tag:theconversation.com,2011:/us/topics/financial-stability-11843/articlesFinancial stability – The Conversation2023-10-12T14:48:26Ztag:theconversation.com,2011:article/2153102023-10-12T14:48:26Z2023-10-12T14:48:26ZBank CEOs set the tone from the top when it comes to risky behaviour — new research<figure><img src="https://images.theconversation.com/files/553295/original/file-20231011-21-2myd73.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3840%2C2160&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/happy-young-charismatic-coach-business-woman-1636779892">KeyStock/Shutterstock</a></span></figcaption></figure><p>Metro Bank positioned itself as “<a href="https://www.metrobankonline.co.uk/about-us/">a fresh start to banking</a>” when it launched in the wake of the 2008 global financial crisis. It was set up in 2010 as a challenger to the “big five” banks dominating the UK market post-crisis: HSBC, NatWest, Lloyds, Barclays and Santander.</p>
<p>But more recently, Metro Bank has <a href="https://otp.tools.investis.com/clients/uk/metro_bank_plc/rns/regulatory-story.aspx?cid=1352&newsid=1720003">caused concern</a> among its investors for not meeting regulatory requirements on its capital levels. These rules dictate the amount of capital the bank must hold based on the riskiness of its assets, so that it can still operate but also meet any customer withdrawal requests. The riskier the bank’s activities, the more capital it must have on hand. </p>
<p>Regulators use such rules to ensure that banks are keeping people’s money safe. Banks can also help by creating a culture that doesn’t value excessive risk-taking. Our <a href="https://www.sciencedirect.com/science/article/pii/S0165176523003981?via%3Dihub#bib0018">new research</a> shows the extent to which top executives at banks set the tone on risk-taking. The way CEOs and even CFOs talk about risk can offer insights into a bank’s likely financial stability. A more relaxed attitude could be a valuable early warning sign of potential bank distress for regulators.</p>
<p>Metro Bank is currently operating normally and there is no reason to think its customer deposits are in danger. It has secured new financing, and plans to open 11 more branches. But <a href="https://www.fca.org.uk/news/press-releases/fca-fines-metro-bank-plc-decision-notices-two-former-executives">ongoing struggles</a> with regulatory capital levels means its <a href="https://www.fitchratings.com/research/banks/fitch-places-metro-bank-holdings-on-rwn-due-to-capital-constraints-04-10-2023">business model is still being questioned</a> by analysts. </p>
<p><a href="https://en.wikipedia.org/wiki/Challenger_bank">Challenger banks</a> like Metro are often <a href="https://www.ft.com/content/a45d50de-f6a1-11e9-9ef3-eca8fc8f2d65">viewed as disadvantaged</a> because they need to keep more money on hand, compared with the UK’s big five. This adds to their costs.</p>
<p>The UK regulator recently rejected Metro Bank’s request to reduce its capital levels, triggering the latest concerns about its stability and causing it to seek more investor funding. The bank subsequently secured this funding, <a href="https://twitter.com/Metro_Bank/status/1711279104308199710">calling it</a> “a new chapter … facilitating the delivery of continued profitable growth over the coming years”.</p>
<h2>Why the regulator won’t relax requirements</h2>
<p>Regulators must maintain a <a href="https://www.bankofengland.co.uk/explainers/what-is-financial-stability">stable financial system</a> that can provide essential services to households and businesses in both good and bad times. Banks are at the heart of this financial system. In the 1980s and 1990s, <a href="https://www.theguardian.com/business/2011/oct/09/big-bang-1986-city-deregulation-boom-bust">deregulation</a> destabilised the industry and led to the 2008 global financial crisis. Many people <a href="https://www.theguardian.com/business/2008/oct/15/unemploymentdata-recession">lost their jobs</a> and homes as a result, while <a href="https://www.bankofengland.co.uk/explainers/is-the-global-financial-system-any-safer-than-before">US$15 trillion (£12.2 trillion) of taxpayers’ money</a> was spent globally to prop up the banking sector.</p>
<p>Banks were largely blamed for the <a href="https://www.aeaweb.org/articles?id=10.1257/aer.99.2.606">reckless risk-taking and careless lending</a> that caused the crisis. But regulators also failed to detect it. </p>
<p>Policymakers around the world introduced extensive reforms to banking and financial regulation after 2008, to protect financial stability and avoid a repeat of this economic catastrophe. This explains the current tough stance by regulators towards relaxing rules for organisations such as Metro Bank.</p>
<p>UK financial authorities have even recently <a href="https://www.telegraph.co.uk/business/2022/12/18/bank-england-hits-back-rishi-sunaks-plan-liberate-city-london/">called out</a> UK government plans to ease financial regulations under the <a href="https://www.aeaweb.org/articles?id=10.1257/aer.99.2.606">Edinburgh Reforms</a> and to remove the bankers’ bonus cap, in case it encourages more risk-taking by banks.</p>
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Read more:
<a href="https://theconversation.com/bankers-bonus-cap-why-scrapping-it-could-hurt-the-uk-economy-190811">Bankers bonus cap: why scrapping it could hurt the UK economy</a>
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<h2>Recent bank failures: a stark reminder</h2>
<p>Regulators, as well as financial market participants, also remain vigilant after the <a href="https://www.theguardian.com/world/2023/mar/17/credit-suisse-silicon-valley-bank">unexpected failure of a number of banks</a> earlier this year. In particular, the collapse of Silicon Valley Bank (SVB) in the US was <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/svb-credit-suisse-turmoil-poses-bank-run-challenge-for-european-regulators-75024480">attributed to poor risk management</a>. It fuelled fears about global financial stability and the possibility of yet another devastating crisis.</p>
<p>However, regulation alone is not enough to mitigate excessively risky behaviour. The attitude to risk that runs through a bank – its risk culture – also matters.</p>
<p>A company’s <a href="https://www.bankingsupervision.europa.eu/press/publications/newsletter/2023/html/ssm.nl230215_3.en.html#:%7E:text=Risk%20culture%20is%20a%20set,on%20the%20risks%20they%20take.">risk culture</a> comprises a set of values, attitudes and behaviour related to the awareness, management and control of risks. It shapes decisions about things like who to lend to, what to invest in, and how to manage the risks that arise as a result. </p>
<p>Most banks’ business models rely on balancing risk management with profit maximisation in this way. But it needs to be done responsibly: signs of poor risk culture, such as <a href="https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2021/organisational-culture-and-bank-risk.pdf?la=en&hash=81DD3E865BC0159475FD10A78AA2293F0379FB8E">excessive risk taking</a> or misconduct, are red flags to regulators and investors. </p>
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<img alt="Image of Wall Street Journal homepage with headline about SVB failure and image of US treasury secretary Janet Yellen." src="https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Silicon Valley Bank collapsed in March 2023, the second-largest bank failure in US history.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/march-10-2023-silicon-valley-bank-2274268829">Domenico Fornas/Shutterstock</a></span>
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<p>But it’s difficult for outsiders, even regulators, to observe and measure a bank’s risk culture. So, our <a href="https://www.sciencedirect.com/science/article/pii/S0165176523003981?via%3Dihub#bib0018">recent study</a> aimed to quantify the risk culture of 160 US banks, including some of the country’s largest. We did this by analysing the text of conference calls on which their CEOs answered questions about the business from analysts, investors and the media. This allowed us to capture their unscripted views and behaviour when these bank CEOs were put on the spot.</p>
<p>We used a machine learning algorithm to construct a dictionary of words and phrases associated with <a href="https://www.sciencedirect.com/science/article/pii/S0377221719301936#sec0002">seven different risk culture dimensions</a>, including “risk strategy” and “regulatory requirements”. We used another algorithm to assess whether these phrases were being used in a positive or negative way. </p>
<p>Our analysis showed that words and phrases associated with the “regulatory requirements” risk culture dimension, for example, were mentioned the least by CEOs prior to and during the global financial crisis. Unsurprisingly, use of the term picked up in its aftermath, as CEOs had to explain how tightening banking regulations were affecting their businesses. </p>
<p>By calculating the number of positive and negative occurrences of each phrase, we were able to create a measure of CEO attitudes for each risk culture dimension. We found that a weaker risk culture – characterised by more negative mentions of these phrases – indicated a greater probability of bank insolvency as a result of not having enough capital.</p>
<p>More worryingly, we found similarities in attitudes to risk between collapsed US banks SVB and <a href="https://finance.yahoo.com/news/latest-banking-crisis-failures-silicon-133525079.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuYmluZy5jb20v&guce_referrer_sig=AQAAADejPCXiax-rs9nNOkrxJsrN71CJ7V381zRYjTDy9eYNcPJ8Mq9HnyyU0jjZKlFddz7olRknKwKo7GWAPh6LeLUFdxmWrNkEElEVs-Qz42kYJvuXNTr4u-sy0cXQsGxjHHQnEgn4N8MWDjKIV9un7wBDx29mkaksHbhsfN-3nuvH">First Republic</a>, and other US banks that are still operating today. </p>
<p>Our research indicates that a strong risk culture in banking starts with the right tone from the top. Executives should be aware of their role model status when making decisions and talking about risk, both within their companies and to the public. Their attitudes cascade down to every other level and, if they are serious about managing risk, this could help maintain financial stability not only of their own bank, but the financial sector as a whole.</p><img src="https://counter.theconversation.com/content/215310/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Our study shows the way bank bosses talk about risk can negatively affect financial stability.Alper Kara, Professor of Banking and Finance, Brunel University LondonArtur Semeyutin, Senior Lecturer in Economics, University of HuddersfieldSaid Kaawach, Lecturer in Economics and Finance, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2148612023-10-10T14:53:23Z2023-10-10T14:53:23ZBattling to make ends meet? Financial planning expert offers 5 tips on how to build your budget<p>Every day seems to bring new headlines about rising costs. <a href="https://www.news24.com/news24/africa/news/nigerias-big-unions-call-indefinite-strike-over-fuel-prices-and-the-cost-of-living-20230926">In Nigeria</a>, unions are threatening to strike amid soaring fuel prices; the country’s inflation rate <a href="https://www.cbn.gov.ng/rates/inflrates.asp">hit 25%</a> in August. The amount it costs to fill a food basket in South Africa <a href="https://pmbejd.org.za/wp-content/uploads/2023/09/PMBEJD_Key-Data_September-2023_27092023.pdf">keeps climbing</a>. Ghanaians <a href="https://www.reuters.com/world/africa/multi-day-protests-over-economic-crisis-grip-ghanas-capital-2023-09-23/">took to the streets</a> of Accra in late September to protest about the cost of living.</p>
<p>A <a href="https://www2.deloitte.com/us/en/insights/industry/retail-distribution/consumer-behavior-trends-state-of-the-consumer-tracker.html">recent study by the audit and consulting firm Deloitte</a> found that 75% of South Africans were concerned that the prices for everyday purchases would continue to increase, while 80% of consumers across all income groups expected the prices of groceries, household utilities and fuel to rise. </p>
<p>This stark reality means budgeting may be more necessary than ever.</p>
