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The case against shrinking the Fed’s balance-sheet

AS EXPECTED, the Federal Reserve announced on September 20th that it will soon begin reversing the asset purchases it made during and after the financial crisis. From October, America’s central bank will stop reinvesting all of the money it receives when its assets start to mature. As a result, its $4.5trn balance-sheet will gradually shrink. However, the Fed did not give any clues as to what the endpoint for the balance-sheet should be. This is an important question. There are strong arguments for keeping the balance-sheet large. In fact, it might be better were the Fed not shedding any assets at all. 

Most commentators view a large balance-sheet, which is the result of quantitative easing (QE), as an extraordinary economic stimulus. Janet Yellen, the Fed’s chair, seems to agree: at a press conference after the Fed announcement, she said the balance-sheet should shrink because the stimulus it provides to the economy is no longer needed. But the claim that the balance-sheet is stimulating the economy is far from an…Continue reading

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Toys “R” Us files for bankruptcy

ASK young American parents about Toys “R” Us and they are likely to be able to sing a jingle from their childhood: “I don’t wanna grow up, ’cause maybe if I did, I couldn’t be a Toys ‘R’ Us kid”. For children of the 1980s, Toys “R” Us was a mecca at the strip mall, an awe-inspiring array of dolls, trucks, board games, bikes, art supplies and much more. Many of them noticed when on September 18th, the chain filed for bankruptcy.

Dave Brandon, the company’s chief executive, emphasised that shops would carry on operating as usual and claimed that the best era of Toys “R” Us was still to come. “These are the right steps to ensure that the iconic Toys “R” Us and Babies “R” Us brands live on for many generations,” he declared. A Chapter 11 bankruptcy, many analysts agree, is a sensible way to deal with the chain’s $5bn of long-term debt. So Toys “R” Us is not dead. But its future is hardly certain.

The company’s tale in many…Continue reading

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Business and financeGulliver

The Ryanair cancellations

SOME strategies are too successful. When Ryanair convinced many of its pilots to take less vacation during peak-travel season, it probably thought it was being clever. However, pilots who ferry tourists to holiday destinations need vacations too. Poor planning and a bit of bad luck have left Ryanair with a shortage of working pilots for the autumn. This shortfall has forced the low-cost airline to cancel around 2,100 flights beginning on September 16th and continuing through October. The abrupt cancellation of last weekend’s flights and the short notice provided to customers has left many angry.

Ryanair’s woes were caused in part by a change in the way the airline determines employee leave. Previously, Ryanair staff took their vacations over an operational year from April to March. In 2016, under pressure from the Irish Aviation Authority, Ryanair adopted the calendar year instead. As part of the transition, it needed to allow its employees to take the entirety of their vacation time between April and December of this year. That…Continue reading

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Business and financeGulliver

The value of credit-card points

THE value of credit-card points has long been a topic of debate among business travellers. The subject is also picked over online on an impressive number of dedicated blogs and forums. Now it is getting an airing in a different sort of venue: the corruption trial of an American senator.

Robert Menendez, a Democratic senator from New Jersey, is facing charges for allegedly doing favours for Salomon Melgen, a Florida-based eye doctor and friend of the lawmaker. Prosecutors say that Mr Melgen was trying to avoid repaying the government $8.9m that he had allegedly overbilled Medicare, the public health-care programme for seniors. And he wanted Mr Menendez’s help in exchange for lavish kickbacks. These included flights in a private jet, stays in a fancy hotel and more than $750,000 in campaign contributions. 

But at the centre of the third day of the trial last week was the issue of credit-card points. In 2010, Mr Salomon paid for Mr Menendez to stay for three nights at the Park Hyatt Vendome, a five-star hotel in…Continue reading

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Global LNG giants turn to poor countries for new markets

Bringing rivers of the liquefied stuff

WHEN it comes to liquefied natural gas (LNG), the supermajors have supersized appetites. The likes of Royal Dutch Shell, ExxonMobil and BP make discoveries described as “elephants”; their cost overruns alone can run into the tens of billions of dollars; and projects take the best part of a decade to complete. For years, the industry has demanded fixed, long-term contracts from their customers to justify the size of these megaprojects.

