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Updated: 1 hour 32 min ago

Increasingly, hunting money-launderers is automated

Thu, 11/02/2017 - 15:51

KEEN, no doubt, to stay alive, drug traffickers tend to be prompter payers than most. For software firms, this is just one of many clues that may hint at the laundering of ill-gotten money. Anti-money-laundering (AML) software, as it is called, monitors financial transactions and produces lists of the people most likely to be transferring the proceeds of crime.

Spending on this software is soaring. Celent, a research company, estimates that financial firms have spent roughly $825m on it so far this year, up from $675m last year. Technavio, another research firm, reckons the market is even bigger and will grow at more than 11% annually in coming years. This is partly because authorities are increasingly quick to punish institutions that let down their guard. Deutsche Bank, for example, has been hit with fines worth at least $827m this year alone. Governments, eager to appear tough on crime, are urging prosecutors to go after not just institutions, but also their employees.

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As the global economy picks up, inflation is oddly quiescent

Thu, 11/02/2017 - 15:51

A FEW years ago, the news about the euro-zone economy was uniformly bad to the point of tedium. These days, it is the humdrum diet of benign data that prompts a yawn. Figures this week show that GDP rose by 0.6% in the three months to the end of September (an annualised rate of 2.4%). The European Commission’s economic-sentiment index rose to its highest level in almost 17 years. Yet when the European Central Bank’s governing council gathered on October 26th, it decided to keep interest rates unchanged, at close to zero, and to extend its bond-buying programme (known as quantitative easing, or QE) for a further nine months.

The central bank said it would slow down the pace of bond purchases each month, to €30bn ($35bn) from January. But Mario Draghi, the bank’s boss, declined to set an end-date for QE. A hefty dose of easy money will be necessary, he argued, until inflation durably converges on the ECB’s target of just below 2%. It shows few signs of doing so, despite the economy’s...

October 30th marked the 70th birthday of the WTO’s precursor

Thu, 11/02/2017 - 15:51

Britain signs up

SUPERLATIVES surrounded the General Agreement on Tariffs and Trade (GATT) when it was signed on October 30th 1947. A press release heralded it as “the most far-reaching negotiation[s] ever undertaken in the history of world trade.” The Economist grumbled it was “one of the longest and most complicated public documents ever issued—and one of the hardest to comprehend.” The Daily Express, a British newspaper, growled: “The big bad bargain is sealed.”

The agreement’s complexity matched the tangle of global trade affairs. In the preceding decades a thicket of protectionism had strangled commerce and slowed recovery from the Depression of the 1930s. The GATT’s length matched its scope. It included both tariff cuts and promises to forswear new duties. Covering 23 countries responsible for 70% of world trade, it came to embody the rules-based multilateral system.

After 48 years as a...

Asian households binge on debt

Thu, 11/02/2017 - 15:51

ONE of the more persistent beliefs about the global economy is that Asians are more frugal than others. Explanations have drawn on culture (the self-discipline of Confucianism), history (memories of privation) and public policy (flimsy social safety-nets forcing people to save). For Lee Kuan Yew, the founding father of Singapore, and other theorists of “Asian values”, thrift was one of them. Whatever the true reason, data long supported the basic claim that Asian households were indeed careful with their cash. But over the past few years consumers across the region have done their best to prove that prudence was perhaps just a passing phase.

Household debt in advanced economies has generally declined as a percentage of GDP since the 2008 global financial crisis, according to the Bank for International Settlements. In a number of Asian countries, however, it has been going in the opposite direction (see chart). The biggest increase has been in China, where households have borrowed about $4.5trn over the past decade. But Chinese...

Catalonia and the perils of fiscal redistribution

Thu, 11/02/2017 - 15:51

POPULISM is the weapon not just of the downtrodden. As the crisis in Catalonia demonstrates, the rich have economic anxieties of their own. Catalonia has an identity distinct, in important ways, from that of the rest of Spain. But the recent drive for independence has been energised by anger over the flow of fiscal redistribution from rich Catalans to their countrymen: people seen, in parts of the restless north-east, as thankless and lazy as well as alien. Paradoxically, globalisation has inflamed separatism around the world by raising the question Catalans now confront: to whom, exactly, do we owe a sense of social responsibility?

Every country or restive region has its own idiosyncratic history. Yet over the long run national borders are surprisingly malleable. Some circumstances offer better prospects for the small and newly independent than others. The smaller the country, the more easily its government can satisfy its people’s political preferences. A broadly satisfying...

