The bears growl

IT TAKES some guts to be a bear about the sector you cover if you are an investment strategist. Generally speaking, strategists are employed by banks and banks are in the business of selling securities, the clients are fund managers who do well when asset prices rise and thus tend to dislike a party pooper. Albert Edwards of SocGen is a long-standing bear of equities as a class and many owe his longevity to the entertaining way he phrases his opinions. 

Life is easier if you have independence. John Paul Smith was a strategist at Deutsche Bank but now gives advice from Ecstrat, a research house. He has been a bear on emerging markets for a few years; as I wrote in this week's column, that was a lonely position a while back. In a new note, he restates the bearish view.

First, he points out that, post the financial crisis of 2008, there was a shift towards a more state-driven model for economic activity; he felt that this would undermine productivity and thus economic growth. Growth has indeed declined. Second, the EM corporate sector was overinvesting and this would lead to a lower return on capital. Third, slower economic growth would bring down commodity prices and hurt producing countries. Fourth,...Continue reading

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Will Britain or America raise interest rates first?

AMERICAN and British central bankers face a similar tough choice. On both sides of the Atlantic, the economy is growing moderately, and unemployment is closing in on 5%­­. As a result, wage growth is picking up. But inflation remains low: 0.2% in America and zero in Britain, according to the central banks’ respective preferred measures. And nobody is certain how much slack remains in labour markets­­—a key determinant of inflationary pressure. In this mixed environment, when is the right time to raise rates? And which rate-setters will go first?

First, take growth. This week new GDP data on both sides of the Atlantic showed continued—if unspectacular­­—growth. America’s economy expanded at an annualised pace of 2.3% in the second quarter. It did not shrink in the first quarter, as previously thought. So far in 2015, America has grown at a 1.5% annualised pace; buoyant Britain has managed 2.2%.

Both demand and supply affect GDP growth, making it hard to judge whether the economies could do better. Debate rages about long-run supply potential in the aftermath of the financial crisis. Jeb Bush, the...Continue reading

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Roaring ahead

IT IS a victory for the humble—for the investment equivalent of a puttering hatchback over a gleaming Porsche. The exchange-traded-fund (ETF) industry is now bigger than the more established business of hedge funds. Assets in the global ETF industry were $2.971 trillion at the end of June, according to ETFGI, a research firm, $2 billion ahead of the hedgies’ $2.969 trillion, as calculated by Hedge Fund Research (see chart 1). In 1999 the ETF industry was less than a tenth the size of its ritzier rival.

ETFs are pooled funds, quoted on stockmarkets, that are designed to replicate the performance of an asset class. They usually do so by tracking a benchmark such as the S&P 500 (for American equities). Once the fund is set up, portfolio changes are mechanical, responding to changes in the underlying benchmark. Funds can track almost anything from the gold price to commercial property. Some have extremely low expenses:...Continue reading

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Rajan in chains

A FEW years ago, when Alan Greenspan was boss of the Federal Reserve, a central banker in Europe remarked how much he disliked it when he saw a headline such as “Greenspan cuts rates”. The Fed’s standing was hurt by such a personalisation of its policymaking, he explained. After all, it is actually all 12 members of the Federal Open Market Committee (FOMC) who decide America’s interest rates, not just its chairman.

In India the Reserve Bank of India (RBI) and its present governor, Raghuram Rajan, are as closely entwined in the popular mind as the Fed was with Mr Greenspan. Yet on July 23rd the government published an external commission’s draft of a new financial code, which would reduce Mr Rajan’s authority over interest rates. It proposes to set up a new monetary-policy committee (MPC) with seven members: four government appointees, the governor of the RBI and two other representatives of the central bank.

The proposal was immediately condemned as an assault on the RBI’s independence, but the reality is more nuanced. Unlike the Fed, the RBI is not technically independent. The governor has the authority to set interest...Continue reading

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The vanishing surplus

The end of the festa

WHEN Brazil won an investment-grade credit rating in 2008, Luiz Inácio Lula da Silva, the then president, compared its earlier, junk-rated incarnation to a ne’er-do-well who spends twice as much as he earns, mainly on gambling and booze. Henceforth, the president crowed in typically folksy fashion, Brazil would be a respectable worker who “looks after the family”. Yet under Lula’s protégée and successor, Dilma Rousseff, Brazil risks falling off the wagon.

On July 28th Standard & Poor’s, a rating agency, said the country may lose its cherished status if it doesn’t sober up. The warning was precipitated by the government’s decision last week to lower its targets for primary surpluses (ie, before debt-service costs) for 2015-18. The goal for this year and next shrank from 1.1% and 2% of GDP, respectively, to 0.15% and 0.7%. The target for 2017 was cut from 2% to 1.3%, even though the IMF had recently suggested that it ought to go up to 2.5%. “The government seems to have thrown in the towel on the fiscal adjustment,” complains one investment banker. The other big rating agencies are...Continue reading

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Flightless

New dawn, gathering clouds

THERE is much to make investors jittery about Turkey. It is becoming ever more involved in the chaos in neighbouring Syria (see article). The Kurdish insurgency in the east of the country appears to have restarted. Politicians are still wrangling over a coalition after an indecisive election in June. The country may be in for a period of unstable, short-lived government or even a fresh election. Worse, Turkey has long been identified as one of the most vulnerable emerging markets, with slowing growth, a large current-account deficit and high corporate dollar-denominated debt. It is little wonder that the lira has been one of the world’s weakest currencies this year.

Fans of the Justice and Development (AK) party and its longtime leader (now president), Recep Tayyip Erdogan, like to boast of its stellar economic record since first forming a government in 2002. It is true that, after the bumpy 1990s and the humiliating bust of 2001, which...Continue reading

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Gutted

In happier times

WHEN Alina, a Moldovan student, had her bank card rejected by a cash machine last week, her first thought was to wonder whether the bank had quietly gone under. Happily, the cause was a fleeting technical glitch—but her reaction was not far-fetched. The country’s financial system is limping badly. In November, thieves stole $1 billion from Moldova’s three biggest banks through a series of fraudulent loans and transfers. Moldova, sandwiched between Romania and Ukraine, is the poorest country in Europe; the theft amounted to more than an eighth of GDP. It has set in train a series of events that will leave the government unable to pay salaries by the end of the summer, according to the recently departed finance minister.

The fraud left the three banks insolvent, so the National Bank of Moldova, the central bank, has taken them over, injecting 12.5 billion Moldovan lei ($660m) in new capital. It did not have such a sum to hand, however—it had to create it. The huge expansion of the money supply caused inflation to double to 8% and the currency to drop. It has fallen by 20% against the dollar this...Continue reading

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Material difficulties

FIVE years ago, two views were fairly common. The future belonged not to the sluggish, ageing advanced economies but to the emerging markets. Furthermore, those economies had such demand for raw materials that a “commodity supercycle” was well under way and would last for years.

Commodity prices peaked in 2011, and have been heading remorselessly downwards ever since. Their decline of more than 40% so far is a huge bear market; had it happened in equities, the talk would be of calamity and collapse.

