would become a prolific essayist and fearsome debater. Rather, it was a choice. His tutors warned him about neglecting his studies. But he preferred to divide his time between his social life, political protests, books (other than the prescribed ones) and lively debates with other thinkers.

As Hitchens’s counterexample demonstrates, it is possible to regret the opportunities missed while striving for top grades. It is a lesson that many of America’s biggest companies have grasped. At one time, the sort of company that could tap the bond market for capital would be given an A-grade as a matter of course. These days the typical corporate-bond issuer has a credit-rating of BBB, only a notch above a junk rating (see chart).

That might seem to imply that business has become less efficient or lucrative. Yet profits have never been higher as a share of GDP. In fact, for much of corporate America a BBB rating is the consequence of a financial strategy. Many established firms have chosen to load up on debt to buy back their own shares in order to boost shareholder returns or, more recently, to pay for mergers.

To understand why, it helps to start with a bit of textbook finance that says share buy-backs are pointless. According to a theory proposed in 1958 by Franco Modigliani and Merton Miller, a firm’s capital structure—its mix of equity and debt finance—has no effect on its value. Debt has first call on profits; shareholders get what is left over. Debt is thus less risky for investors and a cheaper form of finance for companies. The more debt a firm has, the more volatile are its equity returns. Investors dislike volatility. So a firm’s share price should in principle decline as it takes on more debt, leaving its overall financial value (the sum of its debt and equity) unchanged.

Grade deflation

The theory simplifies reality to illustrate a truth—a firm’s worth is ultimately its cashflows. In the real world, there are benefits to using debt. A big one is that interest costs are tax-deductible. This tax shield is in effect a subsidy to debt finance. Debt also has costs. A high interest burden can lead to missed opportunities or a damaging bankruptcy. Each firm has to make a trade-off between the costs and benefits. Capital-goods firms may plump for low debts and a solid credit rating to show they will be around to honour their warranties. Telecom companies, which have more stable earnings, are more likely to gear up.

As the corporate-bond market has expanded, new categories of firms have been able to take advantage of cheap debt finance. The taboo on issuing lower-grade debt became weaker in the 1980s after “corporate raiders” used junk bonds to finance leveraged buy-outs of listed companies. Since the financial crisis corporate-debt issuance has accelerated, says Adam Richmond, an analyst at Morgan Stanley. Low yields on government bonds as a result of quantitative easing have drawn investors into riskier sorts of paper. Companies have seized on this demand as a further subsidy to debt. The number of firms issuing bonds has increased by two-thirds in the past decade, according to PIMCO, a fund manager.

No doubt some firms will discover they have issued too much. It is of some comfort that the ratio of corporate debt to GDP is barely higher than its previous cyclical peaks, in 2000 and 2008. Bond finance has in part displaced bank finance. But if banks are less exposed, investors are more so. For now, strong GDP growth is a balm. A recent report by S&P Global, a credit-rating agency, plays down the risk of a rash of downgrades to junk. Firms might simply choose to buy fewer of their shares back to preserve their BBB rating.

Even so, a recession will come sooner or later. The profits of leveraged firms will be damaged, which will in turn hurt confidence. Downgrades and defaults will follow, as they always do. The process will be more drawn-out than usual if, as seems likely, there proves to be a shortage of buyers for a fresh supply of junk.

For now the market is stable. But corporate credit is an asset class to be wary of in a maturing economic cycle. In good times there seems little prospect that buyers might dry up. But they will. The best time to buy corporate bonds is early in an economic recovery, when downgrades and defaults are still under way. There are likely to be more bargains than usual next time. If companies no longer need to strive for an A-grade, all the more reason for investors to do their homework.

No major Chinese-language newspaper reported his tweets. One of his claims—that China’s stockmarket has fallen 27% in the past four months—was an exaggeration. But why would any self-respecting propagandist in Beijing dwell on that? Chinese stocks have indeed fallen sharply (see chart), which officials do not wish to emphasise.

And this is just one of a series of awkward facts for China as its trade war with America deepens. The yuan is down 8% against the dollar since April, and near its weakest in more than a year. A shrinking trade surplus produced a current-account deficit in the first half of 2018, China’s first such gap in at least two decades. More broadly, China’s growth is slowing at a time when America’s economy is expanding at its fastest pace since 2014. No wonder Mr Trump feels that he is on the right path, and that Chinese investors are jittery.

Making matters worse for China is a whiplash effect. Until recently officials and executives believed their own declarations of technological prowess. Privately, advisers were confident that Mr Trump could be placated with promises to ramp up imports from America. Now both views look wanting. An agreement for China to buy more American natural gas and soyabeans collapsed in June. Chinese officials are keenly aware of vulnerabilities; had America maintained its sanctions on sales of semiconductors to ZTE, the Chinese telecoms giant might well have gone out of business. Those with a conspiratorial mindset see things in a darker light. “The Americans don’t want a deal. They want to screw us,” says a fund manager.

The asymmetry in the trade war is another uncomfortable fact. Since America buys far more from China than vice versa, America has more scope to impose tariffs. This imbalance, long discussed in theoretical terms, is close to becoming a hard reality. Mr Trump has instructed his trade team to consider 25% tariffs on $200bn of Chinese imports as early as September, taking the total affected by its tariffs to about $250bn, with room for twice that amount. China’s threatened retaliation, announced on August 3rd, will be tariffs on $60bn of American imports. This would take the total under its tariffs to $110bn, with little room for more.

China has other weapons at its disposal. It can disrupt the lucrative Chinese operations of American businesses, from Apple to Starbucks. But that would have downsides. Declaring bogus justifications (health violations, say) would reinforce foreign criticism of government meddling in China’s economy. And the nature of such interference, unlike tariffs, is that it will not be announced in advance, meaning it can take longer to register the impact.

The timing of the trade war is most inconvenient for China. Over the past two years the government has waged a campaign to rein in debt levels. Finally this has started to bite, with credit growth slowing sharply. Officials could opt to abandon their tightening stance in order to counteract the trade turmoil. But that might erase the gains from the deleveraging. This explains their restraint so far. At a meeting of the Politburo on July 31st, China’s leaders noted that it was a priority to support growth amid the “clear change” in the external environment, but also pledged to press on with their efforts to control debt. Investors who had hoped for more easing were disappointed.

So there is cause for concern about China’s growth outlook. But markets may be unduly pessimistic. One conclusion from the past few weeks is that policymakers now accept that the trade war is real, and are starting to cushion the economy. The boost to exports from the falling yuan, down about 6% on a trade-weighted basis since mid-June, should be “roughly proportionate” to the blow from the first $50bn of American tariffs and some of the next $200bn, says Andrew Tilton, the chief Asia economist at Goldman Sachs. At the margins, he adds, China is shifting to a more active fiscal policy. Officials have made it easier for cities to get funding for infrastructure projects. One government adviser says there is discussion of a bigger stimulus, likely to be focused on promoting consumption rather than investment.

The economic backdrop to the trade war could also change over the next year. As China tiptoes towards easing, its credit growth should pick up. Meanwhile, America may be near the top of its growth cycle, with gains from last year’s tax cut set to dissipate. Louis Kuijs of Oxford Economics, a research firm, says the divergence in their stockmarkets might reflect overconfidence in America and an evaporation of confidence in China. “Both reactions seem exaggerated,” he says. With no resolution to the trade war in sight, there will be time enough to test this proposition.

drop trade barriers and crown him as dealmaker-in-chief, or they will pay down government debt while saving favoured industries. “Plants are opening all over the US, Steelworkers are working again, and big dollars are flowing into our Treasury,” he tweeted on August 4th. How do those claims stack up?

Tariffs are taxes on imports and so will bring some cash to treasury coffers. But comparatively little. In 2017 America’s government borrowed around 3.5% of GDP. Had the new tariffs been in place, and under the (extreme) assumption that the same goods had been imported despite costing more, they would have raised only 0.08% of GDP. Even including all Chinese imports, the number would have risen to just 0.7% of GDP. And that is before considering tariffs’ depressive effects on demand for imports and on economic growth.

There is more substance to the claim that they have brought American furnaces and smelters roaring back to life. The volume of steel imports from the countries hit by tariffs and quotas was 36% lower in June than a year previously. The corresponding fall for aluminium imports was 27% (see chart). As prices have risen, so has production. Steelmakers are using 78% of their capacity, not far off the administration’s goal of 80%. And some idled aluminium capacity is being brought back online.

But production data are volatile, and recent changes are relatively small when taken in historical context. And some of the recent activity would have happened without new trade barriers. Metal prices have been pulled higher by a strong economy. Higher aluminium prices are in part the result of more expensive alumina, one of the main inputs. American sanctions on Rusal, a massive Russian supplier of alumina, and cuts to alumina production in Brazil because of environmental problems, have left aluminium makers feeling insecure about supply.

Those higher prices are a burden for businesses that use metals, which account for a far higher share of American jobs. They are doubly disadvantaged as inputs become pricier and overseas competitors can undercut them. Some have requested exemptions from the tariffs, only to be blocked by official objections from some of the biggest American steelmakers, which claim that they can supply the supposedly scarce products. But tariffs were not intended to help metal consumers, after all.

More strikingly, even some of those whom protectionism was supposed to help are grumbling. The loudest complaints are about the inclusion of Canada in the list of countries thwacked by trade barriers, which has damaged a highly integrated economic area. Even the United Steel Workers Union, a strong supporter of the tariffs overall, criticised Canada’s inclusion. (It represents workers on both sides of the border.)

In the first quarter of 2018, 52% of American steel exports went to Canada. Those are now being hit with retaliatory tariffs. On August 6th Alcoa, a large aluminium producer, requested a tariff exemption of its own so that it could import aluminium from its Canadian subsidiary to America. It had previously reported that tariffs had raised its costs by around $15m in the second quarter of 2018 (less than the extra profits from higher aluminium prices).

Some producers within both industries do not smelt metal from scratch but recycle or process it instead. It is in their interests for their inputs to be cheap. So far aluminium processors (which account for 97% of employment in the industry) seem to have passed the extra costs on to their buyers. But in the long run higher prices could encourage a switch to different materials. Aluminium competes with steel for use in cars, and with glass in drinks containers.

The big question is whether any revival can be sustained. In the short term, tariffs are more likely to bring older, relatively inefficient steel plants back online than to stimulate new long-term investments, for the simple reason that the president could withdraw the tariffs at any moment. The newest aluminium smelter in America is around 40 years old. If primary aluminium production revives sustainably, it will be because American producers can access cheap, reliable energy.

And tariffs do nothing to address the underlying complaint of American steel and aluminium producers: that state support gives Chinese producers an unfair advantage that has them pumping out production as job losses mount elsewhere. Populist policies can often deliver short-term results. The question for Mr Trump is whether his are worth the cost, and how long the benefits can last.

Learning macro is a source of anxiety for many students. Teaching it can give their professors the jitters, too. The subject is notoriously difficult to explain well. During his 37 years at Carleton Mr Rowe remained, by his own admission, “fairly low down the totem pole” as a researcher. But he became a thunderbird at conveying macroeconomic intuition. In the past decade this served him well in his second intellectual career, contributing to Worthwhile Canadian Initiative, an economics blog. Many a controversy has benefited from one of his ingenious analogies or numerical parables, usually involving some kind of fruit.

Professors may find themselves ill-prepared for the macro classroom. To become academics they had to answer erudite questions posed by more senior members of the discipline. To become good teachers of introductory macro, they have to give clear answers to muddled students. That requires an intuitive feel for the subject. It is not enough to crank through the equations.

Indeed, Mr Rowe attributes part of his success as a teacher to his shortcomings as a mathematician. He quotes Joan Robinson, another clear expositor of macroeconomics: “I never learned maths, so I had to think.” Because the answers did not leap out at him from the equations, he had to dwell on the economic behaviour underneath the algebra.

Macroeconomics is difficult to teach partly because its theorists (classical, Keynesian, monetarist, New Classical and New Keynesian, among others) disagree about so much. It is difficult also because the textbooks disagree about so little. To reach the widest possible audience, most cover similar material: a miscellany of models that are not always consistent with each other or even with themselves. The result is that many professors must teach things they do not believe.

