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Updated: 11 min 47 sec ago

America is pushing the labour market to its limits

Thu, 09/13/2018 - 14:55

BY MANY measures, America’s economy is powering ahead. GDP is on track to grow at around 3% this year, and the unemployment rate is an impressively low 3.9%. For President Donald Trump, it is an unmissable opportunity to gloat. On September 10th he described the economy as “soooo good” and “perhaps the best in our country’s history”. But for others the very same figures present an economic puzzle.

The Federal Reserve has been raising its benchmark interest rate since December 2015, and will probably do so again this month, from a range of 1.75-2% to 2-2.25%. This is the central banker’s version of twiddling the bath taps, but on a national scale. It requires a delicate touch. Too much cold water, in the form of higher rates, will choke off demand and hence jobs. Too much hot, and rising inflation will eat away at people’s spending power. The aim is to find the perfect temperature, where employment is as high as it can be while inflation stays subdued.

But as Jerome...

Tariffs may well bring some high-tech manufacturing back to America

Thu, 09/13/2018 - 14:54

YOU might think a company worth $1trn would gain a sympathetic hearing in the White House. Not, it seems, when the subject is China. On September 7th, as President Donald Trump prepared a new salvo of tariffs on Chinese imports, Apple released a letter pleading with the administration to change tack lest it harm American consumers. “Make your products in the United States instead of China,” Mr Trump tweeted back. “Start building new plants now. Exciting!” The response reflects a view within his administration that in a trade showdown with China, America cannot lose.

Mr Trump’s officials are finalising a list of Chinese imports, of $200bn in value, which will be subject to new tariffs. If and when they come, they would be in addition to tariffs previously levied on $50bn of Chinese goods. The president has expressed himself willing to put tariffs on all Chinese imports. China, for its part, is unbowed. At a summit on September 11th Xi Jinping, the Chinese president, and Vladimir Putin, Russia’s...

Markets are suffering from a nasty bout of millenarianism

Thu, 09/13/2018 - 14:54

A SKIT in the 1979 film, “The Secret Policeman’s Ball”, features Peter Cook, a revered British comedian, as the leader of a cult whose members have gathered on a mountain to watch the end of the world. His followers are full of questions. How will the Earth perish? Will there be a mighty wind? What will happen to homes? “Well, naturally they will be swept away and consuméd by the fire that dances on the Jeroboam,” he replies. “Serve them bloody well right!”

The skit sends up the millenarian sects of medieval Europe whose adherents believed they were living in the “end times” or “last days”. It could as fittingly be aimed at many investors today. A strain of millenarian thinking has been common since the bankruptcy of Lehman Brothers ten years ago this month. Its devotees, too, rail against a discredited priesthood and its vices—in this case, central bankers and quantitative easing (QE). They also maintain that a reckoning is due.

Perhaps it is. As the crisis that followed the...

Money managers and charities are offering joint investment products

Thu, 09/13/2018 - 14:54

IMPACT investing, or investing according to your values, seems a nice idea. But it is hard to turn boutique products into mass-market ones without diluting their virtues. Impact Shares, a non-profit money manager, thinks it has a solution: exchange-traded funds (ETFs) developed with charities and non-profits. “Non-profits, with their long history of fighting for social causes, are much better equipped to determine good corporate citizenry than the asset managers who currently make those calls,” says Ethan Powell, its founder.

Impact Shares hopes to ride two big trends: a shift over the past decade in investing from active (stock-picking) to passive (index-based), and investors’ growing desire to put their money where their values are. Each of the new ETFs houses a basket of around 200 stocks that score well on criteria set by a non-profit in the relevant field. The first, which started trading in July, focuses on empowering minorities and was created with the National Association for the...

Hyperinflation is hard to grasp, harder still to tolerate

Thu, 09/13/2018 - 14:54

Loose change

IN 1946 Gyorgy Faludy, a Hungarian poet, received 300bn pengo for a new edition of his works. The sum would have been worth $60bn before the second world war. But after the Nazis departed with Hungary’s gold reserves and the Russians occupied its territory, the country’s currency was not what it was—and becoming even less so. After collecting the money, Faludy rushed to the nearby market and spent it all on a chicken, two litres of cooking oil and a handful of vegetables.

