Brexit  Wolfgang Schäuble was on a mini-roadshow in London, appearing at a couple of events to push the anti-Brexit case with characteristic toughness but uncharacteristic emotion.

First, the German finance minister appeared alongside George Osborne at a panel. Asked about his reaction should Britain decide to leave, he said: “We would cry … and I hope that we will not.”

Then, at a conference organized by the German British Forum, he urged Britain to go for “splendid integration” rather than “splendid isolation.”

“If the U.K. were to leave the EU, it would be very dangerous for the European Union, it would weaken the European Union … I can’t see that it’s in Britain’s interest for the EU to be weakened,” Schäuble said. “So please don’t.”

“Britain’s future lies in Europe,” he pleaded to an audience of British and German grandees before ending with a very British exhortation: “Go on, lead Europe!”

The prime minister’s biggest headache on Brexit is not Boris Johnson but “Red Jez”, as some papers call the left-wing leader of the Labour Party, according to professor Matthew Goodwin writing for POLITICO. His thesis is that, in order to win the referendum, Cameron needs to win over voters that are not natural Conservative supporters.

Changing Securitization in Europe  Four trade associations have issued a paper pushing for a swift reform of the moribund securitization market.

The four, the Association for Financial Markets in Europe (AFME), the European Fund and Asset Management Association (EFAMA), the International Capital Market Association (ICMA) and Insurance Europe, are broadly supportive of the European Commission’s efforts to revive the market but want more clarity and details on issues such as asset-backed commercial paper, disclosure and third-country deals.

Remember: The US subprime mortgage crisis began with the securitization of mortgages.

UK Life Insurers   The Financial Conduct Authority is concerned about the treatment of long-term customers who wanted to make changes to their policies. Here’s Sky News: “Prudential, Old Mutual, Abbey Life, Scottish Widows, Countrywide and Police Mutual are to be investigated by the Financial Conduct Authority.

“The FCA has been monitoring whether insurers have treated customers who are locked into pensions and other savings plans fairly, compared with new customers. Tracey McDermott, the FCA’s acting chief executive, said: ‘The practices at some firms appear to have been poor.’

Andrew Sheng-and Xiao Geng write: China’s ability to maintain stability depends on a multitude of interrelated factors, such as low productivity growth, declining real interest rates, disruptive technologies, excess capacity and debt overhangs, and excess savings. In fact, the current battle over the renminbi’s exchange rate reflects a tension between the interests of the “financial engineers” (such as the managers of dollar-based hedge funds) and the “real engineers” (Chinese policymakers).

Foreign-exchange markets are, in theory, zero-sum games: the buyer’s loss is the seller’s gain, and vice versa.

Nowadays, financial engineers increasingly shape the exchange rate through financial transactions that may not be linked to economic fundamentals. Because financial markets notoriously overshoot, if the short-sellers win by pushing exchange rates and the real economy into a low-level equilibrium, the losses take the form of investment, jobs, and income. In other words, financial engineers’ gain is real people’s pain.

In order to achieve these gains, financial engineers use the media to influence market behavior.

China’s growth slowdown and the rise of non-performing loans are being discussed as exclusively negative developments. But they are also necessary pains on the path to supply-side reform aimed at eliminating excess capacity, improving resource efficiency, and jettisoning polluting industries.

China’s authorities have long understood that a stable renminbi exchange rate is critical to national, regional, and global stability. Indeed, that is why they did not devalue the renminbi during the Asian financial crisis. They saw what most analysts missed: leaving the US dollar as the main safe-haven currency for global savings, with near-zero interest rates, would have the same deflationary impact that the gold standard had in the 1930s.

In the face of today’s deflationary forces, however, real engineers in the world’s major economies have been unwilling or unable to reflate. The United States, the world’s largest economy, will not use fiscal tools to that end, owing to domestic political constraints. Europe’s unwillingness to reflate reflects Germany’s deep-seated fear of inflation (which underpins its enduring commitment to austerity). Japan cannot reflate because of its aging population and irresolute implementation of Prime Minister Shinzo Abe’s economic plan, so-called Abenomics. And China is still paying for the excessive reflation caused by its CN¥4 trillion ($586 billion) stimulus package in 2009, which added over CN¥80 trillion to its own debt.

