AS CAPITAL controls take hold in Greece and a referendum is set, the mood grows increasingly anxious in Athens
Tuesday, 30 June 2015
The full cost
HOW much does it cost to fund a traditional final salary pension? A lot. OECD tables show that 65 year-old men can expect to live for 19 to 21 years after retirement, while women may manage 22 to 28 years. The traditional UK schemes paid a sixtieth of salary for every year of employment, up to a maximum of 40 years, or two-thirds of final salary. US schemes were the same, with the important exception that full inflation-linking was rarely guaranteed.
There are really three ways of costing this. The first, practiced by US public sector pension funds, is to discount the liabilities by the assumed rate of return on the fund. This is subject to all manner of criticisms; first, it encourages overoptimism, second, expected returns are unlikely to match assumptions, third, no other liability (tax, debts to...Continue reading
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Can Mr Obama really help?
WHAT’S the easiest way to boost America's sluggish wage growth? President Barack Obama thinks that expanding overtime pay may be the answer. On June 30th details emerged of a new scheme in which 5m more Americans will be entitled to “overtime pay”—1.5 times their normal pay when they work more than 40 hours. Mr Obama hopes that the plan will boost the paypackets of some workers. The economic evidence behind it says this may not be the only benefit.
American workers have seen better days. Since the recession, inflation-adjusted private-sector hourly earnings have stumbled. People wistfully remember decades long gone, where they were used to annual rises of 2.5% or more in real terms every year. Small wonder, then, that economists are trying policy ideas from the glory days. The Fair Labor Standards Act (FLSA), implemented in 1938, is one place to look. The FLSA stipulated that any worker who worked more than 44 hours and was paid less than $30 a week was entitled to overtime pay. The FLSA is still in force (and the working-hours threshold is now 40 hours) but the earnings threshold was last updated in 1975 and currently stands at $23,660.
The earnings threshold is meant to strip out managers and supervisors who, the argument goes, have more control over their time. But an exemption designed for highly paid, white-collar employees ended up leaving...Continue reading
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Panic!
ON OCTOBER 4th 1582 the Julian calendar was replaced by the Gregorian in many European countries. The following day was October 15th 1582. The change provoked chaos, as landlords demanded a full month’s rent and greedy bankers attached a full month’s interest to loans, while workers went unpaid for the eleven missing days. Unsurprisingly, riots ensued.
To listen to some pundits, June 30th 2015 will see similar chaos. At midnight that day there will be a “leap second”. The day will be lengthened by one second, in order to realign Coordinated universal Time (UCT), the main standard regulating the world’s clocks, with solar time. This chronological quirk, many worry, will befuddle computer systems.
The last leap-second was added during a weekend in 2012. That time, the computer system of Qantas, an Australian airline, crashed and 400 flights were delayed. But it is the first time since 1997 that a leap-second was added on a working day, with financial markets in full swing. And over the last two decades trading has become much more dependent on computers....Continue reading
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Monday, 29 June 2015
On the frontline with tourists
AS THEY boarded the 5:45am flight from London's Gatwick Airport to Athens in Greece this morning, holidaymakers were weighed down by more than just the usual excess luggage. With Greece's euro membership hanging in the balance as the result of its prime minister's decision to call a referendum (due to take place on Sunday) on whether to accept the latest bailout offer from its creditors, holidaying Britons were preparing for the worst. Handbags, money belts, briefcases and wallets were all bulging with euro bills, in the fear that capital controls—or an exit from the single currency—could leave them stranded without any access to cash.
Most appear to be taking this threat seriously. Tom Persons from London, when asked by your correspondent, said that he wasn’t taking any chances, and brought along enough cash to sustain him for the entire holiday. “I’ve done the same,” replied the lady in the queue behind him. Another guy nodded behind her. A couple from Devon whisper with raised eyebrows (while tapping the several parts of their bodies where the cash is supposedly stored) that they have brought enough for the entire...Continue reading
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Sell Europe
EUROPEAN stocks started the day with losses of 4% or more as investors reflected on the weekend news from Greece: of the planned referendum, bank closures and capital controls. The sell-off reflected a sharp change in mood compared with Friday, when investors were expecting that Greece and its creditors would reach a deal. The Portuguese stockmarket was one of the worst affected, falling almost 6% at the open on fears that the economy would be dragged into the crisis (the Athens stock exchange is closed).
Contagion was seen in the bond markets too, with Spanish and Italian 10-year bond yields rising around 18 basis points, while the German equivalent fell 15 points; a spread widening of around a third of a percentage point. The euro was slighly lower on the news, falling less than 1% against the dollar. While uncertainty over Greece's future is bad news for the European economy, traders had been using the euro as the basis for a "carry trade"; borrowing euros and investing the proceeds in higher-yielding risky assets. As those traders pulled back from their risky bets, they would have paid back the euros they borrowed, limiting the currency's fall.
Traders had three other factors to consider, which might limit losses as the day proceeds. The European Central Bank could step into the market to buy bonds, particularly in places like Portugal, Spain and...Continue reading
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Sunday, 28 June 2015
Nowhere to get money
DAY BY DAY the folly of the unexpected decision by Alexis Tsipras, the Greek prime minister and leader of the radical-left Syriza party, to call a referendum on the proposals made by Greece’s creditors is being exposed as the consequences are laid bare. Yesterday visibly shocked and infuriated finance ministers from the other 18 euro-zone states withdrew the deal that they (together with the IMF) were offering Greece, which would have released urgently needed bail-out funds. Today the European Central Bank (ECB) has put a cap on the amount of money that Greek banks can borrow from the Bank of Greece, the central bank in Athens. On Monday Greek citizens will wake up to find their banks closed.
Since Syriza won the election of late January it has been unclear which would buckle first: the cash-strapped state or the deposit-drained banks. It now appears that they will both buckle within days. Unless a minor miracle occurs the Greek government will not repay the International Monetary Fund €1.5 billion ($1.7 billion), an amount that it is due to make by the end of the month, on Tuesday. Defaulting on the IMF is bad enough and an unwise step for any state let alone one that may lose the security blanket of the euro. But an even bigger crisis for Mr Tsipras will be shuttered banks.
Since late last year when worries mounted about an early election that might bring...Continue reading
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Saturday, 27 June 2015
Greeks caught between Scylla and Charybdis
ODYSSEUS was forced to choose between two routes for his ship - one that passed close to a sea monster (Scylla) and another that skirted a whirlpool (Charybdis). For a while, Greeks have effectively faced a similar choice - between austerity (as conditions for assistance from its creditors) and leaving the euro. Asking them explicitly to make this choice in a referendum might seem fair enough.
The problem is that this choice has never been made explicit. Syriza came to power on a programme on ending austerity and keeping the euro. Months of negotiations with creditors have shown this option is not available. But the planned referendum, if it occurs, does not make this clear; instead the question will be
Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25.
Clearly, the government will campaign for the answer No. As my colleague wrote earlier today, this is dangerous brinkmanship. Greek funding runs out on June 30 (Tuesday). Alexis Tsipras, the...Continue reading
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Raising the stakes
DESPITE twists and turns, there appeared to be the makings of a deal between Greece and its international creditors—euro-zone governments and the IMF—in further negotiations on Friday, which would allow urgently needed bail-out funds to be released shortly. That changed abruptly when Alexis Tsipras, the Greek prime minister and leader of the radical-left Syriza party, announced late that night on television that he was calling a referendum on the creditors’ proposals, to be held on Sunday, July 5th. Euro-zone finance ministers who were due in any case to meet in Brussels today to decide upon their next move have yet to respond. But it is clear that Mr Tsipras’s move takes the dispute into perilous territory, bringing Greece closer to the edge of leaving the euro.
