MONEY Currency

Why You Might Not Want to Cheer for a Strong Dollar

Chris Pine in JACK RYAN: SHADOW RECRUIT, 2013
Anatoliy Vorobev—©Paramount/Courtesy Everett Col Don't tell Jack Ryan, but a strong buck is a mixed blessing.

It makes foreign vacations cheaper, but selling things to foreigners harder

The U.S. dollar has strengthened against pretty much every major currency over the past year. That feels like good news—and in some ways it is. It means that investors worldwide are betting that the U.S. economy is strong; it’s also nice if you’ve been planning a get-away to the French countryside.

And intuitively it just feels like a strong U.S. currency is a good thing, and a weak one is bad. Last year, the plot of the action flick Jack Ryan: Shadow Recruit turned on a (mild spoiler alert) Dr. Evil-like plot to tank the greenback’s value.

But at this moment a too-strong dollar may be the bigger worry.

That is the context behind all the headlines you may be seeing these days about so-called “currency wars.” In a currency war, countries don’t try to take down other nations’ currencies. Instead, they cut the value of their own currencies, in order to make their products cheaper and stoke demand. When one currency falls, that means somebody else’s currency has to go up. Lately, the U.S. has been that somebody else.

Currency

 

Why is the dollar going up? Central banks around the world, from Europe to Japan to Mexico, have been doing what our own Federal Reserve did following the financial crisis, buying up bonds and aggressively seeking to hold down their interest rates. They’re not only doing this to lower the relative value of their currencies—nobody has actually declared a currency war—but it has had that side effect. With yields on 10-year German bonds at just 0.3%, U.S. Treasuries that are paying almost 2% look like a better deal.

When investors seek to hold U.S. assets, that pushes up the buck too.

And there’s reason to think the dollar will keep getting stronger for a while, says Wells Fargo Securities senior economist Sam Bullard. The U.S. economy looks pretty good right now compared with the rest of the world. The American gross domestic product, for instance, grew by 4.6%, 5%, and 2.6% over the past three quarters, while the eurozone muddled through with growth rates at 0.3% or lower. Our unemployment rate is down to 5.7%, while in the eurozone it is stubbornly stuck over 11%.

As a result, the Federal Reserve has begun to put out hints that it will raise short-term interest rates sometime in 2015, the first increase since the Great Recession. Again, that should make dollar-denominated assets relatively more attractive. And a strong dollar trend could feed on itself—the more stable the dollar looks, the more people will want to to invest in the U.S. “Investing over here if you’re foreign company committing capital is more attractive since returns will get translated into your home currency at a more favorable rate,” says Bob Landry, a portfolio manager at USAA Investments.

Still, whenever there are winners, there are also losers.

Who’s losing out? For a start, multinational corporations with significant businesses overseas. Procter & Gamble and its shareholders, for instance, endured disappointing earnings last year and announced that the consumer goods behemoth doesn’t expect to enjoy sales growth this year due to the dollar’s strength.

A strong dollar generally makes U.S. exports less attractive—consumers with euros and yen are finding our products more expensive. The ISM manufacturing new export orders index fell in January to its lowest level since the fall of 2012. That’s bad news for anyone who works in manufacturing, or any other business that hopes to sell to global markets.

Overall, Bullard says, a strong dollar should be “a net drag on overall GDP in 2015.” Perhaps Jack Ryan could have saved himself the trouble.

TIME finance

Report: HSBC Helped Conceal Millions in Foreign Accounts

HSBC helped clients evade tax, leaks show
Facundo Arrizabalaga—EPA Customers use ATM machines outside an HSBC bank in central London, on Feb. 9, 2015.

Some details of such operations were disclosed previously, when HSBC was fined in 2012 by the U.S. for allowing criminals to use its branches for money laundering

(LONDON) — HSBC’s Swiss private bank helped hide millions of dollars for drug traffickers, arms dealers and celebrities as it assisted wealthy people around the world dodge taxes, according to a report based on leaked documents that lifts the veil on the country’s banking secrecy laws.

