A cheaper bill for recapitalising Greek banks

WHEN the third Greek bail-out was outlined in principle on July 13th after an extraordinarily fraught summit of euro-zone leaders, between €10 billion ($11 billion) and €25 billion out of the total sum of up to €86 billion of help was set aside for bank recapitalisation. Greek banks had been undermined for over half a year as deposits drained out of them, on worries about a possible exit from the euro once Syriza, a radical left party, won the election held in January 2015, culminating in their closure for three weeks in late June and July. They had been further hurt by the harm done to the economy and thus to their loans arising from Syriza’s ill-judged attempt to outbluff its official creditors. Even so, the notion that they would need as much as €25 billion to offset the damage and put them on a sound footing appeared unduly pessimistic.

However, just how much they actually required would not be known until the European Central Bank (ECB), since late 2014 the supervisor of the four big Greek banks—Alpha, Eurobank, National Bank of Greece and Piraeus—that dominate the economy, conducted a probe into their books together with a stress test examining how they would be affected if the economy turned even sourer than expected in 2015-17. Today the ECB has published the results. They reveal that the extra capital that will be needed is considerably less than...Continue reading

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The bias against saving

IT SEEMS hard these days to find anyone who has a good word for savings, or savers. There has been talk of a global "savings glut" for a decade now, and Ben Bernanke, one of the original proponents, still sees the concept as a "useful perspective" for understanding current economic conditions. Part of the idea of near-zero interest rates in the developed world is to discourage saving and to encourage borrowing. The perceived problem is that money saved is not money spent and thus the effect of saving is to reduce aggregate demand; by keeping a dollar in your pocket, you deprive a neighbour of employment. This is the "paradox of thrift"; if everyone tries to save too much, the economy will contract and the average person will be poorer, not richer.

This argument is extended to governments pursuing austerity policies, aiming to borrow less (or aim for an eventual surplus). To the extent that governments tax more on spend less, that will subtract demand from the economy; individuals and companies will have less money to spend. Again, the effect may be to slow the economy, causing tax receipts to be lower (and social benefits higher) than the government expects; the deficit...Continue reading

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The Bank of Japan keeps printing money at speed

INACTION may at first glance seem more timid than pulling out the monetary bazooka—but it took nerve for Haruhiko Kuroda to hold fire at the Bank of Japan’s monetary-policy meeting on October 30th. The central bank’s policy board, which Mr Kuroda effectively controls, voted 8-1 to maintain the existing programme of quantitative easing (QE, or printing money to buy bonds) at its current level of ¥80 trillion ($660 billion) a year. Given that Japan is officially back in mild deflation for the first time since 2013, when the BoJ began QE, it was a bold decision not to act. The BoJ’s mandate, after all, is to produce sustained inflation of 2%.

But Mr Kuroda kept his faith in gradually recovering growth, and in a range of measures which, he believes, suggest robust underlying price rises. In July the central bank began publishing a new index of inflation, known as “new core CPI”, which strips out both the price of energy and of fresh food. It shows prices rising at a healthy pace. In August the new gauge rose by 1.1%, and in September by 1.2% (compared to falls in core CPI of -0.1% for both months).

The BoJ duly highlighted the new index in its...Continue reading

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Winning converts

THERE is a proselytising feel to the credit-union movement. Believers talk of a “social mission”: to serve communities, not the false gods of the stockmarket. Today, this creed is winning more converts than ever before. Globally, the number of people in credit unions has doubled since 2000, from 108m to 217m. Savings are up by 130% in real terms (see chart).

Credit unions first appeared in 19th century Germany. Like banks, they took deposits and made loans. But, crucially, they were owned by their members, who shared a “common bond”, such as a profession or place of residence. Earnings were returned to members in the form of better interest rates.

In Europe, most of these early institutions evolved into co-operative networks, such as DZ Bank in Germany and Rabobank of the Netherlands, which are still owned by members but no longer serve a particular group. Elsewhere, the requirement for a common bond endures: Partners Federal Credit Union, for example, is open only to employees of Walt Disney and their families. Fully 39% of American adults belong to a credit union, up from 36% a decade ago—an increase of 14m. In...Continue reading

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The eyes have it

Noteworthy

THEY are, in the view of Paul Volcker, a former chairman of the Federal Reserve, the only useful financial innovation of recent decades. Better yet, cashpoints (ATMs, to Americans) are still evolving. This week Citibank unveiled one that can identify account-holders by scanning their irises, thus doing away with codes—and with cards, for that matter. Customers request funds via their phones before confirming their identity with a scan.

Nearly half a century since the cashpoint came into service, its origin is still disputed. Barclays, a British bank, often gets the credit for installing the first one, at its Enfield branch in 1967. Its future is just as uncertain: those who think plastic and, increasingly, mobile phones are displacing cash one transaction at a time see little need for either paper money or the machines that dispense it.

In fact, cashpoints are still multiplying. Nearly 200,000 were installed in 2014, taking the global total to over 3m, says RBRLondon, a British consultancy. Much of the rise is in emerging markets; Europe and America are barely growing. Diebold and NCR, both American...Continue reading

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Does not compute

GIVEN the many mistakes that human investors are prone to—selling after a market tumble, trading too often, believing they can beat the stockmarket—dealing with money is perhaps best left to computers. That is the premise behind a host of firms selling computer-generated financial advice, which assist savers tired of paying for pricey human counsel. The low cost of these “robo-advisers” had helped them grow rapidly, to the horror of conventional money-managers. But growth in assets under management (AUM) at the biggest outfits has sagged recently, and with it the upstarts’ prospects.

It used to be only those with hundreds of thousands of dollars to invest, if not millions, who could afford advice about where to put their money. Humans charge 1-3% of their clients’ portfolios every year, simply to rebalance among asset classes every so often and do clever things to minimise taxes. Robo-advisers, led by Wealthfront, a Californian outfit, and Betterment, based in New York, do much the same, but for a mere 0.25% or so a year.

Largely because they squash fees, robo-services do a good job for anyone bar the very rich...Continue reading

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Letting go

There are strings attached

YI GANG, a deputy governor of China’s central bank, mused this week about shopping in Moscow in the 1980s. In the streets around Red Square, he said, visitors could find many big shops with identical low-quality goods. But among the drab displays were a few Yugoslav and Polish stores with better selections. These countries had experimented with competition earlier than the Soviet Union and the results were visible on the shelves of their outposts in Moscow.

Banks, Mr Yi suggested, are no different from stores. If governments control them too tightly—as China has long done by dictating the interest rates they pay and charge—banks do not compete with each other and thus fail to develop the range of financial products their customers want and need. So on October 23rd, at the same time as cutting interest rates to support stuttering growth, the People’s Bank of China (PBOC) announced that it was setting banks free. They can now offer depositors whatever interest they like, at least in theory. That removes the last formal restriction on rates.

China has been slowly liberalising...Continue reading

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Take it easy

THIS was supposed to be the year when monetary policy started to get back to normal. Seven years after Lehman Brothers collapsed, central banks were expected to edge away from a policy of near-zero interest rates. But now, with the year almost over, the Federal Reserve has yet to push up rates while other rich-world central banks are focused more on easing than on tightening.