Already on Saturday pictures of anxious savers queuing outside banks to withdraw money were circulating. A slow-motion bank run that had already drained €35 billion ($39 billion) of household and corporate deposits out of the Greek banking system between November 2014 and May 2015 threatens to get out of control. Greek banks have been able to cope with the haemorrhage of deposits only thanks to...Continue reading
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Friday, 26 June 2015
The poorest quarter
MOST measures of poverty just focus on income. About 1 billion people live on less than $1.25 a day. But a new report from Oxford University looks at poverty levels in 101 developing countries, covering 5.2 billion people, or 75% of the world’s population. The report understands poverty in a different way from how economists usually do.
The economists measure "multidimensional poverty". This complements measures based on income and reflects the many different problems people can face all at the same time. These include bad health and a lack of education. In all, they identify ten indicators; if people are deprived in at least one-third them, they are multidimensionally poor. The authors estimate that 1.6 billion people fit this description.
In some countries the difference between the conventional and unconventional measures is stark. In Mexico, Pakistan and Egypt, for instance, there are twice as many multidimensionally poor as there are...Continue reading
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Thursday, 25 June 2015
An old chestnut
IN THIS week's Free exchange column, which has just been published, we consider a question that is much debated at cocktail parties around the world. Does democracy hold back growth? Much evidence seems to suggest that it does. After all:
GDP growth in [China] at an average of 10% over the past decade, has easily outpaced that of its democratic emerging-market rivals. India saw annual growth of 6% over the same period; Brazil, just 2%.
In other words: democracies grow slowly; non-democracies grow quickly.
We report on new research that challenges this perception. The paper uses a huge dataset (175 countries over fifty years) and makes a number of statistical improvements (that are explained in the column) and concludes that "democratisations" (ie, when a country becomes democratic) improves living standards substantially. As the piece notes:
They find that a “permanent” democratisation—where there is no slide back into...Continue reading
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Of rainfall and price rises
ON A brutally hot day in May, Gani Patel is sitting in Vipin Seeds, a farm-supplies store in Jalna, a small town in a drought-prone region of India. The talk in the shop is of prospects for the monsoon, the three-month rainy season beginning in June. Business is slow. Last year’s rains were below normal, so farmers are short of cash. Mr Patel grows cotton and maize on his 12-acre farm in Bhakarwadi, around 45km from Jalna. In case the rains disappoint again, he plans to install a drip-irrigation rig to make the best use of the water he draws from his two wells.
Much in India’s economy depends on the monsoon. Farming is India’s largest employer. Three-fifths of the land under cultivation is watered only by rainfall. Food accounts for almost half of the consumer-price index, so prices ebb and flow with the rains. A forecast at the start of June by the India Meteorological Department that the rainy season would again fall short was worrying. Then the heavens opened. Rainfall across India in the first three weeks of June was 21% above its 50-year average. Mumbai had its wettest 24 hours in ten years on...Continue reading
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Treasure hunt
ANDY MURRAY, a tennis ace, made headlines this month—off the court as well as on it. He is teaming up with Seedrs, an up-and-coming British crowdfunding platform through which small companies sell stakes in themselves. The Scot will advise Seedrs on the health, sports and wearable-technology sectors as well as make the odd investment himself. Through such websites, individuals and funds provided over €1.5 billion ($2 billion) in equity and debt to European small and medium-sized enterprises (SMEs) in 2014, according to researchers at Cambridge University and EY, an accounting firm.
That is a pittance compared with the €926 billion of total new external funding made available to European SMEs the year before, mostly by banks. But the amount is more than doubling each year. That is heartening, since European banks, nursing big losses from the financial crisis and trying to rebuild their capital ratios, have trimmed lending to businesses by 12% over the past six years.
Crowdfunding is just one of a number of ways in which European SMEs, typically far more reliant on bank financing than their American counterparts (see...Continue reading
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A light in the darkness
SOME mountainous parts of Mexico are so remote that the electricity grid fails to reach them, let alone the banking system. A five-year-old social enterprise, Iluméxico, hopes to change that. It provides more than 20,000 people with loans to buy low-cost solar panels and batteries, enabling them to switch lights on, watch television and charge mobile phones, sometimes for the first time.
It also introduces them to the financial system via those same mobile phones. It has launched a pilot project enabling them to pay off the loans in instalments via an SMS-based payment system, Transfer, owned by Banamex, one of Mexico’s biggest banks. Most have no credit history, so Iluméxico takes a big risk in lending to them. Manuel Wiechers, its boss, says they are often late with their payments because rural incomes are unstable. But they are keen to maintain access to credit, so their ultimate default rates (currently 5.8%) are only slightly above the national average.
Until recently such people had little hope of getting credit other than from loan sharks or pyramid schemes. Mexican high-street banks have...Continue reading
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Fight the power
ON JUNE 1st a pressure group called “Reclaim the Power” organised a day of action against the energy industry in Britain, including blockades of offices, protests at art galleries sponsored by oil firms and a 1960s-style “love-in” in which agitators lay in a bed outside one of David Cameron’s offices in an effort to persuade the prime minister to become greener.
Their actions were part of a wider campaign, marshalled by 350.org, that seeks to dissuade investors from owning shares in the companies that produce fossil fuels and thus contribute to climate change. So far the protesters have managed to persuade 220 cities and institutions to divest some of their holdings, varying from the very small (the Australian Guild of Screen Composers) to the large (the $21 billion endowment of Stanford University). This month the campaign landed its biggest recruit yet: Norway’s sovereign-wealth fund, which has assets of almost $900 billion, agreed to sell $9 billion-worth of shares in firms that mine coal and tar sands, a particularly polluting form of oil.
Divestment is not a new idea. A campaign against the apartheid regime in South Africa got...Continue reading
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Dragon v bear
Chinese shares’ manic rally had made them the world’s top performers over the past year, but they fell nearly 15% between June 15th and 19th, their sharpest sell-off since the depths of the global financial crisis. They have since bounced back a little, but it may be only a matter of time before the correction resumes. High-growth companies are still priced at more than 100 times last year’s earnings, redolent of the giddy heights of America’s dotcom bubble in the late 1990s. The only certainty is that more volatility is in store. Shares swung more than 7% within a few hours on June 22nd. Weaker trading volumes suggest that investors are starting to tire of the wild ride.
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Wishful thinking
WALL STREET has been in buoyant mood in recent years. The S&P 500 equity index has reached repeated record highs. One might think that would be great news for America’s public-sector pension plans, which hold more than half their assets in equities.
Only up to a point. The latest report* from the Centre for Retirement Research (CRR) at Boston College estimates that the funding ratio of pension plans—the proportion of liabilities covered by assets—has risen from 72% in 2013 to (drum roll) 74% last year. A fifth of all schemes have a funding ratio of less than 60%—a group that includes not just the usual suspects in Illinois and New Jersey but some in Alaska, Arizona, Connecticut and Kentucky.
To make matters worse, this calculation makes a very generous assumption. Most liabilities of a pension plan fall well into the future—a stream of payments to current and future beneficiaries who may live into their 90s. These payments must be discounted to work out the sum in contemporary dollars needed to cover them, but at what rate? Private-sector pension plans are required to use long-dated AA-rated corporate-bond...Continue reading
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Wednesday, 24 June 2015
The new sticking points
MARKETS breathed a sigh of relief on Monday when European leaders were broadly positive about the latest set of proposals from the Greek government. But today the talks are once again in trouble. The creditors, represented by the European Commission and the IMF, have tabled counter-proposals and Alexis Tsipras, the Greek prime minister, has already rejected them. Tempers are rising again on both sides. So is a compromise now possible?