The producers also have pretty big problems. They are in the midst of a vast expansion in Australia and elsewhere just as the shale revolution and the start of American LNG exports has brought an unexpected burst of gas onto markets, clobbering prices for the foreseeable future and forcing producers into concessions. Demand in rich countries such as Japan and much of western Europe appears to be in long-term decline.

At least one big customer, China, is making life easier….Continue reading

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The business of sperm banks

Fruit of a global supply chain

BROWSING websites that list sperm donors is weirdly similar to online dating. “Sanford is the total package,” begins one online ad, describing his strong jawline and piercing blue eyes. With a degree in finance and a “charming demeanour”, he is more than a pretty face. You can listen to a voice recording from Sanford himself. If all that wins you over, you can have his baby without ever having to go on a date. For $635, Seattle Sperm Bank (SSB) will post you a vial of his frozen swimmers.

The fact that the main customers for many sperm banks are now single women explains the marketing technique. “They tend to be highly educated, impatient and picky,” says Ole Schou, founder of Cryos International, the world’s largest sperm bank, based in Denmark’s second-biggest city, Aarhus. Its website is designed to resemble Match.com, a dating site, because “finding a donor should be as close to finding a natural partner as…Continue reading

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New rail routes between China and Europe will change trade patterns

ASTANA in Kazakhstan is one of the world’s most remote capitals, surrounded by thousands of kilometres of empty steppe. This summer Astana attempted to launch itself onto the global stage by hosting the World Expo, which closed on September 10th and underwhelmed many attendees. But there are other ways to have an impact. On the city’s north side, away from the Expo’s exhibits, a series of diesel trains, each pulling dozens of containers, roll through the old railway station. Most are heading from China to Europe. Last year over 500,000 tonnes of freight went by train between the two, up from next to nothing before 2013. Airlines and shipping firms are watching things closely.

The trains rumbling through Astana result from a Chinese initiative, in tandem with countries like Kazakhstan, to build a “New Silk Road” through Central Asia. The earlier overland routes were once the conduits for most trade between Europe and China and India; they faded into irrelevance…Continue reading

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A legal vulnerability at the heart of China’s big internet firms

COMPANIES’ legal structures are usually mind-numbing fare. But occasionally it is worth pinching yourself and paying attention. Take “variable interest entities” (VIEs), a kind of corporate architecture used mainly by China’s tech firms, including two superstars, Alibaba and Tencent. They go largely unremarked, but VIEs have become incredibly important. Investors outside China have about $1trn invested in firms that use them.

Few legal experts think that VIEs are about to collapse, but few expect them to endure, either. One sizeable investor admits loving Chinese tech firms’ businesses while feeling queasy about their legal structures. Like scientists appalled by their monstrous creations, even the lawyers who designed VIEs worry. They are “China’s version of too-big-to-fail”, says one. As well as being spooky, VIEs are another instance of how China’s weak property rights hurt its citizens.

What are VIEs? Over 100 companies use them. Since the 1990s private firms have sought to break free of China’s isolated legal and financial systems. Many have done so by forming holding companies in tax havens and listing their shares in New York or Hong Kong. The problem is that they are then usually categorised as “foreign firms” under Chinese rules. That in turn prohibits them from owning assets in some politically sensitive sectors, most…Continue reading

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Is Margrethe Vestager championing consumers or her political career?

EVEN her enemies admire the bloody-mindedness of Margrethe Vestager, the European commissioner in charge of competition policy. Last autumn, not long after she had ordered Apple to pay €13bn ($14.5bn) in back-taxes to Ireland, to the fury of many in America, she flew across the Atlantic on a charm offensive. The Americans were not charmed; Ms Vestager was unmoved. Buckling up for the flight home, she tweeted that she had never felt so European.

