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Indians are switching to digital payments in droves

The Economist - Thu, 06/06/2019 - 14:34

THE ALLEYS of the 150-year-old Chor (Thieves’) Bazaar, a colourfully named flea market in Mumbai, are crammed with goats, used tyres, speakers, drills and other assorted ephemera. But even in this unlikely place, modern payment methods are gaining a foothold. In stalls abutting the market, bags of sand can be paid for by providing a phone number or scanning a QR (quick response) code. Many countries have seen digital payments take off in the past few years; in India, where little over a decade ago a cheque could take more than two weeks to clear, it feels like a revolution.

It is one that has been shaped, not always intentionally, by government policies. September 2010 saw the arrival of Aadhaar, a system of biometric IDs that could be used to open a bank account. After becoming prime minister in 2014, Narendra Modi chivvied bankers to open accounts for everyone. Around 360m basic “Jan Dhan” (people’s wealth) accounts were opened, adding to the 243m accounts already in existence. But many sat empty, or held just a rupee or two put in by banks under government pressure to reduce the number of zero-balance accounts. 

Two further developments gave those unused accounts a purpose. The first was the launch in 2016 of the Unified Payments Interface (UPI), an interbank money-transfer system. The second was “demonetisation...

President Donald Trump is trashing deals in favour of tariffs

The Economist - Thu, 06/06/2019 - 14:34

NEW FRONTS in President Donald Trump’s assault on the global trading system are opening up by the day. On May 30th he dropped a bombshell on Mexico, threatening a 5% tariff on all its exports to America, rising to 25% by October if immigration flows do not fall (see article). On May 31st he turned to India, announcing the end of longstanding trade preferences on around $6bn-worth of its exports to America. A proposal is being considered to enable the administration to increase tariffs on imports from countries deemed to be manipulating their currencies. The appointment of judges to the court of appeals of the World Trade Organisation (WTO) is being blocked. Japan and the European Union are on notice that America may impose tariffs on their cars. Meanwhile the biggest trade fight of all, with China, is getting bloodier.

The trade element of Trumponomics is a striking departure from previous administrations’ policies, and a stiff challenge to the multilateral trading system. But critics must face some uncomfortable truths. The first is that some of America’s frustrations with its trading partners are justified. China’s system of subsidies and state-directed capitalism harms competing firms elsewhere, and raises questions about surveillance and security. India’s...

The long-term decline in bond yields enters a new phase

The Economist - Wed, 06/05/2019 - 20:24

AT THE END of 1989, an American in London received a call from a friend back home. The caller had watched the fall of the Berlin Wall and the toppling of Nicolae Ceausescu in Romania with growing dismay. He was at the end of a four-year course in Russian Studies at an elite university with hefty tuition fees. He had learned all the Kremlinology a would-be cold warrior could need—but not that the cold war might suddenly end. “I just took a $60,000 bath,” he said.

This story comes to mind not so much because of fears of a new cold war, this time with China, but because of the bond market’s recent response to such fears. Long-term interest rates have tumbled almost as swiftly as communism fell in Europe. The yield on a ten-year Treasury bond has plunged from 2.5% to 2.1% in the past month. Ten-year Bund yields have turned negative again and have reached a new all-time low.

What happens to long-term interest rates in large part reflects what is expected to happen to short-term rates. The bond market’s Kremlinologists expect the Federal Reserve to cut them soon. Other central banks will seek to keep money easy. One consequence is that the secular decline in real interest rates is unlikely to reverse soon (see chart). The implications are far-reaching: the whole edifice of asset prices is founded on a low-rate regime. But what if...

Advertising may make people miserable, but it still has its uses

The Economist - Tue, 06/04/2019 - 15:17

EVERY YEAR, as Americans polish off their Thanksgiving feasts, a particular genre of advertisement begins to air. The details vary, but the plot does not: one family member surprises another with the Christmas gift of a luxury car, often adorned with a cartoonishly large bow. The recipient never betrays a hint of the dismay one might expect of someone whose partner has spent tens of thousands of dollars without consultation. Such a car can easily cost more than the median annual income of an American household, and most people who see these ads will not be able to afford one. But the envy such spots induce serves an economic purpose, even as it leaves the majority feeling worse about themselves.

