and schedule environmental reviews, in hopes of streamlining the process. It also simplifies some of the requirements for environmental reviews, including placing length limitations on environmental assessments and impact statements.

Agencies will be given one year to complete environmental reviews, and projects that are deemed to have complex impacts on the environment will need to be reviewed within two years.

The bill also gives special treatment to the Mountain Valley Pipeline — a West Virginia natural gas pipeline championed by Sens. Joe Manchin and Shelley Moore Capito — by approving all its outstanding permit requests.

STUDENT LOANS

Republicans have long sought to reel back the Biden administration’s efforts to provide student loan relief and aid to millions of borrowers during the coronavirus pandemic. While the GOP proposal to rescind the White House’s plan to waive $10,000 to $20,000 in debt for nearly all borrowers failed to make it into the package, Biden agreed to put an end to the pause on student loan repayment.

The pause in student loan repayments would end in the final days of August.

The fate of student loan relief, meanwhile, will be decided at the Supreme Court, which is dominated 6-3 by its conservative wing. During oral arguments in the case, several of the justices expressed deep skepticism about the legality of Biden’s plan. A decision is expected before the end of June.

WHAT’S LEFT OUT

House Republicans passed legislation last month that would have created new work requirements for some Medicaid recipients, but that was left out of the final agreement. The idea faced stiff opposition from the White House and congressional Democrats, who said it would lead to fewer people able to afford food or health care without actually increasing the number of people in the workforce.

Also absent from the final deal is the GOP proposal to repeal many of the clean energy tax credits Democrats passed in party-line votes last year to boost the production and consumption of clean energy. McCarthy and Republicans have argued that the tax breaks “distort the market and waste taxpayer money.”

The White House has defended the tax credits as resulting in hundreds of billions of dollars in private-sector investments, creating thousands of manufacturing jobs in the U.S.

Source: WASHINGTON (AP)

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Damon

Forex

De-dollarising seems to be in vogue these days. China, Russia and their BRICS (Brazil, Russia, India, China and South Africa) partners may have initiated the narrative but the desire to remove or at least reduce the U.S. dollar's hegemony has spread. Many nations, including Malaysia, have openly articulated their desire to move away from U.S. dollar dependence for their trade.

Though it has been a long time coming, the rising disdain of the U.S. dollar is in no small part due to American policy hubris and abuse of its reserve currency status. As the only country that can repay its foreign debt in its own currency, it has run years of current account deficits, created a mountain of debt surpassing US$30 trillion (RM136 trillion) and effectively piggybacks on the rest of the world with its autarchic monetary policies.

Like the proverbial big borrower who worries less about a default than his banker, the current brinkmanship being played out in the U.S. Congress over the debt ceiling and potential default causes stress and sleepless nights not in Washington but in Beijing, Tokyo, Seoul and the other Asian capitals — these being the nations that have provided the debt funding, accumulated huge dollar reserves and now have massive exposure to both the U.S. dollar and American policy vicissitudes.

Some months earlier, the dollar had caused a different headache — the rapid rise in U.S. interest rates from near zero to 5% saw every other currency depreciating. Dollar-based commodity prices rose, and the interest rate hike altered the terms of trade of emerging markets, increased the burden of their foreign liabilities and induced volatility in global financial markets.

That despite all these, the dollar remains dominant is testimony to the lack of an alternative. The dollar's dominance began with the Bretton Woods system in 1945 under which it was the anchor currency. However, even the system's collapse in 1972, caused by American profligacy that eroded the dollar's gold parity, appears to have done little to reduce its dominance as a global currency. Even now, 60% of global trade is dollar denominated.

There were two reasons for this supremacy. First, despite its problems, the dollar has over the years played relatively well the three key roles of a well-functioning currency — as a medium of exchange, store of value and unit of account. The second and perhaps more important reason is the lack of an alternative currency that can replace the dollar. The euro is far too small, lacks the liquidity and capital market depth and, as the events of 2011 with Greece had shown, has its own set of problems. The Chinese yuan, though increasingly popular in trade settlement, is not fully convertible, being hobbled with capital controls, opaqueness in policy and effectively subject to one-man rule. Thus, as in the world of the blind where the one-eyed man is king, the dollar continues to reign supreme despite its inadequacies.