Since she assumed her current role in November 2014, Ms Vestager has had several high-profile clashes with American tech firms. In May she fined Facebook €110m for misleading EU trustbusters about its takeover of WhatsApp, a messaging service. In June a long-running investigation resulted in a €2.4bn fine on Google for using its search engine to promote its own comparison-shopping service. EU trustbusters have also charged Google with using its Android operating system to promote its mobile-phone apps and services over those of rivals. That…Continue reading

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China moves towards banning the internal combustion engine

“A DEFINING moment for the auto industry.” That is how usually restrained analysts at Sanford C. Bernstein, a research firm, described the news that China’s government wants to move towards a ban on gas guzzlers. On September 9th, Xin Guobin, vice minister of industry and information technology, told an automotive conference in Tianjin, a grimy industrial city near Beijing, that the government is developing a long-term plan to phase out vehicles powered by fossil fuels.

The news reverberated around car firms, for which China is the largest market. William Russo of China’s Gao Feng Advisory, a consultancy, who was previously a senior executive at Chrysler, says China is simply far too big to lose out on. “If China says no more fossil-fuel powered cars, global carmakers must follow.”

No timeline for a ban was suggested. China already has ambitious medium-term goals for automotive efficiency and climate change, including a cap on carbon emissions by 2030. Experts…Continue reading

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Rivalry between Apple and Samsung in smartphones will grow fiercer

NEVER shy about hype, on September 12th Apple’s boss, Tim Cook, presented the firm’s latest iPhones to a packed auditorium in its glitzy new headquarters in Cupertino. He made a grand prediction: its new, premium phone, the iPhone X (pronounced “ten”), will “set the path of technology for the next decade”. Set to be released this November, ten years after the first iPhone launched, the iPhone X has new features such as an edge-to-edge OLED screen (a thinner screen that does not use a backlight), wireless charging, facial-recognition technology and a dual-lens camera.

On the same day, Samsung, a rival smartphone-maker, held a lower-key event in Seoul. Koh Dong-jin, president of Samsung Electronics’ mobile business, announced that next year Samsung could reimagine the smartphone entirely and launch a new design with a foldable screen, which can close like a small book. On September 15th its latest premium smartphone, the Galaxy Note 8, will go on sale, boasting many of the features offered by the iPhone X.

Both are trying to convince consumers to spend around $1,000 for their new gadgets. Samsung’s new phone will cost $960; Apple’s high-end iPhone X will cost $999, 45% more than the average selling price of an iPhone in 2016. (The iPhone 8, simpler than the X and available for sale in September, will start at $699.)

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Why do European companies bother to hire ex-politicians?

THIS month Gerhard Schröder starts a new job. Shareholders in Rosneft, a Russian energy giant with a market value of nearly $60bn, are set to appoint Germany’s ex-chancellor as a board director on September 29th. Russia’s government, Rosneft’s majority-owner, nominated Mr Schröder, who is pals with Vladimir Putin. Despite Western sanctions imposed on the firm after Russia’s invasion of Ukraine in 2014, Mr Schröder’s move is no surprise. He has worked for years with Gazprom, another energy arm of the Russian state, to promote a gas pipeline to western Europe.

His ties to Russia win him few friends at home. His successor as Germany’s leader, Angela Merkel, calls his behaviour “not OK”. She also vows to reject offers of “any posts in industry once I am no longer chancellor”. Other politicians are happier to follow Mr Schröder’s example. It emerged last month that a former German president, Christian Wulff (pictured), is also employed by a foreign company. He advises…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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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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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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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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Business and financeGulliver

More business travellers are booking their own trips

A friend of Gulliver’s recently received some devastating news, in the form of a change to company policy. No longer would he and his co-workers be able to book their own flights and file for reimbursements. Instead, the firm would buy all employees’ plane tickets from the start.

On the face of it, this is a convenient change. It saves staff time by ensuring that they do not have to fill in tedious expense forms. But many business travellers may not see it that way. A study from Phocuswright, a travel-research firm, finds that more and more employees are booking their own travel and filing for reimbursements. Sometimes doing so allows for a better itinerary: travellers can avoid annoying layovers and airlines for which they reserve particular ire. Sometimes, if they are feeling generous towards their employer, it can save money too. 