Meanwhile, the consequences of financial engineering are intensifying. Zero and negative interest rates have not only encouraged short-term speculation in asset markets and harmed long-term investments; they have also destroyed the business model of banks, insurance companies, and fund managers.

Financial engineers outperformed the real economy only with the support of super-financial engineers – that is, central banks. Initially, balance-sheet expansion – by $5 trillion since 2009 – provided banks with the cheap funding they needed to avoid failure. But bank deleveraging (brought about by stiffer regulatory requirements), together with negative interest rates, caused financial institutions’ equity prices to fall, leading to further pro-cyclical destruction of value through price deflation, increasing illiquidity, and crowded exits.

Past experience has taught China’s real engineers that the only way to escape deflation is through painful structural reforms – not easy money and competitive devaluation.

The US dollar is a safe haven, but savers in need of liquidity still lack an impartial lender of last resort. Depositing in reserve currencies at near-zero interest rates makes sense only if the banker is not funding financial speculation against the depositor.

China’s G-20 presidency this year offers an important opportunity to emphasize that renminbi stability is important not only for China, but also for the global financial system as a whole. If the US dollar enters into another round of revaluation, the only winners will be financial engineers.

Kemal Dervis writes: The Economist recently asked of monetary policymakers. Stephen Roach has called the move by major central banks – including the Bank of Japan, the European Central Bank, and the Bank of Sweden – to negative real (and, in some cases, even nominal) interest rates a “futile” effort that merely sets “the stage for the next crisis.” And, at the February G-20 finance ministers meeting, Bank of England Governor Mark Carney reportedly called these policies “ultimately a zero-sum game.” Have the major advanced economies’ central banks – which have borne the burden of sustaining anemic post-2008 recoveries – really run out of options?

It certainly seems so. Central-bank balance sheets have swelled, and policy rates have reached their “near zero” lower bounds.

But policymakers have one more option: a shift to “purer” fiscal policy, in which they directly finance government spending by printing money – a so-called “helicopter drop.” The new money would bypass the financial and corporate sectors and go straight to the thirstiest horses: middle- and lower-income consumers. The money could go to them directly, and through investment in job-creating, productivity-increasing infrastructure. By placing purchasing power in the hands of those who need it most, direct monetary financing of public spending would also help to improve inclusiveness in economies where inequality is rising fast.

Helicopter drops are currently proposed by both leftist and centrist economists.

Even with such an approach, however, major central banks would have to coordinate their policies.

Success also hinges on the simultaneous pursuit of fiscal expansion worldwide, with each country’s efforts calibrated according to its fiscal space and current-account position. The expansion should finance a global program of investment in physical and human infrastructure, focusing on the two key challenges of our time: cleaner energy and skills for the digital age.

Economic orthodoxy and independent actions have clearly failed. It is time for policymakers to recognize that innovative international policy cooperation is not a luxury; sometimes – like today – it is a necessity.

Ishac Diwan writes:  Five years after the Arab Spring uprisings began, Egypt, Jordan, Morocco, and Tunisia have achieved reasonable levels of political stability. Yet economic growth remains tepid.

Market economies are relatively new to the Middle East and North Africa, having arisen only after the 1980s, when the model of state-directed economic growth collapsed under the weight of its inefficiencies (and resulting debt). Unlike Latin America or Eastern Europe, however, Arab countries liberalized their economies without liberalizing their politics.

As a result, even as the reforms of the 1990s rolled back the state’s economic role – in Egypt, state spending fell from 60% of GDP in 1980 to 30% of GDP in the 1990s – politics continued to shape markets. With economic privileges doled out in a way that favored firms were able to acquire virtual monopolies over entire liberalized economic sectors.

In Egypt, for example, the firms of 32 businessmen closely connected with then-President Hosni Mubarak received in 2010 more than 80% of the credit that went to the formal private sector and earned 60% of the sector’s overall profits, while employing only 11% of the country’s labor force. In Tunisia, former President Zine El Abidine Ben Ali’s cronies received 21% of all private-sector profits in 2010, though their firms employed only 1% of Tunisia’s labor force.

