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Finance and economics
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Should egalitarians fear low interest rates?

Tue, 07/09/2019 - 15:09

JOHN MAYNARD KEYNES once fantasised about a world of permanently low interest rates. In the final chapter of “The General Theory” he imagined an economy in which abundant available capital causes investors’ bargaining power, and hence rates, to collapse. In such a world markets would reward risk-taking and entrepreneurial talent, but not the mere accumulation of capital. The result would be the “euthanasia of the rentier”.

That low rates could feature in a leftish Utopian vision might come as a surprise today. It is commonly argued that a decade of monetary-policy stimulus has filled the pockets of the rich. Low rates and quantitative easing (QE) are said to have sent stock and bond markets soaring, thereby exacerbating wealth inequality. They have also boosted house prices, adding to intergenerational tension. A glance at financial markets suggests more of the same is coming: long-term rates have tumbled this year in anticipation of monetary easing, while stockmarkets have boomed.

Central bankers have defended their policies by arguing that, without loose money, unemployment would have been much higher, badly hurting the poor. That is true. But the effect of monetary stimulus on financial markets has nonetheless angered left and right alike. Judy Shelton, one of President Donald Trump’s new picks for the board of the...

A new trade deal has FOMO as its secret sauce

Thu, 07/04/2019 - 14:59

THE MOTIVE force behind trade deals is supposed to be “FOMO”—the fear of missing out. If negotiators fail to grab new markets for their exporters, the theory goes, rivals may snap those markets up first. On June 28th two trading partners seized better access to each other’s markets as Mercosur, a customs union comprising Argentina, Brazil, Paraguay and Uruguay, agreed to a new trade deal with the European Union. An EU press release gloated that European companies would gain an “important head start into a market with an enormous economic potential”.

The details have yet to be published. But the pact should improve market access for French cheese, Brazilian orange juice and Argentine fish, as well as car parts made in Europe, which now attract Mercosur tariffs of 14-18%. European companies will be eligible to compete for government contracts within Mercosur. Customs procedures will be simplified. Based on current trade patterns, the annual bill for tariffs on Mercosur’s imports from the EU should fall by over €4bn ($4.5bn), more than four times the equivalent sum for the deal the EU recently signed with Japan.

Though 9% of Mercosur’s tariff lines, and 5% of the EU’s, will remain above zero, a “standstill” clause commits the members not to raise any of the tariffs above an agreed rate. In effect the EU has insured itself...

The rise and rise of private capital

Thu, 07/04/2019 - 14:59

THE BIGGEST event on Wall Street in 1956 was the IPO of a company that had stayed private for more than half a century. Investors queued to secure shares in the Ford Motor Company. Their price jumped $5 on the first day’s trading. Yet by the time the company listed, it had no real need for capital. Henry Ford, its founder, had long been hostile to the idea of going public. It was almost a decade after his death in 1947 when the family foundation at last decided to sell some of its Ford shares to the public.

This year’s wave of high-profile flotations has some similarities. Uber, Lyft, Slack and the rest are not old as Ford was when it listed. But nor are they in the first flush of youth. New firms are staying private for longer. The number of public firms in America has declined by more than a third since the 1990s.

One explanation is that today’s tech firms have less need of public capital. More of the value of startups is tied up in ideas than in fixed assets such as factories. Tech moguls like the opportunities a public listing brings. But, like Henry Ford, they are less keen on the loss of control—and the scrutiny (business secrecy matters a great deal for ideas-led firms). Yet the crucial shift has been not a fall in demand for capital, but a rise in its supply. Sums that could once be raised only on public markets...

Swiss stocks are collateral damage in a worsening trade row

Thu, 07/04/2019 - 14:59

IT IS A country famed for avoiding conflict. Yet on July 1st, in a serious escalation of a trade spat with the European Union, Switzerland barred the trading of Swiss-listed companies’ shares on EU platforms. Last December the trade bloc had given Switzerland an ultimatum: sign up to a revamped deal replacing the patchwork of 120 bilateral agreements that governs trade relations between the two by June 30th, or lose stockmarket “equivalence”—a status bestowed by the EU that allows seamless trading of shares across borders. Rather than fold, Switzerland retaliated.