News coverage in the Western media tends to view the decline in commodity prices as a benign phenomenon, as indeed it is for countries that are net importers. But it is not good for commodity exporters, many of which are emerging markets. That helps explain why emerging-market equities have had only one positive year since 2011, and have underperformed their rich-country counterparts by a significant margin in recent years (see chart). The latest sign of trouble came in China, where the Shanghai Composite fell by 8.5% on July 27th.

The growth rate of emerging economies is likely to slow in 2015 for the fifth consecutive...Continue reading

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Graduating from destitution

THE poor do not just lack money. They are also often short of basic know-how, the support of functioning institutions and faith in their own abilities. As a result, note Abhijit Banerjee and Esther Duflo of the Massachusetts Institute of Technology in their book, “Poor Economics”, published in 2004, it takes “that much more skill, willpower and commitment” for the poor to get ahead. No wonder escaping extreme poverty—usually defined as living on less than $1.25 a day—is so hard.

Even the most successful schemes to lift (and keep) people out of dire poverty seem to work only for some people, in some places, some of the time. For example, microcredit works best for the relatively enterprising, who are rarely the very poorest. Similarly, cash transfers linked to school attendance are useful, but require a working education system. What succeeds in one country may fail elsewhere, thanks to different conditions and cultural norms. And the poorest are often the hardest to help.

This dispiriting picture makes a new paper*...Continue reading

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Does fracking make the poor poorer and the rich richer?

“IT DOESN’T hurt to get more education”, argues Donald Trump, a Republican presidential candidate. But too few Americans are acting on Mr Trump’s insight. Wage inequality has spiralled since the 1980s. In theory, as the returns to education grow, people should invest in more of it. The growing ranks of the educated, in turn, should cause the premium that skilled workers can command to shrink.

While this might have happened in the past, economists argue that more recently the supply of skilled workers seems to have fallen behind demand. Americans are blithely ignoring market signals. But while this seems plausible in aggregate, there is surprisingly little supporting microeconomic evidence.

One reason is that it is fiendishly difficult to measure how responsive Americans are to such price signals. One test is whether people in states with more demanding, better–paid jobs invest more in their education. But those jobs might have gone to places...Continue reading

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On the economics of the end of the world as we know it

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, Christoph Rheinberger (pictured right) and Nicolas Treich (at left) of the Toulouse School of Economics explain why quantifying the cost of global climate change is so difficult.

CLIMATE change puts humanity at risk. The Pope’s celebrated encyclical letter on the subject released last month emphasised this risk “for our common home”, arguing that “doomsday predictions can no longer be met with irony or disdain”.  But apocalyptic predictions are often made by religious groups. So, how serious is this claim?

Perhaps for the first time in history, there seems to be a broad consensus among scientists. They claim that our planet might face a frightening future if we cannot agree to take decisive actions here and now. Changes to how seawater circulates in the...Continue reading

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Peaks and valleys

Are landlords to blame for Britain’s housing crisis?

AS WE noted earlier this month, soaring house prices in Britain have put homeownership out of the reach of many young Britons. Although there are many causes behind this—such as the difficulty of finding graduate jobs, population growth and a chronic shortage of new housebuilding—policymakers are now turning on Britain’s growing number of buy-to-let landlords. Earlier this month, George Osborne, the chancellor of the exchequer, announced that he was trimming tax relief for interest payments on buy-to-let mortgages (a handout that those with owner-occupier mortgages do not receive). And the Bank of England revealed that it had launched a review about tightening up rules for lending to landlords. These measures, some hope, will level the playing field between owner-occupiers and buy-to-let landlords in accessing mortgage finance, helping to solve Britain’s affordability crisis. But research suggests that they are likely to be disappointed.

Nevertheless, it is true that the loose regulation of buy-to-let mortgages is difficult to defend, not least...Continue reading

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Bull calves, bear cubs

THE “national team” was supposed to save China’s stockmarket. Investors were coming round to the view that the government had succeeded in stabilising share prices after the central bank had pumped billions of yuan into the market in recent weeks. Stocks were slowly clawing back territory lost in their sharp tumble of the previous month. But on Monday the Shanghai Composite, the country's main index, fell 8.5%, its biggest one-day fall since early 2007 (see chart).

As with any sudden sell-off, the reasons given by analysts were varied and more akin to guesses than solid explanations. Many pointed to a call by the International Monetary Fund, reported by Bloomberg, a media outlet, for the government to Continue reading

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The limits of nudging

THE behavioural revolution is in full swing, it seems. On Thursday the Behavioural Insights Team (BIT), based in London and previously known as the 'Nudge Unit', published a summary of its findings over the past two years. Five years after it started, the buzz surrounding the unit has not faded. So far the BIT has trialled over 100 policy tweaks around the world, and boasts an impressive array of results. But for all the excitement, there is still a long way to go. 

 

The report reveals that, embarassingly slowly, governments around the world are cottoning on to two ideas. First, they need to take into account the behaviour of the people they affect. Second, in the words of Richard Thaler, one of the top dogs in behavioural economics, "we can’t do evidence-based policy without evidence". 

 

In the field of tax collection, the BIT has helped boost tax revenues for cash-strapped governments. For instance, in...Continue reading

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Into the home stretch

FIVE years of trade negotiations, 29 chapters of dense rules and hundreds of tariff lines culminate, in one corner of Asia, in whirring spools of white fabric. Negotiators are still wrangling over the text that aims to establish a new Pacific trade zone, tying together 12 countries from America to Vietnam. But Penfabric, a textile company in Penang, north-western Malaysia, is not waiting around. In one of its mills, bright yellow flags distinguish rolls of high-end fabric from cheaper cloth. Lately, these flags have started to multiply. “We need to be in tune with what America wants,” says H. S. Teh, Penfabric’s managing director.

The zone, dubbed the Trans-Pacific Partnership (TPP), is the most important free-trade agreement in years. If completed, it will be the largest regional trade deal ever, with its members accounting for nearly 40% of the world economy. The countries leading the negotiations want to set a new standard for what trade agreements cover. They are taking on the morass of regulations, such as local-content rules determining how much of a product must be made from local inputs, that have replaced tariffs as the main obstacle to the...Continue reading

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Bypassing the voters

“THE people have spoken. The bastards.” Dick Tuck’s reaction to defeat in a Californian state Senate race in 1966 is not that far from the attitudes of the authorities since the 2008 financial crisis. They have tended to act first, and hope that voters approve of their actions afterwards. Often this has involved the introduction of improvised measures that the people might not have favoured, and the use of bodies that were free from democratic constraint.

The unpopularity of the Bush administration’s bank bail-out in 2008 created a strong sense of caution among elected leaders. Congress initially voted the rescue down in response to a backlash among constituents that eventually created the Tea Party. Although the bail-out was pushed though in the end, many of those who voted in favour lived to regret it.

