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Updated: 2 hours 32 min ago

Is modern monetary theory nutty or essential?

Tue, 03/12/2019 - 18:06

“MODERN MONETARY THEORY” sounds like the subject of a lecture destined to put undergraduates to sleep. But among macroeconomists MMT is far from soporific. Stephanie Kelton, a leading MMT scholar at Stony Brook University, has advised Bernie Sanders, a senator and presidential candidate. Congresswoman Alexandria Ocasio-Cortez, a young flag-bearer of the American left, cites MMT when asked how she plans to pay for a Green New Deal. As MMT’s political stock has risen, so has the temperature of debate about it. Paul Krugman, a Nobel prizewinner and newspaper columnist, recently complained that its devotees engage in “Calvinball” (a game in the comic strip “Calvin and Hobbes” in which players may change the rules on a whim). Larry Summers, a former treasury secretary now at Harvard University, recently called MMT the new “voodoo economics”, an insult formerly reserved for the notion that tax cuts pay for themselves. These arguments are loud, sprawling and difficult to weigh up. They also speak volumes about macroeconomics.

MMT has its roots in deep doctrinal fissures. In the decades after the Depression economists argued, sometimes bitterly, over how to build on the ideas of John Maynard Keynes, macroeconomics’ founding intellect. In the end, a mathematised, American strain of Keynesianism became dominant, while other variants were lumped...

Prices of prime properties around the world are falling

Thu, 03/07/2019 - 15:49

ONE BLACKFRIARS soars into the sky from the south bank of the River Thames, announcing its presence to central London. The new 50-storey tower contains 274 luxury flats that range in value from a merely expensive £1m ($1.3m) to an eye-watering £15m. Thanks to its distinctive midriff the building has been nicknamed “The Tummy” by Robert Shiller, who won a Nobel economics prize for his work on spotting asset bubbles. The name might also apply to London’s bloated housing market. Prices have nearly doubled since 2009.

It is not only in London that property values bulged in the decade after a housing bust that nearly took down the world’s financial system: prices are near new highs in many places, according to The Economist’s latest roundup of global housing markets (see chart). In five of the world’s most desirable cities—Hong Kong, London, New York, Sydney and Vancouver—home prices climbed steadily for several years after 2009.


National development banks are back in vogue

Thu, 03/07/2019 - 15:49

TONY OKPANACHI could be a dealmaker in the City of London or on Wall Street. Smart tie, winning smile, he recounts his 28-year career as a high-flying financier, from his MBA to his last private-sector job as an executive at Ecobank, a pan-African lender. He says profits are important and dismisses handouts to small businesses as “government largesse”. Yet appearances can deceive. “I’m an economist by training, and a commercial banker by profession,” he says. “Now I’m a development banker.”

Mr Okpanachi is the boss of Development Bank of Nigeria (DBN), a wholesale lender to small firms that started operating in 2017. His institution is part of a proliferation of national development banks (NDBs) worldwide. Kevin Gallagher, of Boston University, and Rogerio Studart, of the Federal University of Rio de Janeiro, believe there are more than 250, with total assets of $4.9trn, four times those of multilateral peers. Poor countries account for over three-quarters of the tally, but NDBs are also popular in the rich world. France and Canada have recently opened three between them. Myanmar and Ghana are rolling out new ones. Britain unusually, has no NDB—but some politicians want one.

NDBs are a unique species. Generally state-owned, they lend in pursuit of missions set out by the government. They cater to those often neglected...

China’s trading day is starting to influence global markets

Thu, 03/07/2019 - 15:49

IN HIS BOOK “The Death of Gentlemanly Capitalism”, Philip Augar described a shift in the culture of London’s financial industry during the 1980s and 1990s. The old City of public-school amateurism, late starts, early finishes and long, boozy lunches disappeared. In its place, a new City emerged under the sway of American investment banks. The morning meeting started two hours earlier. Lunch was a sandwich at your desk. And instead of port and cigars, try mineral water.

It was time to sober up, too, because America’s influence on the London market went well beyond the acquisition by its banks of a few old-school stockbrokers. America was home to much of the world’s capital. As more buying and selling of assets took place across borders and time zones, the New York trading day set the tone for markets everywhere else. A City broker had to be at his desk, and with his wits about him, when the New York market opened just after lunchtime in London.

The global trading day still only truly begins when New York clears its throat. Markets in the rest of the world then take note of what has been said. But listen closely, and you hear the beginnings of a dialogue. China has barely opened its capital markets to foreign investors and the yuan is still a managed currency. Yet its say in how global markets rise and fall is already...

