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America the pivot

by George Hoguet

America the pivot

The health of the US economy and US global economic leadership are vital for world prosperity. That may appear a truism, but it is worth restating. The message resonates strongly in David Mulford’s memoir Packing for India: A Life of Action in Global Finance and Diplomacy. Mulford, 77, chronicles his career from Rockford Illinois, to Oxford, to Africa as a research scholar, to the White House as a Fellow, to the investment bank White Weld, to the US Treasury, to the Saudi Arabian Monetary Agency, back to Wall Street and finally to India.

A persistent theme of the book is the necessity for policy-makers to drink the ‘truth serum’. This means boiling a problem down to its essentials, thinking clearly, ‘looking reality in the face’, and recognising the power of markets. It will be of interest to economic historians and to policy analysts interested in international economic cooperation.

Historic transformations

Mulford served as assistant secretary and subsequently undersecretary of the US Treasury for international affairs from 1984- 92, and was US Ambassador to India from 2003-09. In these positions he was present at historic transformations, including the gradual liberalisation of Japan’s capital account, the Plaza and Louvre Accords, the Baker and Brady Plans, the creation of the European Bank for Reconstruction and Development and the US-India Civil-Nuclear Agreement.

Mulford’s discussion of the early days of the Eurobond market and his experiences at SAMA (where Mulford served from 1975- 82 as a senior investment advisor) should be particularly instructive for the current generation of investors. Imagine having to invest $500m a day with a small staff, no computer, no Bloomberg and no internet. It was in this crucible (and earlier on the football fields of the Mid-West) that Mulford refined the skills that at times left investment bankers selling placements to SAMA ‘without warm feelings of gratitude’.

In a masterful stoke, Mulford personally negotiated a permanent seat for Saudi Arabia on the board of the International Monetary Fund. He outlines techniques that current policy-makers may benefit from. The aboutface of the Reagan administration in terms of its willingness to intervene to weaken the dollar represented a profound policy transformation. Mulford acknowledges the ability of markets to overshoot and create excesses. Mulford’s initiative, the dramatic Plaza Accord of 25 September 1985, led to an eventual 40% decline in the value of the dollar. Not only did it remedy a fundamental price misalignment; it also demonstrated that a small group of policy-makers, the G-5, could collaborate.

Similar creativity was shown in launching the Brady Plan. The Treasury’s initial strategy in dealing with the Latin American debt crisis of 1982-89 was to buy time. The countries needed to adjust; the commercial banks had to continue to lend; regulators needed to avoid forcing precipitous write-downs; the IMF and other international financial institutions needed to provide bridge finance; and the world economy needed to grow.

When it became apparent by 1987 that debt burdens were unsustainable and secondary debt markets had emerged, the Brady Plan, which offered the banks both a carrot and a stick, emerged. The cost to the US taxpayer was minimal.

India’s evolution

Mulford’s final chapters deal with USIndia relations and the long and complex negotiations leading to President Bush signing the US-India Nuclear Cooperation Approval and Non-Proliferation Enhancement Act.

This agreement allows India to be a state with nuclear weapons that is permitted full access to the world of civil nuclear commerce without signing the 1974 Nuclear Non-Prolifileration Treaty or giving up its nuclear weapons. This act was contentious in both India and the US. A key breakthrough, facilitated by Mulford’s diplomacy, came when Prime Minister Manmohan Singh asked the International Atomic Energy Agency to approve the IAEAIndia Nuclear Safeguards Agreement.

There are sure to be those who disagree with Mulford’s interpretation of events. But this book is important because it informs readers of the evolution of global capital markets and argues that US leadership is critical to global prosperity.

David Mulford’s message America the pivot George Hoguet, State Street Global Advisors George Hoguet is Global Investment Strategist in the Investment Solutions Group at State Street Global Advisors.