Given the public’s views, letting the central bank take the main role in generating economic recovery made a lot of sense. Getting Congress to sign up to further fiscal stimulus became impossible after the Republicans took control of the House of Representatives in 2010. The Federal Reserve kept interest rates at historic lows and...Continue reading

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Bank free or die

BARREN, dry, desolate. These are words you might choose to describe the terrain left by California’s ongoing drought. But they apply just as readily to the landscape for bank startups in America. In the 25 years before Lehman Brothers collapsed, new banks were licensed at an average rate of 164 per year. Since, the industry has been suffering a seriously arid spell. In 2011 no new banks were licensed, making it the first such year since at least 1934. When Primary Bank, based in New Hampshire, opens its doors on July 28th, it will be just the second lender in America to do so in five years. And it will be a welcome sight, given that small banks play a vital role in the economy.

The new bank began in the mind of Bill Greiner, a New Hampshire businessman who had grown frustrated with large banks. In early 2008, he applied for a commercial-property loan from Citizens Bank, then an American subsidiary of the embattled Royal Bank of Scotland. But despite a proven track record and a 50% downpayment, he was turned away. Baffled, he turned to Hampshire First Bank, a local lender. The relationship was happy, but short-lived: in 2012, the bank was...Continue reading

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Bargaining chips

“WHEN you’ve already settled the price of the car, there’s no point quibbling over whether the gas tank is full.” Thus did Roberto Azevedo, director-general of the World Trade Organisation, urge WTO ambassadors this week to conclude the second Information Technology Agreement (ITA-II). They duly agreed to eliminate import tariffs on 201 new electronics products, such as high-end semiconductors, medical equipment and game consoles.

The 54 countries involved cover 90% of the trade in such goods, which in turn amounts to 10% of all world trade. The deal extends the product list of the original ITA, in 1996, which included floppy disks and tape recorders, to include modern technologies such as the flash drives for smartphones. A final agreement was expected on July 24th.

ITA-II is the first big WTO trade deal since the original ITA and has been haggled over for three years. The slowness of progress was largely due to China, Japan, Taiwan and South Korea fighting over the inclusion of goods produced by infant industries they had been protecting from international competition. India stayed away from the talks altogether, citing the...Continue reading

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Destination unknown

FED up with pay increasing only at a snail’s pace, politicians are resorting to the law instead, by increasing the minimum wages that businesses must pay. But this is taking them into uncharted territory. Britain’s recent minimum-wage increase will take it from the average among OECD countries to the upper ranks. Germany’s new minimum wage, introduced in January, stands at 62% of average earnings in east German states. If a $15-an-hour federal minimum wage were implemented in America, as campaigners want, it would apply to two-fifths of workers.

In the past, cash increases in the minimum wage have been eroded by inflation. America’s federal minimum wage was last set, at $7.25, in 2009 and has not been changed since, so its value has faded over time. This means that in reality most countries have only ever temporarily increased the real minimum wage. If the recently proposed increases are maintained over time (as the electorate will surely expect), there could be long-term effects. Historically, economists have worried that high minimum wages boost the pay of those in work but at the expense of jobs. Take a burger bar, which is forced...Continue reading

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The long march to normality

Show us the money

AFTER three weeks of closure the reopening of Greek banks on July 20th was a positive step. But the banks remain enfeebled; a liquidity crisis has turned into a solvency crisis. Until worries about their viability are quelled after the summer, when stress tests to determine their capital adequacy will be held, they will struggle to get back to some semblance of normality.

Although the shutters have gone up and there are no longer queues at ATMs, little has changed in practice this week. Customers can pay in cheques and gain access to safe-deposit boxes in banks where they have stashed cash. However, strict capital controls still prevent transfers abroad and the existing limit on cash withdrawals remains in place, with only a cosmetic change from the previous daily cap of €60 ($65) to a weekly limit of €420.

Yet the position could have been far worse. After eking out a limited amount of cash over three weeks, the banks were close to running out altogether. What made the difference was the decision by the European Central Bank (ECB) on July 16th to raise the amount of emergency liquidity...Continue reading

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Much ado about trading

FIVE years is the length of a modern British Parliament and one of Stalin’s economic plans. And apparently, it is the time needed to bring in a new American financial regulation. When the Dodd-Frank Act was passed in 2010, the so-called Volcker rule was seen as one of its key provisions. But the rule only formally became operative on July 21st this year.

The pertinent clause of the Dodd-Frank Act amounts to all of 165 words (with the key points covered in 40). Two activities are banned: proprietary trading and ties (through investment and relationships) to hedge and private equity funds. Putting that into practice involved a collaboration of five regulatory agencies: the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Commission, and the Office of the Comptroller of the Currency (OCC). This group produced an 881-page preamble leading to a 76-page rule, all of it written in dense bureaucratese.

 

The aim of the rule is to stop banks (and their worldwide affiliates) with access to American government funds from indulging in speculation...Continue reading

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Money talks: Minimum-wage mania

GOVERNMENTS are enthusiastically raising the minimum wage of workers. But how high can they go without being harmful?

The cap didn't fit

AT LEAST there are some lengths the British government won't go to in pursuit of its obsession with inheriting property. Earlier this month, George Osborne, in a Budget that revealed big cuts to welfare, found room to increase the inheritance tax limit, not for wealth-creating businesses but for residential property. There was no economic justification for this move, just an attempt to consolidate the vote among middle-class and elderly voters. This followed such electoral goodies as the triple lock system for state pensions and the granting of pensions "freedom"—admittedly a potentially poisoned chalice for those who take it up.

Another electoral promise was to cap the costs of long-term care for those forced to go into nursing homes. The recent Conservative manifesto promised that it would "make sure no one is forced to sell their home to pay for care." Yesterday, however, a Parliamentary statement said...Continue reading

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The great bear market

Why do people do it to themselves?

The new Blanchard

NEWS has just come through that Maurice Obstfeld will be the International Monetary Fund's new chief economist, succeeding Olivier Blanchard who is retiring. According to those in the know, Mr Obstfeld was chosen from an exceptionally strong field of candidates, which is a tribute to the role Mr Blanchard has played. Mr Obstfeld ("Maury" to his friends) has both academic experience (he is a professor at the University of California, Berkeley) and policy chops (he is on Barack Obama's Council of Economic Advisers, where apparently he has done a lot of good work). 

To most economists he is known for his "Foundations of International Macroeconomics", a go-to textbook for master's students on macroeconomics courses that he wrote with Kenneth Rogoff of Harvard University. Perhaps unsurprisingly, Mr Rogoff told The Economist that it was "a great appointment". 

So what should we to expect from Mr Obstfeld's tenure? At this stage we can only speculate. He has written on how the establishment of the euro zone led to overlending from the...Continue reading

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Greece and the euro, migration and the Big Mac index

THIS week's print edition has an array of economics articles that may be of interest. The following have particularly caught our eye:

Greece and the euro: From rage to resignation (Leaders)

Migration: No milk, less honey (Britain)

The Big Mac index: A few dollars less (Finance)

And don't forget to take a look at this week's Free Exchange column, which looks at the relationship between debt and growth.