For U.S. policymakers, the dollar's supremacy is taken for granted as nothing can threaten it, at least not in the foreseeable future. Thus, the weaponisation of the dollar, the unilateral imposition of sanctions, the liberal use of prohibiting access to SWIFT and effectively cutting off countries from the global financial system can all continue for a while as no other currency comes close to dethroning the dollar.

So, where does this leave the rest of the world that seeks to de-dollarise? The bilateral trade agreements to settle payments in local currency are really a non-starter. For countries like Malaysia, it may be effective with some currencies but not with others. For example, it could work for the Chinese yuan as Malaysian exporters who receive the yuan could use it to either pay for their imports from China or other parties with trade links to China who would want the yuan.

However, this may not be the case with other bilateral arrangements, for example, with India. It is hard to imagine how the Malaysian exporter who previously received payment in U.S. dollars for his exports to India is better off getting paid in rupees. Where he could previously use his U.S. dollar revenue to source anything from anywhere in the world, with rupees he is severely limited. The same limitation applies to the Indian exporter who now gets paid in ringgit. The difference here is as a medium of exchange. Whereas the U.S. dollar is highly liquid and efficient as a medium of exchange, the yuan is less so and the rupee much less so.

Thus, before pushing for more bilateral arrangements, there are two factors that need to be considered. First, with currencies deemed more volatile and not a good store of value, bid-ask spreads or transactions costs would be higher. Second, the price quotes one receives is often dependent on the currency you would pay with. Even in India, you get a better deal if you pay in U.S. dollars than in rupees. So, let's not get too excited about arrangements that will allow for local currency settlement of trade. Their only benefit may be less reliance on the U.S. dollar, but at a potentially huge cost.

Regional currency arrangements (RCAs) may be a more sensible route, not just to de-dollarise but for its other benefits like enhanced trade and economic integration, exchange rate stability and reserves management. Where no one currency can now challenge the U.S. dollar, a composite regional currency could.

Broadly speaking, RCAs could range from a common currency area (CCA) or currency union with fixed pegs to looser target zone type arrangements. The euro area and WAMU (West African Monetary Union) would be examples of the former while the EMS (European Monetary System), forerunner to the euro, is an example of a target zone arrangement.

The EMS, established in 1979, enabled the 12 participating countries to reduce inflation, stabilise their currencies and enhance trade and economic integration. Yes, it had its problems but over the 20 years until 1999, it enabled the countries to integrate and evolve into a single currency area. At the heart of the EMS was the European Currency Unit (ECU), which was simply a statistical GDP-weighted composite currency. Under the exchange-rate mechanism, each participating currency was linked to the ECU at a fixed rate. However, to avoid a fixed peg and the policy restrictions that come with fixed pegs, currencies were allowed to fluctuate within a band. The band, first set at 2.25%, was later raised to 6% and then 15%. The flexible bands enabled participating countries to benefit from the stability afforded by the RCA without sacrificing economic sovereignty.

It is such flexible arrangements designed on the EMS template that emerging nations aspiring for RCAs should aim for. Fixed peg, monetary union type arrangements would certainly provide more currency stability but the policy restrictions they require can be debilitating. Unless the needs of participating countries are in sync and aligned congruently as with the EU nations or WAMU, a CCA can be notoriously difficult to operationalise. More than the economics, it is in the politics that the real hurdles lie. Imagine the BRICS negotiating a common currency arrangement. How much of its economic sovereignty do you think China would be willing to sacrifice for India's benefit? And how much would India be willing to sacrifice for China's benefit? Therein lies the problem. And so long as such problems exist, the dollar will continue to reign supreme.

Source: The Edge Malaysia

Risk Warnings and Disclaimers

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Thomas

Energy

As Cyclone Mocha gathered strength in the Bay of Bengal in early May, the World Meteorological Organization (WMO) warned of a "very dangerous" storm that could have "major impacts" for hundreds of thousands of the world's most vulnerable people.

Authorities and aid agencies in Bangladesh and Myanmar evacuated about 400,000 coastal dwellers as fears grew that sprawling camps, home to Rohingya families displaced by conflict and military crackdowns, would suffer a direct hit.

While the arrival of yet another powerful cyclone surprised few in a fast-warming world, disaster experts highlighted the relatively low number of deaths - estimated at several hundred in worst-affected Myanmar and zero in Bangladesh.

