February 2018 Vol.9 Ed.2
Desmond Lachman on In conversation with Philippe Desfossés on pension financial sector risk Robert Stheeman funds’ sustainable investments Vicky Pryce on euro Jun Saito on inequality Dariush Yazdani on sovereign area banks in Japan funds’ investments in alternatives
SEEKING STABILIT Risks from market bubbles
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Untitled-1.indd 1 31/01/2018 10:31 Contents
February 2018. Vol.9 Ed.2 8
4 ABOUT OMFIF In conversation 5 LEADER 16 ROBERT STHEEMAN 6 REVIEW / AGENDA with David Marsh Cover: Financial stability Worldview 20 FED PERSONNEL CAROUSEL 8 MARKET EXCESSES HERALD IN FULL SWING CRISIS Darrell Delamaide Desmond Lachman 21 CONTAINING JAPANESE INEQUALITY 10 THREAT TO US INTEREST RATES Jun Saito Marsha Vande Berg 6 22 OPPORTUNITIES BEYOND 11 EMERGING MARKET GAINS SET MANUFACTURING TO FRAY 16 Otaviano Canuto Gary Kleiman 23 SERVICES ARE DRIVING DOWN INFLATION Ben Robinson 24 GOLD’S SOVEREIGN FUND APPEAL Dariush Yazdani 26 INVESTING PENSIONS FOR SUSTAINABLE GROWTH Philippe Desfossés 27 PENSION FUNDS DIVEST FROM 12 FOSSIL FUELS 27 Kat Usita 28 CRYPTOCURRENCY CRUSH Oliver Thew 29 BLOCKCHAIN BEYOND THE HYPE Bhavin Patel 12 GAPS IN GLOBAL FINANCIAL 30 Inquiry SAFETY NET 30 CHART OF THE MONTH: SWITZERLAND Danae Kyriakopoulou BANK LOANS TO GDP 14 SECURING THE EURO AREA’S 30 THE NUMBERS: DIGITAL DIGITS FUTURE 31 BOOK REVIEW: A TIRESOME Kalin Anev Janse THOUGHT EXPERIMENT 15 ECB’S EASY MONEY BOOSTS Julian Frazer Cover illustration: BUBBLE RISK 34 OMFIF ADVISERS NETWORK POLL Nick Lowndes Vicky Pryce Bitcoin market crash ‘inevitable’
OMFIF.ORG FEBRUARY 2018 BULLETIN 3
BTN_02.18_003_Contents copy tc.indd 3 02/02/2018 14:23 About OMFIF
Black Wednesday, Brexit Dialogue on world finance and the making of Europe... and economic policy
THE c a ne a an nanc a n n an n e en en n an cen a an n ec n c c an c n e en a n n n ne e ac ce n SIX DAYS IN e c a e ec e c an e ea a e a c n e cen a an e e n n an c en n n n e a e a e n e a en SEPTEMBER ce n n n an n a e c e n a c an n e en e e a c a n a e ana e en ca a a e an fi nanc a e n e a n e a n cen a an e e n n en n n e a an ea e e e ‘GRIPPING PORTRAYAL’ an a e ance en anc n e c an e e een c an a e ec an a e e Kenneth Clarke n e an n e ec n n an a e e a ‘Required reading’ Norman Lamont Membership Membership offers insight through two complementary channels – Analysis ‘Dramatic account’ and Meetings – where members play a prominent role in shaping the Alistair Darling agenda. For more information about OMFIF membership, advertising or subscriptions contact e ershi o f.or
Analysis OMFIF Analysis includes commentaries, charts, reports, summaries of meetings and The Bulletin. Contributors include in-house experts, advisers network members and representatives of member institutions and academic and offi cial odies. o su it an article for consideration contact the editorial team at anal sis o f.or
The 2017 Amazon bestseller by William Keegan, David Marsh Meetings and Richard Roberts OMFIF Meetin s take lace ithin central anks and other offi cial institutions and are held under OMFIF Rules. A full list of past and With a foreword by forthcoming meetings is available on .o f.or eetin s. For more Helmut Schlesinger information contact eetin s o f.or
OMFIF Advisers Network The 178-strong OMFIF advisers network, chaired by Meghnad Desai, is made up of experts from around the world representing a range of sectors: Available to monetary policy; political economy; capital markets; and industry and buy now at: investment. They support the work of OMFIF in a variety of ways, including omfi f.org/shop contributions to the monthly Bulletin, regular Commentaries, seminars and other OMFIF activities. Membership changes annually owing to rotation.
4 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_004-005_About_Leader (copy tc).indd 4 01/02/2018 13:45 Leader
Offi cial Monetary and Financial Institutions Forum Seeking stability 0 ro n lace ondon 2 nited ingdom T 0 20 008 2 2 0 20 8 .omfi f.org arkets have entered 2018 facing contrasting realities between a Mstrengthening real economy and a build u of fi nancial risk. onsensus BOARD forecasts see im roving gro th for most economic regions. lobal markets David Marsh, Chairman including the T 100 and orld nde ended 201 on record highs. ut Jai Arya Pooma Kimis growth has largely been credit-fuelled, suggesting it may have been generated Edward Longhurst-Pierce by unstable fi nancial systems. lobal debt has reached levels never seen before Phil Middleton Mthuli Ncube at three times the si e of the global economy. John Nugée conomic history suggests this divergence is unlikely to continue. The John Plender uestion is hen and ho it ill sto and hat direction it ill take. ill Lauren Roberts Peter Wilkin stronger gro th hel reduce fi nancial risks or ill asset market bubbles burst
ADVISORY COUNCIL damaging the real economy? This is the question we have tried to answer in Meghnad Desai, Chairman this month’s ulletin. Johannes Witteveen, Honorary Chairman 2018 could be a pivotal year as central banks intensify scaling back monetary Louis de Montpellier, Deputy Chairman Frank Scheidig, Deputy Chairman su ort. hether fi nancial markets ill rove resilient to these shifts as Songzuo Xiang, Deputy Chairman a chief concern among asset and reserve managers at OMFIF’s seminar on Hani Kablawi, Deputy Chairman Gary Smith, Deputy Chairman The reat ormalisation’ held in ondon at the end of anuary. f risks do Otaviano Canuto, Aslihan Gedik, materialise there may be no effective global fi nancial safety net to rotect Robert Johnson,William Keegan, countries that get into trouble. John Kornblum, Norman Lamont, Kingsley Moghalu, Fabrizio Saccomanni, ome markets are already seeing a correction. s antici ated by our dvisers Niels Thygesen, Ted Truman, et ork the rice of bitcoin has dro ed substantially since the start of the Marsha Vande Berg, Ben Shenglin, Chair, OMFIF Economists Network year. o ever there is still a lot to e ect from the underlying blockchain technology as ’s digital e erts e lain even ry to itties and EDITORIAL TEAM Danae Kyriakopoulou, Head of Research ogecoin. Simon Hadley, Production Manager This month marks the start of our annual analysis of asset allocation trends Julian Frazer, Subeditor as art of our lobal ublic nvestor ublication to be released in ay. e Jearelle Wolhuter, Subeditor Ben Robinson, Senior Economist investigate some of these in The ulletin such as the shift of ension funds Bhavin Patel, Economist away from fossil fuels and the need Kat Usita, Economist William Coningsby-Brown, Editorial Assistant for regulation to support a further Darrell Delamaide, US Editor move to ards sustainable assets. MARKETING lobal ublic investors must not Chris Ostrowski, Head, Business Development forget warnings that environmental Sarah Butler, Deputy Head of Development risk could be the ultimate threat to James Fitzgerald, Senior Marketing Executive fi nancial stability for this generation. trictly no hotoco ying is ermitted. t is illegal to reproduce, store in a central retrieval system or transmit, electronically or otherwise, any of the content of this ublication ithout the rior consent of the ublisher. hile every care is taken to rovide accurate information the publisher cannot accept liability for any errors or omissions. o res onsibility ill be acce ted for any loss occurred by any individual due to acting or not acting as a result of any content in this ublication. n any s ecifi c matter reference should be made to an a ro riate adviser. Danae Kyriakopoulou Company Number: 7032533. ISSN: 2398-4236 Chief Economist and Head of Research
OMFIF.ORG FEBRUARY 2018 BULLETIN 5
BTN_02.18_004-005_About_Leader (copy tc).indd 5 01/02/2018 13:45 Review
»23 January, London Doubts on German- French alliance
PRODUCTIVITY and e ort orders during the orld com etitiveness in ermany economic u s ing. are sli ing under a gradual enkel a member of the rocess of uro ean uro ean arliament had been nion harmonisation and a controversial backer of the far centralisation’ aimed at shoring right lternative for ermany u the euro and bridging the f no in the undestag economic ga ith rance and and on track to become the other members of the single formal erman o osition currency. under lans to reforge a grand That as the message from coalition bet een hancellor ans laf enkel former ngela erkel’s conservatives resident of the ederation of and the ocial emocratic erman ndustries in a series arty. enkel uit the f of meetings discussing ith some of the arty’s other his cam aign to kee ritain s in rotest about its in the . enkel said the right ard shift. e no sits
Above: Hans-Olaf Henkel at OMFIF’s offices in London. euro as holding back erman in the uro ean arliament Inset: Henkel and Caroline Butler, OMFIF Adviser, at the London discussion. com anies’ efficiency since for an alliance of liberals and they ere rofiting unduly from conservative reformers.
»30 January, London »13 December, Accra sset and isk anagement ractical tool for financial markets
convened a grou of economic e erts and asset managers ’ e ternal osition has im roved thanks to for a one day seminar to summarise economic and financial macroeconomic reforms according to s eakers at the launch develo ments and discuss the outlook for ublic sector investment of ’s research for the arclays frica rou inancial management in uro e. ttendees discussed the im act of arkets nde . inancing costs are strongly related to countries’ unconventional monetary olicies and the ressure on central inde score making this an im ortant ractical guide for frican banks’ balance sheets. economies.
6 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_006-007_Review.indd 6 01/02/2018 13:50 genda
»22 January, London
vie from the uro ean arliament
held a discussion ith ay inburne right uro ean »Wednesday 7 March, London onservatives and eformists on the ’s Gender Balance e it from the uro ean Index launch nion. To ics included OMFIF launches the Gender Balance Index 2018, assessment of the re it a measure of the presence of men and women negotiations and the role of among senior staff of central banks, pension the uro ean arliament in funds and sovereign funds. Includes a panel the ithdra al rocess. discussion on the role of women in central banking.
»Tuesday 13 March, Frankfurt »17 January, London Economy, growth and erman debt management and investment T and ermany can dra similar lessons from the macroeconomic In the eighth Economists Meeting in Frankfurt, OMFIF and fi nancial vie oints from t o decades of running debt management convenes experts to examine macroeconomic and offi ces. That as the message from an discussion bet een political developments in Europe, the implications of obert theeman and Tammo iemer heads of the and erman debt monetary policy for the banking sector, and the impact management offi ces. e a e an fi acc
»Thursday 15 March, London New challenges for fi nancial regulation Robert Ophèle, chair of the Autorité des marchés fi nanc e ance c a e e a e an ec e e c e n fi nanc a nn a n ana n e e ec n ean markets, and how best to regulate cryptocurrencies.