Sweden’s Riksbank extended its quantitative easing (QE) programme on October 28th. Mario Draghi, the president of the European Central Bank, has indicated that further easing may come in December, probably by adjusting the pace, scale or type of asset purchases in its QE regime. More than two-fifths of economists polled by Bloomberg forecast that the Bank of Japan would pick up the pace of its monetary easing on October 30th, after The Economist went to press. Even if policy is kept unchanged, the bank plans to expand the money supply at an annual rate of ¥80 trillion ($664 billion).

The picture in the emerging markets is more mixed. Capital Economics calculates that, on balance, slightly more emerging...Continue reading

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Broken lever

BRAZIL does not look like an economy on the verge of overheating. The IMF expects it to shrink by 3% this year, and 1% next. (The country has not suffered two straight years of contraction since 1930-31.) Fully 1.2m jobs vanished in the year to September; unemployment has reached 7.6%, up from 4.9% a year ago. Those still in work are finding it harder to make ends meet: real (ie, adjusted for inflation) wages are down 4.3% year-on-year. Despite the weak economy, inflation is nudging double digits. The central bank recently conceded that it will miss its 4.5% inflation target next year. Markets don’t expect it to be met before 2019.

If fast-rising prices are simply a passing effect of the real’s recent fall, which has pushed up the cost of imported goods, then they are not too troubling. But some economists have a more alarming explanation: that Brazil’s budgetary woes are so extreme that they have undermined the central bank’s power to fight inflation—a phenomenon known as fiscal dominance.

The immediate causes of Brazil’s troubles are external: the weak world economy, and China’s faltering appetite for oil and iron ore in...Continue reading

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Keeping up with the Karumes

“WHEN you open the window, both fresh air and flies come in,” said Deng Xiaoping, describing the good and bad consequences of the opening of China’s economy. Most people see economic growth and rising incomes as desirable, but they have their disadvantages. Families break apart, as young people move to the cities. Jobs become more insecure if the labour market is liberalised. Rising inequality may upset even those who are becoming richer. Small wonder, perhaps, that the satisfaction ordinary Chinese expressed with their lot fell at the start of the economic boom sparked by Deng’s reforms, before rising again as growth accelerated. So, at any rate, concluded a study published in 2012 by Richard Easterlin of the University of Southern California and colleagues.

Mr Easterlin is best known for a hotly contested paper published in 1974, which argued that rising incomes do not make people happier. Ever since, in spite of the obvious benefits, economists have debated whether getting richer is all...Continue reading

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Lenders of first resort

EAT, a British sandwich chain, was looking for £13m ($20m) last year to tart up its stores. It knew conventional banks would be hesitant to provide such a loan, given its existing debt. Worse, it would soon need to borrow more, to fund a rapid expansion. So it turned to Ardian, an investment firm, which lent it £40m, not just for the refurbishments, but also to refinance its existing debt and to open 90 new stores.

Although Ardian is charging a heady 15% interest rate, says Strahan Wilson of EAT, it is much less bureaucratic and more flexible than a bank. That has allowed EAT to expand 12-18 months faster than it otherwise could have. What is more, he adds, “Now that we’ve established this relationship with Ardian, if we need more capital we need only ask.”

The easiest way for institutional investors to lend to companies is to buy bonds. Many also buy loans originated by banks and repackaged into securities, or invest in funds that purchase non-performing loans from banks. Before the financial crisis American funds began investing in private debt, as opposed to the sort available publicly on the bond markets. This...Continue reading

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The reason for low wages in Britain that no one mentions

HAVING returned earlier this year from a stint in the Washington office, your correspondent has been struck by one of the big differences between American and British economic discourse. In both countries since the crisis, real wage growth has been pretty measly. There are many reasons for this, which are detailed here and here. One putative reason for low wage growth, argue many American economists, is that the number of American workers who are "part-time for economic reasons" (PTER) is too high. Someone is PTER if they want to work full-time, but can only find a part-time job. Some economists in America are obsessed with the PTER. But in Britain barely anyone mentions it. 

So what's the evidence that a high PTER rate can hold down wages? Since 2008 the number of Americans who are PTER has doubled. A Chicago Fed paper finds that a 1% increase in the PTER rate is associated with a 0.4% fall in real wage growth, even after controlling for the effects of other measures of unemployment. The impact is especially strong for worse-off workers. David...Continue reading

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Accounting for profit

COMPANY bosses have many ways to massage their firms' accounts. Many are legal, but can attract the wrath of investors if discovered

Britain registers quarterly GDP growth of 0.5%

GEORGE OSBORNE, Britain’s chancellor of the exchequer, has long crowed that the economy he presides over is one of the fastest-growing in the rich world. But GDP figures, published today, have given some cause for concern. They show that in the third quarter Britain’s economy grew by just 0.5% (2% in annualised terms), down from 0.9% last year.

The slowdown may be due to the strong pound. The manufacturing sector, which makes up about one-tenth of GDP, is really suffering: it has probably been in recession for the past nine months. Even services, which are not so affected by a dear currency, are not doing so well: services output increased by just 0.7%.

Growth of 0.5% probably pushes back the timing of the first interest-rate rise since 2007. In a speech over the summer, Mark Carney, the governor of the Bank of England, said that at a quarterly growth rate of 0.6% the remaining "slack" in the economy would soon be squeezed out. Today's...Continue reading

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Rate cut shows that even China's government doesn't believe its own data

IF GROWTH is so strong, why did the Chinese central bank feel the need to cut interest rates again? It is only reasonable to ask this after the People's Bank of China cut rates on October 23rd, the sixth time in a year, in the same week that the government said the economy grew 6.9% year-on-year in the third quarter, ahead of market expectations. The answer lies in the question: growth is not as strong as official data suggest, and the government knows that.

Nominal growth has slowed to 6.2%, the weakest since 1999, translating directly into weak cash flow for companies that already face heavy debt burdens. The industrial sector has been especially hard hit, with the country's northern rustbelt on the brink of a recession. And more than a percentage point of overall growth this year has stemmed from activity in the financial sector, a contribution that will fall away quickly in the wake of this summer's stockmarket collapse. Many analysts reckon real growth is closer to 5-6%, well shy of the government's 7% target. More than three years' worth of producer price deflation tilt risks to the downside.

If that all seems bleak, it is important to put the rate cut in the proper context. Paired with a reduction of bank's reserve requirements, and coming unscheduled on the evening of October 23rd, it might have appeared to be a surprise move. But all Chinese monetary...Continue reading

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Does the gig economy revolutionise the world of work, or it is a storm in a teacup?

YOU often hear that the traditional employee job is on its way out. It is a big topic of conversation across the pond, but the issue is also generating heat here in Britain. Whether it’s selling your crafts on Etsy or Ebay, offering taxi services through Uber (perhaps renting out your car on easyCar Club the rest of the time) or accommodating tourists in your spare room via Airbnb (perhaps also commuters in your driveway via JustPark), the world of work appears to be changing. This is the so-called “gig economy”—where incomes are earned or supplemented by trading individual goods and services online.