But the most compelling reason is often the credit-card reward points. Say you are booking a flight from London to New York. On United Airlines, the round-trip will earn you…Continue reading

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A craft-beer boom with Chinese characteristics

EVIDENCE unearthed at Mijiaya in Shaanxi province proved that the Chinese have an ancient tradition of making beer. Brewers were operating 5,000 years ago, using grains such as millet and Job’s tears (a kind of pearl barley). This year a couple of small-scale brewers lovingly recreated that Neolithic ale. The cloudy, hop-free beverage would challenge even the bravest microbrew devotee. Ladislao Raphael of Moonzen Brewery in Hong Kong describes it as “sour and funky”.

Yet Mr Raphael and his fellow craft-beer evangelists are winning converts. The Chinese market, which is the world’s largest, is dominated by mass-produced lager. But craft breweries are sprouting up around the country—by 2016 there were around 150, up threefold from 2015. Consumption of their brews has surged by two-thirds over the past five years, figures from GlobalData show, even as overall beer-swilling declines. This mirrors a global pattern: consumers often crave better beers as they get richer. Trend-setters…Continue reading

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An infrastructure for charging electric vehicles takes shape

A NEW phrase, “range anxiety”—the fear that an electric vehicle (EV) will run out of power before it reaches a charging-point—entered the Oxford English Dictionary in 2013. At the time a Nissan LEAF, the world’s best-selling EV, could travel only 120km between charges. A car with a full tank of fuel will travel 650-800km between refills. A motorist relying on batteries has to find a public charger, a rare sight in 2013, or plug in at home to cover the same distance. Range anxiety has not gone away as EVs have advanced. But the problem now feels much more soluble.

Many governments are pushing hard to replace the internal combustion engine (ICE) with cleaner EVs—this summer both Britain and France said that by 2040 new cars completely reliant on petrol or diesel will be illegal. By 2050, half the cars on the road globally, a billion in total, will be battery-powered, reckons Morgan Stanley, a bank. Falling battery costs mean that the total cost of EV ownership will soon hit…Continue reading

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America’s utilities prepare for a nuclear threat to the grid

When the lights go out

WHEN North Korea said on September 3rd that it had developed a hydrogen bomb, adding that it could be used for a “super-powerful” high-altitude electromagnetic pulse (HEMP) attack, America’s electricity industry was already on alert. Sceptics tend to dismiss as far-fetched the idea that the rogue regime would knock out the electricity grid by detonating a nuclear bomb high in the atmosphere. Regulators have not mandated safety measures. But the utilities are taking it seriously enough.

They are more than a year into a three-year programme, funded by about 60 electricity firms, to understand the potential impact of a HEMP attack on the generation and transmission of electricity, and to find ways to shield the network. Such concerns are not new. In 1962, when America exploded nuclear devices high above the Pacific, electrical damage was found in Hawaii. The industry has also studied analogous space-weather effects on power systems,…Continue reading

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Panipat, the global centre for recycling textiles, is fading

Tools of the shoddy trade

WHEN the doors open to the warehouse at Ambey Spinning Mills in Panipat, a city 90km from Delhi, it seems as if its contents might tumble out like those of an overstuffed cupboard. Heaps of clothes are piled to the ceiling. Ten women meticulously extract zips, chains and buttons from T-shirts, winter jackets and denims using long blades usually used to chop vegetables. Outside, a teenage boy wields a knife to bash synthetic fibre against a tree stump. In another workshop clothes are shredded, spun into yarn and woven by power looms into blankets. Bullock carts take them for further processing; they are then sent off for sale in India and beyond.

Known as the “cast-off capital”, Panipat is home to 150-200 such mills, which take in discarded clothes from Western countries and turn them into recycled cloth. The industry employs around 20,000 people and brings in annual revenues of $62m, according to Pawan Garg of All India Woollen and…Continue reading

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