Before the ban traders based in the EU accounted for 60-80% of trading in Swiss shares by volume, some of that on Swiss exchanges and some on multilateral trading platforms in EU countries. Now those platforms have suspended trading in Swiss shares, as have the London Stock Exchange and Deutsche Börse. Swiss shares are available only on Swiss exchanges—and on far-distant ones, such as American and Asian trading hubs.

This does not mean that Swiss giants such as Nestlé, Novartis and Roche have suddenly become untradeable from within the EU. Though the bloc usually requires its traders to trade on its own venues, or those it recognises as equivalent, it makes an exception when too few of a company’s shares would be available. So EU traders keen to buy Swiss...

President Donald Trump is trying to fill two jobs at the Fed

Thu, 07/04/2019 - 14:59

HIRING FOR the Federal Reserve has been difficult for President Donald Trump. He clearly regrets his pick for chairman, frequently railing against Jerome Powell for keeping interest rates too high. His last two nominees could have fought his corner, but both withdrew after it became clear that neither would be confirmed by the Senate. On July 2nd he had another shot, announcing candidates to fill two vacant spots: Judy Shelton of the European Bank for Reconstruction and Development, and Chris Waller of the Federal Reserve Bank of St Louis.

Mr Trump’s reasoning seems obvious: both look doveish. In a recent interview Mr Waller expressed scepticism about the Phillips curve—the idea that low unemployment necessarily leads to inflation. His boss at the St Louis Fed, James Bullard, voted to lower interest rates at the most recent Fed meeting. Ms Shelton has called for interest-rate cuts, saying that companies benefiting from Mr Trump’s pro-growth agenda need better access to capital.

But there the similarities end. Mr Waller is a conventional choice. Though he has questioned the Fed’s decisions on interest rates, he has also defended its balance of independence and accountability before Congress. Ms Shelton, meanwhile, who acted as an adviser to Mr Trump’s election campaign, has shown distinctly more eccentric—and fluid—views...

Borrowing against art is growing at a stunning rate

Thu, 07/04/2019 - 14:59

FEW ART collectors are as liquid as Patrick Drahi, a French telecoms magnate, who purchased Sotheby’s, an auction house, for $3.7bn in cash last month. Selling art can take months, even years. The only way to unlock its value quickly is to borrow against it. And indeed the number of owners doing so is rising. Deloitte, an accounting firm, estimates that the outstanding value of loans against art in America reached $17bn-20bn in 2017, up 13% from the previous year. Industry insiders say such lending has continued to grow at double-digit rates since then.

“Ten or 20 years ago it never crossed your mind to leverage your art collection. But the word is out now,” says Evan Beard of Bank of America Private Bank, the institution with the highest outstanding value of art-secured loans. As interest rates have fallen, borrowing has become more attractive. Open public registers make it easy to check if art is encumbered. Price estimates and auction results available online since the early 2000s have made underwriting easier. In America collectors can even keep encumbered art on their wall.

Large banks’ private-banking arms have been lending against art since the 1970s. Now the strong market is attracting specialist lenders. For a private bank, though a loan may be secured against a piece of art, it will almost always be backed in...

Japanese people need to put more aside for retirement

Thu, 07/04/2019 - 14:59

LAST MONTH Japan’s Financial Services Agency (FSA), the financial-industry regulator, lobbed a grenade into a fractious debate on how to support the world’s oldest population in retirement. The typical elderly couple, it warned, will need to top up their public pensions by a whopping ¥20m ($185,000). The furore that followed put Taro Aso, the finance minister, on the back foot. Japan’s pension system “will never collapse”, he insisted.

His attempt at reassurance was widely mocked. A cartoon in a weekly magazine depicted him helping a Buddhist deity dispatch souls to financial heaven or hell. The implication was that, aged 78 and one of Japan’s richest politicians, he personally did not risk ending up in penury.

