The Beer Theory of Sovereign Debt: North & Malta vs South Europe

The Beer Theory of Sovereign Debt: North & Malta vs South Europe  

“That’s the difference between beer drinkers and wine drinkers,” says a friend. “The beer drinkers pay.”

The Beer Theory of Credit Quality

Bond investors believed the euro promised stability and security. It was backed not by the wine drinkers, but by the beer drinkers.

We’re not sure how Ireland – a big beer-drinking country – fits into this story. But our friend notes that the countries of Northern Europe – where they also drink mostly beer – tend to repay their debts. Southern Europe – Spain, Italy, and Greece – are bad credit risks.

On the streets of London at this time of year, people stand on the sidewalks with barrels of beer in their hands. And on the Fourth of July holiday, more Americans will raise glasses of beer than wine.

Still, we doubt the “Beer Theory of Credit Quality” will hold up under the pressure of a generalized credit contraction.

In Europe, the beer drinkers of the north sold automobiles, for example, to the wine drinkers of the south. Then, when the winos couldn’t pay, the beer swillers gave them more credit.

Now, when the Greeks still can’t pay, the Germans are getting huffy about it.

And everybody is nervous. If the Germans put the screws to the Greeks, they invite problems with the rest of the wine drinkers.

What the Greeks owe is peanuts compared to what the Italians and Spanish owe. And if the credit stops, who’s going to buy the Germans’ BMWs, Audis, and Mercedes?

Nobody wants the credit to stop… credit no party


Technology is transforming finance. Stock-trading was first to be disrupted, then came banking and Insurance is next in line

Technology is transforming finance. Stock-trading was first to be disrupted, then came banking and  Insurance is next in line.

5 ways technology is transforming finance

For decades, banks and insurers have employed the same relatively static, highly profitable business models. But today they find themselves confronted on all sides by innovators seeking to disrupt their businesses. Crowdfunding, peer-to-peer lenders, mobile payments, bitcoin, robo-advisers – there seems to be no end to the diversity, or to the sky-high valuations, of these “fintech” innovators.

Yet, some might note that they have heard this tune before. The direct banks and “digi-cash” of the 90s captured the imagination of journalists and investors in a similar fashion, but ultimately had little impact. In fact, the financial services industry has been remarkably impervious to past assaults by innovators, partially due to the importance that scale, trust and regulatory know-how have traditionally played in this space.

However, as they say in investing, “past performance is not an indicator of future success” and the same may be true for banks’ and insurers’ record of besting innovators.

A new World Economic Forum report takes a look into what the future holds for the industry. It draws on over 100 interviews with industry experts and a series of workshops that put strategy officers from global financial institutions in the same room as high-flying fintech innovators to discuss the issue. Their findings suggest this round of innovation just might make the big names in financial services rethink their business models in some very fundamental ways.



Here are five characteristics of today’s innovators to suggest this time might really be different when it comes to disruptive innovation in financial services:

1.     They’re deploying highly focused products and services

Past innovators often tried to replicate the whole bank, resulting in business models that either appealed only to the most tech-savvy or price-conscious customers.Today’s innovators are aggressively targeting the intersection between areas of high frustration for customers and high profitability for incumbents, allowing them to “skim the cream” by chipping away at incumbents’ most valuable products. It is hard to think of a better example of this than remittance – banks have traditionally charged very high fees for cross-border money transfers and offered a poor customer experience, with transfers often taking up to three days to arrive at their destination. UK-based company Transferwise is challenging this process using an innovative network of bank accounts and a user-friendly web interface to make international transfers faster, easier and much cheaper. Thanks to this business model, the company now oversees over £500 million of transfers a month and has recently expanded into the US.

2.     They are automating and commoditizing high-margin processes

Innovators are also using their technical skills to automate manual processes that are currently very resource intensive for established players. This allows them to offer services to whole new groups of customers that were once reserved for the elite. “Robo-advisers” like WealthfrontFutureAdvisor and Nutmeg have automated a full suite of wealth management services including asset allocation, investment advice and even complicated tax minimization strategies, all offered to customers via an online portal. While customers must forego the in-person attention of a dedicated adviser, they receive many of the services they would offer at a fraction of the cost and without needing to have the $100,000 in investible assets typically required. As a result, a whole new class of younger, less wealthy individuals are receiving advice and support in their efforts to save, and it remains unclear if they will ever have the desire to switch to a traditional wealth adviser, even as their savings grow to the point where they become eligible for one.