The London Stock Exchange is thriving despite Brexit

Thu, 03/07/2019 - 15:49

WHEN LSE Group, the parent company of the London Stock Exchange, Europe’s largest, released its 2018 annual results on March 1st, there was an elephant on the trading floor. During the hour-long earnings call, LSE’s boss, David Schwimmer, mentioned Brexit just eight times. Six of those occasions came after slide 28.

Mr Schwimmer need not have been so cautious. Britain may be in political turmoil and banks may be shifting jobs and assets out of London, but Brexit is doing little to perturb LSE. Last year the group’s revenue grew by 8% and its operating profit by 15%. Its share price is up by 22% since December. LSE did announce 250 job cuts, 5% of its staff, but after 27 acquisitions and investments in the past decade, it has some tidying to do. It retains five different offices in New York, for example.

In theory, Brexit chaos could harm the exchange, either because investors shun British companies or because they are too nervous to trade at all. Yet last year they traded more, as they swapped racier holdings for more defensive stocks. Opportunistic buyers also jumped in. Because the LSE collects a fee on every transaction, volatility has meant more money coming in.

More important, it has diversified away from cyclical activities since the financial crisis of 2007-08. Trading now accounts for a mere fifth of...

More banks are caught up in money-laundering scandals

Thu, 03/07/2019 - 15:49

THE MONEY-LAUNDERING scandal that struck Danske Bank last year was staggering. The Danish lender’s Estonian branch is suspected of handling up to $230bn of iffy funds from former Soviet states. Aftershocks are rumbling under other European banks. Shares in Austria’s Raiffeisen Bank International tumbled by more than 12% on March 5th after a complaint was filed accusing it (and, to a lesser extent, other Austrian banks) of “gross negligence or acquiescence” in connection with suspicious flows from Danske. Raiffeisen says it is investigating.

Raiffeisen is just the latest bank to be suspected of channelling dirty money from Europe’s eastern fringes. Helsinki-based Nordea and Sweden’s Swedbank are among those embroiled in the Danske affair. Swedbank’s share price has shed 18% since it was linked to Danske last month (see chart). Some banks have been stained by a separate scheme, the “Troika Laundromat”. European banks caught up in such allegations have lost €20bn ($22.6bn) or so in stockmarket value in the past six months.


China’s economy might be nearly a seventh smaller than reported

Thu, 03/07/2019 - 10:33

FOR A COUNTRY that is regularly accused of manipulating its statistics, China is remarkably diligent about collecting them. The government has dispatched two million boffins to visit companies, stores and even street stalls in the first few months of this year, as part of a new national economic census. Ads plastered on billboards implore people to co-operate. In a flashy promotional video on its website, the national statistics bureau warns that any fabrication of data is against the law.

But these laudable efforts do not appear to be solving the basic problems with Chinese statistics. A new paper, by Chang-Tai Hsieh of the University of Chicago and three co-authors from the Chinese University of Hong Kong, finds that industrial output and investment have been consistently embellished. As a result, they argue that China overstated real GDP growth by two percentage points on average every year from 2008 to 2016 (see chart). Over time that adds up: official figures for 2016 would have exaggerated the size of the economy by 16%, or more than $1.5trn.


Why did the China shock hurt so much?

Wed, 03/06/2019 - 15:08

THE PEOPLE of Des Moines, Iowa, are no strangers to economic upheaval. When a wave of Japanese imports arrived in America in the 1980s, their city was one of the places most vulnerable to the new competition. In 1974, 4,500 of them worked at making farm machinery and equipment. As many again made tyres and inner tubes. By 1990 only a little over half of those jobs were left. Yet in the intervening 16 years thousands of new jobs had sprouted, in life insurance, building materials and the restaurant trade. In 1990 Des Moines’ unemployment rate was below 4%, less than the national average of 5.6%.

Not everyone fared as well. Mary Kate Batistich and Timothy Bond, of Purdue University, have recently estimated that the “Japan shock” explains about one-fifth of the fall in African-Americans’ labour-force participation between 1970 and 1990. But Des Moines’ experience was typical. Kerwin Kofi Charles, Erik Hurst and Mariel Schwartz, of the University of Chicago, found that local declines in manufacturing employment in the 1980s were not associated with increases in local unemployment rates.

That may surprise someone familiar with research on the impact on America of trade with China in the 1990s and 2000s. Mr Charles and his colleagues also concluded that in the 2000s jobless rates tended to rise when manufacturing...