The report from the International Consortium of Investigative Journalists and several news organizations comes as governments seek to crack down on tax evasion to bolster treasuries depleted by the financial crisis and staunch criticism that the rich aren’t paying their fair share.

The leaked documents cover the period up to 2007 and relate to accounts worth $100 billion held by more than 100,000 people and legal entities from 200 countries.

Some details of such operations were disclosed previously, when HSBC was fined in 2012 by the U.S. for allowing criminals to use its branches for money laundering. Monday’s report discloses a more detailed cache of data and information.

Academics estimate that $7.6 trillion is held in overseas tax havens, depriving governments of $200 billion a year in tax revenue, according to the ICIJ report.

The French government received the files from a whistleblower in 2010 and passed them onto tax authorities around the world, including the U.S., Britain and Germany.

In Britain, where HSBC is based, the report sparked criticism that tax authorities hadn’t done more to penalize people who have illegally evaded taxes. The tax agency clawed back 135 million pounds ($236 million) from some of the 3,600 Britons identified as using the Geneva branch of HSBC, but only one has been prosecuted.

France, by contrast, launched 103 actions. France’s Prime Minister Manuel Valls told Europe 1 radio on Monday that France is “very determined” to fight tax evasion and will continue to take action at home and at the European level.

In Britain, lawmakers reacted with outrage.

“You are left wondering, as you see the enormity of what has been going on, what it actually takes to bring a tax cheat to court,” Margaret Hodge, chair of Parliaments Public Accounts Committee, told the BBC.

Hodge also said the former chairman of HSBC, Stephen Green, who became the government’s trade minister after he left the bank in 2010, must face serious questions about whether he was “asleep at the wheel, or he did know and he was therefore involved in dodgy tax practices.”

HSBC stressed that the documents were from eight years ago and said that it has since implemented numerous initiatives designed to prevent its banking services from being used to evade taxes or launder money.

Franco Morra, CEO of HSBC’s Swiss subsidiary, said that the new management had overhauled the business, and shut down accounts from clients who “did not meet our high standards.”

“These disclosures about historical business practices are a reminder that the old business model of Swiss private banking is no longer acceptable,” he said in a statement.

The HSBC files were analyzed by the French daily Le Monde, The Guardian in Britain, the BBC and the Washington-based consortium.

__

Associated Press Writers Frank Jordans in Berlin and Greg Keller in Paris contributed to this story.

TIME europe

Former Fed Chair Greenspan Predicts Greece Will Leave Euro

Alan Greenspan Addresses Economic Club Of New York
Spencer Platt—Getty Images Former Federal Reserve Chairman Alan Greenspan speaks to The Economic Club of New York on April 28, 2014 in New York City.

'I think it's just a matter of time before everyone recognizes that parting is the best strategy.'

Greece will eventually be forced to leave the eurozone and switch to a new currency, former Federal Reserve chairman Alan Greenspan told the BBC.

“I don’t see that it helps them to be in the Euro and I certainly don’t see that it helps the rest of the eurozone,” he said in a radio interview. “I think it’s just a matter of time before everyone recognizes that parting is the best strategy.”

Read more: Germans Weigh Response to Likely Demands of New Greek PM

The former official added that he doesn’t believe anyone would be willing to lend Greece the money to avoid an exit.

Greece’s newly-elected prime minister, Alexis Tsipras, won his job promising that he would renegotiate the terms of his country’s debt with the powers that be in Brussels, the financial center of the eurozone, and Germany, the eurozone’s largest economy.

For its part, Germany has remained steadfast in its refusal to loosen the terms of a 240 billion Euro bailout given to Greece in 2013.

The impact of a “Grexit” on the global economy is unclear, though many economists believe it would badly rupture the Eurozone.

