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Updated: 2 hours 37 min ago

The choice of a boss for the New York Fed ends in a familiar way

Thu, 04/05/2018 - 14:51

John Williams: a neutral answer

THE president of the Federal Reserve Bank of New York is perhaps the second most important person in America’s financial hierarchy, behind only the chairman of the Federal Reserve. Unlike the presidents of the other regional Reserve Banks, he sits permanently on the committee in Washington, DC that sets interest rates. The New York Fed supervises Wall Street and, during financial crises, often gathers bankers to hash out a fix or to impose one on them. On April 3rd it was announced that John Williams would be next in line to take charge of the institution, replacing William Dudley.

Mr Williams has led the San Francisco Fed since 2011, when his predecessor in that job, Janet Yellen, moved to Washington. He is best known for his academic contributions to monetary policy. In particular, his estimates of the “neutral rate” of interest, at which money is neither tight nor loose, are regularly cited. In recent years he has appeared...

Insurance and the gig economy

Thu, 04/05/2018 - 14:51

THE rise of the gig economy means not only workers, but those who insure them, are having to adapt. Take third-party liability insurance—the sort that would pay out if, for instance, a courier hit and injured a pedestrian. An employee driving a company van would be covered by a standard commercial-insurance policy. But “gig” couriers, working when they wish and using their own cars, must often insure themselves. Even if they have personal cover, it will not usually pay out for accidents that happen while they are driving for work.

Among the firms seeking to fill this gap is Zego, which sprang up to serve scooter couriers such as those working for Deliveroo, a food-delivery service. Deliveroo and its rivals require proof of insurance from couriers, but had no easy way to check it was valid. Couriers, meanwhile, were often loth to pay stiff premiums. Harry Franks, formerly of Deliveroo and co-founder in 2016 of Zego, spotted an opportunity and convinced insurers that a different model could be...

Spotify makes its stockmarket debut

Wed, 04/04/2018 - 16:22

WHEN Spotify, a music-streaming service, went public on April 3rd, its founder, Daniel Ek, rang no bells on the trading floor of the New York Stock Exchange. Rather than the “pomp and circumstance” of an initial public offering, the Swedish firm, which is widely credited with turning round the fortunes of the music industry, opted for an unusual direct listing. No new shares were issued. Bankers did not sign up new investors, set a target price or stabilise early trading. Existing investors were simply allowed to trade their shares publicly.

Despite the low-key approach, and even as other tech firms’ shares wobbled, there was plenty of interest. That will cheer other firms considering going public. The share price ended its first trading day at $149, comfortably above prices reached in private markets earlier this year. That values the company at $26.5bn, making it the largest firm to list since Snap last year, and the eighth-largest tech listing ever.



Wed, 03/28/2018 - 15:36

“THIS will require a quick lesson in global economics…bear with me,” says Erik Killmonger, the muscular villain in “Black Panther”, a long-running Marvel Comics series. In that saga and the recent film it inspired, Killmonger and the Black Panther vie for the throne of Wakanda, a fictional African kingdom little known to the outside world. A land of great wealth and technological sophistication, it lends itself to several quick lessons in economics. Bear with us.

The source of Wakanda’s riches is its “great mound” of vibranium, a versatile ore left behind by a meteor strike, which can absorb sound and motion. Like other deposits of natural treasure, Wakanda’s vibranium attracts some vicious intruders. But unlike some other resource-rich countries, Wakanda has never succumbed to outside foes.

That has helped it escape the “resource curse”, in which natural riches keep a country poor by crowding out manufacturing or ushering in predatory government. The curse is greatly feared. But Wakanda’s success in eluding it is not as fantastical as widely believed. Many resource-rich economies, including Botswana and Norway, have prospered without superheroic help. According to an article in 2015 by Brock Smith of Montana State University, the 17 countries that discovered big oil, gas or diamond deposits after 1950 achieved GDP per...

America’s trade strategy has many risks and few upsides

Wed, 03/28/2018 - 15:36

AMERICA’S president claims to view China as a friend. But the friendship is going through a rocky patch, to say the least. America’s trade deficit with China, “the largest deficit in the history of our world”, is “out of control”, Donald Trump groused on March 22nd. “A tremendous intellectual-property theft situation” also irks him. And so, after laying out his concerns, he announced plans for some tough love. Litigation against China at the World Trade Organisation (WTO), investment restrictions and tariffs are all on the cards.