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How much the young suffer

BRITONS are obsessed with home-ownership; but it is getting less and less common. A new note from Neal Hudson of Savills, an estate agent, points out that "the share of households owning their home peaked in 2003 at 71% [...] and has been in decline since." But the crucial point, as Mr Hudson goes on to explain, is that things look rather different when splitting up the data by age group. The chart uses data from the Council of Mortgage Lenders and shows Britain's home-ownership by age. Even seasoned watchers of Britain's housing market are surprised by how dramatic it is. 

The pathetic rates of home-ownership among young people in Britain may be down to the country's crazy property prices, particularly in London where lots of young people live. (The economic problems associated with London's housing market are explained in this week's issue). And other factors, not related to prices, may be at play. More young Britons are spending a long time at...Continue reading

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The democratic deficit

SO THE IMF thinks Greek debt is unsustainable. But it has not offered to take a hit on its own holdings. After all, the IMF is a senior creditor; its reputation depends on getting paid. Yesterday, Mario Draghi, the ECB president, said it was

uncontroversial that debt relief is necessary

while simultaneously expressing confidence the ECB will be repaid by Greece. So who should the Greeks default to? The taxpayers of Europe, of course, the very people who were promised that such a thing could not happen. As pointed out in my last post, this would be an odd interpretation of democracy.

Some of these problems arise from the way that the crisis was dealt with. Central banks acted quickly to try and deal with the liquidity crisis of 2008; the EU set up the EFSF and the ESM as a way of dealing with the fiscal crises of its weaker members; the IMF was brought in as a body with experience of "enforcing" conditional loan programmes. None of these bodies have direct democratic legitimacy; indeed it is their lack of democratic accountability that gives them freedom of action.

Writing in the FT today, Glenn Hutchins argued...Continue reading

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A helping hand

FOR almost three weeks now banks have been closed in Greece. Cash withdrawals have been limited to €60 a day and in practice often just €50 a day. Electronic transfers to accounts outside the country have been blocked. Although people are no longer queuing at ATMs, the shuttered premises of banks have become part of everyday life. Despite the everyday bustle of cities like Athens, Greece has been reverting to a cash economy, in part because so much cash had already been withdrawn before the bank closures, with a total of around €45 billion (worth a quarter of Greek GDP) stuffed under mattresses.

The slow-motion bank run has occurred as Greeks have feared for the safety of deposits that might turn overnight from hard euros to worthless drachmas as Syriza, the radical-left party led by Alexis Tsipras that won power in January, played a reckless game of brinkmanship with the rest of the euro area, and in particular with Germany. Though the aim was avowedly to secure a better deal for Greece, all it did was to injure the economy. The game of bluff culminated in a far worse deal on July 13th following the bitter negotiations in Brussels last weekend between Mr Tsipras and other euro-zone leaders, preceded by even sourer talks between the Eurogroup of finance ministers, in which Wolfgang Schäuble, the German finance minister, pressed the case for Greece to leave...Continue reading

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The behavioural-economics explanation for Sajid Javid

A chance of showers

UPON joining a panel mulling new regulations for London’s financial industry in 2010, Martin Taylor was confronted with “an operatic chorus” of bankers threatening to move elsewhere if oversight became too strict. Moneymen from all sorts of firms told the former boss of Barclays, a big British bank, that they were on the verge of decamping to Switzerland, apparently a paradise of low taxes and sympathetic regulators, safely beyond the reach of the European Union’s banker-bashing. “The City”, for centuries a mainstay of the British economy, risked losing its status as the centre of global finance, and with it hundreds of thousands of jobs. It wasn’t until Mr Taylor learned that the financiers of Zurich and Geneva were simultaneously threatening to relocate to London that his concerns eased somewhat.

The grandees of the City are often accused of crying wolf, pretending that their industry is about to be devoured by taxes and regulation when in fact they are just trying to protect profits. In recent months, the same chorus that greeted Mr Taylor has joined a new crescendo, complaining of everything from a new tax surcharge on banks’ profits to...Continue reading

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Losing a tailwind

WHEN supply falls and demand is strong, prices tend to go up. So it has been in America’s stockmarkets. Short-term interest rates at record lows and minuscule yields on government bonds have boosted investors’ demand for equities. And thanks to share buy-backs, the supply of shares has been steadily falling. BCA Research estimates that the number of shares in issue on American stockmarkets has fallen by 6% since 2009. This tailwind for share prices, however, may be starting to fade.

A few decades ago many firms deliberately kept a bit of cash on their balance-sheet as a “rainy-day fund” to help them cope with recessions. That has gone out of fashion, partly due to pressure from activist investors. If firms have no better use for their money, the argument runs, they should return it to their shareholders.

Share buy-backs also help improve a number of financial ratios. Especially at current interest rates, companies earn a low return on their cash. So buying back shares barely dents the company’s total earnings, but reduces the number of shares; earnings per share rise. The same arguments apply to measures such as return on...Continue reading

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A few dollars less

IN NOVEMBER the McDonald’s restaurant in Pushkin Square in Moscow reopened following a three-month closure ordered by local health inspectors. The penalty was widely seen as retaliation for Western sanctions against Russia. The restaurant was a predictable target. When it first opened in 1990, it symbolised the triumph of American capitalism over a crumbling Soviet Union. Now it holds up a mirror to another American economic victory: the resurgence of the dollar. All but four currencies in our Big Mac index look cheap compared to the greenback. The rouble is the cheapest of all.

The index is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same in different countries. Our basket contains just one item: a Big Mac hamburger. If the local cost of a Big Mac converted into dollars is above $4.79 (its price in America), a currency is dear; if it is below the benchmark, it is cheap. In Pushkin Square a Big Mac costs 107 roubles, or $1.88 at the current exchange rate, two-fifths of the average price in four American cities. That in turn...Continue reading

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Not many aboard

Not really the way forward

WITH Brazil’s economy set to shrink by 1.5% this year, and Brazilian bosses more concerned with survival than expansion, Dilma Rousseff, the country’s president, is keen to drum up foreign investment. “I have turned into something of a travelling saleswoman,” she said recently, between trips to the United States and Italy. She is peddling concessions to upgrade and run important bits of infrastructure, including airports, ports, railways and roads. Ms Rousseff hopes to attract 198 billion reais ($69 billion) in total, including 70 billion reais before she leaves office in 2018.

Brazil’s infrastructure is scant and shabby. The World Economic Forum ranks it 120th out of 144 countries for overall quality. Roads and airports are especially ramshackle. The rail network is barely one-eighth as big as that of the United States, a country of comparable size. With a big budget deficit and high borrowing costs, the government is in no position to boost its own investments. So Ms Rousseff has set aside her left-wing instincts to court private investment.

The scepticism among moneymen,...Continue reading

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Sorry to burst your bubble

WHEN Chinese shares plunged earlier this month, the government tried frantically to limit the damage. It pumped cash into the market, capped short-selling and ordered share buy-backs. Although China was unusually heavy-handed, it was hardly the first country to try to bolster stock prices for fear of the economic harm a crash could bring. Alan Greenspan, as chairman of the Federal Reserve, famously created the “Greenspan put” by giving investors the impression he would cut interest rates to stop stockmarket routs.

