The merits of inflation as a solution to the rich world’s problems are easily overstated

IT HAS long been considered a scourge, an obstacle to investment and a tax on the thrifty. It seems strange, then, that inflation is now touted as a solution to the rich world’s economic troubles. At first sight the case seems compelling. If central banks had a higher target for inflation, that would allow for bigger cuts in real interest rates in a recession. Faster inflation makes it easier to restore cost-competitiveness in depressed industries and regions. And it would help reduce the private and public debt burdens that weigh on the rich world’s economies. In practice, however, allowing prices to rise more quickly has costs as well as benefits.

The orthodoxy on inflation is certainly shifting. A recent IMF paper* co-authored by the fund’s chief economist suggests that very low inflation may do more harm than good. Empirical research is far clearer about the harmful effects on output once inflation is in double digits. So a 4% inflation target might be better than a goal of 2% as it would allow for monetary policy to respond more aggressively to economic “shocks”. If the expected inflation rate rose by a notch or two, wages and interest rates would shift up to match it. The higher rates required in normal times would create the space for bigger cuts during slumps. ...

Beijing signals a crackdown on borrowing by local governments

ENDLESS arcane pronouncements spew forth from China’s bureaucracies. But some matter much more than others. In recent weeks a number of the country’s senior leaders and regulators have signalled an end to the practice of local governments extending guarantees on loans taken out by their special financing entities. That could spell big trouble for Chinese banks.

The comments have focused attention on research done by Victor Shih, a professor of Northwestern University in America, into China’s local investment companies. These financing vehicles allow municipalities to circumvent central-government restrictions on direct borrowing. As many as 8,000 of these investment companies may exist, estimates Mr Shih, whose work draws on regulatory filings and various government announcements. ...

A financial system in suspense

THAT old Spanish stereotype of putting things off until manana still applies today. For nearly two years bankers have been talking about the need to restructure a bloated financial system, particularly the country’s 45 unlisted savings banks, the cajas de ahorros. About half of the cajas, which are controlled by local politicians, have announced their intention to merge, hoping to tap into the €99 billion ($135 billion) Fund for Orderly Bank Restructuring (FROB), which was created in June.

Regional politicians, reluctant to give away their piggy banks, are prepared to sanction some internal mergers. Catalonia, for example, has allowed some consolidation, as has Andalusia. Progress is slower elsewhere. Caixanova, a savings bank in Galicia, is resisting a union with Caixa Galicia, a rival. The sector has also been waiting for Spain’s second-largest savings bank, Caja Madrid, to make a move. Until recently, it was paralysed by a political power struggle at the top. ...

Temporary work may dim future employment prospects

IS ANY job better than no job? Some research has suggested that unemployed workers should take up any job they can get, including temporary work, as a bridge to higher-paying employment. But what may be good for the economy, reducing the drain on government coffers, may be bad for the individuals concerned. In a forthcoming paper in the American Economic Journal: Applied Economics, David Autor of the Massachusetts Institute of Technology and Susan Houseman of the W.E. Upjohn Institute for Employment Research in Michigan show that taking up temporary work after a spell of unemployment can hurt future earnings.

The authors looked at data from Detroit’s “Work First” welfare-to-work initiative, which uses placement agencies to put low-skilled unemployed people into paid jobs. They then assessed participants’ earnings and job tenure before and after their involvement in the programme. ...

The administrative costs per $1m lent by the World Bank and the International Development Bank during 2009 were $20,600 and $15,314 respectively, not $19,000 and $26,833 (“Cap in hand”, March 6th). And despite "general consensus", shareholders of the European Bank for Reconstruction and Development do not vote on its capital-increase plan until May. Sorry.

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AIG reluctantly hands its crown as America’s global life insurer to MetLife

ANOTHER week, another opportunity for AIG’s rivals to expand at the American insurer’s expense. Days after sealing a $35.5 billion deal for its Asian life-insurance operations with Britain’s Prudential, the firm, which is being dismembered to recoup bail-out costs, agreed on March 8th to sell another crown jewel, Alico. This will propel New York-based MetLife, which is paying $15.5 billion, into the industry’s global elite. Although it is the biggest life insurer in America, where its Snoopy mascot is ubiquitous, it has been tentative abroad. Alico will give it a presence in 64 countries, up from 17 now, taking its non-American revenue from 15% of the total to 40%.