The announcement early in March of tariffs on steel and aluminium imports to America was chaotic, even prompting the resignation of Gary Cohn, the head of Mr Trump’s National Economic Council. The latest targeting of China, by contrast, is the culmination of months of planning and commands broader support. It was masterminded by Robert Lighthizer, the United States Trade Representative (USTR) and a seasoned trade lawyer. As a deputy USTR under Ronald Reagan in the...

Insurers and undertakers profit as people prepay their last bill

Wed, 03/28/2018 - 15:36

With all the trimmings

“WHEN are you thinking of dying?” asks John Cleese, a British comedian, in a recent television ad. Dressed as the Grim Reaper, he addresses the viewer as he prepares a cup of tea. “Your loved ones could be left all alone and distressed and facing a whacking great bill,” he warns. His advice? Phone in and buy a funeral plan.

As populations age, ads of this sort, imploring people to make financial preparations for their demise, are appearing on both sides of the Atlantic. Some 1.3m Britons now have a pre-paid funeral plan, up from just over 400,000 in 2005. An estimated 2.5m more have a funeral-insurance policy. Millions of Americans prepay some or all of their funeral costs.

The average American funeral now costs nearly $9,000, according to the National Funeral Directors Association (NFDA). In Britain prices have risen by 5.5% on average each year over the past decade, faster than inflation. Add to that stories in the press of...

The average American is much better off now than four decades ago

Wed, 03/28/2018 - 15:36

JUST how bad have the past four decades been for ordinary Americans? One much-cited figure suggests they have been pretty bad. The Census Bureau estimates that for the median household, halfway along the distribution, income has barely grown in real terms since 1979. But a recent report by the Congressional Budget Office (CBO), a non-partisan think-tank, gives a cheerier rise of 51% for median household income between 1979 and 2014. Which is nearer to reality?

The gap between the two is accounted for by three methodological differences (see chart). First, the CBO takes demography into account. This seems sensible: more Americans are living alone and American women are having fewer children, so households have fewer mouths to feed.

The second is that the CBO uses the personal-consumption expenditures (PCE) index to measure inflation, whereas the Census Bureau uses the consumer-price index (CPI). These differ in two main ways. The CPI includes only what consumers spend on themselves,...

India’s economy is back on track. Can it pick up speed?

Wed, 03/28/2018 - 15:36

Along for the ride

IT IS easy to be awed by the Indian railway network. The 23m passengers it carries daily travel, in total, over ten times the distance to the sun and back. It is just as easy to find it unimpressive. Delays are frequent and trains antiquated. It takes 14 hours to get from India’s capital, Delhi, to its commercial hub, Mumbai. The equivalent trip in China—from Beijing to Shanghai, a similar distance—takes just over four hours.

Similarly, India’s economy can be seen in two lights. Its long-term growth rate of 7% a year has proved far more dependable than the rail timetable. GDP has doubled twice in the past two decades. Yet deep poverty still lingers and jobs are scarce. And Indian growth has been left in the dust by the Chinese express (see chart).

After slow running for much of 2017, India is now near to full throttle. Growth of 7.2% in the three months to December put it ahead of China (which grew at a relatively leisurely 6.8%) and...

Asia’s small open economies may suffer in America’s trade war

Wed, 03/28/2018 - 15:36

CHINA is the stated adversary in Donald Trump’s incipient trade war. But 30% of the value of the goods China exports to America is added elsewhere. If the row escalates, countries entwined in Chinese supply chains will suffer.

In absolute terms, Japanese suppliers will fare worst. Japan is the country that exports most to firms in China that export onwards to America. But relative to economic size, such suppliers are a bigger part of several small, open Asian economies (see chart). Between 1% and 2% of some countries’ total output is shipped first to China and then on to America. If Chinese exports to America were to fall by 10%—an extreme but not impossible scenario—it...

China wants to reshape the global oil market

Wed, 03/28/2018 - 15:36

TRADITIONALLY, to count as an oil power a country had to be a big producer of the black stuff. China is the world’s biggest importer but still wants to break into that exclusive club. On March 26th it launched a crude futures contract in a bid to gain more clout in the global market. Some think that, if successful, the yuan could start to displace the dollar in oil trading. For now, though, that is fanciful.

A previous attempt by China to introduce oil futures, in the early 1990s, failed because of unstable pricing. This time regulators prepared methodically. To ward off speculators, notorious in Chinese markets, they made the storage of oil very expensive. Volumes were light in the first few days of trading—less than a tenth of the averages for similar contracts in New York and London. But all went smoothly. It was a good, if modest, start.

China has two goals. The basic one is to help its companies hedge against volatility. Chinese refiners and traders have struggled to...