WMO Secretary-General Petteri Taalas said the storm had caused widespread devastation in both nations, affecting "the poorest of the poor" - but that in the past, they had suffered death tolls as high as hundreds of thousands from such cyclones.

"Thanks to early warnings and disaster management, these catastrophic mortality rates are now thankfully history. Early warnings save lives," he added, as the WMO this week released new figures on the impacts of disasters since 1970.

Over the five decades, economic losses rocketed as extreme weather events were turbo-charged by global warming, with the 2010-2019 period accounting for nearly a third of total losses of $4.3 trillion, largely due to a growth in damage from storms.

By contrast, the number of reported deaths per decade shrank from more than 556,000 in 1970-1979 to about 184,500 in the most recent decade, with a far smaller share attributed to storms.

According to the Global Commission on Adaptation, early warning systems - which give public information about extreme weather events before they hit and activate measures to keep people safe - can cut damage by 30% with just 24 hours' notice.

The WMO says such systems save lives and provide at least a tenfold return on investment - but only half of countries have put them in place so far, with coverage especially low in small island developing states, least developed nations and Africa.

Early Warning for All

The U.N. chief has announced a goal of ensuring everyone on earth is protected by early warning systems by the end of 2027, through an initiative being implemented by U.N. agencies, development banks, governments and national weather services.

The programme is seeking new investments of about $3 billion - a sum the WMO says would be dwarfed by the benefits.

Mami Mizutori, head of the U.N. Office for Disaster Risk Reduction (UNDRR), said the rollout of early warning systems around the world so far had been key in lowering mortality from disasters this century - a rare success as threats spiral.

A mid-point review of goals set in 2015 under a global pact to avert disasters by 2030 said "progress has stalled and, in some cases, reversed", despite more countries creating disaster loss databases and adopting national risk reduction strategies.

"We can definitely say that action has not caught up with awareness - and risk is ahead of us," Mizutori said in an interview during a U.N. meeting on the global pact, called the Sendai Framework, in New York last week.

"If we don't manage to prevent (disasters), we pay a very, very huge price in lives and livelihoods," she added.

Limited Funding

The review of the targets adopted in Sendai, Japan, revealed the number of people affected by disasters each year - through harm to their health, homes and incomes - has fallen since 2015.

But, it noted, economic losses caused by disasters remained high at an average of above $330 billion per year between 2015 and 2021 - or 1% of gross domestic product of the reporting countries - an amount estimated to be significantly undervalued.

The WMO's new analysis of weather, climate and water-related disasters pointed out that more than 60% of economic losses over the past five decades occurred in developed countries, yet the poorest nations and island states took a much bigger blow in terms of the share of their GDP.

In many cases, such as Cyclone Mocha, losses are uninsured and barely register in terms of dollar value - but can be devastating for people who have almost nothing to fall back on.

For example, those most affected by the recent storm in Bangladesh were Rohingya people displaced by successive waves of political violence in Myanmar's Rakhine state and who now live in crowded conditions in camps in Cox's Bazar in Bangladesh.

Aid assessments showed the cyclone wrecked more than 8,000 flimsy bamboo huts there - about one-fifth of shanty homes.

The shelters cannot withstand even modest wind speeds, said Ashish Damle, country head for aid group Oxfam International - adding that if a cyclone were to hit directly, the bamboo huts would be blown about, resulting in "terrible fatalities".

"(Mocha) was more like a teaser for Bangladesh that reminds us that we need to be prepared for future events," Damle said.

Globally, a major obstacle to building more robust homes and infrastructure such as disaster-resilient power lines and transport is a lack of financing, governments and experts say.

In a political declaration issued in New York last week, countries expressed concern that investments in disaster risk reduction and development aid allocated to prevention remain inadequate, and vowed to do more to fill the gap.

One idea backed by UNDRR is to work with the private sector to issue "resilience bonds" whose proceeds could be used by countries or cities to bolster infrastructure and ecosystems that can help protect against flooding, storms or drought.

'Build back better'

Aid agencies argue that, with budgets stretched, it makes more economic sense to invest in reducing risks for vulnerable communities than helping them rebuild after weather disasters.

Yet despite the reasoning - with $1 spent on risk reduction and prevention estimated to save up to $15 in post-disaster recovery, according to UNDRR - the money is still not flowing in anything like the quantities needed.

