Tag: Finance and economics

AFTER just 18 days as Deutsche Bank’s chief executive, Christian Sewing had two tasks to perform on April 26th. The easy one, inherited from his ousted predecessor, John Cryan, was to report predictably glum first-quarter results. Net profit dropped by 79%, year on year, to only €120m ($147m). Harder was indicating where he might lead Germany’s troubled leading lender. The rough answer is: back towards Europe, and away from any aspiration to be a global investment bank.

Mr Sewing intends to concentrate more on raising finance and managing payments and currencies for big European companies, and less on America and Asia. He plans to cut the small swaps-repurchasing business in America and to focus the buying and selling of shares for hedge funds and other investors on the most profitable clients. By 2021 corporate and investment banking’s share of total revenues will be trimmed to 50%, from 54% last year. As a result, Mr Sewing said, earnings should become more…Continue reading

POPULAR concern about free trade with China has focused on the loss of manufacturing jobs in America and Europe. Policymakers have an additional worry: that China’s rise is hurting innovation in the West. This fear is among the small set of issues that unites American Democrats and Republicans. In 2016 Barack Obama’s commerce secretary said that China’s state-driven economy would weaken the world’s innovation ecosystem. Donald Trump’s advisers allege that China makes it harder for foreign firms to invest in innovation by squeezing their returns. Mr Trump’s trade team was expected to raise this complaint, among others, with Chinese officials during talks in Beijing on May 3rd and 4th, as The Economist went to press. There is one problem. Data suggest that competition with China has coincided with more innovation in America, not less.

The relationship between competition and innovation is complex, even before considering trade with China. Economists agree that the…Continue reading

WHICH has provided a better return in recent decades: America’s stockmarket or education? The latter, according to a research review by George Psacharopoulos and Harry Patrinos for the World Bank. The two economists looked at 1,120 studies, across 139 countries, and came up with an annual average “rate of return”—actually a pay premium, the increase in hourly earnings from an extra year of schooling—of 8.8%. The analogy is inexact, but for comparison America’s stockmarket returned an annual 5.6% over the past 50 years.

Their figure excludes social gains, such as lower mortality rates associated with greater education. The premium is higher for girls and for primary education. It is also higher in poor countries, presumably because the smaller the share of educated people, the higher the pay they can command. The same reasoning suggests that the return should have dwindled as educational attainment rose. Instead, it has stayed strong, especially for higher education (see…Continue reading

IN THE skyscraper that is Bank of America’s New York headquarters, the chief executive, Brian Moynihan, looks relaxed. The bank has just announced record first-quarter earnings. Its return on equity is comfortably in double digits. Its share price has been on a roll. The revival of America’s second-largest bank, he avers, was inevitable. Any dark moments? None, except perhaps when America’s sovereign debt was downgraded in 2011 and all the country’s banks suffered. Early hints at the current prosperity? On his first day in the job, in 2010, he says. Vast losses from bad debt and litigation merely obscured billions of dollars in operating profits. “We just had to get rid of what was dragging us down.”

In fact, this renaissance was anything but predictable. Over little more than half a century Mr Moynihan’s two predecessors, Hugh McColl and Ken Lewis, had transformed the tiny North Carolina National Bank into an institution that could claim a business relationship with half of all American…Continue reading

INTEREST rates are heading higher and that is likely to put financial markets under strain. Investors and regulators would both dearly love to know where the next crisis will come from. What is the most likely culprit?

Financial crises tend to involve one or more of these three ingredients: excessive borrowing, concentrated bets, and a mismatch between assets and liabilities. The crisis of 2008 was so serious because it involved all three—big bets on structured products linked to the housing market, and bank-balance sheets that were both overstretched and dependent on short-term funding. The Asian crisis of the late 1990s was the result of companies borrowing too much in dollars when their revenues were in local currency. The dotcom bubble had less serious consequences than either of these because the concentrated bets were in equities; debt did not play a significant part.

It may seem surprising to assert that the genesis of the next crisis is probably lurking in corporate debt….Continue reading

ECONOMISTS have spent the past decade wringing their hands over the health of the euro area’s economy. Last year, in a welcome respite, it expanded by a robust 2.3%, outstripping forecasts and matching America’s growth rate. But it has appeared less rosy-cheeked since.

Symptoms include moderation in a number of monthly indicators. Industrial production fell in January and February, as did business confidence; retail-sales growth was disappointing. The purchasing managers’ index (PMI), an output survey regarded as a good early indicator of GDP growth, has fallen from exuberant—and perhaps unsustainable—levels at the turn of the year, though it still points to decent growth (see chart).

Germany, the bloc’s largest economy, has not been immune. A summary indicator compiled by the Macroeconomic Policy Institute, a German think-tank, which includes production, sentiment and interest-rate data, suggests that the probability of a recession has risen, from 7% in March to 32% in April. A…Continue reading

THE concept of a universal basic income (UBI), an unconditional cash payment to all citizens, has in recent years captured the imagination of a wide spectrum of people, from leftist activists to libertarian Silicon Valley techies. Proponents see a neat solution to poverty and the challenges of automation; detractors argue it would remove the incentive to work. Trials of UBI have been launched, or are about to be, in several countries. Most are publicly funded, although Y Combinator, a Silicon Valley startup accelerator, is starting a privately funded experiment in America.

Finland was one of the first movers. In January 2017 it began a trial for 2,000 people, each receiving €560 ($680) a month. That drew legions of foreign journalists and camera crews. This week, however, international media attention abruptly centred on the ending of the experiment in December 2018. Headlines suggested that it had been “scrapped” or had “failed”. The truth is more nuanced.

The trial…Continue reading

Parag Pathak penned a pupil-picker paper

BOSTON parents were fed up. To get their children into public schools they had to submit a list of their preferences. Spots were allocated first to those who put a school top. Only then would schools consider pupils who put them second or third. Sounds fair? Hold on. The best schools are popular. Picking them risks rejection. Good schools are sought after, too. If put second they may also fill up, leaving only places at worse schools. Should parents aim for the best and risk mediocrity, or settle for the good?

On April 20th the American Economic Association (AEA) awarded the John Bates Clark medal, given annually to a leading economist under 40, to Parag Pathak of the Massachusetts Institute of Technology. He researches market design—eg, creating mechanisms to allocate resources without money, such as school places in Boston. Solutions he devised there have been applied widely, from New York to New Orleans. The AEA says…Continue reading

THE notion that the gentle flap of a butterfly’s wings can cause chaos on the other side of the world is well known. But commodity markets have been tested in recent weeks by what could be called the 800-pound-gorilla effect: the idea that chest-beating in the White House can unleash turmoil in global metals, agricultural and energy markets.

President Donald Trump has slapped sanctions on Russia’s biggest aluminium producer, Rusal, intensified a trade tiff with China and tweeted a gibe against OPEC, the oil-producing cartel. His actions have shaken commodity markets at a time when speculation in futures is near the record heights of 2012, making markets even more volatile (see chart). Aluminium, nickel and palladium prices have soared and then plummeted. Soyabean markets are under threat. Oil prices are at their highest levels for more than three years.