Posts in category Finance and economics


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The Trump administration will review all of America’s trade deals

ACCORDING to a document crafted by the Trump administration, a model trade agreement has 24 elements. Second on the list is “trade-deficit reduction”, giving a hint as to why Mr Trump wants to review America’s existing agreements. In January Sean Spicer, his press secretary, said the administration would “re-examine all of the current trade deals.” A presidential order to do just that is reported to be in the offing.

America boasts 14 bilateral and regional free-trade agreements (FTAs). Mr Trump seems to blame these agreements for America’s large trade deficit. Most economists disagree, seeing it as reflecting macroeconomic imbalances. The FTAs are in any case with countries representing just two-fifths of America’s two-way trade in goods, and less than 10% of its goods-trade deficit (see chart). Most (77%) of America’s deficit stems from trade with China, the European Union and Japan. None has an American FTA.

A focus on trade deficits means that tiddly deals such as those with Jordan and Oman will not face much heat. NAFTA (an agreement with Mexico and Canada), and KORUS (South Korea), will face more scrutiny because of chunky…Continue reading

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The unusual gap between American and European bond yields

AMERICA may be the world’s largest economy, but these days its government pays more than many others to borrow money. Its ten-year bond yields are higher than those in Britain, France, Singapore and even Italy.

The gap between American and German ten-year yields has been above two percentage points. For much of the past 25 years, it was very rare for the difference to exceed a single percentage point. On occasions, American yields fell below German levels (see chart).

Go back a generation and you might have expected the country with the higher bond yields to be the one with the weaker currency; investors would demand a higher yield to compensate for the risk of future depreciation. But that is not the case today. The dollar has been strong, relative to the euro, and many people expect it to strengthen further. Indeed, the higher yield on American government debt is one reason why investors might want to buy the dollar.

Instead, the gap may reflect differences in both monetary and fiscal policy. In America the Federal Reserve stopped buying Treasury bonds a while ago and has raised interest rates three times since December 2015; the European…Continue reading

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China’s growing clout in international economic affairs

THE IMF “systematically impoverishes foreigners”, and the World Bank’s advice has “negative value to its best clients”. These harsh words were voiced not by lefty critics of the Washington Consensus, but by two men (David Malpass and Adam Lerrick, respectively) whom Donald Trump has picked to lead his Treasury’s dealings with the rest of the world, including the international financial institutions (IFIs), such as the World Bank and IMF, and the G20 group of leading economies.

Their future boss, Steven Mnuchin, America’s treasury secretary, is not much more reassuring to the global financial establishment. At his first G20 meeting, in Baden-Baden in Germany on March 17th-18th (pictured), he vetoed a long-standing pledge to “resist all forms of protectionism”. It had often been breached. But hypocrisy is the tribute vice pays to virtue.

To veterans of international economic affairs, this combative stance is baffling. America’s government now seems to disdain a set of institutions it nurtured into life—institutions that are more commonly criticised for following America’s will too closely. “The United States is just handing the leadership over…Continue reading

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An earthquake in European banking

IN BRITAIN alone millions of people make formal complaints each year about their banks. For them, Sebastian Siemiatkowski, founder of Klarna, a Swedish payments startup, brings good news. New European rules, he says, will open the door to a host of innovative services that analyse transactions, so “an app could tell you there’s a cheaper mortgage available and start the switching process for you.” Apps could warn account-holders if they spend more than a predetermined amount or are about to become overdrawn, or even nudge them to save more. Customers need barely ever interact with their bank.