3.     They are using data strategically

Customer data has always been a central decision-making factor for financial institutions – bankers make lending decisions based on your credit score while insurers might look at your driving record or require a health check before issuing a policy. But as people and their devices become more interconnected, new streams of granular, real-time data are emerging, and with them innovators who use that data to support financial decision-making. FriendlyScore, for example, conducts in-depth analyses of people’s social networking patterns to provide an additional layer of data for lenders trying to analyse the credit-worthiness of a borrower. Does your small business get lots of customer likes and respond promptly to complaints? If so, you might be a good risk. Are all of your social connections drinking buddies “checking in” at the same bar? Well that might count against your borrowing prospects.

Meanwhile, a new breed of insurance company is identifying ways to generate streams of data that help them make better pricing decisions and encourage their policy-holders to make smart decisions. Oscar, a US-based health insurer provides its clients with a wearable fitness tracker free of charge. This lets Oscar see which policy-holders prefer the couch to the gym and enables them to provide monetary incentives (like premium rebates) to encourage customers to hit the treadmill. As the sophistication of these analytic models and wearable devices improves, we will likely see more and more financial services companies working to nudge their customers towards better behaviour and more prudent risk management.

4.     They are platform based and capital light

Companies like Uber and Airbnb have shown that marketplace companies, which connect buyers and sellers, are able to grow revenues exponentially while keeping costs more or less flat. This strategy has not gone unnoticed by innovators in financial services. Lending Club and Prosper, the two leading US marketplace lenders, saw their total originations of consumer credit in the US grow from $871 million in 2012 to $2.4 billion in 2013. Lending Club alone issued $3.5 billion in loans in 2014. While this is only a fraction of total US consumer debt, which stood at $3.2 trillion in 2013, the growth of these platforms is impressive. Analysts at Foundation Capital predict that marketplace lenders will issue $1 trillion in consumer credit, globally, by 2025. Even more impressive, they have done so without putting any of their own capital at risk. Instead, they have provided a place where borrowers looking to get a better rate can meet with lenders (both individuals and a range of institutions such as hedge funds) who are eager to invest their money.

Crowdfunding platforms have achieved something similar, becoming an important source of funding for many seed-stage businesses. These platforms connect individuals looking to make small investments in start-ups with an array of potential investment targets, and allow the “wisdom of the crowd” to decide which companies will and will not be funded (while taking a slice of the funds from those that are successful).

5.     They are collaborating with incumbents

This one might seem strange. After all, disruptors are supposed to devour the old economy, not work with it. But this is an oversimplified view. Smart investors have realized that they can employ bifurcated strategies to compete with incumbents in the arenas of their choosing while piggy-backing on their scale and infrastructure where they are unable to compete. For their part, incumbents are realizing that collaborating with new entrants can help them get a new perspective on their industry, better understand their strategic advantages, and even externalize aspects of their research and development. As a result, we’re seeing a growing number of collaborations between innovators and incumbents. ApplePay, the most lauded financial innovation of the past year, doesn’t attempt to disrupt payment networks like Visa and MasterCard, but instead works with them. Meanwhile, regional banks, like Union Bank in California, are forming strategic partnerships with marketplace lenders, providing referrals for customers they are unable to lend to. This helps them meet their customers’ needs while avoiding the risk that they will leave for another full-service financial institution.

Clearly, there is more to this story than simple disruption. How it will play out is still to be seen, although we can safely say that innovators will force incumbents to change, which should ultimately benefit the consumer. But it doesn’t necessarily mean that the brand names we know will be disappearing any time soon – particularly those who learn to play with the new kids on the block.

The Future of Financial Services report is available here.

Should we use a single global currency ?

We should use a single global currency.

Taking away the power of countries to devalue their currency could make them more responsible and their competitiveness capacities much more clear.

