(NEW YORK) Like children clinging to their parents, stock market traders turned to their central banks last week as they sought protection from the frightening economic figures coming out of China. Surely, they asked, the central banks would ward off the approaching bogeymen, as they had so many times since the 2008 crash.
The US Federal Reserve came up with the goods. William Dudley, president of the bank’s New York branch, hinted that the interest rate rise many had expected next month was likely to be delayed.
A signal that borrowing costs would remain at rock bottom was all it took. After Black Monday and Wobbly Tuesday, the markets recovered to regain almost all their recent losses.
It was just as if they had said to themselves: who cares if China’s economy is slowing; the “Greenspan put”, which so famously propped up US stock markets during the 1990s and early 2000s with one interest rate cut after another, is still in operation.
The meeting of the world’s most important central bankers in Jackson Hole, Wyoming, this weekend only confirmed the need for Britain, Japan, the eurozone and the US to keep monetary policy loose.
Yet the palliative offered by the Fed is akin to a parent soothing fears with another round of ice-creams despite expanding waistlines and warnings from the dentist and the doctor.
According to some City analysts, the stock markets are pumped with so much cheap credit that a crash is just around the corner. And they worry that when that crash comes, the central banks are all out of moves to prevent the aftershocks from causing a broader collapse.
Since 2008 the Fed has pumped around $4.5 trillion into the financial system. The Bank of England stopped at £375bn. The Bank of Japan is still adding to its post-crash stimulus with around $700bn a year and the Frankfurt-based European Central Bank will have matched its cousin in Tokyo by the end of the year.
In each case, the central bank has adopted quantitative easing, which involves buying government debt to drive up its price. A higher price lowers the returns and encourages investors to go elsewhere in search of gains. It has meant a big shift in the portfolios of fund managers in favour of shares. Apart from a few blips due to the Greek crisis, stock markets have boomed. This summer, the FTSE 100 soared past 2008 levels to top its 1999 peak.
But China, which has borrowed heavily to keep its economy moving, is running out of steam. Beijing has said it does not want to encourage another borrowing boom. But to prevent a crash, it is doing just that. In the last two weeks it has cut interest rates and loosened borrowing limits. It has even invested directly in the market, buying the shares of smaller companies.
So we face the shocking prospect of central bankers, in thrall to stock market gyrations, making the world a more unstable place with promises of yet more cheap credit.
There are a few alternative courses of action that Bank of England governor Mark Carney could still propose. He could tell politicians that the only sustainable way to get their economies moving is with hard cash from taxed wealth and incomes. If that is too unpalatable, governments should borrow directly to fund public infrastructure and productivity improvements.
And if the government is too embarrassed to admit to voters that it needs to borrow money, then the least central banks can do is sign deals with high street banks to lend, rather than hoping they will take QE funds and do something useful with them. Because the evidence is already there for all to see that investors would prefer to pump the money into the stock market and property, both of them inherently unstable and prone to violent crashes.
In each case, the central bank has adopted quantitative easing, which involves buying government debt to drive up its price. A higher price lowers the returns and encourages investors to go elsewhere in search of gains. It has meant a big shift in the portfolios of fund managers in favour of shares. Apart from a few blips due to the Greek crisis, stock markets have boomed. This summer, the FTSE 100 soared past 2008 levels to top its 1999 peak.
But China, which has borrowed heavily to keep its economy moving, is running out of steam. Beijing has said it does not want to encourage another borrowing boom. But to prevent a crash, it is doing just that. In the last two weeks it has cut interest rates and loosened borrowing limits. It has even invested directly in the market, buying the shares of smaller companies.
So we face the shocking prospect of central bankers, in thrall to stock market gyrations, making the world a more unstable place with promises of yet more cheap credit.
There are a few alternative courses of action that Bank of England governor Mark Carney could still propose. He could tell politicians that the only sustainable way to get their economies moving is with hard cash from taxed wealth and incomes. If that is too unpalatable, governments should borrow directly to fund public infrastructure and productivity improvements.
And if the government is too embarrassed to admit to voters that it needs to borrow money, then the least central banks can do is sign deals with high street banks to lend, rather than hoping they will take QE funds and do something useful with them. Because the evidence is already there for all to see that investors would prefer to pump the money into the stock market and property, both of them inherently unstable and prone to violent crashes.
Google feels the EU heat
‘We have owned the internet,” Barack Obama crowed in a video interview this February. “Our companies have created it, expanded it, perfected it.” But from tax to privacy and now a string of antitrust investigations, one of those companies, Google, is under attack on multiple fronts in Europe.
The US president argued that what has been presented as high-minded intervention by regulators is in fact a commercially driven bid to protect old-world technology companies from the Silicon Valley invaders.
Europe’s most powerful regulator, the Brussels competition policy chief Margrethe Vestager, has taken aim at Google Shopping, its price-comparison service. In April, she launched a legal process that could result in a big fine. On Thursday, the search giant filed a 150-page rebuttal.
First of all, Google says it has not choked off traffic to rival shopping price sites – the traffic it sends to these kinds of sites has increased by 227% over a decade (its own data shows). Sounds like a big number. Until you look at the growth in Google’s own traffic over that period. The number of searches worldwide now stands at somewhere near 1.2 trillion a year – an increase of 750% in a decade.
Google also wants its shopping service considered as part of a much larger group that includes actual retailers, like Amazon, and marketplaces, like eBay, where people also go to compare prices. Perhaps, but these are very different businesses. The capital needed to launch an online retailer, let alone one with a global presence and a one-day delivery guarantee, is much larger than the funding required for a price-comparison startup.
Google’s strongest point is that forcing a company to offer its services to rivals is a drastic measure normally reserved for monopoly utilities. Google is very useful, but it is not water or electricity. Google Shopping is a very niche service.
The argument about fair price comparison is a sideshow given the much bigger worries about privacy, security and tax that currently dog the digital world. But a victory for regulators here could lead to more assaults – on Google’s flight-comparison service and maps. Vestager has also launched an investigation into Android, the group’s market-leading phone software. Obama may be called on to cheer the home team again before this fight is over.
Two sides to the national living wage?
George Osborne has already claimed credit for Sainsbury’s increasing the base pay of its shop floor staff by 4%. “Britain deserves a pay rise so great Sainsbury’s staff will be paid at least national living wage early with biggest increases in 10 years,” he tweeted last week.
It is a indeed a credit to the chancellor that he has put pay on the agenda for Britain’s supermarkets, the country’s largest private employers, by announcing a national living wage in the budget last month. However, Sainsbury’s announcement is just one side of the coin: the other side is how it will finance the pay increase.
The Office for Budget Responsibility has estimated that the chancellor’s national living wage will lead to 60,000 job losses as companies fund the higher minimum pay by cutting jobs. Moody’s, the credit rating agency, has warned retailers could close stores, increase prices and employ more under-25s – who do not qualify for the national living wage. Perks for staff, such as in-store discounts, could also be at risk.
Sainsbury’s did not downgrade its profit forecasts at the same time as announcing the pay increase, so it must have found the money from somewhere – time will tell where.