One battle is over the balance of spending cuts and tax rises. The Greek government dominated by the radical-left Syriza party has been unsurprisingly reluctant to cut public expenditure. Its measures to meet a primary budget surplus (ie, before interest payments) of 1% of GDP (€1.8 billion) this year and 2% of GDP next year rely almost exclusively on tax rises. The corporate-income tax rate would rise from 26% to 29% in 2016. Pension contribution rates in the main private scheme would increase by 3.9 percentage points, reversing a previous cut and raising €350m this year and €800m in 2016. Moreover the Greek plan envisages a one-off 12% tax on corporate profits (above €500,000), raising almost €1 billion this year and €400m in 2016.
However, the creditors want a smaller increase in the corporate-income tax rate, from 26% to 28%. More important, they rule out the one-off corporate-profit tax and the rise in...Continue reading
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Thinking beyond a global carbon price
In December talks in Paris involving more than 200 countries may result in a new agreement aimed at reducing carbon emissions. In the months leading up to the conference, The Economist will be publishing guest columns by experts on the economic issues involved. In our last post, Christian Gollier and Jean Tirole of the Toulouse School of Economics explained why a carbon tax, or a carbon cap-and-trade system, should be policymakers' preferred weapon. Here, Marianne Fay and Stephane Hallegatte from the World Bank explain what governments can do to achieve their climate targets.
LAST month the G7 heads of state reaffirmed their commitment to stabilising global temperature rise at no more than 2°C above preindustrial levels. That in...Continue reading
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Tuesday, 23 June 2015
Spin the bottle
WHEN it comes to investing, those who buy tracker funds are sometimes regarded with a patronising air; of course, those are fine for the mass market, but sophisticated people pick the outperforming funds. And for those, you have to pay more.
But how does one know which fund will outperform? Any assessment of the past record carries the implication that performance is persistent. But that assumption is highly doubtful. The last study I quoted came from Vanguard, which manages index trackers; some doubted the results on those grounds. This time, the survey comes from S&P Dow Jones Indices, so may be criticised for the same reason. The trouble is that active managers are unlikely to produce research in this area as it is not in this area. And it is worth noting that Morningstar found similar results.
So let us take the 682 domestic US equity funds that were in the top quartile as of March 2013. How many were still in the top quartile a year later? If performance was random, one would expect a quarter to do so; the actual number was 21.3%. By the time one reached March 2015, randomness would suggest 6.25% of funds would remain in top quartile (a quarter of a quarter); the outcome was 5.28%....Continue reading
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The Greek saga continues
AS THE deadline for repayment looms, Greece finally offers a concrete set reforms, Russian assets are seized abroad and a look at China's booming and busting stock markets
That 1931 moment
THE markets are certainly convinced that a Greek exit from the euro zone will be avoided, judging by the reaction of equity investors yesterday and today. Game theorists will doubtless debate for years whether the tactics of the Syriza party were designed for an external audience - forcing creditors to give way - or for an internal audience - convincing voters they had done everything possible to secure good terms.
The final package is heavy on tax increases, which of course count as austerity just as much as spending cuts. However, Syriza can present it as the rich, rather than the poor, paying the bill. Jacob Kirkegaard of the Peterson Institute points out that creditors
will find it hard to accept an offer from a government notorious for failing to collect taxes to essentially solve the problem with a tax hike
But this is just the kind of last-minute fudge in which the EU specialises.
The trickier bit is dealing with the expectations of the Greek electorate. Greek newspaper headlines include
8 billion cuts and they want...Continue reading
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Intelligent design
MERCURY, the Roman god of markets, is a quick-witted, eloquent, thieving rascal. Appropriately, many markets, where mere mortals hustle and haggle, reflect his spontaneous nature. Whenever two people meet in the market and engage in a well-informed transaction free from coercion, they benefit from it. As long as these transactions do not hurt others, free exchange without government meddling makes the whole society better off. Yet for markets to work well, as Alvin Roth, a Stanford economist, argues in his new book, "Who gets what—and why", they often require patient and intelligent design.
Mr Roth has spent his career studying markets that are far from this ideal. He argues that economists should be more like engineers and think carefully about designing well-functioning markets. One example that Mr Roth describes in his book is the clearing-house that matches American medical students to their residency programmes in hospitals. Hospitals submit lists of students they want to hire to the clearing-house and students write down their...Continue reading
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Friday, 19 June 2015
Take a chill pill
WHY do teens from poor backgrounds drop out of school or get arrested? New evidence finds that the answer lies in how, not what, they think. Keeping teens in school and out of jail may be as simple as getting them to think more slowly.
In a new paper, a group of researchers analyse results from a trial in some of Chicago’s toughest schools. Their theory is that everyone tends to go on auto-pilot, but that this has much worse consequences for teens from rougher areas.
For example: children from privileged backgrounds are constantly advised to do what they are told. If confronted by a mugger, parents say, hand over your phone: it's safer. Make eye contact with people to whom you speak. "Autopilot" behaviour from children from richer backgrounds is to do what they are told, and that translates into better behaviour at school.
But it does not work the same way for children from poor backgrounds. If confronted by a mugger, it may be better to resist, to avoid being seen as an easy target. Making eye contact may be seen as threatening. The problem is that auto-pilot behaviour on the street can have a big, bad effect on school performance. Uncommunicative, obstreperous students tend to land themselves in trouble.
If that theory is really true, then teenagers' lives could be improved simply by helping them to slow down...Continue reading
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Thursday, 18 June 2015
Why they are a flashpoint
GREEK pensions have been a source of acrimony since the first bail-out five years ago. Germans in particular, who were being asked to retire later, resented having to help what they regarded as feckless Greeks, many of whom were drawing pensions in their 50s. Yet since then there have been two major reforms, pushing the statutory retirement age up from 60 for women and 65 for men to 67, while pension benefits have been cut. So why are they still such a point of contention?
One reason was the dire starting-point. As George Symeonidis, a board member of the Hellenic Actuarial Authority, said earlier this year, “the reforms have not finished, nor is it possible to reform a system in four years, when nothing has actually been changed for decades.” Before the first bail-out in May 2010 the system was already heading for disaster, with pension outlays among the highest in Europe at 13.5% of GDP in 2009 and projected to reach nearly 25% of GDP by 2050.
In part this reflected an especially generous set of benefits, which provided the highest “replacement rate” (of earnings before retirement) for public pensions among the OECD club of 30 or so mainly rich countries before the euro crisis, in 2008. The basic system required only 35 years of contributions rather than the 40 generally needed in pension systems to get a full pension. Pensions could be taken...Continue reading
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Another Greek tragedy
IN THE run-up to the financial crisis, private-equity funds seemed to be trying to outdo each other in overpaying for assets. Yet many avoided the bulk of the losses when disaster struck. Often the industry would contribute only a sliver of equity, then quickly extract an equivalent amount or more through heroic feats of financial engineering—thus ensuring a quick profit, and leaving others to bear the pain if the acquired firm tottered under its new mountain of debt. Wily tax structures could help boost returns further.
Now the chickens appear to be coming home to roost for the architects of one particularly egregious-looking deal: the takeover in 2005 of a Greek telecoms group, TIM Hellas, by funds set up by TPG and Apax Partners, two private-equity giants. One question is whether TPG and Apax put their own payouts from Hellas ahead of the financial health of the company. But aggrieved creditors go further. They allege that the transactions involved were not just imprudent, but fraudulent.