»Tuesday 20 March, Prague The future of money: risks and returns OMFIF and the Czech National Bank organise a n e na ana e e ac fi n ec includes private cryptocurrencies, central bank digital currencies and distributed ledger technology, a e a e e e an enefi an
For details visit omfif.org/meetings
OMFIF.ORG FEBRUARY 2018 BULLETIN 7
BTN_02.18_006-007_Review.indd 7 01/02/2018 13:50 Cover story: Financial stability
SEEKING STABILIT Central banks and policy-makers are struggling to contain volatility and asset price bubbles as they unwind years of unorthodox monetary policies Illustrations by Nick Lowndes
8 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_008-009_coverOpener_Lachman.indd 8 01/02/2018 13:51 Market excesses herald crisis Complacency and mispriced credit bring Minsky moment closer
Desmond Lachman defaulted no fe er than fi ve times in the ast 100 years. American Enterprise Institute The recent bond placements of highly dubious credit risks such as Iraq and Mongolia have been oversubscribed several times. Minsky would have been disappointed by the seeming any years of highly unorthodox monetary policies by complacency of central bank heads at a time when they Mthe world’s major central banks would have shocked should have long since reined in fi nancial market risk. the late Hyman Minsky, the renowned US credit cycle Federal Reserve Chair Janet Yellen’s recent reassurance that scholar. These policies have led to excesses in global asset she did not e ect to see another fi nancial market crisis in prices and the gross mispricing of credit risk. He would her lifetime is diffi cult to believe. have reminded us that e tended eriods of fi nancial market Minsky would have chastised the Fed for having complacency are generally followed by painful crises. excessive faith in bank regulatory reforms put in place after Seldom before has the global credit market displayed the Lehman bankruptcy in 2008. This is not simply because such complacency. Minsky might have noted that the Trump administration is dismantling these reforms. government bond yields have plummeted to record lows Most credit in the US is intermediated through the so-called and global equity valuations have reached lofty levels shadow banking system, which includes hedge funds, asset experienced only three times in the last 100 years. managers and private equity companies. This part of the In their desperate search for yield, investors have lent system is largely free of government regulation. How quickly to risky borrowers at interest rates that do not nearly we forget the lessons of Long-Term Capital Management. In compensate them for default risk. This has been especially 1998, a group of banks under the supervision of the Fed had the case in advanced economies’ high yield markets and the to bail out the highly leveraged hedge fund to prevent the emerging market corporate debt sector, where borrowing colla se of the fi nancial system. has increased by $3tn over the last six years. No one can know when the next Minsky moment, a sudden The overwhelming portion of US and European bank collapse in asset prices after an extended period of growth, loans today are made without the normal protective might occur. o ever fi nancial market e cesses leave little covenants. Despite its high public debt level and the doubt that the conditions for such an event are forming. country’s dysfunctional banking system, the Italian With the major central banks now shifting from government can still borrow long term at around 2% ultra-unorthodox monetary policies towards gradual – a rate not dissimilar to the US government’s. normalisation, it would be unwise to discount the Striking indications of credit mispricing are to be found likelihood of a Minsky moment in the next year or two. in emerging economies. A country such as Argentina can Desmond Lachman is a Resident Fellow at the readily place a 100-year bond in the market, when it has American Enterprise Institute.
OMFIF.ORG FEBRUARY 2018 BULLETIN 9
BTN_02.18_008-009_coverOpener_Lachman.indd 9 01/02/2018 13:52 Financial stability
Threat to US interest rates Trump tax law sets targets for workforce restructuring
Marsha responding positively to the Secretary Steven Mnuchin. The Vande Berg dramatic reduction in the report included estimates of the Advisory statutory corporate tax rate impact of the $1tn increase in $1tn Council to 21 from . almart the defi cit. alf of the attem t ncrease in defi cit due the orld’s largest retailer to offset this must come from to Trump tax plan onsensus is growing that the announced it will increase its ne cor orate ta revenues Cpassage of President Donald starting wage to $11 per hour and Mnuchin said. The remainder Trump’s tax bill in December will distribute a bonus to em loyees should come from temporary tax The president claims credit change corporate behaviour and in addition to expanding parental bracket changes for some citi ens for unleashing ‘animal spirits’ benefi t customers em loyees leave benefi ts. le said it ill deregulation infrastructure that will propel growth. But and shareholders. The question repatriate more than $200bn in development and reductions such promises of success are is hether such benefi ts can overseas rofi ts aying a one off in benefi ts almost all of hich meaningless. boost US labour productivity and ta of 8bn and ill hire another require bipartisan backing. illiam udley the retiring position the economy for more 20 000 orkers and invest New York Federal Reserve than a lone stimulus injection. $30bn in US facilities. Long-term gain resident ainted a different The fundamental expectation JPMorgan Chase chief Jamie icture about the ta cuts’ longer of the Tax Cuts and Jobs Act is Short-term pain imon called the la a big term implications. that companies will redirect their ourth uarter accounting signifi cant ositive for the In January he warned that collective savings o ing to the adjustments necessitated by banking sector and much of it hile a short term lift is robable dramatic reduction in corporate the tax law have obscured its will fall to our bottom line in 2018 the increase in government rates to ards rebuilding e ansive im act on fi nancial and beyond’. borrowing as a result of business’s workforce capacity and increasing services at least tem orarily. Citigroup and Goldman Sachs enthusiasm could lead to faster real wages. Such issues underscore executives agreed that hits to than e ected interest rate The gap between US corporate how complex the law’s their respective balance sheets increases in 2018. rofi ts and ages as a share implementation will be. Many in the fourth quarter of last year A Federal Reserve dominated of GDP is wide – 51% to 43%. questions remain unresolved. The would give way to substantial by Trump appointees will be in long term gains. the diffi cult osition of deciding Strengthening global economic whether to increase rates at a ‘Strengthening global economic conditions conditions augment the benefi ts faster pace in a year that features augment the benefi ts that cor orates that corporates will enjoy from gruelling midterm elections. will enjoy from the rate decrease.’ the rate decrease. For commercial For the tax cuts to produce banks the robability of higher a stronger and inclusive interest rates in 2018 may economy olicy makers and Narrowing that gap will be critical law was adopted in record time likewise boost loan growth. corporates must take a variety to the tax law’s success. This and without the requisite vetting Investment banks can count on of measures. They include the can happen only if the cuts are a though bipartisan committee the tax cut and deregulation need for workforce restructuring genuine boon to the US economy debate. It passed Congress to boost incomes as optimism and retraining in the light and help mitigate the estimated ithout a single emocratic vote spreads to merger and acquisition of disruptive technological 1tn rise in the defi cit. eciding and Trump signed the bill into law targets. advancement o ulation aging how to increase capacity at a just two days later. and Trump’s hardline immigration time of almost full employment When it came to guidance from Rush of rate rises policies. will be critical for the Trump the administration legislators The cheerfulness among US Marsha Vande Berg is a administration. received a altry one age corporates is palpable as Trump Stanford University 2016-17 Some companies are analysis from US Treasury begins his second year in offi ce. Distinguished Career Fellow.
10 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_010_VandeBergCover.indd 10 01/02/2018 13:52 Emerging market gains set to fray 2017 rally did not distinguish between leaders and laggards
Gary geopolitical and banking system was 150% of GDP, the highest in banks continue to deal with Kleiman problems. Financial stability the Organisation for Economic large corporate borrower Kleiman may be a prominent theme after Co-operation and Development. restructurings. Argentina’s International years of post-crisis relief. Private In Europe, Russia lagged behind economic policy turnaround sector leverage is causing concern with a barely positive MSCI result and capital market re-entry and the public sector has limited despite low valuations. It may under President Macri resulted n 2017, the performance capacity to mount rescues, due to face more western sanctions for in record borrowing and a near Iof emerging market bonds stee er fi scal defi cits. election interference, as the US 75% MSCI frontier index bounce and stocks exceeded the most Asia outstripped Latin America Treasury is considering a ban in 2017. This was offset by optimistic early-year expectations. and Europe. MSCI’s inclusion of on buying government bonds. Venezuela’s implosion under a Fears of global monetary and Chinese A-shares and buoyant Turkey’s 35% rise was due to harsher socialist regime bringing trade squeezes proved overdone, com any rofi ts drove the global paving the way for rallies across tech cycle and neutralised concerns ‘In contrast with 2008, economic and credit the asset class. The 35% rise in over stresses in China’s banking spillovers from potential crises would now slam the MSCI index led double-digit system, corporate debt overhang emerging market bonds as well.’ benchmark increases across the and ca ital out o s. uthorities asset class. Almost all countries have announced crackdowns on were part of this trend in a pattern state-enterprise leverage, deposit offi cial loan stimulus overheating hy erin ation debt default and a last seen a decade ago before the withdrawals by bank card holders the economy after the 2016 humanitarian catastrophe. fi nancial crisis. and entrusted loans, where an attempted coup. Last year’s combined agent bank organises loans Foreign investors trimmed local Political jitters investment fund o s of between borrowers and lenders, in bond positions in Hungary and Frontier market stumbles in $200bn mirrored the previous the shadow banking system. They Poland in reaction to populist the Middle East and Africa left peak. Exchange traded funds, have signalled further action, as administrations courting EU the composite gauge 10% below which have since mushroomed, fi nancial stability is a riority of condemnation, and fears that MSCI’s main roster. The boycott accounted for 10% and 25% the ruling Communist party. domestic institutional investors of Qatar by its neighbours has of debt and equity allocations lack back-up capacity after private hurt Gulf states. Political jitters respectively. Better than expected Foreign exposure to bonds pension fund shutdowns. in South Africa and Zimbabwe corporate earnings and average In contrast with 2008, economic Latin America has a packed affected bank liquidity and 5% GDP growth approached the and credit spillovers from China’s 2018 election calendar. In rofi tability. level of boom periods. potential crises would now hit presidential contests in Brazil, It should serve as a warning to However, the rally emerging market bonds as well. Colombia and Mexico the the asset class that the Institute did not distinguish Foreign investors’ corporate and main parties are offering scant for International Finance’s between asset classes sovereign exposure rank near commodity diversifi cation and lending conditions survey and leaders and the top globally in surveys by productivity-raising platforms returned a neutral result. Stock laggards within the Emerging Markets Traders amid scandals and criminal returns will probably continue them, and Association. South Korea, investigations. Brazilian to catch up with bonds over overlooked Malaysia and Thailand are the long term, but there will be grappling with high household wide variation depending on and business debt. South Korea’s individual countries’ political central bank stood out last year by 150% and economic circumstances. hiking interest rates and imposing Household debt as share Gary Kleiman is Co-Founder credit card curbs to shrink the of GDP in South Korea and Senior Partner at Kleiman country’s personal leverage, which International.