To date, despite dire warnings, European retail banking has been remarkably unscathed by technology-driven disruption. Customers stay loyal, and banks still do the most of the lending. Financial-technology (“fintech”) companies are beginning to mount a challenge, most conspicuously in the online-payments industry in northern Europe: Sofort, iDEAL and other fintech firms conduct over half of online transactions in Germany and the Netherlands, for example. But their reach is more limited elsewhere in Europe. Physical payments are still overwhelmingly made with cash or bank…Continue reading

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Economic shocks are more likely to be lethal in America

AMERICAN workers without college degrees have suffered financially for decades—as has been known for decades. More recent is the discovery that their woes might be deadly. In 2015 Anne Case and Angus Deaton, two (married) scholars, reported that in the 20 years to 1998, the mortality rate of middle-aged white Americans fell by about 2% a year. But between 1999 and 2013, deaths rose. The reversal was all the more striking because, in Europe, overall middle-age mortality continued to fall at the same 2% pace. By 2013 middle-aged white Americans were dying at twice the rate of similarly aged Swedes of all races (see chart). Suicide, drug overdoses and alcohol abuse were to blame.

Ms Case and Mr Deaton have now updated their work on these so-called “deaths of despair”. The results, presented this week at the Brookings Institution, a think-tank, are no happier. White middle-age mortality continued to rise in 2014 and 2015, contributing to a fall in life expectancy among the population as a whole. The trend transcends geography. It is found in almost every state, and in both cities and rural areas. The problem seems to be getting worse over time. Deaths from…Continue reading

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Do smart-beta investment funds work?

IN THE world of investing, everyone is always looking for a better mousetrap—a way to beat the market. One approach that is increasingly popular is to select shares based on specific “factors”—for example, the size of companies or their dividend yield. The trend has been given the ugly name of “smart beta”.

A recent survey of institutional investors showed three-quarters were either using or evaluating the approach. By the end of January some $534bn was invested in smart-beta exchange-traded funds, according to ETFGI, a research firm. Compound annual growth in assets under management in the sector has been 30% over the past five years.

The best argument for smart-beta funds is that they simply replicate, at lower cost, what fund managers are doing already. For example, many fund managers follow the “value” approach, seeking out shares that look cheap. A computer program can pick these stocks more methodically than an erratic human. A smart-beta fund does what it says on the tin.

But does it work? The danger here is “data mining”. Carry out enough statistical tests, and you will always find some…Continue reading

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Is the Federal Reserve giving banks a $12bn subsidy?

EVERY time the Federal Reserve has raised rates since the financial crisis, as it did on March 15th, it has done so in part by increasing “Interest On Excess Reserves” (IOER). This obscure policy rate is surprisingly controversial. Jeb Hensarling, the Republican chair of the congressional committee that oversees the Fed, has called it a “subsidy” to some of the largest banks in America.

To understand the argument, consider the Fed’s year-end financial statement. In 2016 it earned $111.1bn in interest income on its vast portfolio of securities. But it also paid JPMorgan Chase, Wells Fargo, and other mostly big banks $12bn in interest on excess cash deposited at regional Federal Reserve banks. Such IOER payments are both woefully unpopular and critical to the Fed’s monetary policy.

Over a decade ago, to give the Fed better control of short-term interest rates, Congress authorised it to pay interest on funds in excess of those banks need to meet reserve requirements. The policy was first used during the financial crisis in 2008. But today, IOER is the Fed’s primary monetary-policy tool, essential to its setting of…Continue reading

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The progressive case for immigration

“WE CAN’T restore our civilisation with somebody else’s babies.” Steve King, a Republican congressman from Iowa, could hardly have been clearer in his meaning in a tweet this week supporting Geert Wilders, a Dutch politician with anti-immigrant views. Across the rich world, those of a similar mind have been emboldened by a nativist turn in politics. Some do push back: plenty of Americans rallied against Donald Trump’s plans to block refugees and migrants. Yet few rich-world politicians are willing to make the case for immigration that it deserves: it is a good thing and there should be much more of it.

Defenders of immigration often fight on nativist turf, citing data to respond to claims about migrants’ damaging effects on wages or public services. Those data are indeed on migrants’ side. Though some research suggests that native workers with skill levels similar to those of arriving migrants take a hit to their wages because of increased migration, most analyses find that they are not harmed, and that many eventually earn more as competition nudges them to specialise in more demanding occupations. But as a slogan, “The data say…Continue reading

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As the Fed raises rates, Janet Yellen’s legacy is pondered

THIRD time lucky. In each of the past two years, the Federal Reserve has predicted multiple interest-rate rises, only to be thrown off-course by events. On March 15th the central bank raised its benchmark Federal Funds rate for the third time since the financial crisis, to a range of 0.75-1%. This was, if anything, ahead of its forecast, which it reaffirmed, that rates would rise three times in 2017. “Lift-off” is at last an apt metaphor for monetary policy. But as Janet Yellen, the Fed’s chairwoman, picks up speed in terms of policy, she must navigate a cloudy political outlook. The next year will define her legacy.

