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Saturday, August 10, 2019

Weekend reading links

1. Arguably the story of the week has been the Renminbi breaching the psychologically important 7 per dollar mark, for the first time since 2008. The decision to not intervene to prop up the currency, which has been over-valued for a long time now, is also a retaliation to President Trump's latest announcement slapping tariffs on another $300 bn worth Chinese exports. Further, with economic activity slowing down, the weaker currency will boost Chinese export competitiveness.

Incidentally, the Government also issued an order to state-owned companies to stop Chinese purchases of US agricultural products.

2. More from FT on the ongoing turmoil in the world of auditing, one of the most important watchdogs of capitalism. Sample this defence by Grant Thornton boss David Dunckley when probed by UK MPs on the firm's audit of scandal-hit cafe chain Patisserie Valerie,
“We are not giving a statement that the accounts are correct... We are saying they are reasonable... We are not looking for fraud.”
And about the egregious accounting misdemeanours of KPMG,
Accounting rules do not stop auditors signing off on numbers divorced from reality. They allowed Carillion to treat £1.6bn of goodwill from acquisitions as permanent assets — 35 per cent of its total — and not write down any of the value despite signs the businesses were struggling. One, Eaga, had its goodwill valued at an unchanged £329m even as losses mounted and it was only kept solvent by Carillion’s financial support. Similarly, accounting rules allowed too much contract revenue to be recognised, profit from partnerships and joint ventures to be consolidated as the company’s own and early payment facilities to inflate cash inflows while obscuring true levels of debt. Auditors’ roles still do not include challenging a company more strongly on its ability to continue operating — new proposals are only being worked on. Nor are auditors’ roles any more separate from their employers’ consulting arms, which can earn big fees from audit clients — again, removing these conflicts are still only proposals.
3. What if there is a trade-off between the effectiveness of the roll-out of 5G spectrum and the government's revenues maximisation policy from spectrum auctions? FT points to a very interesting angle to the global 5G race - cost of ownership of spectrum.
Chinese operators have picked them up for free — part of Beijing’s attempt to have a national rollout of 5G. Yet in parts of Europe recent auctions have been so expensive that at least one company has had to cut shareholder dividends. In the US — where President Donald Trump has declared that “the race to 5G is a race that America must win” — spectrum licences are being sold at historically low prices... For the telecoms operators the licences are the “ticket to ride” — access to the infrastructure that will be critical to their future success, even existence. For governments they are no less important yet some cash-strapped administrations have been sending out mixed signals over how to strike a balance between raising billions from a sector already straining to reduce costs while stimulating investment in the rapid deployment of 5G services... China granted its spectrum licences to the country’s telecoms networks in June rather than selling them off. The US then unveiled its biggest ever sale of spectrum in July boasting of a plan to auction off, by the end of the year, more airwaves than the country’s combined mobile industry currently employs. It has set the bidding for some of the very high frequency bandwidth at a value of one 10th of a cent per megahertz per capita making those airwaves some of the cheapest ever sold.
This has strong resonance in India where telecom operators are struggling to make investments on the face for an ultra-competitive market coupled with exorbitant prices paid for spectrum ownership. But it is unlikely to stop the government in India,
Other governments see spectrum — the airwaves used to carry mobile phone and other electromagnetic signals — as a cash cow. India’s telecoms regulator has just proposed selling blocks of spectrum for 5G at a price that is 40 per cent above what was charged in other Asian markets. Auctions in Italy and Germany have raised huge sums. Vodafone was forced to cut its dividend for the first time in its history following the German sale, amid industry warnings that the more they spend on spectrum, the less they have to spend on building the network via new masts, servers and base stations.
For a country whose telecoms sector is struggling, an expensive 5G spectrum auction can be one too far. But will the government, equally struggling to balance the fisc, realise this and exhibit some temperance?

4. Eswar Prasad has a very good article which summarises the costs of currency wars. For the US, it is hard to imagine any scenario where the US Dollar would end up depreciating,
The US has shown little interest in any fine distinctions between market-driven currency depreciations versus targeted policy-driven devaluations, viewing all currency depreciations relative to the dollar as hostile economic acts. A currency war would do little to boost US growth prospects. It is much harder for the US to push down the value of the dollar, ironically because of the currency’s dominant presence in global financial markets. It would be difficult to engage in unilateral intervention on a scale sufficiently large materially to affect the dollar’s value against other major currencies — especially if the Federal Reserve stayed on the sidelines in such an endeavour. Besides, such a move would incite a broader currency war, with other countries stepping up their own retaliatory intervention. The resulting turmoil in financial markets could actually firm up the dollar’s value if investors turn to it for safety.
5. Daron Acemoglu has the best summary of the case against UBI that I have read,
UBI, which is parachuted from above as a way of placating the discontented masses. It neither empowers nor even consults the people it aims to help. (Do workers who have lost their middle-class jobs want government transfers or an opportunity to get another job?) As such, UBI proposals have all the hallmarks of the “bread and circuses” used by the Roman and Byzantine Empires – handouts to defuse discontent and mollify the masses, rather than providing them with economic opportunities and political agency. By contrast, the modern social welfare state that has served developed countries so well was not handed down by tycoons and politicians. It aimed to provide both social insurance and opportunities to people. And it was the result of democratic politics. Ordinary people made demands, complained, protested, and got involved in policymaking, and the political system responded. The founding document of the British welfare state, the World War II-era Beveridge Report, was as much a response to political demands as to economic hardship. It sought to protect the disadvantaged and create opportunities, while encouraging civic engagement.
The whole argument in favour of ideas like UBI and (certain forms of) direct cash transfers is lazy, and borne out of ignorance, a naive belief in the value of efficiency over other considerations, and lack of any understanding of how the real world works. 

6. FT has this on rising elderly bankruptcy in the US,
The elderly are far more visible in US bankruptcy courts these days than in previous generations. Baby boomers aged 65 and older are racking up far higher levels of debt than their parents, who were raised during the Great Depression, and a growing minority are finding themselves tipping over from desperate financial trouble into bankruptcy. The culprits are vanishing pensions, soaring healthcare costs and tens of thousands of dollars in unpaid student loans for themselves, their children and even their grandchildren... In 1991, over-65s made up only 2 per cent of bankruptcy filers, but by 2016 that had risen to more than 12 per cent... Over the same period, elders grew as a percentage of the US adult population too, but only from 17 per cent to 19.3 per cent... In 1989, only one in five Americans aged 75 or older were in debt; by 2016, almost half were, according to the most recent US Federal Reserve survey of consumer finances.
7. Finally, Noah Smith on how the rules of the game can be tweaked to bring greater role for workers in wage setting. Proposals include multi-employer or sectoral wage bargaining, wage councils or wage boards, German-style industry and regional level collective bargaining through worker's councils etc. 

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