Ads and other forms of marketing ostensibly serve a straightforward economic role. Firms selling goods and services need to tell consumers about the availability and desirability of their wares, and spend on advertising to do so. By informing consumers about the relative merits of various products, ads improve the quality of purchasing decisions and, conceivably, leave both firms and shoppers better off than they would be in an ad-free world.

Yet advertising might fall short of this ideal in many ways. It need not be honest or representative of the full range of available products, for example. Some firms target impressionable...

Bank supervision in America is unfit for the digital age

The Economist - Thu, 05/30/2019 - 10:33

HERE COME the Germans. On May 21st Raisin, a “deposit marketplace” from Berlin, declared its intention to set up shop in America. Within a year Raisin hopes to follow its compatriot, N26, a mobile bank that is due to open there soon. Yet neither will, technically, be a bank. Remarkably, no such startup yet has a national banking charter in America, although the country is a hotbed of financial technology, spawning innovators from PayPal to Quicken Loans.

Both Raisin and N26 will rely, at least at first, on the charters and deposit insurance of local “sponsor” banks. That route is “fastest to market”, says Nicolas Kopp of N26. It is also common. Sponsors such as the Bancorp Bank, Cross River Bank and WebBank stand behind fintechs and others wanting to offer banking services. (They often supply technology, too.)

Varo Bank, of Salt Lake City (hitherto a partner of Bancorp), is likely to be the first purely mobile bank with a national charter. Last August the Office of the Comptroller of the Currency (OCC), a supervisor, gave Varo preliminary approval, subject to its raising $104m in capital and other conditions. Varo will also need a nod from the Federal Deposit Insurance Corporation (FDIC), which it first approached in early 2017. Robinhood, an online wealth-manager, has also applied to the OCC and Square, which handles...

Jokowi wants to improve the quality of Indonesia’s labour force

The Economist - Thu, 05/30/2019 - 10:33

VICTORIA OPAI, a teacher in a remote part of West Kalimantan, Indonesia’s slice of Borneo, is charmed by the new road connecting her school to Putussibau, the nearest town. It is smooth, reasonably straight and cuts through swathes of jungle. It used to take three hours to get into town, she says. Now it takes 40 minutes.

Over the past five years new roads, airports and railways have popped up across Indonesia. Reviving its ailing infrastructure was a pledge of Joko Widodo, the president, known as Jokowi, during his first term. Along with poverty-reduction measures, it helped him win re-election on April 17th. In his first term Indonesia grew by 5.1% annually; last year the IMF said ambitious economic reforms could enable Indonesia to grow at 6.5% by 2022. Jokowi promises to improve “human resources”, meaning education and the quality of the labour force. In a speech on April 30th he talked about “upskilling” Indonesia.

In 2003 the constitution was amended to require the government to spend 20% of its budget on education. Previously it had spent about half that. And the share of 13- to 18-year-olds enrolled in school has risen over the past two decades, to 88%. But outcomes are poor. Over half of those who finish school are functionally illiterate. Between 2003 and 2015 Indonesia’s scores in the PISA tests run by the...

Have regulators created a new type of financial monster?

The Economist - Thu, 05/30/2019 - 10:33

GRIMSTAD, NORWAY, is an unlikely setting for financial-market shenanigans. But the fishing town is home to Einar Aas, a trader who took huge bets on Scandinavian energy markets. His 15 minutes of infamy came in September 2018, when his bets went spectacularly wrong. Unable to cover his losses, he blew a €114m ($133m) hole in the capital buffers of Nasdaq Clearing, which handled his trades. Other members of the clearing house—mostly banks and energy-trading companies—were called upon to replenish its buffers.

The affair sent shivers down regulators’ spines everywhere. In the midst of the global financial crisis in 2009, leaders at the G20 summit in Pittsburgh decided that the chaotic world of derivatives needed to be made safer by ensuring that they were centrally cleared. A decade later the notional value of all derivatives outstanding globally stands at a trifling $639trn, of which 68% are centrally cleared through a handful of clearing houses. Collectively these institutions contain one of the biggest concentrations of financial risk on the planet.