It’s almost a truism to say that membership in the euro exacerbated the Greek crisis. The thinking goes like this: Because Greece doesn’t have its own currency, it couldn’t increase its competitiveness and boost growth through devaluation. Although devaluation is a valuable instrument, I think most countries and companies would benefit if the world, not just Europe, used a single currency.

Today’s fragmented financial world is unfair. On the one hand, there’s Denmark with such a glut of currency, local and foreign, that its central bank’s key deposit rate is minus 0.75 percent and companies are considering overpaying their taxes because the Tax Ministry pays 1 percent interest on the excess. Then there’s Greece, which has had to limit withdrawals from automated teller machines to 60 euros a day because of a severe cash crunch.

Consider the case of Apple, with an enormous cash pile that earns next to nothing. The company had about $160 billion in March 2014 and made $1.795 billion in interest and dividend income that year — which is less than 1 percent, considering that the company’s kept increasing the cash holding. And there are companies, even entire countries, that would kill to be financed at that rate — but are forced to accept much higher ones, and not necessarily because they are unsafe borrowers, but because they are often dragged down by risk perceptions that have little to do with reality.

Before the 2008 financial crisis, financial globalization — defined as international capital inflows — was on the rise, partly because investors underestimated risk. After the mortgage crash, it became clear that rating agencies weren’t much help to investors in making such estimates and that local and specialized knowledge was needed to make intelligent decisions. The European debt crisis only confirmed this. Cross-border investment fell off sharply:


Despite all the talk of globalization and its harmful effects, money doesn’t wander the world looking for opportunities. Mainly, it stays at home. Even some of the recorded international flows are in fact domestic investment made through offshore havens for tax purposes. No wonder direct investment is the most stable component of cross-border capital movements: Companies and individuals investing in specific projects do their homework on a micro level, so they probably have the best information.

Generally, though, the fiscal regimes, political and macroeconomic risks of countries vary so much that mistakes happen, even when a foreign investor can afford detailed and knowledgeable analysis. The bond guru Michael Hasenstab’s investment in Ukrainian bonds for Franklin Templeton is a case in point: The trade was thoroughly analyzed and Hasenstab traveled to Kiev last year to talk to officials and executives, but the country now wants him to accept a 40 percent haircut as part of its International Monetary Fund-led bailout.

To ensure that financial resources are distributed more evenly throughout the world, it would make sense to cut down country-specific risk. Taking monetary policy out of individual countries’ hands would go a long way toward that goal. Currency risk would be eliminated — the same monetary unit would be in use everywhere — and there would be a uniform interest rate environment. The creditworthiness of specific borrowers would be investors’ biggest area of concern. That’s still a big unknown, and there would always be enough coups, revolutions, corruption, fraud and mismanagement to throw the best models off kilter. Yet there would be much less to worry about.

Now, the world’s 140 or so currencies sometimes make cross-border flows dangerous. Switzerland and Denmark have both suffered from their commitment to their own currencies this year. The ability to devalue is nice, but it’s illusory, to a large extent: It helps balance a budget, bring down debt levels and make exports more competitive, but it hits ordinary people with high inflation. Besides, according to a 2010 paper by Stephen Kamin, director of international finance at the Federal Reserve System,

The crisis has also identified an area in which the standard array of central bank tools may have become inadequate in many countries: liquidity provision and the lender-of-last resort function. With the rise in the share of financial transactions undertaken in vehicle currencies such as dollars and euros, the ability to print domestic currency may no longer suffice to address a liquidity crisis. Accordingly, international arrangements for liquidity provision may become increasingly important in the future.

In short, by giving up the right to print their own money, governments stand to lose less and less. And they might even need the discipline imposed by an outside monetary policy aithority. A country dependent on a single natural resource — say, oil — is tempted to spend when the price of that resource is high; knowing that devaluation will be unavailable when it falls will make such a country accumulate windfall revenues in a rainy-day fund instead.

If the world used the same currency, the problems inadvertently caused by the euro wouldn’t be replicated. German banks were too willing to lend to projects in the European periphery because they felt they could trust members of the same exclusive currency club and because the euro made investing in Europe almost frictionless, an advantage the rest of the world didn’t have. The one world, one currency club would make friction disappear.