Only about 5% of disaster-related foreign aid was spent on prevention and preparedness from 2011-2020, UNDRR data shows.

"That continues to be a real bottleneck in terms of progress generally - and it's part of a wider political lack of attention to preparedness versus response," said Sophie Rigg, head of climate and humanitarian policy for charity ActionAid UK.

One solution is to "build back better" when recovering from a disaster, so individuals and communities are less vulnerable to future climate change impacts, said Rigg, who is also a board member for the Global Network of Civil Society Organisations for Disaster Reduction.

To reinforce this approach, recent progress on incorporating disaster prevention into the U.N. climate negotiations could open up expected new streams of finance for tackling loss and damage caused by climate change, she and other experts said.

Meanwhile on the ground, struggling communities could benefit from innovative approaches to help them access funding.

For example, Gawher Nayeem Wahra, founder and secretary of the Disaster Forum in Bangladesh, said microfinance institutions could be used to disburse small sums of resilience aid for rural cyclone survivors to rebuild homes and restart their lives.

And on a longer-term basis, low-cost loans could be offered for private two-storey homes on the condition that their owners allow them to be used by evacuees from cyclones and flooding, easing pressure on crowded public shelters, he added.

Harjeet Singh, head of global political strategy for Climate Action Network International, said governments, aid agencies and others who have worked separately on disaster risk reduction and climate change adaptation should unite "towards a common goal".

"We need to work very closely to make sure that we have the best interests of people in whatever we do, because they are suffering and they need our urgent support," he said.

Source: The Japan Times

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Justin

Economic

Central Bank

Dollar looks to NFP for more juice

It’s been a fantastic month for the US dollar, which smoked the competition with a little help from interest rate differentials and safe-haven flows. With incoming business surveys highlighting the resilience of the American economy, investors have started to recalibrate the Fed’s rate trajectory higher.

Markets are currently pricing in a 40% probability for the Fed to raise rates in June, which increases to 85% when looking at the July meeting. Meanwhile, the rate cuts that were baked into the cake later in the year have been mostly priced out, as concerns of an imminent recession have melted away.

Week Ahead – Nonfarm Payrolls Eyed as Dollar Rides Fed Bets_1

However, Fed officials are split on whether further tightening is needed. Some want to raise rates again, others would rather pause, but the majority is still on the fence, preferring to examine the next round of economic data before making any decisions.

As such, there will be increased attention on the latest employment report due Friday. Forecasts suggest nonfarm payrolls rose by 180k in May, less than the previous month but still a respectable number. The unemployment rate is set to tick up to 3.5%, while wage growth is projected to accelerate slightly in yearly terms.

Nonfarm payrolls have exceeded estimates 12 times in the last 13 months, so economists seem to consistently underestimate the strength of the labor market. This phenomenon might be repeated this time, as the latest business surveys from S&P Global pointed to the fastest increase in employment growth for ten months. They also highlighted rising salary pressures.

A surprisingly strong employment report could cement expectations for one final rate increase this summer, or lead investors to further unwind rate-cut bets, keeping the wind in the dollar’s sails.

Week Ahead – Nonfarm Payrolls Eyed as Dollar Rides Fed Bets_2

Another factor that can boost the reserve currency is a selloff in stocks that fuels safe-haven demand. Paradoxically, the catalyst for such an event might be a debt ceiling deal. After a compromise is reached, the Treasury will scramble to raise its depleted cash levels by ramping up borrowing, unleashing a tsunami of bond issuance that can drain liquidity.

Other data releases include the JOLTS job survey on Wednesday, ahead of the ADP report and the ISM manufacturing index on Thursday. Note that several markets in the US and Europe will be closed on Monday for a bank holiday.

Euro grinds lower ahead of inflation stats

In euro land, the single currency has been under selling pressure for several weeks now. Some of that reflects the resurgent dollar, as the euro and the dollar are basically opposite sides of the same coin. However, there’s also an element of economic weakness creeping in.

In particular, the slowdown in the manufacturing sector has intensified, dragging the bloc’s manufacturing powerhouse – Germany – into a technical recession. That’s a huge problem for the European Central Bank as economic growth seems to be rolling over but inflationary pressures remain scorching hot, leaving policymakers in a bind.

