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Finance and economics
Updated: 2 hours 34 min ago

Worries about the rise of the gig economy are mostly overblown

Thu, 10/04/2018 - 14:43

IT IS a warm morning on Bondi Beach. Simon and Sophia are drinking coffee on a terrace while athleisure-clad millennials stroll by. The young American couple, both management consultants, came to Sydney from New York for a working holiday. Both found work through Expert360, a platform that connects professionals with firms needing help with tasks. They may use the proceeds to travel around Australia—or simply stay by the surf. “Some people think we’re crazy to travel halfway across the world without a job lined up, but the potential of freelance work made us comfortable with the idea,” says Sophia. “It’s one of the best decisions I’ve ever made.”

On a cold day in Turin, 17,000km away, Cecilia sits in her flat. She has just heard from Deliveroo, a food-delivery service, that it does not need her today. She is glad, she says, as she wipes her dripping nose. But it means a day without earning. When asked what she likes about her job as a rider, she pauses for a long time.


Australia’s biggest banks are in the dock

Thu, 10/04/2018 - 14:43

BANKS often face conflicts of interest when it comes to advising their customers. The regulators who are supposed to stop the abuses that can result are not always up to the job. But when wrongdoing does finally come to light, the penalties can be vast. Financial institutions in Britain have had to lay aside £40bn ($52bn) to compensate customers mis-sold payment protection insurance. Wells Fargo was fined $1bn by American regulators and ordered to reimburse the people to whom it had sold useless insurance or mortgages with inflated fees. Now it is the turn of Australian banks to face a reckoning.

A royal commission has exposed a litany of abuses. Its interim report, published on September 28th, paints the country’s financial institutions as consumer-crushing oligopolies. Lenders charged hidden fees long after providing services, and for some services they never provided at all, on occasion to people who were dead. They siphoned off at least A$1bn ($720m) of compulsory pension savings in excessive charges. And they offered mortgages that they should have known were far too expensive to afford. Their behaviour, said Kenneth Hayne, the head of the inquiry, was not just immoral, but criminal.

The banks have tried to pin the blame on a few rogue staff. In fact the wrongdoing was pervasive—and turbo-charged by government policy. Until relatively recently few...

The IMF appoints a new chief economist

Thu, 10/04/2018 - 14:43

Go, Gita Gopinath

THE International Monetary Fund (IMF) used to be known for its unwavering advocacy of the “Washington consensus”, a set of free-market policies including free capital flows and fiscal consolidation. Nowadays it is a little more introspective—or, perhaps, open-minded. On October 1st the fund announced that Gita Gopinath, a professor at Harvard University, will soon replace Maurice Obstfeld as its top economist. The appointment puts another pillar of orthodoxy—regarding the benefits of flexible exchange rates—on notice.

Born in India, Professor Gopinath studied for her doctorate at Princeton under Kenneth Rogoff, a former occupant of her new job, and Ben Bernanke, who later led the Federal Reserve during the financial crisis. From there she moved to the University of Chicago, and on to Harvard, where she has produced prodigious amounts of research.

Most famous is her work on currency movements. One reason countries have flexible...

Brazil is shaping up for a unique kind of financial crisis

Wed, 10/03/2018 - 16:58

RUDI DORNBUSCH, a renowned economist who died in 2002, said there were two sorts of currency crisis. The pre-1990s kind is slow. It starts with an overvalued exchange rate, which gives rise to a trade deficit. Foreign-exchange reserves are gradually run down to pay for it. When they are gone, the game is up. The currency drops. The finance minister loses his job. But life goes on much as before. The world does not collapse.

The second sort of crisis is the first sort on steroids. A country that might once have blown some World Bank loans on bad policies is able to tap global capital markets for billions of dollars to misuse. Domestic banks join the party. The economy booms. When the flow of capital suddenly reverses, the currency collapses. Bankruptcy is widespread. The damage is big enough to affect others.

Brazil would seem to demand a third category. Elections this month will decide its next president and the character of its congress. They will thus shape the...

Rising oil prices catch emerging economies at a vulnerable moment

Thu, 09/27/2018 - 14:51

OIL prices have a knack of jumping at the most inconvenient times. As in 2007, for instance, when the price of a barrel soared into triple digits, destabilising a world economy already heading for a financial crisis. Or, for that matter, now. At more than $80 per barrel, Brent crude is nearly twice as costly as in the summer of 2017 and three times as pricey as in early 2016 (see chart, left panel). Dear oil does not yet mean a crisis. But it is putting emerging markets, already labouring, under further stress.

