Posts in category Finance and economics


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Huge volumes of data make real-time insurance a possibility

Mind your heads

EVEN at weddings or whale watches, the buzz of a drone is no longer a surprise. Drone photography is booming. Gartner, a consultancy, says some 174,000 drones will be sold for commercial use around the world this year, and 2.8m to consumers. It is easy to imagine a few might fall out of the sky, causing damage the pilot cannot hope to pay for: crushed wedding cakes, injured spectators and so on. Amid scores of near-misses, several incidents have already occurred. In 2014, for example, a drone filming a triathlon in Australia crashed on a competitor’s head.

Clearly, drone-users need insurance. Typically, risks are insured through the payment of an annual premium. Insure4drones, a British specialist, charges £738.86 ($1,000) to cover a DJI Phantom, a bestselling drone, for a year. From October Flock, a London startup, will offer insurance on a flight-by-flight basis, at the push of a button in an app, to any commercial drone-operator in Britain….Continue reading

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Marital choices are exacerbating household income inequality

It’s all a matter of degree

“HERE’S what nobody is telling you: Find a husband on campus before you graduate,” wrote Susan Patton, a human-resources consultant, in 2013. In an infamous letter to the editor of Princeton’s student newspaper, Ms Patton warned female students at the university that they will “never again be surrounded by this concentration of men who are worthy of [them]”. Critics responded harshly. Ms Patton recalls that she was branded “a traitor to feminism, a traitor to co-education and an elitist”.

Economists might offer yet another critique of Ms Patton’s letter: it was largely unnecessary. It is clear to academics that people tend to marry spouses with similar levels of education. They also know that “assortative mating”, as the practice is called in the jargon, is exacerbating income inequality. In America, Britain, Denmark, Germany and Norway, they have found that household income would be more evenly spread if…Continue reading

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America holds the World Trade Organisation hostage

EIGHT months into Donald Trump’s presidency, the rules-based system of global trade remains intact. Threats to impose broad tariffs have come to nothing. Some ominous investigations into whether imports into America are a national-security threat are on hold. Mr Trump looks less a hard man than a boy crying wolf. All the same, supporters of the World Trade Organisation (WTO), the guardian of that rules-based system, are worried. Other dangers are lurking. There is more than one way to undermine an institution.

The WTO is meant to be a forum for reaching deals and resolving disputes. But all 164 members must agree to new rules, and agreement has largely been elusive. So if members do not like today’s rules, as interpreted by judges, they have little prospect of negotiating better ones. That puts pressure on the WTO’s judicial function, the bit that has been working fairly well.

Trouble is brewing at the WTO’s court of appeals. It is meant to have seven serving judges, but has only five and by the end of the year will have just four. The Americans refuse to start the process of filling the spots, citing systemic concerns. What seemed an arcane procedural row has become what some call a “crisis”.

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China sets its sights on dominating sunrise industries

IN RECENT days China set the record for the world’s fastest long-distance bullet train, which hurtled between Beijing and Shanghai at 350kph (217mph). This was a triumph of industrial policy as much as of engineering. China’s first high-speed trains started rolling only a decade ago; today the country has 20,000km of high-speed track, more than the rest of the world combined. China could not have built this without a strong government. The state provided funds for research, land for tracks, aid for loss-making railways, subsidies for equipment-makers and, most controversially, incentives for foreign companies to share commercial secrets.

High-speed rail is a prime example of the Chinese government’s prowess at identifying priority industries and deploying money and policy tools to nurture them. It inspires awe of what it can accomplish and fear that other countries stand little chance against such a formidable competitor. Yet there have also been big industrial-policy misses, notably…Continue reading

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Putting a new face on an American banknote is oddly difficult

IT WOULD be hard to find a better example of long-term gridlock in Washington than its treatment of banknotes, whose appearance has essentially been frozen since 1929. The administration of Barack Obama took a half-hearted step towards a new look, proposing the replacement of Alexander Hamilton’s portrait on the $10 bill with a portrait of Harriet Tubman, a former slave who became a civil-war hero.

Problems cropped up at once. It seemed ludicrous to scrap the portrait of the one person on a note who helped create America’s financial system. It did not help that he was also the hero of a smash-hit Broadway musical. So the administration decided instead to replace Andrew Jackson, America’s seventh president, on the $20 bill. But by then it was too close to the election to push the change through.

President Donald Trump has since lent his support to keeping Jackson. In a recent interview, his treasury secretary, Steven Mnuchin, made it clear he had little interest in pursuing…Continue reading

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How to protect yourself against the theft of your identity

AS IDENTITY theft has proliferated, so has the number of businesses hoping to make money selling protection against it. Companies such as LifeLock, Identity Guard and PrivacyGuard sell products similar to Equifax’s TrustedID Premier identity-theft protection. That was the service Equifax offered to every American with a Social Security number in the aftermath of its big data breach.