Commerzbank and Deutsche Bank would gain little by merging

Thu, 02/28/2019 - 15:42

GERMANY’S ECONOMY may be slowing, but its financial capital is booming. New towers are rising to join those of Commerzbank, Deutsche Bank, DZ Bank, Helaba and others on Frankfurt’s jagged skyline. More are on the drawing board. Had you read no financial news for the past decade, you might presume that Germany’s banks were thriving too.

How wrong you would be. Bankers grumble about subterranean official interest rates—they must pay the European Central Bank 0.4% a year to deposit cash—that show no sign of rising. Those compound an old problem: Germany’s extraordinarily crowded banking market. The country has 1,580 banks, grouped in three “pillars”: private, public and co-operative. Although the grand total is shrinking by 40-60 a year, the public pillar still contains 385 Sparkassen—savings banks, mainly municipally owned—and half a dozen Landesbanken—regional lenders, such as Helaba, that also act as clearers for Sparkassen. There are 875 local co-ops. Their clearer and corporate lender, DZ Bank, is Germany’s second-biggest bank by assets.

Some, to be sure, have found ways of making money. Unencumbered by the cost of running branches, DiBa, an online bank owned by ING, a Dutch lender, has clocked up double-digit returns on equity (ROE). But...

Will a worsening outlook for inflation force the ECB to act?

Thu, 02/28/2019 - 15:42

PATIENCE, PERSISTENCE and prudence: the latest incarnation of the European Central Bank’s policy guidance appears to take a leaf out of early Christian writings on virtue. The central bank has counselled that, because it takes time for pricing pressures to recover from crisis years, it will keep interest rates unchanged at least through the summer of this year.

Its waiting game, though, is being sorely tested. Underlying pricing pressures have been doggedly low for years. Now gloomy economic news risks further delaying their recovery. At its monetary-policy meeting on March 7th the bank will have to consider whether to ease policy.

The headline inflation rate, which stood at 1.4% in January, has been buffeted around by movements in oil prices. But core inflation, which strips out volatile components such as food and energy prices, has proved difficult to budge. It has hovered around 1% since 2015. That is subdued compared with its average level in 2000-07, and far off the bank’s target of headline inflation below, but close to, 2%.

The bank had hoped that above-trend economic growth would drive up wages and eventually force companies to put up their consumer prices. Indeed, economic growth was robust in 2017 and early 2018; annual wage growth had risen to 2.5% by the third quarter of 2018, a percentage point...

Governments use receipt lotteries to boost tax compliance

Thu, 02/28/2019 - 15:42

PEOPLE PAY taxes because governments say they must and society says they should. But what if tax compliance became fun? Governments around the world are encouraging consumers to ask for receipts by turning them into lottery tickets. Taiwan was an early experimenter, in 1951. The past decade has seen a flurry of such schemes: China, the Czech Republic, Lithuania, Portugal, Romania and Slovakia all now have them. Latvia will launch one later this year.

The aim is to make it harder for retail businesses to evade taxes. Worldwide, 20-35% of government revenue comes from value-added taxes (VAT) or similar levies on consumption. But as much as a third of what should be collected is thought to be forfeited because businesses under-report revenues. The problem is not business-to-business transactions; firms can usually reclaim any VAT they pay if they keep proper records. But when selling direct to consumers, it is tempting to accept cash without recording the sale. A tax-dodging retailer can undercut law-abiding rivals or pocket a higher margin.

The idea of a receipt-lottery scheme is to give customers an incentive to ask for receipts, thereby forcing sales to be recorded and taxed. Receipts might be printed with a code that can then be submitted into a central draw. Prizes range from decent sums of money to cars and holidays...

The Federal Reserve reviews its monetary-policy framework

Thu, 02/28/2019 - 15:42

SARA GORATH was a little surprised when she was asked to speak at an event held by the Dallas Federal Reserve. What could a woman who runs a food bank have to say about monetary policy? On February 25th she found herself describing to Richard Clarida, vice-chairman of the Federal Reserve, the problems her customers face, including “how do you cut open a butternut squash if you don’t have a sharp knife?”

The event was the first of many “Fed Listens” sessions, part of an official review of the Fed’s monetary-policy framework. In addition to the likes of Ms Gorath, the Fed will hear from business and trade-union leaders, as well as academics. If the economy were a squash, monetary policymakers want advice on how to carve it.

Key questions will include whether the Fed should expand its toolkit and improve its communication. Also up for discussion is whether there might be better ways to meet its 2% inflation target (the level of the target itself will be taken as given). Perhaps, for example, rather than aiming for 2% regardless of recent history, policymakers should try to make up for past misses and aim for an average of 2% instead?