Regulators fret most about a murky subset of derivatives: those that are traded over the counter by dealers and investors, rather than on exchanges. The notional value of these OTC derivatives is $544trn, of which 62% are centrally cleared (see chart). That is up from just...

Will the trade war spell the end of Chinese stock listings in America?

The Economist - Thu, 05/30/2019 - 10:33

AMERICAN INVESTORS wanting a piece of Chinese firms, whether state-owned oil majors or tech stars, need not stray beyond Wall Street. Over the past two decades some 200 Chinese firms have gone public in America, more than from any other foreign country. (Most have their main listing there; a few have a “secondary” one, with a main listing in China.) These firms’ total market value is more than $1trn. For America’s stock exchanges, that is a great triumph. But trade hawks are starting to describe it as a great liability.

In a letter in April a bipartisan group of politicians led by Marco Rubio, a Republican senator, said American investors faced risks because of exposure to Chinese companies “that pose national-security dangers or are complicit in human-rights abuses”. Steve Bannon, President Donald Trump’s former chief strategist, expanded the focus to all Chinese stocks in America in an interview published on May 22nd in the South China Morning Post. “The next move we make is to cut off all the IPOs [initial public offerings], unwind all the pension funds and insurance companies in the US that provide capital to the Chinese Communist Party,” he said.

Those threats might be dismissed as idle, but for the actions of a couple of their targets. On May 24th Semiconductor Manufacturing International...

China cannot easily weaponise its holdings of American government debt

The Economist - Thu, 05/30/2019 - 10:33

AN OLD SAYING: if you owe the bank $100 it’s your problem; if you owe $100m it’s the bank’s. The adage is silent on debts like America’s to China, of more than $1.1trn. The IOU looks like a source of leverage for China’s leadership—a reason for President Donald Trump to be cautious in waging trade war, lest his counterpart, Xi Jinping, command the People’s Bank of China (PBOC) to dump its Treasury bonds and plunge America into a fiscal crisis. An editorial on May 29th in the People’s Daily, a Communist Party mouthpiece, suggested that China might restrict exports to America of rare earths, which are used in smartphones, electric vehicles and much more. Seen against fresh threats, the $20bn-worth of long-term bonds China sold in March might seem a shot across the bow. Yet China’s bond pile is more blunderbuss than laser-guided missile. It is as likely to miss or blow up as to strike its target.

China’s bond-buying began innocently enough. Its leaders, eager to follow the time-tested path to export-led development, favoured an undervalued currency. In the early 2000s, as rapid growth in output and exports put upward pressure on the exchange rate, the PBOC sold yuan and bought dollars, most of which it parked in American Treasuries. Cheap funding looked like a boon to America, at the time awash in red ink because...

Facebook’s planned new currency may be based on a blockchain

The Economist - Wed, 05/29/2019 - 11:55

THE EXCITEMENT among crypto-buffs is palpable. Facebook, the world’s largest social network, appears to be planning to launch a digital coin early next year. But they should not get their hopes up too high. If the firm does indeed launch what is being dubbed FB Coin, GlobalCoin or Libra, it will be a tame sort of cryptocurrency—more Bitcoin 0.5 than 2.0.

Facebook has declined to comment on the speculation, but is clearly up to something. Last year it put a highly regarded senior executive, David Marcus, in charge of a new team exploring “ways to leverage the power of blockchain technology”, which underlies cryptocurrencies. In April Mark Zuckerberg, Facebook’s boss, said at its annual shindig for developers that it “should be as easy to send money to someone as it is to send a photo”. It seems to be talking to potential partners, such as credit-card issuers and merchants, and financial regulators, such as Mark Carney, the governor of the Bank of England.

In America Facebook’s Messenger app already allows peer-to-peer transfers, but only in existing currencies and between accounts linked to bank-issued payment cards. But the new blockchain-based money would be a currency on its own.

Reasons abound why Facebook might want to take this step. It has to pull even with other big global apps that already offer easy...