<p>If you don’t know how to create a budget, then you shouldn’t feel bad – most adults aren’t taught how to create one. And most people don’t budget, because they see it as restrictive or unsustainable. But it need not be: once you appreciate that a budget can work for you, it can be a financially empowering exercise. It’s a cornerstone of financial planning because it ensures you are living within your means and helps you remain in financial control.</p>
<p>As a financial planning academic, I focus in <a href="https://researchprofiles.canberra.edu.au/en/persons/bomikazi-zeka/publications/">my research</a> on improving financial wellbeing and promoting savings behaviours through interventions such as budgeting. Here are five guidelines for creating a budget.</p>
<h2>1. Apps vs spreadsheet</h2>
<p>A good place to start is to choose the format of how you’re going to budget. There are several <a href="https://www.sanlamreality.co.za/wealth-sense/setting-up-a-family-budget-that-works/">online templates</a> and apps you can use for budgeting. For instance, <a href="https://www.22seven.com/">22Seven</a> has gained popularity in South Africa due to its compatibility with several financial institutions, including the country’s big five banks. Similarly, <a href="https://www.the-star.co.ke/business/kenya/2021-01-25-budgeting-using-mint-app/">Mint</a> is a popular budgeting tool that is used in Kenya and Nigeria. </p>
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Read more:
<a href="https://theconversation.com/are-you-financially-literate-here-are-7-signs-youre-on-the-right-track-202331">Are you financially literate? Here are 7 signs you're on the right track</a>
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<p>If you prefer to put pen to paper, some online templates come with <a href="https://www.wonga.co.za/blog/free-budget-template">free printable budgets</a>. Creating your own <a href="https://create.microsoft.com/en-us/learn/articles/how-to-make-excel-budget">Excel spreadsheet</a> is an equally good approach. </p>
<p>What matters most is using a tool that you can commit to.</p>
<h2>2. Itemising your income and expenses</h2>
<p>A budget essentially shows how much you’re spending in relation to how much you’re earning. So once you have selected your budgeting tool, you need to fill in your income and itemise how much you’re spending on each expense in a month. A budget can be considered a cashflow statement because it allows you to track money coming in (income) and money going out (expenses). </p>
<p>If you are living within your means, your budget should indicate a surplus – more cash inflows than cash outflows. So budgeting provides an accurate account of your short-term financial position.</p>
<h2>3. A realistic account of expenses</h2>
<p>When you look at your financial statements, fill your expenses into your budget honestly and accurately. Don’t cheat! Since everyone’s financial situation is different, your budget will also be unique. </p>
<p>Even though there is no one-size-fits-all approach to budgeting, it should still consider all of your expenses (both regular and intermittent). A general rule of thumb is that if it’s deducted from your account then you should treat it as an expense. This includes payments for housing, medical insurance, fuel, dining out, credit card repayments and even bank fees.</p>
<h2>4. Save first, spend later</h2>
<p>Now you’ve seen how much you’re spending. Either it’s too much – and you can plan where to cut back – or you have savings at the end of the month.</p>
<p>When compiling your budget it’s important to demarcate how much will be in the form of savings. What’s more important is getting into the habit of saving before you spend instead of saving after spending. If you spend first then you’ve deprived yourself of the opportunity to save for a rainy day. </p>
<p>Furthermore, <a href="https://eprints.hud.ac.uk/id/eprint/10231/1/Microsoft_Word_-_submitted_version_3rd_June_201.pdf">research</a> has shown that getting into the habit of saving has a transgenerational effect: it can be considered a cultural value that is passed on from one generation to another. So think of saving as paying yourself first. Once you have done so, you won’t feel guilty for treating yourself because you’ve already done the financially responsible thing by putting your savings aside.</p>
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Read more:
<a href="https://theconversation.com/kids-and-money-five-ways-to-start-the-conversation-193632">Kids and money: five ways to start the conversation</a>
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<h2>5. Considering assets and liabilities</h2>
<p>Once you’ve become comfortable with consistently budgeting, you can take it up a notch by including your assets (everything you own with an economic value) and liabilities (everything you owe) to determine your overall financial position. </p>
<p>You can get a clearer picture of your overall financial wellbeing by compiling a list of all your assets, for example your savings and <a href="https://www.investopedia.com/terms/h/home_equity.asp">home equity</a>, in relation to liabilities (such as bank loans). Knowing your long-term financial position can indicate how financially resilient or vulnerable you are. In the event of a financial emergency, you will know which resources you can draw upon to meet an unexpected expense.</p>
<p>By creating a budget (and sticking to it), you can protect yourself and your household from financial shocks. Consider the alternative. Imagine you haven’t budgeted and set savings aside. If a financial emergency were to arise, your next best bet would be to borrow the funds you need. You’d have to come up with a plan to repay what you’d borrowed while also building your savings.</p>
<h2>A healthy habit</h2>
<p>Getting into the habit of budgeting isn’t easy, especially if you haven’t done it before or you’re intimidated by the process. But, as the expression goes, “a journey of a thousand miles begins with a single step”. Think of budgeting as taking a small but important step towards reclaiming control over your finances and improving your financial well-being.</p><img src="https://counter.theconversation.com/content/214861/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bomikazi Zeka does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Once you appreciate that a budget can work for you, it can be a financially empowering exercise.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2125692023-09-06T21:48:14Z2023-09-06T21:48:14ZThe price of love: Why millennials and Gen Zs are running up major dating debt<figure><img src="https://images.theconversation.com/files/546762/original/file-20230906-40532-qq86zj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Are you looking for love in all the wrong places?</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/the-price-of-love-why-millennials-and-gen-zs-are-running-up-major-dating-debt" width="100%" height="400"></iframe>
<p><a href="https://nypost.com/2019/09/12/heres-how-much-money-the-average-american-spends-on-dating/">The average American invests US$120,000 throughout their lifetime in pursuit of love</a>, spending significant money on romantic dinners, movie outings and thoughtful gifts, not to mention personal grooming and cosmetic products. </p>
<p>As a result, according to <a href="https://www.lendingtree.com/credit-cards/study/dating-money-inflation/">a survey by LendingTree</a>, 22 per cent of millennials and 19 per cent of Gen Z have begun to incur “dating debt.”</p>
<p>Another study by <a href="https://www.creditkarma.com/insights/i/dating-debt-young-adults-survey">Credit Karma</a> found that 29 per cent of people aged 18–34 have accrued debt for a date, with 21 per cent exceeding $500 in dating debt in a year. Reasons include accidental overspending (29 per cent), an attempt to impress dates (28 per cent) and seeking intimacy (19 per cent).</p>
<p>But another survey <a href="https://www.finder.com/unacceptable-partner-debt">by Finder</a> also reveals that 44 per cent of Gen Zs consider debt a romantic deal-breaker when considering a partner. </p>
<p>This highlights potential ties between accumulating <a href="https://doi.org/10.1111/j.1741-3729.2012.00715.x">dating-related debt and barriers to the chances of success</a> in forming meaningful romantic connections.</p>
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<img alt="A man sits on a picnic blanket and opens a bottle of champagne." src="https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=429&fit=crop&dpr=1 600w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=429&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=429&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=539&fit=crop&dpr=1 754w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=539&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/546426/original/file-20230905-25-1rh7hy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=539&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Luxury dates are leading to debt for millennials and Gen Zs.</span>
<span class="attribution"><span class="source">(Jelleke Vanooteghem/Unsplash)</span></span>
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<p>This conundrum is a problem for younger generations, where the pursuit of love and connection is intricately tied to an appetite for luxury, ultimately leading to debt accumulation. </p>
<p>The trend has implications for financial stability, emotional well-being and the very essence of modern relationships.</p>
<p>There are a few issues fuelling it, including the desire to signal status and the persuasive retail marketing of luxury as being synonymous with love, creating that false sense of connection between luxury and love.</p>
<h2>‘Costly signalling’</h2>
<p>Accumulating debt for romantic engagements has its roots in an innate human desire — namely, the urge to signal status. In a digital age where social media and online dating platforms are the norm, <a href="https://doi.org/10.1007/s11621-012-0108-7">standing out in a crowd has never been more challenging</a>, yet it’s also crucial.</p>
<p><a href="https://doi.org/10.1007/978-3-319-16999-6_3483-1">The “costly signalling” theory</a> may explain why such habits develop. It argues that humans and animals use resource-intensive or risky behaviours as genuine, hard-to-fake signals indicating their desirable traits and availability. </p>
<p>This is related to <a href="https://doi.org/10.4324/9780203936993">conspicuous consumption</a>, which is driven by a desire for status and the clear signalling of this status to onlookers. </p>
<p><a href="https://www.psychologytoday.com/ca/blog/after-service/202102/what-your-social-signals-reveal">Signalling status in relationships or social circles isn’t uncommon</a>, but it’s found a financial expression in younger generations. Young adults are increasingly associating luxury experiences and goods with a <a href="https://doi.org/10.1057/palgrave.bm.2540194">unique form of personal expression</a>. </p>
<p>Whether it’s a lavish dinner at a high-end restaurant or gifting a designer handbag, these actions become <a href="https://doi.org/10.1080/21639159.2022.2033132">markers of distinction and status</a>. While these acts add a layer of individuality to a relationship, they come with the risk of potential financial instability.</p>
<h2>Retail marketing</h2>
<p>Retailers often <a href="https://doi.org/10.1093/jcr/ucac034">employ strategic marketing tactics to link luxury with love</a>, capitalizing on the emotional connection between these two powerful concepts to entice consumers into purchasing high-end goods. </p>
<p>For instance, luxury brands often release limited-edition Valentine’s Day collections, adorned with romantic motifs and themes, ranging from heart-shaped jewellery to high-end designer fragrances. </p>
<p>Additionally, retailers leverage the allure of love in their advertisements. They often showcase couples exchanging luxury gifts in opulent settings, fostering an aspirational connection between luxury products and romantic ideals. </p>
<figure class="align-right ">