But turn to official data and evidence for this revolution is hard to find. In both America and Britain, the share of workers with permanent jobs has not changed much in recent decades; nor has multiple job-holding. The share of workers who are self-employed is actually falling in...Continue reading

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Cracking the vault

A FEW dollars spent at Starbucks, a monthly mortgage payment, a Netflix fee, Starbucks again: bank-account statements are not exactly exciting stuff. But there is gold hidden in this by-product of our financial lives, or so many budding technology firms believe. A host of startups crave access to the data and are pitching services, from budgeting apps to cheaper loans, to those who open their books to them. Yet banks worry that co-operating is the first step towards losing the lucrative grip they have on their customers.

Squeezing insights out of a bank statement is hardly at the cutting edge of big data. Years of salary payments confirm stable employment; bounced cheques hint at carelessness; regular green fees suggest an interest in golf. Banks implicitly use balance and income information when making loan decisions. That has typically given them a leg up over such rivals as consumer-lending companies, which have to base offers of credit on less detailed information.

Add the fact that switching bank accounts is seen as a chore, and incumbents are in effect shielded from competition. But three things have changed in recent years. The first is...Continue reading

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Under threat

It could get messy after Malta

FOR much of the past five or so years, the euro area has been suffering from a toxic combination of economic, financial and political ailments, making it the main source of fragility in the global economy. That honour has now passed to emerging markets. Yet their difficulties are likely to impede what has in any case been an insipid recovery, making it harder for the euro zone to clamber out of deflation.

The European Central Bank (ECB) was not expected to announce extra monetary stimulus when its governing council met in Malta on October 22nd (after The Economist had gone to press). But many economists think it will act within a few months, maybe as early as December. The ECB’s most likely response would be to extend its programme of quantitative easing (QE)—creating money to buy mainly public assets—beyond September 2016, when it is currently scheduled to end.

Until clouds gathered over China and emerging markets over the summer, the economic weather had appeared to be brightening. The euro zone’s output grew at an average rate of 0.4% a quarter...Continue reading

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Deleveraging delayed

IN MOST respects, double-digit growth is a relic of the past for China. In the third quarter the economy grew by just 6.9% year-on-year according to official data, and probably by a percentage point or two less in reality. Yet bank loans increased by 15.4% in the third quarter compared with the same period in 2014. Having released a torrent of credit to buoy the economy during the financial crisis, China was supposed to have started deleveraging by now. Instead, banks are continuing to pump debt into the economy, while the authorities, apparently worried about the damage a contraction in credit might do, coax them on.

Growth in credit has at least slowed in recent years. A broad measure is “total social financing” (TSF), which encompasses bank loans, corporate bonds and a range of shadowy loan-like products. TSF growth soared to 35% in 2009 when the government called on banks to open the taps and support the then-faltering economy. It has since decelerated: it rose by 13% in the third quarter from a year earlier. The problem, though, is that nominal GDP growth has fallen much lower, to 6.2%.

This means that China’s...Continue reading

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Dwindling dollars

DESPITE the government’s best efforts, the rattle of money-counting machines can again be heard in Egypt’s back alleys, where traders sell dollars at a premium to the official rate. The government devalued the pound to match the black-market price earlier in the year, thereby wiping out the illicit trade. But demand for greenbacks is outpacing supply once more, leaving the government short of cash and putting the traders back in business.

Egypt’s foreign reserves fell to $16.4 billion in September, enough to cover about three months of imports—the minimum the IMF considers advisable. But Egypt is not attracting many dollars at the moment. Years of political turmoil have hit tourism and foreign direct investment (FDI), which amounted to $6.4 billion in the last fiscal year (running from July until June). The government hopes for $10 billion in FDI this year—wishful thinking, analysts say.

At the same time, demand for dollars is rising. Egypt has run annual trade deficits for over a decade. Lately they have grown. Although the bill for oil has come down along with the price, Egypt still imported $12.3 billion-worth last year. It...Continue reading

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Funny numbers

IN THE coming week government statisticians in America and Britain will release their initial estimates of economic growth for the third quarter of the year. Markets will leap or sag, depending on the news. But investors are wrong to see the releases as a moment of statistical insight; they are merely the first round in a high-stakes game of “pin the tail on the donkey”.

Take January-March last year in America, when an icy winter kept shoppers at home. The intial estimate of GDP growth from the Bureau of Economic Analysis (BEA)—an annualised gain of 0.1%—was disappointing but not disastrous. The second estimate—a decline of 1%—made things looks bleaker. By the time the third and final estimate came in, at -2.9%, it was clear the quarter had been the worst since the depths of the financial crisis (see chart).

Statistics are revised for years, but their relevance soon fades. The BEA recently reviewed its data for 2012-14 and discovered that the American economy had grown more slowly than it had previously thought. At a stroke it removed $70 billion, equivalent to Sri Lanka’s entire output, from its figures. No one...Continue reading

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Putting Goldilocks to work

“ALWAYS pack a sweater,” one local businessman advises visitors to Singapore, “because the best thing about our weather is the air conditioning.” Singapore’s first prime minister, Lee Kuan Yew, would have agreed—he considered the air conditioner the greatest invention of the 20th century. Another Singaporean politician once remarked that if it had not been for artificial cooling, local workers would be “sitting under coconut trees” rather than labouring away in high-tech factories.

Singapore is rich enough to keep its indoor spaces cool. Neighbouring Indonesia is not. Economists used to think that rich countries’ greater cooling power would enable them to limit the damage to their economies from the higher temperatures brought by global warming. A cross-country comparison published in 2012 found that higher temperatures did not seem to sap growth in rich countries, but did in poor ones. It is hard to compare the impact of temperature on growth in hot and cold countries directly, since there are too many variables to control for. Instead, the study compared growth...Continue reading

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The European Central Bank prepares to extend its quantitative-easing programme in December

AS EXPECTED, the European Central Bank (ECB) did not act to further ease its already extraordinarily loose monetary stance when its governing council met today in Valletta, the capital of Malta, the 19-strong currency club’s smallest member. But the ECB gave a broad hint that it was preparing to do so when the council convenes for its final monetary-policy meeting of the year, on December 3rd at its home in Frankfurt.

Speaking after today’s meeting, Mario Draghi, the head of the ECB, highlighted “the strength and persistence” of the factors that were currently slowing inflation from returning to the central bank’s goal of nearly 2%. That called for “thorough analysis” and a re-examination of the degree of monetary-policy stimulus (“accommodation”) when the council meets in December, at which point new staff forecasts would also be available. The decision in Malta was not one to “wait and see” but rather to “work and assess”, he added.

The ECB is already delivering a hefty stimulus to the euro area, following decisions taken between June 2014 and early 2015. It has introduced a negative interest rate, of minus 0.2%, which is charged on deposits left by banks with the ECB. It has also been providing ultra-cheap long-term funding to banks provided that they improve their lending record to the private sector. And, most important of...Continue reading

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State raid

SELDOM do governments try to turn away extra tax. But that is just what Luxembourg and the Netherlands did this week, after the European Commission ruled that subsidiaries of multinationals in the two countries were paying €20m-30m ($23m-34m) too little. The commission argued that the favourable tax treatment the firms were receiving was tantamount to a government subsidy, and thus illegal under European rules on “state aid”. The two countries, worried that the decision will deter other foreign firms from investing, demurred.