The joys and pains of investing in a mature business cycle

The Economist - Thu, 05/23/2019 - 14:52

IN 14TH-CENTURY Germany a heretical cult grew up around the figure of Frederick II, a dead emperor. Its adherents believed that the apocalypse was close at hand. “In all countries a hard time sets in,” is how a prophecy from the period begins. “Rapine and arson go hand in hand,” it continues. “Everyone is at everyone else’s throat. Everyone harms everyone else in his person and his belongings. There is nobody but has cause to lament.”

This is not the sort of language used in investment-bank research notes and hedge-fund letters, or by pundits on CNBC and Bloomberg News, however troubled the outlook might seem for financial markets. Yet there is a parallel between today’s market chatter and the prophecies of medieval cults. The millenarians believed they were living in the end times or “last days”; and so, in a way, do today’s investors. Much of the talk is of “late-cycle” market conditions—the kind that prevail after a long expansion, when economic slack is largely used up and assets are richly priced.

The late-cycle mindset is a battleground for two impulses. On the one hand, it recognises that these are the good times. The economy is strong, jobs are plentiful, and factories and offices are humming with activity. Animal spirits are higher than they were in the earlier stages of the business cycle. So there is money to...

How to tax sugary drinks

The Economist - Thu, 05/23/2019 - 14:52

SUGAR TAXES are on a high. Around 40 countries and seven American cities have started to tax sugary drinks, mostly in the past few years. Supporters say such levies compensate for the costs imposed on health services by higher rates of obesity, diabetes and heart disease. They might also help short-termist buyers avoid the long-term consequences of sugary indulgences. Opponents counter that such levies are a fun-killer, souring people’s pleasure, and regressive, because poorer people spend a bigger share of their incomes on soft drinks.

Two working papers published on May 20th seek to help policymakers find the sweet spot. Hunt Allcott of New York University, Benjamin Lockwood of the University of Pennsylvania and Dmitry Taubinsky of the University of California, Berkeley, compute the “optimal” tax rate that maximises social well-being, taking into account differences in consumers’ income and behavioural biases.

Consumer data show that a soda tax does indeed have regressive effects. American households earning less than $10,000 a year buy twice as much sugary drink as those earning $100,000. Weighed against that, the gap between desired and actual consumption is wider for poorer people than it is for richer ones. The authors surveyed households to gauge their knowledge of sweet drinks’ nutritional content and how much...

TransferWise becomes Europe’s most valuable fintech

The Economist - Thu, 05/23/2019 - 14:52

THE TEA BUILDING, in London’s hip Shoreditch district, used to hold factories making biscuits and bacon. Now it is home to tech startups and media firms. Yet their ideas require space, too. In the outsized lifts, still operated by push buttons as big as traffic lights, a pair of movers have just finished a job. TransferWise, which rents Floor 6, is taking over another level, barely three years after moving in.

On May 22nd the cross-border payments firm, which was founded in 2011, said it had collected $292m in fresh capital. The fundraising round, led by Lead Edge Capital, Lone Pine Capital and Vitruvian Partners, venture-capital firms known for backing tech stars such as Uber, Snap and Spotify, valued it at $3.5bn—a doubling in 18 months. Now Europe’s most valuable private fintech firm, it plans to add 750 staff in the next 12 months to its existing 1,600.

TransferWise allows users to send money along 1,600 currency routes at 15% or less of the fee banks typically charge. Unburdened by old IT systems and focused on moving money, it has automated many of the steps required. It also aggregates transfers and nets them out against payments going the other way, which means it need borrow less currency offshore to meet customers’ requests. And it seeks to build direct relationships with multiple banks, even as those lenders...

Zimbabwe struggles to keep its fledgling currency alive

The Economist - Thu, 05/23/2019 - 14:52

MOST CURRENCIES have snappy names, like yen, won, kip or lek. Some have unfortunate ones: dong or colón. Few have names as cumbersome as Zimbabwe’s Real-Time Gross-Settlement Dollars, also known as RTGS-dollars or “zollars”. Hard to say, the new currency is also hard to price. Last week it lost about 20% of its value against the American dollar, according to Market Watch, which tracks the currency’s movements on the black market. This week it zagged, then zigged again (see chart). “You have to follow Zimbabwe hour by hour,” says an economist in Harare.