<img alt="A diamond engagement ring on a Tiffany blue background." src="https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=353&fit=crop&dpr=1 600w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=353&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=353&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=444&fit=crop&dpr=1 754w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=444&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/546439/original/file-20230905-19-g0bd2x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=444&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Tiffany ‘Believe in Love’ campaign featured links to engagement ring offerings.</span>
<span class="attribution"><span class="source">(Unsplash)</span></span>
</figcaption>
</figure>
<p>For example, <a href="https://www.tiffany.ca/engagement/love-stories/">Tiffany & Co. released a “Believe in Love”</a> campaign featuring stories of seven couples at different stages of their relationships, and how Tiffany has played a part in their love journey.</p>
<p>Retailers create an <a href="https://doi.org/10.1093/jcr/ucac034">ambience of indulgence and luxury</a>, presenting their offerings as tokens of affection and devotion. </p>
<p>Personalized engraving services on luxury items, such as monogrammed initials or special dates, further enhance the sentimentality and connection between the product and the act of gifting, convincing consumers to spend money on these high-end, emotionally charged offerings. </p>
<p>For example, Gucci’s “<a href="https://www.lofficielbaltic.com/en/fashion/apple-of-my-eye-gucci-s-apple-print-collection-comes-in-time-for-chinese-valentine-s-day">apple of my eye</a>” limited-edition collection shows two interlocking red letter Gs that are meant to signify romantic love.</p>
<p>These strategic marketing tactics linking luxury with love contribute to more debt by enticing consumers to overspend on high-end goods with premium price tags. They promote impulse buying through limited-edition collections, foster unrealistic desires through aspirational advertising, encourage additional spending on personalized services and compel people to prioritize romantic gestures over financial responsibility.</p>
<p>This ultimately leads to the accumulation of debt as consumers strive to express their love through emotionally charged purchases.</p>
<h2>False sense of connection</h2>
<p>But there seems to be an intriguing paradox when it comes to luxury goods and their ties to social relationships. </p>
<p>While luxury items can enhance someone’s social image and boost self-perception, <a href="https://doi.org/10.1108/JCM-09-2014-1161">people also tend to view themselves more positively when they possess or experience luxury — even though they often hold a less favourable view of others who do the same</a>. </p>
<p>This sheds light on a fascinating discrepancy in self-versus-other evaluations when it comes to luxury consumption. </p>
<p>In a dating context, a person boasting about the purchase of an expensive wine on a dinner date, for example, may over-estimate whether it will actually impress their date.</p>
<figure class="align-center ">
<img alt="A glass of white wine sits in front of a woman at a table in a restaurant." src="https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/546516/original/file-20230905-31392-5c4cul.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Ordering an expensive bottle of wine on a date isn’t necessarily impressive.</span>
<span class="attribution"><span class="source">(JP Valery/Unsplash)</span></span>
</figcaption>
</figure>
<p>Gift-givers often believe that more expensive gifts are more appreciated, assuming they convey greater thoughtfulness. But gift recipients don’t necessarily share this belief because they don’t consistently link gift price to their level of appreciation.</p>
<p><a href="https://doi.org/10.1016/j.jesp.2008.11.003">This suggests that gift-givers may not accurately predict what gifts will be meaningful to others</a>. And because they personally may connect expensive gifts with something meaningful, it may lead them to spend more, ultimately contributing to greater dating debt.</p>
<p>Interestingly, while it’s known that people use luxury items to signal their social status and earning capacity, the reactions to such gifts may be complex. Indeed, <a href="https://doi.org/10.1016/j.jesp.2019.103945">many people prioritize their independence and question the giver’s motives behind such gifts, fearing power imbalances and expectations</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/an-essential-piece-in-every-wardrobe-young-people-are-shopping-for-luxury-like-never-before-184536">'An essential piece in every wardrobe': Young people are shopping for luxury like never before</a>
</strong>
</em>
</p>
<hr>
<p>Instead, they may value personal connections over materialistic displays and be cautious in the early stages of a relationship. </p>
<p>Ultimately, open and honest communication about expectations is crucial for navigating these complexities, ensuring that gift-giving aligns with the relationship’s goals and mutual desires.</p>
<p>The concept of luxury often gets mixed up with our quest for love, creating a captivating but misleading link between the two. In the realm of romantic relationships, luxury goods or indulging in extravagant experiences can sometimes make us feel closer to our partners than we really are.</p>
<p>But the ties between luxury and love can be deceiving. While luxury can certainly add to the romance, it’s important for younger generations to see the difference between flashy things and the deep, lasting connections that bring us closer to love.</p><img src="https://counter.theconversation.com/content/212569/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Genuine love holds immeasurable value, yet discovering it can pose challenges — and come with a significant price tag.Omar H. Fares, Lecturer in the Ted Rogers School of Retail Management, Toronto Metropolitan UniversitySeung Hwan (Mark) Lee, Professor and Associate Dean of Engagement & Inclusion, Ted Rogers School of Management, Toronto Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1915872022-10-04T07:00:37Z2022-10-04T07:00:37ZA basic income grant for South Africa: more money in poor people’s pockets, but at a heavy cost<figure><img src="https://images.theconversation.com/files/487325/original/file-20220929-5657-so6h92.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A South African street vendor awaits customers. The country has some of the highest inequality in the world.</span> <span class="attribution"><span class="source">Mujahid Safodien/AFP via Getty Images</span></span></figcaption></figure><p>Analyses of the implications of extending income support measures in South Africa, including a basic income grant, have focused on one of three things: how much it will cost, calculations about how much revenue would need to be raised (but without assessing the ripple effects), and how it might affect the incomes of the rich and the poor.</p>
<p>Each of these provide important contributions. But they don’t address the dynamic and long-term implications of basic income support options on the country’s economy and its finances. What’s been missing is a modelling that compares – or tests – the impact of the different policy choices and their permutations and how these are funded and who benefits and who loses.</p>
<p>In <a href="https://econrsa.org/publications/technical-background-paper-the-macroeconomics-of-establishing-a-basic-income-grant-in-south-africa/">a recent paper</a> we attempt to do just that.</p>
<p>Our model allows for both positive and negative economic effects of higher direct transfers to households. The model thus captures feedback effects between government expenditure, taxation, household consumption, firm investment, debt, interest rates and economic growth.</p>
<p>On the one hand, our model shows that a basic income grant would decrease economic growth through three main channels: an increase in borrowing costs, an increase in taxes, and crowding-out of private and other forms of public spending.</p>
<p>On the other hand, it would have a positive impact on economic growth through one main channel: an increase in consumption by poor households. </p>
<p>Overall, the results suggest that the negative economic effects of an expansion in social grants would outweigh the positive. We conclude that, without structural reform of the economy and sustained economic growth, introducing additional permanent social transfers could threaten South Africa’s macroeconomic and fiscal stability.</p>
<h2>Three possibilities</h2>
<p>The paper considers three basic income grant scenarios. And it estimates different combinations of tax and debt funding. </p>
<p><strong>Scenario 1:</strong> This estimates tax and debt outcomes for different grant sizes without imposing any specific “funding policy”. The estimated model based on historical data guides the macro-fiscal dynamics. </p>
<p>The scenario estimates two possibilities for expanding social transfers:</p>
<ul>
<li><p>convert the R350 temporary social relief of distress grant into a permanent basic income grant</p></li>
<li><p>raise the grant in three possible ways – to the food poverty line (R624 in current prices); the lower bound poverty line (R890 in current prices); the upper bound estimate of the poverty line (R1,335 in current prices). </p></li>
</ul>
<p>Different eligibility criteria can also be inferred. These include considering four potential eligibility groups. They are:</p>
<ul>
<li><p>covering 8.3 million people</p></li>
<li><p>reaching the same as the current social relief of distress grant (10.5 million people) </p></li>
<li><p>a grant targeting all poor people (33 million).</p></li>
<li><p>a universal basic income grant to the whole population (60 million) </p></li>
</ul>
<p>Converting the R350 social relief of distress grant into a permanent basic income grant is estimated to require an increase in public debt of about 3 percentage points of GDP after five years. It would require a marginal increase in effective indirect taxes (mainly the value added tax rate, VAT), an increase in the effective personal income tax rate of about 2 percentage points, and an increase in the effective corporate income tax rate of about 0.25 percentage points. </p>
<p>The model shows that the consumption of poor households would rise. But it
predicts that there would be some job losses owing to the contractionary impact on investment and growth from higher debt and higher taxes.</p>
<p>Introducing a grant at the food poverty line (R624 per person in 2022 prices for an eligible population of 10.5 million at a cost of R79 billion) would lead to higher debt, VAT and personal income tax increases. Debt would rise by 7.7 percentage points of GDP, VAT by about half a percentage point and personal income tax by about 5.3 percentage points.</p>
<p>The model predicts job losses amounting to about 200,000. These
come about because of the fiscal impact of a permanent increase in spending (higher taxes and higher interest rates).</p>
<p>The contractionary effects operate through:</p>
<ul>
<li><p>higher debt, which leads to relatively higher borrowing costs and lower long-term economic growth </p></li>
<li><p>direct crowding-out of government expenditure in an attempt to maintain fiscal sustainability </p></li>
<li><p>crowding-out of private sector expenditure through higher taxes. </p></li>
</ul>
<p>These effects dominate any expansionary effects from higher transfers. </p>
<p>As a result, a large fiscal transfer of the type proposed by advocates of BIG is not estimated to boost economic growth. </p>
<p>The largest transfer expansion considered is a grant of R840 per month for 33 million households at a cost of R333 billion. This, the model suggests, would increase debt by 42 percentage points of GDP, requiring higher VAT of 3 percentage points and personal income tax to rise by 29 percentage points, essentially a doubling. </p>
<p>The contractionary impact on the economy would be estimated to lead to nearly a
million job losses.</p>