One could ask why the review is happening now; economists have argued over the Fed’s framework for years. The first official answer is that economic conditions are ripe for some chin-...

New data sources make it harder for executives to mislead investors

Thu, 02/28/2019 - 15:42

“GO STRAIGHT to the source” is a useful rule for anyone seeking accurate information. It suggests that equity investors can best glean insight into a firm by quizzing its chief executive. But bosses are not always reliable narrators. Their position encourages them to be overly optimistic about their company’s outlook. Sometimes they are clueless. And occasionally they are careless about what they tweet.

On February 25th the Securities and Exchange Commission (SEC), America’s financial-market regulator, asked a federal judge to hold Elon Musk, the chief executive of Tesla, a carmaker, in contempt. Mr Musk’s troubles with the SEC began in August when his tweet claiming that he had secured funding to take Tesla private caused the firm’s share price to soar. When the claim proved false, the SEC sued him for securities fraud. They settled in October, when Mr Musk stood down as Tesla’s chairman (he remains chief executive), paid a $20m fine and agreed to have his tweets approved by Tesla’s lawyers. He violated that last condition on February 20th by tweeting that Tesla would produce 500,000 vehicles this year—a claim he later had to clarify—without consulting the firm.

Regulators are not the only ones frustrated by Mr Musk’s antics. Investors have long clamoured for more insight into Tesla’s operations. Happily for investors...

Narendra Modi’s most distinctive economic policies were his worst

Thu, 02/28/2019 - 10:48

NARENDRA MODI, India’s prime minister, stormed to power so decisively in 2014 that it is difficult now to imagine any other outcome. But try. Imagine that the United Progressive Alliance (UPA), a tired coalition led (if that is the word) by the Congress party, had limped to victory instead. What economic policies might it have pursued in a third term? This is not an entirely idle question. Any assessment of Mr Modi’s economic record in his first stint as prime minister requires a counterfactual scenario against which to measure it. A third UPA government is one such baseline.

A Congress-led government would no doubt have built on some of its existing pet initiatives, such as a job guarantee, providing employment on public works to rural households, and an identification scheme, giving every Indian a unique identity number based on a fingerprint or an iris scan. It presumably would have allowed the central bank to continue to fight against inflation, aided by a drop in oil prices.

A third UPA government would surely have shied away from reforming India’s onerous labour laws or privatising poorly run public enterprises, like Air India. It probably would also have dallied with resolving the banking system’s bad loans, fearing it might otherwise be condemned for bailing out crony companies.

As the next election...

Why a global manufacturing slump is a recurring threat

Wed, 02/27/2019 - 17:39

THE GLOBAL economy had an inauspicious start to 2019. Markets went into a tailspin and America’s government was locked in a seemingly interminable shutdown. But matters have not played out as dismally as they might have. The government in Washington is open again. America and China appear close to a trade deal which, although modest in its achievements, would nonetheless reflect a welcome easing of tension between the world’s two biggest economies. Markets have smiled on these developments: the MSCI index of global shares has risen by 10% so far this year.

Good news notwithstanding, many economic indicators have undergone a remarkable downward shift since early 2018. Back then economists were celebrating the emergence of a broad-based expansion. When it assessed the world economy in January last year, the IMF hailed the “broadest synchronised global growth upsurge since 2010”. Now the progress on trade talks is occurring against a darker economic backdrop.

Global manufacturing activity has slowed (see chart). Economies that are especially reliant on trade, such as Germany and Japan, have suffered. Industrial production in the euro area has fallen over the past year. Both Japan and South Korea reported tumbling exports in January. The World Trade Organisation’s global trade outlook index has been falling for the past...

Why private equity appeals

Thu, 02/21/2019 - 15:49

JOHN MCGAHERN’S novel, “That They May Face the Rising Sun”, is set in a remote corner of Ireland. There is a lake, a church, two bars and not much else. Gossip is prized but in short supply. Much of it is concerns John Quinn, a womaniser who has buried two wives and is looking for a third. His quest takes him to Knock, a shrine to the Virgin Mary, which has become a place to find a partner. Like many pilgrims, John Quinn is outwardly pious. But his mind is fixed on earthly matters.

The masking of intent may also be true of visitors to the temple of private equity. On the surface, investors in such funds might hope to harvest a reward—an “illiquidity premium”—for locking up their money for five to ten years. That allows private-equity funds time to turn sluggish businesses into world-beaters. The pitch is seductive. Capital has flooded in as readily as pilgrims flock to the shrine at Knock.