That oil should once again be causing trouble is a bit of a surprise. Half a decade ago prices in excess of $100 per barrel seemed to be a permanent feature of the economic landscape. But in 2014 prices crashed, as America’s shale boom turned the market on its head. The world quickly embraced the idea of a “new normal” for oil: in which large-scale, flexible shale production in America promised to keep prices stable and moderate. Americans scarcely had an opportunity to swap their...

A scramble to replace LIBOR is under way

Thu, 09/27/2018 - 14:51

SITTING in his office in the Wrigley Building overlooking the Chicago river in 2012, Richard Sandor, who has spent his career inventing financial products, was reading about the scandals surrounding the London Interbank Offered Rate (LIBOR), an array of interest rates set daily by a club of banks in Britain and used to price trillions of dollars’ worth of loans, derivatives and more. “This is stupid,” Mr Sandor recalls saying to a colleague. “Let’s make a bet; LIBOR will lose its pre-eminence.”

Two years later the Federal Reserve reached the same conclusion. It formed a group, the Alternative Rate Reference Committee, which has created a new benchmark dollar interest rate, the Secured Overnight Financing Rate (SOFR). Since April, SOFR has been used for a handful of bond offerings by large institutions including the World Bank, MetLife and Fannie Mae. Central banks in Britain, the euro zone, Japan and Switzerland are also constructing new benchmark rates.

LIBOR is heading for...

American startups have less need to list on the stockmarket

Thu, 09/27/2018 - 14:51

WHATEVER your view of the recent antics of Elon Musk, one thing seems clear. He rather regrets that Tesla, the electric-car maker of which he is boss, ever became a public company. To recap: in August Mr Musk announced that he had secured the funding to take Tesla private. The gyrating stock price is a distraction to staff, he explained. The obligation to report earnings each quarter fosters short-term fixes that may hurt the firm’s long-term health. And being listed makes Tesla prey to short-sellers.

Tesla’s share price rallied. The shorts lost money. It then emerged that the money to buy out shareholders was not quite as secure as Mr Musk may have suggested. Before long, the board confirmed that the firm would not be taken private. Its shares sank back. The company is now under investigation for possible securities fraud.

Whatever these larger consequences, Mr Musk achieved a minor feat. He has drawn fresh attention to some familiar grumbles about public markets....

America is trying to change the way trade rows are settled

Thu, 09/27/2018 - 14:51

This version comes with a whistle

ONE of President Donald Trump’s more improbable achievements has been to make international trade negotiations into front-page news. Less visibly, his officials have turned the legal systems for settling trade disputes into hotly contested topics. Not only is dispute settlement one of the last obstacles between America and Canada reaching a new North American Free Trade Agreement (NAFTA), it is also central to Mr Trump’s assault on the World Trade Organisation (WTO), the guardian of the global rules-based system of trade.

A trade deal is a bit like the rulebook of a game in which the players are of very different sizes and speak a host of different languages, and so may have different ideas of what constitutes fair play. A dispute-settlement system is the referee, deciding whether the rules have been broken. Its very existence may discourage cheating.

The system Canadian and American negotiators are arguing over dates...

American creditors say China should honour pre-Communist debts

Thu, 09/27/2018 - 14:51

Still outstanding

LIKE many Americans, Jonna Bianco believes President Donald Trump to be “a tireless defender of the American people against Chinese economic aggression”. Ms Bianco, a Tennessee cattle-rancher, is president of the American Bondholders Foundation (ABF), which represents more than 20,000 owners of bonds issued by Chinese governments before the Communist revolution in 1949—and which claims that American citizens are owed more than $750bn. Having met Mr Trump at his golf resort in New Jersey last month, Ms Bianco hopes he will press their case.

The ABF’s claim is built on the widely accepted doctrine that governments inherit their predecessors’ debts. Pre-Communist Chinese governments flooded international markets with debt, such as a £25m (then $122m) issue of “gold loan” bonds in 1913. “As a legal matter, those debts still exist,” notes Mitu Gulati of Duke University. “But so too does the statute of limitations.”

Sovereign debtors are...

The IMF agrees to beef up Argentina’s bail-out

Thu, 09/27/2018 - 14:51

All smiles: Dujovne and Lagarde

THE three-year, $50bn credit line agreed on with the IMF on June 7th was intended to halt Argentina’s currency crisis. The peso had lost a quarter of its value against the dollar since the start of the year as investors fled to safe havens. It kept sliding. On August 29th Mauricio Macri, Argentina’s president, asked the IMF to bulk up the package. On September 26th, after three weeks of negotiations, the fund’s managing director, Christine Lagarde, agreed to increase Argentina’s credit line from $50bn to $57.1bn and accelerate its disbursal.