Unsurprisingly, this system generated only modest growth.

And it was not only traditional rent-filled sectors, such as real estate or natural resources, that failed to reach their growth potential. In tradable sectors, such as manufacturing and utilities, rents were created through non-tariff protection and subsidies, leading to anemic export growth.

The result was a dearth of jobs in the formal sector. Intensifying social dissatisfaction was met with rising levels of repression.

The governments that emerged from the Arab Spring’s wreckage inherited a broken system of closed deals. Inadequate property-rights protection is impeding investment, but moving to fair and well-enforced rules is not a realistic prospect in the current environment, given the petty corruption of an underpaid bureaucracy and the polarized political environment.

These countries could try to replicate Turkey’s economic success in 2000-2010, when a political alliance between the ruling party and a broad group of dynamic small and medium-size enterprises (SMEs) contributed to a tripling of exports.

Here, Morocco and Jordan have had some success, with their monarchies proving capable of managing elites who offer both political acquiescence and economic sustenance. Tunisia could take a page out of Morocco’s playbook, expanding its export sector by attracting foreign direct investment, while opening up its domestic services sector to local SMEs. For its part, Egypt is relying on public and private firms close to its army, together with finance from the Gulf Cooperation Council, to support its economy.

For Morocco and Tunisia, the convergence of interests between moderate Islamists and liberals offers a ray of hope. But such hope seems to be lacking for the moment in Egypt and elsewhere in the region.

Can things get worse in Russia?  Last year, as other money managers were steering clear of Russia’s broken economy, the Moscow-born Barinov pulled off something of a coup: He persuaded his bosses to take the plunge and buy Russian government bonds. It was a narrow bet, but he ended up winning because the central bank—after implementing the biggest interest rate hike since the Russian financial crisis in 1998 to prop up the collapsing ruble—changed course and aggressively backtracked. In the first 10 months of 2015, ruble-denominated government bonds handed investors such as Barinov a 25 percent return in dollar terms, the biggest gain for local bonds anywhere.

This year not even Barinov can spot an escape from the rubble of an economy mired in its longest recession in two decades, Bloomberg Markets magazine reports in its forthcoming issue. Sanctions imposed by the U.S. and the European Union to punish President Vladimir Putin for meddling in Ukraine remain a drag on growth. And oil’s decline to a 13-year low has been catastrophic for Russia, where almost 50 percent of government revenue comes from crude and natural gas. “With oil, you rely on a very volatile factor,” says Barinov, who oversees about $2.6 billion in assets. So as far as he’s concerned, “all bets are off.”

A persistent glut in crude supply could push prices to as low as $16 a barrel this year, according to former Russian Finance Minister Alexei Kudrin. Kudrin won plaudits overseas for his stewardship of Russia’s finances during Putin’s first decade in power. As the current crisis deepened, Bloomberg News reported in December, he was in discussions about a possible return to government. (He declined to comment on that.) A Putin ally, Kudrin remains negative about Russia’s prospects. “Over the next year to 18 months,” he says, “Russia will suffer major economic difficulties.”

In mid-January, as snow blanketed Moscow, the mood was grim at the Gaidar Forum, a kind of Russia-focused mini-Davos. The yearly economic conference is named after the free-market Russian economist Yegor Gaidar, who pioneered the shock therapy that introduced capitalism to Russia in the early 1990s. Finance Minister Anton Siluanov set the tone for the event, warning that without deep budget cuts to keep the deficit at 3 percent, the country risks a financial crash like that of the late ’90s, when Russia defaulted on its debts, the ruble crashed, and inflation spun out of control.

 

 

 

Boeing Co. has developed a new attempt to tackle a basic fear for flying germophobes: airliner lavatories that turn into virtual petri dishes during long-range trips.

The U.S. planemaker says its engineers and designers have created self-cleaning toilets that use ultraviolet light to kill 99.99 percent of germs, disinfecting all surfaces after every use in just three seconds.

