Category Archives: Finance

Shorter Work Day?

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Can we successfully reduce the number of hours people work each work?

Sweden’s six-hour workday  The reality of Sweden’s six-hour workday is a little less revolutionary. Starting early 2015, the town of Gothenburg initiated a yearlong trial at a local nursing home: some 60 nurses switched from eight- to six-hour days, with the same salary as before. Researchers are looking at changes in productivity, overall health and happiness among the staff, number of sick days and staff retention, as well as satisfaction among the elderly residents. A handful of other places, including some small private companies, have followed suit.  The trial is ongoing and its effects have yet to be fully evaluated, which means that even in Sweden, the study has generated a great deal more debate and opinion than it has, so far, any concrete facts or analysis.

 

Phishing for Phools

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The key point of the book is aimed at the mythology of free markets. Simply stated they are an ideal that does not exist. According to the two authors, big corporations take advantage of the ‘stories we tell ourselves’ and of our ‘monkey-on-our-shoulder tastes’. Our propensity to make choices according to multiple cognitive and psychological biases makes us easy targets for the phishermen. If one sentence could epitomise their thesis, it would be Jean-Paul Sartre’s’ famous saying: ‘We are what we make of what people want to turn us into.’

In their new book Phishing for Phools: The Economics of Manipulation & Deception, Nobel Prize winners George A. Akerlof and Robert J. Shiller deliver a timely and much-needed plea against the free market dogma that surprisingly seems to have outlived the financial crisis. According to the two authors, big corporations take advantage of the ‘stories we tell ourselves’ and of our ‘monkey-on-our-shoulder tastes’.

Some of the most recent news, including Volkswagen’s fool’s game of rigging pollution tests, remind us that one should always keep in mind the key insights of Phishing for Phools. Flawed studies sponsored by Big Pharma, money politics, political action committees, Daedalean financial engineering, credit cards (or ‘magic pills’) that encourage us to buy more: numerous are the ways in which one can be phooled. Akerlof and Shiller give a detailed and highly accessible account of the short-sightedness of the free market equilibrium thesis as a putative Pareto optimal situation maximising the economic welfare of everyone.). Phishing for Phools

Phools

 

Yuan Freely Usable?

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Yuan proposed as reserve currency by IMF.

International Monetary Fund chief Christine Lagarde said in a statement that the staff experts, in their report to the International Monetary Fund board, ruled the yuan or renminbi (RMB) “meets the requirements to be a “freely usable” currency”.

According to the IMF, a key focus for the Board review is whether the RMB, which continues to meet the export criterion for inclusion in the SDR basket, also meets the other existing criterion, that the currency be “freely usable”, which is defined as being “widely used” for worldwide transactions and “widely traded” in the principal foreign exchange markets. Beijing has been campaigning for its currency to join the Special Drawing Rights (SDR) basket, which could increase demand for the yuan among reserve managers and mark a symbolic coming of age for China’s economy. The fund’s executive board will take up the issue November 30.

It says a staff level agreement was reached to lower the target for the primary surplus to 7.25 per cent of gross domestic product (GDP) for this fiscal year and to seven per cent of GDP for the next fiscal year.

If the yuan’s addition wins 70 percent or more of International Monetary Fund board votes, it will be the first time the number of currencies in the SDR basket – which determines the composition of loans made to countries such as Greece – has been expanded.

Joining the basket would give the yuan the IMF’s seal of approval and might encourage foreigners to use the Chinese currency more and to have more confidence in China’s financial markets.

“The People’s Bank of China welcomes the statement of Mme”.

In future, China will unswervingly continue to push forward the strategic plan of comprehensively deepening reform and will steadily promote financial reform and opening up, it said.

In 2013, Jamaica entered into a four year US$948.1 million EFF agreement with the International Monetary Fund and she said consideration of the policies will be undertaken by the IMF’s executive board, tentatively scheduled for December.

Yuan as Reserve Currency

Central Banks Only Work at the National Level?

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One currency implausible?

Larry Hatheway and Alexander Friedman write: Central banks, while ideally independent from political influence, are nonetheless accountable to the body politic. They owe their legitimacy to the political process that created them, rooted in the will of the citizenry they were established to serve (and from which they derive their authority).