And yet the gloomy forecast should have come as no surprise. Government mandarins have fretted over Japan’s pension system for years. The Nikkei Shimbun, a staid business newspaper, warned last year of “disaster” unless it was reformed. The system was built on the expectation that people would live until their 70s or 80s, says Naoyuki Yoshino of the Asian Development Bank Institute, a think-tank. But more than half of Japanese babies today can expect to live to over 100. A quarter of all 60-year-olds will still be alive in 35 years, estimates the government.

All 20- to 59-year-...

Foreign financiers look past the trade war and ramp up in China

Thu, 07/04/2019 - 14:59

AS CHINA WAS preparing to join the World Trade Organisation in 2001, the phrase “the wolves are coming” kept cropping up in state media. The country was about to open up to foreign banks and the fear was that Wall Street’s finest would devour their Chinese rivals. But regulators managed to defang the wolves, never giving them a chance. Today, foreign firms account for less than 2% of assets in China’s banking sector.

It is instructive to keep this in mind as China again talks of opening its financial system. On July 2nd the prime minister, Li Keqiang, said that foreign investors would be allowed to take full ownership of investment banks and insurers in China from 2020, a year earlier than previously promised. Over the past two decades they have been limited to minority shares, and only last year were they permitted 51% stakes.

For foreign financiers the initial reaction is naturally one of scepticism. China still has plenty of ways to slow them down. One investment banker says that rather than rejecting his firm’s application for a majority stake, which might have sparked criticism, regulators simply refused to acknowledge receipt.

Nevertheless, there are grounds for cautious optimism. For starters China is under closer scrutiny than in the past. Its rule changes are partly a response to the trade war with...

OPEC’s predictable deal cannot conceal its long-term difficulties

Wed, 07/03/2019 - 19:50

THE MEETING of the Organisation of Petroleum Exporting Countries (OPEC) in Vienna on July 1st and 2nd was, in some respects, a snooze. The deal announced by OPEC and its allies was the continuation of one struck late last year. For at least another nine months, daily production will remain 1.2m barrels below last October’s level. But behind the predictability giant problems loom, for the oil market and for OPEC itself.

America and Iran, an OPEC member, are flirting with war. The decline in Venezuela’s production has steepened since January, when America announced sanctions against PDVSA, its national oil company. Escalating conflict in Libya could cause production there to plummet as well.

Nevertheless, oil producers are more concerned about weakening demand than tight supply. The price of Brent crude climbed to $74 a barrel in late April, after President Donald Trump said he would not extend waivers to sanctions on Iranian exports. It then plunged in May as inventories built up, investors fretted about the trade war and government-bond yields tumbled in America and Europe. The announcement on June 29th that America and China would resume trade talks has helped, but a deal is far from certain. Faced with shaky economic indicators, OPEC is keen to avoid a market awash...

How a victim of the Cultural Revolution mastered economics

Tue, 07/02/2019 - 16:40

THE STUDENTS embarking on an economics doctorate at the University of California, Berkeley, this autumn face a daunting obstacle: Econ 201A, a course in microeconomic theory inflicted on all new recruits. Over 16 weeks they must acquaint themselves with some of the most formalised parts of economics, including Houthakker’s Axiom, the Slutsky matrix and Afriat’s Theorem. According to one instructor, between five and seven class members (out of 20 to 25) usually receive a grade of B- or worse.

But anyone losing heart should take inspiration from a past student, Weijian Shan. He tried the course in 1982 after becoming one of America’s first PhD students from communist China. As he recounts in “Out of the Gobi”, his memoir published earlier this year, he had not taken a mathematics class beyond the age of 12. His faculty adviser, Janet Yellen, who would later chair the Federal Reserve, and George Akerlof, who would later win a Nobel prize, worried that the difficulties of Econ 201A would be “insurmountable”.

Mr Shan, however, had already surmounted more than most. After his schooling was cut short in 1966 by the Cultural Revolution, he was “sent down” to the countryside, like millions of other city kids. He joined a Construction Army corps in the Gobi desert, trying to create farms out of...