The ruling marks an important advance in the battle against tax avoidance by jurisdiction-shopping multinationals. The commission took issue with an advance ruling the tax authorities in the Netherlands had provided to a subsidiary of Starbucks, a coffee chain, confirming that its tax planning in the country was sound, and with a similar assurance Luxembourg had given a unit of Fiat Chrysler, a carmaker (whose chairman, John Elkann, sits on the board of The Economist’s parent company). Such “comfort letters” are fine in principle, the commission said, but in these two instances had been used to provide preferential treatment.

The commission suggested that the two countries had connived in the two firms’ manipulation of transfer prices, the notional amounts for which different subsidiaries of the...Continue reading

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Out of fashion

LIKE hemlines and hairstyles, emerging markets swing in and out of fashion. A burst of enthusiasm in the late 1980s was followed by the financial crises of the late 1990s. In the first decade of the 21st century, they were all the rage again, and the term BRIC (for Brazil, Russia, India and China) was coined. When the economies of the rich world swooned in 2008, emerging markets seemed to be the best hope for the future.

But the past few years have seen their popularity wane once more (see chart). The change in mood is understandable. The IMF has forecast that 2015 will be the fifth successive year in which economic growth in emerging markets has slowed. Two of the BRICs—Brazil and Russia—are in recession. Many are uncertain whether the Chinese authorities can engineer a soft landing for their economy, as it slows from the furious growth of previous decades. Emerging markets’ advantage over rich countries, in terms of a faster growth rate, will be the smallest this year since 2001, according to IMF forecasts.

It is easier these days to find pessimists than optimists. Andrew Haldane, the Bank of England’s chief economist, sees emerging...Continue reading

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A housing boom puts young people off studying

HOUSING bubbles have a lot to answer for. The bursting of the US ‘subprime’ bubble in 2007-2008 triggered financial panic. Soaring house prices have been blamed for widening inequality. A new paper, from researchers at Chicago and Northwestern universities, adds another item to the charge sheet: a housing boom might stop your kids going to university.

At first glance, this seems surprising. For homeowning families, rising house prices should enable them to borrow more against the value of their house, helping to pay fees for university-going offspring. But tuition is not the only cost of further study. Those extra years in the library (or the bar) is time that could have been spent in a job. When they can get a decent wage without going to university, some young people will choose work over lectures.

The authors argue that this is exactly the choice that many young Americans made in the early noughties. A housing boom pushed up wages in related industries, like construction and real estate. Wages may also have increased in low-skilled retail and service jobs, as upbeat homeowners spent their...Continue reading

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The fintech edge

WILL Silicon Valley bring down the banks? From payments to remittances, startups are disrupting the world of financial services and luring young talent away from banks

Official data say China's economy is barely slowing. Are they believable?

FOR most countries, delivering resilient growth when investors had expected an abrupt slowdown would be impressive. China is different. The announcement that its economy grew 6.9% in the third quarter, just below the second quarter’s 7% pace, is more grist for the already-brimming mill of scepticism about its data. Such are the doubts about Chinese figures that it is difficult to write a straightforward analysis of them without riddling it with caveats about what is and is not credible. So it is sensible to look at the latest numbers in two parts: what the government reported and what ought to be believed.

The official data are indeed impressive, not least because they cover a quarter during which concerns about China's economy were so widespread. July began with the Continue reading

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Collateral damage

WHEN the financial system teetered on the brink of collapse in 2008, the biggest problem was a lack of liquidity. Banks were unable to refinance themselves in the short-term debt markets. Central banks had to step in on a massive scale to offer support. Calm was eventually restored, but not without enormous economic damage.

But has the underlying problem of liquidity gone away? A research note from Michael Howell of Crossborder Capital argues that, in the modern financial system, central banks are no longer the only, or even the main, providers of liquidity. Instead, the system looks a lot like that of the Victorian era, with banks dependent on the wholesale markets for funding. Back then, the trade bill was the key asset for bank financing; now it is the mysteriously named “repo” market.

A repurchase, or repo, agreement involves a borrower selling a bunch of securities for cash and agreeing to buy them back later for a higher price. The difference between the two prices represents the interest payment. The market is huge: a survey by the International Capital Market Association estimated that, in June this year, European...Continue reading

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Transfer window

WHEN Abdirashid Duale, the chief executive of Dahabshiil, Africa’s largest money-transfer business, visits Hargeisa, the capital of Somaliland, a breakaway province of Somalia, he cannot walk down the street easily. It is not that his security is under threat. It is that with every step, another businessman stops to greet him. Strolling from the new offices of Dahabshiil’s bank to the headquarters of its money-transfer operation, a distance of perhaps a couple of hundred metres, takes the best part of half an hour.

On arrival, it becomes clear why. In Hargeisa, Dahabshiil, which means “gold smelter” in Somali, is the local economy’s nerve centre. In its money-transfer hub, huge amounts trade over the counter; at one point, your correspondent is handed $200,000 in cash to hold.

In its new bank, every floor is air-conditioned—this in a state where electricity is generated by diesel and costs roughly ten times what it does in the West. Every street trader proudly displays his Dahab account number—the mobile-money arm of the firm’s telecoms network. At least half of Somaliland’s annual income flows through the firm, reckons Mr...Continue reading

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The unstimulating stimulus

Not pointing in the right direction

IN EARLY September, Joko Widodo, Indonesia’s president, promised a “massive deregulation” aimed at attracting foreign investment. Outsiders were thrilled. Mr Joko’s predecessor, Susilo Bambang Yudhoyono, left the country’s business climate choking on what Adam Schwarz, a consultant, calls “a regulatory miasma” that strongly discouraged investment, whereas Mr Joko, best known as Jokowi, has openly courted foreign capital.

Over the past six weeks his administration has unveiled a series of deregulatory measures. On September 9th the government made it easier for foreigners to open bank accounts, struck down import restrictions on goods such as tyres and cosmetics that were designed to protect local industries, and eliminated some onerous and silly business regulations. No longer, for instance, must Indonesian-language labels be affixed to imported goods before they arrive; now they can be printed in Indonesia and attached before public circulation.

A couple of weeks later Jokowi cut the time required to process some investment permits, and cut taxes for exporters who...Continue reading

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Banking and nothingness

YOU wait ages for a European bank to send a clear signal on its future strategy and then it gives two in as many days—saying seemingly opposite things. On October 11th the chairman of Barclays hinted its investment-banking unit might be flogged to a rival for want of scale. Investors intrigued by the prospect of a simpler Barclays focused on dull-but-reliable retail banking had but a few hours to ponder the prospect. By the next day reports emerged that the same chairman had plumped for a former J.P. Morgan investment banker, Jes Staley, to be the bank’s next boss.

Seven years after the height of the financial crisis, Europe’s large banks still behave as if they are in the thick of the storm. Plans for radical restructurings are shelved before they are even implemented, often accompanied by management defenestrations—Barclays is one of four big European banks with new leaders. And they have dithered on the most basic questions, for example on how much capital they need or whether to scale back misfiring investment-banking arms.