Investors call the end of the government-bond bull market (again)

Thu, 11/02/2017 - 15:51

FOR the umpteenth time in the past decade, a great turning-point has been declared in the government-bond market. Bond yields have risen across the world, including in China, where the yield on the ten-year bond has come close to 4% for the first time since 2014. The ten-year Treasury-bond yield, the most important benchmark, has risen from 2.05% in early September to 2.37%, though that is still below its level of early March (see chart).

Investors have been expecting bond yields to rise for a while. A survey by JPMorgan Chase found that a record 70% of its clients with speculative accounts had “short” positions in Treasury bonds—ie, betting that prices would fall and that yields would rise. Meanwhile a poll of global fund managers by Bank of America Merrill Lynch (BAML) in October found that a net 85% thought bonds overvalued. In addition, 82% of the managers expected short-term interest rates to rise over the next 12 months—something that tends to push bond yields higher.

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Firms should make more information about salaries public

Thu, 10/26/2017 - 14:47

SWEDES discuss their incomes with a frankness that would horrify Britons or Americans. They have little reason to be coy; in Sweden you can learn a stranger’s salary simply by ringing the tax authorities and asking. Pay transparency can be a potent weapon against persistent inequities. When hackers published e-mails from executives at Sony Pictures, a film studio, the world learned that some of Hollywood’s most bankable female stars earned less than their male co-stars. The revelation has since helped women in the industry drive harder bargains. Yet outside Nordic countries transparency faces fierce resistance. Donald Trump recently cancelled a rule set by Barack Obama requiring large firms to provide more pay data to anti-discrimination regulators. Even those less temperamentally averse to sunlight than Mr Trump balk at what can seem an intrusion into a private matter. That is a shame. Despite the discomfort that transparency can cause, it would be better to publish more information....

Firms should make more information about salaries public

Thu, 10/26/2017 - 14:47

SWEDES discuss their incomes with a frankness that would horrify Britons or Americans. They have little reason to be coy; in Sweden you can learn a stranger’s salary simply by ringing the tax authorities and asking. Pay transparency can be a potent weapon against persistent inequities. When hackers published e-mails from executives at Sony Pictures, a film studio, the world learned that some of Hollywood’s most bankable female stars earned less than their male co-stars. The revelation has since helped women in the industry drive harder bargains. Yet outside Nordic countries transparency faces fierce resistance. Donald Trump recently cancelled a rule set by Barack Obama requiring large firms to provide more pay data to anti-discrimination regulators. Even those less temperamentally averse to sunlight than Mr Trump balk at what can seem an intrusion into a private matter. That is a shame. Despite the discomfort that transparency can cause, it would be better to publish more information....

Italy’s fourth-biggest bank returns to the stockmarket

Thu, 10/26/2017 - 14:47

A TELEVISION advertisement for Monte dei Paschi di Siena begins with a toddler tumbling and a gymnast stumbling. “Falling is the first thing we learn,” declares the voice-over. “The second is getting up again.” Italy’s fourth-biggest bank and the world’s oldest, which was bailed out by the Italian government in July, has had several bruising falls over the years. On October 25th it returned to the stockmarket after a ten-month hiatus—the latest stage of its plan to get back on its feet. The shares closed higher on the day, at €4.55 ($5.37), but still far below the €6.49 the government paid.

Trading was suspended last December, after a failed private-sector attempt to save the bank through a share issue. The government said it would get involved. In July the European Commission approved a €8.1bn “precautionary recapitalisation”. European rules say banks receiving such aid must be solvent, the capital injection must not distort competition and the capital shortfall must be...

India recapitalises its state-owned banks

Thu, 10/26/2017 - 14:47

Pillars to be reinforced

ONE of the perks of owning a bank is the ability to tap it when you need money. The Indian government, which has majority stakes in 21 lenders, is no exception. As it happens, it needs to finance a bail-out of the banks it owns, most of which are in trouble. So under a cunning plan unveiled on October 24th, the ailing banks will lend the government 1.35trn rupees ($21bn), about a third of their combined market value. The government will reinvest this money in bank shares, thus ensuring they no longer need a bail-out.

Steadying a tottering financial system is never a graceful exercise, as American and European authorities discovered after the financial crisis. India’s lenders withstood the meltdown of 2007-08 well, but then embarked on an ill-advised lending spree, backing lots of infrastructure projects that got snarled in bureaucracy. Bad loans piled up. State-owned lenders, which account for around two-thirds of the sector, now...

Millennials are doing better than the baby-boomers did at their age

Thu, 10/26/2017 - 14:47

ALL men are created equal, but they do not stay that way for long. That is one message of a report this month by the OECD, a club of 35 mostly rich democracies. Many studies show how income gaps have evolved over time or between countries. The OECD’s report looks instead at how inequality evolves with age.