The history of central banking, though comparatively brief, suggests that democratically derived legitimacy is possible only at the level of the nation-state. At the supra-national level, legitimacy remains highly questionable, as the experience of the eurozone amply demonstrates. Only if the European Union’s sovereignty eclipses, by democratic choice, that of the nation-states that comprise it will the European Central Bank have the legitimacy it requires to remain the eurozone’s sole monetary authority.

But the same political legitimacy cannot be imagined for any transatlantic or trans-Pacific monetary authority, much less a global one. Treaties between countries can harmonize rules governing commerce and other areas. But they cannot transfer sovereignty over an institution as powerful as a central bank or a symbol as compelling as paper money.

Central banks’ legitimacy matters most when the stakes are highest. Everyday monetary-policy decisions are, to put it mildly, unlikely to excite the passions of the masses. The same cannot be said of the less frequent need (one hopes) for the monetary authority to act as lender of last resort to commercial banks and even to the government. As we have witnessed in recent years, such interventions can be the difference between financial chaos and collapse and mere retrenchment and recession. And only central banks, with their ability to create freely their own liabilities, can play this role.

Yet the tough decisions that central banks must make in such circumstances – preventing destabilizing runs versus encouraging moral hazard – are simultaneously technocratic and political. Above all, the legitimacy of their decisions is rooted in law, which itself is the expression of democratic will. Bail out one bank and not another? Purchase sovereign debt but not state or commonwealth (for example, Puerto Rican) debt? Though deciding such questions at a supranational level is not theoretically impossible, it is utterly impractical in the modern era. Legitimacy, not technology, is the currency of central banks.

But the fact that a single global central bank and currency would fail spectacularly (regardless of how strong the economic case for it may be) does not absolve policymakers of their responsibility to address the challenges posed by a fragmented global monetary system. And that means bolstering global multilateral institutions.

The International Monetary Fund’s role as independent arbiter of sound macroeconomic policy and guardian against competitive currency devaluation ought to be strengthened. Finance ministers and central bankers in large economies should underscore, in a common protocol, their commitment to market-determined exchange rates. And, as Raghuram Rajan, the governor of the Reserve Bank of India, recently suggested, the IMF should backstop emerging economies that might face liquidity crises as a result of the normalization of US monetary policy.

Likewise, a more globalized world requires a commitment from all actors to improve infrastructure, in order to ensure the efficient flow of resources throughout the world economy. To this end, the World Bank’s capital base in its International Bank for Reconstruction and Development should be increased along the lines of the requested $253 billion, to help fund emerging economies’ investments in highways, airports, and much else.

Multilateral support for infrastructure investment is not the only way global trade can be revived under the current monetary arrangements. As was amply demonstrated in the last seven decades, reducing tariffs and non-tariff barriers would also help – above all in agriculture and services, as envisaged by the Doha Round.

Global financial stability, too, can be strengthened within the existing framework. All that is required is harmonized, transparent, and easy-to-understand regulation and supervision.

For today’s international monetary system, the perfect – an unattainable single central bank and currency – should not be made the enemy of the good. Working within our existing means, it is surely possible to improve our policy tools and boost global growth and prosperity.

0615central-bank-vaccuum

One Currency For The World?

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Today’s world is more economically and financially integrated than at any time since the latter half of the nineteenth century. But policymaking – particularly central banking – remains anachronistically national and parochial. Isn’t it time to re-think the global monetary (non)system? In particular, wouldn’t a single global central bank and a world currency make more sense than our confusing, inefficient, and outdated assemblage of national monetary policies and currencies?

Technology is now reaching the point where a common digital currency, enabled by near-universal mobile phone adoption, certainly makes this possible. And however farfetched a global currency may sound, recall that before World War I, ditching the gold standard seemed equally implausible.

The current system is both risky and inefficient. Different monies are not only a nuisance for tourists who arrive home with pockets full of unspendable foreign coins. Global firms waste time and resources on largely futile efforts to hedge currency risk (benefiting only the banks that act as middlemen).

The benefits of ridding the world of national currencies would be enormous. In one fell swoop, the risk of currency wars, and the harm they can inflict on the world economy, would be eliminated. Pricing would be more transparent, and consumers could spot anomalies (from their phones) and shop for the best deals. And, by eliminating foreign-exchange transactions and hedging costs, a single currency would reinvigorate stalled world trade and improve the efficiency of global capital allocation.

In short, the current state of affairs is the by-product of the superseded era of the nation-state. Globalization has shrunk the dimensions of the world economy, and the time for a world central bank has arrived.