<p><strong>Scenario 2.</strong> This focuses on a basic income at the food poverty line financed by an increase in taxes (a “balanced budget” scenario). Debt would still rise marginally because the economy would slow. If the new grant was funded by VAT alone, this would require an increase of 7 percentage points in the rate – from 15% currently to 22%.</p>
<p>If funded from a combination of higher VAT and personal income tax, VAT would need to rise by 4 percentage points and personal income tax would rise by almost 3.5 percentage points. For the average taxpayer, who earns R370,000 and pays an effective rate of 21.3%, this would mean an increase in taxes from R79,000 per year to R91,500 per year. This, in turn, would lead to significant contraction in the economy, even though there would be some short-term employment gains from the large direct income effects from higher transfers.</p>
<p><strong>Scenario 3.</strong> This models a grant at the food poverty line financed by a combination of higher VAT but also higher economic growth. In this scenario, the assumption is that government simultaneously expands government investment by R60 billion and successfully undertakes structural reforms (such as removing constraints on electricity availability).</p>
<p>In this scenario, VAT would still need to rise (by 9 percentage points without structural reform, and 5 percentage points with reform) to fund the transfer expansion. </p>
<p>This scenario is estimated to lead to job gains but only because the structural reforms permanently raise long-run growth and, therefore, government revenue. </p>
<p>Moreover, by enhancing the economy’s productive capacity, government
investment would have long-run growth-enhancing effects.</p>
<h2>The take-away</h2>
<p>Our paper shows that the introduction of a basic income grant would require significant long-term tax increases and would likely lead to employment losses. We also show that without sustained higher economic growth, much higher social transfers could threaten fiscal sustainability. </p>
<p>Poverty, inequality and unemployment are three interdependent socio-economic challenges South African policymakers are seeking to address. Addressing this triple challenge is critical for the future of the country. But an unfunded expansion of the social transfer system could lead to even worse economic outcomes — the medicine should not be worse than the disease.</p><img src="https://counter.theconversation.com/content/191587/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hylton Hollander receives funding from Economic Research Southern Africa and has received funding from UNU-WIDER. He is affiliated with Stellenbosch University.</span></em></p><p class="fine-print"><em><span>Daan Steenkamp receives funding from ERSA. He is affiliated with Codera Analytics, and Stellenbosch University Economics Department and SARB as a research fellow.</span></em></p><p class="fine-print"><em><span>Roy Havemann receives funding from Economic Research South Africa. He is affiliated with Stellenbosch University and the Western Cape Government. </span></em></p>An unfunded expansion of the social transfer system could lead to even worse economic outcomes — the medicine should not be worse than the disease.Hylton Hollander, Senior Lecturer, Stellenbosch UniversityDaan Steenkamp, Research Associate, Stellenbosch UniversityRoy Havemann, Research Associate, Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1916192022-09-30T14:40:48Z2022-09-30T14:40:48ZWhy IMF comments on the UK economy spooked traders and investors<figure><img src="https://images.theconversation.com/files/487356/original/file-20220929-20-piv9cr.jpg?ixlib=rb-1.1.0&rect=25%2C44%2C4198%2C3191&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The International Monetary Fund recently issued an assessment of the UK economy.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/washington-dc-june-04-2018-pedestrian-1118510882">Bumble Dee / Shutterstock</a></span></figcaption></figure><p>Everyone from political pundits to people on the street have issued forth on the new UK government’s tax cut-laden growth plan recently. But it was a <a href="https://www.bbc.co.uk/news/business-63051702">rare public rebuke</a> from the International Monetary Fund (IMF) that really impacted financial markets. </p>
<p>Days after the government made its mini-budget announcement, the IMF <a href="https://www.imf.org/en/Countries/GBR">warned</a> that “large and untargeted fiscal packages” could work at “cross purposes” to monetary policy, referring to current efforts by central banks around the world to fight <a href="https://www.independent.co.uk/news/inflation-ap-frankfurt-germany-consumer-prices-b2182732.html">rampant inflation</a>. It also suggested the government should reevaluate its tax measures and provide more targeted energy crisis support at its next budget, currently scheduled for November 23.</p>
<p>Investors <a href="https://www.bbc.com/news/business-63051702">responded</a> by beating an even hastier exit from government bond markets and sending the pound plummeting. Within hours of the IMF statement, the Bank of England had <a href="https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation">announced a plan</a> to try to calm the markets.</p>
<p>The IMF’s decision to comment on UK tax policy was significant and clearly had an impact on traders and investors. And while the uninitiated may be blissfully unaware of the IMF’s existence, it has played a key role in supporting economies in trouble since the middle of the last century.</p>
<h2>Upholding global financial stability</h2>
<p>The IMF was established in 1944 at the Bretton Woods Conference, which sought to stabilise global finances after the second world war. Based in Washington D.C., it is an international organisation with <a href="https://www.imf.org/en/About#:%7E:text=The%20IMF%20works%20to%20achieve,of%20its%20190%20member%20countries">190 member states</a> – from Afghanistan to the UK and US, right through to Zimbabwe. </p>
<p>Its mandate is to uphold international financial stability, which it tries to do by monitoring global macroeconomic developments and providing governments with advice and <a href="https://www.imf.org/en/Capacity-Development">training</a> on economic policy management.</p>
<p>Most importantly, perhaps, the IMF frequently acts as a “lender of last resort” for its members. This means it provides countries in dire financial straits with much-needed money in the form of loans. </p>
<p>In return, these countries must agree to certain austerity measures. Depending on the situation, this can include <a href="https://link.springer.com/article/10.1007/s12116-020-09307-4">tax</a> hikes and drastic spending <a href="https://link.springer.com/article/10.1007/s11558-018-9332-5">cuts</a>, alongside other substantial economic <a href="https://www.sciencedirect.com/science/article/pii/S0176268018304890?casa_token=vaRXAJWeV_8AAAAA:fq4KXMT_Ixn395-cOXoVmjU1-CAMjWDhE8feQI15aPQ9Yf5A8TTDwh8FNDE_4LEFeifrzKPFYQ">reforms</a>. </p>
<p>In the last few years, governments in <a href="https://www.theguardian.com/commentisfree/2020/aug/29/ecuador-austerity-imf-disaster">Ecuador</a> and <a href="https://www.ft.com/content/fb64d5f8-ed3e-4b1f-aab4-d19927519efe">Pakistan</a>, among others, have hiked interest rates, cut back on public spending programmes, and reduced subsidies on household essentials such as fuel and food to meet the IMF’s performance criteria. As a result, the IMF has become one of the world’s most <a href="https://link.springer.com/book/10.1007/978-3-030-05761-9">controversial</a> organisations.</p>
<p>Since the performance criteria it uses are based on the IMF’s worldview, the question of whether its advice is adequate, proportionate, and effective is often subject to debate. </p>
<p>For IMF <a href="https://www.cfr.org/backgrounder/imf-worlds-controversial-financial-firefighter">advocates</a>, the sometimes draconian measures it mandates are necessary to restore investor confidence, boost economic growth and help countries become more competitive in the long run. As such, the IMF can work like a <a href="https://www.sciencedirect.com/science/article/pii/S0304387820300821?casa_token=abQpxiHlyekAAAAA:1QBvfEdtm_ZhO0t2KhsdaCU3erjauQ9fl0uWpGftd29wP-OwacF3iFee25y-KrLF-pkGQIJLMw">seal of approval</a> for a country’s policy plans, helping governments to shore up international confidence in their economies.</p>
<p>To its critics, the IMF has used its policy leverage to advance reforms that have increased <a href="https://link.springer.com/article/10.1007/s11558-020-09405-x">poverty</a> and <a href="https://www.sciencedirect.com/science/article/pii/S0049089X18300802?casa_token=xR1kGl8fdKwAAAAA:0XlgVsv5bRBP2HE-wnrguY6ao8oKKukenVFGWcn4XjndIAYIOWxfxssNZ-Sskkm-hoQygBC9MA">inequality</a>, leaving countries with deep social and political scars for years after accepting its help. For example, during the Ebola crisis in 2014-15, the IMF was <a href="https://www.sciencedirect.com/science/article/pii/S0277953616306876?casa_token=M_z016hRpy0AAAAA:sjHc_4R9Lw8sTBO5EIvewyUdjanCYI8dZ3go-krrjUGW0l5vMZ5NSPs7H1QCqoWrC8brLe5wOQ">criticised</a> for contributing to underfunded health systems that prevented effective government responses to the epidemic. </p>
<h2>Moving markets</h2>
<p>Regardless, as the recent case of the UK shows, an IMF verdict on government policy proposals can significantly <a href="https://www.tandfonline.com/doi/full/10.1080/09692290.2021.2004441">affect</a> financial markets. For countries with immediate financing needs – typically developing economies – restoring investor confidence with an IMF intervention can be <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/rego.12422">critical</a> to the successful resolution of financial crises. </p>
<p>But the IMF has also used its “magic shield” to rescue UK governments from global financial woes in the past. In fact, since the Fund’s creation, the UK has called upon the IMF 11 times. </p>
<p>Its last <a href="https://www.telegraph.co.uk/business/2020/05/13/1976-bailout-rescued-britains-failing-economy/">IMF rescue</a> happened in 1976 when stagflation and political stalemate forced the UK government to ask for a loan to halt speculative pressures on the British pound. The IMF provided not only financial relief, but also stability to a newly elected British administration by helping to calm market nerves about the UK economy.</p>
<p>This time, the IMF offered up its thoughts on the current economic situation in Britain, rather than being invited to intervene. But instead of curbing speculation about the UK’s financial viability, the statement had the opposite effect: markets panicked. </p>
<p>Mortgage lenders continued to <a href="https://www.theguardian.com/money/2022/sep/28/almost-1000-mortgage-deals-pulled-as-panic-grips-uk-housing-market">pull their offerings</a> and investors kept <a href="https://www.aljazeera.com/economy/2022/9/28/uk-stocks-sterling-slip-as-boe-intervenes-after-imf-slams-budget">unloading government bonds</a>, forcing up yields and the cost of government borrowing. Add the <a href="https://www.theguardian.com/uk-news/2022/sep/26/why-is-sterling-falling-and-what-does-it-mean-for-the-rest-of-the-world">plummeting British pound</a> in the mix and the current situation is in danger of becoming a textbook financial crisis.</p>
<p>But the IMF’s assessment is in line with <a href="https://markets.businessinsider.com/news/currencies/uk-pound-fall-tax-cut-budget-inflation-recession-paul-krugman-2022-9">international experts</a> and <a href="https://www.reuters.com/world/uk/moodys-warns-uk-unfunded-tax-cuts-are-credit-negative-2022-09-28/">ratings agencies</a> in doubting that tax cuts will help reignite UK economic growth. Instead, it argues that the cuts will further expand the budget deficit. </p>
<p>Without a sound fiscal plan, this will increase the need for new government debt. At a time of rampant inflation, deteriorating global economic conditions and rising interest rates – which affect the cost of financing for the government – such debts may become unsustainable for the UK. </p>
<p>Taking into account the reaction of market participants to the IMF’s statement, and that the Bank of England felt the need to intervene in the bond market afterwards, the IMF assessment seems to have carried weight. </p>