TIME Economy

5 Plunging Numbers That Explain the World This Week

Greek Prime Minister Alexis Tsipras looks on before swearing in ceremony of the new deputies that were elected in the January 25 national polls, in Athens, Feb. 5,2015.
Yannis Behrakis—EPA Greek Prime Minister Alexis Tsipras in Athens, Feb. 5,2015.

From Greek bond rates to Indonesian approval numbers, these figures tell the story of an unstable world

With spiraling oil prices, crumbling economies, weakened leaders, and intensifying violence in Ukraine and the Middle East, we’re experiencing unusual volatility in markets and geopolitics. Here are five falling numbers that have broad-reaching implications.

1. Down to 1.38%

There’s a huge difference between the current Greek crisis and previous cycles of panic: today bond markets are treating the Greek economy as an isolated patient, swatting away notions of contagion risk to other periphery countries. The numbers tell the story. In the wake of the anti-austerity party Syriza’s victory in Greek elections last month, Spain’s 10-year yield fell to new record-breaking lows, closing at a staggering 1.38% at one point last week. That means Spain can borrow at better rates than the thriving United States. Compare that to Greece’s 10-year yield, which shot above 11% in the days after Syriza took office.

(Source: Eurasia Group, Bloomberg Business: Spain, Greece)

2. -30% Approval

Expectations for Indonesia’s new president Joko Widodo were sky-high when he was elected last summer. (He even graced the cover of this publication in October with the headline “A New Hope.”) But his recent nominee for police chief is a former aide to party powerbroker and ex-president Megawati Sukarnoputri, raising concerns about her influence over the supposedly independent Joko. Just days after the announcement, police chief nominee was named as a suspect in a corruption probe. Joko’s decision to trim fuel subsidies in November was lauded by investors; after all, between 2009 and 2013, Indonesia spent more on such subsidies than it did on social welfare programs and infrastructure put together. But it’s no surprise that a hike in fuel prices didn’t go over as well with the general population. According to an opinion poll by LSI, Joko’s approval rating has dropped 30 points—from 72% in August to just 42% in January.

(Source: Wall Street Journal, The Economist, Financial Times)

3. -$58 per barrel

The price of Venezuelan oil collapsed from $96 in September to $38 last month. That’s not a good thing in a country where oil exports provide more than 95% of foreign exchange. Venezuela needs that hard currency—more than 70% of its consumer goods are imported. Things are getting bleaker. The International Monetary Fund predicts an economic contraction this year of as much as 7% of GDP. Inflation is over 60%. And an economic perk is coming under threat: Venezuelans enjoy the world’s cheapest gasoline, paying the heavily subsidized rate of roughly $0.06 per gallon. This provision costs the government more than $12 billion a year. In a recent speech, President Nicolas Maduro declared, “You can crucify me if you want, but there’s a need for us to go to a balanced price.” Given all the economic woes and the President’s tanking approval ratings, it’s definitely not the easiest time to rake back this subsidy.

(Brookings, New York Times, Wall Street Journal, Bloomberg, International Business Times)

4. -$500,000,000 in military aid

With ISIS rampaging across Iraq and Syria—and Houthi rebels seizing the capital of Yemen and pushing that country into civil war—Saudi Arabia is accelerating its plans to wall itself off from volatile neighbors. In September, the Saudis began construction on a 600-mile wall along the border with Iraq. To the south, they are strengthening fortifications to keep unwanted visitors from breaching the 1,060-mile border with Yemen. Border guards told a CNN correspondent that in just the last three months, they have stopped 42,000 people from crossing a 500-mile section of the border. It’s not just about security—it’s also economic. As of 2013, Saudi citizens represented just 43% of the country’s workers—and only some 15% of the private sector—with the rest consisting of foreign workers. With youth unemployment at around 40% in Yemen, many try to cross in search of work. But even as the spending spree on security continues, the Saudi Kingdom is halting most of its financial aid for Yemen, fearful it could fall into Houthi hands. According to a Yemeni official, the Saudis recently refused to pay $500 million earmarked for military aid.