European indecisiveness stands in sharp contrast to America’s large banks, which restructured more quickly....Continue reading

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Pegs under pressure

SINKING might be a better description than floating when it comes to many of the world’s currencies. A plunge in commodity prices has hit producers of natural resources hard. The weak oil price, in particular, has undermined the current-account position of oil exporters. The Economist Intelligence Unit (EIU), our sister company, expects the Norwegian current account to have deteriorated by 3.3 percentage points between 2013 and 2015. Many currencies have followed the oil price down. Since June 2014, the Norwegian krone has declined by 26%, the Brazilian real by 40% and the Russian rouble by 45% against the greenback (see chart).

Those who believe that competitive exchange rates boost economic growth should be pleased. But not every country is willing to let its currency freely adjust. The IMF’s annual review of currency regimes, published this month, revealed that at the beginning of 2015 only 35% of member countries let their currencies float, and only 16% intervened rarely enough for the IMF to classify them as “free floating”. The rest, from Hong Kong’s iron-clad peg to the dollar to the stumbling Nigerian naira, are...Continue reading

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How to build more?

IN A LEADER published today the Financial Times offers a rather gloomy assessment of housebuilding in Britain. To keep up with demand, Britain needs to build well over 200,000 dwellings each year. But typically it manages about half that. This is largely down to the intransigence of local councils, many of whom oppose housebuilding because it will irritate local residents. There are many potential solutions to this problem. I think the FT ignores the best one.

The article argues that central government must force through planning applications (as the current government has promised to do). David Cameron, the prime minister, "should be prepared if necessary to crack the whip", the leader argues. George Osborne, the chancellor, has indeed promised to penalise councils that fail to make planning decisions "on time" (which probably means within 13 weeks). The government also promises to cajole local councils into building high-density housing. 

But how effective will all this really be? Local councils' spending per person has already been cut by 20% in real terms in the last five years, with more cuts to come. The government is hardly going to make matters even worse by whacking on huge fines too. A similar problem will...Continue reading

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Reality cheque

AT 6:10am on October 12th, Angus Deaton, an economist at Princeton University on America’s east coast, picked up the phone to a Swedish voice. The voice was so concerned to persuade him that this wasn’t a prank call that he started to worry it was precisely that. No need. The Nobel committee had awarded him the Sveriges Riksbank Prize in Economic Sciences, “for his analysis of consumption, poverty, and welfare”. The prize celebrated a whole career, in which he has used data to overturn sloppy assumptions, reimagined how we measure the world, and intertwined microeconomics and macroeconomics. He even has a paradox named after him.

The 69-year-old professor was working on issues of poverty and inequality long before the financial crisis made them voguish. As a designer of household surveys, he helped transform development economics from its sorry state in the 1980s, when it was stuck in a rut of murky data and unverifiable theories. He has explored how much more the poor eat when they get more income, how well insured they are when their earnings shrivel and, more broadly, the relationship between health and income growth. His thinking on the topic of inequality is typically textured. He frames it...Continue reading

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Balancing budgets

BRITAIN'S parliament passed the "charter for budget responsibility" in a move that was seen as a tactical triumph for George Osborne, the finance minister, largely because it led to a u-turn in opposition Labour policy. The charter is designed to achieve a budget surplus in "normal times", with an immediate aim of the 2019-2020 fiscal year.

The use of the "normal times" phrase is designed to get round the usual objection to balanced budget amendments; that they prevent governments from using fiscal stimulus to revive the economy in a recession. The charter says that

These targets apply unless and until the Office for Budget Responsibility (OBR) assess, as part of their economic and fiscal forecast, that there is a significant negative shock to the UK. A significant negative shock is defined as real GDP growth of less than 1% on a rolling 4-quarter-on-4-quarter basis. If the OBR assess that a significant negative shock: occurred in the most recent 4 quarter period; is occurring at the time the assessment is being made; or will occur during the forecast period then: if the normal times surplus rule in 3.2 is in force, the target for a surplus each year...Continue reading

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The GDP conundrum

GROSS DOMESTIC PRODUCT (GDP) is the most closely watched economic indicator but is it fit for purpose?

The autumn meetings of the IMF and World Bank conclude with a chill

AS LIMA bid farewell to the annual jamboree of the International Monetary Fund and World Bank on October 11th the leaden sky that greeted the global economy’s great and good earlier in the week had cleared. But among the 12,000 delegates, policymakers, their retinues, academics and do-gooders departing the Peruvian capital, the mood was distinctly unsunny. Clouds will continue to hang over the global economy in the foreseeable future, all agreed; anxieties over China’s slowdown, weakening emerging markets, and the effects of the Federal Reserve’s have done nothing to dispel them.

At least, quipped those optimistically inclined, sentiment on October 11th was no worse than on October 6th, when the IMF cut its forecast for global growth this year to 3.1% and to 3.6% next. Indeed, the meetings that took place in Lima brought little new information. There were the usual platitudes about the need for structural reforms. There were expressions of "deep disappointment" over the American Congress’s sad refusal to ratify the 2010 reform of the global financial institutions to allow greater say to emerging economies.

Christine Lagarde, the IMF’s boss, presented a new...Continue reading

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Why air pollution is sometimes good news for 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 will be publishing guest columns by experts on the economic issues involved. Here, Stefan Ambec of the Toulouse School of Economics and Jessica Coria of the University of Gothenburg argue that efforts to reduce greenhouse-gas emissions and efforts to reduce other pollutants are not always complementary.

BURNING fossil fuels for heating, generating electricity or for transport does not simply produce carbon-dioxide emissions, but also other greenhouse gases (GHG), such as particulate matter (PM), sulphur dioxide (SO2), nitrogen oxides (NOx) and volatile organic compounds (VOC). They are harmful to human health and damage the environment. Local air pollution is a big concern in many countries, and measures to reduce carbon-dioxide emissions have been implemented to combat this. China has recently issued a national five-year action plan to cut air pollution, by reducing the use of coal in generating electricity, and by encouraging investment in wind power and...Continue reading

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The Nobel prize goes to Angus Deaton

ANGUS DEATON has been named the winner of this year's Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel. Mr Deaton is a Britain-born economist (Scotland, to be specific), who earned his PhD in economics at Cambridge University before moving to America; he is now at Princeton University. Mr Deaton is best known for his work on consumption theory, welfare and inequality.

The committee awarded him the honour “for his analysis of consumption, poverty, and welfare”. His work “linking detailed individual choices and aggregate outcomes” was praised for having helped to “transform the fields of microeconomics, macroeconomics, and development economics”. According to the Royal Swedish Academy of Sciences’s website, his work has helped to provide answers for three big questions in economics:

How do consumers distribute their spending among different goods? Answering this question is not only necessary for explaining and forecasting actual consumption patterns, but also...Continue reading

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TPP, llamas and quantitative frightening

TAKE at look at this week's print edition, in which we look at a variety of economic issues including: 

The Trans-Pacific Partnership: Every silver lining has a cloud (Leaders)

Latin America's economies: Grey days (Finance)

And don't forget to take a look at this week's Free Exchange column, which looks at quantitative frightening.

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No TEE, thank you

HOW best to encourage people to save for their old age? Governments face many trade-offs when dealing with this issue. In the long run, they want to reduce the dependence of citizens upon the state; in the short term, they may prefer workers to consume rather than save, in order to manage the economic cycle.