Professors can also sometimes forget that macroeconomics is full of faux amis: words that mean something different in everyday speech. “Saving” is an example. In ordinary life, it means the opposite of spending. In macroeconomics it means the opposite of consumption (or, more precisely, not buying new consumer goods with income earned from production). In macro, someone who spends a fortune on a house is saving even if they have emptied their bank account to do so. The term can be so confusing that Mr Rowe thinks it should be banished from the discipline.

More difficulties, Mr Rowe suggests, follow from the fact that macroeconomics is a bit “weird”. For him, the discipline’s fundamental question is the one broached by Jean-Baptiste Say 200 years ago: does supply create its own demand? The answer, which is often no, is odd. Why do people go to the trouble of producing and marketing stuff (thereby adding to supply) if not to obtain equally valuable goods with the proceeds (thereby adding to demand)? Because students take recessions for granted, they may not realise how peculiar they are. Professors may recognise the strangeness. But they sometimes struggle or neglect to explain it. Mr Rowe did not encounter Say’s law explicitly until well into graduate school.

As a monetarist, he thinks the explanation for recessions lies in an excess demand for money, the medium of exchange. To illustrate the point he has built a “minimalist” macroeconomic model, the smallest he can get away with. Its aim is to show what is required for a recession and, by what it leaves out, what is not necessarily required. Inevitably, it involves fruit.

In this model half the people have apples, the other half bananas. The two groups also have mangoes, but not as many. The apple-sellers would like more bananas; the banana-sellers more apples. But what they all want most is more mangoes.

People in this world can clearly gain from trading apples for bananas. And in a barter economy that is exactly what happens. But what if one of the fruits—mangoes—serves as the medium of exchange? What if apples and bananas can be traded for mangoes but not directly with each other? This parallels the real world where goods are typically traded for money but not each other.

In this scenario less fruit will change hands and potential gains from trade will be lost. People are unwilling to buy much with their mangoes, which they hoard. As a result they are themselves unable to sell much of their fruit for the mangoes that everyone else is similarly hoarding. This, according to Mr Rowe, is what a recession looks like. An excess demand for the medium of exchange depresses trade. Workers are unable to sell their labour for money, partly because they (and everyone else) are unwilling to part with their money for the fruits of anyone else’s labour.

Monetarists think the medium of exchange is distinctive for a variety of reasons. With any other good or asset, when people want more they must buy it. If they want more money, however, they can simply refrain from buying other things, a drop in spending characteristic of a recession. Similarly, if any other asset or good is in hot demand, its price will rise until the demand is quenched. But because everything is priced in money, it has no price of its own. It can rise in value only if the price of everything else falls, a deflationary pressure also characteristic of recessions.

The hidden fundamentals of macro

You cannot teach macro well without a strong intuitive feel for the subject. But the best way to gain a feel for the subject is to teach it. “I learn something every time,” Mr Rowe says. On Rate my Professors, a website, one student paid him the ultimate tribute: he made an 8.30am class worth attending. And how, at the end of his long teaching career, did his students show their appreciation? Naturally, by giving him an apple and a banana.

This is the idea, credited to economists Eugene Fama and Kenneth French, that predictable, persistent factors explain long-term asset returns. Their 1992 model for equities used the size of firms and what became known as “value” (the tendency for cheap assets to outperform pricey ones). Later models added factors such as “momentum” (the tendency of prices to keep moving in the same direction). Factor-based analysis has squeezed active managers (since it explains much of their returns) and helped drive the rise of passive investing. Investors can access factors in equities, often called “smart beta”, through cheap index-tracking funds or exchange-traded funds (ETFs) from the likes of BlackRock and State Street Global Advisors.

Messrs Fama and French considered factors in bond returns as early as 1993, though not the same ones as for equities (they reckoned, for instance, that for bonds value had “no obvious meaning”). Federal requirements since 2002 to disclose transaction prices and volumes have enabled closer analyses. A recent paper by researchers at AQR Capital Management, a $226bn hedge fund founded by a student of Mr Fama that specialises in factor investing for equities, looks at four factors for global sovereign bonds and American corporate ones: carry (high-yielding bonds beat low-yielding ones), quality (safer assets have better risk-adjusted returns), value and momentum.

These not only would have provided consistently good returns over the past two decades, but were also largely uncorrelated with factors in equity markets, credit risk for bonds and macroeconomic variables such as inflation. Since active bond-fund managers tend to make excess returns mainly by buying riskier bonds, and a traditional bond index-tracking fund means exposure to the firms and countries that issue the most debt, factors provide a third, distinctive investment option.

AQR’s first dedicated fixed-income offering, a fund of American high-yield (that is, junk-rated) bonds, was launched in mid-2016. It outperformed the benchmark index by 2.1 percentage points in its first year, and 2.6 points in its second. Tony Gould of AQR credits not only the factor modelling for its success. He says that the higher cost of trading bonds compared with equities needs to be built into the bond-picking process. The firm has since started two more bond funds. Other such firms that used to focus on equities are looking into bonds, too. Man Numeric, for instance, a quant fund in Boston, wants to apply its expertise in company-level analysis to high-yield bonds.

Among the mass-market offerings are BlackRock’s first smart-beta bond fund, launched in 2015. It switched from active management to index-tracking in 2018, and the firm now has several index-tracking bond ETFs that use factors (mostly quality and value). Fidelity Investments launched two bond factor ETFs in March, and Invesco launched eight on July 25th.

Factor investing for bonds is still so new that many investors have not even heard of it. But opportunities to use it are growing because of recent European regulations mandating price and volume disclosure for bonds. Just five years ago a fund manager would have struggled to find enough data for non-American bonds, says Collin Crownover of State Street Global Advisors. Now the firm is applying quality- and value-factor analysis to corporate bonds in euros and sterling. The way index-trackers and smart-beta approaches laid waste to stock-pickers suggests that managers of active bond funds should be quaking.

Clarification (August 10th 2018): This article was amended to reflect the fact that factors in bonds provide consistent returns, but not necessarily ones correlated with overall bond-market returns.

Augur is not the first online service that allows people to buy and sell predictions like shares. Since 1988 it has been possible to bet on American elections via Iowa Electronic Markets (IEM), run by the University of Iowa. PredictIt, a site based in New Zealand but with a largely American audience, and Betfair Exchange, a British service, also let users bet on political events. Some firms run such markets internally, for instance to predict demand for a product. All have the same goal: to gain insights into the future by giving those who hold useful information an incentive to reveal it.

But legal barriers have long hampered such attempts at crowdsourcing. In America many prediction markets are considered a form of illegal gambling, or akin to trading in commodities futures that requires a licence. Regulators have allowed such services to operate if they are structured as non-profit “research” initiatives and limit bet sizes and numbers of traders, as IEM and PredictIt do. But because of the legal risk, private investors are reluctant to finance prediction markets. Intrade, an Irish site, shut in 2013, partly because the Commodity Futures Trading Commission forced it to stop serving Americans.

Augur’s decentralised design should allow it to sidestep regulatory difficulties. In 2015 the Forecast Foundation, a non-profit group of developers, raised $5.5m by issuing a crypto-currency, REP, in a form of crowdfunding now known as an initial coin offering. Rather than living on a few servers, as Intrade did, Augur is a “protocol”, or set of technical rules, based on the Ethereum blockchain, that allows punters to set up their own prediction market. This will make betting cheaper, says Joseph Krug, one of Augur’s developers, and shift legal responsibility to bettors.

Yet decentralisation creates a new problem: who will decide the outcome of a bet? For Intrade, the firm itself declared the winner. For Augur, any holder of REP can become a “reporter”, in charge of checking facts on the ground for a fee. So that they are kept honest, reporters must stake some REP, which is forfeit if other reporters overturn a decision. Reporters can close a market they deem illegal or unethical. If they err, whether towards caution or tolerance, they can lose their REP deposit.

Markets have been created on the deaths of famous people. That has raised fears about the rise of “assassination markets” that incite people to commit murder for financial gain (none has been shut down yet since there have been no trades). A more immediate problem for Augur is getting people to use it. Predictions.Global, a website that tracks activity on Augur, lists nearly 1,000 markets with almost $1.5m at stake. Yet most are bets on the value of crypto-currencies. Worse, according to DappRadar, another website, the number of daily users has fallen from a peak of 265 in early July, straight after Augur’s launch, to 37 on August 8th.

Mr Krug says he is unconcerned. Augur is clunky and slow for users: downloading its software and the Ethereum blockchain can take hours. Now that they know the system works, he and his developers plan to make it more user-friendly. But success is not in their hands alone: Ethereum has run out of capacity and needs major upgrades.

Even if Augur is not a wild success, it is a “worthwhile exploration” of the viability of decentralised services, says Kevin Werbach, the author of “The Blockchain and the New Architecture of Trust”, a forthcoming book. Learning needs a lot of doing in the complex world of blockchains.

locations have gone through the roof. The Economist’s new house-price index covers 22 of the world’s most vibrant cities (see table). They are home to 163m people, with an economic output equal to Germany and Japan combined. The average price of a home in these cities rose by 34% in real terms over the past five years. In seven cities it rose by more than half.

Some of this is a rebound from the global financial crisis, which started with a housing bust. Prices in our cities fell by an average of 22% in real terms, peak to trough—in Dublin by 62%, and in San Francisco by 42%. But they have since risen by an average of 56%, in real terms, from their lowest points. In 14 cities prices are above their pre-crisis peak—by an average of 45%.

Before the crisis, city and national prices broadly rose in tandem. They fell together, too, after the bust. But when they started to rise again, they did so on average twice as fast in our cities as nationally. Moreover, according to the IMF house-price inflation in capital cities is increasingly synchronised.

To gauge whether house prices reflect fundamentals or froth, The Economist has compared them with rents and median household incomes. If prices rise faster in the long run than the revenue a property could generate or the earnings that service mortgages, they may be unsustainable. Or, at least, incomes or rents will eventually have to rise.

Taking the average ratio over the past 20 years (or more if data exist) as “fair value”, national house prices in Australia, Canada and New Zealand have been more than 20% above fair value compared with income and 30% above fair value compared with rents for the past three years. They have now hit 40% above fair value for both metrics. Data for rents at the level of cities are lacking. But compared with long-run median incomes, prices appear even bubblier at city level than nationally.

Prices in Vancouver are 65% overvalued by the same metric. The figures for Amsterdam, Copenhagen and Sydney are around 50%, and for London 59%, with rent consuming half of gross pay. In just four of our cities are prices at or under fair value: Tokyo, Milan, New York and Singapore.

But our index suggests that property prices may be near a turning point. The average rate of house-price inflation across our 22 cities has slowed, from 6.2% annually 12 months ago to 4.7% now. In six cities prices have fallen from recent peaks.

The three reasons why cities have experienced a property boom—and why it may now be ending—are demand, supply and the cost of money. In recent years people and jobs have flocked to the biggest cities from other parts of their own countries and elsewhere. More than a third of London’s population was born abroad. For Toronto, the share is more than half. The population of our 22 cities rose, on average, by 12% over the past decade. A further boost to demand has come from foreign investors. Auckland, London, Sydney and Vancouver have attracted large inflows, particularly from China.

But according to the Economist Intelligence Unit (EIU), our sister company, the growth in globalised cities’ population will soon start to slow. A few might shrink. London lost 100,000 people to the rest of Britain in the 12 months to June 2017, and the EIU expects its population to fall over the coming decade.

One reason people may stop flocking to cities is that they have been priced out. And cities are becoming less welcoming to foreign capital, too. Vancouver has made it harder for foreigners to buy property. Australia has increased property-transaction taxes for non-residents. New Zealand is considering a ban on foreigners buying property. Tighter capital controls in China add to the squeeze.