FEBRUARY 2018 BULLETIN 11
BTN_02.18_011_KleimanCover.indd 11 01/02/2018 13:52 Financial stability
Gaps in global financial safety net How to augment large but fragmented reserves
Danae the 2008 fi nancial crisis global and to borrow to smooth global fi nancial safety net Kyriakopoulou ca ital o s have begun to consumption in the face defi ned as the collective value of OMFIF recover. Their com osition has of shocks. The otential countries’ sources of insurance also changed. s analysed in gains resulting from such and fi nancing. These include the e tember ulletin the international risk sharing and individual countries’ reserves as he risk of fi nancial post-crisis regulatory wave has effi cient resource utilisation ell as e ternal ublic fi nancing Tinstability may have succeeded in curbing cross- can be large. ut ca ital at the regional and global level, risen over the past decades as border bank lending. o ever o s can also be volatile and such as central bank bilateral globalisation has intensifi ed. this has been partly offset unpredictable, and abrupt swap arrangements, regional This is in spite of a string of by increasing levels of direct reversals can have damaging fi nancial arrangements such as international measures to investments. anks’ total effects on the real economy. s regional reserve pooling, and the im rove fi nancial regulation foreign claims stood at 2 .8tn develo ed countries’ central nternational onetary und. and tighten surveillance over in 201 . tn do n from their banks navigate a period of These measures are intended to countries that follow unbalanced re crisis eak. normalising monetary policy, provide countries with insurance olicies. ome elements of a Globally integrated capital the global economy is entering against crises fi nancing hen global fi nancial safety net’ markets offer important rewards a juncture where these risks shocks hit and incentives for intended to protect countries to individual economies, may intensify, particularly in sound macroeconomic olicies. against crises are in place, but enabling them to expand emerging markets. s sho n in igures 1 2 the large ga s remain. investment opportunities and This backdrop highlights elements of a potential safety Following a sharp drop after diversify risk internationally, the importance of an effective net grew strongly following the
Figure 1: Largest regional safety nets are European and Asian European Stability Mechanism, a e na fi nanc a a an e en $500bn. Est. 2012.
Chiang Mai Initiative, $240bn. Est. 2010.
Bric Contingent Reserve Arrangement, $85bn. Est. 2015.
European Commission Balance of Payments assistance, $15bn. Est. 2002.
Eurasian Fund for Stabilisation and Development, $8.5bn. Est. 2009.
North America Framework Agreement, $5bn. Est. 1994.
Latin America Reserve Fund (Flar), $4.7bn. Est. 1991.
Arab Monetary Fund, value unreported. Est. 1976. Source: National sources, OMFIF analysis
12 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_012-013_DanaeCover.indd 12 01/02/2018 13:53 ith regional im act. These by the oard in ecember indeed the Fund insists that the may create situations when 2017, who cited worries over proposals are not completely off individual countries want to ‘the importance to maintain the table, but rather on the shelf access the regional pool at incentives for strong policies, for no . ut the alternative of a hare of global foreign the same time. The choice of minimising moral hazard, global fi nancial safety net hich reserves ointly held by sia currency for regional reserve safeguarding Fund resources never took off the ground could and the Middle East pools can also be problematic: and avoiding overlap and be even more roblematic. Unless reserves are denominated roliferation of instruments’. Danae Kyriakopoulou is in a currency that is issued These important concerns Chief Economist and Head of fi nancial crisis as individual by one of the central banks in need to be addressed, and Research at OMFIF. countries amassed more foreign the region, they run the risk reserves and s and s of being depleted quickly in a ere introduced. crisis. ut the alternative ould Figure 2: Reserves have risen six-fold since only be feasible for regions with new millennium Expanding the net currencies that enjoy reserve e n e e e e c n n a a ut even this may not be status. s are also olitically enough. eserves including diffi cult to im lement. etter 14 gold of individual countries’ mechanisms to contain potential 12 central banks and sovereign disorderly spillovers are urgently 10 funds make up the vast majority needed if they are to become of the total at around 20tn. effective tools. 8 Out of these, around $12tn are These constraints elevate the 6 foreign exchange reserves held importance of global resources 4 at central banks (see Figure 2). held at the . uota resources 2 This resents several roblems. at the Fund doubled as part 0 Global reserves may be large, but of the 1 th eneral evie they are also fragmented. sia of uotas reform ackage 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 led by China, and the Middle im lemented in 201 and no
East, led by the oil-exporting stand at sdr bn bn . 2017 (Q3) Gulf economies, jointly hold The und’s lending toolkit Source: International Monetary Fund, OMFIF analysis of global foreign reserves offers multiple instruments according to the 2017 edition of of crisis prevention through ’s Global Public Investor which its members can receive Figure 3: Asian sovereign fund and central bank re ort. This uneven distribution fi nancial assistance such assets largest in the world will rarely match the global as the Flexible Credit Line e e e e n an e n n n distribution of risks. and the Precautionary and
Moreover, size is not always a i uidity ine. ut the stigma 10 guarantee of resilience. n times associated with requesting 9 of crisis individual countries’ recautionary fi nancing has 8 2.48 reserves can be depleted very constrained the extent to which 7 6 uickly. ussia’s reserves the facilities have been used. n 5 declined by almost 0 in ust response, IMF staff proposed 4 6.85 2.01 nine months in 201 1 . eserve a new facility, the ‘short-term 3 2.67 2 ooling and s such as sia’s li uidity s a ’ for members 0.11 1 2.60 0.24 0.23 Chiang Mai Initiative and the with strong fundamentals and 1.08 0.83 0 0.49 0.44 uro ean tability echanism olicies’ to rovide li uidity Asia Europe Middle Latin America/ North Africa Pacific East Caribbean America in the euro area can go some support for potential balance of way to address this, but remain payments needs of a short-term, Central bank Sovereign fund vulnerable to regional shocks fre uent and moderate nature’. Source: OMFIF Global Public Investor 2017 and domestic disturbances The proposals were rejected
OMFIF.ORG FEBRUARY 2018 BULLETIN 13
BTN_02.18_012-013_DanaeCover.indd 13 01/02/2018 13:53 Financial stability
Securing the euro area’s future ostering fi nancial integration in uro e
Kalin Anev Janse are ositive about the move to have a facility to address such the uro ean debt crisis started uro ean tability com lete banking union. asymmetric shocks. The can the euro area had neither the echanism Third uro e needs to address roblems in individual e ertise nor funds to assist. ut harmonise its fi nancial markets countries but only hen it is over time the ’s fi nancial so it becomes easier to invest too late and hen they have ca acity and e ertise have across borders. This is a ide already lost access to markets. gro n and the role of the has n talks ith investors about ranging ro ect referred to as ne facility could be develo ed become less rominent. There Ithe future of the euro area ca ital markets union. or orate to avert such roblems and a ears to be a consensus that in the most common to ics of ta and bankru tcy la s vary ho efully to revent the any future uro ean crisis the conversation include the need massively bet een uro ean from having to act. ill robably not be involved for greater market integration countries. aking it easier to ifferent models are being in the region’s rogrammes. a more com etitive fi nancial deci her other countries’ la s discussed. ne strict condition These are not vague conce ts sector and dee er economic ould increase cross border is that countries al ays need to they are concrete ste s that collaboration. ortunately for investment and benefi t uro e’s re ay funds they receive. There are fi rmly art of the olitical them uro e’s olitical agenda is venture ca ital and rivate ill be no ermanent transfers agenda. They all aim to make already heading in that direction. e uity markets. bet een countries and there ill markets stronger to su ort the There are fi ve ideas that may be no ointly issued debt. recovery of the fi nancial sector hel secure uro e’s future. Building new models ome eo le are orried that to make monetary union more irst uro e must com lete The fourth factor relates to these changes will mean ‘a lot robust and the economy more banking union. uch ork uro e’s fi scal tools and the more uro e’ and a eakening of resilient. has already been com leted ossibility of establishing a national sovereignty. That is not Kalin Anev Janse is Secretary including the establishment rainy day fund’. resently the case. uro e does not need a General of the European of the ingle u ervisory oorer uro ean countries can full fi scal union ith additional Stability Mechanism. echanism and the ingle already receive su ort from the transfers bet een countries nor esolution und to ind do n uro ean nion budget hich a full olitical union. banks. The is slo ly fi lling is around 1 of the si e of the The fi fth idea on the future its coffers but should be economy. or reci ients of the region concerns the su orted by a backsto to make uro ean countries the transfers establishment of a uro ean it more credible in the eyes of the can be large orth u to of onetary und. The role of the markets. The uro ean tability their . nternational onetary und in echanism is considered as There is a further set of uro e has diminished. hen a robable candidate to lay measures to meet a severe this role. euro area do nturn. n that The second element that case countries can s end more olitical leaders must add to ta ayer money. ormally there banking union is a common is a ca on budget defi cits of de osit insurance scheme. f all of . ut during the euro debt These ideas for securing uro e’s banks ould guarantee crisis countries agreed to e ceed uro e’s future are de osits together it ould the limit. This hel ed stimulate concrete ste s fi rmly art reduce the risk of bank runs in the economy at a crucial time. any country. egacy roblems ut if a single country is hit of the olitical agenda.’ in certain countries need to by a crisis and its neighbours be rectifi ed but in general are not there is no fi scal cross border uro ean banks lee ay. t ould be benefi cial to
14 BULLETIN JANUARY 2018 OMFIF.ORG
BTN_02.18_014_JanseCover.indd 14 01/02/2018 13:54 ECB’s easy money boosts bubble risk stabilised uro ean banks but hurt rofi tability
Vicky Pryce n many ays une 201 mortgages. our year T T s the starts reversing the dvisory as a turning oint. The issued in 2016 still have a long rocess as the ederal oard launched a negative rate on ay to go so olicy remains eserve is doing it is unclear bank de osits hich ersists. accommodating for the moment. hat the im act ill be. The introduction of uantitative uch unconventional he uro ean economy is easing on a massive scale in monetary olicy inevitably On the positive side Tpowering ahead despite 2015, which is also continuing, caused distortions as the n the ositive side has months of olitical uncertainty although at a reduced rate, made moved into uncharted aters. reduced the risk to banks by in ermany and ain. ro th a big difference. The same is true ut the can claim ith some delinking them as far as possible in world trade, with developed for extra purchases of covered ustifi cation that the overall from sovereign risk. o ever and emerging nations all low interest rates have affected e eriencing synchronised nconcentional monetary olicy inevitably uro ean banks’ rofi tability e ansion has hel ed. ut caused distortions. ombie com anies may in com arison ith their getting to the point where counter arts. Europe can take advantage have been ke t going artifi cially storing u Despite a recent improvement, of better trading conditions owes trouble for the banks and the economy.’ roughly 8 bn of lending a lot to the European Central across the euro area is still ank articularly the huge bonds and corporate bonds, effect has been ositive. The classifi ed as non erforming injection of funds and general though they are d arfed by the banking sector stabilised in a much of this the legacy of the easy monetary stance ursued government bond purchases more or less orderly fashion and fi nancial crisis. since une 201 . under the scheme. des ite tighter regulatory and Although that represents As Mario Draghi, the president The overall monetary easing ca ital re uirements has done only about of all lending for of the kee s reminding us olicy included a series of relatively ell in stress tests. the euro area, the difference the euro area has en oyed t o year targeted long term t the same time bond yields bet een countries is stark. The gro th of bet een 0. and refi nancing o erations hich across countries moved closer fi gure in reece and y rus 0.8 each uarter since mid 201 were used to increase bank together. reece hich is ho ing is much higher and despite tight or at best neutral lending to the non fi nancial to e it its third bail out soon res ectively. hile talian banks’ fi scal olicies. private sector, excluding has seen its benchmark 10 year non erforming loan ratio is no bond yield s read over erman belo its eak of 18 its si e is a The euro area’s bad loans government bonds reduced to concern for the future. Bank non-performing loans to total gross loans, %, 2016 around three percentage points The ’s ro osed rules to from more than fi ve ercentage encourage banks to deal more Cyprus 49% oints in late 201 . aggressively ith their s over orries ersist. This huge the ne t t o years have caused injection of funds and record low much an iety and have met Greece 37% interest rates may have created strong resistance. ot only from the perfect conditions for an Greece, where banks have been asset bubble. ombie’ com anies forced to sell bad loans at huge Italy 18% may have been ke t going discounts, but also from the likes artifi cially storing u trouble for of taly and rance hich have Portugal 12% the banks and the economy. The urged a slo er ath of reform. Euro area 6% preservation of these companies Vicky Pryce is a Board Member could be leading to misallocation at the Centre for Economics Source: World Bank, OMFIF analysis of ca ital. nd if and hen and Business Research.