Another trade-off is between cost and simplicity. Governments offer tax breaks as an incentive to save for retirement, although it’s not clear whether such inducements increase the total amount of saving or merely cause workers to reallocate their savings to tax-favoured vehicles.

The greatest gains from such incentives tend to accrue to the better-off—they have more money to save, after all. But that makes pension tax breaks a tempting target when governments are trying to balance their budgets. Britain introduced a “simple” regime for pensions tax in 2006 and successive governments have been fiddling with the rules ever since. To control the cost, governments have introduced lifetime caps on pension pots and annual limits on contributions; to encourage saving, they have brought in auto-enrolment for pension schemes and investment...Continue reading

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Oily food

THE prices of staple crops, like those of other commodities, are falling fast. In August they reached their lowest level for eight years, down by over 41% from their peak in 2011. That is not because people are eating less, or because farmers have become much more productive. Nor is it because of a slowdown in Chinese growth, in contrast to many other commodities. Whether going down or up, food prices are largely driven by other factors, among them oil prices and government policy.

Oil first. Cheap fuel means cheaper food. Natural gas, whose price is tied to that of oil, is used for producing fertiliser; other hydrocarbons are used for machinery and transport. Roughly 20% of the cost of producing grain comes from oil, according to Kona Haque at ED&F Man, an agricultural-commodities merchant. Cheap oil also means less demand for biofuels, which in turn means cheaper food because of reduced appetite for grains used in biofuels, particularly maize (corn). Biofuel demand, once an insignificant feature of food markets, now has a sizeable impact: from 2000 to 2011, America went from using 6% of its corn crop (the world’s biggest) to make ethanol, to 40%.

Derek...Continue reading

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Journalist wanted

Journalist wanted: The Economist is looking for a journalist to write about banking, based in London. First-rate analytical and writing skills are essential. Competitive salary. Applicants should send a CV and an original 600-word article, in the style of The Economist, to bankingjob@economist.com by October 30th.

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The pause before fast-forward

THE recent slowdown in American health spending has attracted much attention. Some have dared to hope that a decades-long trend has been broken, in part because of cost-saving measures within reforms introduced by Barack Obama in 2010. But a new study of international health spending and financing published by the OECD, an intergovernmental think-tank, shows that wider influences must be at work, since America is not alone in experiencing such a deceleration over the past few years. That in turn suggests that medical spending is merely pausing before resuming its upward trajectory.

Between 2000 and 2009 real health spending per person grew at an annual rate of 4% on average across the 30 or so mainly rich countries that belong to the OECD. Since 2009 the rate has slackened to just 0.3% a year (see chart). Despite the slowdown in America, spending growth there has been higher than the OECD average. In several countries, health spending per person has fallen, most markedly in the periphery of the euro area.

The generalised nature of the slowdown in health spending indicates that it occurred mainly in response to the economic...Continue reading

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Two’s a crowd

COULD asset managers pose a systemic risk to the economy? Some regulators, looking for the cause of the next crisis, worry that they might, particularly at times when markets are already volatile and liquidity ebbing. Fund-management firms, understandably, take the opposite view: unlike banks, they do not take risks with their own money and do not have much debt.

A new paper* suggests that big fund managers could have an outsize impact on the market. It does so by examining the impact of the merger of two asset managers in 2009: BlackRock and Barclays Global Investors (BGI). The deal created the biggest fund-management group in the world, looking after $2.7 trillion of assets at the time. Between them BlackRock and BGI had stakes in some 60% of listed global firms, by value.

The authors focus on the reactions of other investors to the merger. In theory, they could have piled into the shares jointly owned by BlackRock and BGI, viewing their stakes as a seal of approval from the world’s largest investor. But they did the opposite, rushing out of the stocks when the deal went through. The jointly owned shares underperformed: for those stocks where the increase in BlackRock ownership due to the merger was unusually high, risk-adjusted returns fell by 1% per month over the three months it took to consummate the deal.

The motivation for such sales, the...Continue reading

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Friends without benefits

EVEN a non-decision by the Supreme Court can cause waves. On October 5th, as part of its routine disclosure of upcoming cases, the Court declined to take up a petition related to insider trading. The Justice Department had wanted it to overturn an appeals court’s decision in December to throw out the conviction of two hedge-fund managers. That means the decision will now stand, setting an important legal precedent.

This is not only a blow to Preet Bharara, the federal prosecutor with jurisdiction over Wall Street who had brought the original case, but also an attack on an aggressive and—up to that point—successful approach to insider trading. Since his appointment in 2009 as the US Attorney for the Southern District of New York, Mr Bharara’s office has had a remarkable record in insider-trading cases: 87 findings of guilt, and only one acquittal.

This record is all the more impressive given the stature, connections and legal resources of the defendants. Among the most prominent were Rajat Gupta, who sat on the boards of Goldman Sachs and Procter & Gamble, and once led McKinsey, a consultancy; Raj Rajaratnam, head of Galleon, once...Continue reading

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Grey days

It used to gallop

IN 2012, when Latin America was enjoying a burst of rapid economic growth and social progress, the IMF and World Bank decided to hold this year’s annual meeting in the region—something they had not done since 1967. They chose Lima, the capital of Peru, one of the region’s economic stars. Such decisions are always hostage to fortune, which in this case has been cruel.

Over the past few months most of Latin America’s currencies and stockmarkets have suffered a battering. The IMF now expects the region’s economy to contract slightly this year (see chart). With emerging markets in general heading downwards, and the world economy poised uncertainly between China’s slowdown and an impending rise in interest rates in America, the mood of many of the 12,000 attending the meeting is as grey as Lima’s thick, low winter clouds. As the event began, the IMF trimmed its forecast for global growth.

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Quantitative frightening

A DEFINING feature of the world economy over the past 15 years was the unprecedented accumulation of foreign-exchange reserves. Central banks, led by those in China and the oil-producing states, built up enormous hoards of other countries’ currencies. Global reserves swelled from $1.8 trillion in 2000 to $12 trillion by mid-2014. That proved to be a high point. Since then reserves have dropped by at least $500 billion. China, whose reserves peaked at around $4 trillion, has burnt through a chunk of its holdings to prop up the yuan, as capital that had once gushed in started to leak out. Other emerging markets, notably Russia and Saudi Arabia, have also called on their rainy-day stashes.

This has sparked warnings that the world faces a liquidity squeeze from dwindling reserves. When central banks in China and elsewhere were buying Treasuries and other prized bonds to add to their reserves, it put downward pressure on rich-world bond yields. Running down reserves will mean selling some of these accumulated assets. That threatens to push...Continue reading

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Weighing anchor

DONALD TRUMP, an American presidential candidate, denounced it as “a terrible deal”. Another, Hillary Clinton, does not think it meets “the high bar” that should be applied to trade pacts. Yet proponents of the Trans-Pacific Partnership (TPP), which encompasses 12 countries in Asia and the Americas, including America and Japan, herald it as the biggest multilateral trade deal in 20 years, which will “define the rules of the road” for international commerce. Which is it?