Second, planning restrictions, local campaigns against new developments and developers sitting on land they think will rise in value have conspired to make new housing scarce. In the five years to 2016 London’s population grew almost twice as fast as its housing stock. Comparing new-builds with population growth (an imperfect measure, since household composition may change, but the best available) suggests a shortfall across ten of our cities of 28,000 homes a year in the past decade.

But the calculus here, too, may be changing. Prices seem to have climbed high enough to encourage new supply. London added 40,000 homes last year—the most for decades. New-builds have added almost a fifth to Sydney’s stock of apartments in the past three years.

Finally, loose monetary policy since the financial crisis has made mortgages extremely cheap. This has “super-charged” prices, says Liam Bailey of Knight Frank Global Research, a property consultancy. Cheap money has also lowered bond yields, pushing investors into other assets, including property. As central banks tighten, servicing a property loan will become more expensive and fewer investors will seek alternatives to fixed-income assets.

London, vulnerable because of Brexit, may be a bellwether. Agents say developers have started to offer discounts of as much as 10% to close sales. As demand weakens, supply strengthens and mortgage rates rise, the bull run in global cities’ housing may be drawing to an end.

Explore the data for 44 cities in our interactive house-price index 

When Myanmar moved from military dictatorship to a form of democracy, its new government embarked on a series of reforms. Since 2011 it has passed at least two dozen laws related to the economy. Foreign investment, much of it from China, has helped the economy to grow at around 7% a year. But it remains one of the region’s poorest countries. And vast swathes of the economy remain untouched.

State-owned enterprises (SOEs) employ about 145,000 people and provide about half of government revenue, excluding foreign aid. They collect around 12% of GDP in fiscal revenue and spend about the same. But the junta-era law that regulates them is a vaguely worded two-page document that is silent on what they are supposed to do. It simply states which sectors are government monopolies and promises prison to anyone who encroaches.

Myanmar now has 31 SOEs. Some are decrepit industrial complexes like that in Thagaya, but others deal with juicy sectors such as airlines, gems, oil and gas, telecommunications and timber. Their economic impact is huge. They not only pursue commercial activities; most also collect taxes and regulate the sectors they operate in.

A recent report by two think-tanks, the local Renaissance Institute and the Natural Resource Governance Institute, in New York, details their freedom from government oversight. The SOEs have no specific performance targets or formal appointment procedures for senior staff—most are run by former army men. Their accounts are kept by hand, in physical books. Audits consist of nothing more than checking bank statements against the figures they provide. Only their total budgets are reported to members of parliament, who do not get to see detailed line items.

Exceedingly conservative accounting rules require them to set aside 55% of their profits. Myanmar Gem Enterprise, for instance, holds enough cash to run itself for 172 years, earning no interest in a state-owned bank. In January 2017 SOEs held $8.6bn. Officials admit that much of that money is sitting idle.

Myanmar’s SOEs are not unique in the region in being legacies of dirigiste military rule. But they are probably the most opaque and badly run. Other countries generally require their counterparts to publish annual reports. Thailand’s have adopted international reporting standards. A few in the Philippines have private minority shareholders. Malaysia uses performance indicators for some SOEs’ managers. In China bosses’ pay is linked to performance (which, admittedly, encourages the fiddling of statistics).

There are a few glimmers of improvement. Myanmar’s government has joined an Asian forum on how best to monitor SOEs. It recently rid itself of a finance minister, Kyaw Win, who had been accused of corruption and admitted in 2016 that his PhD was fake. His replacement, Soe Win, may do more to promote oversight. He used to work for Deloitte, a global accounting firm, and sits on the board of the Renaissance Institute.

But formidable obstacles remain. Different ministries are responsible for different SOEs and the finance ministry has no control over their spending. Only Aung San Suu Kyi, Myanmar’s de facto leader, has the authority to pass reforms. But the economy is not her priority and she tends to tread carefully when it comes to the armed forces’ interests.

MPs from the lower house’s public-accounts committee are keen to look into the mess, says Aung Min, their chair. But they lack administrative support and, in many cases, expertise. And few other parliamentarians would welcome scrutiny of zombie factories in their constituencies. Workers in Thagaya, for their part, feel secure. The factory cannot close, one says, “because it belongs to the government”.

Fidelity’s competitors immediately felt the heat. Shares in BlackRock, the world’s largest asset manager and largest provider of passive exchange-traded funds (ETFs), closed 4.7% down on the day, as shareholders digested the implications for its business model. Those in Invesco, the fourth-largest ETF provider, dropped by 4.2%, and those in State Street (which, though the third-largest ETF provider, also has many business lines besides asset management) by 1.2%.

Competition had already driven charges on index-tracking mutual funds and ETFs to very low levels. The fee for the index-tracking mutual fund at Vanguard most similar to Fidelity’s new offering is 0.14%, and its ETF version costs just 0.04%. Charles Schwab’s corresponding offerings cost even less: both the mutual fund and ETF cost just 0.03%. There are economies of scale in index investing, since costs do not rise in line with assets under management.

Without skimming any explicit fee from the new funds, Fidelity will have to find other ways to make money, such as by lending shares to short-sellers for a consideration. It may also see the new funds as loss-leaders, hoping that investors will eventually migrate to its other offerings. To make that more attractive it has cut fees for its existing stock and bond index funds by around a third, which will save investors $47m annually, and done away with minimum investments across the board. And it surely hopes it will be able to “upsell” customers more lucrative products, such as financial advice.

That it was Fidelity that went to zero first was something of a surprise. Its reputation was made on the prowess of its stockpickers. The move therefore reveals just how much active management in shares is suffering. Over the past decade, an average of 87% of actively managed American equity funds underperformed their benchmark indices. Average active-management fees in 2017 were 0.57%.

Active-only asset managers have tried to respond to pressure from passive funds by consolidating. Examples include mergers between Janus, an American fund house, and Henderson, an Anglo-Australian firm; and in Britain, between Aberdeen Investments and Standard Life. But it is hard to see a reversal of the shift toward passive management, which, by some estimates, already approaches half of all assets in managed American equity funds. Fidelity’s move is likely to prompt further consolidation among passive-fund providers, too, even though many are already giants. After all, to make a decent income from such activities as lending shares to short-sellers means doing it at scale.

In recent years Fidelity has lost business to rivals who had moved earlier to focus on passive investing and to squeeze costs. It was already shifting its emphasis. In June a net $5.6bn flowed into its passive fund offerings, even as $2.6bn net flowed out of its active strategies. Its new zero-cost funds will surely accelerate this trend.

The price war in asset management was already fierce. Will anyone go to the wall? At the very least, it is hard to imagine that Fidelity’s rivals can hold off from lowering or even scrapping their fees, too. As free current accounts show, once something is provided for nothing, it is very difficult ever to start charging again.

Correction (August 6th 2018): This article has been amended to reflect the fact that Charles Schwab's total market index-tracking mutual fund costs the same as its ETF version: 0.03%, not 0.09%.

three. And yet Casper’s customers are spoiled for choice at the till. Those who cannot afford to pay with a debit or credit card, or PayPal, can pay by instalments over six to 12 months. Those who make payments on time can enjoy the service free.

Such “point-of-sale” loans, which have been around for decades in one form or another, are becoming increasingly popular in America. Consumers who might previously have financed big-ticket purchases such as furniture, electronics or home-improvement projects with a credit card are now opting to borrow at the checkout, often with an initial 0% interest rate. These short-term credit products were once the domain of big banks like Wells Fargo, which finances consumer purchases, and Synchrony Financial, an issuer of store-branded credit cards. Now tech startups are entering the market with innovative techniques for underwriting and approving potential borrowers, often in seconds.

Demand is driven, in part, by younger consumers. Many young Americans tell pollsters that they dislike big banks. And they seem to have been scared off revolving credit by the financial crisis; according to the Federal Reserve Bank of St. Louis, those aged 20-35 hold about a third less credit-card debt than the same age cohort did in 2001. But they are willing to borrow over a fixed term for specific purchases such as a phone or car.

Some traditional banks have piled into the point-of-sale market. In 2015 Citizens Financial Group, a regional bank, began providing instalment loans to customers upgrading their iPhones at Apple stores. Its portfolio of such merchant-financing loans grew from $700m to $1.2bn over the past year. Millennials toting iPhones are not the only ones borrowing more. In the first quarter of 2018, personal-loan balances in America surged by 18% year-on-year to $120bn, according to TransUnion, a credit-scoring firm (see chart). Credit-card debt, meanwhile, rose by just 6%.

Some new entrants offer credit mainly through online merchants. Many target affluent youngsters with simple borrowing terms and partnerships with high-end brands. Affirm, an online lender based in San Francisco, was founded by Max Levchin, who co-founded PayPal. It has agreements with 1,500 online retailers, including Nest, which sells smart thermostats, and Peloton, which sells internet-connected exercise bikes.

Affirm’s loans, which typically range from $500 to $5,000, tend to carry higher interest rates than traditional credit cards. But the firm says borrowers end up paying less because they are not subject to hidden fees or compound interest, and have a set pay-off date. Its figures suggest that merchants using the service see revenue increase by 7-12% thanks to shopping baskets that are bigger and less likely to be abandoned before checkout is complete.

Other lenders partner with brick-and-mortar sellers. GreenSky, an Atlanta-based lender founded in 2006, arranges financing for home improvements, elective medical procedures and other pricey items. Rather than lend the money, it matches merchants like Home Depot with banks like SunTrust and Regions Financial to finance their loans. Loans are arranged face-to-face by the retailer or contractor making the sale, cutting the risk of fraud. GreenSky, which makes money by charging fees to both merchants and banks, earned $326m in revenue and $139m in net income in 2017. It went public in May and is now valued at $3.5bn, making it America’s fourth most valuable fintech company.

Investor enthusiasm for online lenders can be fickle, however. LendingClub and OnDeck Capital, two lenders that went public in 2014 promising to shake up the banking industry, have struggled with high sales-and-marketing costs, and difficulty finding cheap and stable funding for loans. Since its initial public offering, LendingClub’s share price has fallen by 82%; OnDeck’s has dropped 76%. Neither company turned a profit in 2017. GreenSky, which bills itself as a technology company rather than a lender, hopes to fare better by partnering with traditional banks rather than trying to beat them at their own game. That may not be as striking as the strategy of other fintech startups. But it has the advantage that it is already profitable.

Economic growth of the sort familiar today is a staggering departure from the pattern of pre-industrial human history. More than a century of study has not resolved the question of why it began where and when it did. This is a matter of more than historical interest. Weak growth in productivity has economists asking whether humanity is running out of ideas, and whether it is losing its ability to turn new technologies into rising incomes. A clearer understanding of what exactly happened in 18th-century Britain could shed light on the matter.

Those studying the productivity slowdown typically focus on supply-side factors such as workers’ skills and investment in research and development. Explanations of the Industrial Revolution often draw on similar factors, namely the characteristics of Britain that made it a fertile place to apply new technologies to production. Some scholars emphasise institutional features such as the emergence of stable parliamentary democracy, the rule of law and secure property rights. Others credit Britain’s capital markets, communities of skilled tinkerers and cultural habits that encouraged disciplined effort and entrepreneurial ambition.

But if such factors are necessary for industrialisation, they do not appear to be sufficient. Though other parts of north-west Europe shared many such features with Britain, it was in Britain alone that industrialisation began. Economic historians have therefore considered the “demand side” of industrialisation: the conditions under which firms found it worth experimenting with unproven technologies. In particular, scholars are embroiled in a debate concerning the “high-wage hypothesis” put forward by Robert Allen.

Over the past two decades Mr Allen has argued that the key to Britain’s industrialisation lies in the expansion of commerce and trade that preceded it. That had pushed up wages for British workers, while pay elsewhere in Europe stayed flat. On the eve of the Industrial Revolution, British firms operated in a market where coal was cheap but labour was dear. It thus made sense for firms to seek ways to use coal-fired machines to wring more out of their workers. At British wage rates, tinkering with new spinning or weaving equipment made sense, Mr Allen writes, whereas in France, say, new modes of production were less likely to pay off. Not until decades of mechanisation and innovation in Britain had boosted the efficiency of new equipment was it worth adopting on the continent.

