LIBOR prison blues

A TRADER is sentenced to 14 years in prison for rate-rigging, armoured cars enter the luxury goods market and the British government sells down its stake in Royal Bank of Scotland

The people's QE and central bank independence

ENTHUSIASM for political outsiders is not confined to Donald Trump, Greece's Syriza or France's Marine Le Pen. In Britain, a formerly obscure leftwinger named Jeremy Corbyn seems on course to be Labour leader and thus potentially the next prime minister. There is plenty to be said about his foreign policy views, such as withdrawal from NATO; read this profile in Labour's in-house magazine, the New Statesman, for the details. 

But the enthusiasm for Mr Corbyn seems driven by his economic policies, notably his opposition to austerity. His maths look shaky as has been pointed out by Jolyon Maugham; he thinks the 50% tax rate would raise £5 billion when £3.5 billion is the maximum even if one assumes there are no effects on behaviour from the higher tax rate. And he assumes that £120 billion can be collected in higher taxes by eliminating evasion and avoidance when £34 billion is the theoretical maximum if one assumes, heroically, the government could collect all potential revenues (this "tax gap" has fallen, not risen, in recent years).

Perhaps the most interesting policy is that of...Continue reading

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Is mining as bad as asset-stripping?

We received the following response from Professor Paul Stevens of Chatham House, a think-tank, about a recent article in The Economist

On January 10th 2015, The Economist published an article entitled "African economic growth: The twilight of the resource curse?" The article argued that the economic outlook for many African countries looks promising despite falling commodity prices. This, it was claimed, reflected growing economic diversification by these countries away from dependence on commodities, and lessons learned about the power of good governance. It was argued that, "with better education systems, investment in infrastructure and sensible regulatory reforms, the continent could completely break the spell that has held it back so often in the past". The article concluded that countries with natural resources should encourage their development and not be concerned about the threat of "resource curse".

This view reflects a growing consensus away from the idea that...Continue reading

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Why aren't companies spending?

ONE of the justifications for low interest rates and quantitative easing is that reduced borrowing costs will encourage companies to invest more money - building plant, buying equipment and hiring new workers. But the record has been pretty disappointing. A survey by Standard & Poor's funds that global capital expendiure by non-financial companies is likely to decline in 2015 for the third year in succession, even though the corporate sector has an estimated $4.4 trillion on its balance sheet, earning very little.

Admittedly, the problem this year is focused on one particular sector - energy and materials. Falling commodity prices have led to big cutbacks; S&P estimates the decline will be 14% this year. If you exclude commodities, the rest of industry will grow capex by 8%. But that is only of limited comfort. The commodity sectors were helping to keep global capex propped up - they accounted for 39% of the total in 2014.

S&P is dubious of the view, taken by Andrew Smithers and others, that the cash has been diverted to share buy-backs; this is a largely American phenomenon. In 2014, North America was the only region delivering capex growth. This year, it is the only region expected to report a decline and...Continue reading

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How weak regulation is helping to build corporate kingdoms in America

"IF WE will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life." So said Senator John Sherman, who proposed the first American law against monopolies in 1890. Merging firms, however, argue that they will rule benevolently and lower prices. They claim that savings made from combining their efforts will be passed on to customers. The problem for regulators is that it is difficult to tell how much firms are fibbing. Prices can change for many reasons—higher costs, tariff changes, consumers’ tastes—and a price rise after a merger might not directly be the result of price fixing by a newly crowned monopoly.

A new paper published earlier this summer in the RAND Journal of Economics tests whether regulators made the right call in the American beer industry. The paper looks at the 2008 merger of Miller and Coors, the second and third largest brewers at the time in the United States. Miller and Coors argued that a merger would combine their distribution networks, thus reducing transportation costs. Regulators worried that the merger would...Continue reading

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Switzerland's central bank makes a massive loss

ON FRIDAY, the Swiss National Bank (SNB), Switzerland’s central bank, reported second quarter losses of 20 billion Swiss francs ($20 billion). Following an equally bad first three months of the year, the SNB’s losses so far for 2015 now amount to a whopping 50.1 billion Swiss francs, equivalent to 7.5% of Switzerland's GDP (see chart).

The SNB's losses were large but not unexpected. For years, the Bank has intervened in foreign exchange markets to prevent the Swiss franc from appreciating above its euro exchange rate cap, set at 1.20 francs per euro in September 2011. In January, the SNB abruptly abandoned its currency peg as the European Central Bank geared up for its €1.1 trillion quantitative easing programme. That caused the franc to immediately jump in value by more than 20% against the euro.

Scrapping the currency peg has had two nasty consequences. First, the appreciation of the franc made Swiss exports more expensive for foreigners, prompting the Swiss economy to start shrinking in the first quarter of 2015. Second, the depreciation of the euro against the franc led to significant currency losses on the SNB’s $550 billion foreign-exchange reserves, of which some $230 billion is held in the single currency. This alone accounted for 94% of the central bank's losses in the first half of the year.

The SNB must now strike a delicate...Continue reading

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Moldova's bust banks, renewable energy and Turkey's flightless economy

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

Moldova's economy: Gutted (Finance)

Renewable energy: Puffs of hope (Leaders)

Turkey's economy: Flightless (Finance)

And don't forget to take a look at this week's Free Exchange column, which looks at how ways of fighting poverty.

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