TPP will apply to 40% of the world’s economy. For American exporters alone, 18,000 individual tariffs will be reduced to zero. Much the same will be true for firms in the other 11 members. Even agricultural barriers, usually among the most heavily defended, will start to come down. Foreigners will gain a toehold in Canada’s dairy sector and a bigger share of Japan’s beef market, for example. Some of these reductions will be phased in lamentably slowly, however: American tariffs on Japanese lorries will last another 30 years.

Tariffs in the region were not that high to begin with, though. More important is TPP’s effort to free trade in services. These are not...Continue reading

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Americans are spending more of the oil-price windfall than they realise

BETWEEN June 2014 and February 2015 the price Americans paid for petrol fell by a third. Economists predicted this would boost growth by causing consumers, newly flush with cash, to spend more on other goods and services. Instead, the economy seemed to slow, with early estimates putting annualised growth in the first half of the year at a paltry 1.4%. Many claimed Americans were saving the windfall, or using it to pay down debts. Estimates of growth in the first half of the year have since been revised up sharply, to 2.3% annualised. Reinforcing this turnaround, a report released today argues that Americans are spending most of the oil-price windfall after all.

Researchers at the JPMorgan Institute, a think-tank tied to the bank, examined anonymised data from one million of the bank’s credit- and debit-card customers. The number-crunchers divvied up customers according to how much they spent on fuel before prices fell. Gas-guzzlers gain the most when fuel gets cheaper; reluctant-refuelers benefit less. Comparing the two groups’ spending before and after the price collapse can reveal how much of a dollar saved at the pump is spent elsewhere.

To mitigate the...Continue reading

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IMF projects steady emerging-market growth over next five years

THE developing world is catching up with advanced economies, but no longer as quickly as they would like. That has spooked investors. The slump in commodity prices and fears of an increase in interest rates in America led to 2015 being the first year since 1988 in which there will be a net capital flow out of emerging markets.

The International Monetary Fund’s new World Economic Outlook, published yesterday, offers little comfort. Some of the IMF’s headline projections seem relatively chirpy. Despite Brazil being downgraded into negative territory, the BRICS economies are still growing at a decent speed of 4.8% this year, projected to nearly hit 6.0% in 2020. Compared to Citi’s warning last month that a global recession led by an emerging-market slowdown is on the way, the IMF are positively bullish. The IMF expects China to steam ahead at 6.3% growth, and India at a whopping 7.5% in 2016.

But the IMF has been accused of over-optimism in the past, and they themselves admit that there are some big risks. One they highlight is the risk of a slow-down in emerging markets, coupled with investor panic. The IMF's charts (see below) suggest what might happen in this scenario. A four percentage-point drop in investment would slash growth in the BRICS economies (Brazil, Russia, India, China, and South Africa) from 6%...Continue reading

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The art of the tax dodge

CORPORATE tax avoidance schemes cost governments an estimated $240 billion a year. Can new measures to curb the practice keep company profits away from offshore havens? 

The share buyback mirage

WHY don't equity investors get the full benefits of economic growth? Or to put it another way, why don't dividends grow as fast as GDP? We tend to assume that, over the course of the cycle, profits will grow in line with the economy. But research by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School, shows that real dividends in 21 countries fell by an average of 0.12% a year between 1900 and 2014; in the US, they grew by 1.7% but still below the GDP growth rate. 

A plausible-sounding explanation is that, over time, the dividend payout ratio has fallen; companies are reinvesting more of their cash. Some companies, of course, don't pay dividends at all and paying high dividends is associated with mature, slow-growing companies; utilities, for example. But this reasoning does not really work at the aggregate level. If companies have been profitably reinvesting all their free cash, surely that would have showed up in higher dividends by now; the data cover more than a century. And research by Robert Arnott and Cliff Asness shows that high payout ratios are followed by periods of high earnings growth, not low. Low payout ratios were followed by periods of slow earnings growth; companies, in short,...Continue reading

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The Fed should have abandoned inflation targeting

The dominant and dangerous dollar

TAKE at look at this week's special report on the global economy, focussing on the role of the dollar in the wider world:

The world economy: Dominant and dangerous (Leaders)

This week's special report

And don't forget to take a look at this week's Free Exchange column, which looks at what America can learn from sterling's decline as a reserve currency in the 20th century.

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The money wave hitting emerging markets

Lousy jobs numbers suggest the Fed was right not to hike rates

THE world was on tenterhooks on September 17th, when it appeared the Fed might just be about to raise interest rates in America, for the first time in more than nine years. Although monetary-policy hawks feared that the world's largest economy was starting to overheat, doves pointed to low inflation, and to building financial stress in emerging markets, as reasons enough to hold off. In the event, the Fed decided to keep rates where they were. New data on the state of emerging-markets economies released this week, as well as today's disappointing jobs report from America, seem to vindicate the call.

However one looks at the Bureau of Labour Statistics' latest employment data, the view is an ugly one. American firms added just 142,000 jobs last month, far less than the 200,000 that the markets had been expecting. The unemployment rate remained at...Continue reading

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QE and the banks revisited

THE power of central banks over the economy is so great that the debate over the effectiveness of recent policy changes will rumble on for many years. This is all to the good, in a democratic society. But it is important to get the facts right. As my post earlier this week pointed out, the left seems to argue that quantitative easing (QE) was a handout to the banks. In particular, that QE was used to buy assets off the banks. (This post will focus on Britain, but the arguments apply elsewhere.)

There was reader scepticism about my contrary view, with one claiming that the banks had bought £100bn of gilts in the first quarter of 2009 to "front run" the Bank of England. But here is a link to the Debt Management Office website which has the details of gilt ownership (you have to open the spreadsheet entitled "distribution of gilt holdings"). At the end of 2008, the banks owned £25.7 billion of gilts; at the end of 2009, they owned £38.7 billion. They were buying, not selling. On the latest figures, they own £157.8 billion worth - largely because they need to hold safe assets like gilts to meet regulatory-imposed "liquidity ratios". These regulations are good for the taxpayer in two ways. First, they make...Continue reading

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The vultures circle

THERE is no shortage of bad omens for the global economy at the moment. To name a few: plunging commodity prices, wobbly equity markets, weak world trade, reduced profit forecasts for American companies and lower long-term inflation expectations. In recent weeks, a new one has joined the list: rising corporate-bond spreads.  

These spreads—the difference between the interest rates paid by governments and blue-chip companies and those paid by riskier borrowers—reflect the risk of default. Rising spreads imply that investors are getting antsier about being repaid. That anxiety may well stem from worry about the economy.

Spiking credit spreads have often been a harbinger of recession (see chart). As David Ranson of Wainwright Economics argues: “Yield spreads represent a market assessment of the strength of the economy and are not affected by any of the technical measurement problems that plague the GDP figures.”

As an indicator, credit is clearly not entirely reliable: a rise in spreads in 2012 was not followed by a downturn. As yet there is no sign of a rise in the default rate on high-yield debt: it...Continue reading

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Red scare

ALONG the muddy banks of the River Severn in Newport, Wales, sits the “mega-shredder”, an industrial monster owned by one of the world’s biggest metal-recycling firms, Sims Metal Management. It is one of the planet’s biggest consumers of metals—literally. Every hour the 560-tonne machine gobbles up more than half its weight in cars, washing machines and other appliances, making the earth shudder as it grinds them to pieces. It then uses magnets to separate the ferrous from the non-ferrous bits, spitting out small nuggets of steel, copper and other scrap. These are shipped to smelters in Asia, where they are mixed with ore and re-blasted into the rods and sheets that feed that other great devourer of metals, China.