Hellas wobbled—and eventually toppled—after the private-equity sponsors increased its debt many times...Continue reading
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True to form
FOREIGN skiers were bound to suffer. So was the Swiss economy, most assumed, after the Swiss National Bank (SNB) suddenly abandoned the Swiss franc’s peg to the euro in January. The franc rose by 30% against the euro in a matter of minutes, and remains about 15% higher than it was. This made Swiss exports more expensive for foreigners, and foreign goods cheaper for the Swiss. That would dent exports and deter tourists, the assumption ran—a particular worry in a country where net exports (ie, exports less imports) make up 12% of GDP. In addition, shopkeepers seemed likely to suffer for another reason, as more Swiss headed across the border into the euro zone to load up on cheap goods.
At a vinothèque in Ferney-Voltaire, a French town a short walk from the border, the manager says that the franc’s appreciation has been good for business. Swiss families flocked to Ferney-Voltaire in January to exchange their francs for euros and go on a shopping spree. “Cars were queuing down the road,” he says.
Yet the loss of business to the euro zone cannot be all that bad, since consumer spending within...Continue reading
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Torture by tariff
SEVEN long years ago Congress passed a law requiring beef and pork sold in America to be labelled with its country of origin. Canada and Mexico, which export lots of meat to America, denounced the measure as protectionism and complained to the World Trade Organisation (WTO). Last month it ruled in their favour, prompting Canada to ask the WTO’s permission this week to impose retaliatory tariffs of $2.5 billion on American exports. Mexico plans to submit a similar request soon.
The list of imports Canada intends to hit with a tariff of 100% of their value includes live cows and pigs, as well as fresh and frozen beef and pork. But it is not pure tit-for-tat: cherries, mattresses, wooden office furniture, wine and just about anything containing chocolate also face punitive levies. As one unhappy representative of America’s wine industry told a congressional committee, the list was designed to “affect every state in the country, potentially delivering a paralysing blow to US winemakers, other farm and food economies and rural households”.
That is the point. Countries in the situation of Canada and Mexico deliberately select a wide range of targets from a variety of states. That, they believe, will maximise the number of congressmen being importuned by victims to repeal the offending law, says John Weekes, a former Canadian ambassador to the WTO who now...Continue reading
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The mocha hedge
FOR three months last year the price of Arabica coffee behaved like a toddler who has drunk a few espressos, jumping wildly to a price of $2.27 a pound ($5 a kilo) in October—the highest level since 2011. A comedown was inevitable: the price of coffee has since plummeted, falling below $1.28 for three days last month. It has recovered, slightly but steadily—but the calm is likely to be short-lived.
The reasons behind the fluctuations are fairly simple. Last year a drought hit Brazil, the world’s biggest coffee producer. But since then Brazil’s currency has weakened, which has prompted growers there to sell off their inventory because dollar-denominated sales now bring in more reais. In late 2014 Brazilian exports began to rise markedly, which has kept global prices low despite decreased exports from the world’s second- and fourth-biggest producers (Vietnam and Indonesia).
Cocoa prices, meanwhile, have been rising. Futures are now at a nine-month high of more than $3,250 a tonne (see chart). According to Mark Keenan of Société Générale, a French...Continue reading
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RG-bargy
EVER since Thomas Piketty, a French economist, published his monumental best-seller “Capital in the 21st Century” last year, his work has come under attack on theoretical and statistical grounds. The latest assault* comes from an unsurprising source: the libertarian Cato Institute.
The argument centres on Mr Piketty’s use of the expression “r > g”, where r is the return on capital and g is the growth rate of the economy. Mr Piketty argues that the growth rate of developed economies has been slowing, but that the return on capital is relatively undiminished. Since capital is concentrated in the hands of the wealthy, a long period in which returns exceed the growth rate will lead to widening inequality. This can be countered only by higher taxes.
The authors, who work for Research Affiliates, a fund-management firm, accept that the growth rate of the developed world has slowed, largely for demographic reasons. Where they differ from Mr Piketty is over the impact on investment returns.
The wealthy have indeed enjoyed very good returns on financial assets over the past 30 years. Bond yields have plunged (and prices risen) from...Continue reading
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Forgive and remember
SINCE the financial crisis all manner of sovereign debtors have sought relief. Ukraine wants concessions from bondholders; Greece, which has already obtained that, wants forgiveness from other governments too. They are appealing not just to creditors’ compassion, but to economic efficiency: diminishing their burden will be for the greater good, they suggest, in that it will provide a boost to growth. That was also one of the arguments made by advocates for the world’s 39 “heavily indebted poor countries” (HIPCs), which secured a promise of substantial debt relief a decade ago, at a summit of rich countries in Gleneagles, a Scottish resort. HIPCs’ external public debt duly fell from about 100% of GDP in 2005 to 40% by 2012, thanks to big write-offs. But new research suggests the relationship between debt relief and economic growth is not as straightforward as campaigners claimed.
Egged on by a coterie of pop stars, multilateral bodies like the International Monetary Fund and the World Bank agreed at Gleneagles to the multilateral-debt-relief initiative (MDRI). It built on a prior round of debt relief agreed upon in 1996, the HIPC initiative, which...Continue reading
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Down but not yet out
SINCE the euro crisis erupted five years ago, the possibility of “Grexit” has been a recurring nightmare. It is looming again, as large as it did in 2012, when Greece was ultimately kept in the fold by a second big bail-out from the IMF and other euro-zone governments. Negotiations over the release of the remaining rescue funds have virtually broken down, as a new Greek government dominated by the radical-left Syriza party continues to balk at the reforms its creditors are demanding. The chances of a deal when euro-zone finance ministers met on June 18th (after The Economist had gone to press) looked slim. Yet Grexit looks no better an option now than it did three years ago.
The Greek population overwhelmingly wants to stay in the euro and the government led by Alexis Tsipras says it does too. This is understandable, since leaving the monetary union would be a bloody business rather than a surgical operation—or so the IMF predicted in 2012. The reintroduction of the drachma would entail the forcible conversion of all domestic assets and liabilities to the new currency, which would immediately plunge by 50% against the...Continue reading
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Pyrrhus would be proud
THE endless and costly litigation regarding the nationalisation at the height of the financial crisis of AIG, the world’s biggest insurer at the time, has always had a Dickensian air. The case, which was initiated in 2011 by Hank Greenberg, AIG’s disgruntled former boss, involves more than 1,600 exhibits, a transcript of 8,812 pages and 442 docket entries. On June 15th the element of farce was heightened when a court ruled in Mr Greenberg’s favour in every respect except the one that matters.
The punitive terms of AIG’s bail-out involved “plain violations of the Federal Reserve Act”, Judge Thomas Wheeler of the Court of Federal Claims decided. Yet, “If the government had done nothing, the shareholders would have been left with 100 per cent of nothing.” In other words, Mr Greenberg is right to question the legality of the government’s actions, but wrong to expect compensation.
Mr Greenberg had sought damages in “excess of $40 billion” on behalf of Starr International, AIG’s largest shareholder, which he controls. He has already said he will appeal. The government, too, may want to appeal to clarify its authority to rescue struggling financial firms and to ward off more lawsuits challenging its conduct during the crisis—especially from the shareholders of Fannie Mae and Freddie Mac, two government-backed mortgage giants it also took...Continue reading
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Wednesday, 17 June 2015
Heating up
CRUNCH time is approaching for Britain's labour market. Figures released today show that unemployment held steady at 5.5% in the three months to April, as the pace of job creation slowed. With joblessness now just half a percentage point above the Bank of England’s estimate of its equilibirum, Britain’s jobs boom, which has seen employment rise by 2m in five years, may be nearing its end.
That means growth in demand (or spending in the economy) is beginning to show up in wage rises, rather than new jobs. Regular pay, excluding bonuses, is now growing at 2.7% annually in nominal terms—easily the fastest rate of growth since February 2009. Thanks to near-zero inflation, workers are enjoying their juiciest real (ie, inflation-adjusted) pay rises since November 2007 (see first chart).