More market volatility seems likely

Wed, 03/28/2018 - 09:33

“FASTEN your seat belts. It’s going to be a bumpy night.” Those famous lines of Bette Davis in “All About Eve” may turn out to be the motto for the markets in 2018. After the “volatility vortex” in February, sparked by concerns about inflation, markets have thrown a “tariff tantrum” after President Donald Trump sparked fears of a trade war with China.

In February stocks sank on heavy hints of American levies on imported steel and aluminium. The prospect of trade measures against China, signalled on March 22nd, again hit shares. Then reports that China and America were making progress in trade talks caused the S&P 500 index to rise by 2.7% on March 26th, its best day since August 2015. It promptly fell again by 1.7% the next day (see chart).

Further volatility seems likely, not least after the appointment of John Bolton, an ultra-hawk on foreign policy, as Mr Trump’s national security adviser. That raises the possibility of increased tension with North Korea, despite the recent...

Why tariffs on steel and aluminium are easier said than done

Thu, 03/22/2018 - 15:48

HISTORY will rhyme on March 23rd, when Donald Trump’s tariffs on steel and aluminium imports are due to come into force. Several previous presidents, from Ronald Reagan to Barack Obama, also used tariffs in an attempt to protect America’s steel producers from foreign competition. (There are historical echoes, too, in Mr Trump’s plans to slap tariffs on a range of Chinese imports; in the 1980s Japan was the target.) A rhyme is not a repeat. But past experience is not encouraging.

The central problem for America’s policymakers is that trade is like water. Block its flow in one place and pressure builds elsewhere. When many countries are covered by tariffs, trade may simply be diverted through those countries that are let off the hook. Importers will howl for exemptions. As a result, whatever the Trump administration’s broader ambitions with respect to trade, bellicose unilateralism will make them harder to achieve.

In 1982 America browbeat the European Community, the forerunner of the European Union, into limiting its steel exports to...

The EU wants to make finance more environmentally friendly

Thu, 03/22/2018 - 15:48

TO GAUGE an issue’s importance, a guest list is a good place to start. The one for a conference in Brussels on March 22nd to discuss the European Union’s “action plan” on sustainable finance features heavy-hitters including Emmanuel Macron, France’s president, and Michael Bloomberg, a former mayor of New York who campaigns on climate change. Given that sustainable finance is well-established, what action does the EU think is needed?

Investing with an eye to environmental or social issues, not just financial returns, has become mainstream in the past decade. According to the Global Sustainable Investment Alliance (GSIA), $23trn, or 26% of all assets under management in 2016, were in “socially responsible investments” that take account of environmental, social and governance (ESG) issues. New asset classes have sprung up. According to SEB, a Swedish bank, the issuance of green bonds, the proceeds of which are invested in environmental projects, reached $163bn in 2017, up from less than $500m in 2008.

Yet standards are a...

Europeans fret that Chinese investment is a security risk

Thu, 03/22/2018 - 15:48

“WE ARE not naive free traders. Europe must always defend its strategic interests,” said Jean-Claude Juncker, the president of the European Commission, last year as he introduced plans to screen foreign investment into the European Union. America has had such rules since the 1970s; they are set to tighten further. The EU used to be more relaxed about acquisitions by foreigners. Now it too is toughening up.

The target is China, whose firms have been on a shopping spree (see chart). Purchases of fripperies such as football clubs and hotels have been curbed by the Chinese authorities, but investment continues to flow into technology and infrastructure, notes James Zhan of the...

The digitisation of trade’s paper trail may be at hand

Thu, 03/22/2018 - 15:47

Dockumentary evidence

THE enormous ships steaming into and out of the world’s ports do not only carry cargo. They also represent paperwork: bills of lading (BOLs), packing lists, letters of credit, insurance policies, orders, invoices, sanitary certificates, certificates of origin. Maersk, the world’s biggest container-shipping line, found that a shipment of avocados from Mombasa to Rotterdam in 2014 entailed more than 200 communications involving 30 parties. A giant container vessel may be associated with hundreds of thousands of documents. “A Venetian merchant…would recognise some of our documentation,” says John Laurens, head of global transaction services at DBS, a Singaporean bank.

According to the World Economic Forum, the costs of processing trade documents are as much as a fifth of those of shifting goods. Removing administrative blockages in supply chains could do more to boost international trade than eliminating tariffs. Full digitisation of trade...

What if China corners the cobalt market?