(Newsweek, Reuters, Bloomberg, CNN, Al Arabiya News, Reuters, Wall Street Journal)

5. -$61,000,000,000 … and -16%

They’re the group of Russians best equipped to weather hard times, but that doesn’t mean they aren’t feeling the burn. In 2014, the 21 wealthiest people in Russia lost a combined $61 billion—a quarter of their net fortune. Those who aren’t losing money are removing it: 2014’s net outflows by companies and banks topped $150 billion. That’s more than double the 2013 figure, and shatters the old record from ’08, amidst the financial crisis. The IMF expects the Russian economy to contract 3.5% in 2015. At least Russians can express their dismay while drinking more affordable liquor: this week, Moscow passed a new measure cutting the minimum price of a bottle of vodka by 16%.

(Reuters, Businessweek, IMF, Washington Post)

 

MONEY Jobs

Why We Should Be Happy With a Higher Unemployment Rate

woman holding "Hire Me" sign
Catherine Lane—Getty Images

A higher unemployment rate in an improving economy means more people are beginning to look for work again.

For the most part, Friday’s jobs report is clearly reason to cheer. The economy added 257,000, making January the the 12th consecutive month employers hired over 200,000 workers. The Labor Department even revised earlier figures, announcing 147,000 more jobs were created in November and December than previously thought.

But in spite of all this great news, one number seemed to stick out: the unemployment rate actually went up, jumping from 5.6 to 5.7 percent.

That’s not a big change but it doesn’t seem to jibe with everything else happening in the economy. How could the unemployment rate still be increasing when hiring seems to be at a post-recession high?

The answer is the official unemployment rate, at least by itself, doesn’t actually measure the economic recovery very well. This metric, also known as U3, is one of six different ways the Department of Labor measures unemployment, and it only includes people who are unemployed and actively looking for work. That means people who are unemployed but too discouraged to look for a job aren’t included in the unemployed population.

This quirk is what Gallup CEO Jim Clifton was talking about when he called the unemployment rate a “big lie,” but it’s actually telling the truth if you know what to look for. When hiring increases, as it has over the past year, people who previously gave up searching for work will once again start trying to find employment. This is obviously a good thing, but for the moment an influx of new job hunters is pushing up unemployment numbers because those who just began searching for work after a long break are essentially treated as newly unemployed.

“I don’t think [Friday’s unemployment bump] is a big deal,” says Elise Gould, a senior economist at the Economic Policy Institute, a left-leaning think tank. “I think that is mostly due to people coming back into the labor force—some of them finding jobs, some of them not finding jobs.”

In fact, as the economy continues to recover, it’s likely the unemployment rate will likely stay the same or even increase. “If had to project the unemployment rate, I would expect it would hold steady and could move a little up, but I don’t think we’re going to see it going down,” explains Gould. “As the economy gets stronger more people will enter the labor force and that will move the unemployment rate, potentially in the wrong direction.”

All this sounds nice in theory, but do we really know more people are entering the job market? The most accurate metric we have to answer that question is the labor force participation rate, which includes everyone who is working or looking for work. Unfortunately, that number can be misleading since many older Americans are leaving the market at the same time job-seekers are re-entering it, leading to a long-term downward trend.

Luckily, today’s report shows enough people started looking for work in January to push the labor force participation rate up a tick. It wasn’t much—less than a percentage point—but even a small increase is meaningful when the demographic tide is flowing the other way.

At least for once, a higher unemployment rate isn’t so bad.

MONEY Jobs

Employers Hired 257,000 Workers in January

150206_INV_Wage_1
Datacraft Co Ltd/Getty Images

The economic picture continues to mend, but workers still looking for better wages.

The U.S. economy added 257,000 jobs in January, the 12th consecutive month employers hired more than 200,000 workers. Meanwhile, the unemployment rate rose slightly to 5.7%.

Employers also added more employees in the end of 2014 than originally thought. The Labor Department revised November’s employment change to 423,000, compared to 353,000, and December’s to 329,000, from 252,000.