One Currency for the World?

 

Technology’s Impact on Banking?

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Does regulation inhibit new forms of banking?

Dambisa MoyoIt writes:  Banking is a rare industry nowadays that is not at risk of being upended by digital technology. Amazon, having swept away bookshops, is now laying siege to the rest of the retail sector. In transportation, Uber is outrunning traditional taxi companies, while Airbnb is undermining the foundations of the hotel industry. Meanwhile, smartphones are transforming how we communicate and revolutionizing the way we discover and patronize businesses.

So it is no surprise that banking and financial-services companies are not safe from the immense transformations wrought by technological innovation. Indeed, for the last decade, digital startups have been penetrating areas traditionally dominated by the financial industry. But there is reason to believe that finance will prove resilient.

Today, money can be sent to the other side of a country – or the world – simply by tapping an app, without ever interacting with a traditional financial-services company. Migrants’ remittances alone, which the World Bank estimates will total $586 billion this year, represent a tremendous growth opportunity for companies competing with banks to move money.

Meanwhile, would-be disrupters are offering opportunities to save and invest – the very heart of traditional banking institutions’ operations. Startups such as Acorns – an app that automatically allocates a proportion of everyday purchases to a pre-selected investment portfolio – are making rapid inroads into a very competitive marketplace.

Acorns, launched in 2014, already manages more than 650,000 investment accounts. The company – and others like it – are not just moving into the market; the simplified investment and savings processes they offer are expanding and transforming it. According to research by the digital ad agency Fractl, approximately 85% of millennials are saving a portion of their paycheck – a larger percentage than their predecessors.

Lending, too, is being transformed by technology. Crowdsourced funding and peer-to-peer lending schemes give borrowers the opportunity to circumvent many of the hurdles of traditional banking – including, in some cases, collateral requirements and credit ratings.

According to the research firm Massolution, the crowdfunding market has grown exponentially, from $880 million in 2010 to $16.2 billion in 2014. Global crowdfunding volumes are expected to double this year, surpassing $34 billion. In 2016, crowdfunding is expected to provide more funding than traditional venture capital.

Even financial services traditionally characterized by face-to-face dealings with clients, such as investment banking advisory services, have been affected. When Google conducted its initial public offering in 2004, it chose to bypass the investment banking industry, which traditionally underwrites the process of taking a company public. Instead, the company opted for an electronic auction in which anyone could participate. Other companies – like the financial research firm Morningstar – have followed suit. While these attempts to revolutionize the equity capital markets have yet to gain widespread traction, their very existence is evidence of the opportunities for disruption in this sector.

But it would be premature to conclude that traditional banking has yielded to new financial platforms. Many of the new entrants have benefited from advantages that would be difficult to maintain were they to scale up in size and importance.

Traditional banking is subject to intense oversight, and regulations have only become more onerous in recent years, as regulatory authorities reacted to the 2008 global financial crisis by tightening rules on leveraging ratios and know-your-customer requirements. Many upstarts in the sector have carved out a competitive advantage by avoiding thresholds beyond which they would face substantial regulatory scrutiny and requirements.

This places a significant constraint on the size and type of financial transactions these new companies can offer. By steering clear of services that might draw the scrutiny of financial authorities, digital startups face a natural limit to the size of their market. Indeed, this arrangement – albeit informal – can be viewed as the way regulators manage the systemic risk posed by new entrants.

As the digital revolution evolves, much of the financial terrain in which technology companies are making the deepest inroads will come into much sharper regulatory focus. This will favor the established players. As a result, the digital revolution’s assault on the traditional banking industry is by no means overwhelming. In finance, at least, technology firms should not be viewed simply as a threat, but as a source of productivity-boosting innovation.