Russia is heaven for bondholders and hell for stockpickers

Thu, 06/27/2019 - 14:25

A VISITOR TO Moscow inquiring about the outlook for Russia’s economy will often be met with answers that take a detour into the country’s past. Ask, for instance, why Russia runs such conservative budgetary and interest-rate policies and you may be told that the trauma of default in 1998 bred a strong desire for low debt and low inflation. Ask why property rights are weak and you may be taken further back, to the end of serfdom in 1861. Until then many Russians did not even own their own souls.

Not all investors are history buffs. But looking at Russia through the lens of risk and reward they see a dichotomy. On the one hand, the emphasis the authorities place on controlling public debt and curbing inflation makes it an attractive place for bond investors. Russia is fixed-income heaven. On the other, the economy lacks dynamism, in large part because the venturesome cannot lay secure claim to their investments. For equity investors, Russia can be hellish.

Start with its charms for bond investors. Their aim for their money is to get it back with interest. They would also like it to retain its purchasing power. Their big concerns, aside from default, are inflation and (unless they are buying hard-currency bonds) devaluation. So there is much to like about Russia. The public-debt burden is light, at below 20% of GDP. True...

The war on money-launderers’ vehicle of choice intensifies

Thu, 06/27/2019 - 14:25

FINANCIAL CRIMES come in all shapes and sizes, from politicians siphoning off state wealth and officials taking bungs to terrorists buying arms and gangs laundering drug profits. A common element is the use of shell companies, partnerships or foundations to hide the identities of those moving dirty money. Such brass-plate entities, whose ownership is typically hard if not impossible to trace, were at the heart of the theft from 1MDB, a Malaysian state fund, and a $230bn money-rinsing scandal at Danske Bank. They have been dubbed the “getaway cars” of financial crime.

NGOs such as Global Witness and Transparency International have long highlighted shells’ pernicious role, picking up support from government investigators sick of trails going cold. Their biggest success was to persuade Britain, in 2016, to become the first G20 country to set up a public register of company owners. The rest of the European Union is set to follow once a new money-laundering directive takes effect. That leaves plenty of gaps. But two of the biggest, Britain’s offshore territories and America, are also moving in the direction of ditching secrecy.

Earlier this month Britain’s three Crown Dependencies—Jersey, Guernsey and the Isle of Man—issued a surprise joint statement pledging to table legislation to introduce public registers by 2023. They...

An idea for a parallel currency resurfaces in Italy

Thu, 06/27/2019 - 14:25

GOVERNMENTS IN FISCAL distress sometimes find creative ways to pay the bills. Revolutionary France sold bonds secured against land confiscated from the Catholic church; America used paper bills to fund its war of independence. In 2001 Argentina issued IOUs, as did California in 2009. During Greece’s sovereign-debt crisis Yanis Varoufakis, then its finance minister, toyed with plans for a parallel currency.

Not the most desirable of clubs, then, yet some in Italy are eager to join. So-called mini-BOTs, originally hatched by eurosceptics to replace the euro, made it onto the ruling coalition’s manifesto last year. Mini-BOTs (Buoni Ordinari del Tesoro, or ordinary treasury bonds) would be used to settle the government’s bills with commercial suppliers. Recipients could use them to pay taxes, or for public services. Devised by Claudio Borghi, an economist of the Northern League, one of Italy’s ruling parties, they would be low-denomination bills (up to €500, or $569) that bear no interest.

They would not be legal tender—that would break EU law. But Mr Borghi would like them to circulate widely, eventually being used in shops to price goods. He has written that mini-BOTs would enable a quick exit from the euro, though ministers say they have no such plan.

On May 28th the lower house of...

The Big Four may be blocked from doing Indian audits for years to come

Thu, 06/27/2019 - 14:25

GLOBAL AUDITORS have had a torrid time of late. KPMG is haemorrhaging clients in South Africa after allegations of fraud linked to its work for the powerful Gupta family; Deloitte is under investigation in both America and Malaysia relating to scandal at 1MDB, a Malaysian state-development fund. In Britain the Big Four face threats of break-up after the failure last year of Carillion, a big government contractor for which all four had done work. Now Indian prosecutors have the auditors in their sights.