As people build their careers, or don’t, their incomes tend to diverge. This inequality peaks when a generation reaches its late 50s. But it tends to fall thereafter, as people draw redistributive public pensions and quit the rat race, a contest that tends to give more unto every one that hath. Old age, the OECD notes, is a “leveller”.

Will it remain so? Retirement, after all, flattens incomes not by redistributing from rich seniors to poor, but by transferring money to old people from younger, working taxpayers. There will be fewer of them around in the future for every retired person, reducing the role of redistributive public pensions.

One logical response to the diminishing number of workers per pensioner is to raise the retirement age. But that will exacerbate old-age inequality, if mildly. Longer careers will give richer workers more time to compound their advantages. And when retirement eventually arrives, the poor, who die earlier, will have less time to enjoy their pensions.

Today’s youngsters may resent having to provide for...

Silicon speculators

Thu, 10/26/2017 - 14:47

Nail-biting decisions

EXCHANGE-TRADED funds (ETFs) were supposed to make investing easy. Instead of spending hours researching individual stocks and bonds or paying an expert fund manager, investors could simply buy a few ETFs. But now there are too many to choose from. BlackRock offers 346 in America alone. Some investors need help allocating their money between different funds. Many companies now offer “automated wealth managers” (AWMs) that perform this service.

AWMs have been around for less than ten years, but they have proliferated, offering different services in different countries. Often, they are called “robo-advisers”, but this term can be misleading. Some offer clients detailed advice about how to save. For example, Wealthfront, an American AWM, predicts the cost of sending a student to a given college, taking into account increases in tuition fees and likely financial aid. It then suggests how parents can save in a tax-efficient way. Other...

Will corporate tax cuts boost workers’ wages?

Thu, 10/26/2017 - 14:47

THE president’s tax promise has always been clear: he will reduce the amount middle-earners, but not rich Americans, must pay. Yet every time Donald Trump releases a plan, analysts say it does almost the opposite. The Tax Policy Centre, a think-tank, recently filled in the blanks in the latest Republican tax proposals and concluded that more than half of its giveaways would go to the top 1% of earners. Their incomes would rise by an average of $130,000; middle-earners would get just $660. The White House maintains that tax reform will deliver a much heftier boost to workers’ pay packets. Who is right?

The disagreement boils down to who benefits when taxes on corporations fall. The Tax Policy Centre says it is mainly rich investors. But in a report released on October 16th, Mr Trump’s Council of Economic Advisers (CEA) claimed that cutting the corporate-tax rate from 35% to 20%, as Republicans propose, would eventually boost annual wages by a staggering $4,000-9,000 for the average household.

The claim has sparked a debate among economists that is as ill-tempered as it is geeky. Left-leaning economists are incredulous. Writing in the Wall Street Journal, Jason Furman, who led the CEA under Barack Obama, pointed out that if the report is right, wage increases would total about three to six times the cost of the tax cut. Larry...

For American Express, competition will only intensify

Thu, 10/26/2017 - 14:47

HE IS leaving with the share price rising and the announcement, on October 18th, of earnings that were largely well received. Better still, Kenneth Chenault, American Express’s chief executive for 16 years, accomplished a feat rare in the upper reaches of American finance: to stand down without an obvious helping shove. No grandstanding senators hounded him out (see Wells Fargo). No boardroom coup hastened the end (Citigroup). The financial crisis left him untouched (take your pick). His successor, Stephen Squeri, promoted from within and apparently groomed for the job, takes over in February.

For all that, Mr Chenault’s long tenure has not been an unequivocal triumph. Though generating strong returns on assets and equity, American Express has continued its slide within the fast-changing and competitive payments industry. According to Nilson, an industry bible, in 1974 the amount of money for purchases channelled through American Express was equivalent to 50% of what went through...

Sauce for a Brussels goose

Thu, 10/26/2017 - 14:47

DIVORCES are rarely easy. In the 16 months since Britain voted to leave the EU in a referendum, the negotiations have made little progress. One of the trickiest aspects is the amount that Britain should pay to meet its existing spending commitments for EU programmes.

This is not analogous to dividing up the bill in a restaurant, and deciding who had the lobster and who stuck to the mixed green salad. Take the cost of EU officials’ pensions. The tricky bit in calculating it is that pensions are long-term commitments; a bureaucrat who starts work in Brussels today might still be collecting a pension 70 years from now. Working out the cost is fiendishly complicated, requiring estimates of how much wages will rise (if the pension is linked to salary) and how long employees will live. Then the sum of future benefits has to be discounted at some rate to work out the current cost; the higher the discount rate, the lower the presumed expense.