Mr Allen’s work has prompted a wave of research delineating the contours of the high-wage argument. No systematic income data existed at the time. Scholars must instead glean wage information wherever history chanced to leave it. They must determine how productive workers were (hence the debate about daily spinning rates), and whether they were typical of most labourers. And then they must work out what such workers bought with their earnings, and at what price. Consumption of expensive wheat bread might imply that real wages (that is, adjusted for living costs) were low—unless those workers could have bought cheaper bread, made from oats or barley, which would suggest they earned enough to afford a luxury.

This work has galvanised efforts to understand a critical period in economic history. New research by Jane Humphries and Benjamin Schneider, for example, reveals information on the economic role of women and children, who earned less than men, in the spinning industry. Judy Stephenson has uncovered new details about construction workers in London and shown that many estimates of working hours are probably too high.

Those who disagree with Mr Allen’s thesis try to find evidence to support a rival, older, theory that the impetus to industrialise came from low wages rather than high ones. In this story vast pools of cheap labour in pre-industrial societies were a potentially lucrative resource and anyone who could put it to better use stood to benefit enormously. In Mr Allen’s narrative, spinners’ wages, though very low by modern standards, were high enough to motivate the development and deployment of equipment like the spinning jenny. For Ms Humphries, however, capitalists found the spinning jenny attractive because it enabled them to squeeze more out of the cheap labour of women and children.

Tinker tailor

For now Mr Allen’s theory looks more compelling, though further work might easily alter the balance. Yet the central role of labour costs in both theories has lessons for economists studying productivity growth today. They tend to treat wage growth as a function of technological progress, rather than an influence on it. The ability to produce new ideas surely depends upon supply-side factors, from the number and quality of engineers a society produces to the competitive environment facing large firms. But if productivity is growing slowly, that might also be because labour costs discourage experimentation with new technologies.

Such experiments are slow, risky and expensive. When profits are high and wages stagnant, they are hardly worth the trouble. Until wages become too high, human burger-flippers and call-centre workers, like hand-spinners, will do.

Sources:
"The British industrial revolution in global perspective", Robert Allen, 2006.
"Unreal wages: a new empirical foundation for the study of living standards and economic growth in England, 1260-1860", Jane Humphries and Jacob Weisdorf, 2016.
"Spinning the industrial revolution", Jane Humphries and Benjamin Schneider, 2016.
"Looking for work? Or looking for workers? Days and hours of work in London construction in the eighteenth century", Judy Stephenson, 2018.
"Spinning their wheels: A reply to Jane Humphries and Benjamin Schneider", Robert Allen, 2018.

2014. A chatty man with a sunny disposition, he started driving a taxi instead, ferrying tourists around Athens and offering travel tips. But he doubts he will be able to afford a holiday himself any time soon.

Greece’s public-debt woes triggered an economic collapse that lasted longer than the Great Depression in America. In 2009 the new prime minister admitted that budget-deficit figures had been understated for years, and were perhaps double those originally reported. Ratings agencies downgraded its debt. Interest rates surged. In 2010 the government turned to the euro zone and the IMF for help. Their loans had strings attached: that Greece implement deep spending cuts and structural reforms.

On August 20th Greece exits the last of three bail-out packages. Both its creditors and its government think its public finances have improved enough for it to borrow from the markets again. Debt relief agreed on in June helps cushion its return. The maturity of some loans has been extended, and interest-rate relief offered on others. A cash buffer of €24bn, enough to cover nearly two years of Greece’s funding needs, should also reassure investors.

But the public finances and economy have miles to go before they reach normality. Public spending is still severely restrained. The Greek government has signed up to exceedingly ambitious targets: primary surpluses (that is, excluding interest payments) of 3.5% of GDP until 2022—which only a few non-oil-producing countries have achieved in the past 30 years—and an average of 2.2% until 2060. In the early years, creditors will monitor progress every quarter.

Euclid Tsakalotos, the finance minister, is confident that Greece will beat these targets, freeing up budgetary space for tax cuts and greater investment and social spending. But Greece’s public-debt burden of 180% of GDP means that creditors’ faith in the public finances is vulnerable to missed targets, slow growth or a sharp rise in interest rates. In a report released on July 31st the IMF said that further debt relief might be needed.

After years of contraction, followed by stagnation, the economy is growing again. But Mr Vourvoulakis and most of his compatriots are yet to feel the benefit. The crisis caused profound damage to the economy. In real terms, GDP and investment are significantly below pre-crisis peaks (see chart). A fifth of the workforce, and two-fifths of young people, are unemployed. For Greeks lucky enough to have jobs, wages have been slashed and taxes raised. Hundreds of thousands of mostly young and skilled people have left the country in search of better livelihoods.

The crisis exposed deep flaws in Greece’s economic model. It relied too much on low interest rates, which funded splurges on public spending and housing, and too little on exports. Wages had far outstripped productivity, making the country less competitive than many others in the euro zone. The government bureaucracy and courts were corrupt and inefficient. Greece was a forbidding place for foreign investors and new businesses.

The situation is now improving, though slowly. Exports have risen, partly thanks to a doubling in the number of tourists visiting Greece (though Spain and Ireland, which also struggled after the financial crisis, have seen exports grow more). Competitiveness has improved because of falling nominal wages—a painful way to adjust, but the only one possible in a currency union with low inflation.

The government’s belt-tightening has been drastic—and counterproductive, many economists argue. Tax rates are now higher than in most of the European Union, points out Miranda Xafa of the Centre for International Governance Innovation, and may be choking growth. The tax-free threshold is higher than the median private-sector wage, meaning revenues depend on a small share of taxpayers. The marginal rate for Greeks earning €40,000 ($46,500) or above (including social-security contributions) is around 70%. Ms Xafa thinks that evasion may be rising, as self-employed people conceal their income. At its creditors’ insistence, the government will broaden the tax base in 2020.

Growth is still disappointing. GDP rose by 1.4% in 2017, and is expected to increase by around 2% this year. The IMF is gloomy about the economy’s potential, partly because of a rapidly ageing population.

The banking system is still ailing. Just under half of existing loans are non-performing, and banks have little appetite to offer new credit. They are now better set up to sell non-performing assets, but working out how much collateral is worth and which indebted businesses can survive will take time. Even if banks’ targets are hit by the end of 2019, bad loans will still account for over a third of the books.

The biggest barrier to growth, though, is that it is still harder to do business in Greece than in other European countries. Take the €8bn privatisation of Hellenikon, the site of the old Athens airport. The lease for the land was put out to tender in 2011 and eventually bought by a consortium of Greek, Chinese and Emirati investors, who intend to turn it into a holiday resort. But delays, arguments over terms and investigations by environmental agencies mean that the buyer has yet to break ground.

Improvements to the business environment, justice system and public administration are all on Mr Tsakalotos’s agenda. But critics doubt his government’s commitment to reform. Greece rose rapidly up the World Bank’s Doing Business rankings until 2015, when a coalition government led by Syriza, a radical left-wing party, came to power. It has rowed back on some of its predecessors’ reforms, such as liberalising highly regulated professions and curbing collective wage-bargaining. The IMF frets that pay rises might once again become untethered from productivity gains.

Here’s looking at Euclid

With a general election due by October 2019, the government could roll back even more reforms in order to win the support of interest groups. Economists suspect that both financial markets and creditors pay more attention to the fiscal targets being pursued by Mr Tsakolotos. That leaves important and politically difficult reforms by the wayside.

The road is still uphill. “We have a great history,” Mr Vourvoulakis says in Athens, as he drives through the old town. “But I don’t know if we have a good future.”

of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

themselves escaped relatively unscathed, owing to defences built during the 1990s, when the country struggled with deflation and excessive debt. But they seem to have forgotten the lesson. Risk-taking is back.

Squeezed at home by razor-thin margins and negative interest rates, both major and regional banks have been on a spree abroad. Banks have more than doubled borrowing and lending in dollars since 2007. Dollar-denominated assets of Japanese banks topped $3.5trn at the end of 2016, according to the Bank for International Settlements (BIS) in Basel. That leaves them vulnerable to currency swings and external shocks, it warns.

Pantheon, a consultancy, compares the way the foreign-currency balance-sheet of the Japanese banking system has evolved with those of five other rich countries with internationally active banks: Britain, Canada, France, Germany and Switzerland (see chart). France and Germany still have a smaller safety margin, but only Japan’s liquidity ratio (ability to cover funding outflows in a short period of stress) has worsened since 2006. Japan has “bucked the global banking trend of greater caution in foreign activities”, it says.

The BIS describes a game of financial musical chairs. Japanese banks were heavily exposed in the Asian meltdown of 1997-98. When they cut down on credit, European competitors stepped in. The crash in 2008 and the European sovereign-debt crisis that kicked off in 2010 sent the interlopers scurrying for cover. Japanese banks, less exposed to those crises, expanded their lending, relying heavily on volatile swap-market funding to do so. 

National regulators are worried. The Financial Services Agency has repeatedly issued warnings about banks’ exposure to dollar holdings, fearful that a strengthening dollar would make foreign debt dearer to service and harder to roll over. The Bank of Japan (BoJ) has prodded institutions to prepare for imported shocks, such as an exchange-rate shift or financial crisis. Domestic activities are less of a concern. Most banks still bear the imprint of their painful restructuring two decades ago after a property bubble burst, says Shinobu Nakagawa of the BoJ. “Foreign currency—US funding—continues to be the main worry.” 

Such fears were among the reasons why the BoJ introduced “yield-curve control” two years ago, says Freya Beamish of Pantheon. This policy aims to keep long-term rates higher than short-term rates, easing the pressure on banks to seek higher returns abroad. Though at first it seemed to work, banks and insurers have begun building up foreign exposures again. This week was marked by speculation that the BoJ is considering further tweaks, and that it may taper its quantitative-easing policy sometime this year—much earlier than had been expected. That pushed up Japanese bond yields, with an effect that rippled out to America and Europe.

The BoJ may stay its hand for now: inflation remains stubbornly below its target of 2%. But Japanese banks’ foreign adventures are certainly complicating its task. Ms Beamish sees the potential for “several vicious spirals”. Japanese institutions could find themselves unable to roll over short-term dollar funding, forcing them to sell assets quickly to repay loans. That would damage their balance-sheets, raising the interest rates demanded of them and further weakening their position. If they were to liquidate yen assets to repay loans, this would drive the dollar up further, again squeezing global liquidity.

Nobody is predicting imminent meltdown. Banks in Japan are flush with liquidity, notes Takuji Okubo of Japan Macro Advisor, a consultancy. But five years of exotic financial engineering, from quantitative easing to negative interest rates to yield-curve control, have left the yen “abnormally” weak, says Mr Okubo. They have also left the BoJ with fewer options.

“Ten years ago only a few private-equity houses had dedicated health-care teams,” says Dmitry Podpolny of McKinsey, a consultancy. “Today nearly everyone does.” Last year saw a frenzy of deal activity, the highest by value since the go-go year of 2007.

Private-equity funds are not the only ones keen on the industry. Institutional investors, tech-focused funds, generalist asset managers and corporate buyers are sniffing around, too. As they chase a limited number of targets, they are pushing up prices. Not high enough to dampen interest, however: health care is loved by investors for its resilience in downturns. It held up in 2000, when the dotcom bubble burst, and in 2008, during the financial crisis. People who need medical care rarely wait for an economic recovery. “Particularly late in the cycle, or if you’re leveraged, the sector can offer stability,” says Jim Momtazee of KKR.

But interest is not merely defensive. America’s health-care market has grown faster than GDP for decades and annual spending is now $3.5trn. Further growth worldwide will be fuelled by ageing populations, the rising prevalence of chronic diseases, new treatments and an expanding middle class. According to McKinsey, in 1990-2015 health care offered shareholders higher total returns than any other sector.