Week Ahead – Nonfarm Payrolls Eyed as Dollar Rides Fed Bets_3

Markets are still pricing in another 60bps of ECB rate increases in the coming months, so the focus will be on incoming data, starting on Wednesday with Germany’s inflation and unemployment numbers for May. Then on Thursday, investors will get a glimpse at the same releases for the entire Eurozone, alongside the latest ECB minutes.

Forecasts point to a cooldown in inflation, something supported by business surveys where average selling prices for goods and services rose at the slowest pace in two years in May. If inflation cools significantly, some of those ECB rate-hike bets could be unwound, spelling more trouble for euro/dollar.

Chinese, Canadian, and Australian releases

Over in China, the latest PMIs will be released Wednesday. The economy has lost steam lately as the reopening boom faded, so these surveys will reveal whether this worrisome trend persisted in May. If so, the currencies of nations that depend on Chinese demand to absorb their exports – such as Australia and New Zealand – could encounter further downside.

Week Ahead – Nonfarm Payrolls Eyed as Dollar Rides Fed Bets_4

Speaking of Australia, monthly CPI data for April is out on Wednesday, ahead of Thursday’s capex data. In Canada, GDP growth numbers for Q1 will see the light on Wednesday.

Finally in Turkey, the second round of the presidential election will be held Sunday.

Source:XM

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Cohen

Economic

Expectations for lower returns in stocks and bonds are sending some pension funds into currency markets to diversify their portfolios and bolster performance.

While both equities and fixed income have partially rebounded from last year's steep declines, some portfolio managers worry the scope for upside in either asset class may be limited, as markets face a tangle of issues including a standoff over raising the U.S. debt ceiling and a potential recession brought on by the Federal Reserve's aggressive monetary policy tightening.

As a result, investors are looking at currency strategies to boost their portfolio's overall returns. Currency managers said they are seeing more inquiries from government and corporate pensions in recent months.

"Most pension funds, including us, have been trying to add differentiated sources of returns," said Sriram Lakshminarayanan, chief investment officer of the Iowa Public Employees' Retirement System, which oversees roughly $40 billion.

The fund, which already has roughly $400 million invested in strategies that trade currencies, is in the process of adding a forex strategy that invests in emerging market currencies to its portfolio, Lakshminarayanan said.

Riding Volatility

Global central banks cut rates in the aftermath of the 2008 financial crisis and generally kept them low, ironing out monetary policy divergences and suppressing the market swings that help traders make money in forex.

But currency volatility shot higher last year, as central banks across the world began raising rates to fight surging inflation, fueling sharp moves in the U.S. dollar, British pound and a wide range of other currencies.

Global Pension Funds Eye Currencies for Additional Returns_1

While gyrations have been more muted in 2023, some investors believe volatility will keep bubbling up, driven in part by central banks normalizing monetary policy at differing pace.

"When interest rates were compressed … those are times when these strategies may not perform quite as great. But what we're seeing in this particular market is perfect for these types of strategies," said Joe Hoffman, CEO of Chicago-based Mesirow Currency Management.

The firm is fielding "considerably more" inquiries than it did two years ago as investors look for alternative sources of return, he added.

Searching For Returns

Investors' hunt for assets that can produce returns if stocks and bonds both tumble, as they did in 2022, is also driving interest in foreign exchange strategies.

Searches for managers of dynamic currency overlay strategies, which investors use to generate additional returns as well as hedge risk, have more than doubled in the last 12 months versus the prior five-year rolling average, said Toby Goodworth, managing director and head of liquid markets at bfinance, a consultancy that helps pension funds with investment strategy, including manager selection.

One reason is that currency strategies have tended to produce returns that are negatively correlated to the S&P 500.

The Barclay Hedge Currency Traders Index, for example, has a correlation of -0.157 correlation versus the S&P 500 Total Return Index over the last 24 years. A correlation of 1 would indicate that assets move in the same direction, while a -1 correlation shows that assets move in opposite directions.

The index returned 8.9% in 2022, Backstop-BarclayHedge data show. The S&P 500 fell 19.4% that year while the ICE BofA US Treasury Index slid 13%, its biggest annual loss in history.

After last year's twin declines in stocks and bonds, "any additional source of diversification is even more valuable," said Van Luu, global head of solutions strategy, fixed income and FX, at Russell Investments in London.