The positive monthly employment report is another sign of a building economic recovery. The four-week moving average initial jobless claims recently fell by 6,500 to 292,750 The employment cost index, which measures salary and benefits, increased by 2.3% in the last three months of 2014. And the gross domestic product grew by 2.6% in the last quarter of 2014 after climbing by 5%. This good news, along with cheap energy prices, has also pushed up economic confidence.

The economy still is not back to a pre-2008 definition of normal, however. The headline unemployment rate measures only people who are looking for work. Since the post-crisis recession, however, many people dropped out of the work force, and they have been slow to come back in. Today’s report shows the labor-force participation rate at 62.9%, a marginal increase from a month ago, but still in line with a long-term decline. The rate is five points lower than it was at the turn of the century.

Another sign that the job market recovery remains soft: Average hourly wages in January were only up 2.2% compared to a year earlier. (While that’s an improvement over last month, wages grew around 4% per year prior to the Great Recession.) Long-term unemployment is also still at elevated levels.

fredgraph (1)

Modest wage growth helps to explain why inflation has remained low, even after stripping out the effect of falling prices at the gas pump. Core inflation, which strips away volatile energy and food prices, was up 1.6% year-over-year in December. That’s well below the 2% the Federal Reserve says it is targeting in deciding whether or not to raise key interest rates.

The Fed has been holding short-term rates near zero since the crisis, and is widely expected to begin raising rates this year as the economy improves. But they’ll have to weigh the encouraging signs from the new unemployment numbers against continued low inflation and wage growth, as well as the mounting economic troubles in Europe.

Sam Bullard, a senior economist at Wells Fargo Securities, shares the Fed’s belief that the labor market and economy are repairing, and thinks more hiring will push down the unemployment rate in the months to come, which will result in more money in worker’s paychecks. Eventually.

“Overall, we’re looking at an economy that’s improving,” says Bullard. “The one missing piece is a pickup in wage growth.”

TIME Starbucks

Howard Schultz Has a Radical Plan for Starbucks—And America

Photograph by Ian Allen for TIME

The outspoken Starbucks CEO tells TIME about his plans to transform his business

Starbucks CEO Howard Schultz has big plans for the future of his coffee empire. In a new cover story, the 61-year-old executive gives TIME’s Rana Foroohar a preview of the company’s transformation, much of it designed to cope with a rapidly changing American middle class. In a wide-ranging, exclusive interview Schultz describes the firm’s strategy to move up market, delving into the personal history that has shaped his beliefs on issues ranging from the working poor to race relations.

Just as fashion brands have haute ­couture and mass-market lines, Starbucks this year will start opening a series of luxury Reserve stores, where customers can get a more rarefied and expensive assortment of coffee. (Some may experiment with selling wine.) Expect many more specialized formats designed for specific places, like express stores coming to New York City or mobile trucks currently on college campuses. Over the next five years, Schultz will be busy retooling the Starbucks experience, in large part by experimenting with ways to draw in ever-more-fickle ­consumers.

To read the full story, please subscribe to TIME. More from the story:

On whether he will run for President in 2016, Schultz insists to TIME that he’s not interested in running for office at the moment, saying, “I don’t think that is a solution. I don’t think it ends well.” For now, Schultz says he’s content to, “see what Hillary does.”

On Starbucks’ coffee-­sales figures from nearly 12,000 stores nationwide, Schultz says: “We have a lens on almost every community in America…. At 4:30 in the morning, I wake up and see the numbers of basically every store from yesterday.” Over the past few years, says Schultz, they’ve pointed to a “fractured level of trust and confidence” that he attributes in large part to a sense that government is no longer functional and that no one is looking out for the welfare of the middle and working classes.

On how businesses should operate in America: “I think the private sector simply has to take a larger role than they have in the past. Our responsibility goes beyond the P&L and our stock price…. If half the country or at least a third of the country doesn’t have the same opportunities as the rest going forward, then the country won’t survive. That’s not socialism.”