Of course, there would be the question of who should administer the global central bank. The U.S. would want to — the dollar is as close to a global currency as we have — but resistance from other global players would sink the project. This is where something like Bitcoin could come in handy: a decentralized system that works with little human intervention. “Mining” rules could be established to prevent anyone from cornering the market, but the system would self-regulate.

This is naive utopianism, of course. The obstacles to such a project are beyond estimation, as so is the technical complexity. But this pipe-dream is a reminder of how tough and complex the euro project is. Those who hasten to write it off as a failure don’t show it enough respect. Sure, there have been setbacks, and some countries may prove unable to keep taking part, but its participants are accumulating data that may one day allow us to figure out how to bring the whole world closer together.

Grexit to the Left: Members on Greece, the EU and the Bailout….many and our point of view as well

Grexit to the Left: Members on Greece, the EU and the Bailout….many and our point of view as well

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Following a turbulent weekend that culminated with Greece’s Parliament voting to hold a referendum on whether or not to accept the terms of the latest bailout package, Greece woke up Monday morning to closed banks, stringent capital controls and plenty of uncertainty regarding its future as member of theEurozone.Stock markets throughout Europe stumbled out of the gate on Monday upon announcement of the Sunday July 5 referendum,cheekily dubbed as theGreferendum by the mainstream media.The FTSE in London fell by more than 2%, while markets in France and Germany dropped by 4%. European banking shares alone lost 10% of their value amid worries of a Greek default.

Banks in Greece, as well as the Greek stock market, will remain closed until July 7 and ATM withdrawals have been limited to 60 Euros per day.

Fears of a Euro collapse have shaken the continent. A Greek departure—colloquially referred to as Grexit—might lead to a domino effect, further weakening already fragile economies in Spain, Italy and Portugal, and also forcing them out of the Eurozone.Even though he doesn’t think a Grexit would be a problem for the monetary union, Thiago Hupsel, a member from Brazil, takes a similar stance, stating, “The default and consequent withdrawal of Greece may trigger a serious moral hazard that could let the market think that other weaker members may be next.” He adds that, by studying this week’s movements, “we could observe that those countries’ bonds plunged, while those for the UK, France and Germany had their yields lowered in a clear movement of flight to quality.”While financial experts believe the European banking system is better equipped this time around to mitigate the impacts of a Greek default, the fact that this is unchartered territory makes it difficult to accurately predict the market’s reaction to a Grexit. Add to this a rapidly shifting political, economic and social landscape, and it only becomes more complicated to forecast Greece’s and the Eurozone’s future.

Belinda Wong, another member and Director atLeader Corporate Services Limited in Hong Kong, summarizes this uncertainty nicely: “It is unclear how theGreece issue will affect the EU because many things need to unfold in the next few days and weeks. Since Greece has announced it will not repay its loan to the IMF, it remains to be seen what this default will trigger in Greece, the EU and the international banking system.”As evinced by the range of views collected from other members, perspectives on the outcome of this crisis and its effects on the EU and the financial system cover the whole spectrum.Dimitrios Kyriazis, a Doctoral Researcher and Tutor at Oxford University, suggests that the recent impasse has been caused by political and ideological differences. “The handling of the Greek government’s requests will set a precedent for other crisis-ridden Eurozone countries. The stakes are very high because both the creditors’ failure to keep the Eurozone intact and Greece’s failure to remain in the Eurozone will haunt them for years to come,” he says.

According to Yaroslav Abramov, Counsel at Silver Seal Advisers in Kyiv, Ukraine, there are two negative economic outcomes to a Grexit. First, there would be “an additional loss of confidence in the Euro as an instrument for savings,” further indicating that EU and IMF policies are inefficient and adversely affecting the integrity of OECD regulations. Second, businesses are bound to fall out of favor with Greek banks such as Hellenic, Piraeus, Alpha and Eurobank, leading to “a new migration of capital.”