The underlying rationale for these interventions is an idea that until recently received surprisingly little scrutiny—namely, that stockmarket busts are very damaging for the economy. The link seems clear enough in the case of the crash of 1929, which led in short order to the Depression. But it is also easy to point to contrary examples. The bursting of America’s dotcom bubble in 2000 wiped out $5 trillion in market value, equivalent to half of GDP. Yet it was followed by a shallow recession.

Not all bubbles, it would appear, are equally bad. According to two new papers*, the crucial variable that separates relatively...Continue reading

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Right on target

IT ALL seems a little too perfect to be true. The Chinese government set a growth target of “about 7%” this year; the economy, ever responsive to the Communist Party’s needs, has hit exactly that number for two quarters in a row. Cue a chorus of scepticism.

The first quarter did look suspicious. Growth in industrial production was the weakest since the depths of the financial crisis; the property market, a pillar of the economy, crumbled. China reported real growth (ie, after accounting for inflation) of 7% year on year in the first quarter, but nominal growth of just 5.8%. The only way to arrive at the higher real figure was to put the GDP deflator, a measure of inflation, at -1.1%. That implied the economy suffered broad-based deflation, a bizarre claim given that consumer prices rose by more than 1% at the same time. Had the GDP deflator been more accurate, Chang Liu and Mark Williams of Capital Economics reckon, real growth in the first quarter would have been one or two percentage points lower.

The data for the second quarter are more credible. In nominal terms, growth rebounded strongly to 7.1%. The corollary is that the GDP deflator is now 0.1%, a reading that is much more consistent with rising consumer prices and falling producer prices. There were signs of some tampering: without explanation, the national bureau of statistics cut the...Continue reading

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Can fuel-economy standards save the climate?

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 is publishing guest columns by experts on the economic issues involved. Here, Arthur van Benthem (pictured at left) of the University of Pennsylvania and Mathias Reynaert (at right) of the Toulouse School of Economics explain why a fuel tax is a more efficient way to reduce emissions from vehicles than fuel-economy standards.

TRANSPORT is responsible for about 20% of global greenhouse gas emissions. To save the climate, transportation is an obvious and visible target for regulators. Fuel-economy standards, requiring a minimum sales-weighted average miles per gallon (mpg) rating of new cars, are a popular tool around the world. In August 2012, president Barack Obama touted his new fuel-economy standard of...Continue reading

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Even more on debt and democracy

AS THE Greek deal was being hammered out on Sunday, and the harsh details leaked out, the hashtag #thisisacoup trended on Twitter. The people of Greece had voted against austerity a week previously, but austerity (and overseas monitoring of their economic policies) was being foisted upon them.

But this is an oversimplification of the forces at work, regardless of whether Greece manages to meet all the conditions of the deal (probably not) or whether the Greeks handled the negotiations well (definitely not). The narrative is that Greece is being penalised to bail out "the banks". But if only the banks were the creditors, the whole issue might be easier to deal with. Go back to the 2012 deal; the private sector creditors (the banks) were made to take a 50% write-off (equivalent to €100 billion, or €10,000 per Greek citizen) and the official creditors stepped in, in a package that involved extended debt maturities, lower interest rates on existing debt and holidays for interest payments. (All...Continue reading

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Hawkish tones

WHEN David Miles joined the Bank of England’s Monetary Policy Committee in August 2009, interest rates were at a record low of 0.5%. They have not budged since. Not once during his tenure, which comes to an end on August 31st, has Mr Miles voted for a change in rates. In his time he has been called a “dove”, and even an “arch-dove”. But in his final speech as a member of the Monetary Policy Committee (MPC) on July 14th, he shrugged off this label, suggesting that rates should rise gradually, but soon. 

His speech came on the same day that Mark Carney, the bank’s governor, also suggested that the time for a rate rise is “moving closer”. The governor’s comments caused sterling to jump 0.7% against the dollar.

Most economists have been expecting the Bank of England to wait for America's Federal Reserve to raise raistes before taking action itself, for fear of causing a surge in the pound and immediate deflationary pressure. Inflation was exactly zero in June, well below the bank's two percent target. Were the bank to move first and the pound to appreciate as a result, it could be pushed further off-target in the...Continue reading

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Whether or not to believe China's GDP figures

IT ALL seems a little too perfect to be true. The Chinese government set a growth target of “about 7%” this year. And for a second consecutive quarter, despite ample evidence of stress in its industrial sector, it managed to hit that right on its head. In the three months from April to June, the economy expanded 7% compared with the same period a year earlier. Cue the chorus of scepticism: Chinese data just cannot be trusted, goes the usual refrain. Yes and no. There is a difference between smoothing data and totally fabricating it. Evidence suggests that China is guilty of the former (the lesser charge) but not the latter (the more serious allegation).

China has a history of Continue reading

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Tiger finance

BOTH the City of London and Wall Street fear the exodus of banks to eastern capitals, but just how dominant are Asia's financial centres?

The Greek crisis, China's stockmarket crash and the economics of price-comparison websites

THIS week's print edition has an array of economics articles that may be of interest. The following have particularly caught our eye:

Grexit: A how-to guide (Leaders)

Britain's budget: The new Conservatism (Leaders)

Stocks in China: China embraces the markets (Leaders)

And don't forget to take a look at this week's Free Exchange column, which looks at why price-comparison websites can increase prices.

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Easy, now

THE American economy faces a crucial turning point in the coming months. After over six years of near-zero interest rates and three rounds of quantitative easing, the Federal Reserve is poised to begin tightening. Is 2015 the year for liftoff?

The Fed seems to think so. According to its latest forecasts, 15 out of 17 Federal Open Market Committee (FOMC) members expect a rate hike by year-end. This view is based in part on the expectation that inflation will move towards its 2% target. An earlier rate rise would help stave off inflation while containing possible bubbles in stock and housing markets. Minutes from the latest FOMC meeting indicate that members believe an earlier hike would also “convey the committee’s confidence in prospects for the economy.”

Not everyone is convinced. The International Monetary Fund has urged the Fed to keep rates low until at least 2016. The IMF reckons that low inflation and residual slack in the labour market call for at least another few months of easy money. Hiking too early could destabilise financial markets and increase the risk of deflation. Interest rates, moreover, are not always the...Continue reading

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Should I stay or should I go now?

NICOS, a surgeon in a regional hospital in Greece, has been tearing his hair out for weeks now. As “Grexit” has moved from a hypothetical scenario to a very real, imminent threat, he and his wife have been staying up deep into the night to mull over what they would do. “I don’t think we could stay,” says the young father of two, who moved back to Greece only a few years ago after specialising at a top university hospital in Britain. He had been hopeful that his country was going to recover again and wanted his children to grow up in his homeland. But the last months have been very tough, with shortages for all sorts of basic supplies and medication, as well job cuts. And he is certain things will only get worse if Greece leaves the euro.

