A radical idea for reducing inequality deserves more attention
Thu, 20 September 2018 14:46:34 GMT

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, 20 September 2018 14:46:34 GMT

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, 20 September 2018 14:46:34 GMT

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, 20 September 2018 14:46:34 GMT

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, 20 September 2018 14:46:34 GMT

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, 20 September 2018 14:46:34 GMT

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, 20 September 2018 14:46:34 GMT

“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, 19 September 2018 19:11:52 GMT

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...

What the sliding lira and economy mean for Turkey’s banks
Thu, 13 September 2018 14:55:03 GMT

THESE are glorious days at Recep Tayyip Erdogan Stadium, a tidy 14,000-seat football ground perched on a steep hillside in the Kasimpasa district of Istanbul—and named after a local lad who became president. Kasimpasa SK are top of the Super Lig, Turkey’s top division, having won their first four games of the season.

The economy over which Mr Erdogan presides, by contrast, is embroiled in a battle for survival. This year the lira has fallen by 40% against the dollar, tumbling especially hard last month after a diplomatic row with America. Inflation is nearly 18%. The central bank, pressed by Mr Erdogan to keep interest rates down, has been slow to react, but on September 13th, even as the president urged a cut, it raised its policy rate by 6.25 percentage points, much more than markets had expected, to 24%. The lira leapt in response.

Turkey’s economy is already slowing sharply. Year on year, growth fell from a breakneck 7.4% in the first quarter to 5.2% in the second. GDP may shrink in the closing months of 2018. The credit that fuelled the boom—much of it from abroad, pushing the current-account deficit to 6% of GDP—is drying up. Adjusted for inflation, bank lending is declining. Even big companies are being quoted borrowing rates of 35%.

Such a sudden halt often spells trouble for banks. Warning signs are flashing. Listed banks’ share prices...

America is pushing the labour market to its limits
Thu, 13 September 2018 14:55:03 GMT

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

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

But as Jerome...

Tariffs may well bring some high-tech manufacturing back to America
Thu, 13 September 2018 14:54:59 GMT

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

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

Markets are suffering from a nasty bout of millenarianism
Thu, 13 September 2018 14:54:59 GMT

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

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

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

Money managers and charities are offering joint investment products
Thu, 13 September 2018 14:54:59 GMT

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

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

Hyperinflation is hard to grasp, harder still to tolerate
Thu, 13 September 2018 14:54:59 GMT

Loose change

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

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

Colombia’s development bank has brought in private-sector discipline
Thu, 13 September 2018 14:54:59 GMT

Removing road blocks

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

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

That forces it to support only viable...

As regulators circle, China’s fintech giants put the emphasis on tech
Tue, 11 September 2018 15:03:13 GMT

Kitty cash

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

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

Why Italy’s government bonds are so unstable
Thu, 06 September 2018 14:48:53 GMT

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

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

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

More solar power hurts nuclear energy. But it also hurts itself
Thu, 06 September 2018 14:48:53 GMT

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

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

Why Argentine orthodoxy has worked no better than Turkish iconoclasm
Thu, 06 September 2018 14:48:52 GMT

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

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

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

ING and Danske Bank are in the spotlight for their handling of dirty money
Thu, 06 September 2018 14:48:52 GMT

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

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

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


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