Fareed Zakaria, the renowned political commentator on world affairs, talked about the preoccupation of Donald Trump on the role of the manufacturing sector in the US economy. Trump is hell-bent on revitalising (according to him) this sector in the US as part of his broader economic agenda. Fareed has some key points on this topic to counter the stand taken by Trump. Trump positioned his administration as one that would bring manufacturing and manufacturing jobs back to the U.S shores, on the pretext that previous trade agreements had harmed American workers. He emphasised on the need to invest in domestic manufacturing to promote job growth. Zakaria has noted how Trump’s approach included renegotiating trade deals, such as the USMCA (United States-Mexico-Canada Agreement) aimed at creating more favourable terms for American manufacturers. Zakaria pointed out the mixed results of these policies highlighting the complexities of global supply chains. Trump’s “America First” policy was rooted in economic nationalism aiming to protect U.S. industries from foreign competition. Zakaria has pointed out that while this approach appeals to certain voter bases, it may not be sustainable or beneficial in the long term given the global nature of modern economies. Zakaria has acknowledged the challenges of revitalising manufacturing such as automation and technological advancements, which have transformed the industry and reduced the number of jobs available. He often discusses the need for a balanced approach that considers innovation alongside job creation. Finally, Zakaria places Trump’s manufacturing focus within a larger context, considering how global competition and changing economic dynamics affect U.S. manufacturing emphasising that simple solutions may not address the structural issues facing the sector. According to hm, if manufacturing were to come back to the American shores it would be nothing short of a disaster. As countries make economic progress, the focus on manufacturing inevitably shifts to other economic areas like services where the value added by the country increases. All the progressive economies are today dominated by services. In America alone, services account today for over 80% of the economy and manufacturing is less than 10%. His take is that as one gets richer and prosperous one spends money more on services than on goods. This is a universal phenomenon. In 1960 American consumers spent 50% of their spending on goods but by 2010 it was only 33%. This shift in consumption can be seen in other developed countries like France, Germany, UK and Canada. Donald Trump had always wanted the US to develop like Japan. However, Japan’s industries failed to live up to their promise declining steadily over the years. Today Japan does not have an example to show for the success of its policies. So is the case with Germany who also has only one company to show for its success – SAP. But one swallow doesn’t make a summer! According to Zakaria “in 2023 US services exports were worth more than $1 trillion accounting for 13% of the global total and they expanded a further 8% in 2024”. Moreover, “professional and business services jobs paid an hourly wage of $43.60 in February 25 compared to $34.83 for manufacturing”! He concludes his argument thus: “the effort to protect jobs in manufacturing is to defy basic economics”. He adds presciently: “the long history of capitalism tells us that countries and companies don’t innovate because of tax credits and depreciation. They do so because of competition. That is why markets work. They force efficiency. If you shield American workers from competition you will get, not dynamism but stagnation”. Well said Fareed.
Just as investors were getting used to the thought that bank failures are confined to the co operative sector units, here comes the news that has shaken the confidence of investors. On March 10 IndusInd Bank disclosed a financial misstatement related to is derivative transactions. The estimated impact of this issue stands at 2.35 per cent of the bank’s net worth, amounting to approximately ₹1,577 crore. Following the revelation, the stock plunged 27 per cent on March 11, wiping out nearly ₹20,000 crore in market capitalisation and prompting a ban on its inclusion in the Futures & Options (F&O). In this day and age news of discrepancies of this nature in the bank does not augur well for the banking system but also is a matter grave concern. As per the bank’s CEO, the bank had an “internal desk” for hedging its own foreign currency borrowings and deposits. Here, different departments of the bank would contract with each other to manage each of their forex risks — presumably at internal rates rather than the market rate. This internal desk followed “hedge accounting”, where it could spread gains and losses gradually. Here, for years the bank did something strange. Often, when the bank had notional, mark-to-market gains, it promptly booked those gains. On the other hand, a lot of the money that it notionally lost was parked and conveniently clubbed with its “other liabilities” where it would get lost amongst a lot of other liabilities of short-term nature. So basically, any gains from trading looked like income, but it dressed losses up so that they didn’t look like money already lost. Meanwhile, it also had an “external desk,” which dealt with trades it was making outside the bank. Here, it used a daily mark-to-market approach, where it was updating values in real time. Because each desk booked derivative results differently, somewhere a mismatch started to happen, inevitably so. While its external operations were reported accurately (and conveniently too) there were obvious issues in its internal operations. Essentially, the bank began over reporting profits but under reporting losses. This created a yawning gap that went unnoticed. The bank is now busy picking up the pieces of wrecked confidence. Having lost the trust of the investors and customers it would be a tough call to earn it back. Was it all a matter of bad investment decisions and reporting or not reporting the consequences thereof? The latest issue of The Economic Times clearly hints at a possible case of insider trading – top executives dumping their shares before the disclosure of the bank’s financial issues. Now that Reserve Bank of India is ceased of the matter the matter it is unlikely to end here. Watch this space.