<p>Certainly, the UK in debt distress is the last thing the world needs. Many governments in developing and emerging markets are <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3951586">struggling</a> to keep their own economies afloat right now while awaiting financial relief from western banks and the IMF. </p>
<p>But the UK’s <a href="https://link.springer.com/article/10.1007/s11558-021-09446-w">central position in global financial markets</a> means any panic in the City of London can spread quickly to global financial markets. From this perspective, the IMF’s recent comments about the UK can be seen an attempt to prevent the world from slipping further into a winter of despair.</p><img src="https://counter.theconversation.com/content/191619/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Why the IMF has weighed into the UK’s current financial situation and what it means for markets.Bernhard Reinsberg, Reader in Politics, University of GlasgowAndreas Kern, Associate Teaching Professor, McCourt School of Public Policy, Georgetown UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1663572021-08-26T14:00:11Z2021-08-26T14:00:11ZIn conversation with South Africa’s central bank governor Lesetja Kganyago<figure><img src="https://images.theconversation.com/files/417768/original/file-20210825-19-1hgzepp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African Reserve Bank Governor Lesetja Kganyago</span> <span class="attribution"><span class="source">Andrew Caballero-Reynolds/AFP via Getty Images</span></span></figcaption></figure><p><em>The <a href="https://www.resbank.co.za/">South African Reserve Bank</a> is critical in formulating and implementing monetary policy and ensuring financial stability in the country. In this Wits Business School Leadership Dialogue, Professor Mills Soko <a href="https://www.wbs.ac.za/news/wbs-leadership-dialogues---from-village-boy-to-central-bank-governor-of-south-africa-.php">talks to</a> Reserve Bank Governor Lesetja Kganyago about the central bank and the issues that it grapples with on a day-to-day basis.</em></p>
<p><strong>Mills Soko: When you were appointed as governor one of the first things you did was to go to your village and you went on a shopping spree. What was the significance of this gesture?</strong></p>
<p><strong>Lesetja Kganyago</strong>: I felt it was an opportunity to teach people about the value of money. And I went back to the same shop, where every morning I would go and buy bread before going to school. There was an important inflation lesson because at the time – 1972 – a loaf of bread cost 10 cents. And I was saying to the villagers, today you cannot get a loaf of bread for 10 cents. You cannot even get it for R10 but the size of the bread is still the same. I said to them, therein lies the lesson of inflation, and that’s the reason why we have to keep inflation in check. I think the message got through to them.</p>
<p><strong>Mills Soko: Are there any differences between the mandate of the South African Reserve Bank and other central banks in the world?</strong></p>
<p><strong>Lesetja Kganyago</strong>: Central banks are creatures of their society. Society creates institutions and gives them a particular responsibility. The one thing common across central banks is that they have a responsibility for price stability.</p>
<p>The authors of our constitution were of the view that price stability is not an end in itself. It is a prerequisite for balanced and sustainable growth. South Africa’s constitution goes even further. It says the central bank can also do such other things, ordinarily done by other central banks, provided they are spelled out in national legislation.</p>
<p>The bank is also responsible for <a href="https://www.resbank.co.za/en/home/what-we-do/financial-stability">financial stability</a>, outlined in the Financial Sector Regulation Act, and the country’s <a href="https://www.resbank.co.za/en/home/what-we-do/payments-and-settlements">payments system</a>, enabled by the National Payment Systems Act.</p>
<p><strong>Mills Soko: Why is the focus limited to price stability? Why not focus on unemployment?</strong></p>
<p><strong>Lesetja Kganyago</strong>: We need balanced and sustainable growth. Price stability is a necessary condition for that growth. But it is by no way a sufficient condition.</p>
<p>It is important to distinguish between two important aspects. Monetary policy can only affect what is called cyclical growth. It will not affect structural growth. The monetary policy horizon is 12 to 18 months. So, monetary policy can only affect short run growth.</p>
<p>Job creation is an outcome of sustained economic growth. For that to happen, all players in the economy have to work together to achieve that.</p>
<p>I have a friend who explains this using the metaphor of the speed limit on the road. If you drive faster than the speed limit, the chances are that you could even lose your life or very soon have an appointment with the courts because you have broken the speed limit. If you drive below the speed limit, the chances are that you will reach your destination later than you would have otherwise.</p>
<p>Central banks are better able to influence cyclical or short-run growth.</p>
<p>The central bank is not going to create that higher growth rate that we require on its own. There is nothing monetary policy can do to produce the engineers that the country needs in order for its economy to grow. This is but one example.</p>
<p><strong>Mills Soko: How does the Monetary Policy Committee of the Bank function?</strong></p>
<p><strong>Lesetja Kganyago</strong>: It comprises the governor and the three deputy governors. They then add a staff member or two. Currently we have the chief economist, and they make up the <a href="https://www.resbank.co.za/en/home/what-we-do/monetary-policy/monetary-policy-committee">Monetary Policy Committee</a>.</p>
<p>The model that we use for forecasting, like all economics models, does have assumptions. And so the process starts with the Monetary Policy Committee members meeting with the Economic Research Department to agree on what the assumptions for the forecast are going to be. The two most important assumptions have to do with the price of oil and the exchange rate. They are important because they influence what is going to happen to inflation and what happens to economic growth.</p>
<p>Once we have signed off on the assumptions, the Bank’s modelling team puts together a forecast of what they think economic growth is going to be, what inflation is going to be.</p>
<p>The Monetary Policy Committee will then meet with a number of officials over three days. On the first day we assess the state of the economy, starting with the global economic outlook, moving to the domestic economy, and then we look at global and domestic financial markets respectively. On the second day, a smaller group debates the forecast.</p>
<p>On the third day, the chief economist will outline the options and gives the reasons why we should keep interest rates the same, why we should hike or cut them.</p>
<p>Each committee member will then say what their preference is.</p>
<p>If there is disagreement, we will debate and debate and debate some more. If we can’t convince each other, we go with the preferences of the majority of the committee. Once that is done, the chief economist drafts the <a href="https://www.resbank.co.za/en/home/publications/statements/mpc-statements">statement</a>, which is sent to all members. The committee then debates every single word, and where every comma should be. And by that time you realise that your English is more important than your economics.</p>
<p><strong>Mills Soko: Your thoughts on a cryptocurrency?</strong></p>
<p><strong>Lesetja Kganyago</strong>: It is a crypto asset. A currency must meet the following three criteria. One, it must be a generally acceptable medium of exchange. Secondly, it must be accepted as a store of value. And thirdly, it must be a unit of a account. A cryptocurrency is a store of value. It is a medium of exchange, but is not generally accepted. It’s only accepted by those who are participating in it.</p>
<p><a href="https://www.resbank.co.za/en/home/publications/publication-detail-pages/media-releases/2021/IFWG-CAR-Working-Group-position-paper-on-crypto-assets">Our approach</a> is that we are going to have to regulate this because people go and invest in cryptos and when they lose money, they ask what government has done about it.</p>
<p>Many of these crypto assets have got a technology called blockchain that underlies them. It can be useful in many other respects. And so, like many other central banks, we are experimenting with the blockchain technology.</p>
<p><strong>Mills Soko: Are there any plans to regulate financial technology (fintech) firms in the same way as banks are regulated?</strong></p>
<p><strong>Lesetja Kganyago:</strong> We don’t intend to regulate <a href="https://www.resbank.co.za/en/home/quick-links/fintech">fintech firms</a> like banks. But if it walks and quacks like a duck, then it is a duck. So, if you are a fintech firm, and you take deposits, we will regulate you like a deposit taker. If you are a fintech firm, and you do money transmission, we will regulate you like a payments provider. If you are a fintech firm, and you sell insurance policies, we will regulate you like an insurer.</p>
<p>Our regulatory mandate is to regulate activity.</p>
<p>It’s important that we understand the value that the fintech firms bring to the financial sector. We have created an innovation hub at the Reserve Bank in response to the growth in this area.</p>
<p><strong>Mills Soko: Central bank governors have been criticised for being a bunch of unelected bureaucrats who make decisions without being held accountable. What is your response?</strong></p>
<p><strong>Lesetja Kganyago</strong>: Central bankers are unelected. Yes, we are technocrats. Yes, we have got a lot of power. One <a href="https://ces.fas.harvard.edu/people/001970-paul-tucker">author</a> called it <a href="https://press.princeton.edu/books/paperback/9780691196305/unelected-power">unelected power</a>.</p>
<p>I don’t think that we should have elected central bankers. I think it will defeat the purpose because instead of focusing on the task at hand, they will focus on the next election.</p>
<p>Central banking was given to technocrats whose job is to make the difficult decisions. But across the globe the power of the technocrats is constrained. There are parameters. And within these, central bankers must act independently, without fear or favour. In our case, this is prescribed in the South African constitution.</p>
<p>The other side of preserving independence is accountability. We have got to be accountable for the decisions we make, and the way in which we make those decisions.</p>
<p>We <a href="https://www.resbank.co.za/en/home/publications/publication-detail-pages/presentations-to-parliament/presentations-to-parliament/2021/SARB-and-PA-2020-21-Annual-Report-Presentation-to-Parliament">account to parliament</a>. We also account to the public through our own public forums. The decisions we make are transparent and in the public domain, and thus open to public scrutiny.</p>
<p><em>This is an excerpt of the Wits Business School Leadership Dialogue. The full interview is available <a href="https://www.wbs.ac.za/news/wbs-leadership-dialogues---from-village-boy-to-central-bank-governor-of-south-africa-.php">here</a>.</em></p><img src="https://counter.theconversation.com/content/166357/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mills Soko does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Central banking was given to technocrats whose job is to make the difficult decisions. But there are parameters. And within these, central bankers must act independently, without fear or favour.Mills Soko, Professor: International Business & Strategy, Wits Business School, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1217352019-10-14T19:10:41Z2019-10-14T19:10:41ZLocation, location, location: why up to two-thirds of property investors may get it wrong<figure><img src="https://images.theconversation.com/files/296810/original/file-20191014-135529-1lrwlq7.jpg?ixlib=rb-1.1.0&rect=35%2C0%2C3950%2C1948&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">How likely is it that where you happen to live will always outperform every other location?</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The housing market is moving again. In the past month, national prices have <a href="https://www.corelogic.com.au/sites/default/files/2019-10/CoreLogic%20home%20value%20index%20Oct%2019%20FINAL.pdf">climbed 0.9%</a>.</p>