Health care has an added appeal for private-equity investors, says Bain, another consultancy. It has been comparatively untouched by the innovation, disruption and consolidation that have driven costs down elsewhere. Investors argue that they can add value by consolidating assets and making companies more efficient, for example with technology or better joint purchasing. Laboratories are a case in point. A decade ago most labs in America and Europe were small; now megalabs dominate. Dentists, radiologists, ophthalmologists and care homes are consolidating, too.

Investors are less vocal about complex systems of reimbursement, though they are another draw. Those receiving health care are rarely those who pay for it, which helps providers be opaque about charges. As payers try to control costs, particularly in America, they are shifting from reimbursing by treatment to reimbursing by outcome. In response, health-care firms are seeking to reposition themselves through mergers and acquisitions.

Recent months have seen a string of deals between payers and providers, such as the buy-out of Kindred Healthcare by Humana, a large American health insurer, together with TPG and Welsh Carson, two private-equity firms. During such corporate shake-ups, being private can be useful. “Public markets are impatient and focused on quarterly results,” says Kara Murphy of Bain. “With private capital you can bet on what a company could become rather than what it is.” The particular sensitivities associated with the industry are another consideration. “Given the extra scrutiny that the health-care industry gets, it’s often better for the company to be private,” she adds.

Corporate buyers looking to expand into new products or markets offer private-equity firms an exit route. An example is the sale in 2016 of Truven Health Analytics, a health-data cruncher, by Veritas Capital to IBM for $2.6bn. The tech giant paid more than double what Veritas had paid four years earlier. But the data firm was well matched with Watson, IBM’s artificial-intelligence platform, which it is promoting as a diagnostic tool.

High prices and stiff competition mean investors must think creatively. “When everything is expensive we look for quality assets in niche markets with high barriers to entry and high growth opportunities,” says Philippe Poletti of Ardian, a European private-equity firm. Lateral thinking led it to disinfectants. In 2013 it co-invested in Laboratoires Anios, a French maker of hand-sanitisers, cleaning materials for hospital equipment and the like. After bulking up the sales team and investing in innovation, it made five acquisitions, in Brazil, Turkey and elsewhere. And it identified a niche within a niche—products for cleaning and disinfecting endoscopes—which it thought it could dominate, for example by buying a producer of endoscope-cleaning machines (which in turn use Anios’s chemicals). When Ardian cashed out last year, turnover had expanded by 25% and earnings by 50%.

Public scrutiny of health-care provision, not to mention complex webs of national regulations and payments systems, mean that investors have often preferred products to services. It is easier to sell latex gloves or bandages than surgery across borders. This also helps explain why private equity has made greater inroads into American health care than into Europe’s smaller, more varied markets (where public systems have also often resisted private investment). But that very fragmentation may mean that Europe’s health-care market is next to fall.

Budget constraints are making governments there more open to private capital. Several countries, including Finland and Spain, are turning towards public-private partnerships and some investors hope that Britain’s struggling National Health Service will become more welcoming. “In Europe almost every country faces ageing populations and in 10-20 years they will need health care,” says one fund manager. “There’s a huge challenge in providing for that growing demand while increasing efficiency. PE can help solve that problem.”

Scarce assets, stiff competition, cheap debt and large amounts of “dry powder” make a volatile mix. “Valuations are very high, but I really can’t see an end in sight,” says Martin Gouldstone of Results Healthcare, an advisory firm. Such remarks normally suggest bubbles. But health care is not normal. Some parts may be hyped (bits of biotech and med-tech spring to mind). There will be disruption as big new actors such as Amazon barge in. But as long as human bodies fail, they will need fixing.

stocks at all. In his book “The Intelligent Investor”, Graham distinguished between two archetypes. Enterprising investors are willing to devote time and care to stock-picking. Defensive investors want a quiet life. So they should simply buy a diversified list of leading stocks instead.

The emergence of low-cost indexed funds has made it easy to be this kind of know-nothing investor. Yet there is still a decision to make, namely asset allocation. How much of a portfolio should be in risky stocks and how much in safe bonds? In theory the split depends on expected returns, volatility (how much asset prices fluctuate), the investor’s appetite for such volatility—and even the investor’s age and job. Thankfully Graham had a simpler answer: a 50-50 split between stocks and bonds, maintained by adjusting as required by market prices.

The merit of this approach—or indeed the 60-40 rule favoured by many pension funds—is simplicity. There is a better chance of sticking to a simple, fixed-weights rule than a complex one. Deciding on the right portfolio weights is not the most important part of asset allocation. What matters is sticking to whatever weights are chosen. And that requires regularly rebalancing your portfolio.

Rebalancing has many plusses. For a start, it prevents the portfolio becoming riskier or safer than desired. If stockmarkets boom while bond prices drift, a 50-50 split can quickly become 70-30. A timely rebalancing would mean selling shares and buying bonds to restore parity. This is also a crude way of taking account of changing valuations. To say a security is cheap is to say it has a high expected return. When prices rise a lot, expected returns go down. Investors should want to hold more cheap assets and fewer dear ones. Rebalancing is helpful in this regard. It requires the shedding of assets whose expected returns have fallen most in favour of those that are cheaper.

All this would seem to go against a lot of market wisdom. “Cut your losses and let your winners ride” is a doctrine for the hedge-fund traders who bet on short-term shifts in market prices. Rebalancing does the opposite. Recent winners are cut in favour of more exposure to recent losers.

The long and the short of it

Yet the two approaches can be reconciled. Short-term “directional” trades—that the dollar will fall or oil prices surge, say—are highly speculative. The premise behind them might be wrong. So it is best to cut losses quickly. If a forecast is right and prices veer in a new direction, they often travel a long way. In which case, it is best to let winning trades run. Rebalancing, in contrast, is a strategy for the long term. It is a bet that extremes in market prices will be corrected eventually.

Andrew Ang of BlackRock offers an example of how rebalancing works, drawing on the 15 years between 1926 and 1940, which included the 1929 crash and the Depression. A $1 investment in stocks in January 1926 was worth $1.81 by December 1940 (after some extreme ups and downs). Bonds did better. A dollar invested in 1926 was worth $2.08 by 1940. A buy-and-hold portfolio of 60% stocks and 40% bonds in 1926 left untouched would be worth just $1.92. But a 60-40 portfolio, rebalanced every quarter, would be worth $2.46, beating both stocks and bonds (see chart). Rebalancing pays off because it cuts back on equities when they become dear and adds to them when they become cheap.

This is not an easy policy to follow. It goes against instinct to buy assets that have fallen heavily in price. But having a clear and simple strategy helps. It has parallels with other goals that require personal discipline, such as staying fit. “It doesn’t really matter whether you are swimming, playing tennis or running,” says Mr Ang. “What’s really important is getting into the habit of making a regular time to exercise.” If a rebalancing habit is established in calm markets, it will be much easier to follow when markets become stormy. How often should you do it? It is best to put a date in your diary for once a quarter, says Victor Haghani of Elm Partners. Indexed funds can be traded quite cheaply. But a lot of rebalancing can be done by diverting the flow of regular savings into the underweighted asset.

Not everyone can manage this. Indeed, rebalancing is effective because it works against the boom-bust cycle. Different weights will lead to different paths of returns. But what really matters is not the nature of an investment rule. It is whether you can stick to it. So keep it simple.

Since 2014 around 1,000 such dealerships have been bought or sold in America. According to Kerrigan Advisors, a firm that helps sellers, around 200 more will change hands this year. The largest deal to date came in 2015, when Warren Buffett bought Van Tuyl Group, a network of 78 dealerships with over $8bn in annual revenue. Holding companies such as South Africa’s Imperial and Super Group have been buying showrooms across England. Penske, an American group, has become the largest dealer network in Europe by revenue.

Car showrooms might seem an unlikely asset class to go global. For decades manufacturers relied on individual franchise-holders to sell and repair vehicles in local markets. Carmakers liked this fragmented market, because dealers lacked the clout to demand large discounts. For franchise-holders, the advantage was having a local monopoly on the brands they sold.

But the car market is changing in ways that favour consolidation. The spread of ride-hailing means fewer young city-dwellers are buying cars. Larger networks will be better placed to survive, says Andy Bruce, the boss of Lookers, since they have the scale to offer better deals on high-margin financing and insurance. Moreover, says Gianluca Camplone, a partner at McKinsey, a consulting firm, only the biggest dealerships will have the capital to invest in the equipment and training needed to service high-tech electric and, one day, autonomous vehicles.

For manufacturers, consolidation may mean a loss of pricing power. But there is a consolation, says David Kendrick, who specialises in dealership transactions at UHY Hacker Young, an accountancy firm. Interacting with a few dozen networks will be more straightforward than dealing with lots of individual ones—though carmakers still usually seek to ensure that no retailer has more than 10% of a national market.

The appeal of dealerships as an investment is boosted by their location, generally on major roads near retail centres. Such prime plots lend themselves to repurposing as industrial warehouses or e-commerce fulfilment centres, says Tim Savage of CBRE, a property company. Although interiors are tailored to the brands sold, the structure is frequently made of steel portal frames with internal partitioning that is easily redesigned. And it is often a condition of franchises that car showrooms are refurbished every three to five years, meaning they stay in excellent condition.

For small franchises, the main reason for selling may be that they would struggle to find enough capital on their own. Carmakers want their products sold in bigger, more luxurious outlets than they used to, says Mr Guiver. This year he became managing director of Group 1’s British operations, overseeing 53 dealerships across the country. Though he no longer owns the business he built piece by piece, he will still see the investment pour in.

equity, there is no let-up. The “shops”, as private-equity funds like to call themselves, are stuffed with money and raising more: $1.1trn in “dry powder” ready to spend around the world, according to Preqin, a consultancy, with another $950bn being raised by 3,050 firms.

So hot is the market that there are rumours of money being turned away. Even the firms themselves, which receive fees linked to assets under management, cannot fathom how to use all that may come their way. It is not for want of trying. The year to date has seen nearly 1,000 acquisitions (see chart 1). Health care has been particularly vibrant (see next article).

Even more noteworthy than the volume of money pouring into private equity is the way the business is maturing. Banks are reconfiguring their operations to serve such a transaction-heavy clientele. Limited partners—the public-pension schemes, sovereign-wealth funds, endowments and family offices that provide the bulk of private-equity investment—are playing more active roles. It all adds up to a stealthy, but significant, reshaping of the financial ecosystem.

Data on returns are patchy. Odd measures are often used to gauge performance and disclosure is intermittent. But there is plenty of reason to believe that private-equity funds have done well in the past decade. Low interest rates have favoured their debt-heavy business model. Rising asset prices have made it easy to sell for large gains.

And some recent clouds on the horizon have dissipated. Mooted tax reforms would have stopped private-equity firms from deducting the interest they pay on debt from their taxable income and forced their managers to pay the personal-tax rate on their investment profits (or “carried interest”), rather than the lower capital-gains rate. In the event, however, the new rules brought in last year did not touch carried interest at all and only slightly reduced the benefits of debt.

Another fear had been that regulations would become less supportive. Jay Clayton, who took over at the Securities and Exchange Commission (SEC) last year, made it clear that he wanted to see a shift towards public markets. He noted that the loss of companies to private equity had denied opportunities to small investors. A flurry of public offerings followed his appointment, including sales by private-equity firms. But the burdens of being listed remain heavy. These include onerous filing requirements and the knowledge that routine business decisions may become the subject of caustic public debate.

The result is that the value of public companies being taken private continues to rise (see chart 2). The figures understate the trend, since they omit the growing number of large companies selling off divisions to private-equity firms. These deals attract little attention—which is partly the point. Headquarters do not move; senior executives keep their jobs. Recent examples include the decision by J.M. Smucker, a food company, to sell its baking business to Brynwood Partners and GE’s move to sell its industrial-engines division to Advent International. Similarly unremarked is the rising number of transactions in which one private-equity firm sells to another, rather than listing an asset on the public markets.

Private equity’s growing heft has knock-on effects throughout the financial sector. Goldman Sachs has 25 merger bankers assigned to private-equity firms, working on deals alongside colleagues who focus on specific industries. Its analysts monitor 5,500 private-equity holdings—50% more than the number of listings on the American public markets. The other big institutional banks, such as Morgan Stanley and JPMorgan Chase, are just as attentive to private equity.