All over the country, similar hushed conversations are going on around kitchen tables of doctors, lawyers, entrepreneurs, engineers and other professionals. “This is my home, of course I want to stay, but I just don’t see how,” says Dimitris, a university lecturer. George, a 21-year old currently studying civil engineering at Edinburgh University, says he and most of his friends would love...Continue reading

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Feud for thought

A LAMENTABLE feature of the Greek crisis of the past few months is the extent to which it has restoked national antipathies, on the part of both the Greeks and the Germans. A project—the single currency—that was conceived to cement European integration and put a seal on post-war reconciliation has instead revived memories of the Nazi occupation of Greece and torn both countries apart, at least in their public opinion, whether expressed on the streets of Athens or in the bromides of German tabloids.

Greece has now submitted new proposals to try to convince its creditors to provide a third bail-out that would enable it to stay within the euro. They are being pored over by officials representing the creditors from the European Commission and IMF (along with the European Central Bank) today and will be considered by the Eurogroup of finance ministers on Saturday. If the Eurogroup were to give them the green light the planned summit of leaders from the whole of the EU on Sunday to determine Greece’s fate may not happen after all. Yet even if the finance ministers respond favourably, it will still be touch and go whether bridging funds can be provided to enable Greece to redeem €3.5 billion of its debt held by the European Central Bank, which comes due on July 20th; a failure to pay this would make it virtually impossible for the ECB to sustain its support for Greek...Continue reading

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Costly comparison

AT FIRST glance, price-comparison websites are an example of capitalism at its best. Savvy consumers can use them to hunt down the best available deal for insurance, electricity or a mortgage. Firms providing such items, terrified of losing customers, feel an obligation to improve their offerings all the time. But recent theory and practice suggest the reality is more complex: comparison sites are simultaneously friends and foes of competition.

In 1971 Peter Diamond, an American economist, showed that even small “search costs”, such as the time it takes to walk down the street to see what is on offer at a rival shop, can seriously undermine competition on price. Industries in which it is much harder to compare offerings and switch providers can expect sky-high prices and profits. In the past, this problem was acute in the insurance market. Many consumers, on discovering their insurance was running out, would lazily renew with their existing provider. The hassle of comparing competing offers, and the need to maintain coverage without interruption, hindered competition. That...Continue reading

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Tax them and they will grow

Protesting against low taxes

SOMALIA is not only one of the world’s poorest and least developed countries, it is also one of the most dangerous for tax collectors. By one reckoning a fifth of tax collectors in the capital, Mogadishu, were killed in 2012-14. Armed guards now accompany the remainder on their rounds. That may be an extreme case, but most poor countries struggle to raise much revenue, and therefore to pay for basic infrastructure and services.

Such difficulties will be one of the main topics of discussion at a United Nations conference in mid-July in Addis Ababa, the capital of Ethiopia, which will debate ways to finance developing countries’ most urgent needs. It is a precursor to two more big powwows this year that hope to set the agenda for development for the next 15 years. At the first, in New York in September, the UN plans to adopt global targets for development, called the “sustainable development goals”. At the second, in Paris in December, it hopes to agree a global scheme to combat climate change. Christine Lagarde, the head of the IMF, calls the three meetings a “once-in-a-generation...Continue reading

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Aiming for the net

TEXTBOOKS say that banks make money by raising deposits relatively cheaply from savers and lending them, at a higher rate, to borrowers. The difference between the two rates is known in the trade as the “net interest margin” (NIM), and its size is an important factor in banks’ profits. But as the financial crisis prompted central banks around the world to lower interest rates almost to zero (and below, in a few cases), banks have been in a quandary. They cannot lower deposit rates enough to be able to lend at a decent margin, since most assume that depositors will not tolerate negative rates. Instead, they have watched the NIM shrink (see chart on next page), and tried to recoup some of the lost profits by raising fees.

America’s 5,600 banks have therefore eagerly been awaiting the turn in the interest-rate cycle, in the hope that higher rates will bring a wider NIM and thus fatter profits. Since January 28th, when Janet Yellen, the chairman of the Federal Reserve, suggested the first increase was not too far off, bank shares have risen by 11%, much more than the market as a whole. In a presentation in February, JPMorgan Chase,...Continue reading

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The debt trap

ALMOST eight years have elapsed since the financial crisis took hold in August 2007 and still the same issues are being fought over. Who should suffer the most pain—creditors or debtors? Is the best way to achieve growth short-term fiscal stimulus or long-term structural reform? And, in Europe in particular, how does one reconcile local democracy with international obligations?

Debt is a claim on future wealth: lenders expect to be paid back. The stock of debt accordingly tends to expand at moments of economic optimism. Borrowers hope that their incomes are set to rise, or that the assets they are buying with borrowed money will increase in price; lenders share that enthusiasm.

But if wealth does not rise sufficiently to justify the optimism, lenders will be disappointed. Debtors will default. This causes creditors to cut back on further lending, creating a liquidity problem even for solvent borrowers. Governments then step in, as they did in 2008 and 2009.

The best way of coping with too much debt is to spur growth. But developed countries, even America, have struggled to reproduce their pre-crisis growth rates. So...Continue reading

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The trials of Saint Antony

FEW will soon forget Bob Diamond, the combative ex-boss of Barclays, Britain’s second-biggest bank, who beseeched bankers to “stop apologising” for causing the financial crisis in 2011, some years before the British public was ready to call a halt. The same cannot be said of his successor, Antony Jenkins, who tried valiantly to smooth things over after regulators demanded Mr Diamond’s dismissal in 2012. A decent chap who did a decent job, “Saint Antony”, as he was sometimes depicted, was himself ousted on July 8th. What will change as a result is far from clear.

Mr Jenkins was not the most inspiring banker. He lacked the Diamond-esque gumption of some of his peers, many of whom have energetically driven their institutions into the ground. A retail and commercial banker by training, his understated pitch focused on improving the bank’s “culture”—ie, discouraging traders from fiddling foreign-exchange markets and the like. He twice restructured its investment bank, clearly not his favourite division. That seemed tailored to please scalp-hunting regulators.

But Barclays’ board is seemingly in the market for...Continue reading

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Toothpick alert redux

We have received this response from the Central Bank of Nigeria about a recent article in The Economist:

The attention of the Central Bank of Nigeria (CBN) has been drawn to your recent article titled “Toothpick Alert” in The Economist. First, the article seems to miss the fact that the exchange rate is simply a price that is essentially determined by the forces of supply and demand. The CBN believes that the 48% decline in oil prices may not be transitory and made bold policy changes including closure of the subsidised official foreign-exchange window, which resulted in a 22% depreciation in the currency, the Naira. As the Nigerian economy is heavily dependent on imports and the exchange rate pass-through to inflation is high, we believe that this adjustment is optimal at this time.

Contrary to the article’s argument, adjustments to a sharp decline in supply of American dollars cannot all be borne by an indeterminate depreciation, without considering the full impact on the Nigerian economy. The demand side also has to be considered, not just in response to the pressure on the Naira but as an opportunity to change the economy’s structure, resuscitate local manufacturing, and expand job creation...Continue reading

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Glitch perfect

A shockingly insignificant outage

THE timing was poor. At 11:32am on July 8th, at a time when market turmoil in China and fiscal turmoil in Greece were already causing concerns, trading was halted on the New York Stock Exchange (NYSE), once the epicentre of America’s financial markets, on which almost all other trading hinged.