Argentina is on the brink of its second recession since Mr Macri took office in 2015. The peso has now fallen by more than half in 2018, pushing inflation to 34% in August. The central bank has raised interest rates to 60%. Investors worry that a further slide in the peso would leave Argentina unable to service its large pile of foreign-currency debt. Mr Macri’s approval ratings have slumped.


The trade deal between America and South Korea has barely changed

Thu, 09/27/2018 - 14:51

“IT’S a horrible deal. It was a Hillary Clinton disaster, a deal that should’ve never been made,” said America’s president in April 2017. Donald Trump was threatening to scrap his country’s free-trade agreement with South Korea, known as KORUS, claiming that it had left America “destroyed”. On September 24th, after he and Moon Jae-in, his South Korean counterpart, had signed a revised deal on the sidelines of the UN General Assembly in New York, Mr Trump sounded much more emollient. “This is a great day for the United States and a great day for South Korea,” he said, having hailed a “basic redoing” of the old, “unfair” version.

In fact, KORUS has undergone something well short of a full overhaul. Most of the original 24 chapters were untouched. KORUS is just the first of many pacts Mr Trump has said he wants to negotiate; on September 26th, for example, Mr Trump announced his intention to start formal talks with Japan. The Japanese may hope the results are similarly shallow.


The beleaguered BRICS can be proud of their bank

Thu, 09/27/2018 - 14:51

AS STORM clouds gather over emerging markets, the BRICS countries that were supposed to be the building blocks of a new globalised economy are instead in various degrees of trouble. Brazil and Russia are recovering only slowly from downturns. A sharp fall in the rupee reflects jitters about India. China is mired in a trade war with America. South Africa has slipped into a recession. Those who dismissed the BRICS as little more than a marketing acronym might feel justified in their cynicism. But at this moment of weakness, their most tangible creation—a bank that aims to reshape the world of development finance—is making surprising headway.

The New Development Bank (NDB), which is based in Shanghai, was founded just over three years ago. It has received far less attention than another multilateral lender launched a short time later, the Asian Infrastructure Investment Bank (AIIB) in Beijing. Take The Economist’s own coverage: a dozen articles have mentioned...

A radical idea for reducing inequality deserves more attention

Thu, 09/20/2018 - 14:46

RECENT decades have not been particularly good ones for those who toil on, rather than own, the means of production. Labour markets have made a slow and incomplete recovery from the trauma of the Great Recession. The crisis only briefly dislodged corporate profits as a share of GDP from historically high levels. Across much of the world, the share of national income flowing to labour has fallen over the past 40 years.

Taxing the rich in order to fund spending on the poor is a straightforward solution to inequality. But the well-heeled are adept at squeezing through tax loopholes, and at marshalling the political clout needed to chip away at high tax rates. Those frustrated by enduring levels of inequality are contemplating ever bolder ways to redress the lopsided balance between owners and workers.

In an ideal world, untrammelled markets would ensure that every firm and every worker earned precisely what they deserved. But as economists since Adam Smith have recognised, markets...

Extreme poverty is growing rarer

Thu, 09/20/2018 - 14:46

HANS ROSLING, a Swedish academic who died in 2017, became famous for telling people that the world was faring better than they believed. One of his favourite examples was the rapid decline in extreme poverty. Sadly, just as Rosling’s elegant charts and YouTube talks drilled that story into people’s minds, the facts began to change.

On September 19th the World Bank released estimates for extreme poverty in 2015, defined as living on less than $1.90 a day at 2011 purchasing-power parity. The good, Roslingish news is that poverty continued to diminish (see chart). In 2015 the extreme poor numbered 736m people, or 10% of the world. The Bank’s best guess for 2018 is 8.6%.

The bad news is that poverty is becoming harder to tackle. Over the past few decades, rapid economic growth and the expansion of welfare in Asia have borne down on extreme want there. That leaves sub-Saharan Africans as a growing majority of paupers. African poverty is especially intractable because of...

Asia is not immune to emerging-market woe

Thu, 09/20/2018 - 14:46

THERE are many ways to defend a currency. Ayam Geprek Juara, an Indonesian restaurant chain that serves crushed fried chicken, has offered free meals this month to customers who can show they have sold dollars for rupiah that day. The restaurant has provided more than 80 meals to these “rupiah warriors”, according to Reuters, a news agency.

Perhaps it should extend the offer to the staff of Bank Indonesia, the country’s central bank, which is only about 20 minutes away from one of the restaurant’s branches. To defend the rupiah, it has been selling billions of dollars of foreign-currency reserves, which have fallen from over $125bn in January to less than $112bn in August. Despite these sales, and four interest-rate rises since May, the rupiah has lost almost 10% of its value against the dollar this year, returning to levels last seen during the Asian financial crisis of 1997-98.

