The Economist USA 03.28.2020

64 Finance & economics The EconomistMarch 28th 2020

2 risen from $2-3 per kilo to $9-11, which for

some goods is prohibitively expensive.

Land borders are becoming harder to

cross too. Countries from America to Ar-

menia have placed new restrictions on free

movement. In almost all cases there are

meant to be exceptions for people tran-

sporting goods. But haphazard implemen-

tation has led to queues that stretch for

miles. On March 15th the Italian transport

minister had to call her Hungarian coun-

terpart to request that a blockade be re-

moved. Restricted border crossings have in

some cases made it hard for drivers to get to

work. “Everybody wants to do their own

thing,” grumbles Umberto de Pretto of the

International Road Transport Union. “If

road transport stops the world stops.”

Bunged-up borders mean that it gets

harder to refill empty supermarket shelves

as people stockpile food, and to meet rock-

eting demand for medical equipment. Ma-

rio Aronovich, a customs broker in Mexico,

remembers receiving calls when the crisis

started about whether it was possible to ex-

port medical masks from Mexico to China.

Now he is getting calls about trade in the

opposite direction.

So just how big will the drop in overall

trade be? In 2009 declining demand ac-

counted for over two-thirds of the crash in

trade, a far bigger share than the 15-20%

caused by the credit crunch. The extent of

the pandemic-induced slowdown in con-

sumer spending and investment is already

becoming clear. And it has already dented

trade activity badly—a survey of factory

bosses in March suggests sharp falls in ex-

port orders in advanced countries. Simon

Macadam of Capital Economics, a consul-

tancy, has pencilled in a 20% drop in trade

volumesthisyear.Thatisbiggerthanin

2009.Thedropintradecouldbeworseif

themostpessimisticforecastsofjaw-drop-

pingdouble-digityear-on-yeardeclinesin

gdpinsomerichcountriesoverthenext

quarterortwocometrue.

A lesson from 2009 is that trade

bounces back. Some of the precipitous

drop then reflected companies drawing

down their inventories; that reversed

quicklyenoughwhenthingsreturnedto

normal.Gloomiertypespointouttheco-

lossaluncertaintyaboutwhentherebound

mightcome.Tradethrivesontrustandpre-

dictability. Today, with supply chains

bucklingandbordersclosing,botharein

shortsupply. 7

Hitting close to home

United States

Sources:Bloomberg;ShowingTime

40

20

0

-20

-40

Jan Feb Mar

Homeviewings,%changefromthefirstweek

oftheyear,seven-daymovingaverage

2019

Ratio of average 2020

debt-to-enterprise

value

Totalmarket

capitalisation,

$bn

50

40

30

20

10

0

Jan Feb Mar

0.90

0.85

0.80

0.75

0.70

Jan Feb Mar

Five largest US mortgage-investment trusts

2020

America’s $19trn commercial and residentialmortgagemarketisjitteryasinvestors

begin to fear that laid-off workers and shut-downfirmswillstruggletorepaytheir

debts. Plenty of investors—such as real-estateinvestmenttrusts—arehighlyleveraged.

As the value of mortgage-backed securitieshasdroppedsharplytheyhavebegunto

face margin calls on their debt from their bankers.Somehavewarnedinvestorsthat

they are unable to meet cash calls. Demandfornewresidentialmortgagesislikelyto

suffer, too. Lockdowns and economic uncertaintyhavestoppedhomebuyerslooking.

On shaky ground

W

hen americaand its allies wanted to

cheapen the dollar in 1985, their offi-

cials met in the Plaza Hotel in New York.

When they sought to stabilise the currency

two years later, they gathered in the Louvre

Palace in Paris, conversing over turbot

soufflé cardinale washed down with Pu-

ligny Montrachet, according to Funabashi

Yoichi, a former journalist. The dollar is

again a cause of international concern,

strengthening from March 9th to 20th, as

companies, banks and countries scram-

bled for the world’s dominant currency, be-

fore falling a little this week. But if the

world’s policymakers wish to tame it again,

where will they meet? In a time of lock-

downs, any successor to the Plaza and Lou-

vre accords will have a less resonant name.

America’s Federal Reserve has already

tried to alleviate dollar scarcity by reviving

a network of swap lines, which allow other

central banks to borrow dollars in ex-

change for the equivalent amount in their

own currencies, swapping them back again

up to three months later. The Fed eased the

terms of its existing lines with Britain,

Canada, the euro area, Japan and Switzer-

land. It then reintroduced lines with nine

other central banks, including those of

Australia, Brazil, Mexico, New Zealand,

Singapore and South Korea.

Many of these central banks are now

busily furnishing dollars to banks at home.

The Bank of Japan has offered over $156bn

since March 17th. Its counterparts in the

euro area, Britain and Switzerland have

lent over $182bn combined. On March 18th

Brazil’s central bank began offering dollar

loans to financial institutions that could

provide Brazilian government bonds, is-

sued in global markets, as collateral. The

Bank of Mexico said it would begin dollar

auctions. Earlier this month, the Reserve

Bank of India (rbi), which does not have a

Fed swap line, but does have almost $482bn

of its own foreign-exchange reserves, of-

fered $2bn to its banks. It received bids

worth over $4.6bn, prompting it to offer

another $2bn auction on March 23rd.

Could the Fed extend these lines fur-

ther? It has no appetite for assessing which

countries warrant its help, or bearing the

risk that it might not get its dollars back.

Some have therefore suggested it should

team up with the imf. In 2015 Randall Hen-

ning of the American University in Wash-

ington, dc, proposed that the fund could

decide confidentially which of its mem-

bers has the “very strong” policies and in-

stitutions required to qualify for its own

precautionary, strings-free loans. These

countries would then also become eligible

for a Fed swap line. If ever they could not re-

pay, the fund would lend them the money

to do so. Mr Henning calculated that, in ad-

dition to Mexico and South Korea, another

seven emerging markets might qualify, in-

cluding Chile and Malaysia.

If the dollar resumes its upward march,

America’s Treasury could also help weaken

it by buying other currencies, points out

Zach Pandl of Goldman Sachs. But what to

buy? The traditional choices would be the

euro and the yen. But both Japan and the

euro area fear the deflationary impact of a

stronger currency. A better bet, Mr Pandl

argues, might be Mexico’s peso or Brazil’s

real. It’s just a pity officials cannot share a

meal and a bottle of fine wine before they

tuck in to each other’s currencies. 7

HONG KONG

America’s central bank is not the only

one doling out greenbacks

The dollar

The Zoom accord