OMFIF.ORG FEBRUARY 2018 BULLETIN 15
BTN_02.18_015_PryceCover.indd 15 01/02/2018 13:54 In conversation
Sterling status ‘a good thing’
Robert Stheeman ho since 200 has led the ’s ebt anagement ffice an e ecutive agency of the Treasury set u in 1 8 tells hairman David Marsh about changes in sovereign debt management the im act of re it and the benefits of sterling’s reserve currency status.
avid Marsh: As head of Marsh: Sterling is still one sense that the UK is sovereign market. oating e change rate Dthe DMO, you have seen of the world’s major reserve in its currency. This sovereignty allo s the market to e ress great change in the external currencies. Is that a good thing? orks to our advantage in a ay itself in a ay that ould be environment. There was the that it robably ould not for much harder if investor attention Stheeman: think it is robably financial crisis and a big one or t o smaller euro area focused on bond markets ith a a good thing from a debt increase in UK international countries. The idea that decisions limited amount in other areas. management ers ective as it debt issuance because of the on debt management olicy feel that it has been a huge boon adds to the diversification of country’s parlous economic and debt management issuance having a oating e change rate. the investor base. don’t think position at the time. Do ould have to take in hat other it’s a deliberate target to say Marsh: What do you think the debt managers now have urisdictions are doing ould sterling needs to have reserve government needs to do to to be more concerned with hugely com licate roceedings. currency status. ut having make sure during the Brexit relationship management with it is undoubtedly beneficial. process that the UK keeps faith big international investors, Marsh: There are a couple terling is the fourth or fifth with the considerable number including sovereign funds and of questions I need to ask largest reserve currency. That is of foreign investors who have central banks? about Britain’s exit from the a good osition to be in. eing European Union. The last time put money into gilts? Robert Stheeman: es. hen the the largest reserve currency on sterling suffered a serious fall Stheeman: This is all about o ened our borro ing the other hand ould bring all was after the Brexit referendum uantity as much less than it is credibility. The nature of sorts of com le ities from a debt in June 2016. What did your no . used to go abroad to seek sovereign debt is that it needs management ers ective. peers say to you the day after otential investors only once to be credible to be a serious Marsh: Countries in the euro we decided to leave? every t o years. o e have to ro osition for an investor. ebt area are linked together by be more roactive. The market Stheeman: don’t think any management and the rice of monetary union, but they don’t too has fundamentally changed. of them s oke to me the day sovereign debt are a manifestation have a debt union and they t’s not ust bigger it’s also much after the referendum hich as of credibility and faith in don’t have a single government. dee er. That li uidity has enabled robably a good thing ritain’s government credit. overnments Does that give Britain the and ould enable oating e change rate as an must make sure that they u hold advantages over individual euro any other debt manager to im ortant safety valve and hel ed that standing. area issuers? access markets and raise funds on mitigate otential ressures To listen to this a scale hich 1 years ago ould Stheeman: think it does on a from the international investor conversation in full, not have been imaginable. cou le of levels. The first is the community and on the bond visit omfif.org podcasts
16 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_016-018_InConversation (copy t/c).indd 16 01/02/2018 13:55 t’s is all about credibility. The nature of sovereign debt is that it needs to be credible to be a serious ro osition for an investor.’
Profile Education: Having left Stowe school, Stheeman pursued a banking career in Germany. Career: In 1982 Stheeman a fi e a a an e a a chamber of commerce and subsequently held various n n e an fi nanc a institutions. From 1991-2002 he worked in debt capital markets at Deutsche Bank. Since 2003 he has been chief executive of e e ana e en ce He was awarded a knighthood in December 2015.
OMFIF.ORG FEBRUARY 2018 BULLETIN 17
BTN_02.18_016-018_InConversation (copy t/c).indd 17 01/02/2018 13:55 The OMFIF Podcast
Subscribe to the OMFIF podcast for the latest news and insight on fi nancial markets, monetary policy and global investment themes. Published weekly, the podcast features input from a range of academic experts, policy-makers and investment professionals.
Podcasts available include:
Combating terrorist Global order: Beyond Focus on and criminal fi nancing China and the US Green fi nance
Rob Wainwright, executi ve Danny Quah, professor of A series of podcasts that director of Europol, joins economics and acti ng dean analyse developments in Anton Varga to discuss of the Lee Kuan Yew School green fi nance. Speakers the methods terrorists and criminals use to of Public Policy at the Nati onal University of include Bertrand de Mazières, director general transfer and launder illicit funds. They cover Singapore, joins Adam Cott er to discuss the of fi nance at the European Investment Bank, the impact of these crimes on the fi nancial shift ing world economy. They cover emerging George Papaconstanti nou, former Greek sector and wider economy, the problems economies, a new era for China, challenges fi nance minister, and Joël Prohin, head of asset surrounding globalisati on and technology, and for traditi onal politi cal systems, equality management at Caisse des Dépôts. Topics of how global authoriti es are seeking to prevent of opportunity and the positi ve impact of discussion feature the regulati on, infrastructure criminal fi nancing. technological disrupti on. and development of the green fi nance market.
Download now from iTunes or omfi f.podbean.com
Untitled-1.indd 1 01/02/2018 12:06 Worldview This month’s expert analysis Kat Usita on public pensions divesting 21 from fossil fuels
Philippe Desfossés on 24 pension funds helping 26 economies grow Dariush Yazdani on gold’s appeal
Darrell Delamaide on Fed vice-chair 29 20 speculation Bhavin Patel on the potential of blockchain
Jun Saito on containing Japanese 27 inequality
22 Otaviano Canuto on manufacturing
OMFIF.ORG FEBRUARY 2018 BULLETIN 19
BTN_02.18_019_Worldview (copy tc).indd 19 01/02/2018 13:56 US
Fed personnel carousel in full swing Pressure to increase diversity in powerful New York post
Darrell infl ation. ‘It could be a little for a new normal after a decade is considerable pressure to keep Delamaide bit quicker pace of increases,’ of crisis management. Boston the search for the second-most US Editor he said, ‘but I don’t see any Fed chief Eric Rosengren has important policy-maker on the kind of game-changing shift in suggested the Fed should adopt Federal Open Market Committee strategy.’ a more fl exible infl ation target. broad and transparent. espite the recent US In a separate newspaper With unemployment still Unlike the board of governors, Dgovernment shutdown and interview, he said the chances declining, he worries that a surge whose members are nominated the Federal Reserve remaining were greater that faster in infl ation would prompt the Fed by the president and confi rmed in limbo, the economy continues growth would prompt four rate to slam on the brakes to keep to by the Senate, the presidents of to surge ahead, powered by increases rather than pulling its 2% infl ation target, risking a the regional banks are chosen by tax reform, deregulation and back to two. He is relatively recession. the board of each bank, subject improved business and consumer sanguine about the possibility Trump’s third nomination to approval by the governors in confi dence. Washington. The three banking Jerome Powell had to be members of the regional boards renominated as the next Fed FED DEBATE CONTINUES don’t get to vote on the president, chair, since his nomination leaving it to the three industry did not come up for a vote in representatives and the three the Senate before its session ‘Sanguine’ ‘Worried’ ‘public’ representatives to make ended in 2017. Then he had to John Williams, Eric Rosengren, the choice. San Francisco Boston Fed be reapproved by the banking Fed chief chief committee, but his confi rmation Increase diversity by the full Senate quickly The powerful New York post followed before Fed chair Janet ‘Leans ‘Ready the president is vice-chair of the Yellen’s term expired at the hawkish, to go’ FOMC has always been fi lled beginning of February. sounded Marvin by a white male, and the Fed has dovish’ Goodfriend, been under pressure to increase economics Good foil Patrick Harker, professor at diversity. Speculation over a new vice- Philadelphia Fed chief Carnegie Mellon Raphael Bostic, who became chair continues. John Williams, head of the Atlanta Fed in June, the San Francisco Fed chief, is is the fi rst ever African-American the latest contender. A long-time that defi cits resulting from tax to the Fed board is Marvin to head one of the regional banks. aide to Yellen when she headed reform could become a drag on Goodfriend, an economics One of the rumoured candidates the regional bank, Williams growth. As a voting member this professor at Carnegie Mellon for the New York job, former is an economist and therefore year, Williams will have his say University. The former research Pimco chief executive Mohamed a good foil for Powell, whose whether he gets the vice-chair director at the Richmond Fed, El-Erian, was born in New York background is in law. nomination or not. who is a well-known monetary to an Egyptian father and French Williams has turned hawkish Philadelphia Fed chief Patrick policy scholar, has pledged mother, and grew up partly in of late and in January described Harker, who leans hawkish, to increase transparency and Egypt and Europe. Minneapolis the three rate increases on sounded dovish when he accountability at the Fed. Fed chief Neel Kashkari was born the agenda for 2018 as a ‘good suggested that just two interest The New York Fed is searching in the US to immigrant parents starting point’. He said growth rate hikes might be more for a successor to William from India. should be faster this year than appropriate in 2018 if infl ation Dudley, who will step down as Darrell Delamaide is a originally forecast but there continues to be soft. president in mid-2018, before writer and editor based in are no signs of wage-driven Fed policy-makers are looking his term expires in 2019. There Washington.