For those not enduring it, hyperinflation can seem mind-bendingly abstract. The numbers are hard to fathom. In Venezuela’s faltering economy, prices rose by 223.1% last month alone, according to Ángel Alvarado, an economist and opposition politician (the government has long ceased publishing official statistics). Each day throngs of Venezuelans rush across the 300m Simón Bolívar bridge joining their country to the economic sanity of Colombia, where they hope to obtain medicines, food...

Colombia’s development bank has brought in private-sector discipline

Thu, 09/13/2018 - 14:54

Removing road blocks

IT COSTS more to send a 40-foot container by road from Bogotá, Colombia’s capital, to Buenaventura on its Pacific coast than to ship it on from Buenaventura to Shanghai. According to the World Economic Forum, Colombia’s roads are among the worst in Latin America. For more than 20 years governments have tried to improve matters, with little success. Now Colombia is trying again.

Central to the latest attempt, called the Fourth Generation (4G) road-development programme, is the National Development Finance corporation (FDN), which was launched in 2013. Unlike most development banks elsewhere, it funds at most 25% of any project. It must seek out private investors, at home and abroad, and package projects to offer acceptable risks and returns. Colombia’s needs are so great, says Clemente del Valle, the FDN’s president, that it “can’t just sit around and wait till those markets are developed.”

That forces it to support only viable...

As regulators circle, China’s fintech giants put the emphasis on tech

Tue, 09/11/2018 - 15:03

Kitty cash

FOR those still trying to work out what exactly “fintech” involves, we are sorry to bring you this update from China, a world leader in mixing finance with technology. Fintech is passé; the hot new thing is “techfin”. This ungainly portmanteau was coined by Jack Ma, the chairman of Alibaba, an e-commerce giant, who announced on September 10th that he plans to step down in a year’s time (see article). It is not mere semantics, but indicative of the way that China’s fintech upstarts—firms that have excited investors, frightened banks and attracted legions of users—are adjusting as their reach is limited by regulators.

The landscape of Chinese fintech is dominated by two players: Ant Financial, an affiliate of Alibaba, and Tencent, best known for WeChat, its social-media network. Ant is estimated to be...

Why Italy’s government bonds are so unstable

Thu, 09/06/2018 - 14:48

A SHREWD observer of London’s after-work drinking culture once offered the following bit of mathematical heterodoxy to explain it: “There is no number between two and six.” If you go out with colleagues and stop at two drinks, you will be able to summon the will to go home at a reasonable hour. After a third drink, another will seem like a good idea—and another, and another. You will be on course for a hangover.

A modified version might apply to Italy’s bond market. As long as yields are two-point-something or lower, they are sustainable. At that level, the bonds are safe. Italy’s public finances are stable. As yields rise above 3%, they may become unmoored. The bonds start to look like speculative instruments. The stability of public finances is in question. Yields might plausibly spike to 6% or more.

It is thus a source of anxiety that Italy is on its metaphorical third pint, with yields on ten-year government bonds hovering around the 3% mark. In part this reflects lingering...

More solar power hurts nuclear energy. But it also hurts itself

Thu, 09/06/2018 - 14:48

SOME call it a zero-carbon schism, others a heresy. The researchers, policymakers and environmentalists united over the need to stop global warming are divided on how to go about it. Many believe that renewable energy, especially wind and solar, has by far the biggest role to play. A dogged few, however, cling to nuclear energy, which is also carbon-free but has an image problem. The two camps barely speak to each other.

That is why three little words, “zero-carbon resources”, in a bill that landed on the desk of California’s governor, Jerry Brown, on August 29th are so important. Not only would the legislation commit the state to generating 60% of its electricity from renewables by 2030, up from a previous mandate of 50%. It also calls for generating 100% by 2045 from renewable and “zero-carbon resources”, which could include nuclear power. Of course, by then other emission-free energy technologies, such as batteries, hydrogen, and the capture and sequestration of carbon dioxide...

Why Argentine orthodoxy has worked no better than Turkish iconoclasm

Thu, 09/06/2018 - 14:48

WHEN an emerging market loses favour with its creditors, how should its government respond? The policy prescriptions do not typically include intimidating the central bank, railing against the “interest-rate lobby”, falling out with allies, eschewing the IMF’s help, pouring scorn on the dollar or appointing the president’s son-in-law as finance minister. Turkey has done all of these things, and its currency has duly lost 40% of its value this year.