Those who enroll in TrustedID are promised notification if their information is offered for sale on the internet. Their credit reports with Equifax, Experian and TransUnion, the “Big Three” credit-reporting agencies (CRAs), are also monitored for suspicious activity, such as the opening of new accounts or failures to pay a bill on time. If such activity is detected, users can “freeze” their Equifax credit reports, ie, make them unavailable to lenders. And TrustedID offers $1m-worth of insurance to compensate users for losses incurred as a result of identity theft. Equifax is offering the service free…Continue reading

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The big data breach suffered by Equifax has alarming implications

UNTIL something goes wrong, few people give much thought to the surveillance they undergo by credit-reporting agencies (CRAs). Yet these agencies’ business is deeply intrusive: quantifying character. They assign individuals credit scores based on how they previously managed debt. The scores are then sold to lenders. In America, Equifax, Experian and TransUnion, the “Big Three” CRAs, have gathered credit histories and identifying information for nearly every adult.

On September 7th Equifax admitted that something had indeed gone very wrong: hackers had gained access to personal information on about 143m people, mostly Americans. It reported that, from mid-May to July, hackers exploited a vulnerability in its website. The data compromised included Social Security numbers (SSNs), dates of birth and driving-licence numbers, and for 209,000 people, possibly their credit-card numbers as well. Equifax also noted that data about some Britons and Canadians may have been stolen.

The…Continue reading

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Goldman Sachs announces a change in strategy

IT IS not easy to feel pity for Goldman Sachs. Its alumni lord it in pivotal government positions around the world; from every prestigious business school, applicants queue in hope of a job; its senior executives earn eye-watering amounts; and it has a presence, it seems, in every corner of the global economy. Yet these are troubling times for the bank. It is facing fundamental questions about its business model.

Its investors are particularly worried by a precipitous decline in the fortunes of its core fixed-income, currencies and commodities unit (FICC). That is the business from which Goldman’s current leadership graduated. The bank’s president, Harvey Schwartz, used a conference on September 12th to give an unusually detailed account of how it is changing. He outlined plans for igniting growth in an apparently stagnant business, and for preserving profitability despite that stagnation.

One factor in Goldman’s problems has been a change in its staff structure. In the hunt…Continue reading

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ICO stands for Investor Caution Obligatory

HERE is the deal. You can buy an entry in a computer ledger issued by a startup company on the basis of an unregulated prospectus. It is called an “initial coin offering” or ICO. But though the ledger entry is called a coin, you cannot spend it in any shop. And whereas the use of the term ICO makes it sound like an IPO (initial public offering), the process whereby a firm lists on a stockmarket, coin ownership does not necessarily get you equity in the company concerned.

This sounds like the kind of bargain that would appeal only to people who reply to e-mails from Nigerian princes offering to transfer millions to their accounts. But ICOs may well be the most popular investment craze since the dotcom boom of 1999-2000; even Paris Hilton, a celebrity heiress, has jumped on the bandwagon. The list of active, upcoming and recent ICOs on the website “ICO alert” covers 31 pages of A4 paper and includes around 600 companies. More than $2bn has been raised in…Continue reading

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Governments need to rethink their attitudes to debt

GOVERNMENTS do not always make the best budget managers. Assuming it avoids an accidental debt default, America will run a bigger budget deficit this year than the last, despite a booming economy. Germany runs a surplus—but scrimps on critical investments and annoys its euro-area neighbours in the process. Japan, cowering under a mammoth public-debt pile, is weighing raising its consumption tax, though the last rise strangled a tenuous economic recovery. It is awkward, therefore, that the role of fiscal policy as a recession-fighting tool is only growing. The next downturn will be a painful and dangerous learning experience for many politicians.

When that comes, at some point in the next few years, the initial policy response is easily foreseeable. Central banks, nimbler than parliaments, will again move first. But markets reckon that two years from now the Fed’s benchmark rate will remain below 2%, the Bank of England’s below 1% and the European Central Bank’s close to zero. Rates can only go so negative before people abandon the banking system for cash. So cuts to interest rates will be limited. By contrast, in the relatively mild recession of 2001 the Fed cut rates by more than six percentage points. Central-bank asset purchases will follow, assuming they are not already happening, as they might well still be in Europe and Japan. Their effects will be less…Continue reading

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Exchange-rate shifts have helped the global economy

STICKLERS for value have plenty of reasons to frown at financial markets. Much feels out of whack, from squashed bond yields to pricey stockmarkets. Yet currency markets, at least, seem to have shifted in line with fundamentals this year. Take the euro, for instance. Since the start of 2017 it has risen by almost 15% against the dollar, to $1.19 (see chart). That has taken it much closer to fair value by benchmarks such as purchasing-power parity (PPP), the exchange rate at which a basket of goods is worth the same in different countries. The OECD puts the euro’s PPP at $1.33. That is quite a stretch from $1.04 in January. “The elastic had to snap back,” says Kit Juckes of Société Générale, a French bank.