India’s rupee has fared even worse, reaching a record low against the dollar. And even where Asia’s...

The Fed stalls the creation of a bank with a novel business model

Thu, 09/20/2018 - 14:46

TEN years on from the financial crisis, the structure of American banking has not changed. At its core are government-guaranteed, and therefore cheap, deposits that banks put to work, primarily through lending. Deposits have become more important for bank funding in recent years; governments have become increasingly fussy about how the money is lent out. The basic set-up is so entrenched that many believe there is no alternative.

A startup called TNB, short for The Narrow Bank, is questioning that assumption, and causing a stir as a result. On August 31st TNB filed a complaint in federal court against the New York Fed, which, it alleges, is breaking the law by refusing to grant it access to the central bank’s payment system. The Fed has made no comment, but in response to growing pressure, it has acknowledged the complaint.

The case throws light on an unusual business model. Led by a former head of research at the New York Fed, TNB is based on the idea of a narrow bank, which was...

What a controversial pastry says about China’s economy

Thu, 09/20/2018 - 14:46

Gift or graft?

MOONCAKES are among the most divisive treats. For some the chewy pastries are delicacies on which to gorge for the Mid-Autumn Festival, a Chinese holiday that falls this year on September 24th. For others they are dry, dense and full of calories. But for economists they are something else entirely: an indicator of important trends in consumption, innovation, corruption and grey-market trading.

Mooncakes play this role because of their status as gifts. Ahead of the mid-autumn holiday, companies give them to employees; business contacts exchange them. Consumption of mooncakes is thus less a reflection of whether people enjoy the pastries, likened by some to edible hockey pucks, and more a measure of the health of the economy. So it is heartening to know that, amid rising trade tensions with America, the Chinese bakery association has forecast that sales of mooncakes will rise by a solid 5-10% this year.

Some observers fret that Chinese...

How the yuan sets the tone in currency markets

Thu, 09/20/2018 - 14:46

MARIO DRAGHI, boss of the European Central Bank (ECB), is a polished speaker, clear and direct. Yet there was a moment after the bank’s monetary-policy meeting on September 13th when he was uncharacteristically vague. Asked how the ECB might recycle the proceeds from maturing bonds once it ends its bond-buying programme, he said the issue had not come up. “We haven’t even discussed when we’re going to discuss it.” Perhaps at the meeting in November. Or December. It will be soon, anyway.

Much of what central banks do is now telegraphed well in advance. Despite the occasional absurdities involved in giving fine-grained “forward guidance”, the Federal Reserve, the ECB and others have trained investors to know when to expect an increase in interest rates. Indeed, central-bank watching is no longer just concerned with clues about the timing of interest-rate changes or plans for bond purchases or sales. It has reached a more elevated plane, where statements by central bankers are parsed...

Denmark’s biggest bank reports on its Estonian shambles

Thu, 09/20/2018 - 14:46

“THE bank has clearly failed to live up to its responsibility,” said Ole Andersen, chairman of Danske Bank, on September 19th. Well, indeed. The findings of an inquiry into the laundering of money, much of it from Russia, through Danske’s Estonian branch are sobering. The euro amount rinsed through the branch’s books runs to 12 digits and Danske missed chance after chance to stop the sluice. To no one’s surprise its chief executive, Thomas Borgen, has resigned.

Denmark’s biggest bank had already admitted doing too little to prevent the abuse of its branch between 2007, when it bought Finland’s Sampo Bank, the unit’s owner, and 2015. An 87-page report by Bruun & Hjejle, a law firm, both tries to quantify the suspicious activity and traces how Danske’s anti-laundering procedures went so catastrophically wrong.

The main conduit was the branch’s “non-resident portfolio”, comprising about 10,000 accounts, of which 3,000-4,000 were open at any one time. The branch also...

America and China are in a proper trade war

Wed, 09/19/2018 - 19:11

ANOTHER week, a further ratcheting up of trade tensions between America and China. On September 17th President Donald Trump announced that he had approved a further wave of tariffs on Chinese imports. From September 24th, imports of products which in 2017 were worth as much as $189bn, including furniture, computers and car parts, will be hit with duties of 10%. The Chinese have promised to retaliate on the same day with duties on $60bn of American exports. Unless peace breaks out before the new year, the American rate will increase to 25% on January 1st.

Mr Trump frequently rants about how the Chinese have long taken advantage of Americans. But American bureaucrats stress that the duties come after careful deliberation. The Office of the United States Trade Representative (USTR) took seven months to write a report detailing China’s unfair trade practices. Each tranche of tariffs has been consulted on and then revised. The latest set came after the USTR’s office had received 6,000...