<p>What matters most to buyers (and especially to investors), along with price and value, is location.</p>
<p>The <a href="https://www.realestate.com.au/news/how-to-use-location-location-location-to-find-the-ideal-property-position/">cliché</a> suggests that in the long run that’s all that matters.</p>
<p>So it would be unfortunate if investors were getting it wrong. Our examination of proprietary data from a major bank covering 1.15 million residential mortgage applications over the six years between 2003 and 2009 suggests they might be.</p>
<p>Published this month in the Pacific-Basin Finance Journal under the title <a href="https://www.sciencedirect.com/science/article/pii/S0927538X19300630">Home advantage: the preference for local residential real estate investment</a>, it finds that more than two in every three Australians buying an investment property pick one close to where they live. </p>
<p>This means that someone who lives in Manly is far more likely to invest in Manly over anywhere else in Sydney or in Australia and so on.</p>
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Read more:
<a href="https://theconversation.com/three-charts-on-who-is-the-typical-investor-in-the-australian-property-market-81319">Three charts on: who is the typical investor in the Australian property market?</a>
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<p>There are several good reasons for this. First, the time, effort and travel costs are typically lower when investing in your local area than investing further away. </p>
<p>Second, property investors sometimes plan to self-manage without an agent, making proximity an advantage. The Real Estate Institute of Australia believes <a href="https://reia.asn.au/wp-content/uploads/2014/03/REIA_News_No17_Oct12_.pdf">1 in 5</a> investors self-manage.</p>
<p>And property investors might believe that they have a “home advantage” in knowing their location better than non-locals. </p>
<h2>Home bias means eggs in one basket</h2>
<p>Home bias is well-documented in other markets. For example, investors in the stock market are more likely to hold shares in Australian rather than international companies. </p>
<p>This is even the case for superannuation funds, who set aside a sizeable portion of their assets for investment in Australian stocks – far more than the Australian stock market would represent in a global stock portfolio.</p>
<p>It brings with it problems alongside the advantages of convenience and local knowledge. </p>
<p>Most investors hold only one investment property alongside their place of residence, making it one of the few chances they have to diversify away from the risk embodied in that suburb.</p>
<p>Instead, most double down on that investment. </p>
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Read more:
<a href="https://theconversation.com/the-game-of-homes-how-the-vested-interests-lie-about-negative-gearing-112222">The Game of Homes: how the vested interests lie about negative gearing</a>
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<p>If you are wondering whether this is unwise, or unwise enough to outweigh the advantages of local knowledge, consider this question: How likely is it that the location you happen to live in will always outperform every other location?</p>
<p>Interestingly we find that “sophisticated” investors are more likely to invest outside of the suburb in which they live than less sophisticated investors.</p>
<p>Investing non-locally is more likely among investors who own shares, already receive rental income, and work as professionals or in management positions.</p>
<h2>And a more fragile financial system</h2>
<p>The risks that doubling down on locations impose on unsophisticated investors extend to the financial system itself. </p>
<p>Higher geographical concentration of property investments increase the risk of defaults and foreclosures in a market downturn, amplifying economic cycles. </p>
<p>Australians have a lot of wealth tied up in property, and the property market in turn is <a href="https://www.rba.gov.au/publications/fsr/2014/sep/box-c.html">highly connected</a> to the financial system through bank lending. </p>
<p>Our study suggests there is an opportunity to strengthen Australia’s financial system by educating potential investors about risk. It could make them, and the Australian economy, better able to withstand downturns.</p><img src="https://counter.theconversation.com/content/121735/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>María Yanotti receives funding from the Australian Housing and Urban Research Institute.</span></em></p><p class="fine-print"><em><span>Danika Wright does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Investing where you’ve last invested isn’t bright. new research finds that two thirds of property investors do.María Yanotti, Lecturer of Economics and Finance Tasmanian School of Business & Economics, University of TasmaniaDanika Wright, Lecturer in Finance, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/967142018-05-16T04:13:15Z2018-05-16T04:13:15ZThe RBA’s shift to worrying about financial stability could be hurting Australian wages<p>The Reserve Bank of Australia (RBA) is making an explicit trade-off between inflation and financial stability concerns. And this could be weighing on Australians’ wages. </p>
<p>In the past, the RBA focused more on keeping inflation in check, the usual role of the central bank. But now the bank is playing more into concerns about financial stability risks in explaining why it is persistently undershooting the middle of its inflation target.</p>
<p>In the wake of the global financial crisis, the federal Treasurer and Reserve Bank governor signed an updated <a href="http://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-5-30092010.html">agreement</a> on what the bank should focus on in setting interest rates. This included a new section on financial stability. </p>
<p>That statement made clear that financial stability was to be pursued without compromising the RBA’s traditional focus on inflation.</p>
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<a href="https://theconversation.com/why-the-rba-needs-to-talk-about-future-interest-rate-policy-93292">Why the RBA needs to talk about future interest-rate policy</a>
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<p>The latest <a href="http://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html">agreement</a>, adopted when Philip Lowe became governor of the bank in 2016, means the bank can pursue the financial stability objective even at the expense of the inflation target, at least in the short-term.</p>
<p>While the RBA board has <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2018/2018-02-06.html">explained</a> its recent steady interest rate decisions partly on the basis of risks to financial stability, this sits uneasily with what the RBA otherwise has to say about underlying fundamentals of our economy. </p>
<p>It correctly blames trends in house prices and household debt on a lack of supply of housing, and not on excessive borrowing. These supply restrictions amplify the response of house prices to changes in demand for housing. RBA <a href="https://www.rba.gov.au/publications/rdp/2018/pdf/rdp2018-03.pdf">research</a> estimates that zoning alone adds 73% to the marginal cost of houses in Sydney.</p>
<p><a href="http://www.apra.gov.au/MediaReleases/Pages/14_30.aspx">Restrictions</a> on lending growth by the Australian Prudential Regulation Authority since the end of 2014 have been designed to give housing supply a chance to catch-up with demand and to maintain the resilience of households against future shocks.</p>
<p>The RBA argues that it needs to balance financial stability risks against the need to stimulate the economy through lower interest rates. But this has left inflation running below the middle of its target range and helps explain why wages growth has been weak. </p>
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Read more:
<a href="https://theconversation.com/why-new-zealand-cant-outsource-employment-policy-to-its-central-bank-87522">Why New Zealand can't outsource employment policy to its central bank</a>
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<p>The official cash rate has been left unchanged since August 2016, the longest period of steady policy rates on record. The fact that inflation has undershot its target of 2-3% is the most straightforward evidence that monetary policy has been too restrictive.</p>
<p>While long-term interest rates in the US continue to rise, reflecting expectations for stronger economic growth and higher inflation, Australia’s long-term interest rates have languished.</p>
<p>Australian long-term interest rates are below those in the US by the <a href="https://fred.stlouisfed.org/graph/fredgraph.png?g=jRoG">largest margin</a> since the early 1980s. This implies the Australian economy is expected to underperform that of the US in the years ahead.</p>
<p>Inflation expectations (implied by Australia’s long-term interest rates) have been stuck around 2% in recent years, below the Reserve Bank’s desired average for inflation of 2.5%. </p>
<p>Financial markets can be forgiven for thinking the RBA will not hit the middle of its 2-3% target range any time soon. The RBA doesn’t believe it will either, with its deputy governor Guy Debelle repeating the word “gradual” no less than 12 times in a <a href="https://www.rba.gov.au/speeches/2018/sp-dg-2018-05-15-1.html">speech</a> when describing the outlook for inflation and wages. </p>
<p>Inflation has been below the midpoint of the target range since the December quarter in 2014. On the RBA’s own <a href="https://www.rba.gov.au/publications/smp/2018/feb/">forecasts</a> inflation isn’t expected to return to the middle of the target range over the next two years.</p>
<p>The Reserve Bank blames low inflation on slow wages growth, claiming in its most recent <a href="https://www.rba.gov.au/publications/smp/2018/feb/">statement on monetary policy</a>that “labour costs are a key driver of inflationary pressure”. But this is putting the cart before the horse.</p>
<p>In fact, <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1475-4932.12401?af=R">recently published research</a> shows that it is low inflation expectations that are largely to blame for low wages growth.</p>
<p>Workers and employers look at likely inflation outcomes when negotiating over wages. These expectations are in turn driven by perceptions of monetary policy.</p>
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Read more:
<a href="https://theconversation.com/should-banks-be-compelled-to-pass-on-interest-rate-cuts-4579">Should banks be compelled to pass on interest rate cuts?</a>
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<p>Below target inflation makes Australia less resilient to economic shocks, not least because it works against the objective of stabilising the household debt to income ratio. Subdued economic growth and inflation also gives the economy a weaker starting point if and when an actual shock does occur, potentially exacerbating a future downturn.</p>
<p>When the RBA governor and the federal treasurer renegotiate their agreement on monetary policy after the next election, the treasurer should insist on reinstating the wording of the 2010 statement that explicitly prioritised the inflation target over financial stability risks.</p>