20 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_020_Darrell.indd 20 02/02/2018 14:18 Asia
Containing Japanese inequality Policy-makers must enhance globalisation while preserving social stability
Jun Saito somewhat but is still below 1.5 Japan Center births per woman, far below the ‘Japan has not had to for Economic replacement rate of 2.1. This Research contributes to the increase in the grapple with disruptive country-wide relative poverty rate. technological advances and Second is the increase in the the negative consequences olicy-makers often cite number of irregular workers, those of globalisation to the same PJapan as an example of how who work part-time or under degree as other countries.’ countries can effectively contain agency and fi ed term contracts the threat of widening inequality. over the last 30-40 years. They are According to traditional indicators aid less and en oy fe er benefi ts such as the ini coeffi cient and than those in regular, full-time not increased. There are two However, if the cost of containing data on the income share of the employment. The government has possible answers that may explain widening inequality is to give up top percentile of earners, Japan said it wants to narrow the wage this variation between Japan and growth opportunities, this creates outperforms the US and major gap between irregular and regular other developed countries, all different problems for countries. European economies. workers as part of Prime Minister of which have had to contend o far a an has o ted to sacrifi ce However, the situation is more Shinzo Abe’s labour reform with the impact of technological some elements of technological serious if one examines Japan’s programme. Regardless, since disruption and globalisation. change and globalisation, relative poverty rate. Among the share of irregular workers One is that Japanese labour conse uently sacrifi cing gro th members of the Organisation among all employees is increasing, market polices have successfully to preserve social stability. for Economic Co-operation and reaching almost 40% in 2017, the restrained the rise in inequality. But the Japanese economy Development, Japan’s relative relative poverty rate should again However, public expenditure on needs to strengthen. If growth poverty rate is high, close to the increase. such policies is low compared to prospects are to improve, the US and much higher than the UK, The third is poverty in single other countries. Indeed, Japan country must orientate its and is continuing to rise. There parent households, which are belongs to the group of nations, policies towards enhancing are several reasons for this. becoming increasingly common alongside the US, which spends technology and globalisation. The fi rst is a an’s aging owing to Japan’s rising divorce the least on such measures. These measures would inevitably population. The relative poverty rate. This is especially the case for This leaves the other answer: involve pressures that could widen rate is higher among elderly single mother households, which Japan has not had to grapple with inequality, and should therefore people, who, in the light of tend to rely on a disproportionate disruptive technological advances be complemented by mitigating Japan’s demographics and low amount of irregular work. and the negative consequences of policies, including expanded fertility rate, make up a larger globalisation to the same degree education and retraining share of population than in other Limited globalisation as other countries. Low growth in programmes. countries. The number of Japanese These observations imply that Japanese labour productivity, as The alternatives are that Japan aged 65 or older has almost inequality is becoming an well as import protection in the will continue to suffer from low quadrupled over the last 40 years. increasingly serious issue in agricultural sector, limited inward growth, or that increased exposure The fertility rate has recovered Japan. However, market watchers foreign direct investment, and to globalisation and technological should take note of the major restricted immigration seem to disruption will lead to heightened difference in the country’s confi rm this idea. social instability. Neither situation composition of inequality when is attractive for the world’s fourth 40% compared with other nations. Stability v. growth largest economy. Share of irregular workers In Japan, inequality among Widening inequality is a serious Jun Saito is Senior Research in Japan prime-age workers those threat to society and should be Fellow at the Japan Center for between 24-54 years old has avoided as much as possible. Economic Research.
OMFIF.ORG FEBRUARY 2018 BULLETIN 21
BTN_02.18_021_Asia.indd 21 01/02/2018 13:57 Trade policy
Opportunities beyond manufacturing Scope of stand-alone and embedded services
Otaviano manufacturing to emerging The Future of Manufacturing-Led local manufacturing centres Canuto economies. Development. benefi t from demand for these Advisory For latecomers, using Hallward-Driemeier and manufacturing-related services. Council manufacturing exports as a Nayyar call attention to how platform for high growth is technological advances have ‘Servicifi cation’ ince the second half of the last likely to become more diffi cult. made some services, including In their assessment of the rising Scentury, manufacturing has At the least one may say fi nance and telecommunications servicifi cation’ of manufacturing been a vehicle for job creation, that the requisite standards increasingly tradable. This Hallward-Driemeier and Nayyar productivity increases and growth of infrastructure, business may help raise productivity in conclude, ‘While a range of in emerging economies. First environment, local availability developing economies. They “stand-alone” services and in Latin America, followed by of skilled workers and other highlight, too, the potential some embedded services can Asia and eastern Europe, rising competitiveness factors are benefi ts of rea ing economies of provide growth opportunities manufacturing levels transferred rising. scale in services that are highly without a manufacturing core, labour from low-productivity affected by technology, especially the increasing servicifi cation occupations to activities using Unskilled labour since only low marginal costs of manufacturing underscores more technology. This was Market watchers are increasingly are incurred by adding units the growing interdependence facilitated by the transferability asking whether services can to production. However, these between the two sectors. Given of manufacturing technologies eventually surpass manufacturing services are unlikely to be a strong this deepening interdependence, relative to other parts of the in terms of job creation in source of jobs for unskilled labour. policies that improve productivity economy. But two issues cast developing countries. They Low-end services that provide across different parts of the doubt over the possibility of wonder if further innovations can unskilled employment are less value chain will result in the replicating or deepening this lead to higher transferability of likely to create opportunities for whole being greater than the process. technologies and tradability of productivity gains. With some sum of its parts. The agenda First, manufacturing is highly services, and examine whether exceptions – Hallward-Driemeier therefore should be to prepare sensitive to minor changes in local manufacturing centres and Nayyar mention construction countries to use synergies across overall competitiveness factors, will remain a precondition for and tourism – the services sectors to participate in the including labour costs, real production of services. sector has less scope than the entire value chain of a product exchange rates, the business These issues are addressed by manufacturing-led development while also exploiting stand- environment and infrastructure. Mary Hallward-Driemeier and of recent decades to yield both alone opportunities beyond Second, technological changes Gaurav Nayyar, senior economic high productivity gains and job manufacturing.’ that reduce labour costs are adviser and economist at the creation for unskilled labour. t is becoming more diffi cult to threatening to unwind some of World Bank respectively, in their There is much still to be boost employment of unskilled the motivation for transferring book Trouble in the Making?: learned about the connection workers while at the same time between manufacturing and obtaining substantial increases services. Alongside increases in productivity. There is no ‘The services sector in demand for stand-alone alternative but to raise standards has less scope than services that are very sensitive domestically if a developing the manufacturing-led to changes in consumers’ country wants to make best use development of recent income, policy-makers must of services and manufacturing as determine the prospects engines for meaningful growth. decades to yield both high for the demand for services Otaviano Canuto is an productivity gains and job accompanying the transformation Executive Director of the World creation for unskilled labour.’ of manufacturing. They will have Bank. The opinions expressed to deduce the extent to which in this article are his own.
22 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_022_Canuto.indd 22 01/02/2018 13:57 International monetary policy
Services are driving down in ation Central bank policy must adapt to new reality
Ben steadily both as a share of global advances in digital technologies experience is striking. Robinson GDP and employment. Many of and communications services Data-driven services have also OMFIF these sectors are increasingly had not been ca tured by offi cial allowed dramatic improvements knowledge and technology- fi gures. n ation mean hile as in quality, although these are driven. This has had a dramatic lo er than re orted re ecting often hard to quantify. As a impact on economic organisation, the adjusted value of the services result, it can be misleading to entral banks are struggling to productivity, costs and product produced. compare the price of items over Caccount for the persistence quality, which may have lowered These diffi culties re resent time creating diffi culties for the of lo in ation des ite the in ationary ressures of a signifi cant break from the year on year nature of in ation trillions of dollars of monetary economic growth and low past, where producing more of measures. An iPhone may be stimulus and tighter labour unem loyment. iffi culties a given good or service required much more expensive than an markets. Their explanations in measurement mean these greater demand for physical outmoded mobile phone, but it centre on the disin ationary issues are often overlooked, but inputs, pushing up aggregate offers much greater functionality. effect of globalised product, their in uence on monetary demand. This ensured a strong Improvements in technology and capital and labour markets on policy transmission could be link between economic slack and communications have similarly shifting the Phillips curve, the substantial. in ation and allo ed central transformed even low-tech inverse relationship between banks to manage price levels via sectors such as food delivery and unem loyment and in ation. Challenges of measurement traditional monetary policy tools. transportation, further hindering It is widely acknowledged that The internet has made many The digital economy is more comparison. tighter labour markets in a given functions that were previously dependent on intangibles that Central bank models depend country no longer result in the paid for, such as communication, have a less direct in uence on on historical data to guide their e ected rise in in ation because entertainment, information and aggregate demand. Many services forecasts. The rapid growth of the global rather than domestic news, effectively free. This means are produced and distributed digital economy and technology- slack has become a fundamental a large amount of economic using software rather than enabled services is creating a new determinant of prices. activity no longer appears in GDP requiring physical inputs, supply reality to which policy-makers Monetary policy-makers see fi gures. networks and bricks-and-mortar must adapt. Updated models ever-larger stimulus, for the sake With output becoming more outlets. This is making the using assumptions based on of adding a few extra basis points diffi cult to measure accurately marginal cost of new production services output, quality, prices to in ation as not orth the productivity gains may be essentially zero. and productivity gains are fi nancial risk. tructural changes under-reported. In late January The extent to which this needed. The lack of hard data here in the global economy add the ffi ce for ational has affected the link between suggests one reason hy in ation urgency to this reassessment. tatistics revised its estimates for otential out ut in ation has consistently undershot Over the last few decades productivity and sectoral growth and monetary policy is still forecasts and why monetary the services sector has risen upwards after acknowledging that unclear, but the break with past policy has been so slow to achieve its target. Policy-makers are trying to understand the true impact of the ‘The extent to which the digital economy evolving digital and service-based has affected the link between potential economy on in ation dynamics. out ut in ation and monetary olicy Until they succeed, the risk of is still unclear, but the break with past inappropriate or potentially harmful choices could grow. experience is striking.’ Ben Robinson is Senior Economist at O .