On growing up while struggling with poverty in the housing projects of Canarsie, Brooklyn: “When you say you went to Canarsie High School, you get a whole new level of street cred!”

Grover Norquist talks to TIME about how Starbucks can act as a model for a kind of business federalism in which the private sector does things better and faster than government, saying: “Howard isn’t saying, Hey, I’ll give you a check. He’s saying, I want your skills, [at the same time] that he’s changing the cost of education by revolutionizing education itself. He’s backing into the reform of public education.”

His friend David Geffen says: “I first told Howard he should run back in 2008. We were having a very intense conversation about things that were happening in the country, and Howard had a strong point of view about various things…. We both felt there was a lot of corruption in government and a lack of conviction to put things right.

Read next: Starbucks For America

Listen to the most important stories of the day.

TIME Education

Shrinking the Education Gap Would Boost the Economy, Study Says

Students applaud as U.S. President Obama arrives to deliver the commencement address at the Worcester Technical High School graduation ceremony in Worcester
Kevin Lamarque —Reuters Students applaud as U.S. President Barack Obama arrives to deliver the commencement address at the Worcester Technical High School graduation ceremony in Worcester, Massachusetts June 11, 2014

A modest improvement in the lowest test scores could see GDP rise by $2.5 trillion by 2050

Narrowing the education gap between America’s poor and wealthy school children could accelerate the economy and significantly increase government revenues, according to a new study.

An improvement in the educational performance of the average student will result in “stronger, more broadly shared economic growth, which in turn raises national income and increases government revenue, providing the means by which to invest in improving our economic future,” says the Washington Center for Equitable Growth.

The study is based on findings from a 2012 assessment given by the Organization for Economic Cooperation and Development. Data showed the U.S. education system performed poorly when compared against the world’s 34 developed nations, ranking below average in mathematics and just average in reading and science.

The Washington Center took America’s test score of 978, and in their most modest scenario boosted the achievement scores of the country’s bottom 75% testers so that the national score reached the worldwide developed nation average of 995 (or roughly equal with France).

This would raise the U.S. GDP by 1.7% by 2050, they found, which, taking inflation into account, would amount to a $2.5 trillion rise or an average of $72 billion extra per year.

The country would also make over $900 billion extra in total federal, local and state revenue.

If the U.S. were able to match Canada’s educational achievement score of 1044, the potential gain would be significantly higher. The study estimates that GDP would grow by 6.7%, equivalent to $10 trillion or about $285 billion per year.

This latter scenario would mean a revenue boost of $3.6 trillion.

The Washington Center said their findings suggest that governmental investments into education would pay for itself in the form of economic growth for many years to come.

MONEY Jobs

Noooo! GDP Slowed in Fourth Quarter. And That’s Not Even the Worst Part

150130_INV_LowWageGrowth
Jan Stromme—Getty Images

While the U.S. recovery continued in the fourth quarter, wages didn't grow as fast as many economists were hoping.

Economists got a fresh read on the U.S. recovery today: The federal government reported fourth-quarter gross domestic product growth slowed to 2.6% from the third-quarter’s 5%.

The good news is few economists expected the economy to outstrip the third-quarter’s robust number. The bad news is slower GDP growth wasn’t the only disappointment. In fact, many experts were looking past that headline number at something else: the Employment Cost Index.

The Labor Department index, a measure of overall employment costs, including wages but also benefits like health care, rose 2.2% year over year for the fourth quarter. It had grown 2.3% in the fourth quarter, and economists had been hoping that it would meet or exceed that mark.

That it failed to do so suggests wage growth—largely seen as the last missing piece of the recovery—still hasn’t picked up as much as we would all like. The upshot is that, while Americans seem to be able to find work, solid middle class jobs are still disturbingly scarce. Sluggish wage growth also means the Federal Reserve, which is feeling pressure to raise interest rates, may have extra breathing room, since rising wages are a key driver of inflation.

Here’s the wage growth trend line, fyi:

ECI

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