<p>If the RBA continues to sacrifice its inflation target on the altar of financial stability risks, inflation expectations and wages growth will continue to languish and the economy underperform its potential.</p><img src="https://counter.theconversation.com/content/96714/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Kirchner is affiliated with the Fraser Institute. </span></em></p>If the RBA continues to sacrifice its inflation target on the altar of financial stability risks, inflation expectations and our wages growth will continue to languish.Stephen Kirchner, Program Director, Trade and Investment, United States Studies Centre, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/871822017-11-15T19:16:43Z2017-11-15T19:16:43ZIncreasing wages would make the Australian economy safer<figure><img src="https://images.theconversation.com/files/194746/original/file-20171115-19829-1ogp92h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Slow wage growth is leading to over-indebtedness among those that can afford hosues. </span> <span class="attribution"><span class="source">shutterstock</span></span></figcaption></figure><p>Australian wages have <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbyCatalogue/71b77142e6fdc370ca2581d700791977?OpenDocument">again</a> failed to meet expectations - rising by just 2% on an annual basis. This is bad not just for workers, but for the economy in general. Wages need to rise, especially for those on low to middle incomes. </p>
<p><a href="https://www.researchgate.net/publication/317703679_The_Balancing_Act_Household_Indebtedness_Over_the_Lifecycle?ev=prf_high">Research</a> shows that even a small increase in interest rates disproportionately harms borrowers who are on lower incomes, and especially those at the start of the debt repayment process. </p>
<p>The Bank of England <a href="http://www.bankofengland.co.uk/publications/Pages/news/2017/007.aspx">recently raised interest rates</a> for the first time in a decade. The US Federal Reserve and European Central Bank will eventually follow suit. And as interest rates rise across the developed world, Australia will also be forced to follow. </p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/6523.0%7E2015-16%7EFeature%20Article%7EHousehold%20Debt%20and%20Over-indebtedness%20(Feature%20Article)%7E101">Around 29%</a> of Australian households are “over-indebted”. As interest rates rise, many of these households will be unable to meet their mortgage repayments. An increase in mortgage defaults will hit banks’ balance sheets, and will spread through the financial system.</p>
<p>Increasing wages would not only ease some of this financial stress, but would also jolt inflation as these newly enriched workers buy themselves things. Rising inflation will erode some of the debt repayment the household sector faces over the coming years.</p>
<h2>Warning signs</h2>
<p>A <a href="https://www.researchgate.net/publication/317703679_The_Balancing_Act_Household_Indebtedness_Over_the_Lifecycle?ev=prf_high">study</a> in Ireland (which has similar household debt levels to Australia) found that a 1-2% increase in interest rates leads to a 2-4% reduction in a typical borrower’s disposable income after debt repayments.</p>
<p>Households are <a href="https://scholar.harvard.edu/campbell/publications/model-mortgage-default">considered</a> “vulnerable” if their debt service ratio (the share of debt repayments to income) is over 30%. If you earn A$1,500 after taxes every week, but are barely making a A$850 mortgage repayment, you’re going to be in trouble if repayments rise to $A900. </p>
<p><iframe id="V6Ya3" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/V6Ya3/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Part of the reason for the increased household debt is that the “labour share” of the Australian economy has been declining.</p>
<p>In 1960, Australian workers took home 62% of the value of what they produced. Australian owners of capital got 38%. This split <a href="https://www.quandl.com/data/AMECO/AUS_1_0_0_0_ALCD2-Adjusted-wage-share-total-economy-as-percentage-of-GDP-at-current-factor-cost-Compensation-per-employee-as-percentage-of-GDP-at-factor-cost-per-person-employed-Australia">was similar</a> in the rest of the developed world.</p>
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Read more:
<a href="https://theconversation.com/how-market-forces-and-weakened-institutions-are-keeping-our-wages-low-83446">How market forces and weakened institutions are keeping our wages low</a>
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<p>In 2018, workers will <a href="https://www.quandl.com/data/AMECO/AUS_1_0_0_0_ALCD0-Adjusted-wage-share-total-economy-as-percentage-of-GDP-at-current-prices-Compensation-per-employee-as-percentage-of-GDP-at-market-prices-per-person-employed-Australia">most likely</a> take home less than 50% of the value of what they produce. The <a href="https://www.oecd.org/g20/topics/employment-and-social-policy/The-Labour-Share-in-G20-Economies.pdf">average drop</a> in the labour share as a percentage of GDP since 1960 is 12% across the OECD. </p>
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<p>Wages <a href="https://www.rba.gov.au/publications/bulletin/2017/mar/pdf/bu-0317-2-insights-into-low-wage-growth-in-australia.pdf">have been growing</a> at less than 2% a year since 2014. This is despite the fact that unemployment is 5.5% and falling, which is around the level where we would expect to see wages rise because workers can command a premium in the market. </p>
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<p>But the Australian labour market is also changing. Underemployment (workers who would like to work more hours) is a key problem in many households. Underemployment is relatively high among 15-24-year-olds and is projected to rise.</p>
<p>According to the Oxford Internet Institute’s <a href="http://ilabour.oii.ox.ac.uk/online-labour-index/">online labour index</a>, Australia is number three in the world for “gig economy” jobs, behind Britain and the United States. These jobs provide cash flow but no security. They also build up other vulnerabilities - <a href="https://theconversation.com/how-gig-economy-workers-will-be-left-short-of-super-85814">many Uber drivers will be short on Super</a>, for example.</p>
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<p>As you can see from the previous chart, Australian corporations aren’t doing too badly even as the labour share declines. The chart shows the gross profits, compared to the last month of 2008 – pretty much the peak of the crisis. This comparison allows us to see the changes in profits before and after the crisis more clearly. </p>
<p>The raw data <a href="https://www.quandl.com/data/AUSBS-Australian-Bureau-of-Statistics?keyword=operating%20surplus">show</a> the same pattern. </p>
<p>You can see clearly a drop after the global financial crisis hits, and then a very sharp recovery in 2015 and 2016. Gross operating surplus, our rough measure of the profits of the private sector, are more than 24% higher than they were in 2008. One important reason for the increase in profits is the lack of wage growth for households. </p>
<h2>What should be done?</h2>
<p>In the longer term the ratio of debt to income and assets will have to fall. This could happen via write-offs, sell-ons and bankruptcies, or via increases in incomes. But we don’t live in the longer term. </p>
<p>Right now, middle-income workers need more cash in their pockets. There are a couple of options available. </p>
<p>The first is to reduce the burden of debt repayment on those new entrants to the mortgage market. One solution is to provide tax relief on the interest that a household pays in the first few years of a mortgage (as <a href="https://www.revenue.ie/en/property/mortgage-interest-relief/index.aspx">Ireland</a> and the <a href="http://taxsummaries.pwc.com/ID/United-Kingdom-Individual-Deductions">United Kingdom</a> do). This will keep the property market working well and support younger borrowers, if only temporarily. But it could also bid up house prices if not properly targeted. </p>
<p>The second is the simplest approach - reduce taxes, combined with tax reform. But the federal government is already running a budget deficit of <a href="http://www.budget.gov.au/2017-18/content/glossies/overview/download/Budget2017-18-Overview.pdf">around</a> 2% of GDP, so this doesn’t work in the short term. </p>
<p>The third option is to reduce the cost of living by making public transport easier to access, improving early education, and reducing energy prices. But <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2424835">research shows</a> that the “worst” infrastructure projects are the ones that generally get built, so this isn’t advisable either. </p>
<p>The solution, then, is to increase wages, especially at the middle of the income distribution. Minimum wages have already gone up by more than 3% this year, but this is unlikely to help those on middle incomes, who have access to enough credit to afford current house prices and so <a href="http://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0010/2437426/HILDA-SR-med-res.pdf">have become stretched</a>. </p>
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Read more:
<a href="https://theconversation.com/the-costs-of-a-casual-job-are-now-outweighing-any-pay-benefits-82207">The costs of a casual job are now outweighing any pay benefits</a>
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<p>There are models Australia can learn from internationally. In Germany, the <a href="https://www.eurofound.europa.eu/observatories/eurwork/comparative-information/national-contributions/germany/germany-wage-flexibility-and-collective-bargaining">Variable Payment System</a> links pay increases to profit sharing and bonuses. When the company or the sector does well, the worker does well. The reverse is also true. </p>
<p><a href="http://ftp.iza.org/dp3867.pdf">A survey</a> of 23 different wage-increasing mechanisms found almost all countries bar the US, Hungary and Poland have some collective bargaining and minimum wages. These range from hard wage indexation enforced by law, to intra-associational coordination (roughly what we have here in Australia). The right model for the 21st century and the changing nature of work may be very different, however. </p>
<p>As we’ve seen, private sector is doing very well and can afford a wage hike. And productivity increases in the Australian workforce has <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5260.0.55.003">long outpaced</a> wage increases. A wage increase is not only feasible and justified, it is in the national interest.</p><img src="https://counter.theconversation.com/content/87182/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Kinsella does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Low wage growth isn’t just bad for households - it’s also bad for the overall economy. Research shows that increasing wages would take some of the risk out of the housing sector.Stephen Kinsella, Reseach Fellow, School of Government, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/591272016-05-12T00:50:31Z2016-05-12T00:50:31ZCan Puerto Rico escape its $72 billion debt trap and avoid Greece’s fate?<p>To almost no one’s surprise, Puerto Rico <a href="http://money.cnn.com/2016/05/02/investing/puerto-rico-default-may-1/">missed</a> a US$422 million debt payment earlier this month, triggering fears among investors that additional defaults are on the way and increasing pressure on Congress to act. </p>
<p>The <a href="https://theconversation.com/puerto-ricos-long-fall-from-shining-star-to-the-greece-of-the-caribbean-43097">warnings</a> that this would happen could hardly have been louder. The major credit rating agencies <a href="http://www.reuters.com/article/sp-puertorico-idUSL3N0ZG1UQ20150630">long ago cut</a> Puerto Rico’s $72 billion in debt to some of the lowest levels. Its bonds have been trading at steep discounts to their face value for several years. And in December, Puerto Rico Governor Alejandro García Padilla <a href="http://www.theguardian.com/world/2015/dec/01/puerto-rico-debt-govenor-alejandro-garcia-padilla-senate-repayment">told the U.S. Senate</a> that his government had “no cash left” and would need to restructure its debt or face “disastrous” consequences. </p>
<p>And this week, Treasury Secretary Jack Lew <a href="http://www.nytimes.com/2016/05/10/business/dealbook/treasury-secretary-jacob-lew-puts-a-face-on-puerto-rico-debt-crisis.html?_r=0">visited the island</a> with a similar message, urging lawmakers to act and highlighting the crisis’ human toll. </p>