The EU doesn’t pre-fund pensions...

How should recessions be fought when interest rates are low?

Thu, 10/19/2017 - 14:57

ONE day, perhaps quite soon, it will happen. Some gale of bad news will blow in: an oil-price spike, a market panic or a generalised formless dread. Governments will spot the danger too late. A new recession will begin. Once, the response would have been clear: central banks should swing into action, cutting interest rates to boost borrowing and investment. But during the financial crisis, and after four decades of falling interest rates and inflation, the inevitable occurred (see chart). The rates so deftly wielded by central banks hit zero, leaving policymakers grasping at untested alternatives. Ten years on, despite exhaustive debate, economists cannot agree on how to handle such a world.

During the next recession, the “zero lower bound” (ZLB) on interest rates will almost certainly bite again. When it does, central banks will reach for crisis-tested tools, such as quantitative easing (creating money to buy bonds) and promises to keep rates low for a long time. Such policies will...

Higher taxes can lower inequality without denting economic growth

Thu, 10/19/2017 - 14:57

INEQUALITY is one of the big political issues of the 21st century, with many commentators citing it as a significant factor behind the rise of populism. After all, nothing could be more indicative of the triumph of the common man than the elevation of a property billionaire to the American presidency.

A new IMF report* looks at how fiscal policy can help tackle inequality. In advanced economies, taxation already has an impact. The Gini coefficient (a standard measure of income inequality) is around a third lower after taxes and transfers than it is before them. But whereas such policies offset around 60% of the change in market inequality between 1985 and 1995, they have had barely any impact since.

That is because of a change in policy direction. Across the West, taxes on higher incomes have generally fallen. This could be for a number of reasons, the IMF says. The tax take from high earners could have become more “elastic” (ie, sensitive to rate changes); in a mobile...

Politics ensnares South Africa’s biggest asset manager

Thu, 10/19/2017 - 14:57

Matjila, survivor

THE rot in South African politics, which has eaten away at state companies, is spreading. This week McKinsey, a consultancy, apologised for the “distress” it had caused the South African people. Political mud had already drowned Bell Pottinger, a British public-relations firm, and forced resignations at KPMG, an auditor. So the shenanigans at the government-owned Public Investment Corporation (PIC), have set off alarm bells. One concern is an apparent attempt to oust Dan Matjila, its boss. A linked worry is whether PIC funds will be used to prop up state businesses.

The PIC is a lucrative prize: it is Africa’s largest money manager, controlling 1.9trn rand ($140bn) of assets, mostly the pensions of state employees, and holding 11% of shares in South Africa’s biggest 25 companies. So anonymous allegations against Mr Matjila, including the claim that he had misdirected funds to his girlfriend’s business, naturally provoked a furore. On...

Workers are not switching jobs more often

Thu, 10/19/2017 - 14:57

EVERYBODY knows—or at least thinks he knows—that a millennial with one job must be after a new one. Today’s youngsters are thought to have little loyalty towards their employers and to be prone to “job-hop”. Millennials (ie, those born after about 1982) are indeed more likely to switch jobs than their older colleagues. But that is more a result of how old they are than of the era they were born in. In America at least, average job tenures have barely changed in recent decades.

Data from America’s Bureau of Labour Statistics show workers aged 25 and over now spend a median of 5.1 years with their employers, slightly more than in 1983 (see chart). Job tenure has declined for the lower end of that age group, but only slightly. Men between the ages of 25 and 34 now spend a median of 2.9 years with each employer, down from 3.2 years in 1983.

It is middle-aged men whose relationship with their employers has changed most dramatically. Partly because of a collapse in the number...

A rash of bankruptcies hits Chinese lenders backed by state firms

Thu, 10/19/2017 - 14:57

THE Communist Party dominates China’s economy and uses state-run companies, which it controls with an iron fist, to enforce its diktats. Or so the theory goes. Reality is messier: the party often struggles to monitor state-owned enterprises (SOEs), let alone to get them to toe its line. As it convenes its five-yearly congress, one of the financial system’s dodgiest corners has served up a reminder of the limits to its power.

In the past two months at least seven online lenders backed by SOEs have collapsed. It was a business none should have been in, far removed from the industries they were supposed to focus on. The money potentially lost is trivial—roughly 1bn yuan ($150m), compared with government assets worth more than 100trn yuan. Still, these cases highlight how hard it is for the party to stamp its authority on the vast state sector.

The troubled SOEs include distant subsidiaries of the national nuclear company, an aviation company and a big energy company in...

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