Increasing nominal wage growth will worry inflation hawks. In their June meeting, interest-rate setters at the Bank of England voted unanimously to keep interest rates at 0.5%, but two of the nine members—probably Martin Weale and Ian McCafferty, the usual hawks—continued to think the case for a rate hike was “finely...Continue reading
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The wealth of nations
LAST year, global private wealth grew by 12%, or $17.5 trillion, to reach $164 trillion (in stocks, bonds, savings and cash) according to a report released this week by BCG, a consultancy. Good news for many, but particularly for Asia, where private wealth grew by a whopping 29% compared to 5.6% in North America and 6.6% in Europe.
For the first time in modern history, Asia is now richer than Europe. And it is catching up with North America too; by 2019 the region’s wealth is expected to reach $75 trillion compared to $73 trillion in North America. And although America is still the country with by far the most millionaires in the world, of the 2m new millionaire households created last year 62% are from Asia-Pacific. China is the main driver here; it will account for 70% of Asia’s growth between now and 2019, predicts BCG, and by 2021 it will overtake America as the world’s wealthiest nation.
At the same time, the world’s wealth is being concentrated in fewer pockets. Whereas in 2012 38% was held by millionaires, in 2014 this was 42% and the trend is increasing. Whereas households with more than a million dollars in the bank saw their wealth swell by 16% on average, those with less wealth saw it grow by only 9%.
Where is all this wealth coming from? Strong performance by stocks, which now make up 39% of private wealth compared to 31% in 2009,...Continue reading
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Tuesday, 16 June 2015
Debt relief
IF GREECE does not reach a deal capital controls may become necessary, the Swiss economy stays strong despite its currency gamble and the impact of debt relief on very poor countries
What's priced in?
PERHAPS Congress should get the blame. There have been so many deadlines over increasing the debt ceiling and shutting down the government, that investors have become inured to forecasts of doom. A deal will be done at the 11th hour (or even the 13th) and the crisis will be averted. When it comes to Greece, there have been so many deadlines and so many extensions; the assumption has been of "politics as usual". A deal will be done.
But Syriza was elected on a promise that the Greeks would not suffer "politics as usual" any more. Even today, with a crucial EU meeting in 48 hours' time, Alexis Tsipras, the Greek prime minister, was sounding defiant, proclaiming that the IMF has "criminal responsibility" for the crisis. Depending on your point of view, this is either brilliant brinkmanship (forcing creditors to blink), Churchillian defiance designed to shore up domestic support or foolhardy bluster akin to telling your bank manager "You're detestable. Please lend me a million."
None of this means a deal won't be done at the last minute. But the odds have shifted. Eric Lascelles of the Royal Bank of Canada now reckons the odds of Greek capital controls being imposed are 60% and the odds on default are 50/50. Fund managers polled by...Continue reading
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Monday, 15 June 2015
Thursday, 11 June 2015
In hole, still digging
ALL houseguests are said to bring pleasure: some when they arrive, others when they leave. The same could be said of banking bosses and the strategies they champion. The surprise ousting on June 6th of Deutsche Bank’s embattled co-bosses, Anshu Jain and Jürgen Fitschen (who will leave the bank this month and in May 2016 respectively), caused its share price to jump by 8%. Meanwhile, a new strategy at HSBC, hemming in its investment bank and expanding in Asia, was greeted by investors with the enthusiasm usually reserved for visiting in-laws (shares dropped by 1%).
The travails of Deutsche and HSBC are distinct but related: international jack-of-all-trade banks are out of fashion. The cost of running them has spiralled. Regulators who fret they will one day have to bail out these horribly complex global institutions demand that banks finance themselves with more equity (cash from shareholders) rather than cheaper funds borrowed from depositors or in money markets. Compliance costs have ballooned, alongside multi-billion-dollar fines for fiddling currency markets and interest rates or facilitating money-laundering and tax-dodging, among many other...Continue reading
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A bigger stick
CAN misbehaving bankers be reined in? In the wake of seemingly endless banking scandals, Mark Carney, governor of the Bank of England, promised on June 10th to do just that. “The age of irresponsibility is over,” Mr Carney declared. The bank, the Financial Conduct Authority (a fellow regulator) and the Treasury hope to adopt and export a new model for regulating scandal-ridden fixed income, currency and commodities (“FICC”) markets. Recent wrongdoing in this area includes the rigging of LIBOR, a benchmark interest rate, and the manipulation of currency markets. Yet authorities have struggled to bring the individuals responsible to account.
Banks have not gone unpunished for their sins: it seems that at every recent results season, they have had to set aside ever greater provisions for fines, often sapping their already feeble profits. Between 2009 and 2014 the world’s banks incurred £160 billion ($245 billion) in such costs and set aside a further £46 billion to cover future payouts, says CCP, a research group.
Yet while shareholders have seen their wallets emptied, bankers themselves have evaded severe punishment—much to the public’s frustration. There has been only one conviction in Britain relating to market rigging. Another trial—of Tom Hayes, a former UBS and Citigroup trader—is currently under way. American regulators, too, have...Continue reading
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Dotty
INVESTORS obsess over the Federal Reserve’s “dot-plots”. These charts show the rough trajectory that senior Fed officials think its benchmark interest rate should follow over the next few years. Before every second meeting of the rate-setting Federal Open Market Committee (FOMC), members say how high they think the rate should be at the end of the current year and the two subsequent ones. Each estimate is then plotted as an anonymous dot on a chart, to provide a sense of the range of views within the FOMC. For instance, at its meeting in March, seven of the 17 members thought that the benchmark rate should be 0.625% by the end of the year (see chart). They will now be preparing new dots for their next meeting, on June 16th-17th.
At first glance, the dot-plots seem to offer a wealth of information. For instance, they show that there is plenty of disagreement within the FOMC. Its two most dovish members think the rate should remain where it is (a range of 0-0.25%) until the end of the year, whereas its fiercest hawk wants the rate to rise to 1.625%. For the end of 2016, the range is even wider: 0.375% to 3.75%.
But the...Continue reading
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Astounding claims
ASIANS are becoming older and richer, which should mean plenty of business for insurers. Age, after all, increases the need for health insurance; wealth brings property to protect. The region’s middle class is expected to balloon from 525m in 2009 to 3.2 billion by 2030, according to BCG, a consultancy. Household wealth will double over the coming decade, from $81 trillion today to $174 trillion by 2025. Thanks to increased life expectancy, the region’s army of pensioners will grow rapidly, especially in China, which already has 132m people over the age of 65. Rich-country diseases are proliferating too: by 2030 half of the world’s new cancer cases will be in Asia and, according to Swiss Re, a reinsurer, non-communicable chronic conditions such as heart disease could account for 67% of deaths in India.
No wonder that insurance in the region is indeed booming. In 2013 premiums grew by 7.3%, compared to 1.4% in Europe and a decline in North America (see chart). In 2003 Indonesians spent $7 a person on life insurance; in 2013, $59.
Yet Asia remains woefully underinsured. Western countries typically spend 7-8% of GDP on...Continue reading
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The neglected wealth of nations
TO SELL or not to sell? That is usually the question cash-strapped governments wrestle with when reviewing public holdings of companies, land and infrastructure. But this public-versus-private, left-versus-right debate is a “phoney war”, argue Dag Detter and Stefan Fölster in an upcoming book, “The Public Wealth of Nations”. They advocate a third way: ring-fencing assets from political meddling in independent “National Wealth Funds” (NWFs)—holding companies whose professional managers are free to sweat them as if they were privately owned. The focus, they argue, should be on yield, not ownership.