Global Pension Funds Eye Currencies for Additional Returns_2

Some currency managers believe funds' allocations to foreign exchange are often too small to make a meaningful difference. Allocations to currencies typically make up less than 1% of funds' portfolios, said Ulf Lindahl, CEO at Currency Research Associates.

"Regardless of what the return is, it has no impact on the portfolio," Lindahl said.

Meanwhile, the time it takes funds to hire a currency manager often stretches for more than a year. That could mean currency markets may have gone dormant once again by the time a decision is made, Lindahl said.

Others, however, believe uncertainty in debt and equity markets is likely to continue stoking interest in forex from global pension funds.

Dominik Mueller, head of currency management at German bank Metzler said the lender, in cooperation with its Japanese subsidiary, won an active currency overlay mandate from a large pension fund in Japan in 2022.

Increasing differentials between interest rates are a "favorable scenario or environment for active currency strategies," he said.

Source: Reuters

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Justin

Central Bank

Economic

Urgent action is needed to reduce greenhouse gas emissions and prevent the most disastrous effects of climate change. This is why the EU aims to reduce such emissions by 55% by 2030 (compared to 1990 levels), and to achieve net zero emissions by 2050. The EU’s Fit-for-55 package will use measures like carbon prices, regulation and green investment, all of which will affect the economy. But how, and with what economic consequences?

Carbon pricing and the economy

In this post we focus on carbon pricing. It is the most effective instrument to reduce emissions because it is targeted at the carbon footprint of the economy. It forces everyone to take the damage caused by emissions into account – for example when running a business, driving a car, or heating a home. Carbon pricing usually takes the form of a tax imposed on emissions or an emission trading scheme in which companies can buy and sell the right to generate emissions (which The ECB Blog will look at in a dedicated post soon). All forms of carbon pricing provide incentives to reduce emissions. They do that by putting a price tag on the emissions from consumption and production. For example, you might travel less often by plane as you see prices rising due to the fact that airlines have to buy carbon emissions allowances.

How does carbon pricing affect the economy and, eventually, growth and inflation? Carbon prices influence both supply and demand primarily via higher energy prices – either directly via their impact on consumer prices or indirectly via their impact on production costs. On the supply side, the increase in production costs drives up inflation and results in lower production. If the government sets out the future path of carbon price increases in a credible way, firms can anticipate and factor in those higher costs when they set their prices or decide on production volumes. The more firms do so today, the stronger the inflation impact will be upfront. On the demand side, higher carbon prices hit household incomes and firm profits. This in turn reduces consumption and investment, eventually creating downward pressure on inflation. The more households and firms take into account future carbon price increases for their spending today, the more they will frontload this reduction in consumption and investment. So we have two forces moving inflation in opposite directions.

There are a number of factors affecting how strong these effects are, and in which direction they pull. Fiscal policy, for example, can redistribute the receipts from carbon taxes to low-income households. This would reduce the loss of real incomes and help sustain household consumption. If countries around the world tax carbon emissions differently this will affect international competitiveness, the terms of trade (the amount of goods a country can purchase for a certain amount of exported goods), and the demand for export goods.

Quantifying the overall effect of carbon pricing on the economy is fraught with a high level of uncertainty, including model uncertainty. To deal with this uncertainty, we used six macroeconomic models to assess the impact of raising carbon prices in the euro area.[2] For the calculation we assumed a carbon price increase from €85 in 2021 to €140 per tonne of CO2 emission by 2030.[3] For the rest of the world, we factored in a proportionate increase in carbon prices, albeit from lower levels.

What would be the quantitative impact of this increase in carbon prices on the euro area economy? The models suggest that it would moderately lower consumption and investment, with GDP falling 0.5-1.2% below baseline by 2030 (see Chart 1, LHS, where the baseline refers to a scenario with no changes in carbon prices). Across all models, the median estimate for GDP translates into average annual growth dropping by roughly 0.1 percentage points. Likewise, the models suggest that the maximum impact on annual inflation would be modest at less than 0.2 percentage points per year in the period up to 2025, and falling gradually thereafter

Carbon pricing impact on real GDP (LHS) and inflation (RHS)

How Will Higher Carbon Prices Affect Growth and Inflation?_1

Accordingly, the carbon price increase, as assumed for this simulation, would only have a rather limited economic impact on the euro area economy. That means monetary policy would face only a modest trade-off in terms of stabilising inflation relative to output. The size and, ultimately, the direction of the resulting response of policy interest rates depend on the model. Models emphasising the adverse supply-side effects of the scenario, with a larger impact on inflation, tend to prescribe a limited increase of policy interest rates. And models in which adverse demand effects dominate tend to show a small decline of policy rates.