OMFIF.ORG FEBRUARY 2018 BULLETIN 23
BTN_02.18_023_Ben_IntMontPolicy.indd 23 01/02/2018 13:58 International monetary policy
Gold’s sovereign fund appeal iversifi cation and li uidity guide allocation strategy
Dariush environment over the ast decade the asset’s value uctuates idely n terms of erformance Yazdani has led sovereign funds to search according to business cycles or different alternative assets rice aterhouse for higher yields and in the seasonal demand. deliver strong returns on a fi ve Coopers rocess turn to ards alternatives. evertheless the 10 and 20 year ers ective see The inclusion of alternatives heterogeneous as ects of chart des ite uncertain market in a ortfolio can im rove its alternatives allo sovereign funds conditions. n both a 10 and igh levels of assets risk re ard rofi le signifi cantly. to select appropriate asset classes 20 year basis gold and rivate Hunder management and old for e am le has a negative to suit their s ecifi c ob ectives. e uity out erform. edge funds so histicated strategies have correlation ith e uities and Alternative asset classes possess and commodities consistently increased the im ortance of erforms ell during stock different correlations of returns under erform hen com ared sovereign funds as institutional market do nturns. rinci al investors. Their resence in reservation introducing a The inclusion of a ide variety of asset classes orld markets has become more source of returns that has reduced in a sovereign fund’s ortfolio rovides strong ronounced. The introduction of market risk is attained hile various funds in recent years has the value of investments is diversifi cation benefi ts es ecially if it is cemented their global in uence. rotected from ossible decreases combined ith more traditional asset classes.’ s the number and diversity of in the urchasing o er of sovereign funds e and more are the currency the asset class is com ared ith traditional asset ith traditional and other shifting into alternative assets. e ressed in. classes. The inclusion of a ide alternative asset classes. n the ast these funds’ main ut the inclusion of certain variety of asset classes in a overeign funds’ general goal asset allocation as to e uities alternatives in a ortfolio can also sovereign fund’s ortfolio thus of safeguarding the ros erity Gold delivers andstro fi ng ed re incometurns instruments. compared to alteintroducernave risks asse suchts as illi uidity rovides strong diversifi cation of their home country by o ever a lo interest rate com le ity and cyclicality here benefi ts es ecially if it is accumulating and increasing Annualised returns, % combined ith more traditional ealth fi ts ell ith alternatives asset classes such as bonds or offering diversifi cation a hedge Gold outperforms other alternative assets e uities. against in ation and im roving Annualised returns, by type of asset, % ortfolio erformance. hile i uidity benefi ts alternatives are not immune nly gold can rival traditional to risks such as illi uidity 10 8 investments ith regards to com le ity and cyclicality their 6 li uidity. easured against ability to rovide do nside 4 traditional investments the lack rotection and diversifi cation ill 2 of li uidity of most alternative entice investors. 0 asset classes is a signifi cant overeign funds should -2 dra back. nclusion in a ortfolio continue to consider alternatives -4 -6 ill cause diversifi cation but as a ne source of income. ut to -8 it ill also create illi uidity rea the re ards these investors s s s ty ty re ie nd ui ui roblems. must fi nd the right allocation nd tate tu it fu eq Eq es Bo uc od
GOLD This means alternatives strategy monitor their ortfolios e e tr al at dg as mm
Re re uire long term investment ell and reallocate their ca ital to iv fr He Co Pr In hori ons and are rone to further re ect economic develo ments. 10-year basis 20-year basis illi uidity in times of crisis as Dariush Yazdani is Partner as the case in the sub rime at PricewaterhouseCoopers Source: PwC analysis, Bloomberg, Prequin mortgage crisis. Luxembourg.
Source: PWC an24alysBULLETINis, Bloombe JANUARYrg, Preq 2018uin OMFIF.ORG
BTN_02.18_024_Gold_IntMontPolicy.indd 24 01/02/2018 13:59
lobal ublic nvestor 2018
MAY 2018
Asset allocation Global Flows Digital Economy
The fi fth annual Global Public Investor is devoted to public sector asset ownership and management across a full range of offi cial institutions around the world. GPI 2018 focuses on key developments on the world investment scene and extends further the coverage of asset classes from previous editions. The Top anking encompasses the world’s largest central banks, sovereign funds and public pension funds based on assets under management. Articles by GPIs make it a practical guide to the global asset management community.
or more information and to view the synopsis visit omfi f.org
BTN_02.18_GPI_Adx.indd 1 31/01/2018 10:50 Sustainable investment
Investing pensions for sustainable growth Greater allocation to equities and infrastructure needed
Philippe First, regulators tend to consider the economy are aimed at Desfossés mistakenly that market rice regaining control over the ERAFP volatility of assets is a good creation of money. 70% indicator of risk. This is true for For young contributors to those that manage very short pension funds, the consequences Expected equity allocation term commitments (proprietary of the investment choices made of Norges Bank Investment ig pension funds bear trading by a bank, for instance) by their funds today will have a Management assets Ba special responsibility but irrelevant for funds whose direct impact on their pensions because they manage sizeable investment horizons span but also, by correlation, on the cases very ositive cash o s assets for the long term. Better decades. world in which they will live. these resources could be used alignment is needed between the Second, benchmarked n ay as you go systems more effi ciently. fi nancing of the economy and management prompts managers contributions by members are Norges Bank Investment these large investors. to avoid any risk of deviating redistributed immediately. Management in Norway is hile banks fi nance long from the consensus. Many Funded pension schemes have increasing its equities exposure term ro ects ith shorter term investors therefore adopt to invest sustainably. Achieving from 62.5% to 70%, and Japan’s funds, the nature of their activity investment strategies that are long term economic gro th Government Pension Investment changes when they can distribute limited to replicating indices, without harming the prospects Fund has raised its equity credit virtually without limit. or even purchasing indexed of future generations benefi ts allocation to 50% of assets. In Contrary to banks, pension products such as exchange long term investors. the unlikely case that negative funds and other very long traded funds. These products market trends should result in a term investors are encouraged, are inexpensive, which naturally Productive capital fund failing to cover 100% of its even obliged, to make the pleases administrators, and more If a pension fund’s aim is to obligations, it would be preferable transformation the other way attention is paid to reducing ensure the transfer of a deferred to give it access to refi nancing around. But, unlike banks, management expenses than to income from generation to by the central bank rather than pension funds do not create whether these investments will generation, then it should obliging it to sell assets at the money; their contributions deliver the desired performance be helped to invest in the risk of accelerating the fall in are a form of saving. However, over the long term. economy’s productive capital. their prices. regulations lead most funds to Recent proposals regarding Pension funds must be allowed Pension funds manage the invest in far shorter term assets. how pension funds can to increase their investments in transfer of savings over time There are two explanations. contribute to the fi nancing of equities, infrastructure, unlisted and their liabilities are therefore securities and anything that very long lived. The mobilisation contributes directly to growing of these long term resources the economy. should be encouraged to ensure The fall in bond yields (most of fi nancing that is less reliant on ‘If a pension fund’s aim is which now generate lower returns debt and money creation. This to ensure the transfer of than the rates at which bonds re uires in de th re assessment a deferred income from remunerate their liabilities) has of regulatory frameworks resulted in a strong appreciation applicable to pension funds as generation to generation, of bond portfolios. However, ell as a re e amination of the then it should be helped these capital gains cannot be role of the banks. to invest in the economy’s built upon due to restrictive Philippe Desfossés is Chief productive capital.’ investment rules. Given that Executive Offi cer of E many pension funds currently the rench public sector post solid liquidity, and in some pension fund.
26 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_026_SustInv_Desfosses.indd 26 01/02/2018 13:59 ustainable investment
Pension funds divest from fossil fuels and uro e lead the ay hile disa oints
Kat Usita sharply with President Donald Trum ’s refusal to ackno ledge climate change as a legitimate ‘With the growing availability of green olicy concern. fi nancial instruments funds should The uro ean nion has not be hard ressed to fi nd alternative been more consistent. n late investment o ortunities that su ort ublic pension funds are 201 the uro ean arliament sustainability goals.’ Ptasked with safeguarding the passed a resolution calling on all fi nancial future of their members ublic and rivate investment hich re uires making the best institutions to divest from fossil ossible investment choices. fuels. arlier in the year the There is a glaring irony when rish arliament a roved a bill those choices may endanger the requiring its sovereign fund to sell lives they are intended to su ort off all fossil fuel assets. such as hen such funds fi nance nce this is im lemented fossil fuel roduction. olicy reland ill be the fi rst country makers and fund managers must in the world to achieve full acknowledge this discrepancy divestiture of ublic money from and address how pension funds fossil fuel. or ay’s sovereign and other ublic investment fund has also divested a signifi cant institutions are contributing to amount of fossil fuel assets after global arming. legislators ordered it to remove fi nd the best fi nancial returns for ere issued in 201 12 times the New York City is taking investments from com anies that members. number a decade ago. hile this res onsibility. ver the ne t generate more than 0 of their Critics are quick to highlight is still a relatively small amount fi ve years the city’s fi ve ublic revenue from coal. the fi nancial burden of green fi nance is gro ing uickly pension funds will divest the divestment es ecially hen and ill become an increasingly $5bn they hold in fossil fuel Financial pressures fossil fuel investments make im ortant com onent of funds’ investments as its offi cials sue rogress has been more u a signifi cant share of a ortfolios. the fi ve biggest oil com anies disa ointing in the in s ite fund’s ortfolio. There could ublic investment funds are hevron onoco hilli s on of its legislated commitment to be conse uences to a fund’s different from other investing and hell. reduce greenhouse emissions by ability to fi nance current ension institutions as they have a social hile e ork ity’s 80 from 1 0 levels by 20 0. incomes for instance. This is function. ressure to fi nd the divestment is the largest of any everal large ublic ension funds hy divestiture must be e ecuted best investment returns have city to date it is not the fi rst including the 1 .2bn reater strategically as the e am les in com romised this role. ublic body to make such a move. anchester fund still have assets or ay and the sho . If pension funds are genuinely In 2015 the state of California allocated to fossil fuel com anies. eyond divesting funds need committed to rotecting their ordered its two largest public Local public pension funds have to become more roactive in members’ future livelihoods ension funds to divest the 200m 1 .1bn invested in fossil fuels selecting climate conscious they need to assess carefully they held in fossil fuel com anies. com rising . of total assets. investments. ith the gro ing the broader im lications of The follo ing year the city of com rehensive shift a ay from availability of green fi nancial investment decisions and rectify ashington’s retirement board these investments ould re uire instruments there are alternative actions that counter their dis osed of . m of such assets. policy guidance to clarify that investment o ortunities that ultimate ob ective. These actions are signifi cant for doing so would not betray public su ort sustainability goals. ver Kat Usita is Economist at the oil industry and contrast ension funds’ fi duciary duty to $100bn worth of green bonds OMFIF.