Governments have trillions of dollars in assets, from companies to forests. These are typically poorly managed, and often not even recorded at all (Greece, for instance, still has no proper land registry). Dozens of countries have asset-management agencies, but these tend to be run by government departments, not external experts. Only 1.5% of public assets are in politically insulated NWF-style funds with wide latitude to value them at market rates, restructure them, and keep, sell or merge them as they see fit.
Mr Detter sees public wealth as “a huge but sorely neglected asset class”. How big is difficult to say due to gaps in the data, but the authors believe the pool of public “commercial” assets (lumpy stakes in companies, property and...Continue reading
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The flows resume
HAVING nearly capsized in the stormy seas of international capital flows, Iceland is now making a cautious foray back into the water. On June 8th the government announced the lifting of the controls the country imposed in 2008—with one big caveat.
Investors with money tied up in Icelandic assets will soon be able to move it out of the country, and Icelanders will be free to buy foreign currencies. The hitch is that those who are owed money by the estates of Iceland’s failed banks, worth about 500 billion kronur ($3.8 billion), or 30% of GDP, must agree to haircuts and maturity extensions on the debts involved before they can sell them and transfer the proceeds out of the country. Alternatively, they must pay a tax of 39% before doing so.
There will also be auctions to drain foreign investors’ offshore holdings of kronur, preventing uncontrolled sales that might send the currency tumbling. Foreigners with kronur stuck abroad will now be able to put them in term-deposit accounts, swap them for bonds, or buy euros at a discount. All of these measures are designed to slow the inevitable rush to...Continue reading
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The wrong solution
IMAGINE how the financial crisis of late 2016 might play out. A surge in wage inflation, caused by a tight labour market, prompts the Federal Reserve to push up interest rates more quickly than the markets expect. Both government and corporate bonds fall in price.
That creates a problem for funds that specialise in corporate debt. They had promised investors that they could redeem their holdings at any time, but the corporate-bond market is very illiquid; many bonds prove almost impossible to sell. Some funds are forced to impose “gates”, limiting fundholders’ access to their money. The restrictions cause a panic among investors, who scramble to sell all bond-fund holdings. Prices plunge, in effect closing the market for new issuers: firms find it impossible to raise new cash. Rumours about financial problems at a big fund manager start to circulate.
That scenario seems to be at the heart of a weighty consultation document issued by the Financial Stability Board (FSB), an international body charged with preserving the health of the global financial system. Regulators, it is generally agreed, were asleep at the wheel in 2005-06, when the...Continue reading
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Who really owns the skies?
MANY holidaymakers will be expecting cheap air fares this summer. The plummet in oil prices has meant that jet fuel, which account for nearly a third of the industry’s costs, is 35% cheaper than it was a year ago. But whether these savings get passed on will depend on how competitive the market is. By conventional measures, the industry looks highly contested: profit margins are historically slim and the number of carriers—more than 140 in America alone—is large.
But a new paper by Jose Azar, Martin Schmalz and Isabel Tecu argues that trustbusters now need to look in a new direction: at concentrated ownership. If, for instance, a mutual fund owns shares in two rival companies in the same industry, it would not be in their best interest as shareholders to encourage them to act in a competitive way. The boss of Delta Airlines might propose a price war to win boost his business. But would a mutual-fund manager who also owned shares in United Airlines be supportive? And would company managements be as keen to cut prices and fight for market share if they knew that their...Continue reading
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A tight squeeze
DURING the financial crisis, when the global economy faced its gravest threat since the 1930s, policymakers sprang into action. To stimulate the economy, central banks slashed interest rates and politicians spent lavishly. As a result, the recession, though bad, was far less severe than the Depression.
Unfortunately, however, that quick response nearly exhausted governments’ economic arsenals. Seven years later they remain depleted. Central banks’ benchmark interest rates hover above zero; government debt and deficits have ballooned. Should recession strike again, as inevitably it will, rich countries in particular will be ill-equipped to fend it off.
Just how much wriggle room do they have? For comparison, The Economist has devised a composite measure of debt, deficits and interest rates—the weapons policymakers typically wield to dispel threatening conditions. Though crude, the analysis yields a clear and troubling conclusion. A few economies could mount a robust defence against a new shock, but most are sitting ducks.
For interest rates, we assign a value of 100—meaning maximum wriggle...Continue reading
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Wednesday, 10 June 2015
Why low rates are not good for equity returns
ONE of the most common bullish arguments for equities is that interest rates are low. The value of a share is the sum of its future cashflows, discounted back to the present day; as rates fall, the discount rate declines, so the present value must rise.
Rather than get bogged down in the theory straight away, let us start with the practice. At a recent Economist conference, we were lucky enough to have a talk from Elroy Dimson, best known for this work at the London Business School, but now at Cambridge's Judge School. Professor Dimson is well-respected for his work in market history and he produced this data on the relationship between real rates and future equity returns. The numbers cover 20 separate countries over a period of 113 years (1900-2012) and so are pretty authoritative. He split the data into eight sections; the lowest 5% and the highest 5% of real rates and the six bands of 15% between. The figures below show the subsequent annualised real returns from equities over 5 years.
Returns
Lowest 5% -1.2%
Next 15% 3%
Next 15% ...Continue reading
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Wrong number?
EVERY quarter the financial markets wait eagerly for the latest estimate of the size of the American economy, dubbed gross domestic product or GDP. Politicians are judged by their ability to get this number rising; a sharp fall in GDP (a recession) is seen as a crisis.
At the beginning of the 20th century people had no way of measuring the volume of economic activity. But the great depression and the second world war made politicians realise that it was essential to generate such numbers. A brilliant and resourceful economist called Simon Kuznets devised a way of doing so. In the process, he, and those who followed him, had to decide what to measure. Understandably, they focused on monetary transactions.
In a new book, “The Little Big Number: How GDP Came to Rule ther World and What to Do About It”, Dirk Philipsen, an American economic historian and environmental advocate, argues that this approach has distorted our view of society and the economy ever since. Wash your own windows and GDP is unaffected; employ a window cleaner and output is boosted. Smash your car on the highway and the costs of repairing it add to GDP. The production of cigarettes that cause lung cancer and handguns that are used in murders are also counted as a positive in GDP terms.
These flaws have been understood for decades ; in 1968, in a campaign speech that was mostly about the...Continue reading
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Tuesday, 9 June 2015
Index exclusion
FIGHT gradualism with gradualism. That is the philosophy underlying the decision by MSCI, a company that creates stock indices followed by leading funds, to reject Chinese shares, for now. Had MSCI chosen to bring yuan-denominated stocks into its global emerging-markets benchmark, investors around the world would have been pressed to allocate billions of dollars to China. Many fought against this because, despite China’s greater openness, access to its stockmarket is still fraught. Technically, MSCI's next review of its global indices is in one year. An earlier, off-cycle decision to bring China into the fold is possible, but MSCI made clear that the ball was in the court of Chinese regulators: only when they do more to address the concerns of foreign investors will their stockmarket enter the big leagues of global indices.
MSCI was careful to word its decision in Continue reading
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Iceland's return
THIS week: Sweeping changes at Deutsche Bank and HSBC and Iceland's capital controls are lifted, delicately
Government workers live longer
IT IS not quite the secret of eternal life. But it seems that, in America, public sector workers live slightly longer than those employed in the private sector. A new briefing from the Center for Retirement Research at Boston College examines the figures. It takes a cohort of 55-64 year of workers from 1983 and checks the mortality rate for such workers over the next 11 years.
When it comes to men, 17% of those in the public sector died over the following 11 years, compared with 17.6% of those in the private sector. For women, the difference was starker, and statistically significant; just 8.7% of public sector workers died, compared with 9.9% of those in the private sector. A second study covered a shorter follow-up period of just six years; the male gap disappears but female public sector workers still live longer.