Raising carbon prices is expected to support the transition to a low-carbon economy. But the carbon price increase in our scenario would reduce carbon emissions in the euro area by only around 11% by 2030. This is the median estimate of our six models (see Chart 2). And that figure is far below the EU’s intermediate goal of reducing emissions by 46% by 2030 (compared to 2021 levels). This shortfall highlights the need for a more ambitious carbon pricing policy, additional regulatory action, green investments, and technological adaptation and innovation.

Carbon pricing impact on carbon emissions

How Will Higher Carbon Prices Affect Growth and Inflation?_2

We have to put the estimated reductions in carbon emissions in the euro area into an international perspective. The euro area currently contributes a mere 5% of global carbon emissions. Achieving a substantial effect on global emissions would require a more ambitious increase in carbon prices in the rest of the world. If these carbon prices were aligned with those for the euro area by 2030, the estimated reduction in global carbon emissions would be about three times greater than in our benchmark scenario. In this event, the euro area terms of trade would improve by more, while euro area foreign demand would weaken more strongly, doubling the estimated negative impact on euro area GDP.

How fast carbon emissions can be reduced depends on how quickly the economy adjusts to higher prices for carbon emissions. If capital and labour get reallocated more swiftly, if the economy adapts more rapidly to new technologies and if there is sufficient financial support, the process can go faster. It would also help if green energy could replace fossil fuel generated energy more easily than assumed in the models. This would reduce emissions more strongly and also mitigate the impact on GDP and inflation. More green investments or major technological advances would also help in this regard.

To conclude, model-based estimates of carbon-price increases consistent with the International Energy Agency’s net-zero scenario in 2050 suggest a moderate impact on euro area GDP and inflation over the current decade, with modest inflation-output trade-offs for monetary policy as it seeks to preserve price stability. But the estimated carbon emission reductions by 2030 are limited, equal to around one-fourth of the EU’s intermediate goal. Achieving greater cuts in emissions with higher carbon prices would have a bigger impact on inflation and GDP, with more sizeable trade-offs for monetary policy. Accordingly, reaching the EU’s climate goals will require a mix of ambitious carbon emission pricing, additional regulatory action and technological innovation, as set out in the Fit-for-55 package.

Source:The ECB Blog

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What exactly is the Singularity, and what implications does it hold for our collective future? This enigmatic concept refers to a potential moment when artificial intelligence (AI) attains levels of intelligence and autonomy that surpass human capabilities. It marks the point at which machines become self-improving entities, triggering a cascade of advances that defy our current understanding.

In this article, readers will gain a comprehensive understanding of the Singularity and its potential impact on our world. They will explore AI's journey towards human-like capabilities and discover the fascinating Time to Edit (TTE) metric that measures AI's progress.

Additionally, readers will gain insights into the confluence of technologies driving us closer to the Singularity, including gene therapy, robotics, and nanotechnology. Could we be approaching this event horizon? The signs are increasingly evident.

On the Verge of Transformation

As we approach the mid-21st century, a pivotal juncture looms before us: the Singularity. This concept, envisioned by inventor Ray Kurzweil, foretells a time when AI transcends human control, forever transforming the very fabric of our society. In this captivating exploration, we will delve deeper into AI's remarkable journey towards human-like capabilities, examine the profound implications of the Singularity, and assess the proximity of this transformative event.

Unveiling the Singularity: A Technological Event Horizon

The Singularity, a term shrouded in mystery and anticipation, represents a momentous leap in human progress. It signifies a point where AI surpasses the limits of human cognition and ventures into uncharted territories of self-improvement.

At this juncture, machines become autonomous entities, setting off a chain reaction of advances that challenge our current comprehension. The question arises: are we on the precipice of this mind-bending event?

Measuring Progress: The Time to Edit (TTE) Metric

Intriguingly, a translation company has devised a metric called Time to Edit (TTE) to quantify AI's trajectory towards the Singularity, particularly in the domain of language translation. This innovative measure examines the level of proximity between machine-generated translations and their human-authored counterparts. The findings of the TTE metric show a remarkable acceleration in AI's ability to emulate human skills, suggesting that the Singularity might be within closer reach than previously speculated.