Zimbabwe’s previous homegrown currency was destroyed by the hyperinflation of 2007-08, forcing the country to adopt the American dollar (and other foreign currencies) instead. That worked well until 2015. But in the final years under Robert Mugabe, the longstanding dictator ousted in November 2017, the government could not muster enough genuine dollars to meet its spending ambitions. Instead it paid people with money of its own creation, transferred electronically into their dollar bank accounts. These “zollars”, it claimed, were identical to a dollar. But if depositors withdrew them from the bank they received not greenbacks, but “bond notes”: paper currency issued by the Reserve Bank of Zimbabwe, the country’s central bank.

Last October the new government, led by...

Goldman wants to manage the assets of the middling rich

The Economist - Thu, 05/23/2019 - 14:52

IF THE BEST way to get rich is by managing other people’s money, it helps if your clients control a lot of it. For private-equity firms and hedge funds, that means courting pension-fund managers, investment bankers and the like. For the top wealth managers, the money in question belongs to the super-rich, whom they advise on asset allocation, tax planning and even which artists should adorn their walls.

Now some are starting to tout for the custom of the merely well-heeled. On May 16th Goldman Sachs paid $750m in cash for United Capital Financial Advisors, a wealth-management firm based in California that manages $25bn-worth of assets for 22,000 clients. It was Goldman’s biggest acquisition in two decades.

It accelerates the firm’s shift of emphasis under David Solomon, who became its boss last year, away from volatile businesses such as trading towards more stable fee-based ones. It also broadens Goldman’s target market for wealth-management services. Until now, the bank’s individual customers were drawn almost entirely from the ranks of those with at least $25m in investable assets. United Capital serves those who have $1m-5m.

The non-filthy rich used to find it surprisingly hard to get customised help with managing their money. The fees they generated were not fat enough to satisfy full-service wealth advisers...

Economies and stockmarkets do not always match up well

The Economist - Thu, 05/23/2019 - 14:52

EVERYBODY KNOWS Monty Python’s “cheese shop” sketch—everybody who is over 50 and a comedy nerd, that is. The shopkeeper, played by Michael Palin, asks a customer, played by John Cleese, what cheese he would like. Do you have Red Leicester? Sold out. Caerphilly? On order. Cheddar? Not much call for it. Each increasingly testy request for a different cheese (43 of them) is cheerfully met with a “no”, “sorry” or feeble excuse. Pressed to back up his claim to the best cheese shop around, the shopkeeper replies: “Well, it’s so clean, sir!”

This leads us, as smoothly as a Python segue, to a frequent complaint about the main stock index for investors in emerging markets. The opportunity is as clear as a sign saying “Cheese Shop”. Most of the growth in the world’s GDP over the next five years will be in developing countries, says the IMF. You might like to buy a basket of stocks from a broad range of countries that taps into this growth. But the benchmark MSCI emerging-market index does not really offer that.

It is light on exposure to the fastest-growing bits of the world economy, notably in Africa. Instead it has a heavy tilt towards economies in the Asian supply chain to rich-world consumers. In short, it looks to some investors like a cheese shop that is so clean because it is uncontaminated by cheese. Yet the trouble lies...

American importers of metals from Canada and Mexico gain relief from tariffs

The Economist - Thu, 05/23/2019 - 14:52

TIMES HAVE been tough for Riverdale Mills Corporation, a company based in Northbridge, Massachusetts. In June last year the Trump administration imposed tariffs of 25% on steel imported from Canada, which accounted for half the firm’s supply. As its business involves transforming steel rods to supply 85% of North America’s lobster traps, and 31 miles (50km) of security fencing along America’s border, its costs soared. “We were very, very disappointed,” said James Knott, its chief executive.

Disappointment has given way to delight. On May 19th President Donald Trump declared that steel and aluminium from Mexico and Canada no longer posed a threat to America’s national security, and the next day the tariffs were no more. “This is just pure good news for Canadians,” said Justin Trudeau, Canada’s prime minister.