Shaukat Murad of Dubai-based Alpha Management Limitedbelieves Greece overplayed its hand by putting the issue up for referendum: “I think Greece has over-estimated their importance to the Eurozone. The Eurozone, although somewhat weakened, will survive a Grexit. The Greeks need to consider that even after receiving all those billions of dollars, their economy is still contracting, so how will additional billions help the economy climb out of its present predicament?”Anuj Sharma, Director of Abacus Offshore Seychelles, looks at it differently. “Greece remaining in the EU is more important for the EU than for Greece since losing a member means membership is reversible, and this could take down the Euro’s near-term stability with it,” he says.Dmitry Tratas, a Russia-based specialist for Aragonia Group, is more sanguine about the whole situation. As long as the negative political effects involved are overcome, he regards a Grexit as financially beneficial to all parties: “The Eurozone would feel better without any additional ballast, and Greece could devalue its currency so that their products and services would be more attractive in Europe. “

On the other hand, Arun Gupta of India’s G D Singla & Co. Chartered Accountants stands somewhere in the middle, claiming a Grexit could lead to a paradoxical situation: “If Greece does well upon exit, then others in the Eurozone might consider the option of exiting. If they don’t, then that would be bad for the country.”

Many other members voiced their concerns over the hard times being experienced by the Greek people and the aging of the European population.

Steven Landes of SH Landes LLP, an accounting and auditing firm in London, states, “The very sad scenes with ordinary people suffering on a daily basis due to the actions of their own politicians and those of the EU” highlight “everything that is wrong with the EU and strengthens the case for a British exit from the Union.”Likewise,Spyros Binias, a Tax Lawyer with Loyens & Loeff in Luxembourg, added that throughout this entire situation, “The only constant is the living conditions of the Greek people, which have deteriorated and continue to do so, and the current financial aid on the table is not perceived as being of help by the current government and many Greeks too.”Furthermore, Hendrik Van Duijn of DTS Duijn’s Tax Solutions BV in the Netherlands brings up an interesting point, saying “The local pension schemes and how they are affected by the aging of people can form a genuine threat to the system,” and “the situation in Greece is just the forerunner” to this entire affair.

Others see a potential Grexit as an opportunity for other European markets to flourish.

Alberto Balatti, Founder and Managing Director of MaltaWay, thinks the ongoing situation will “push more people to move their businesses, assets, and wealth away from Europe’s PIIGS countries and into jurisdictions like Malta.”

Maxim Schvidkiy, Managing Director at SHFM Overseas in Sweden, mirrors this position and says he’s advised his clients to “diversify their midterm financial assets and instruments within non-Euro EU countries like the UK, Denmark and Sweden.”Furthermore, Iliyan Ivanov, a Lawyer with Atanassov and Ivanov Law Firmin Bulgaria, suggests that, at a micro-level, this situation will provide greater “financial and legal independence of international subsidiaries of Greek banks” and a “freer movement of goods, services and capital, for example, small Greek businesses incorporating in Bulgaria and managing their affairs from there.”Back in Greece, however, some just want a quick agreement.

Eleftherios Erkekoglou, a Partner at KSi Greece, says he wants a EU-sponsored solution that “will provide space for Greece to breathe, work, create and pay off.” He adds, “I strongly believe that Greece cannot be a non-EU country. It would somehow affect other EU countries, but it would be a disaster for my country. The problem is that the Greek people cannot afford any more short-term solutions and we need to find a future goal to strive for. We need solidarity and understanding from other EU countries.”

Panagiotis Spatiotis, an Athens-based private tax specialist, shares this sentiment, believing “it is in the best interest of every part to end this crisis. The EU wants to remove uncertainty from the European economic climate in order to achieve higher growth and end any discussion about the sustainability of the Eurozone.”

One thing is certain: Greece is at a crossroads, and a decision will be made, at the latest, come Sunday.

Grexit - problems in Greece

An executive’s guide to machine learning

An executive’s guide to machine learning

Machine learning is based on algorithms that can learn from data without relying on rules-based programming. It came into its own as a scientific discipline in the late 1990s as steady advances in digitization and cheap computing power enabled data scientists to stop building finished models and instead train computers to do so. The unmanageable volume and complexity of the big data that the world is now swimming in have increased the potential of machine learning—and the need for it.