Today there are two eminent economists who are vying for our attention. One is Scott Bessent, the newly appointed Secretary of Treasury in the US Government. He comes with a formidable reputation. The other is Mark Carney, the newly appointed Prime Minister of Canada. Granted that it may not be fit and proper to compare both these personalities, it would be no exaggeration that these two are arguably the most renowned economists. It is necessary for us to understand more about both these gentlemen and their approach to macroeconomics. Carney has a strong background in international finance having served as the Governor of both the Bank of Canada and the Bank of England. This experience gives him a deep understanding of global financial systems and the role of monetary policy. He is known for his articulate and thoughtful approach to economic issues, and he has been a prominent voice on issues such as climate change and sustainable finance. Carney has operated on the global stage in very high-profile positions dealing with very complex international financial situations. He is shown to be a person who prefers “substantive discussions between sovereign nations”. Bessent’s current role as U.S. Treasury Secretary places him at the centre of U.S. economic policy particularly in relation to international trade. His approach may be characterised by a more direct and assertive stance on trade, particularly concerning Trump’s reciprocal tariffs and addressing unfair trade practices as perceived by Trump. He is very involved in the current US administration’s trade policy and is involved in direct talks with other nations regarding trade. That makes his position very crucial. How he would manage in today’s America under Trump remains to be seen. He comes with an enviable reputation and his t actions and statements would have a substantive effect on world markets. Carney’s experience is heavily weighted towards central banking and international financial regulation, while Bessent’s current experience is centred on national treasury policy with a focus on trade. Carney is portrayed as favouring diplomatic and substantive discussions whereas Bessent is likely to employ a more direct and potentially confrontational approach to achieve US trade policy goals. A la Trump! While both operate on the global stage Carney’s prior roles give him a more internationally focused perspective while Bessent’s current role is primarily focused on advancing U.S. economic interests. Interesting times; interesting personalities!
It is now that time of the year when all eyes are focussed on the US Fed. This is particularly important now when the whole world (literally) looking at it for directions about the movement of interest rates. The market generally feel that Jerome Powell, the Fed Chair would hold the rates. But there is a new President in the White House who thinks otherwise. He wants the rates to come down to spur the economy. In the eyes of Trump, it is payback time. Jerome Powell was appointed by Trump during the latter’s previous stint as President. So, transactional that Trump is, he is expecting Powell to return the favour. However, the situation looks quite grim that Powell can oblige Trump only if he breaks a law or two. Apart from the economic compulsions, there is this statutory prohibition on the Fed. The Fed expects the economy to grow by 1.7%, way below 2.10% projected earlier. The Economists are worried of stagflation in the economy which is when growth is slow while prices keep climbing. It is distinctly possible that inflation and growth would move in the wrong directions all at once. The unemployment rate is estimated to be about 4.4%, a relatively low figure by historical standards. Even as these figures are floating around, there is this lurking uncertainty of the trade war unleashed by the President. All these taking place at a time when the Fed is busy in quantitative tightening. The Fed has been busy shrinking its balance sheet for some time now. All these would further complicate because the US Treasury cannot borrow beyond a certain limit without the approval of the Congress. Right now, it is up against that limit which means that it cannot issue fresh debt. In short, the Fed is between the devil and the deep sea. Under these circumstances, the most likely scene, therefore, is that the Fed would keep the interest rates steady and shrink the balance sheet. This is a stand that is not likely to endear to Trump.
I picked up the book “What Went Wrong with Capitalism” authored by Ruchir Sharma. The book delves into the systemic issues plaguing modern capitalism, offering a thought-provoking critique. I started reading the book with a lot of enthusiasm because of the reputation of the author and the gravity of the subject itself. When you write a book on a highly specialised subject, like Economics in this case, you subscribe yourself to an unwritten undertaking to also “educate” the reader on the subject. Reading a book on Economics is a tedious task as all of us know. The narrative style of the author makes the book a bit tortuous. I had to practically read it twice. The author’s scholarship appears to have taken precedence over his approach to the subject. Though the work of the author is no doubt praiseworthy, the book is more eminently suitable for the library of a university. With these comments I am not in any way downgrading the book. Those who are interested in the subject it is an invaluable tome. The book argues that capitalism’s current challenges stem largely from excessive government intervention, which has distorted markets and exacerbated wealth inequality. Sharma critiques both left- and right-wing policies, highlighting how government debt and deficit spending have become progressively unsustainable. The book is primarily focussed on the US economy. The book is divided into three parts, with the first section focusing on the historical evolution of capitalism. Sharma contrasts the economic philosophies of figures like Alexander Hamilton and Thomas Jefferson exploring how their ideas have shaped modern economic policies. He also examines the global financial landscape, including the impact of Keynesian economics and the rise of populist policies. Sharma’s ability to weave complex economic arguments into an accessible narrative is commendable though his perspective as a financial analyst may limit the scope of his critique. The book is particularly relevant for readers interested in understanding the interplay between government policies and market dynamics. After a somewhat a sombre and pessimistic analysis on capitalism, as it is practiced around the world, the author concludes the book on an optimistic note thus: “Capitalism is still humanity’s best hope for economic and social progress, but only if it is free to work”.
Thank you.
Venkat R Venkitachalam