It was also excellent news for American consumers of steel. Faced with a lack of steel of similar quality from American suppliers nearby, and the expense of shipping from those farther away, Mr Knott had stuck with his Canadian suppliers, which hit profits and forced him to trim his workforce. Although he kept prices steady for his core products, some customers decamped anyway, worried that price rises were coming.

The tariff cuts will relieve strain for metal importers immediately. But the effect on the...

Should Germany borrow to invest?

The Economist - Thu, 05/23/2019 - 08:48

OUTSIDE THE headquarters of the German Taxpayers’ Federation in Berlin, a display tracks the public debt in real time. Now displaying a total of just under €2trn ($2.2trn), it has been ticking down since early 2018. Germany’s public-debt ratio, expected to be 58% of GDP in 2019, is as much the envy of other rich countries as its engineering prowess. Thanks to rising labour-market participation, says Michael Hüther of the German Economic Institute, a think-tank, tax revenues per head reached their highest level ever, in real terms, in 2018.

Even so, Germany’s fiscal policy is becoming a subject of debate. Olaf Scholz, the finance minister, has warned that the “fat years” are over. Economic growth is projected to slow this year, reducing the tax take. If he is to meet Germany’s stringent fiscal rule, he must rein in public spending.

The Schuldenbremse (debt brake) was enshrined in the constitution in 2009, when the financial crisis was expected to swell public debt beyond 80% of GDP. It restricts the federal-government deficit to no more than 0.35% of GDP a year unless a downturn hits; any overshoot beyond that must be made up in better times. (The debt brake also affects states’ finances: from 2020, they will be forbidden to run structural deficits.) Some economists, though...

As the trade war heats up, China looks to Japan’s past for lessons

The Economist - Tue, 05/21/2019 - 16:25

HISTORY IS NEVER far from China’s mind in its trade dispute with America. A few months ago, when negotiations looked on track, staunch nationalists warned of echoes with the “unequal treaties” that foreign powers had forced upon China in the 19th century. In recent weeks the breakdown in talks has led state propagandists to draw comparisons with the Korean war of the 1950s, a bloody struggle between China and America. But the analogy that haunts Chinese economists does not involve China itself. They fear a replay of the Plaza accord of 1985, when Japan, under American pressure, tried to resolve trade tensions by pushing the yen higher. That calmed the tensions but, most Chinese economists think, at an intolerable price: stagnant Japanese growth for two-plus decades.

The parallels are imperfect. Dependent on America for security, Japan was constrained in its pushback. The Plaza accord also involved Britain, France and West Germany. Jeffrey Frankel of Harvard University has called it “a high-water mark of international policy co-ordination”, which is not President Donald Trump’s trademark. The substance was different, too. The five countries announced that they wanted the dollar to depreciate and intervened in currency markets to make it happen. Within a year the yen soared by nearly 50% against the dollar. By contrast, currencies...

The biggest collapse in private-equity history will have a lasting impact

The Economist - Thu, 05/16/2019 - 15:13

IN SEPTEMBER 2017 executives at Hamilton Lane, an asset manager, received an email. Entitled “Abraaj Fund VI warning”, it accused the Abraaj Group, a buy-out firm based in Dubai, of inflating the value of its investments to lure capital into its latest fund. The email was anonymous and littered with typos and grammatical errors, but its tone was sinister. “The governance is not what it appears but employees are afraid to speak,” it said. Hamilton Lane forwarded it to Abraaj, requesting documents disproving the claims. The evidence provided allayed its concerns, and the firm backed Fund VI with over $100m.

Similar emails went to other Abraaj clients. They had little effect: weeks later Fund VI had already attracted $3bn, half its $6bn target. But the firm’s problems were real. Its collapse last year consumed millions of dollars of investors’ money, the reputation of Dubai’s financial regulator and Abraaj itself. Even as rivals divide up the firm’s former empire, it threatens to cause yet more damage.

It had taken 16 years for Abraaj to become the best-known emerging-markets buy-out firm. With over 30 funds spanning Africa, Asia, Latin America and Turkey, it managed $14bn in assets. Its Pakistani boss, Arif Naqvi, was a Davos regular and arts patron. He presented a kinder, gentler face of private equity: Abraaj’s $1bn...