Dazzling as such feats are, machine learning is nothing like learning in the human sense (yet). But what it already does extraordinarily well—and will get better at—is relentlessly chewing through any amount of data and every combination of variables. Because machine learning’s emergence as a mainstream management tool is relatively recent, it often raises questions. In this article, we’ve posed some that we often hear and answered them in a way we hope will be useful for any executive. Now is the time to grapple with these issues, because the competitive significance of business models turbocharged by machine learning is poised to surge

What does it take to get started?

C-level executives will best exploit machine learning if they see it as a tool to craft and implement a strategic vision. But that means putting strategy first. Without strategy as a starting point, machine learning risks becoming a tool buried inside a company’s routine operations: it will provide a useful service, but its long-term value will probably be limited to an endless repetition of “cookie cutter” applications such as models for acquiring, stimulating, and retaining customers.

We find the parallels with M&A instructive. That, after all, is a means to a well-defined end. No sensible business rushes into a flurry of acquisitions or mergers and then just sits back to see what happens. Companies embarking on machine learning should make the same three commitments companies make before embracing M&A. Those commitments are, first, to investigate all feasible alternatives; second, to pursue the strategy wholeheartedly at the C-suite level; and, third, to use (or if necessary acquire) existing expertise and knowledge in the C-suite to guide the application of that strategy.

The people charged with creating the strategic vision may well be (or have been) data scientists. But as they define the problem and the desired outcome of the strategy, they will need guidance from C-level colleagues overseeing other crucial strategic initiatives. More broadly, companies must have two types of people to unleash the potential of machine learning. “Quants” are schooled in its language and methods. “Translators” can bridge the disciplines of data, machine learning, and decision making by reframing the quants’ complex results as actionable insights that generalist managers can execute.

Are we any nearer to knowing whether machines will replace managers?
It’s true that change is coming (and data are generated) so quickly that human-in-the-loop involvement in all decision making is rapidly becoming impractical. Looking three to five years out, we expect to see far higher levels of artificial intelligence, as well as the development of distributed autonomous corporations. These self-motivating, self-contained agents, formed as corporations, will be able to carry out set objectives autonomously, without any direct human supervision. Some DACs will certainly become self-programming.

One current of opinion sees distributed autonomous corporations as threatening and inimical to our culture. But by the time they fully evolve, machine learning will have become culturally invisible in the same way technological inventions of the 20th century disappeared into the background. The role of humans will be to direct and guide the algorithms as they attempt to achieve the objectives that they are given. That is one lesson of the automatic-trading algorithms which wreaked such damage during the financial crisis of 2008.

No matter what fresh insights computers unearth, only human managers can decide the essential questions, such as which critical business problems a company is really trying to solve. Just as human colleagues need regular reviews and assessments, so these “brilliant machines” and their works will also need to be regularly evaluated, refined—and, who knows, perhaps even fired or told to pursue entirely different paths—by executives with experience, judgment, and domain expertise.

The winners will be neither machines alone, nor humans alone, but the two working together effectively.


Productivity is falling globally: “Internet of Everything” is everywhere except in the productivity statistics

The productivity paradox is back. Productivity is falling globally, especially in the US and China.“Internet of Everything” is everywhere except in the productivity statistics

Those of us that are immersed in the innovation economy may find this hard to believe, but we are not, as a whole, actually more productive when we are in the midst of an innovation cycle boom. New technologies take time to absorb, refine and make mainstream. Computer software can be reprogrammed quickly. Humans can’t.

Optimists maintain that the official statistics fail to capture marked quality-of-life improvements, which may be true, especially in the light of promising advances in biotechnology and online education. But this overlooks a much more important aspect of the productivity-measurement critique: the undercounting of work time associated with the widespread use of portable information appliances.
In the US, the Bureau of Labor Statistics estimates that the length of the average workweek has held steady at about 34 hours since the advent of the Internet two decades ago. Yet nothing could be further from the truth: knowledge workers continually toil outside the traditional office, checking their email, updating spreadsheets, writing reports, and engaging in collective brainstorming. Indeed, white-collar knowledge workers – that is, most workers in advanced economies – are now tethered to their workplaces essentially 24 hours a day, seven days a week, a reality that is not reflected in the official statistics.
Productivity growth is not about working longer; it is about generating more output per unit of labor input. Any undercounting of output pales in comparison with the IT-assisted undercounting of working hours.