While AI plays a pivotal role in the path to the Singularity, it is not alone in driving progress. Breakthroughs in gene therapy, robotics, and nanotechnology act as catalysts, accelerating our trajectory towards this transformative moment. Gene therapy, with its potential to enhance human cognitive capacities, holds profound implications for bridging the gap between humans and machines.

Robotics and nanotechnology provide AI with physical embodiment and unprecedented functionality. This convergence of emerging technologies propels us ever closer to the Singularity, raising fundamental questions about societal norms and the very essence of our existence.

Challenges Ahead: Are We Prepared?

The advent of the Singularity brings forth unprecedented challenges that demand our utmost preparedness. Are we equipped to navigate a future where AI exceeds human control and reshapes society at an accelerated pace?

The readiness of individuals, societies, and governments to confront this paradigm shift becomes a pressing concern. Ethical dilemmas, socio-economic disruptions, and political debates surrounding the Singularity require urgent attention and thoughtful consideration to ensure a harmonious transition.

Embracing the Future: Navigating Uncertainty

As we embark on this uncharted voyage into the realm of advanced AI, a proactive mindset becomes essential. Rather than succumbing to fear or trepidation, we must actively engage in shaping the future we envision. Collaboration among scientists, policymakers, and the public is crucial for ethically developing and responsibly implementing AI technologies. With a future-oriented perspective, we can harness the Singularity's potential while mitigating its risks.

The Inevitable Course

The Singularity stands as an enigmatic frontier, beckoning us with both possibilities and lingering uncertainties. It represents humanity's tireless pursuit of progress and signals an era of unparalleled transformation. As AI continues its relentless evolution, bridging the gap between human and machine, we find ourselves at the threshold of an epoch-defining metamorphosis.

The journey towards the Singularity is well underway, and it falls to us to navigate the complexities, sculpting a future that harnesses the power of AI while safeguarding our core values and collective well-being.

The implications of the Singularity extend far beyond the realm of technology. Industries across the spectrum, from healthcare to transportation, stand to be revolutionized. In a world of AI-driven medical breakthroughs and transformative transportation systems, the Singularity promises advances that enhance our lives beyond our current comprehension.

However, alongside these prospects come profound ethical considerations. As AI approaches or surpasses human intelligence, questions of morality and responsibility come to the forefront.

Will machines possess consciousness? How will they make decisions that align with human values? Safeguarding against unintended consequences and ensuring transparency in AI systems becomes paramount to prevent abuses of power.

Jobs and the Singularity

Socio-economic implications also loom large on the horizon. The rapid integration of AI and automation into the workforce has the potential to disrupt traditional employment patterns. As jobs become automated, the displacement of workers may lead to significant societal challenges. It becomes crucial to foster a proactive approach. Emphasizing reskilling and education to adapt to the evolving job market and ensure a smooth transition.

Governments around the world are grappling with the implications of the Singularity. Policy frameworks are necessary to address the ethical, legal, and social dimensions of AI. International collaborations and standards are crucial to ensure that AI development aligns with shared values and prevents the emergence of a technological divide. Striking a balance between innovation and regulation will be key to harnessing the full potential of the Singularity.

In conclusion, the Singularity represents a paradigm shift of immense proportions. As AI advances towards human-like capabilities, we find ourselves standing on the precipice of a transformation that will redefine the very essence of our existence.

The journey towards the Singularity encompasses not only advancements in AI but also breakthroughs in gene therapy, robotics, and nanotechnology. It demands our preparedness, our ethical consideration, and our collective responsibility.

Amid uncertainties, adopting a future-oriented mindset, collaborating with stakeholders, and establishing strong policy frameworks enable navigation of this uncharted territory. The Singularity presents opportunities for progress and human flourishing, necessitating the preservation of our core values.

Let us embrace AI's potential while safeguarding our humanity as we navigate this evolving landscape.

Source: Be in Crypto

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How Will Higher Carbon Prices Affect Growth and Inflation?

Carbon pricing and the economy

Carbon pricing impact on real GDP (LHS) and inflation (RHS)

Carbon pricing impact on carbon emissions

Source:The ECB Blog

Singularity Now? How AI Will Change Our World Sooner Than We Think

Source: Be in Crypto

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