Argentina, by contrast, has stuck much closer to convention. Its finance minister has two economics-related degrees. Its central bank has raised interest rates through the roof (lifting them to 60% on August 30th), and its government has secured prompt and generous assistance from the IMF, which agreed to a $50bn loan in June, the largest in its history. And yet Argentina’s currency has lost over 50% of its value this year (see chart 1).

Why has Argentine orthodoxy yielded such poor results? The question is growing more urgent. America...

ING and Danske Bank are in the spotlight for their handling of dirty money

Thu, 09/06/2018 - 14:48

A LINGERIE trader, a building-materials supplier and two fruit-and-vegetable importers are all accused of laundering hundreds of millions of euros through their accounts with ING, a big Dutch bank, between 2010 and 2015. Its accounts were also used by a telecoms company, VimpelCom (now VEON), to pay $55m in bribes in order to operate in Uzbekistan (the firm admitted the charges and reached a separate settlement with Dutch and American authorities in 2016).

ING, Dutch prosecutors say, missed the signs because of “serious and repeated shortcomings” in its approach to anti-money-laundering rules. On September 4th they fined it €775m ($900m). It has acknowledged failings and will hold back bonuses for, or suspend, senior staff who fell short of standards.

ING is not the only lender in the spotlight for carelessness with dirty money. On September 4th the Financial Times reported that an independent investigation commissioned by Danske Bank, Denmark’s biggest...

Sir James Mirrlees, a Nobel-prizewinning economist, died on August 29th

Thu, 09/06/2018 - 14:48

The optimal economist

WHEN James Mirrlees got the call to say he had won the Nobel prize for economics in 1996, he assumed that a friend was pulling a prank. “Jim politely suggested that it didn’t sound very likely and he’d need some proof,” his wife later recalled. Friends and colleagues say it paints a fair picture of the man: polite and modest in all his dealings; rigorous and evidence-based in his work.

As a youngster, he would have been surprised to be told his future academic field. Born in the village of Minnigaff, in south-west Scotland, at school he had aspired to be a mathematics professor. Two undergraduate degrees in the subject later, from Edinburgh and Cambridge universities, he realised that the question of how to solve poverty in the developing world was “what really mattered”. That meant a career studying economics.

It was only after Oxford University appointed him as a full professor of economics in 1968, at the tender age...

America’s recovery breeds complacency about macroeconomic risks

Thu, 09/06/2018 - 08:48

FIVE years after the darkest days of the financial crisis, Lawrence Summers took the dais at an IMF forum to offer a few thoughts on America’s recovery. It was lousy. Growth showed no signs of making up ground lost during a deep recession. The unemployment rate had only just fallen back below 7%. It was common to attribute this lousiness to the after-effects of a monumentally nasty downturn. But Mr Summers suggested that his listeners consider another possibility: that America was stuck in a pattern of slumps punctuated by bubbles, and had been since well before the banking system seized up in August 2007. It is fashionable now, a decade after Lehman Brothers collapsed, to say that the “secular stagnation” hypothesis Mr Summers put forward is no longer relevant. America’s economy grew at an annual pace of 4.2% in the most recent quarter, and unemployment is at 3.9%. But there is little reason to think the world has escaped from the macroeconomic pattern that made the crisis possible.

Mr Summers...

Central bankers grapple with the changing nature of competition

Thu, 08/30/2018 - 14:15

RECENT visitors to Jackson Hole, a resort in the Teton Mountain range in Wyoming, were denied the usual scenic views by a shroud of smoke from recent forest fires. Disappointing, no doubt, for the tourists among them—but oddly fitting for the economic panjandrums attending the Federal Reserve Bank of Kansas City’s annual symposium on August 23rd-25th. Not only are economic policymakers used to making choices in a fog of uncertainty, but this year’s theme of market structures generated its own haze. Though the nature of competition in America’s economy is changing, it is unclear how worried they should be.

Jerome Powell, the chairman of the Federal Reserve, highlighted slow wage growth in recent decades. America seems stuck in a “low-productivity mode”, he said. Others pointed to sluggish investment, despite cheap capital, and a fall in workers’ share of national income. Could these ills share some common causes, namely rising market concentration and crimped competition?


Rules on bank lending in poor neighbourhoods are being rethought

Thu, 08/30/2018 - 14:15

THE document is dry, dusted with references to “benchmarks”, “performance evaluation” and “a metric-based framework”. But the 25 pages published on August 28th by the Office of the Comptroller of the Currency (OCC), one of America’s federal bank regulators, may start a protracted dispute over lenders’ obligations to poor neighbourhoods and hence to racial minorities.