In the late 1980s, there was intense debate about the so-called productivity paradox – when massive investments in information technology (IT) were not delivering measureable productivity improvements. That paradox is now back, posing a problem for both the United States and China – one that may well come up in their annual Strategic and Economic Dialogue.
Back in 1987, Nobel laureate Robert Solow famously quipped, “You can see the computer age everywhere except in the productivity statistics.” The productivity paradox seemed to be resolved in the 1990s, when America experienced a spectacular productivity renaissance. Average annual productivity growth in the country’s nonfarm business sector accelerated to 2.5% from 1991 to 2007, from the 1.5% trend in the preceding 15 years. The benefits of the Internet Age had finally materialized. Concern about the paradox all but vanished.
But the celebration appears to have been premature. Despite another technological revolution, productivity growth is slumping again. And this time the downturn is global in scope, affecting the world’s two largest economies, the US and China, most of all.
Over the past five years, from 2010 to 2014, annual US productivity growth has fallen to an average of 0.9%. It actually fell at a 2.6% annual rate in the two most recent quarters (in late 2014 and early 2015). Barring a major data revision, America’s productivity renaissance seems to have run into serious trouble.
China is witnessing a similar pattern. Although the government does not publish regular productivity statistics, there is no mistaking the problem: Overall urban employment growth has been steady, at around 13.2 million workers per year since 2013 – well in excess of the government’s targeted growth rate of ten million. Moreover, hiring seems to be holding at that brisk pace in early 2015.
At the same time, output growth has slowed from the 10% trend of the 33 years ending in 2011 to around 7% today. That downshift, in the face of sustained rapid job creation, implies an unmistakable deceleration of productivity.
Therein lies the latest paradox. With revolutionary technologies now driving the creation of new markets (digital media and computerized wearables), services (energy management and DNA sequencing), products (smartphones and robotics), and technology companies (Alibaba and Apple), surely productivity growth must be surging. As a modern-day Solow might say, the “Internet of Everything” is everywhere except in the productivity statistics.
But is there really a paradox? Northwestern University’s Robert Gordon has argued that IT- and Internet-led innovations like automated high-speed data processing and e-commerce pale in comparison to the breakthroughs of the Industrial Revolution, including the steam engine, electricity, and indoor plumbing. He maintains that, although these innovations led to dramatic transformations of the major advanced economies – such as higher female labor-force participation, increased transportation speed, urbanization, and normalized temperature control – these changes will be extremely hard to replicate.
Indeed, as taken with today’s revolutionary technologies as we are – I say this staring at my sleek new Apple Watch – I am sympathetic to Gordon’s argument. If US productivity figures are to be taken at anything close to face value – a persistently sluggish trend interrupted by a 16-year spurt that now appears to have faded – it is possible that all America has accomplished are transitional efficiency improvements associated with the IT-enabled shift from one technology platform to another.–roach-2015-06


Scaring Europe??? Forget Greece, Portugal and… are the eurozone’s next crisis

Scaring Europe??? Forget Greece, Portugal and… are the eurozone’s next crisis

In the end, they kicked the can a little further down the road. After keeping the markets on a cliff-hanger for the last week, wondering whether the Greeks might end up getting kicked out of the eurozone, a deal of some sort looks likely.

It won’t fix Greece, and it won’t fix the euro EURUSD, +0.0178% either. But it will patch the whole system up until Christmas — and that will buy everyone some time to concentrate on something else.

And yet, in reality, the real crisis may not be in the east of the eurozone, but right over in the west. Portugal is the ticking time-bomb waiting to explode.

Why? Because the country has run up unsustainable debts, most of the money is owed to foreigners, and with the economy still in deep trouble it may have to default as well. The elections later this year may well trigger the second Portuguese crisis — and that will reveal how the problems in Europe involve far more than just Greece, even if that attracts most of the world’s attention.