<p>The warnings thus far, however, have fallen on deaf ears, leading to this month’s inevitable default. The only question is – as it has been for a long time – how to resolve the crisis before it spins out of control. </p>
<p>At stake is years of falling incomes and house prices, chronic unemployment and lost economic opportunities – typical outcomes of unresolved debt crises, as <a href="http://www.bbc.com/news/world-europe-33507802">citizens of Greece can attest</a>. </p>
<h2>No easy way out</h2>
<p>Debt crises are typically contentious and take a long time to unwind. </p>
<p>I’ve been researching financial crises for 25 years, and several unique features promise to make Puerto Rico’s especially messy. These include years of economic decline, no standing in U.S. bankruptcy courts and hedge funds intent on seeking to collect as much possible in a lawsuit. </p>
<p>At this juncture, resolution of the crisis without action from Washington is hard to imagine. </p>
<p>How did Puerto Rico get to this point? And what options remain to avoid disaster? </p>
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<h2>Economic shocks</h2>
<p>For decades, Puerto Rico, a largely self-governing U.S. territory, had a vibrant economy. Real income per capita more than doubled from 1975 to 2006, growing at a 4.2 percent annual pace, much faster than in the U.S. or Latin America over the same period. </p>
<p>But the commonwealth suffered a severe economic shock in 2006, when Congress allowed tax breaks encouraging businesses to set up on the island to expire. The result: factories closed and job losses followed. </p>
<p>Next came the 2008-09 financial crisis and recession, which hit Puerto Rico especially hard. Its economy has contracted every year but one since, resulting in the loss of <a href="http://www.gdb-pur.com/economy/statistical-appendix.html">more than a third</a> of manufacturing jobs and <a href="http://data.bls.gov/timeseries/LASST720000000000003?data_tool=XGtable">driving unemployment</a> to as high as 17 percent in 2010. <a href="http://country.eiu.com/article.aspx?articleid=1524151536&Country=Puerto%20Rico&topic=Economy&subtopic=Forecast&subsubtopic=Forecast+summary.">Economic output</a> is expected to decline at least through the 2017 fiscal year. </p>
<p>As U.S. citizens, Puerto Ricans can move to the mainland in search of jobs, and the island’s population has been falling as thousands have done just that, leaving the commonwealth with a lower tax base.</p>
<p>These shocks, together with chronic budget deficits, put Puerto Rico on an “unsustainable trajectory of financing gaps” with <a href="http://www.bgfpr.com/documents/puertoricoawayforward.pdf">no end in sight</a>. </p>
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<h2>Surging debt levels</h2>
<p>But how did Puerto Rico’s economic crisis spiral into a debt crisis? </p>
<p>Puerto Rico bonds enjoy what is known as a triple tax exemption. That means interest investors earn on the bonds is exempt from federal, state and local taxes, giving them higher after-tax yields than similarly rated debt.</p>
<p>Normally, the triple tax exemption is available only to those who live in the state or city that issued the bonds. But buyers of Puerto Rico’s bonds get the exemption regardless of where they live, which made them popular with tax-exempt mutual funds, hedge funds and wealthy individual investors.</p>
<p>That meant there was always plenty of demand for the debt, even as Puerto Rico’s budget deficits worsened and its economy contracted – problems that required ever more borrowing to pay the bills. As a result, its <a href="http://www.economist.com/news/finance-and-economics/21588364-heavily-indebted-island-weighs-americas-municipal-bond-market-puerto-pobre">debt burden</a> soared to 89 percent of personal income, about nine times that of the most heavily indebted U.S. state by that measure (Hawaii).</p>
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<h2>How can we get out of this mess?</h2>
<p>The first step in resolving any debt crisis is to recognize that a loss has occurred and that without changes in policies or external intervention, it is likely to get worse. In Puerto Rico’s case, this is no longer in question. </p>
<p>The only real issue now is how the loss should be split among Puerto Rico’s creditors, its residents and taxpayers in the mainland United States. Here Puerto Rico government’s options are limited. </p>
<p>Its access to the bond market has been cut off, so further borrowing is out of the question. With another $2 billion in debt payments due in July, the <a href="http://www.wsj.com/articles/puerto-ricos-debt-crisis-turns-up-the-heat-on-congress-1462219483">government says</a> that paying creditors would require cutting essential public services.</p>
<p>What’s more, bankruptcy <a href="https://www.law.cornell.edu/uscode/text/11/109">is currently not an option</a> because neither Puerto Rico nor its municipalities are eligible for protection under Chapter 9. </p>
<p>So what options are left to deal with the crisis, at least in the short term? Here are a few of the main ones under consideration:</p>
<ol>
<li><p><strong>Provide a bailout.</strong> A federal bailout could be devised to cover losses on Puerto Rico’s bonds, but it’s highly unlikely because neither the White House nor Congress has any appetite for it. The concern is, in part, that it would set a precedent for financially troubled states. The federal government has not come to the direct assistance of a state since it assumed their independence-related debts in 1790. Barring an outright bailout, Congress could modify some federal programs for the island, something the <a href="http://www.c-span.org/video/?326821-1/white-house-briefing">Obama administration appears interested</a> in doing. Under current rules, Puerto Rico receives less from Medicaid than states and no Supplemental Security Income. </p></li>
<li><p><strong>Change the law to allow bankruptcy.</strong> Congress could amend Chapter 9 to allow Puerto Rico and its cities to declare bankruptcy. <a href="http://www.bloomberg.com/news/articles/2015-07-29/treasury-s-lew-says-puerto-rico-crisis-must-be-resolved-locally">Treasury Secretary Lew has expressed support</a> for this approach. Legislation has been introduced to do just that but has run into opposition from some hedge funds and other investors. In December, an effort to <a href="http://www.nytimes.com/2015/12/20/us/politics/puerto-rico-money-debt.html?_r=0">bring one of the bills</a> to a vote failed. </p></li>
<li><p><strong>Establish an oversight board.</strong> Nearly everyone involved with Puerto Rico’s crisis agrees on the need for fiscal and economic reforms, though not necessarily on how to implement them. Puerto Rico’s government has already cut the public pension system, hiked taxes and laid off government employees, but the budget’s red ink <a href="https://www.fas.org/sgp/crs/row/R44095.pdf">continues to flow</a>. Recently, House Republicans has been in negotiations with the White House over legislation calling for a federal control board to oversee Puerto Rico’s finances. But <a href="http://www.usnews.com/news/politics/articles/2016-03-25/republican-bill-would-create-oversight-board-for-puerto-rico">some Democrats oppose</a> such a board, arguing that it would infringe on the island’s sovereignty. </p></li>
<li><p><strong>Restructure the debt.</strong> The resolution of a debt crisis often involves convincing investors to take a loss on their holdings. The Latin American debt crisis of the 1980s, for example, did not end until the <a href="http://www.oecd.org/development/pgd/1919358.pdf">Brady Plan provided</a> cut the amount countries owed by an average of 30 percent. The outlook for a debt deal is in doubt, however, because hedge funds have been buying Puerto Rico’s debt in an apparent effort to use U.S. courts to force a favorable settlement – as <a href="http://www.npr.org/sections/thetwo-way/2016/02/29/468600774/argentina-reaches-settlement-with-hedge-funds-ending-15-year-dispute">happened recently</a> over Argentina’s 2002 default.</p></li>
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<h2>Long-term challenges and way forward</h2>
<p>Solving the debt crisis, however, is only a first step toward resolving Puerto Rico’s problems. It must also find a way to sustainable economic growth, which inevitably means becoming more competitive. </p>
<p>A group of former International Monetary Fund economists <a href="http://www.bgfpr.com/documents/puertoricoawayforward.pdf">issued a report last summer</a> in which they argued that Puerto Rico needs to alter labor market practices to lower the costs of doing business, for example by temporarily exempting companies from the federal minimum wage and easing rules governing overtime, vacations and layoffs. They also advocated cutting federal welfare benefits, noting that those benefits can provide a disincentive to work for low-wage workers. </p>
<p>A more long-term-oriented strategy would be to build on the island’s strengths, such as its well-educated workforce. <a href="https://www.newyorkfed.org/regional/puertorico/index.html">Almost 49 percent of Puerto Rico’s population</a> has some college education, making it one of the best-educated work forces in the world. Another advantage is a credible legal system (especially relative to its Latin American neighbors). </p>
<p>These strengths suggest that Puerto Rico could grow by increasing support for high-value industries like finance, management and software rather than competing to lure low-wage producers. Singapore and South Korea are two examples of countries that successfully followed a development strategy of moving up the value-added ladder. </p>
<p>But to follow such a strategy, a more favorable business climate is needed. According to the World Bank, Puerto Rico <a href="http://www.doingbusiness.org/%7E/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB15-Full-Report.pdf">ranks 47th</a> out of 188 countries in terms of ease of doing business (the U.S. is 7th), and is particularly weak in ease of paying taxes, registering property and obtaining construction permits.</p>
<p>The <a href="http://www.maritimelawcenter.com/html/the_jones_act.html">Jones Act</a>, meanwhile, hurts business by requiring that cargo shipped between U.S. ports be carried on U.S. ships. An exemption from the act would help Puerto Rico develop as a regional hub.</p>
<p>While there seems to be consensus that reforms like these are necessary, they will take time to implement and bear fruit. And before we can tackle Puerto Rico’s long-term problems, we must first find a way to resolve its debt crisis. </p>
<p>Time is not on our side: Latin America’s debt crisis took a decade to resolve, and Europe is still struggling with aspects of its debt crisis, six years on. Let’s hope Puerto Rico’s doesn’t take quite as long.</p><img src="https://counter.theconversation.com/content/59127/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian Gendreau receives funding from a Natural Resource Center grant from the U.S. Department of Education. </span></em></p>The island, which missed a debt payment earlier this month, faces ‘disastrous’ consequences if a solution to its spiraling crisis isn’t found soon.Brian Gendreau, Director, Latin American Business Environment program, University of FloridaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/302722014-08-10T21:35:07Z2014-08-10T21:35:07ZInfographic: How exposed are Australian banks?<figure><img src="https://images.theconversation.com/files/56052/original/y4jkkbrp-1407484197.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australian banks are the envy of their global counterparts.</span> <span class="attribution"><span class="source">David Crosling/AAP</span></span></figcaption></figure><figure class="align-center ">
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<p class="fine-print"><em><span>Thomas Clarke does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Charis Palmer, Deputy Editor/Chief of StaffEmil Jeyaratnam, Data + Interactives Editor, The ConversationLicensed as Creative Commons – attribution, no derivatives.