Perhaps, though, private equity’s pilgrims are really after something else. These institutional investors may face limitations on how much they can borrow. Private equity offers a way round such constraints: it is liberal in its use of debt to juice up returns. And that is not all. The value of privately held assets are not assessed all that often. That is a plus for those who, for ignoble reasons, would like not to be told how...

A surprising number of North Korean refugees send money home

Thu, 02/21/2019 - 15:49

IN FEBRUARY 2018 Jessie Kim found out that she had been sending money to a dead man. Ms Kim, now a 27-year-old student in Seoul, fled North Korea for China in 2011. She had been sending her father in Yanggang province in the North around $1,000 a year since she arrived in South Korea in early 2014. Two years later she doubled the contributions, working several part-time jobs, after her aunt told her that her father had been in an accident and needed money for medical bills. But another call from her aunt last winter, claiming that her father was asking for yet more money, made her suspicious. “He wasn’t the kind of man to ask his daughter for money,” she says. Ms Kim made enquiries through the broker who had facilitated the transactions. She eventually found out that her father had died in the accident in 2016 and that the money had gone to her aunt’s family instead.

Ms Kim’s case illustrates the pitfalls of supporting relatives in a country that is all but cut off from global communications and financial-services networks. Ordinary North Koreans are not allowed to receive money or even phone calls from abroad. Foreign banks are hesitant to handle any transaction associated with the North, for fear of falling foul of sanctions, intended to curtail its nuclear programme, that have been imposed by America and others.


The global soyabean market has been upended

Thu, 02/21/2019 - 15:49

“WE’VE BEEN gambling up to this point,” says Tim Bardole, a soyabean farmer from Iowa. After the price of soyabeans crashed last summer (see chart), he held on to most of his harvest and waited for the market to recover. But seven months later, and with large loans to repay, he sold up. “We decided we’d better take what we have,” he says.

The cause of the crash was a 25% tariff on American soyabeans imposed by China, the world’s biggest importer, as one shot in the trade war between the two countries. Yet peace is supposedly in the offing. The two countries are locked in negotiations over a deal, ahead of a deadline of March 1st that has been imposed by America (though on February 19th President Donald Trump declared the timing to be flexible). That Mr Bardole cut his losses despite those talks is not that surprising. Even if the tariff is lifted—which is far from certain—the past year’s disruption will probably leave a permanent scar.

The trade war caught...

A gamble in France could cost UBS dear

Thu, 02/21/2019 - 15:49

In a fine state

THE MOST intriguing bit of the six-week tax-evasion trial of UBS in France late last year was dairy-themed. Prosecutors accused the Swiss bank of keeping coded notes to track how many “milk cans”—units of money—had been moved to Swiss accounts by tax-dodging French clients. UBS denied having any such parallel accounting system. A former manager insisted the notes related to bankers’ bonuses, not tax-shy funds.

France’s Tribunal de Grande Instance, its high court in Paris, did not buy that explanation. On February 20th it found the Swiss bank guilty of helping thousands of rich French clients set up undeclared accounts, potentially containing over €10bn ($11.3bn), between 2004 and 2012. It fined the bank an eye-watering €3.7bn and added an additional €800m in damages for the French state.

If upheld, it would be more than 12 times larger than France’s previous record...

Countries are seeking help to deal with corporate tax avoidance

Thu, 02/21/2019 - 15:49

PORT ROYAL, at the mouth of Kingston harbour, was once the largest city in the Caribbean, its population swollen by privateers paid by the English and the Dutch to attack Spanish ships. When the practice of issuing such “letters of marque” faded in the 17th century, crews went rogue. As pirates, they continued to use the Jamaican port as their base and to spend their loot there, earning it a reputation for unparalleled debauchery.

Jamaica still has a piracy problem, but today’s buccaneers are in surrounding territories. Unenamoured by Jamaica’s 25% corporate income-tax rate, some international firms with operations there find ways to shelter profits using the British Virgin Islands and other nearby tax havens.

The scale of this plunder is unclear—Jamaica publishes no estimate of its corporate-tax gap. But the problem is serious enough to lead the government to seek outside help. Since 2017, auditors from Tax Administration Jamaica (TAJ), the national tax authority, have received training to help them identify and challenge the tax planning of large firms. The assistance is offered by Tax Inspectors Without Borders (TIWB), a programme backed by the OECD and the UN.

Jamaica is not alone in suffering leakage. Estimates of uncollected revenues vary. The OECD reckons that exchequers worldwide lose $100bn-240bn a year...