All the evidence suggests that, once the debt-to-GDP ratio climbs into the 130% bracket and above, it is basically unsustainable.
Back in 2011 and 2012, when the euro crisis first flared up, three countries went bust.

Of those, Greece is still in intensive care, and looks likely to remain so for the foreseeable future — the Greeks look willing to do just enough to stay in the eurozone, while the rest of Europe is willing to offer it just enough money to stay afloat while making it impossible to grow (it is a reverse Goldilocks — probably the worst of all possible solutions).

Ireland, which was always the strongest of the three bankrupt nations, is now growing again at a reasonable rate, helped along by the robust recovery in the U.K., which is still its main export market.

And then there is Portugal — which is not in Greek-style permanent crisis, and yet does not seem capable of a sustainable recovery.

On the surface, Portugal looks in much better shape than it did three years ago. It has exited the bailout scheme, leaving the program in May last year, after hitting European Central Bank and International Monetary Fund targets. The economy is starting to expand again. Gross domestic product rose by 0.4% in the latest quarter, extending the run to a whole year of expansion, taking the annual growth rate up to 1.5%. It is forecast to expand by another 1.6% this year.

If Portugal can indeed recover, that would be a big win for the EU and IMF. Their catastrophic mix of internal devaluation and austerity looks to have been a complete failure in Greece, but if they can make it work in both Ireland and Portugal, the reputation of both institutions could be salvaged.

After all, two out of three is not too bad.

The trouble is, Portugal may not be ‘saved’ after all.

The recovery does not look very durable. It is mainly is driven by consumer spending and a cyclical uptick in investment. But exports continue to fall, and unemployment is still rising — the latest figures show it up to 13.7% of the workforce.

The real issue, however, is debt. According to the latest figures from Eurostat, the EU’s statistical agency, Portugal’s debt-to-GDP ratio has climbed to 130%. Rather more worryingly, 70% of that is owned by foreigners.

Some countries such as Finland or Latvia have most of their debt held by foreigners — but are in the fortunate position of not having very much of it. Other countries, such as Italy, have a lot of debt, but are in the fortunate position of having most of it owned domestically.

The Portuguese are close to unique, in both having very high debts, and most of it being owned abroad. Nor does it just end there. Once household and corporate debt is added into the equation, Portugal has more debt in total than any other eurozone country, Greece included (which mainly has government debt to deal with). There aren’t any reliable figures on who that debt belongs to, but it is fair bet that is mostly foreigners as well.

So long as the economy is stable and the government is secure, that might not be a problem. Portugal doesn’t appear to have that luxury. The government of the center-right leader Pedro Coelho has to call an election before the end of October. Antonio Costa’s Socialist Party is likely to make sweeping gains on an anti-austerity platform. If it wins the election — and the polls put it ahead — then it is likely to slow the pace of austerity, provoking the wrath of the ECB and the IMF.

If Podemos, the Spanish protest party, does well across the border in that country’s elections, it will embolden a left-of-center Portuguese government to reject the cuts in spending demanded of it.

So far, there is little evidence of investors getting nervous about that. Yields on 10-year Portuguese bonds have spiked back up to 2.7%, from the 1.6% they reached earlier this year, but are nowhere close to the 14% they reached at the height of the crisis. Portuguese stocks have recovered most of their losses suffered as the country went bust, even if they are not quite back to 2011 levels.

But they should be. All the evidence suggests that, once the debt-to-GDP ratio climbs into the 130% bracket and above, it is basically unsustainable. A country has to grow at 3%-plus simply to keep its debts at the same level — and there is absolutely nothing to suggest Portugal can achieve that or anything like it.

At some point, all those foreign holders of Portuguese debt are going to realize it will have to be written off, at least in part. Once that happens, there will be a stampede to sell — and the elections later this year could well be the trigger for that.

Right now, the markets believe Greece can be contained. Perhaps it can. But Portugal as well? That seems unlikely. Most people think the center of the eurozone crisis is in Athens — but it might well be in Lisbon instead.






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