OMFIF.ORG FEBRUARY 2018 BULLETIN 27
BTN_02.18_027_Kat.indd 27 01/02/2018 14:00 Digital economy
Cryptocurrency crush Retail investors crowding into risky asset alarms regulators
Oliver Thew cryptocurrencies, claiming they there is no signifi cant e osure can affect fi nancial stability to core fi nancial institutions. and cause harm to society. The The bursting of a cryptocurrency 3,429% People’s Bank of China closed bubble should not have systemic local exchanges, implemented or macroeconomic implications. Rate of increase of total ast month’s World Economic a blanket ban on initial coin However, the threat to market capitalisation for LForum meeting in Davos offerings and put pressure on individuals’ ersonal fi nances cryptocurrencies over 2017 featured an entire session bitcoin miners to try and shut is real. Last year’s boom was dedicated to the crypto-asset them down. largely driven by speculation and opposite effect. The South Korean bubble. The total market But Mark Carney, governor of herd mentality, rather than any government recently announced capitalisation increased 3,429% the Bank of England, and Janet intrinsic value or established it would make cryptocurrency to $600bn over the course of Yellen, chair of the Fed, have investment strategies. Easily trading illegal. This prompted 2017. Millions of ordinary people stated that cryptocurrencies and accessible exchanges and a public backlash in the world’s around the world began investing, the rally do not ose a signifi cant products, such as contracts for biggest cryptocurrency market with an estimated $5bn in trading risk to fi nancial stability. ther difference, allowed lower- and and triggered a big sell-off, volume per day across 1,100 regulators, including the Banco middle-income consumers which caused individuals to lose currencies and tokens. From Central do Brasil, have reiterated to invest large amounts in up to 40% of their portfolios. established cryptocurrencies that there is no immediate risk to cryptocurrencies. As last month’s When Chinese regulators banned such as bitcoin and ether to cryptocurrency trading in 2017, cryptokitties – a blockchain-based ‘When the South Korean government announced bitcoin lost 32% of its value. game that allows players to buy and trade virtual cats (see p.30) – it would make cryptocurrency trading illegal, Educational approach the market rallied. it triggered a sell-off that caused individuals to More progressive regulators have The rise of cryptocurrency lose up to 40% of their portfolios.’ taken an educational approach. trading has been accompanied They inform consumers about by warnings from regulators the fi nancial system. egulation crash showed, individuals with the relevant risks, including the concerned that the new market is needed for the market to grow, little investment experience can fact that cryptocurrencies are not oses a threat to fi nancial but it also seems as though be e osed to ild uctuations regulated fi nancial instruments stability. In November 2017, the cryptocurrency rally is a in value and can lose signifi cant but stop short of banning related Randal Quarles, vice-chairman speculative bubble. amounts of money. activities. The UK’s Financial for supervision at the US Federal Furthermore, cryptocurrency Conduct Authority, the BoE, the Reserve, claimed that bitcoin No systemic risk exchanges, trading platforms and Monetary Authority of Singapore, could ose serious fi nancial Although total market wallets are frequently hacked. the US Securities and Exchange stability issues as it is adopted capitalisation has increased A large hack, similar to the Mt. Commission and Financial more widely. over the past year, it still Gox attack in 2014, could cause tability versight ouncil have Some regulators began represents a tiny segment of investors to lose most, if not taken this approach. clamping down. In Israel, global markets - equivalent all, of their cryptocurrencies. As Jens Weidmann, president the securities agency barred to less than 2% of any major While some inverstors have been of the Bundesbank, said, ‘Just companies trading in bitcoin asset class. The cryptocurrency refunded after a hack, the general because investors can lose from operating on the country’s market has few links to the wider absence of depositor’s insurance money isn’t a good reason to get stock exchange because it economy and is not systemically to absorb losses for these involved.’ believes the public is unprotected. interconnected. It is not being investments makes them risky. Oliver Thew is Business Bank Indonesia outlawed all held traded or fi nanced by the A heavy-handed approach to Development Manager payments and transactions in banking sector, which means protect consumers can have the at OMFIF.
28 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_028_DigiOllie.indd 28 01/02/2018 14:01 Digital economy
Blockchain beyond the hype Technology reduces counterparty risk and aids regulation
Bhavin Patel immediately, as interoperability other. Groups such as R3, which factors are usually responsible OMFIF is a problem. Blockchain attempts has 41 banks as members, are for causing problematic noise to transfer value from one seeking to overcome this issue in data, which is one of the party to another and reconcile by developing a standardised, problems the distributed ledger the changes to their respective interoperable platform. aims to solve. Harmonising f you believe the hype, accounts quickly and securely. data standards can solve most Iblockchain is a revolutionary This requires all parties to be on When blockchain works problems, without the need for technology that will transform the same blockchain system and A blockchain is needed in a the company to implement a the ay fi nancial services access the same data. Given the multiparty agreement where no blockchain. operate. However, the ‘year of the number of competing systems, one trusts each other and there is Blockchain operates blockchain’ is yet to materialise. this is impractical. Additionally, an opportunity for deception. continuously, while traditional n the conte t of fi nance as a system grows, the speed of The decentralised nature of transaction processing has a blockchain can be defi ned as transactions suffers. blockchain means there is one two-day settlement period. a digital platform that uses time record of a transaction and Legislators and regulators have cryptography and a distributed Scalability problems the data are replicated through not caught up with the need for messaging protocol to create a Blockchain payments are not nodes. Nodes are important real-time regulation. link between two or more parties fast enough to support large- members of the network If a regulatory body became a to transfer asset ownership. The scale operations. For instance, that validate transactions. node in the blockchain system, it transaction is registered across the Bitcoin blockchain is unable Participants in the system could see all the information in a a network of computers, in a to process transactions at the cannot lose or destroy market, making regulation more distributed ledger. speed required by banks. At most transactional data without effective. The promise of blockchain it can handle seven transactions incurring very high costs. Monitoring the stability of the cannot be ignored. In capital per second. In comparison, Visa The adoption of blockchain banking sector could be easier markets, the technology has averages 2,000 and can scale up has been transformational for if the Financial Stability Board the potential to settle currency, to 56,000 transactions per second certain industries, especially for used blockchain. If a blockchain e uity and fi ed income trades if required. companies in parts of the world recorded every instance of a almost instantaneously, creating As chains grow they become that lack the infrastructure to bank failing to make a payment an opportunity for banks to unwieldy. Private ledgers tailored transfer large-value contracts, or transfer assets, the regulator eliminate intermediaries. to overcome this lag are in or where centralised solutions would have the power to act Institutions are not development, but these ledgers are unreliable and open to quickly to stop the bank from switching their business models will not interact with each corruption. trading, or inject emergency In the diamond industry for liquidity if required. instance, a distributed ledger can Blockchain could become the be used to track the history of backbone of capital markets ownership back to the mine. The infrastructure, reducing blockchain generates a tracking counterparty risk and settlement 7 key, which is etched into the times, and increasing regulatory Most transactions per diamond. transparency. The system will second the Bitcoin Blockchain technology can only ever be as good as the blockchain can handle. drive solutions even without information built into it – Visa averages 2,000. im lementation. The fi rst ste which is why much more work towards implementation involves lies ahead. a company agreeing on data Bhavin Patel is Economist at and processing models. Human OMFIF.
OMFIF.ORG FEBRUARY 2018 BULLETIN 29
BTN_02.18_029_Bhavin.indd 29 01/02/2018 14:01 Inquiry
The (digital) numbers $114,000 $2bn The amount that some digital ‘CryptoKitties’ are worth The market capitalism which on the ethereum blockchain market. CryptoKitties are Dogecoin reached in early generated in a game where players can January 2018. The 2013-era purchase, sell and breed digital cats. cryptocurrency was designed It has proved to be hugely popular, as a parody of more prominent with a reported 180,000 digital currencies like bitcoin and is players signed up and a associated with the Shiba Inu breed of dog. Dogecoin total expenditure of $20m has re-emerged as a result of general cryptocurrency in ether, ethereum’s popularity, resulting in investors purchasing low- cryptocurrency. priced assets. ¥46bn $8m The value of rapper 50 Cent’s forgotten The amount which Coincheck, a Japanese cryptocurrency 700 bitcoins. In 2014 he off ered fans the chance to pay for exchange, must refund to customers after hackers stole his new album in the cryptocurrency transactions he funds in January. Coincheck said it would reimburse 260,000 had forgotten about until the recent boom reminded him of people who lost their holdings in the NEM cryptocurrency. his digital foresight.
The chart
Each month we take a look at a chart Swiss bank loans growing faster than the economy from the world’s central banks. Ratio of bank loans to nominal GDP 1.75 This month, Switzerland. 1.75 1.70 1.70 The ratio of bank loans to GDP in Switzerland has 1.65 risen sharply post-crisis, indicating potential risks to 1.65 1.60 fi nanc a a 1.60 1.55 1.55 1.50 1.50 1.45 1.45 1.40 1.40 1.35 1.35 1.30 1.30 19901995 2000 20052010 2015 19901995 2000 20052010 2015 Bank loans / nominal GDP Bank loans / nominal GDP Source: Swiss National Bank, OMFIF analysis
30 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_030-031_Inquiry(copy tc).indd 30 01/02/2018 14:02 Inquiry
The (digital) numbers Book review
A tiresome of Four Futures, readers will be gainful piece of political thought asking why it was necessary writing, which is what one for this book to be written, assumes Frase was aiming experiment when so many better ones are for with Four Futures, ought Julian Frazer available. to avoid such stock and facile Problems begin with the references. THIS introduction, which takes up His chapter on rentism reviewer has more than one fi fth of this is the strongest because its never read six-chapter book. The preamble foundations are the closest to a book like could have easily been cut by what is on view in the modern Four Futures: 10 pages without diluting the economy. It is, after all, much Life After argument. This would allow easier to criticise something Capitalism readers to meet Frase’s ‘four which exists than it is to ¥4.4tn before – futures’ with vigour, rather elucidate nuanced political mostly, than exasperation. ideals. Fragments on the future The total income one should hope, because Things are not helped by the of intellectual property rights, generated from most sensible editors will tell nauseating number of allusions in the light of potentially Japan’s intellectual authors who produce a work to Star Trek and other parts of epoch-shaping technologies property, with like this to return to their offi ce popular culture. While it may such as 3D printing, offer revenue up 74% and try again. be television’s favourite space some worthwhile ideas and are in the last fi ve The author, Peter Frase, adventure series, Star Trek is deserving of further research. years to ¥4.4tn in this slim volume ventures not, contrary to Frase’s leftist These assages are rofi cient (around $40bn) to sketch a quartet of but not strong enough to at the end of 2017. postcapitalist visions based on ‘Four Futures reads redeem the whole book. The development the ‘twin anxieties’ of resource too much like an Though just 150 pages long, and protection scarcity, due to climate change, Four Futures is a tiresome of intellectual and robotised automation. over-embellished attempt at social theorising, property is part of The formulas for each are university a failed thought experiment. Japanese Prime simple. A scarcity of resources dissertation and It reads too much like an Swiss bank loans growing faster than the economy Minister Shinzo combined with social equality too little like over-embellished university Abe’s long-term Ratio of bank loans to nominal GDP will lead to socialism. a meaningful dissertation and too little like a growth strategy. Communism will arise where meaningful political critique. there is social equality and an political critique.’ Frase spends too much time abundance of resources. These referencing other people’s are Frase’s utopias. On the impressions, well known for its writing, which undermines other side, hierarchical society ‘communistic quality’. the worthiness of his and abundance will engender Likewise The Hunger Games occasional original thinking. rentism. The most dystopian has found ‘enormous success’ His reading list includes Kurt system, combining hierarchy not because it is a work, as Vonnegut’s Player Piano, The with scarcity, is exterminism, Frase believes, of dystopian Second Machine Age by Erik in which the rich and powerful criticism, but because of its Brynjolfsson and Andrew eradicate the poor. simpler appeals. As with McAfee, and Charles Stross’s Early in the text Frase writes: other works of ‘young adult’ Accelerando, to name a few. ‘Why the reader might ask, is it (or, less delicately, ‘old child’) This reviewer recommends you even necessary to write another fi ction its success is based turn to those books instead. book about automation and the on pandering to teenagers’ Julian Frazer is Subeditor at postwork future?’ By the end rebellious compulsions. A OMFIF.