Banking and Technology

Banking and Technology

Entrepreneur Alert: US Iconic products by state

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Entrepreneur alert:   The iconic product of each state in the United States:

Alabama, cotton; Alaska, Salmon: Arizona, copper; Arkansas, broilers; California, wine; Colorado, Marijuana; Delaware, corporations; Florida, oranges; Georgia, peaches; Hawaii, pineapples; Idaho, potatoes; Illinois, farm equipment; Indiana, limestone; Iowa, corn; Kansas, wheat; Kentucky, bourbon whiskey; Louisiana, shrimp; Maine, lobsters; Maryland, crabs; Massachusetts, cranberries; Michigan, cars; Minnesota, butter; Mississippi, catfish; Missouri, beer; Montana; precious metals; Nebraska, beef; Nevada, casinos; New Hampshire, granite; New Jersey, salt water taffy; New Mexico, chile peppers; New York, apples; North Carolina, textiles; North Dakota, sunflowers; Ohio, rubber; Oklahoma, wind power; Oregon, sneakers; Pennsylvania, steel; Rhode Island, steamers; South Carolina, boiled peanuts; South Dakota, pork; Tennessee, whiskey; Texas, petroleum; Utah, candy; Vermont, maple syrup; Virginia, tobacco; Washington, airplanes; west Virginia,coal; Wisconsin, cheese; Wyoming, horses.

Where in the USA?

IMF Chief Lagarde High on Malaysia

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International Monetary Fund (IMF) managing director Christine Lagarde says Malaysia and some Asian countries continue to enjoy reasonable economic growth and vibrancy, despite global economic risks.

Lagarde said the slowdown in China and its multiple transitions, lower commodity prices and anaemic demand globally as well as transition of monetary policy by the biggest central banks were some of the risks. But she said the situation also presented some opportunities. “Asia in general and certainly Malaysia are countries where there are reasonable growth and vibrancy, yield, and, if there is political stability and a business-friendly environment, economic activities, capital and investments will continue to move, too.”

“In Malaysia’s case, Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz has been a strong pillar and anchor of solidity, wisdom and training in Islamic finance and we owe it to her, if nobody else.” Lagarde, a former finance minister of France, has headed the fund since July 2011. Under her watch, the Washington-based IMF had shifted its policy on capital controls. Malaysia was criticised for implementing capital controls at the height of the Asian financial crisis in the late 1990s. “For many instances, once capital controls are in place, it is difficult and slow to remove them without creating significant disruption. “There are, and have been, situations like Iceland and Cyprus where we have recommended capital controls, or Greece, where the authorities decided capital controls as the ultimate response as everything had been tried without success.”

Malaysia's Economic Prospects

China’s Slowdown Impacts the World

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On the Rocky Road to Globalization the impact of China’s slowing economy is felt around the world.

Paul Wiseman and Rod McGuirk write: China’s economic troubles have dropped on the doorstep of a sun-weathered house at 18 Edgar St. in Port Hedland on Australia’s northwest coast.

Four years ago, the 50-year-old home, fabricated from cheap asbestos cement, sold for the equivalent of $1.3 million. It’s now for sale again — recently priced at $310,000.

What happened to $1 million in home equity? It vanished down the China sinkhole.

From Australia to Zambia, Chile to Indonesia, the pain of China’s sharp economic slowdown is being felt in the form of depressed commodity prices, elevated unemployment and shrunken home prices in towns like Port Hedland that once thrived from supplying materials to Chinese factories.

China’s deceleration isn’t surprising. The extent of the collateral damage is. And it’s raising fears of a global recession.

Noting that the harm from China’s woes has been worse than expected, the International Monetary Fund has downgraded its outlook for worldwide growth this year to 3.1 percent, which would be the slowest since the recession year of 2009.

Citigroup has warned of a possible new worldwide recession caused by China’s slump. So has the Organization for Economic Cooperation and Development.

China has an outsize effect on the world because it accounted for 30 percent of global growth last year, up from just 13 percent a decade earlier, according to the World Bank. The impact is seen in Standard & Poor’s GSCI commodities index: The index, reflecting prices of 24 items, including crude oil, copper and cattle, shrank 19 percent from July through September

What is sure is that an impact is being felt in countries that export raw materials___

AUSTRALIA

China’s investment boom richly benefited Australia. Between 2007 and 2013, the percentage of exports to China jumped from 14 percent to 36 percent — the biggest such share among wealthy countries, according to the Peterson Institute for International Economics. Australian iron ore, coal and copper fed China’s factories.

The China connection shielded Australia from the Great Recession: Unlike the United States and the countries that use the euro currency, Australia’s economy kept growing through the recession years of 2008 and 2009.

But Australia was uniquely vulnerable to China’s slowdown and its move away from heavy investment. Australia produces a third of the world’s iron ore, and China’s slump has sent the price of iron ore from a peak of $185 per metric ton in 2011 to below $60. The research firm AlphaBeta notes that every 1 percent drop in China’s investment shaves 0.2 percentage point off Australia’s economy.