The biggest leap will be in Japan, the world’s second-largest life market, in which Alico is a top-tier competitor. But MetLife’s boss, Robert Henrikson (who took over in 2006 from Robert Benmosche, now AIG’s chief executive), also has his eye on the faster-growing markets in eastern Europe, the Middle East and Latin America that make up almost a quarter of Alico’s business. Another attraction is its distribution network: 60,000 agents, brokers and other local middlemen. ...

Microfinance focuses on lending. Now the industry is turning to deposits

IT IS hard for people in the rich world to imagine what it is like to live on $2 a day. But for those who do, the problem is often not just a low income, but an unpredictable one. Living on $2 a day frequently means living for ten days on $20 earned on a single day. The task of smoothing consumption is made more complicated if there is nowhere to store money safely. In an emergency, richer people might choose between dipping into their savings and borrowing. The choice for the great mass of the unbanked in the developing world is limited to whom to borrow from, often at great cost.

That they can borrow at all is partly due to the rapid growth of microfinance, which specialises in lending small amounts to poor people. Several big microfinance institutions (MFIs) also offer savings accounts: Grameen Bank in Bangladesh is a prominent example. But the industry remains dominated by credit, and the ability to save through an MFI is often linked to customers’ willingness to borrow from it. Of 166 MFIs surveyed in 2009 by the Microfinance Information Exchange, a think-tank, all offered credit but only 27% offered savings products. Advocates of a greater variety of financial services for the poor argue for more balance. ...

Insuring crops with a mobile phone

ONE of the things holding back agriculture in developing countries is the unwillingness of farmers with small plots of land to invest in better seed and fertiliser. Only half of Kenyan farmers buy improved seed or spend money on other inputs. Many use poor-quality seed kept from previous harvests. That is understandable when drought or deluge can destroy their crop, but it has the effect of reducing yields. A new microinsurance scheme promises to help.

Kilimo Salama, which in Kiswahili means “safe farming”, uses a combination of mobile phones and 30 automated solar-powered weather stations to provide crop insurance. It has been set up by UAP Insurance of Kenya, Safaricom, Kenya’s biggest mobile-network operator, and the Syngenta Foundation for Sustainable Agriculture, part of a big Swiss agribusiness group. After a successful trial with 200 farmers last year, Kilimo Salama has just been expanded in the hope of attracting 5,000 farmers in western and central Kenya this year. ...

Eurocrats offer up half-baked ideas to prevent a future sovereign-debt scare

NOW that Greece has given in to pressure from its peers for a more austere budget, the euro zone’s policy brass suddenly seems more sympathetic towards its most troubled member. On reflection, perhaps the fault with Greece’s parlous public finances lay not just with its budgetary profligacy but also elsewhere: in the absence of a central euro-zone authority for helping out cash-strapped countries; or with the credit-rating agencies that had unhelpfully downgraded Greek government bonds; or with the amoral speculators who had bet against those bonds and helped drive up borrowing costs.

It was mildly surprising that some of the messages of support came from Germany, where fiscal indiscipline is least tolerated. On March 7th the finance minister, Wolfgang Schauble, floated the idea of a European Monetary Fund (EMF) to act as a lender of last resort to euro-zone countries that could not raise funds in capital markets on tolerable terms. He offered few details about how an EMF would be financed or how it would operate. It would not be a “competitor” to the IMF, based in Washington, DC, though it would seek to police the fiscal policies of lax member countries. ...

The alarming future for Japan's finances

CASSANDRA’S curse was that her warnings would never be believed. Doom-mongers in the Japanese government-bond market have suffered a milder fate: they were just far, far too early.

The trade has seemed obvious for years. Japan has run continuous fiscal deficits and seen its debt downgraded by the ratings agencies. With its bonds yielding between 1-2%, the downside risk of a bearish bet has been limited while the upside potential has looked huge. ...