The most serious case concerns the collapse last year of IL&FS, a monstrously complex financial firm with deep state ties. On July 15th the corporate-affairs ministry will argue before a commercial court to have Deloitte’s and KPMG’s local affiliates suspended from doing audits for five years because of flaws in their work for an IL&FS subsidiary. Ernst & Young (EY) is under fire, too: its local affiliate audited IL&FS and another subsidiary. It had already been suspended for a year from doing bank audits because of its work for Yes Bank, India’s fourth-biggest private lender. PwC, meanwhile, faces a two-year suspension relating to work for Satyam, a computer-services firm that went bust a decade ago.

These legal travails could bring to an end an odd exception to India’s localism. In most areas, lobby...

Displays dedicated to explaining economics offer marginal returns

Thu, 06/27/2019 - 14:25

ECONOMICS IS THE study of how societies allocate scarce resources. But why let eggheads have all the fun? A museum aiming to bring the discipline to the masses opened in Paris on June 14th. A visit to Citéco offers both seasoned and neophyte dismal scientists a chance to reflect on the field’s importance.

Plenty of central banks run museums of coins and banknotes. The Banque de France, looking to repurpose a branch closed in 2006, had higher ambitions. It aims to “reconcile the French with economics”, as if a lovers’ tiff had driven them apart. That it is housed in a neo-gothic mansion, complete with a moat defending what used to be its underground vault, adds to the mystique.

But it turns out there is a reason why only one other economics museum exists (in Mexico City). Though books in the “Freakonomics” mould have pitched economics as an endeavour that goes beyond GDP estimates and inflation targeting, bringing it to life is hard. Barbs that economics is but the “painful elaboration of the obvious” will resonate with visitors traipsing through gallery after gallery running the gamut of economic actors, from firms to consumers and governments. Exhibits on the Basel Committee and TARGET2 payments will strain to excite the hordes of school pupils Citéco aims to attract.

French statist biases are on display: the...

Another European fund manager runs into concerns over liquidity

Thu, 06/27/2019 - 14:25

COMPANIES AND governments need to borrow money for years or decades. But ordinary savers often want instant access to their nest-egg. That age-old mismatch is the origin of many of modern finance’s intermediaries, from banks to fund managers. They promise to lend money for long periods, backed by money they must return to their own creditors and investors at the drop of a hat. Aided by regulation, the arrangement usually helps savers to save and borrowers to borrow. The trouble is, it does not always work so seamlessly.

Fears over the “liquidity mismatch” created by such intermediaries have recurred in recent months, notably in Europe. They resurfaced on June 18th, when an article in the Financial Times highlighted how H2O, a fund manager based in London that invests mainly in government and big-company bonds, had a sideline lending money to smaller businesses. Their bonds are far less liquid, meaning that it may be hard to find a buyer quickly and at a reasonable price should the need arise. In theory, that might result in the fund being unable to repay its own customers immediately, should many of them demand the on-the-spot access they had been promised.

Investors took fright. It hardly helped that the illiquid bonds in question (worth €1.4bn, or $1.6bn, out of about €30bn in assets under...

London’s reign as the world’s capital of capital is at risk

Thu, 06/27/2019 - 09:48

A WELL-KNOWN stockmarket sell signal is a company splurging on flashy new headquarters. It might then be time to go short the City of London. From the Shard, the tallest building in the European Union, the view is of a crowded skyline of fellow concept skyscrapers. There is the Gherkin, the Cheesegrater, the Walkie Talkie and, rising in their midst, 22 Bishopsgate, which will be the Square Mile’s tallest and most capacious tower. The building frenzy is even accelerating. Londoners are waiting to hear if the 1,000-foot Tulip—with a design that many contend is more phallic than floral—will be approved.