For a moment, the stoppage seemed like grounds for panic. It did not help that a mysterious computer glitch had caused United, one of America’s biggest airlines, to ground all its flights shortly beforehand. The excitable speculated that a co-ordinated cyber-attack was under way. The president was being briefed, the White House solemnly declared. Happily, it soon became clear that the problem was an internal failure, not an external assault. United’s troubles were unrelated, it turned out. At 3:10pm trading resumed.

Some bemoaned the computerisation of a business that had once relied chiefly on men shouting at one another. But technology had also helped turn the outage into a non-event. All trading in shares listed on the NYSE used to occur at the NYSE. But liberalising...Continue reading

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Uncle Xi's bear market

BEFORE it met a violent end last month, China’s stockmarket rally was more than just your run-of-the-mill mania. It was political. Many investors called it a “state bull market”, believing the government was firmly in control, guaranteeing that shares would only go up. Others said it was an “Uncle Xi bull market”, as if it were a gift from China’s top leader, Xi Jinping. State media lent their official imprimatur to the frenzy: a People’s Daily editorial in May, shortly before the bubble popped, predicted the good times were just beginning. Buying stocks “is buying the Chinese dream”, proclaimed a top brokerage.

The plunge of nearly a third over the past four weeks has left the dream in tatters. Although the market is still up by 75% over the past year, many mom-and-pop investors were late to the party. Less than a fifth of respondents to a large online survey by Sina, a web portal, reported making any money from stocks this year.

For the government, the fall is damaging. Officials are seen to have promised the population a bull market, only to lure them into a bear trap. A flourishing of gallows...Continue reading

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The five key questions answered

YESTERDAY, we stated what questions George Osborne, the chancellor of the exchequer, needed to have answered when he today unveiled the first "purely-Conservative" budget in 19 years. But even though he has now been freed from the clutches of the Liberal Democrats, the Conservatives' coalition partners for the last five years, Mr Osborne seemed to steal his opponents' policies anyway. The introduction of a 8% extra tax on bank profits came straight from the Lib Dems' recent general-election manifesto, just as Mr Osborne's crackdown on non-doms tax breaks came from Labour's. And in a dramatic outflanking manueovre at the end of his budget speech, the chancellor promised to introduce a "National Living Wage" by 2020, £1 above the wage floor proposed by Labour in its recent manifesto. Mr Osborne described his proposals as harking back to "one nation Conservatism", the attempt by 19th-century prime minister Benjamin Disraeli to make the party appeal to the working classes:

From a one nation government, this is a one nation Budget that takes the necessary steps and follows a sensible path for...Continue reading

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Separation anxiety

Showing them the exit

GREECE'S back is to the wall; its time has run out; it is stuck between a rock and a hard place with other rocks waiting to fall on its collective head; etc. Europe's response to Greece's overwhelming "no" vote on July 5th came through late last night. There will be no concessions made to Greece. On the contrary, by early Friday morning Greece must submit to its creditors a new bail-out proposal, which contains more cuts and more significant reforms than those in the offer voters rejected last Sunday. If it does, Greece's European partners will decide on Sunday whether to accept or reject the plan. If they accept it, or something like it, new discussions on a long-run bail-out programme (lasting 2-3 years) can begin, and the European Central Bank (ECB) will presumably step in to prevent Greek banks from collapsing. If they reject it, the ECB will withdrawal all emergency liquidity aid to Greek banks, essentially forcing the Greek government to issue an alternative currency to prevent a massive collapse of the banking system. That's assuming Greece's troubled banks don't begin failing between now and Friday.

And so now the possible...Continue reading

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The great leap backward

THE great Charles Kindleberger described the pattern of how bubbles form and then burst in his book "Manias, Panics and Crashes". His model, which was linked to the work of the economist Hyman Minsky, saw the process as having five stages: displacement, boom, over-trading, revulsion and tranquillity. China looks like it is following the model pretty closely, having reached stage four already. The Shanghai Composite rose 130% between September 2014 and June 12 this year and has fallen 31% since then, with another 6% decline today.

To explain the model in more detail, the first stage (displacement) sees some economic change (a new narrative, if you like) that encourages investors to take an optimistic view of the asset class. Think of how the internet was a "new paradigm" in the late 1990s. Prices begin to rise; this draws more investors into the market, pushing prices higher (the boom stage). When prices are booming, even more money can be made by using leverage (options, buying stocks on margin, or buying houses with very little in the way of deposit). Rapid credit growth is common; this is the overtrading stage.  At some point, insiders take profits and prices start to fall; leveraged investors, and retail investors suckered in at the top of the market, panic and...Continue reading

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Two paradoxes

THE Greek crisis manages to combine elements of tragedy with farce. Everybody was waiting for the Greeks to present a new proposal to the Eurogroup of finance ministers today, only for initial reports to suggest they had no plan at all; it subsequently emerged that they resubmitted last week's proposal but in oral, not written, form. Here is the statement of the Eurogroup president, Jeroen Dijsselbloem

We welcomed our new Greek colleague and listened to his assessment of the situation after the "No" vote in Greece. There were no new proposals at this point from the Greek minister, and the first step will be that the Greek government will send the Eurogroup a new request; a new request letter for ESM support and as soon as this comes in - hopefully already tomorrow morning - we will have another Eurogroup conference call to formally start the process of dealing with this request. I will first ask the institutions to look at the financial situation in Greece, their finances and debt sustainability, and then the institutions will come back to us and we will see if we can formally start the negotiations. All this has to be done in a matter of days. We have very little time, as you are all aware. Thanks.

The "institutions" in this statement is another term for the hated troika. A running complaint of the EU is that the...Continue reading

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The economic consequences of Syriza

AFTER the party in Syntagma Square celebrating the landslide victory for the "no" campaign in Sunday's referendum, comes the hangover. They went wild "because we are tired of everything, from all the lies, from paying for the rich, and from years of austerity, especially for young", as one partying Athenian told us. To be fair, with youth unemployment rates of over 50%, many have had little to celebrate for a long time. They support the aggressive stance taken towards the country's lenders by Syriza and its leader, the Greek prime minister Alexis Tspiras, whose position in domestic politics has been strengthened as a result of the referendum.

But the fact remains, two days after the close of the polls, that Greece's real economy is in a mess. Capital controls, that were imposed after Mr Tsipras called the referendum on June 26th, forced the country's banks to close. Ordinary Greeks were limited to cash withdrawals from ATMs of just €60 ($67) a day, now...Continue reading

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A red flag

CHINA is certainly not the first country to try to prop up a falling stockmarket. The central banks of America, Europe and Japan have all shown form in buying shares after crashes and cutting interest rates to cheer up bloodied investors. But the circumstances and the manner of China’s intervention of the past ten days make it an outlier, worryingly so.

The trigger in China’s case is perplexing. Yes, the stockmarket is down a third over the past month, but that has simply taken it back to March levels; it is still up 80% over the last year. Growth, though slowing, has stabilised recently. Other asset markets are performing well. Property, long in the doldrums, is turning up. Money-market rates are low and steady, suggesting calm in the banking sector. The anticipated correction of over-valued stocks hardly seems cause for much anguish.