“We’re trying to alleviate the anxiety we all face when using a restroom that gets a workout during a flight,” Jeanne Yu, director of environmental performance for Boeing’s commercial airplanes division, said in a statement.

The concept offers a new twist on the old aviator saying, “If it ain’t Boeing, I ain’t going,” aviation consultant Robert Mann said by e-mail. “Boeing should ground-test these in big-city public facilities to develop some street cred,” he said.

The lavatory prototype uses a type of ultraviolet light, different from the rays in tanning beds, that doesn’t harm humans. Activated only when the airliner toilet isn’t in use, the lights flood touch surfaces such as the toilet seat, sink and counter top.

Boeing has filed a patent for the concept, which it says can minimize the growth and potential transmission of micro-organisms. The sanitizing even helps rid a lavatory of odors.

Better yet, it would be touchless. The cleaning system would lift and close the toilet seat by itself so that all surfaces are exposed during the cleaning cycle, according to Boeing. Other perks for those worried about germs: hands-free faucet, soap dispense, trash flap, lid and hand dryer. The planemaker is also studying a hands-free door latch and vacuum vent system for floor spillage.

The concept is a finalist for a Crystal Cabin Award that will be announced at the Aircraft Interiors Expo in Hamburg, Germany on April 5.

The potential benefits aren’t just in the bathroom. The self-cleaning concept could also help airlines save money on costly repairs, Mann said.

Toilets “are notoriously difficult to keep maintained to high standards, which shows up as odors that cannot be controlled and eventually, corrosion to structures adjoining the lav module,” such as floor beams and fuselage, Mann said. “It really would be a maintenance cost savings, too.”

2. SYDNEY — And the Australian share market looks set to open higher as the recent recovery in oil prices and a batch of positive economic data from Australia to the US calms fears of a global economic slowdown. At 0645 AEDT on Thursday, the share price index futures contract was up 15 points at 5.029.

3. WASHINGTON — US businesses added a healthy 214,000 jobs last month, another sign that the US job market remains resilient despite economic weakness overseas and tumult in financial markets.

4. WASHINGTON — The Federal Reserve says the economy was expanding in most of the country in January and February, helped by gains in consumer spending and home sales. But there were also rising headwinds from falling oil prices and a strong US dollar that held back some sectors.

5. BEIJING — China plans to target broadbased money supply growth of about 13 per cent this year, sources said, a signal that further monetary policy easing is likely during a painful economic restructuring that could result in millions of workers losing jobs.

6. MOSCOW — Russia’s Rosneft, the world’s biggest listed oil producer by volume, is considering a cut to domestic production to balance the global market and as the firm faces a natural decline this year.

7. BRASILIA — Mining company Samarco agreed with the Brazilian government to pay more than 24 billion reals ($A8.6 billion) in damages for a deadly dam spill in November, an environment ministry memo seen by Reuters says.

8. LONDON — Anheuser-Busch InBev has agreed to sell SABMiller’s stake in China’s Snow Breweries for $US1.6 billion ($A2.23 billion) to ease regulatory concerns about the merger of the world’s two biggest beer-makers.

9. LAGOS — Tens of thousands of Nigerian fishermen and farmers are suing multinational oil giant Shell in two new lawsuits filed in a British High Court, alleging that decades of uncleaned oil spills have destroyed their lives.

Koichi Hamada writes:  In a bold attempt to reflate the Japanese economy, the Bank of Japan has now pushed interest rates on deposits into negative territory. Though this policy is not new – it is already being pursued by the European Central Bank, the Bank of Sweden, the Swiss National Bank, and others – it is uncharted ground for the BOJ. And, unfortunately, markets have not responded as expected.

In theory, negative rates, by forcing commercial banks essentially to pay the central bank to be able to park their money, should spur increased lending to companies, which would then spend more, including on hiring more employees. This should spur a stock-market rebound, boost household consumption, weaken the yen’s exchange rate, and halt deflation.