The most significant change may be in private equity’s investor base. In the past two years the number of limited partners with more than $1bn invested has grown from 304 to 359. Together they account for $1.5trn—half of all private-equity money, according to Preqin. And this statistic does not fully capture their growing activism. As well as placing cash in private-equity funds, they increasingly “co-invest”—ie, take direct stakes in a buy-out.

The advantage for limited partners is that they avoid management fees—often 2% annually, plus 20% of profits. Private-equity funds gain from being less reliant on each other. Not long ago, large deals often required several funds to collaborate. The purchase of Nielsen Media in 2006, for example, involved seven. That alarmed antitrust regulators, complicated management and made it hard to exit from investments, since many potential buyers were already co-owners. The value of deals done by more than one private-equity firm has fallen by half since the Nielsen deal. Even when firms work together, the average number involved is smaller than it was.

For the biggest deals, private-equity firms are today making acquisitions solo and then syndicating large stakes through co-investments to limited partners. Notable among numerous recent examples are Blackstone’s purchase of Thomson Reuters’ finance and risk division in January for $20bn, and Carlyle’s of the specialty-chemicals division of Akzo Nobel, a Dutch multinational, in March for $12bn. The process often begins with a phone call by a private-equity firm to big, sophisticated investors such as GIC, Singapore’s sovereign-wealth fund, or CPP Investment Board, a giant Canadian pension fund. They can quickly put together teams to analyse transactions. Smaller limited partners are brought in later if needed, along with select outsiders, notably family offices.

This trend does not just reduce risk for private-equity managers. It also underlines a change in financial markets. Why should companies accept the costs and scrutiny that come with selling shares to the general public when there is a sophisticated, rich, private alternative? And when the time comes for one private-equity owner to sell, another private-equity fund can put together such a network to buy. Brokers and exchanges developed a century ago to help companies tap money where it lay—in individual pockets. Today that capital increasingly lies elsewhere.

Trump during talks on July 25th. The reminder of shared values and sacrifices may have helped nudge the two men towards a truce in the incipient transatlantic trade war (see article). That truce will help America and Europe to co-operate on another front.

Both suspect that investment from China is a ploy to gain access to advanced technology and undermine domestic security. European officials are thrashing out the details of an EU-wide investment-screening mechanism, proposed by Mr Juncker in 2017. A government white paper on national security and investment published on July 24th suggests that post-Brexit Britain will be no soft touch, either: it was widely seen as intended to increase scrutiny of Chinese buyers. But it is the Trump administration that is moving fastest.

Mr Trump had considered raising barriers to Chinese inward investment in sectors targeted by the “Made in China 2025” development policy. But he decided instead to support a plan to strengthen an existing investment-screening mechanism, the Committee on Foreign Investment in the United States (CFIUS). With votes in both houses of Congress expected shortly, and bipartisan support, he could soon be signing it into law.

CFIUS is already powerful. If it thinks a deal threatens national security, it can propose remedies or recommend that the president blocks the transaction. But security threats have evolved since it was set up in 1975, says Heath Tarbert, assistant secretary of the Treasury. The line between commercial and defence technologies has blurred, and the explosion in personal data has created new vulnerabilities. CFIUS’s workload has more than doubled in a decade. Lawyers complain that even uncontroversial deals are being held up.

The Foreign Investment Risk Review Modernisation Act would give CFIUS greater authority to examine deals where foreign investors gain control of critical infrastructure or technology, or of personal data. Minority investments would be covered if they give investors access to sensitive information. It allows for CFIUS’s budget to be increased. And it tightens export-control rules, which prevent sensitive technology being transferred abroad.

Early drafts were seen by businesses and former CFIUS officials as too draconian. Lawmakers have been surprisingly willing to listen to critics, and unusually bipartisan, says Kevin Wolf, a former assistant secretary to the commerce department under Barack Obama. The latest version should, he reckons, give businesses more clarity on the kinds of technology that will come under CFIUS review.

Other aspects are hazier. Without further regulations, businesses that store personal data may not always know if their deals need review. CFIUS’s remit will expand to include more small firms receiving early-stage investment. Reviews are costly, since would-be buyers and sellers usually hire lawyers and CFIUS is to be allowed to start charging fees. Some fret that the costs could put startups off foreign investment.

Although the new rules set out the kinds of deals that should be scrutinised, CFIUS alone decides if a deal poses a security risk. Among its members are officials from both security-oriented defence and justice agencies, and business-facing departments such as commerce and treasury. That split used to allow CFIUS both to protect national security and to promote foreign investment, says Clay Lowery, a former assistant secretary of the Treasury. Under Mr Trump, though, the economic protectionists now line up alongside the security hawks.

Investment from China has already fallen (see chart). That partly reflects capital controls and crackdowns on dealmaking back home. CFIUS blocked several high-profile deals in the past year, and Mr Trump’s threats on trade and investment will not have helped.

Flows of capital to Europe have held up a bit better. But it too is becoming less welcoming to Chinese investment. Mr Juncker’s proposals, which officials are hoping to finalise by the end of the year, would allow EU countries to share information on the national-security impact of foreign deals. With the tough guys in charge in America and Europe, Chinese investors may have to look elsewhere.

It is no “death cross” or “vomiting camel”. But what it lacks in panache, the inverted yield curve more than makes up for in predictive potency. Just before each of America’s most recent three recessions the yield curve for government bonds “inverted”, meaning that yields on long-term bonds fell below those on short-term bonds. Economists and stockmarkets seem unconcerned that inversion looms again (see chart). But despite generally strong economic data, there is reason to heed the warning signs flashing across bond markets.

There is nothing particularly magical about the yield curve’s predictive power. Short-term interest rates are overwhelmingly determined by changes in central banks’ overnight policy rates—for example, the federal funds rate in America, which has risen by 1.75 percentage points since December 2015. Long-term rates are less well-behaved. They reflect the average short-term rate over a bond’s lifetime, but also a “term premium”: an extra return for holding a longer-term security.

An inverted yield curve may mean a few things, none of them cheering. Markets may expect future short-term rates to be lower than present ones, presumably because the central bank has chosen to cut rates in response to economic weakness. Or markets may think they need less compensation for holding long-term bonds in the future. That might reflect expectations that inflation will fall, or that appetite will grow for the safety provided in financial storms by long-run government debt.

More generally, the yield curve often inverts when a central bank is expected to switch from a bout of monetary tightening to one of monetary easing. Such transitions often happen around the time a boom comes to an end and a recession begins. The flattening of the American yield curve over the past few years has occurred as the Fed has begun raising its main policy rate, in order to prevent a long expansion from becoming worryingly inflationary. Rate rises will eventually give way to rate cuts, most probably when Fed policymakers begin worrying more about slow growth than about inflation. At that point a recession might be on the cards. Inversion of the yield curve would warn as much.

The yield-curve omen is not simply folk wisdom. Research generally concludes that it is indeed a useful indicator of future economic conditions. An analysis by Menzie Chinn and Kavan Kucko, for example, in which the authors examined nine advanced economies between 1970 and 2009, determined that the spread between the yield on ten-year and three-month bonds was a meaningful predictor of industrial activity in the following year. According to a paper in 2008 by Glenn Rudebusch and John Williams (now the president of the Federal Reserve Bank of New York), simple predictive models based on the yield curve are better than professional forecasters at predicting recessions a few quarters ahead.

Yet there is also something strange about the enduring power of the yield-curve indicator. A reliable signal that a recession looms should prod central banks into preventive action. That should help avert recession, thereby destroying the predictive power of the indicator. It is possible that this is starting to happen. In their analysis Mr Chinn and Mr Kucko note that the relationship between the signal sent by the yield curve and subsequent growth was weaker in the 2000s than in previous decades. Perhaps central banks are wising up.

Or perhaps not. In 2006 Ben Bernanke, then the chairman of the Federal Reserve, expressed scepticism about the danger indicated by the yield curve, noting that he “would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come”. (It did.) When asked about the flattening yield curve in March of this year, Jerome Powell, the current chairman, echoed Mr Bernanke’s sentiment, saying: “I don’t think that recession probabilities are particularly high at the moment, any higher than they normally are.” Awkwardly, whether Mr Powell is right or not depends on how his Fed plans to react to the yield-curve signal.

Oh, inverted world

There are two potential reasons why the curve remains a portent. One is that central banks make mistakes. In 2006 Mr Bernanke argued that the yield curve’s signal was distorted by unusual purchases of American bonds by foreign central banks and pensions. Similar arguments are made today, concerning the effect of asset-purchase programmes by the European Central Bank and the Bank of Japan.

Yet just how much distortion is occurring is unclear, and the Fed could easily misjudge the friendliness of the global financial environment. Similarly, central bankers often overestimate the durability of a boom. Recessions happen when central banks overtighten. When such accidents occur, the yield curve inverts. Because the effects of monetary policy are felt only after some time, and because central bankers make mistakes, the yield curve retains its power.

The second reason to keep watching the yield curve is that central bankers generally worry more about high inflation than about rising unemployment. It is hawkishness rather than doveishness that leads to inverted yield curves and recessions, after all. The Fed’s own communications make this plain. According to its most recent projections, the policy rate will eventually settle at a level of 2.9%. But in 2019 and 2020 the policy rate will rise higher than that, meaning that cuts will be necessary later. The yield curve, the Fed is advertising, is quite likely to invert.

And why? Because, again according to the projections, the unemployment rate is now unsustainably low. A slowing of growth sufficient to bring the unemployment rate back up to what the Fed sees as its natural long-run level—4.5%, rather than the current 4%—is needed, lest inflation rise out of the Fed’s comfort zone. This strategy may well turn out to be a mistake. It will not have been an accident.

order to “avoid a crisis like those we have faced before in our history”. That steadied the peso. But it also brought back painful memories for Argentines, highlighted doubts about Mr Macri’s approach to mending Argentina’s economy and cast a shadow over the reformist president’s future.

Argentines have bitter memories of the last time their government sought the IMF’s help. Many blame the fund for imposing austerity in return for loans and then pulling the plug in 2001, tipping their country into a devastating $82bn sovereign default. It was followed by widespread unemployment, a sharp rise in poverty and the corralito, in which the government froze bank accounts for a year to halt a run. Argentina’s economy had been battered by the lunatic policies of a succession of populist governments. But most Argentines still hold the IMF responsible for their own Depression. To turn to it for help was, therefore, politically risky, but Mr Macri was running out of alternatives.

Argentina’s peso has fallen by a fifth against the dollar since the beginning of the year (see chart). The central bank’s frantic efforts to halt the slide failed. Between April 23rd and May 4th it sold $5bn of currency reserves and raised interest rates in stages by 12.75 percentage points. As part of the effort to reassure investors, Nicolás Dujovne, the treasury minister, cut the target for this year’s primary budget deficit from 3.2% to 2.7%. It had reached 3.9% in 2017. But each new step brought only brief respite before the peso started to fall again.

Like other emerging markets, Argentina is suffering from the strengthening dollar and higher American interest rates. On April 24th the yield on ten-year Treasury bonds rose above 3% for the first time since January 2014. That fuelled a sell-off, which gained fresh impetus on May 8th when Jerome Powell, chairman of the Federal Reserve, spooked investors by saying, in effect, that interest-rate policy would be set without taking much notice of the impact on emerging markets. The Turkish lira, Mexican peso and Polish zloty all fell.

But Argentina is unusually vulnerable. Inflation expectations for this year have risen to 22%, well above the central bank’s target of 15%. Investors are worried by foreign-currency debt that has risen to 40% of GDP, up from 26% in 2015, and by large fiscal and current-account deficits. High interest rates and underdeveloped capital markets mean Argentina has been unable to find the financing it needs locally and in its own currency, as some developing countries have done.