A decade ago, when the machine was installed, China’s hunger for scrap seemed insatiable. Plumbers the world over developed a nifty side business as copper merchants. Theft was so rife that Britain banned cash payments for scrap metal. But in the first half of 2015 exports to China were half the level of 2012, when demand was at its peak, says Ian Hetherington of the British Metals Recycling Association. Scrap dealers’ hunt for...Continue reading

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Under the cosh

BEING an emerging-market fund manager used to be fun. They enjoyed trips to exotic locations, faced less competition than those managing American or European equities and were so flush with cash that some funds could turn investors away. Today, emerging-market investing is less of a jaunt. The globetrotting that money managers do now is mainly to beg nervous investors not to sell up.

Their entreaties are falling on deaf ears. In August alone investors pulled $10 billion from bond funds and $24 billion from various types of equity funds, according to the Institute of International Finance. Add in the effect of falling markets and the stock of investment in emerging-market exchange-traded funds (ETFs) and mutual funds has fallen from $1.37 trillion in December to $1.17 trillion now, the lowest since June 2012. Money is being carted away from the emerging world almost as fast as during the “taper tantrum” of 2013. Brazil, China, Indonesia and Turkey have suffered the largest outflows, largely due to continuing doubts over their growth prospects and the stability of their currencies. Faced with pervasive uncertainty, investment managers of all stripes have...Continue reading

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Upwardly mobile

WHEN the bottom finally fell out of America’s housing market in 2006, it triggered the worst global recession since the 1930s. But rising house prices need not spell disaster. The Economist’s latest round-up of house prices across the globe shows that prices have risen over the past year in 21 of the 26 economies we track, at a median pace of 4.7% (see table). Not every rise is alike, however.

America is still—just—in the category of countries where the housing market remains in recovery. House prices there increased by 4.7% in the 12 months to July, according to the Case-Shiller national index. Prices have now risen by 25% from their 2011 trough, but still remain 7% from their 2007 peak. The Economist measures national affordability by comparing prices to the long-run average of their relationship with rents and income. On this basis, we reckon house prices in America are broadly at their fair value.

Not for long, perhaps. Activity is buoyant: sales of existing homes increased by 6.2% on the previous year. With 30-year fixed-rate mortgages at...Continue reading

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Money for everything

CASH has many enemies. Banks have added contactless technology to their credit and debit cards; apps like Uber use pre-stored details for transactions and services such as Venmo allow people to make transfers to one another using only mobile phones. Peter Bofinger of the German Council of Economic Experts says cash should be phased out to save the money spent printing and distributing it, and to eliminate the annoying queues generated by shoppers who insist on using it. Lawmen dislike it, since it is an enticingly anonymous store of value for criminals. Now even central bankers are getting in on the act: the chief economist of the Bank of England has proposed eliminating cash as part of a plan to permit negative interest rates. (Storing bank notes under the mattress is an easy way of thwarting a bank intent on charging negative rates.) Yet for all its detractors, cash is puzzlingly resilient.

Economists had long assumed that as nations grow richer and their financial infrastructure becomes more elaborate, the amount of cash in circulation would first grow rapidly and then begin to slow, as alternatives gained traction. Eventually, an...Continue reading

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The patient awakes

UKRAINE has just released balance-of-payments data for August. In Ukraine-terms, at least, it makes for good reading. Exports are rising and the country is running both current-account and budget surpluses. The reserves of the National Bank of Ukraine are rising, and the finance ministry has a record level of $2.2bn in its Treasury account. Pretty impressive. 

The NBU reckons that by the fourth quarter of this year, the Ukrainian economy will be growing again (in dollar terms the economy has more than halved over the last year or so). This may be an optimistic forecast; things still look pretty terrible. The following chart shows industrial production, retail sales and exports (in American dollars), all of which are shown as a year-on-year change. Ukraine has moved away from the depths of economic despair of a few months ago, but they hardly look great: 

Also I am not sure that Ukraine should boast too much about its twin surpluses. As Timothy Ash of Nomura argues,

On the current-account side, the collapse in domestic demand and deep recession has slashed imports, more than making up for the collapse also in...Continue reading

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Less of the same

An economic stimulus plan

Updated October 1st 2015

AFTER four months battling to pass unpopular security legislation, Shinzo Abe, Japan’s prime minister, lost no time in returning to somewhat safer ground: the economy. On September 24th he fired off what he called “three new arrows” in service of Abenomics, his programme of monetary easing, fiscal stimulus and far-reaching structural reform. Yet recent data suggest the economy may offer Mr Abe no respite from a bruising year.

Japan’s GDP shrank by 1.2% on an annualised basis in the second quarter, after expanding in the first. Now worries about the third quarter are mounting. Industrial production continued to fall in August, suggesting that the economy may even have entered recession in the quarter. In addition, for the first time since the government embarked on Abenomics in April 2013, prices in Japan are falling again, albeit only slightly. One key gauge of inflation, core CPI (the consumer-price index excluding fresh food), fell by 0.1% in August.

It is all dire news for the Bank of...Continue reading

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Taking a pounding

WHEN did Britain cease to be the world’s pre-eminent power? Some date its dotage to the end of the first world war; others to the second. By the time of Britain’s humiliation during the Suez crisis in 1956, America’s hegemony was clear to all. Yet perhaps the most significant indicator of decline went relatively unnoticed by contemporaries: the dollar’s usurpation of sterling as the world’s main reserve currency.

Fears that a similar fate awaits America and the dollar, at the hands of China and the yuan, have burgeoned over the past decade. They have been fuelled by China’s growing economic weight—last year it became the world’s biggest economy in terms of purchasing power—and by the efforts of its government to promote the use of the yuan in international transactions. That has prompted economic historians to re-examine sterling’s downfall, in search of clues about how the impending tussle between the dollar and the yuan might unfold. The research yields lessons in three broad areas—how a currency attains reserve status, whether a two-currency system is possible, and how poor policymaking can speed a currency’s...Continue reading

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Assessing the assessments

Why some emerging-market leaders say they want the Fed to hike

SCARCELY is one Federal Reserve meeting over before the doves and hawks start circling again. The hawks, who hope for a rate increase, had some unlikely companions in their flock in the run-up to the September meeting: central bankers from India, Indonesia, Mexico and Peru. These emerging-market policymakers have said that since everyone is expecting a hike by the end of this year, it would be better to get it over and done with sooner (October) rather than later (December).

That is surprising, given warnings by international development heads, such as Kaushik Basu of the World Bank, that a rate hike would be tough for emerging economies. Portfolio investors have already sold $40 billion worth of emerging-market assets in the third quarter of 2015, according to a report released on September 29 by the Institute of International Finance, making this the worst quarter for emerging markets since the last quarter of 2008. The IMF reported this week that corporate debt in emerging markets quadrupled from 2004 to 2014, and a growing portion of this debt is traded in bond markets. Indonesia, Mexico, and Peru are all in the top eight emerging markets most vulnerable to dearer imports, a...Continue reading

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