One reason for this is widespread pessimism about Japan’s economy, reinforced by volatility in China, monetary tightening in the United States, and the collapse in world oil prices. But, as BOJ Governor Haruhiko Kuroda recently reported to the House of Councillors, Japan’s economic fundamentals are generally sound, and pessimistic predictions are greatly exaggerated.

In fact, Prime Minister Shinzo Abe’s economy strategy – so-called “Abenomics” – has enabled Japan to stay on a reasonably positive path in highly uncertain times.

Japan, like emerging economies with flexible exchange-rate regimes, may actually benefit from America’s monetary tightening, as an appreciating dollar makes Japanese exports more competitive.

There is no reason why the Tokyo stock market should gyrate whenever the Shanghai market shakes. Yet, even though Japan’s economic situation is far from dire, introducing negative interest rates has not been treated as what it is: a maneuver to loosen monetary policy. Instead, the Japanese stock market regarded negative rates as a harbinger of greater financial risk, and speculators have remained bullish on the yen.

From 2003 to 2004, the Japanese treasury purchased a large amount of dollars, thereby easing monetary conditions at a time when the BOJ was reluctant to pursue open market operations. In recent years, however, the yen’s exchange rate has been determined through monetary policy, not manipulated by intervention. In general, I welcome this new approach, and thus do not recommend major interventions to change the direction of the yen exchange rate. I do, however, believe that sporadic interventions may be needed to punish speculators who are taking advantage of temporary market psychology to keep the yen far above its market value.

Martin Feldstein writes:  The US Congressional Budget Office (CBO) has just delivered the bad news that the national debt is now rising faster than GDP and heading toward ratios that we usually associate with Italy or Spain. That confirms my view that the fiscal deficit is the most serious long-term economic problem facing US policymakers.

The high and rising level of the national debt hurts the US economy in many ways. Paying the interest requires higher federal taxes or a larger budget deficit. In 2016, the interest on the national debt is equal to nearly 16% of the revenue from personal income tax. By 2026, the projected interest on the national debt will equal more than 31% of this revenue, even if interest rates rise as slowly as the CBO projects.

Foreign investors now own more than half of net government debt, and that proportion is likely to keep growing.

Increased borrowing by the federal government also means crowding out the private sector. Lower borrowing and capital investment by firms reduces future productivity growth and growth in real incomes.

So it is important to find ways to reduce the budget deficit and minimize the future debt ratio. The good news is that a relatively small reduction in the deficit can put the debt ratio on a path to a much lower level. Cutting the deficit to 2% of GDP, for example, would cause the debt ratio eventually to reach 50%.

Deficit reduction requires cutting government spending, increasing revenue, or both. Neither is politically easy; but neither should be impossible.

Cutting spending is made more difficult by the reductions in relative outlays that have already occurred. The share of GDP devoted to defense has fallen from 7.5% of GDP in 1966 to 3.2% of GDP this year, and the CBO projects it to fall to 2.6% during the next decade. That would be the lowest GDP share since World War II, representing a level of spending that military experts believe is dangerously low.

Other spending is split between the annually appropriated amounts (known as non-defense discretionary spending) and the programs in which spending follows from established rules that are not subject to annual review (known as the “mandatory” spending programs, primarily Social Security retirement benefits and health-care spending).

The non-defense discretionary spending is also heading toward 2.6% of GDP – also the smallest share of GDP since WWII.

Federal taxes now take 18.3% of GDP and are projected to remain at that level for the next decade, unless tax rules or rates are changed. The rate structure for personal taxation has changed over the past 30 years, with the top tax rate rising from 28% in 1986 to more than 40% now. The corporate rate of 35% is already the highest in the industrial world.

Higher marginal tax rates would weaken incentives and distort economic decisions.

The mortgage deduction alone will reduce tax revenue in 2016 by $84 billion, or more than 5% of the personal income tax collected. The exclusion of health insurance premiums from employees’ taxable income will reduce revenue by more than $200 billion, or about 15% of receipts from the personal income tax.

Nothing to start shrinking the deficit will happen before this year’s presidential election. But tackling the spending and revenue components of deficit reduction should be high on the agenda when the new president takes office next year.