Money, banking & insurance

The generous CEO

The trend for CEO pay to exponentially outpace worker pay seems unstoppable with the average CEO in America earning US$12.2 million compared to the average unskilled worker’s paltry US$34,645. But one innovative CEO, Dan Price of Gravity Payments in Seattle, wants to change all that.

Price found out people who earn less than $70,000 are much happier when they get more money. He dropped his own pay from $US1 million to $US70,000 so his 100 workers could each earn $US70,000. About 30 saw their salaries double. Was it some kind of publicity stunt? It seems not – he is totally committed to a happier, fairer workforce.

The High Pay Centre in London found unequal workplaces – where the CEO/worker gap is large – had more industrial disputes, work-related stress and higher turnover than equitable workplaces. So perhaps Price was betting on a happier, more stable workforce, to ultimately make his credit card processing company more valuable.

The United States has one of the world’s biggest pay gaps, with CEOs regularly earning 300 times the average worker. A recent Harvard Business School study of what pay gaps people desire came up with some very surprising results. People across 40 countries, from diverse backgrounds, all agreed on about 4.6 times – except one outlier. Australians would like to see a ratio of 8.3 times! (We have no idea why.)

Price heard from 100 other CEOs who supported his generous action. It will be interesting to see if any other CEOs have followed his lead: we are certainly not aware of any. We think Dan Price is just an unusually good guy and an outlier (or outlaw).


Finance as a weapon

The idea of using financial sanctions to bring about political change isn’t new. Current sanctions against Russia are merely the latest in a long line of attempts by broadly pro-US and Western interests to influence or divide political will elsewhere.

It’s natural to ponder whether or not the dramatic fall in the price of oil is entirely coincidental. To put this into context, the collapse of the oil price from a peak of almost $US150 in 2007 to under $US50 in 2015 had a positive effect on oil-consuming economies, which spend the most on net oil imports relative to GDP. The US is a slight anomaly here, having suddenly ‘discovered’ huge deposits of shale gas right under its own feet.

As for oil producers, it’s a very mixed story. Saudi Arabia, a friend of the US and Europe for all the ‘wrong’ reasons, is sitting on about $US750 billion of foreign exchange reserves. Kuwait is similarly comfortable, having been cautious about spending and therefore able to balance its budget on an oil price of just $US44.

Contrast this with Russia, which needs a price of $US100+ to balance its books and Venezuela, which needs $US160. One wonders whether a deal has been done under the table between the US and Saudi Arabia to destabilise the Russian economy. Or perhaps this is a high-risk gamble by OPEC to destabilise the US by making Canadian oil sands, US shale oil and US gas uneconomic. Just saying…

Ref: Various, including Financial Times (US) 8 November 2014, ‘How low can it go?’ by E. Crooks. www.ft.com
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A few myths about the future

Doomsayers declare the West is history, from an economic viewpoint. The ‘death of the West’ narrative is based on the convergence of a few major trends: falling populations, declining fertility and societal ageing. This, so the theory goes, will push the West to the margins of economic power and political influence.

Contrast this with rapidly advancing economies, such as China, which are overflowing with people and cash. Or are they?

First, demographically, the story is more mixed than the headlines suggest. The US has a relatively high fertility rate and, crucially, has always been open to immigration. Moreover, US immigrants tend to assimilate successfully and many start their own businesses. One in four Silicon Valley start-ups, for instance, is founded by first generation Chinese or Indian immigrants. The UK is a similar story, although assimilation is more problematic.

Meanwhile, Europe itself is forecast to grow its population from around 507 million today to about 525 million by 2050 and Europe’s birthrate will probably increase too, largely thanks to immigrants.

Contrast this to China and other BRIC, MINT and African nations. Again it’s a mixed story: China is ageing quickly while Russia is imploding demographically. India is a mixed story and while interesting it can be chaotic. Without exception, all these nations have systemic governance issues, which means they are fragile economically and potentially unstable politically. China, in particular, has maintained its autocratic system with the promise of growing prosperity. If the Chinese economy breaks down, so might social stability.

Sustainability is another concern in emerging markets. Pollution is worryingly high and resource shortages, especially water and food, are potentially worsened by climate change and could create more destabilisation.

Even putting all this to one side, all nations are increasingly connected economically and it’s hard to imagine how the demise of one major economy or group of economies would not have serious implications for the rest. The ‘death of the rest’ is almost as ridiculous as the ‘death of the West’.

There remain a number of wildcards too. Migration is one. There is nothing preventing a country such as Germany from importing labour to offset its declining workforce, although this may trigger a series of political shifts and questions about identity.

Technology is another wildcard. Advances in automation could push productivity through the roof, but access to technologies may not remain equal. A third wildcard is that Western countries enjoy wide democratic consensus along with property rights and the rule of law. This tends to encourage experimentation, which drives innovation and ultimately economic expansion.

Ref: Daily Telegraph (US) May 8, 2015, ‘The West’s demise is greatly exaggerated’ by D. Coleman and S. Basten. www.dailytelegraph.co.uk
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History’s revenge

You might not be interested in geopolitics but, to paraphrase Leon Trotsky, “geopolitics is interested in you”. Following WW2, a widespread geopolitical and economic consensus emerged, with the West largely shaping a series of new global institutions.

The world was generally governed by Western rules and, with some notable exceptions, it seemed merely a matter of time before free markets and democracy tumbled across the globe. It was a period of relative stability, partly due to the balancing effects of Soviet communism and US-inspired capitalism. Western leaders adopted the language of inevitability and generations believed that wealth would cascade alongside freedom. This culminated with the ‘end of history’ hypothesis, but of course history had other ideas.

It’s hard to know exactly when things changed. The fall of the Berlin Wall and collapse of the Soviet Union were pivotal events. So too were 9/11 and the 2008 financial crash. The Arab Spring briefly suggested a return to the outskirts of normal, but the rise of a self-proclaimed state (ISIS) and Russian expansion into Crimea challenged our ideas about modernisation, religion and political convergence.

These events perhaps act to remind us that autocracy and violence have been the norm throughout history. Now globalisation and technology have spawned volatility and uncertainty and a new and but largely unknown world order is emerging.

Ref: The Atlantic (US) May 2015, Globalisation bites back’ by C. Freeland. www.theatlantic.com
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Mobile payments: technology in search of a problem?

The rush to become the dominant player in mobile payments continues as both Apple and Google announce upgrades to Apple Pay and Android Pay. Meanwhile, Samsung has acquired Loop Pay, a competitor to Google Wallet.

According to Forrester Research, mobile payments could be worth $US142 billion by 2019 in the US, up from $US52 billion in 2014. While security concerns still persist, it’s possible these applications are a technology searching for a problem.

Consumers are becoming more comfortable with the idea of mobile payments and the positive experiences of Japan and South Korea show where things are going. Even so, cash and credit cards are ubiquitous. They are easy to use and credit cards are broadly accepted worldwide so who, ultimately, will benefit from mobile payments?

Ref: New York Times (US) 27 May 2015, ‘Google and Apple adjust strategies on mobile payments’ by M. Isaac and B.
Chen. www.nyt.com
See also Raconteur (UK) 31 May 2015, Future of Payments’ www.raconteur.net
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