OMFIF.ORG FEBRUARY 2018 BULLETIN 31
BTN_02.18_030-031_Inquiry(copy tc).indd 31 01/02/2018 14:02 OMFIF Advisors Network
COUNCIL Norman CAPITAL MARKETS MONETARY POLICY Lamont House of Lords
John Adams Daniel Hanna Iain Begg Meghnad Desai China Financial Standard London School of House of Lords; Kingsley Services Chartered Bank Economics chairman, OMFIF Moghalu Advisers Tufts University
Yaseen Anwar George Marek Belka Industrial & Hoguet Hani Kablawi Fabrizio former prime Chairman EMEA and Commercial Bank CFA Research minister of Poland Saccomanni of China Foundation CEO Global Asset LUISS University Servicing BNY Irena Louis de Asmundson Soh Kian Harald Montpellier Gary Smith California Tiong Benink State Street Global Barings Department DBS Bank Tilburg University Advisors of Finance
Frank Georgina Baker Stuart Scheidig William Keegan Mario Blejer DZ BANK The Observer International Mackintosh Finance Group of Thirty Banco Hipotecario Corporation
Johannes Stewart Witteveen Niels Thygesen Stefan Paul Newton University of Copenhagen Fleming honorary chairman, Bielmeier London & Oxford St Antony’s OMFIF Advisers DZ BANK Capital Markets College, University of Oxford Songzuo Ted Truman Xiang Peterson Institute for Saker Renmin University Hans José Manuel International Economics Nusseibeh González- of China Blommestein Hermes Fund Vivid Economics Páramo Managers BBVA
Otaviano Marsha Canuto Vande Berg Brigitte Stanford University World Bank Group Mark Burgess Jukka Granville Jamieson Coote Pihlman Queen Mary, Bonds Standard University of Aslihan Chartered Bank London Gedik Ben Shenglin OYAK Anker Renmin University Bank Hon Cheung Colin Graham State Street Robertson Hacche Global Advisors SW1 Consulting NIESR Robert Johnson John Kornblum Institute for New Noerr Economic Thinking Michael Fabio Akinari Horii Cole-Fontayn The Canon Association for Scacciavillani Oman Investment Institute for Global Financial Markets Fund Studies in Europe NETWORK Lutfey Siddiqi Harold James Bahar Alsharif François Heisbourg Robin Poynder Thomas Finke National Barings University of Princeton David Badham Frederick Hopson Poul Nyrup Rasmussen Singapore University Franco Bassanini Matthew Hurn Janusz Reiter Eduardo Borensztein Korkmaz Ilkorur Anthony Robinson Consuelo Brooke Karl Kaiser Philippe Sachs Gao Haihong David Hemraz Colin Budd David Kihangire Nasser Saidi Institute of World Suratgar Jankee Michael Burda Ben Knapen Pedro Schwartz Economics and BMCE Bank formerly Central International Bank of Mauritius Shiyin Cai Ludger Kühnhardt Vilem Semerak Politics David Cameron Celeste Cecilia Lo Turco Song Shanshan Forrest Capie Bo Lundgren Marina Shargorodska Volker Pawel Stefano Carcascio Mariela Mendez Paola Subacchi Christian Wieland Gärtner German Council Kowalewski Desmond Cecil Murade Miguigy Murargy José Alberto Tavares DZ BANK of Economic Narodowy Bank Efraim Chalamish George Milling-Stanley Moreira Experts Polski Moorad Choudhry Winston Moore Jens Thomsen John Chown Wilhelm Nölling David Tonge Trevor Katarzyna Vladimir Dlouhy Jorge Vasconcelos Greetham Zajdel- Philippe José Roberto Novaes Lagayette Obindah Gershon de Almeida Gottfried von Bismarck Royal London Kurowska Asset Narodowy Bank formerly Banque Jonathan Grant Michael Oliver Jack Wigglesworth Management Polski de France Peter Gray Francesco Papadia Paul Wilson
32 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_032-033_AdvisoryBoard (CHANGES TC).indd 32 01/02/2018 14:03 OMFIF Advisors Network
MONETARY POLICY INDUSTRY & INVESTMENT POLITICAL ECONOMY
Andrew Antonio Andrew Ruud Lubbers Large Joel Kibazo Armellini former prime Hedge Fund Adonis JK Associates former minister of the Standards Board House of Lords ambassador, Netherlands OSCE
Jean-Claude Frits Gerard Lyons Jürgen Denis Bank of China Bastos de Bolkestein Krönig formerly European MacShane (UK) Morais Die Zeit Avisa Partners Quantum Global Commission
Kishore Robert Laurens Jan Rakesh Oscar Mahbubani Bischof Brinkhorst formerly Lee Kuan Mohan German-British Lewisohn University of Yale University Soditic Yew School of Forum Leiden Public Policy
Albert Boyd Athanasios Peter Bruce Orphanides Bressand McCleary Business Day David Owen MIT Sloan School European 39 Essex House of Lords of Management Commission Chambers
Luiz Eduardo Vicky Pryce Nagpurnanand Caroline Melin Jenny Corbett Centre for Prabhala International Australia National Economics University of Butler Walcot Partners Economic University & Business Maryland Synergies Research
Willem Edoardo Nick Butler Brian Reading Reviglio King’s College Middelkoop Reginald Dale independent Cassa Depositi e Atlantic Council London Commodity economist Prestiti Discovery Fund
Célestin Maria Olivier John Monga Antonieta Del Robert Rousseau African Fonds de réserve Campbell Tedesco Lins Skidelsky Campbell Lutyens Development House of Lords pour les retraites University of São Bank Paulo
Miroslav Danny Quah Hans Eichel Mark Crosby Lee Kuan Yew former German Gabriel Stein Singer Monash Stein Brothers School of Public minister of Generali CEE University (UK) Holding Policy fi nance
Natalie Shumpei David Smith Jonathan Michael Dempster formerly United Takemori World Gold Fenby Stürmer Keio University Nations TS Lombard WELT-Gruppe Council
Jeffry Makoto Hans Genberg Takuji Tanaka Christopher Utsumi The Seacen Japan Finance Frieden formerly Japan Harvard University Tugendhat Centre Ministry House of Lords Finance Ministry
Tarisa Steve Hanke Daniel The Johns Elliot Hentov John West Watanagase State Street Asian Century formerly Bank of Hopkins Titelman ECLAC Global Advisors Institute Thailand University
Ernst Welteke Hans-Olaf Pasquale formerly Henkel Roel Janssen William White Deutsche University of Urselli NRC Handelsblad OECD Mazars Bundesbank Mannheim
Mumtaz Khan Paul van Thomas Linda Yueh Middle East & St Edmund Hall, Asia Capital Seters Kielinger University of Partners Tilburg University Die Welt Oxford
OMFIF.ORG FEBRUARY 2018 BULLETIN 33
BTN_02.18_032-033_AdvisoryBoard (CHANGES TC).indd 33 01/02/2018 14:03 Inquiry
Advisers network poll Bitcoin market crash ‘inevitable’ OMFIF networks fail to back the controversial currency
‘Will the bitcoin market crash exponentially and if so, when?’ The poll for this month focuses on the future of bitcoin. Participants were asked: ‘Will the bitcoin market crash exponentially and if so, when?’ 22% 29% Of those who responded to the advisers network poll, 78% agree there will be an exponential crash compared to 22% who say that prices would fl uctuate. However, within the timeframe of the poll a major drop in Fluctuate bitcoin price occurred. Subsequent answers took this on board, with many suggesting the crash had already begun. Crash The question was also opened up to OMFIF’s Twitter network for the fi rst time and respondents came to a similar conclusion, 71% to 29%, that the market would fail, though this poll closed before bitcoin’s signifi cant decline 71% 78% in value. The following statements were received as part of the January poll, conducted between 10-22 January, with responses from 18 advisory network Twitter Advisers network members and 38 Twitter users.
‘The bitcoin crash is already underway as it does not ‘I really think a crash is inevitable have real values justifying its existence, due to the as bitcoin’s value is not based on currency being just a absolutely brilliant product of imagination, along with the measures being taken in anything fundamental.’ several jurisdictions forbidding its use.’ Jukka Pihlman, Standard Chartered José Tavares Moreira, formerly Banco de Portugal ‘We are already witnessing a burst in the bitcoin ‘No it will not fall exponentially, at least not this year. bubble in 2018. There is need of offi cial recognition With apologies to Keynes “The price of bitcoin can of this cryptocurrency phenomenon in order to have stay irrational longer than you can stay solvent.’ more market stability and confi dence from investors.’ Paul Newton, London & Oxford Capital Markets Hemraz Jankee, formerly Bank of Mauritius
‘The bitcoin market is a classic ‘The market should crash within the next two years. It is a shame the monetary, regulatory and political sectors case of a bubble and will let these speculative assets freely undermine the overall therefore crash soon.’ market economy.’ Hans Blommestein, Vivid Economics Korkmaz Ilkorur, Credit Europe
March’s question: What are your expectations for the European Central Bank president and vice-president candidates when Mario Draghi and Vítor Constâncio step down? a. Both women b. A man and a woman c. Both men
34 BULLETIN FEBRUARY 2018 OMFIF.ORG
BTN_02.18_034_POLL.indd 34 01/02/2018 14:03 Africa awaits
Asset and risk management forum
OMFIF, the South African Reserve Bank and the World Bank Treasury’s Reserves Advisory and Management Program (RAMP), convene public sector asset managers, as well as select private market participants, over two days. The orum focuses on governance macroeconomic and fi nancial develo ments as ell as the challenges and opportunities for public sector investment managers. The aim is to discuss best practices and offer an avenue for an interactive dialogue.
Venue: South Africa Reserve Bank, Pretoria Date: 14-15 June 2018 or more information or to register your interest please visit omfi f.org meetings
BTN_02.18_SARBmeeting_Ad.indd 35 01/02/2018 12:25 Untitled-3DZ.indd 1 1 09/01/201815/12/2017 14:3511:39