CHILE

China’s troubles have delivered a painful blow to Chile, the world’s top copper producer. Its economy grew just 1.9 percent last year, the weakest since 2009. As China’s demand dropped, the price of copper went into freefall — to a six-year low $2.25 a pound. The state-owned miner Codelco has reduced or delayed projects, including the expansion of its main Andina mine and a plan to turn the world’s largest open-pit mine into an underground operation.

Chileans are suffering. Mining jobs offered low-income families their best shot at middle-class lifestyles. Now, the mines are retrenching. In September, Arizona-based Freeport-McMoran laid off more than 640 workers at its El Abra copper mine in northern Chile.

INDONESIA

Arbona Hutabarat of Bank Indonesia, the country’s central bank, says every 1 percentage drop in China’s economy cuts 0.6 percentage point off Indonesia’s. The IMF thinks Indonesia’s economy this year will post its weakest growth since 2002: 4.7 percent.

Indonesia’s exports have sunk 13 percent through September from a year earlier. Exports to China are down 21 percent. The coal industry has been slammed. In the province of East Kalimantan, 125 coal-mining companies have suspended operations, putting 5,000 miners out of work, according to the industry journal Coal Age.

ZAMBIA

The African nation of Zambia is 6,300 miles from the factories of southern China, but its economy is absorbing a direct hit from the slowdown in China’s growth and demand for copper.

Zambia‘s currency, the kwacha, has dropped 53 percent against the dollar this year. A weak currency stokes inflation. So Zambia’s central bank has raised its benchmark interest rate to 15.5 percent — which will likely squeeze the economy just as it is weakening.

Glencore, an Anglo-Swiss commodities company and one of Zambia’s biggest employers, is cutting 4,000 jobs at the Mopani Copper Mine. The Konkola Copper Mine has laid off 150 and is expected to cut more.

The Chinese-owned company CNMC Limited has suspended operations at the Baluba mine in Luanshya, laying off 1,600. Spokesman Sydney Chileya blamed plummeting copper prices.

China's Slowdown

 

 

South Africa Needs to Play Catchup

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Acha Leke and Michael Katz write:  A paradox of Sub-Saharan Africa’s rapid economic expansion is the fact that the region’s most sophisticated economy seems not to be part of it. Since 2008, South Africa has recorded average annual GDP growth of just 1.8%, less than half the rate of the previous five years. Sub-Saharan Africa is porjected to grow at a rate of close to 5% next year, but South Africa is projected at about 1% growth. More worrying still, the country’s 25% unemployment rate  is one of the highest in the world.

Countries across the continent are constructing the roads, ports, power stations, schools, and hospitals.  They need to sustain their growth and meet the needs of their fast-growing and urbanizing populations.  They need most of all is expertise.

But while South Africa has highly capable architecture, construction, and engineering sectors, its current share of foreign-built projects in Sub-Saharan Africa stands at only 7%, compared to 32% for China.

The opportunities are not limited to the construction industry. South Africa has the know-how to meet Africa’s burgeoning need for a wide range of services, from banking and insurance to retail and transport. The country currently provides only 2% of Sub-Saharan Africa’s service imports – a market worth some $40 billion annually.

South Africa is home to several well-established, innovative banks that are well placed to offer low-cost, digital services to millions of currently unbanked African households and businesses. Indeed, South African banks already command a 12% share of Sub-Saharan Africa’s banking market.

South Africa has a highly developed insurance sector, with a long history of creating products for every demographic and income level. It is ideally placed to provide insurance to the rest of Sub-Saharan Africa, where just 1% of households have insurance of any kind.

South Africa also has been punching below its weight in merchandise trade.

The key to reigniting South Africa’s economic growth is an ambitious regional strategy driven by government and business leaders working in partnership. A massive scale-up of vocational education is particularly important, as this will provide young South Africans with the technical skills needed to support the expansion of export industries. Putting in place infrastructure to support growth – notably power generation, which currently lags demand – will also be crucial.

South Africa’s economic transformation since its transition to democracy two decades ago has been remarkable. But its renaissance is in danger of running out of steam. Only by boldly seizing the initiative can South Africa put itself at the core of Africa’s economic renewal, and only by embracing its role as regional leader can it revitalize its own prospects.

African growth?