Alas, simply applying for a government job will not add years to your life (although if the work is boring enough, it may feel like it). The main reason for the gap is education. In this particular cohort, 31.3% of male public sector...Continue reading
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Monday, 8 June 2015
A minnow recovers
“THANK you all, you have done a good job”. The Icelandic finance minister, the rather dashing Bjarni Benediktsson, is proud of his country. Today, his government revealed its plans to remove the capital controls that it had imposed when it went the Nordic country went into economic meltdown in 2008. For a country that the International Monetary Fund sees as having suffered the biggest banking failure in history relative to the size of an economy, this is big news.
Iceland was the first country to be hit by the financial crisis—and it was hit hard. Small wonder: it had a massive exposure to the volatile world of global finance. By 2008, the combined assets of its three biggest banks—Glitnir, Kaupthing and Landsbanki—were 14 times larger than Iceland’s entire GDP. By way of comparison, when Lehman Brothers collapsed its assets were only worth about 5% of American GDP.
These three banks had lent excessively and recklessly. But only about one-fifth of their loans were in Icelandic kronur, since interest rates on these were punitively high. Ordinary citizens instead borrowed from their banks in cheaper currencies such as...Continue reading
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Friday, 5 June 2015
Healthy, but not toned
AMERICA’S economy has been looking frail. According to recently revised estimates, in the first quarter of 2015 GDP shrank by 0.7%, at an annualised rate. Yesterday the International Monetary Fund advised the Federal Reserve not to raise interest rates until next year. But the prognosis is not all bad. For signs of strength, look at the labour market. Today the Bureau of Labour Statistics reported that about 228,000 non-farm jobs were created in May—below the monthly average for the past year, but healthy nonetheless. There are now 11m more jobs than when the recession finished in mid-2009; the unemployment rate is 5.4%, more than half a percentage point below the average over the past two decades. One black spot, though, is wages. In the past few months the rate of pay increases has fallen. That suggests that the American labour market still has lots of slack.
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India's bad-debt problem, Brazil's economy and America's blip
THIS week's print edition has an array of economics articles that may be of interest. The following have particularly caught our eye:
Why privatising India's public-sector banks is the only way to fix them (Leaders)
Despite a sagging economy, Brazil's government is regaining its credibility on budget policy (Americas)
Also, don't forget to take a glance at this week's Free Exchange...Continue reading
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Thursday, 4 June 2015
Terms of Indira
IN JULY 1969 India’s embattled prime minister, Indira Gandhi, sacked her finance minister and took the job for herself. The next day she told a senior bureaucrat to take 14 of India’s biggest private banks into public ownership. Nationalisation was cheered in the streets. Banks were seen as servants of rich industrialists that ignored the needs of poor folk. The work of a few hours transformed the prime minister’s political fortunes.
These days public-sector banks can scarcely raise a loan, never mind a cheer. Credit growth in India is feeble (see chart 1). A large and growing chunk of the loans advanced to firms during an investment boom that ended in 2012 is turning bad. Problem loans in India’s public-sector banks—those that are six months or more in arrears plus those whose terms have been altered to make repayment easier—were 12% of their assets at the last count (see chart 2). The mess is larger than at privately owned banks and is of greater importance, because public-sector banks account for more than 70% of India’s stock of loans. A growing concern is that the banks are so hampered by bad assets from the last boom that they are...Continue reading
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Blip or blight?
FOR the world’s largest economy, 2015 has been a series of disappointments. In March builders began construction on just 944,000 new homes, well short of the million or more that had been expected. In April the number of people out of work and claiming benefits exceeded economists’ predictions. And on May 29th official data, which had previously suggested the economy had grown by 0.2% at an annualised rate in the first quarter, were revised to show a contraction of 0.7%. Consumption slowed, investment slid 2.8% and exports dropped by 7.6%.
America still accounts for 23% of the world’s output, so a sustained slowdown would have global impact. Happily, most economists offer a comforting explanation: this is all temporary. Start with America’s dreadful weather. Though this year escaped the “polar vortex” (the weather system that dragged down temperatures and output in 2014), it was bitterly cold. Thermometers showed record lows in many eastern cities in February. With streets so icy and air so cold it is no wonder consumption expanded at just 1.8% at an annualised rate, much lower than the 4.4% of the previous quarter.
A simple analysis by Aneta Markowska of Société Générale, a French bank, tracks the correlation between anomalous temperatures and GDP. It suggests that the freeze lowered first-quarter growth by around 1.9 percentage points....Continue reading
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Stuffing mattresses
As The Economist went to press, Greece was locked in talks with its creditors (see Charlemagne). Without a deal, its ability to pay its bills, starting with €300m ($338m) due to the IMF on June 5th, was in doubt. Greek depositors seem to fear that a default might lead the government to shore up the country’s finances by freezing accounts or converting them to a new, less valuable currency. At any rate, since December they have been withdrawing money at a more frenetic pace than at any point in Greece’s long crisis, much of it in cash. That has forced the central bank to print more euro notes.
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With a little help from my friends
“I LIKE money and nice things, but it’s not money that makes me happy. It’s people,” says one woman in a World Bank survey. She’s not alone: research has found that social integration is more important for well-being than income, and also decreases poverty. Loneliness, conversely, can be deadly: one study found it did more damage to health than smoking. This week, policymakers from 40 countries met in Colombia to ponder ways to measure deprivation that take account of more than just income, including isolation. Several Latin American countries are devising or have already adopted such “multi-dimensional” measures of poverty.
Income can be a misleading measure of need because poor people end up living in different degrees of hardship depending on their intangible resources. Having strong social bonds eases financial deprivation. Friends and relatives can lend money, pool risk, mind children and bring news of job openings. Researchers from the London School of Economics found that when a group of Bangladeshi women were given business training and free livestock, not only did they move up the income ladder, but their friends’ lot improved too. A year later the friends’ consumption had risen by almost 20%, and they claimed to have become savvier about business as well.
The downside is that not having the right friends can cement hardship. The...Continue reading
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Flying high
IMAGINE owning a shopping centre that your customers are forced to stay in for several hours. Better yet, everyone who visits is relatively rich, and many are in a giddy holiday mood. Now imagine that the number of these special shopping centres is strictly regulated, giving you a near-monopoly. On top of this you get paid a fee per visitor. No wonder buying airports has become something of an investment fad.
Though potentially lucrative, airports tie up a lot of capital, which is why governments around the world are selling them. Some are being listed on stockmarkets, others sold to private investors. The Japanese government is selling 30-40-year concessions to run some of its airports. France is flogging its regional airports: it sold a 49.9% stake in Toulouse airport to a Chinese-led consortium in December. Investors include pension funds, sovereign-wealth funds, infrastructure specialists and private-equity houses.
What sets airports apart from most investments in infrastructure is their dual income stream: they bring in money both on the aeronautical...Continue reading
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Keeping the grease
THE headlines focused on the fact that GE, a big industrial conglomerate, is beginning to sell off its $500 billion finance arm in small chunks. This week it put a $40 billion portfolio of corporate loans up for sale. But not all of GE Capital will end up on the block: GE is keeping the $90 billion division that finances purchases of medical equipment, power-generation gear and aeroplanes, or leases them to users. In part, that is because those fields are critical to GE: it makes all or part of the products being financed or leased. But it is also because the financing of old-fashioned capital goods is a booming business.