Yet China’s intervention has screamed of panic. Had...Continue reading

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Another manic Monday

ANOTHER Monday, another sell-off dominated by news from Greece. The decisive No vote in the Greek referendum came as a surprise to most investors, just as the decision to call a referendum had caught out the markets a week before. And the initial reaction was very similar.

Asian equity markets fell with the Hang Seng index down 5.2% in Hong Kong and the Topix index in Tokyo down 2%. Perhaps the Chinese authorities had the most reason to regret the Greek decision; they had provided liquidity to support a sliding market but saw an initial 8% gain in the Shanghai Composite almost entirely dissipate.

Early indications were that the DAX in Frankfurt might fall 3% at the market open and the FTSE 100 index in London 2%. Meanwhile, on the currency markets, the euro fell around 1% against the dollar and the yen. All these market reactions were similar to those seen the previous Monday.

The big test will come later in the morning when bond markets open; will Spanish and Italian markets sell off, seeing the spread (or excess rate) over German bond yields widen? That was the issue in 2011 and 2012, when it was feared that several countries might be forced out of the euro zone. This time round, the European Central Bank has the firepower (via quantitative easing) to buy the bonds of Spain and Italy and hold down the yields.

Although the risks of a Grexit...Continue reading

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When banks die

MARIANA doesn’t really care who wins today’s referendum. The young pharmacist, working in a relatively poor part of Athens, has more pressing problems: she has been running out of medication fast this week. Greece relies almost entirely on foreign imports for its pharmaceutical supplies. But since capital control imposed last Sunday brought the country’s banking system to a sudden halt, some suppliers have stopped delivering key medication because they cannot get paid. Foreign bank transfers have been banned by the Greek government (with some complicated exceptions which in no way suffice) and Greek credit is no longer accepted outside the country (as stranded Greek tourists found this week when their credit cards stopped working). As things stand, she has another week’s worth of insulin in stock for diabetics but will then have to start turning her patients away. “Do you know what that means?” she asks, trying to keep a proud face, “Do you know what insulin does?”

Hospital employees report similar problems. They have already had their last cash reserves taken from them, by the current government in April, to pay...Continue reading

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Throwing more money at homeowners

Payday!

IN APRIL, Britain's prime minister, David Cameron, who was then campaigning in the run up to the general election, said:

That wish to pass something on is about the most basic, human and natural instinct there is…That home that you have worked and saved for belongs to you and your family…And with the Conservatives, the tax man will not get his hands on it.

Despite being in government for the previous five years, Mr Cameron had been unable to cut inheritance tax. His coalition partners had blocked reform of the current system, of a 40% tax payable on assets worth over and above £325,000 ($507,000). But in Wednesday’s budget, Mr Cameron’s dreams may well come true, as the government will lift the middle classes from the shackles of the "death tax".

The Conservative manifesto revealed plans to create a new exemption for property, worth £175,000. It would be added to everyone’s tax-free allowance of £325,000, and the total would be transferable between couples. So under the new rules a couple with a house worth £1m would be able to pass it all, tax free to...Continue reading

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Where there's a will, there's a way to buy votes

BRITAIN'S government had a budget deficit of 5.2% of GDP in the last financial year and is aiming to eliminate that shortfall by 2018-2019; as a result, this week's Budget is expected to reveal a £12 billion crackdown on welfare spending. So this might seem an odd time to be announcing a cut in taxes. Or, at least, any tax breaks ought to be targeted on improving the country's appalling productivity record.

But no. The first Budget leak concerns a change to the inheritance tax laws to exempt domestic property worth less than £1m. The current limit, which covers the value of all estates (not just property), is £325,000. Estates above that are taxed at 40%. If two children, by accident of birth or geography, share a £1m estate, their cut, after tax, is £355,000 each (13 times the average annual salary). With many people now living into their 80s, the children will get this sum in their 50s, by which time they'll have had a chance to make decent provision for themselves.

This doesn't seem like the greatest...Continue reading

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Greek tragedy

ANALYSING a country’s debt sustainability sounds dry and nerdy. But the one for Greece prepared by the IMF in late June spells out the truly tragic consequences of the Greek electorate’s fateful decision in January to vote in a populist government led by Alexis Tsipras, the prime minister and leader of the radical-left Syriza party. Greece has gone from a position where both its economy and its underlying debt position were on the mend to one where it will need bucketfuls of further rescue finance from official creditors together with more debt relief, the IMF shows.

Worse, these calculations were before Mr Tsipras’s reckless decision to call a referendum on the terms of a further bail-out (and to campaign for rejecting it), which has inflicted yet more damage on the economy by closing down the banks as well as the negotiations with creditors and caused Greece to become the first developed country to default on the IMF (though the Fund more blandly calls this going into arrears). Even if voters on Sunday vote against Mr Tsipras and support the now withdrawn bail-out proposals made by the creditors the cost of clearing up the mess caused by the Syriza-dominated government has clearly risen dramatically.

Some commentators are now arguing that the Greek economy is simply an economic misfit that is unable to cope with being in the euro area. Certainly the...Continue reading

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Aren't markets manipulated on the way up?

CHINA'S stockmarket sell-off continues, with the Shanghai Composite sell-off reaching 10% in a week and approaching 30% from the peak. Somoene must be to blame and the authorities are investigating "market manipulation" with some short-selling accounts suspended. Earlier this week, measures were announced to prop up the market, including a proposal to allow traders to pledge their houses in margin accounts; one of the craziest ideas ever announced. What next? Pledge your kidneys on commodity futures?

In this, China follows a long, ignoble western tradition of blaming short-sellers when things go wrong. In fact, there was a sudden bubble in Chinese stock prices, fuelled by margin buying; prices are now returning to normal. Short-sellers can act to deflate bubbles by betting against the trend but their activities are often restricted and, much of the time, it is an unprofitable business; to survive, they need to make money in bear markets. Stopping them now means there will be fewer shorts around, and...Continue reading

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Is it working yet?

A Caribbean fuse

On the verge of a tumultuous descent

FOR more than two years Alejandro García Padilla, Puerto Rico’s governor, told the island’s creditors what they wanted to hear. The autonomous American territory, he said, had a “moral obligation” to service its $72 billion debt. It could not default on its “general-obligation” bonds, he added, because its constitution gives payments on them priority over all other expenses. He called attention to his record of tax increases and spending cuts. But after 30 months of reassurances, the governor reversed course this week and announced that he would seek to restructure Puerto Rico’s liabilities. “The public debt…is unpayable,” he declared on June 29th. “This isn’t about politics. It’s about math.”

Mr García Padilla demanded a multi-year moratorium on debt service. “The alternative”, he says, “would be a unilateral and unplanned non-payment of obligations.” Puerto Rican bond yields duly soared, and shares in the island’s banks, which own lots of the bonds, plunged.

Mr García Padilla’s announcement coincided with the release of a report by...Continue reading

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