Ms Yellen took office in February 2014 after dithering by the Obama administration over a choice between her and Larry Summers, a former treasury secretary. Left-wingers preferred Ms Yellen, in part because she seemed more likely to give jobs priority over stable prices. Indeed, Republicans in Congress worried that she would be too soft on inflation. The Economist called her the “first acknowledged dove” to lead the central bank.

Today Ms Yellen looks more hawkish—certainly than Mr Summers, who…Continue reading

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As the Fed raises rates, Janet Yellen’s legacy is pondered

THIRD time lucky. In each of the past two years, the Federal Reserve has predicted multiple interest-rate rises, only to be thrown off-course by events. On March 15th the central bank raised its benchmark Federal Funds rate for the third time since the financial crisis, to a range of 0.75-1%. This was, if anything, ahead of its forecast, which it reaffirmed, that rates would rise three times in 2017. “Lift-off” is at last an apt metaphor for monetary policy. But as Janet Yellen, the Fed’s chairwoman, picks up speed in terms of policy, she must navigate a cloudy political outlook. The next year will define her legacy.

Ms Yellen took office in February 2014 after dithering by the Obama administration over a choice between her and Larry Summers, a former treasury secretary. Left-wingers preferred Ms Yellen, in part because she seemed more likely to give jobs priority over stable prices. Indeed, Republicans in Congress worried that she would be too soft on inflation. The Economist called her the “first acknowledged dove” to lead the central bank.

Today Ms Yellen looks more hawkish—certainly than Mr Summers, who regularly urges the Fed to…Continue reading

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Foreign buyers push up global house prices

MANY Americans were taken aback when news broke in January that Peter Thiel, an internet billionaire and adviser to Donald Trump, had New Zealand citizenship. For five years this backer of an “America first” president had kept his Kiwi passport quiet. Then the government released details of his $10m-lakeside estate (pictured).

A growing horde of rich foreigners see New Zealand as a safe haven. In 2016 overseas investors bought just 3% of all properties. But their purchases were concentrated at the expensive end of the market, which is growing fast: sales involving homes worth more than NZ$1m ($690,000) increased by 21%. That helped push prices in the country up by 13% over the past year, to lead The Economist’s latest tally of global house-price inflation (see table).

New Zealand is one of several countries where the impact of foreign money on housing is under scrutiny. Prices have also risen rapidly in Australia and Canada. Central bankers fret about the dangers fickle capital flows pose to financial stability. London’s mayor has ordered a study on foreign ownership in the capital after property prices…Continue reading

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Deutsche Bank raises capital, and changes course

THREE times since the financial crisis, Deutsche Bank’s bosses have turned to its shareholders for cash: €10.2bn ($13.6bn) in 2010, €3bn in 2013 and €8.5bn in 2014. Since becoming chief executive in 2015, John Cryan has had no plans to ask for more. Deutsche still needed to thicken its equity cushion, but disposals, cost cuts and earnings (if any: it has made losses for the past two years) would provide the stuffing.

Well, plans change. On March 5th Mr Cryan announced an €8bn rights issue. Some comfort for investors: the price, €11.65 a share, is 39% below the previous close; and Mr Cryan, who had suspended the dividend, promises a return to “competitive” payouts next year. In another reversal, Deutsche will keep rather than sell Postbank, a mass-market retail business that was once part of the post office. Deutsche has owned it since 2010.