The gear GE sells is expensive; would-be buyers often lack the capital to buy it outright. For GE, therefore, the financial engineering that underpins the use of its wares is as important as the mechanical engineering that created them. Many hospitals, for instance, do not buy expensive scanners from GE, but lease them instead. When it develops improved versions, it helps the hospitals swap the new generation for the old, by passing the outmoded gear to another, thriftier institution, and so on down a long chain. By the...Continue reading
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A fearful number
NO NUMBER strikes fear into bankers’ hearts like “311”. That is the section of America’s Patriot Act of 2001 that gives the Treasury sweeping powers to act against those who facilitate financial crime, anywhere in the world, by labelling them a “primary money-laundering concern”. For firms badly behaved or unlucky enough to be targeted, a 311 designation is more often than not a death sentence.
The latest use of the power, in March, was against Banca Privada d’Andorra, a small money-manager based in the mountainous financial haven nestled between France and Spain. The move in effect shut the bank and its subsidiaries out of America’s financial system, preventing them from concluding any transactions denominated in dollars—an essential function for almost any bank. BPA’s Spanish unit has since been liquidated. The parent has been placed under the control of the Andorran authorities.
FinCEN, the arm of Treasury that handed out the black spot, accuses the bank of aiding money-launderers from China, Russia and Venezuela. It alleges that high-level managers knowingly facilitated untoward transactions, as well as €20m...Continue reading
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Open season
SOMETIMES revolutions have small beginnings. SeedInvest is a three-year-old company with 20 employees sharing space in a second-tier building near Wall Street. But it has positioned itself to be at the heart of a fundamental change in America’s capital markets.
On June 19th Title IV of the JOBS (Jumpstart Our Business Startups) Act of 2012 goes into effect. It will change how small companies raise money. Those seeking $20m-50m will be able to offer their shares to the public while skipping some of the most costly regulatory requirements that normally involves, including being vetted by state officials, issuing quarterly reports and listing their shares on an exchange.
In the past, firms that did not meet those requirements could only raise money from investors with a net worth in excess of $1m or $200,000 in annual income. Ten thousand people who did pass that test have signed on to SeedInvest’s system. With the lifting of the rules on income, any adult American can now invest in small share offerings, according to Ryan Feit, SeedInvest’s chief executive.
A wide...Continue reading
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Signs of a slowdown
THE efficacy of Abenomics, the reform programme of Japan’s prime minister, Shinzo Abe, is a matter of vigorous debate. There have been periods of decent economic growth and higher inflation since Mr Abe became prime minister in 2012, but they have not lasted. Japanese GDP is forecast to rise by only 0.8% this year and headline inflation is just 0.6% (the core rate is even lower, at 0.3%).
Where Abenomics has clearly made a difference is in the value of the yen. At the end of 2012 it was trading at ¥87 to the dollar; this week, it fell below ¥125, a decline of more than 30% in 30 months (see chart 1). That is down to the Bank of Japan’s massive programme of quantitative easing (QE), which involves creating new yen to buy assets; the Bank is printing ¥80 trillion ($644 billion) a year.
A weaker yen creates two challenges for the rest of the world. First, it makes Japanese exporters more competitive and thus weakens the position of rival exporting nations. That is happening at an especially inconvenient time. Over the past three months, all the main emerging markets bar China and Hong Kong have seen weaker exports than in...Continue reading
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The force assaulting the euro
THE euro area has been doing better of late: growth of 0.4% in the first quarter (1.6% on an annualised basis) was the strongest in the two-year recovery; unemployment has fallen to 11.1%, its lowest in three years; and inflation is positive again. There has even been a surge of hope that Greece’s membership of the currency may yet be preserved. But even if a deal is stitched together to keep Greece in, the euro will soon face a broader crisis. The slow growth and strained government finances of recent years will soon be dramatically amplified by demography. And the member facing the most severe onslaught is not a small Mediterranean country but Germany, the euro area’s muscleman.
The economic impact of an ageing population is initially positive but ultimately negative. The big generation born after the second world war contributed for many years to higher growth by making the workforce larger, both in absolute terms and relative to the population as a whole. But as baby-boomers retire, they are being replaced by smaller generations born when fertility was much lower. Unless there are offsetting improvements in productivity or...Continue reading
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Two forces
A LOT has been going on in financial markets in recent weeks and, as always, it is difficult to sort out the trends from the noise. The ever-shifting headlines on Greece have not been conducive to calming investor nerves; at more than five years in duration, the Greek crisis has now lasted longer than 10% of marriages. But it is the economic background, and the potential knock-on effect on central bank policy, that is probably at the heart of the volatility. Deflationary forces in some parts of the world are being countered by inflationary forces elsewhere.
Whether you blame it on China, lower commodity prices, or simply the stronger dollar, all is not well in emerging markets (see bottom chart).
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Wednesday, 3 June 2015
How much is too much?
PUBLIC debt in rich countries exploded between 2007 and 2012, rising from an average of 53% of GDP to nearly 80%. Some people think this is a problem, and say that governments need to do their best to cut it. But that view has been challenged in a new paper from the International Monetary Fund, which suggests that “paying down the debt” (or in the words of George Osborne, Britain's chancellor of the exchequer, “fixing the roof while the sun is shining”) is not the most sensible approach.
The IMF's economists reckon that if a government could choose between having high or low debt today, then all else equal they would (and should) choose the latter. After...Continue reading
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Mismatch
THIS month Britain's universities will churn out 350,000 graduates in the class of 2015. But once the end-of-year celebrations are over, almost half of those who manage to find work will be entering jobs that do not formally require a degree (see chart). That has not stopped employers complaining of skills shortages. For instance, on June 1st Adzuna, a job-search-engine firm, reported the highest number of vacancies since the recession.
Economists believe that much of this difficulty lies in matching the supply of graduates to the available jobs. In 2010 Peter Diamond, Dale Mortensen and Christopher Pissarides won the economics Nobel prize by demonstrating that unemployment can stay high in times of vacancies. It is not possible to assume that buyers and sellers of labour immediately find each other; in many markets this only happens after a costly and lengthy search process. To understand this...Continue reading
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Tuesday, 2 June 2015
June 2nd 2015
WHY fears of an economic slump in America are overblown, and why Mark Carney's Financial Stability Board is taking aim at asset managers
Not so dismal
TO SOME, a festival of economics might sound like an oxymoron. The dismal science tends to be technical in nature, usually provoking more debate at academic conferences than at celebrations for the masses. But in picturesque Trento in northern Italy, an annual celebration of the dismal science is in its tenth year. Founded by Tito Boeri, an Italian economist, the public event takes over the city for five days at the end of May each year. Attendees trundle along between libraries, auditoriums, and elegant palazzi to hear economists, academics and policymakers pontificate. For those who don’t fancy braving the queues for some of the events, a giant screen has been erected in the city’s main square to broadcast some of the discussions.
“Wonderful” is how Joseph Stiglitz, a Nobel-prize-winning economist, describes the festival on his first visit. “Normally we [economists] talk to each other," he says. “This is a real attempt to move beyond the circle.” The theme this time is social mobility, on which Mr Stiglitz has written widely and which he examines in his latest book, “The Great Divide”. Opening the...Continue reading
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Monday, 1 June 2015
Making climate agreements work
In December talks in Paris involving more than 200 countries may result in a new agreement aimed at reducing carbon emissions. In the months leading up to the conference, The Economist will be publishing guest columns by experts on the economic issues involved. Here, Christian Gollier (pictured at left) and Jean Tirole (at right) of the Toulouse School of Economics explain why a carbon tax, or a carbon cap-and-trade system, should be policymakers' preferred weapon.
THIS December France will play host to crowds of diplomats as the United Nations holds make-or-break talks on climate change. The challenge for delegates in Paris is to achieve a binding agreement that will limit the increase in the world’s temperature to no more than 2°C. It is an incredibly difficult task. But economics can shed light on which strategies have the best chance at success.
Climate change is a...Continue reading
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