The OCC is inviting responses to 31 questions about putative changes to the rules implementing the Community Reinvestment Act (CRA), which was passed in 1977 with the best of intentions: maintaining lending and bank branches in America’s poorest areas; and combating “redlining”, the denial of loans to people in certain districts as a disguised means of racial discrimination. The CRA obliges regulators to assess not only banks’ financial soundness but also their lending to poor customers and small businesses, and their commitment to “community development” in the areas where they operate. The results can determine whether banks are...

Informal trade is ubiquitous in Africa, but too often ignored

Thu, 08/30/2018 - 14:15

Fair exchange, sometimes robbery

“THE border is like a river,” says Ronald Sembatya, “where somebody can come to get fish.” He is resting beside his wheelchair in the muddy no-man’s land between Uganda and Kenya. His disability makes it hard to find work elsewhere. But here he earns his “fish” by shuttling goods across the border, slotting a bag of flour or carton of eggs beneath the seat of his chair. Scores of other wheelchair-users trundle back and forth, their loads rarely inspected by officials. The local police commander says he has orders not to touch them. Stop a wheelchair, sighs a customs officer, and “people will lynch you”.

Informal trade is ubiquitous in Africa, but often, like Mr Sembatya’s wheelchair, tactfully ignored. He passes on a potholed track a few hundred metres from the main border post at Busia, a town straddling the frontier. Kenyan women tramp through the same puddles to buy cheap Ugandan tomatoes. Some traders deal in charcoal; other hoist...

A draft deal clarifies what populist trade policy means in practice

Thu, 08/30/2018 - 14:15

“IT’S a big day for trade, a big day for our country,” boasted President Donald Trump on August 27th. The cause of this jubilation was progress in renegotiating the North American Free Trade Agreement (NAFTA), a deal between America, Mexico and Canada. Enrique Peña Nieto, Mexico’s president, confirmed that Mr Trump had managed to secure a bilateral “understanding” with Mexico. According to the White House’s spin doctors, Mr Trump had kept his pledge to renegotiate NAFTA and had produced a “mutually beneficial win for North American farmers, ranchers, workers and businesses”.

The deadline for publishing a more concrete version of the deal is August 31st, when the American administration plans to notify Congress of Mr Trump’s intent to sign. The rush is to enable Mr Peña to sign before December 1st, when he will be replaced by Andrés Manuel López Obrador, a firebrand leftist. Both men are keen to have the deal wrapped up by then, Mr Peña to make it part of his legacy and Mr López Obrador so he...

KPMG is caught up in scandals but its woes are not existential

Thu, 08/30/2018 - 14:15

AUDITORS are often accused of being too lenient on the companies they scrutinise. After all, those companies pay the bills. The four that dominate the market—Deloitte, EY, KPMG and PwC—also offer lucrative services like consulting and tax advice. Concerns have long swirled that conflicts of interest risk deterring auditors from challenging dodgy accounting.

Recent controversies have centred on KPMG, the smallest of the Big Four. In Britain lawmakers have criticised it for signing off the accounts of Carillion, a public-sector contractor that later went bust. A regulatory investigation is under way. Last week regulators fined it for misconduct in its audits of Ted Baker, a clothing retailer.

In America three former partners face criminal charges for alleged involvement in the theft of confidential information about the regulator’s plans to inspect KPMG audits. In South Africa KPMG is under investigation for its work for companies owned by the Gupta family, which has been accused...

Markets bash Argentina’s and Turkey’s currencies again

Thu, 08/30/2018 - 14:15

THE first YouTube video, posted in 2005, showed the site’s 25-year-old co-founder standing in front of elephants at the San Diego zoo. One of its most recent videos is a little different: it shows Argentina’s president, Mauricio Macri, explaining why he needs the IMF to stand in front of the bears destroying his country’s currency.

The peso fell by more than 7% on August 29th, capping another difficult month. Its fall will make it harder for the central bank to meet next year’s inflation target, further undermining the institution’s credibility and the currency’s appeal. Argentina must also roll over or replace about $50bn of debt falling due over the remainder of 2018 and 2019. The financial markets worry that the government will struggle to secure both refinancing and re-election, since the sky-high interest rates required to attract creditors may further repel voters in the October 2019 elections.

On YouTube, Mr Macri asked the IMF to speed up disbursement of the $50bn loan it had...