Postbank and the posher “blue” Deutsche Bank brand will be more closely integrated—notably, sharing computer systems. Mr Cryan is also selling a slice of Deutsche’s asset-management division and some lesser assets. And he is reorganising its corporate and investment bank to…Continue reading

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The retreat of globalisation threatens the Dutch economy

AS ANY football fan knows, little delights the Dutch more than beating the Germans. So, as the country prepares for an election on March 15th, it should be cheering an economy that, after lagging behind Germany’s for years, is at last outpacing it. GDP grew by 2.1% last year, which was the fastest rate since 2007 and a stronger performance than its neighbours, including Germany. Unemployment has fallen to 5.3% and more people are in work than before the crisis in 2007-08.

After years of belt-tightening, households are spending again, thanks to a strong housing-market recovery and rising wages. Government finances are sound. This year the budget may be in balance—perhaps even in surplus—and public debt may drop below 60% of GDP. Yet this sunny outlook has not brightened the mood of a tetchy election campaign.

That is not so surprising. Marieke Blom, the chief economist at ING, a bank, attributes the positive forecast mostly to tough government reforms over the past few years—particularly raising the retirement age to 67 (from 2021) and reforming the financing of the health-care system. Years of reform, austerity and…Continue reading

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Green finance for dirty ships

Smokestack lightening

SHIPPING may seem like a clean form of transport. Carrying more than 90% of the world’s trade, ocean-going vessels produce just 3% of its greenhouse-gas emissions. But the industry is dirtier than that makes it sound. By burning heavy fuel oil, just 15 of the biggest ships emit more oxides of nitrogen and sulphur—gases much worse for global warming than carbon dioxide—than all the world’s cars put together. So it is no surprise that shipowners are being forced to clean up their act. But in an industry awash in overcapacity and debt, few have access to the finance they need to improve their vessels. Innovative thinking is trying to change that.

A new report from the Carbon War Room (CWR), an international NGO, and UMAS, a consultancy, highlights the threat that new environmental regulations pose to the industry. The International Maritime Organisation, the UN’s regulatory agency for shipping, has agreed to cap emissions of sulphur from 2020. Last month the European Parliament voted to include shipping in the EU’s emissions-trading scheme from 2021. Without any retrofitting of ships to meet the…Continue reading

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Economists argue about the impact of Chinese imports on America

COMPETITION from Chinese imports may have cost some Americans jobs, but economists have done pretty well out of it. Since 2013 David Autor, David Dorn and Gordon Hanson have published nine separate studies digging into the costs of trade. They have found that, of the fall in manufacturing jobs between 1990 and 2007, one-quarter could be attributed to a surge in imports from China. Other sectors failed to soak up the extra workers. Their research also suggested that the China shock has cut the supply of marriageable men and opened the door of the White House to Donald Trump.

In recent weeks a dispute has erupted over their results. Jonathan Rothwell, an economist at Gallup, a pollster, alleged “serious flaws” in one paper, prompting a fierce eight-page response from the authors, and an acrimonious public tiff.

The row centres on how the effect of the China shock is measured. The trio wanted to isolate the effects of extra Chinese supply, rather than of something happening in America, so they checked that imports of particular Chinese products were surging in other rich countries, too. They then compared places in America…Continue reading

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The Trump administration’s trade strategy is dangerously outdated

The trade guns of Navarro

ON THE campaign trail, Donald Trump’s trade policy was an alarming mixture of coruscating complaints and fierce threats of protectionist retaliation. But the world has been in the dark about how much of this rhetoric his administration might turn into reality. A flicker of light came on March 1st as the administration’s trade-strategy document was presented to Congress. Washington wonks see the hand of Peter Navarro, Mr Trump’s trade adviser and author of a book (and film) called “Death by China”. Robert Lighthizer, the nominee for the United States Trade Representative (USTR), has not yet been confirmed.

Little is new in the document’s promises of “ new and better trade deals” or of strict enforcement of American trade laws. But a preference for bilateral trade deals over multilateral ones is a change of tack. And the tone is certainly confrontational: “It is time for a more aggressive approach.” The document also gives an indication of how a Trump administration might take a trade fight to China: by using sections 201 and 301 of the Trade Act of 1974.

The first weapon,…Continue reading

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