None of this suggests a financial centre bracing for Britain’s departure from the European Union. But as soon as Theresa May, the prime minister, made leaving the single market a “red line” after the Brexit referendum in 2016, it seemed likely that the City would be sundered from its biggest foreign market. Regulators on both sides of the Channel scrambled to ensure business continuity and financial stability. British firms were asked to draw up contingency plans, including opening hubs in the EU27 (the EU minus Britain). For much of the City, Brexit happened sometime last year. 

According to New Financial, a think-tank in London, 291 big financial firms have moved some activities or people to the EU27, or opened...

The global economy is on a knife-edge

Tue, 06/25/2019 - 15:46

THE GLOBAL economic mood has taken to whipsawing between gloom and optimism. It can be hard to keep pace. This newspaper warned readers to prepare for “the next recession” in 2015 and 2018, pausing in 2017 to hail “the world economy’s surprising rise”. Lately, the periods of alarm and alacrity seem to have shortened. Markets began 2019 on the rebound and then took fright—only to surge in recent weeks. It is tempting to see the swings as mistaken attempts to find narratives in noise. But they have been accompanied by very real economic wobbles. Trade growth slumped in 2015, rebounded and is now decelerating. Global output, as reflected in measures of purchasing managers’ activity, bounced along with market gyrations, sinking in 2015 and lurching upward in 2017 before falling this year to levels not seen since the depths of the euro-area crisis. Rather than noise, the mood swings reflect investors’ attempts to work out which of two very different equilibria an unsettled global economy will land on.

You might suppose that such uncertainty would be the norm. Though highly integrated, the global economy lacks a centralised, stabilising hand, like a national Treasury or central bank. During the financial crisis, the members of the G20 managed an impressive degree of policy co-ordination. But the desire to co-operate has rather waned since...

As growth slows, the spectre of local-government debt looms once more

Thu, 06/20/2019 - 14:51

A STATUE OF a golden bull, poised to charge, stands outside the headquarters of Xiangtan Jiuhua, a government-owned company that funds much of Xiangtan’s infrastructure investment. It has seen better days: the gold paint is flaking and the torso is cracked. That makes it a fitting symbol for public finances in the sprawling prefecture of 3m people in central China, and scores of similar cities across the country, where the ambitions of local officials have collided with heavy debt loads.

Concerns about local balance-sheets in China have recurred over the past decade. Recently they have come into sharp focus again. Attempts to clean up local debts have not worked. And borrowing looks set to rise as the trade war rumbles on: China wants its provinces and cities to prop up growth by building roads and railways.

At just 38% of GDP, less than half the average in advanced economies, government debt in China might seem under control. But that misses much of what is happening. Local governments have long relied on off-balance-sheet debt to solve a perennial policy quandary. They are responsible for about 85% of public expenditures, yet command only 50% of revenues. Moreover, central authorities make it hard for them to borrow formally, hoping to limit their profligacy. So they have created entities such as Xiangtan Jiuhua,...

UBS faces a China backlash because of a quip about pigs

Thu, 06/20/2019 - 14:51

AFRICAN SWINE FEVER has devastated China’s pigs. The country’s herd has shrunk by 20%, or roughly 100m, over the past year. The epidemic is now threatening to claim another victim: the standing in China of UBS, a Swiss bank.

Its troubles stem from a quip about the inflationary impact of the porcine pandemic, which has pushed up consumer prices. “Does this matter? It matters if you are a Chinese pig. It matters if you like eating pork in China,” Paul Donovan, global chief economist of UBS’s wealth-management arm, wrote in a note to clients. To some in China, the phrase “Chinese pig” looked insulting, even racist.

Screenshots quickly circulated among Chinese investors and analysts. Mr Donovan apologised and UBS deleted the note. Yet the anger was unabated. The Chinese Securities Association of Hong Kong called for Mr Donovan to be sacked. Haitong International Securities, a brokerage, said it would sever ties with UBS; China Railway Construction Corp decided against appointing it as a co-ordinator for a bond sale. As the pressure mounted, UBS put Mr Donovan on leave.

Some observers saw the reaction as a sign of rising anti-foreign sentiment as China’s rift with America over trade deepens. Others spied a conspiracy. UBS has been one of the most successful foreign financial firms in China and is set to play a bigger...