Thu, 03/22/2018 - 15:47

COBALT derives its name from Kobold, a mischievous German goblin who, according to legend, lurks underground. For centuries it vexed medieval miners by lookinglike a valuable ore that subsequently turned into worthless—and sometimes noxious—rubble. Once again it is threatening to cause trouble, this time in the growing market for batteries for electric vehicles (EVs), each of which uses about 10kg of cobalt. The source of mischief is no longer in Germany, though, but in China.

It is widely known that more than half of the world’s cobalt reserves and production are in one dangerously unstable country, the Democratic Republic of Congo. What is less well known is that four-fifths of the cobalt sulphates and oxides used to make the all-important cathodes for lithium-ion batteries are refined in China. (Much of the other 20% is processed in Finland, but its raw material, too, comes from a mine in Congo, majority-owned by a Chinese firm, China Molybdenum.)

On March 14th concerns about...

Can’t hardly wait

Thu, 03/22/2018 - 15:47

LIKE teenagers, central bankers long to feel normal. For many of them (the central bankers, that is), the past decade has been an unusually angst-ridden one. They stumbled through it, confused by the way their policymaking bodies were changing, unsure what to do with their interest rates, embarrassed by their burgeoning balance-sheets. Teenagers often seek to quell their anxiety and insecurity by imitating behaviour they regard as normal. So too for central bankers.

But the desire to normalise policy, and leave crisis-era measures behind, could distract central bankers from their main goals, namely to support growth and control inflation. The Bank for International Settlements, a global club for central bankers, recently urged officials not to let market jitters discourage them from raising interest rates. Yet at worst, chasing some elusive notion of normal could put the global recovery at risk.

What central bankers mean by normalising policy is clear enough. As Peter Praet, the chief economist of the European Central Bank (ECB), explained in a recent speech, to normalise is to end their reliance on “unconventional” or “non-standard” tools such as quantitative easing (QE, the printing of new money to buy assets). It means returning to a familiar world in which adjustments to interest rates are their main policy lever.

Central bankers make no...

Wall Street looks overvalued

Thu, 03/22/2018 - 15:47

FEW measures of stockmarket valuation are as controversial as the cyclically adjusted price-earnings ratio, or CAPE. American equities have looked expensive on this measure for most of the past 20 years, which is why many bulls tend to dismiss its usefulness. It is pretty clear that the CAPE does not help investors to time the market.

But a new paper* from Research Affiliates, a fund-management group, explains why many criticisms are overblown. The strongest case for the measure is that a higher ratio tends to be associated with lower long-term returns. A study of 12 national markets shows that a 5% increase in the CAPE, from 20 to 21, say, tends on average to reduce the total ten-year expected return by four percentage points.

The attraction of the CAPE is that it smooths out the vicissitudes of the profit cycle. In a recession, profits can plunge even faster than share prices. So if you look only at the ratio of a share price and the previous year’s profits, the market can look very...

In America, a political coalition in favour of protectionism may be emerging

Thu, 03/15/2018 - 15:50

THE post-war system of global trade has been close to expiring, seemingly, for most of the post-war period. It tottered in the 1980s, when Ronald Reagan muscled trading partners into curbing their exports to America. It wobbled with the end of the fruitless Doha round of trade talks. The system now faces the antediluvian economics of President Donald Trump, who seems bent on its destruction.

Mr Trump’s mercantilism is gaining steam. Straight after saying he would slap hefty tariffs on aluminium and steel imports, he is setting his sights on China, a favourite stump-speech bogeyman. This week he blocked the takeover of an American chipmaker by a Singaporean rival, because of fears of Chinese technological leadership. He is poised to act against China over its theft of intellectual property and its trade surplus.

And yet global trade has proven itself to be remarkably resilient. An optimist could argue that, historically, it is big political realignments that overturn trade-policy...

Why Japanese houses have such limited lifespans

Thu, 03/15/2018 - 15:50

EVERY 20 years in the eastern coastal Japanese city of Ise, the shrine, one of the country’s most venerated, is knocked down and rebuilt. The ritual is believed to refresh spiritual bonds between the people and the gods. Demolishing houses has no such lofty objective. Yet in Japan they have a similarly short life expectancy.

According to Nomura, a brokerage, the value of the average Japanese house depreciates to zero in 22 years. (It is calculated separately from the land, which is more likely to hold its value.) Most are knocked down and rebuilt. Sales of new homes far outstrip those of used ones, which usually change hands in the expectation that they will be demolished and replaced. In America and Europe second-hand houses accounted for 90% of sales and new-builds for 10% in 2017. In Japan the proportions are the other way around.

The reasons for Japanese houses’ rapid loss of value lie partly in tradition. In many countries people buy when they pair off, when they move to a...