Of course, the euro’s revival is a result of more than its being cheap. The anxiety that elections in Europe might bring to power anti-euro populists, such as Marine Le Pen in France, has dissipated. The euro-zone economy has further strengthened, raising the prospect that monetary…Continue reading

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Hurricane Harvey has exposed the inadequacy of flood insurance

THOSE who live on America’s coasts know to prepare for wrathful hurricanes in late summer—nailing plywood to their windows as the storm approaches. America’s property insurers and reinsurers are ready, too, using sophisticated models to track storms and estimate potential losses. But wind is not the only danger from hurricanes. Ask Houstonians who saw their homes inundated by Hurricane Harvey’s 52 inches (132cm) of rain in the six days to August 30th. Or those in tthe path of Hurricane Irma, which, as The Economist went to press, was wreaking havoc across the Caribbean. But whereas wind damage is covered under most standard insurance policies in America, flood insurance is a government-run add-on that far from all homeowners buy. As a result, of over $30bn in property losses in Texas, only 40% may be insured.

The National Flood Insurance Program (NFIP) was set up in 1968, after a series of large losses led private insurers to pull back. Those living within a…Continue reading

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A year on, Wells Fargo cannot shake off its mis-selling scandal

ON SEPTEMBER 8th 2016, Wells Fargo’s reputation plummeted abruptly from that of America’s finest bank to that of yet another dodgy company. It was revealed to have opened an enormous number of potentially unauthorised retail deposit, current (checking) and credit-card accounts. A year on, two questions have yet to be put to rest. How much harm did Wells do to its customers? And how much did the scandal hurt the bank itself?

Wells has not been passive in its response. It has produced report after report on its misdeeds and submitted to investigations by two federal regulators, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency. It has purged its chief executive and the head of its retail bank, clawed back executive bonuses, transformed its board and simplified its formerly decentralised structure. It has created a comprehensive process for restitution and settled a class-action suit.

Yet it cannot put the scandal behind it. In July it…Continue reading

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Foreign jurisdictions try to lure legal business from London

National treasures

LOFTILY as they may disdain the profit motive, Britain’s judges are, on a national level, money-spinners. English law is often specified as the one under which commercial contracts are to be interpreted and enforced. And disputes often end up being heard in British courts. But, like any business, the law is competitive, and other jurisdictions want to snatch a share of this market. London is mounting its defences.

It has several hard-to-beat advantages: the use of English; a reputation for fairness; the centuries of precedent that lend predictability. Richard Caird, a partner at Dentons, a global law firm, notes that a foreign company can expect an impartial decision in an English court, even if it is pitted against a British firm. Over 70% of cases in the English commercial courts involve a foreign party. In 2015, Britain had a £3.4bn ($5.2bn) positive balance of payments on legal services.

One way for other financial centres,…Continue reading

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Of Indian banknotes cancelled last year, 99% are accounted for

ON NOVEMBER 8th 2016, Narendra Modi, India’s prime minister, stunned its 1.3bn people by announcing that most banknotes would soon become worthless. Indians then queued for weeks on end to exchange or deposit their banned money at banks. The comfort for the poor was that the greedy, tax-dodging rich would suffer more, as they struggled to launder their suitcases full of cash by year-end.

Not so. A report from the central bank, the Reserve Bank of India (RBI), on August 30th suggests that of the 15.4trn rupees ($241bn) withdrawn—roughly 86% of all banknotes by value—15.3trn rupees, or 99% of them, have been accounted for. Either the “black money” never existed or, more likely, the hoarders found a way of making it legitimate.

Defenders of the scheme say it is merely one plank of a wider fight against informal economic activity and corruption. Banks have enjoyed an influx of cash. Digital payments are up (from a low base), as issuance of replacement notes has not caught…Continue reading

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The gap between India’s richer and poorer states is widening

COUNTRIES find it easier to get rich once their neighbours already are. East Asia’s growth pattern has for decades been likened to a skein of geese, from Japan at the vanguard to laggards such as Myanmar at the rear. The same pattern can often be seen within big countries. Over the past decade, for example, China’s poorer provinces have grown faster than their wealthier peers. India is different. Far from converging, its states are getting ever more unequal. A recent shake-up in the tax system might even make matters worse.

Bar a few Mumbai penthouses and Bangalore startup offices, all parts of India are relatively poor by global standards. Taken together, its 1.3bn people make up roughly the third and fourth decile of the world’s population, with an income per person (adjusted for purchasing power) of $6,600 dollars. But that average conceals a vast gap. In Kerala, a southern state, the average resident has an annual income per person of $9,300, higher than Ukraine, and…Continue reading

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