Squabbles over the speed of deficit reduction have created fractures in Mr Macri’s coalition. An emboldened opposition is seeking to derail his economic reforms. “Investors are questioning whether the government is willing to assume the political costs required to sustain its long-term economic strategy,” says Dante Sica of Abeceb, an economic consultancy.

Mr Macri has taken a cautious approach to cleaning up the mess he inherited from his predecessor, Cristina Fernández de Kirchner. When he took office in December 2015, the economy was in complete disarray. The national statistics institute produced fictitious inflation figures to disguise annual price rises of more than 40%. The central bank printed money to finance the deficit, which swelled to 5.4% of GDP in 2015. Currency controls artificially inflated the peso. Export taxes encouraged farmers to hoard grain. A dispute with bondholders meant that Argentina was locked out of international credit markets.

Mr Macri quickly lifted currency controls, cut export taxes and settled with holders of Argentina’s defaulted debt. But lacking a majority in congress, and hoping not to stifle economic growth, he decided to reduce the deficit slowly. Subsidies on transport and utilities were withdrawn only gradually in order to avoid a spike in inflation. Low international borrowing costs allowed the government to plug the fiscal deficit cheaply. Foreign investors appeared to endorse the strategy. In June 2017 they snapped up Argentina’s first 100-year bond, with an annual yield of 7.9%.

But then Mr Macri seemed to take his eye off the ball. Doubts first flared up in December, when the central bank loosened its inflation target for 2018 from 12% to 15%. It did so at the behest of the government, which was worried about the impact of high interest rates on economic growth. The bank then cut rates by 0.75 percentage points, causing inflation expectations to rise. Investors began to fret about its independence and its commitment to reducing inflation. In April, when the government introduced a capital-gains tax on Argentine bonds, the nerviness intensified.

With credit now prohibitively expensive, Argentina has little alternative but to turn to the IMF. It would no doubt have preferred an unconditional “flexible credit line”. But the IMF offers such loans only to countries with “strong economic fundamentals and policy track records”. Despite the progress made under Mr Macri, Argentina lacks both. On May 10th it confirmed that it was seeking a “stand-by” arrangement, which guarantees that credit will be available in exchange for whatever reforms the IMF deems necessary.

Things could be worse for Mr Macri. Argentines were not queuing to withdraw their deposits from banks, as they did in 2001. He does not face re-election until October 2019 and has until now enjoyed relatively good approval ratings. But he seems likely to pay a high political price for the crisis. A recent poll found that three-quarters of Argentines were opposed to approaching the IMF. Next year’s election looks likely to be more competitive than expected, reckons Sergio Berensztein, a political scientist. Holders of Argentina’s 100-year bonds have a nervous few months ahead of them.

That crisis prompted liberalising reforms that helped integrate India into the global economy. By 2013 India’s exports as a percentage of GDP had nearly quadrupled, to over 25%, not far from the global average. But an exporting funk since then has pushed the figure to its lowest level in 14 years. Paired with a rise in imports, the trend has revived questions about the competitiveness of Indian firms—if not the government’s ability to finance a growing current-account deficit.

A repeat of the 1991 drama is not in the offing. India’s economy today is growing at a world-beating pace. Its central bank holds enough foreign reserves to pay for nearly a year’s worth of imports. Foreign investors are on hand to finance both government and corporate borrowing. Yet economists are left pondering why India has been unable to boost exports even as the global economy has purred along.

In the 12 months to March 2018, $303bn of Indian goods ended up overseas. That was up on the previous year, but still short of the $310bn achieved in 2014, when the Indian economy was a quarter smaller. Imports, meanwhile, have increased to $460bn, pushing the merchandise deficit to $157bn last year, up from $109bn in 2016-17 and its highest level in five years. A surplus in services such as IT outsourcing helps reduce the overall trade deficit by around half, but even there imports are growing faster than exports.

The shortfall is swollen by the rising price of oil, lots of which India imports (and some of which is also sold on as refined products). The surge from around $30 per barrel in early 2016 to over $70 now goes a long way to explaining the rise in India’s current-account deficit, which is expected to reach 2% of GDP this fiscal year, triple last year’s reading. Gold imports, used for saving or jewellery, have their own unpredictable rhythms, but also deepen the deficit.

The current trade lull extends beyond gold and oil, however. Exporters across the economy are being squeezed by the poor implementation of a goods-and-services tax that came into force last July. Perhaps 100bn rupees ($1.5bn) of refunds due to exporters once they can prove they have shipped their wares abroad is being held up by sclerotic administration. That is working capital which small-time exporters cannot easily replace.

Worse, a $2bn suspected fraud by a diamond dealer in February has resulted in regulators banning certain types of bank guarantees that exporters use to ensure they get paid promptly, exacerbating their funding problems. These snafus come as many firms are still recovering from the ill-advised “demonetisation” of November 2016, when most banknotes were taken out of circulation overnight. The move snagged local supply chains, giving foreign rivals opportunities to fulfil orders that would have gone to hobbled Indian firms and to gain market share in India itself.

Those woes come on top of perennial frailties. Crippling red tape means most Indian firms are small: the country lacks the mega-factories hosting thousands of workers making T-shirts or mobile phones that are common elsewhere in Asia. All but a few firms lack the heft to participate in global supply chains. A relatively strong rupee in recent years has not helped.

Unwilling to enact labour and land-acquisition reforms that might foster larger firms, the Indian government is instead shielding its industry from foreign competition. In recent months it has imposed tariffs on a dizzying array of goods, from mobile phones to kites. Though those will no doubt help stymie imports, it is just as likely that trade measures imposed by other governments will hobble India’s exports.

For it is India’s misfortune that Donald Trump’s America is its biggest source of trade surpluses. Mr Trump’s administration has multiplied the salvos against India, whether decrying supposed export subsidies, making it harder for Indian IT workers to get visas or accusing India of artificially weakening its currency. Unlike many American allies, India has not been exempted from imminent steel tariffs.

India would be seriously damaged by any further escalation in trade conflicts. It needs hard currency from exports not only to finance imports and economic growth, but also to repay external debts. These have swelled to around $500bn, or roughly a fifth of GDP, more than 40% of which is due in less than a year. Economists at DBS, a bank, say that this, together with India’s trade slump, has put “external financing risks back on the radar”. Keen to woo the investors it needs to fill the gap between exports and imports, India recently made it easier for outsiders to buy short-dated bonds, a move it had previously resisted for fear that investors might pull out suddenly if sentiment turned.

In a benign global macroeconomic environment, none of this matters too much. But investors’ appetite for funding emerging-market deficits ebbs and flows. A previous bout of monetary-policy tightening in America in 2013 led to a “taper tantrum” in which money rapidly sloshed out of emerging markets. India used to be shielded from such turns in global sentiment. But its poor trade record means it is becoming more exposed.

China’s tech darlings initially went abroad because it was their only real option. Chinese regulations forbid dual-class shares, a structure favoured by tech entrepreneurs because it means they can raise capital while retaining control. Companies must also have three years of profits before going public. This is a stumbling block for tech companies, which often burn through cash as they scale up.

But as tech has grown ever more important to China’s economy, its absence from the stockmarket has become glaring. The fact that foreigners have easier access to China’s most dynamic companies is a long-standing gripe for local investors.

So the government looked for ways to bring them home. It has not been a simple matter: their foreign corporate structures and dual-class shares violate local market rules. Officials finally settled on depositary receipts as the answer. The firms will keep their primary listings abroad but entrust banks with a small portion of their shares; the banks will then offer certificates in China backed by these shares.

The threshold for issuing Chinese Depositary Receipts (CDRs) will be high. Listed companies must have market capitalisations of more than 200bn yuan ($31bn). Companies going public abroad can offer CDRs at the same time if their market cap is expected to be higher than 20bn yuan. The first approvals could come as soon as June. Four companies are mentioned most often as candidates: Xiaomi, a smartphone maker that filed for a flotation in Hong Kong on May 3rd; Alibaba and JD.com, two e-commerce rivals; and Baidu, known for its search engine.

Companies could reap several benefits, says James Wang, the head of Goldman Sachs’s equity business in China. CDRs will be good for marketing, because their legions of Chinese users will now be able to own part of them. They will make it easier to include shares in pay packages, which previously had been complicated by capital controls. And they will give companies one more avenue for raising cash, all the more useful since it will be yuan (bringing dollars in from overseas takes time).

Yet there is no doubt that the overriding motive will be political. Keeping regulators happy is a requirement for any company in China. Left to their own devices the tech firms would be in no rush to sell shares in China; foreign listings have served them well. But when the government asks them to do something, they cannot say no.

What might the downsides be? One risk is that, as local investors clamour to buy them, CDRs will trade at a huge premium to their foreign counterparts. Because of capital controls, there is no channel for arbitraging between onshore and offshore markets. If premiums are too high, companies might look exploitative. Sean Darby of Jefferies, an investment bank, says they will need to issue enough CDRs to satisfy pent-up demand. But regulators will want to cap CDRs for fear that cash will be drained from the rest of the market.

Another worry is that companies will have to comply with onerous extra rules after issuing CDRs. One example concerns follow-on offerings. Listed firms in developed markets can go from announcing extra share sales to completing them in a day; in China, the process can take two months since they must obtain shareholder and regulatory approval. Analysts had thought that China would ease rules such as these for CDR issuers, but it appears set to keep them in place. The upshot is that the tech firms that list in China will, for their troubles, face cumbersome new regulations. Welcome home.

Though women in economics have long been aware of the discipline’s biases, a growing body of research is making the problem harder for men to ignore. When decisions are made about tenure, men are not penalised for having co-authored lots of papers, whereas women who co-author with men are, according to work by Heather Sarsons, of Harvard University. That suggests women’s contributions to such papers are discounted; in other fields, like sociology, this is not the case. Research by Erin Hengel of the University of Liverpool has shown that papers by women are better-written, on average, than those by men, but spend longer in peer review, suggesting that women are held to a higher standard. That makes female researchers less productive.

The climate within economics can be hostile as well. Economics Job Market Rumors, an anonymous website frequented by graduate students and used to discuss job openings and candidates, has long been notorious for threads that include derogatory or sexually inappropriate remarks. A recent newsletter of the American Economic Association (AEA) opens with an essay by Jennifer Bennett Shinall, of Vanderbilt University. On a flight home from the AEA’s annual meeting, another attendee attempted to kiss her and suggested her career would be fine so long as she “made smart decisions”. Ms Shinall says she considered keeping the incident to herself, because she did not yet have tenure and might need letters of reference from her attacker’s colleagues. Such concerns surely stop other episodes of this sort from ever coming to light.

The profession’s failings in this regard almost certainly influence the quality and focus of economic research. Putting women off careers in academic economics, and undermining the productivity of those who persist, means excluding good minds and good ideas. It also means excluding different viewpoints. Although individual women have all sorts of ideologies, surveys suggest that the views of men and women on some issues diverge, on average, in significant ways. Male economists are more likely to prefer market solutions to government interventions. Women are more likely to favour redistribution and environmental-protection rules. Were economics to include a broader array of views, its findings might well change, too.

Indeed, these biases may also inform views about bias. Women are far more likely than their male colleagues to say that gender gaps are rooted in inequities in the market. A survey of a random sample of members of the AEA, by Ann Mari May and Mary McGarvey of the University of Nebraska and Robert Whaples of Wake Forest University, found that hardly any men believed professional opportunities for economics faculty are tilted against women. Remarkably, about a third believe there is bias in favour of women. Many male economists seem to reckon the meritocracy is functioning perfectly well, with no problems to fix; men presumably dominate because of superior ability.

The lack of diversity within economics is not just a matter of women. Limited diversity of race and background at the top of the field can distort policy in worrying ways. For example, Narayana Kocherlakota, an economist and former president of the Federal Reserve Bank of Minneapolis, argued in 2014 that an absence of diversity at the Fed reduces the breadth of perspectives considered and undermines its effectiveness as a central bank. (Mr Kocherlakota was the first non-white person to be president of a regional Fed bank.)

Economists are taking some steps to address these problems. The AEA recently adopted a code of conduct obliging economists to carry on civil and respectful dialogue, and is working to set up its own forum for discussion of job openings and candidates. But there is far more to be done. Hiring committees should re-examine their recruitment and promotion practices. Economic journals could take a page out of sociology’s book and list authors according to their contributions to papers, rather than alphabetically. Removing the barriers faced by underrepresented groups would not transform the profession overnight, but would inject a bracing gust of competition into the field’s imperfect meritocracy.

Improperly identified

To generate lasting improvement, in its diversity and in other problem areas, economics could also do with a change in mindset. The profession has a strong sense of who an economist is and what one does; it is, as Axel Leijonhufvud once noted in an amusing paper, like a strange and insular tribe. This group identity is bolstered by the field’s status and influence, which might be threatened by changes to its composition, ideas and methodologies. But as economists point out so persuasively in other contexts, to improve requires change. Economics, like the economy, cannot thrive without a little creative destruction.

Many readers will no doubt recall dingy halls of residence owned by universities, or squalid private digs owned by individual landlords. But student accommodation has got an upgrade. Private halls have sprung up as cash-strapped universities have outsourced to companies such as Unite. Some have grown into publicly traded brands offering thousands of beds across the globe. American Campus Communities owns more than 134,000 beds across America. Dubai’s GSA has student housing in eight countries.

Some $16bn poured into the sector globally in 2016. Sovereign-wealth funds invested over 15% of their worldwide spending in student accommodation that year, up from less than 4% in 2011-15, according to the Sovereign Wealth Lab at IE Business School. The Canada Pension Plan Investment Board announced earlier this year that it had acquired a new portfolio of student housing in America for $1.1bn as part of a joint venture. The sector offers strong risk-adjusted returns, limited supply and stable demand, says Peter Ballon, who oversees the fund’s property investments.

Some of this is a punt on the global middle class. As families in developing countries, in particular India and China, have become richer, the appetite for English-language degrees has grown. More than a fifth of university students in Britain are from abroad. America’s foreign-student population grew by 40% over the past five years.

To serve the rich among them, developers now offer hot tubs, rooftop bars, cinema rooms and the like. But most of the action is in more affordable housing close to campus. According to Knight Frank, an estate agent, rising tuition fees in Britain seem counter-intuitively to make students willing to spend more on housing, since it is a smaller share of the total cost. Akshay Bagga is a typical customer. The 19-year-old from Birmingham spent his first year commuting to Aston before deciding he wanted the full university experience. He chose what he thinks is Unite’s cheaper option and is happy with the convenience of living five minutes from the library.

Student accommodation has some specific risks as an investment. Students tend to move only at the beginning of academic years, so failing to find a tenant then may mean a vacancy for a full 12 months. Students are harder on properties than most renters. Students, parents and universities demand prompt repairs and tight security, particularly when the student is living away from home for the first time. And a nativist turn in both America and Britain has led to tighter rules on visas for foreign students, crimping their numbers.

Against that, yields are higher than in other sorts of residential property, according to Savills. In America the average is 5.9% for student accommodation, compared with 5.6% for private residential rentals. And student accommodation has a valuable countercyclical quality. In recessions, people tend to go back to school.

The first lesson would be to avoid confusing the economy with the financial markets. If you looked at share prices alone, you might assume the intervening period had been calm; the S&P 500 index is around double its level when this column began in September 2006. But though the markets have long since recovered their sangfroid after the crisis of 2008-09, the trend growth rate of developed economies has never regained its strength. That is a bitter irony given that the crisis originated within the financial sector, bringing to mind a teenager who crashes their parents’ car and leaves them with the bill.

In part, the market’s resilience was owing to the remarkable strength of corporate profits, something else that would not have been obvious 12 years ago. Back then American profits were only just reaching a post-war high, relative to GDP. When they plunged in 2009, it looked like a return to normal. But the pre-crisis levels were rapidly regained and, indeed, surpassed. Explanations for the strength of profits include less competition in some industries, in particular technology, and the way globalisation has suppressed wage growth. In turn, this sluggish growth of real wages was a significant factor in the rise of populism, another big development of the past 12 years.

The second lesson would be never to underestimate the power of central banks. Readers would have scoffed if this column had forecast, back in 2006, that short rates would be cut to zero and below; that trillions of dollars of government bonds would trade on negative yields; and that even the ultra-cautious European Central Bank would join its peers in wholesale purchases of government debt. But quantitative easing happened without creating the inflation that many feared. And it perhaps averted another Depression.

Another timely tip back in 2006 would have been to relax about China. Those who worried about a banking crash or “ghost cities” full of vacant skyscrapers have yet to be proved right. China’s economy may be growing a little more slowly, but it has not stalled. More broadly, there have been crises in specific emerging markets over the past decade, but nothing as widespread as the turmoil of the late 1990s.

Perhaps these were obvious monsters, like the Doctor’s foes, the Daleks, who could be confused by the simple expedient of throwing a coat over their heads or (in early series) defeated by their inability to climb stairs. The greater financial dangers may be the equivalent of the Weeping Angels—living statues that creep up on you when you are not looking.

For example, experience has shown that there is no innovation, however seemingly benign, that the finance sector cannot overcomplicate and overextend. Securitisation was a good idea when first adopted, but ended with the mess of subprime loans that were sliced and diced into a dog’s breakfast. Exchange-traded funds (ETFs) are an excellent idea—a low-cost way for investors to own a diversified portfolio. But there are now too many funds and too many unnecessary varieties, such as ones that bet on trends in volatility or invest in ETF providers.

One day, this overexpansion may turn out to be a problem, especially as some ETFs have a liability mismatch. They offer instant liquidity in assets, like corporate bonds, that are fundamentally illiquid. Market-makers known as authorised participants (APs) are supposed to step in and keep the price of ETFs and asset values aligned. But as Helen Thomas of Blonde Money, an economic consultancy, points out, it is not clear which APs back which fund, nor whether it is easy for them to hedge their risks. What will happen in a sharp market downturn?

Markets have recovered from the crisis of 2008. But some day a combination of high valuations, illiquidity and the withdrawal of monetary stimulus by central banks will cause a problem that takes more than the Doctor’s sonic screwdriver to fix. Forecasting exactly when that will happen is the tricky bit and, sadly, Buttonwood’s Tardis can only go backwards, not forwards, in time.

Indeed, the moment has come for a change. Eventually, after a few series, Doctor Who has to regenerate and be replaced by someone younger, and with a better script. The same is true of columnists. Thank you all for reading.

America is edging towards trade conflict not just with an avowed rival but with its closest friends. In March, when President Donald Trump announced plans for tariffs on steel and aluminium, America’s allies were granted temporary exemptions to allow time to negotiate deals. Those exemptions are due to run out on June 1st.

Many countries are already off the hook, having agreed to restrict shipments to America. South Korea will cap its exports of steel to 70% of the annual average during 2015-2017. Argentina, Australia and Brazil have reached agreements in principle. Exemptions for Canada and Mexico are linked to progress on renegotiating the North American Free-Trade Agreement; those talks restarted on May 7th. The big exception is the European Union. The European Commission, which negotiates on its behalf, says it is willing to discuss a deal but will not do so while being threatened.

EU countries that have a lot to lose are less keen on that principled stand. Peter Altmaier, Germany’s minister for economic affairs, has said he would rather strike a deal than risk tensions escalating. In 2017 Germany exported €112bn ($133bn) of goods to America, substantially more than France and Italy combined. And if American tariffs are imposed, the commission would probably impose retaliatory levies on American goods, including bourbon and jeans. That might provoke a second round of American tariffs, which would probably take aim at cars, a big German export.

Europe has two ways to avoid an immediate trade war, reckons André Sapir of Bruegel, a think-tank. One is to offer broader trade talks. Deciding what to put on the table and reaching a deal in just three weeks is near-impossible, but that offer might be enough to gain a permanent exemption from metal tariffs. The EU would need to agree on a position first. Mr Altmaier favours a deal covering industrial goods; France wants to discuss public-procurement rules. The Italian minister for economic development told Bloomberg that quotas could be part of a deal that also covers cars, pharmaceuticals and textiles.

The alternative is for Europe to follow other allies’ lead and accept quotas. The commission is rumoured to be thinking of offering a “100% quota”—in other words, to keep steel exports to America at or below their current level. That would be a departure from its principled insistence on multilateralism, but would avoid a climbdown of the sort that Mr Trump might take as incentive to try the same trick with other goods. Whether he would sign up to such a deal, though, is unclear.

But Indonesia’s are growing fast. According to the Financial Services Authority (OJK), the industry’s supervisor, last year their assets rose by 19%, against 9.8% for conventional banks. BRIsyariah’s IPO will help tackle what the OJK says is the biggest obstacle to their development: a want of capital. Indonesian regulation divides banks into four categories; the more tier-1 capital they have, the broader their range of permitted activities. Of the 13 Islamic banks run as separate entities from their conventional parents, none is in category 4—banks with capital above 30trn rupiah, which are permitted to operate globally. BRIsyariah expects to become only the second in category 3 (over 5trn rupiah and allowed to operate in Asia). Lack of capital, says the OJK, means fewer branches and dearer funding, which constrains Islamic banks to focus on retail rather than corporate customers.

To appeal, Islamic products must be competitive with conventional ones, says Mohamed Damak of S&P Global, a rating agency. But sharia banking is far from doomed to failure. Arsalaan Ahmed, the chief executive of the Malaysian subsidiary of HSBC Amanah, the bank’s Islamic division, says that 65-70% of his retail customers are not Muslim.

Last year Indonesia’s president, Joko Widodo, known as Jokowi, set up a committee to promote Islamic finance and establish Indonesia as a hub. In June the OJK published a two-year “roadmap”. The supervisory body is also promoting awareness of sharia products: a survey in 2016 found that only 6.6% of Indonesians understood them. A council of Islamic scholars established several years ago may help avoid disputes over whether products meet sharia standards. Whether it will be as successful as Malaysia’s, which is housed in the central bank and enjoys legal authority, is not yet clear.

Lack of scale, says Herwin Bustaman, head of sharia banking at the Indonesian arm of Maybank, Malaysia’s biggest lender, bedevils all small banks, not just Islamic ones. But some banks’ legal structures make matters worse. A bank may create either a separate entity for its sharia division (eg, BRIsyariah) or a “sharia business unit” (UUS) that uses the capital, branch networks and personnel of the parent (eg, Maybank). The latter, says Mr Bustaman, is much cheaper: he says he matches the returns and cost-income ratios of conventional banks. The UUSs’ non-performing loans are just 2.5% of the total, against 4.6% at stand-alone entities. Their return on assets averages 2.4%, versus 1.2%.

It would be hugely helpful, says Mr Bustaman, if the OJK embraced the UUS model. A law from 2008, however, points the other way. A UUS must be spun off once its assets are half those of its parent (only a handful, including Maybank’s, reach even 10%) or in any event by 2023. The OJK is preparing simpler regulation allowing subsidiaries to use their parents’ branches, computers and people. Letting UUSs continue might be simpler still.

Regardless of legal form, the fastest route to scale may lie in Jokowi’s ambitious infrastructure plans and in loans to big companies. Even handling a tenth of the many billions being splurged on roads, railways and so forth would double Islamic banks’ assets, Mr Bustaman reckons. Indonesia is already the top international issuer of sovereign sukuk (sharia-compliant bonds), points out Bashar Al-Natoor of Fitch, another rating agency, and this year sold the first “green” sukuk, raising $1.25bn, although Malaysia issues far more sukuk in all through its domestic market.

The OJK says it indeed expects Islamic banks to play a bigger role in infrastructure. It also envisages a special role for them in financial inclusion, microfinance and supporting small businesses—which, it says, will differentiate Indonesia’s model from those of Malaysia and the Gulf states. Yet financial inclusion is rising fast anyway. The share of Indonesians aged 15 and over with bank accounts leapt from 36% in 2014 to 49% last year, according to the World Bank. Conventional banks and Asia’s technology companies will also vie to serve them. Islamic banks have their work cut out.