Economy

Lenin, the Russian revolutionary leader, is said to have remarked that the best way to destroy the capitalist system was to debauch the currency. The Bank of England currently forecasts that inflation in the UK will soon top 10 per cent. This falls short of outright currency debasement. Yet we live in an economy where the capitalists are no longer a tiny group of rentiers and rich business moguls but ordinary people with savings tied up in pension schemes. With the general price level rising at the fastest rate since the 1970s there is a serious threat to UK retirement incomes.Behind Lenin’s aphorism is an important political truth, namely that inflation brings about a transfer of wealth from creditors to debtors that is unsanctioned by democratic or legal process.

Because inflation is a monetary phenomenon, the big winners in investment terms tend to be owners of assets that act as a residual sink for the excess money created by central banks. Real assets such as property are an obvious example. So, too, are energy companies and commodities including gold. Some argue that crypto assets fall into the same category. Certainly they have been boosted by ultra-loose monetary policy since the 2007-09 financial crisis. But, as I argued here in a piece on the respective investment merits of bitcoin and gold in April, the record of crypto as an inflation hedge is unproven and bitcoin’s performance in recent months has been disastrous in terms of providing a haven against spiralling prices. The big losers from inflation are fixed-interest investments such as gilts — a core holding in British pension funds. The capital value and income stream shrink in real terms and tend to underperform equities when price levels are rising fast.Debtors who have borrowed on fixed-price contracts enjoy a windfall, notably the government. And since much property is financed by fixed-interest debt, property investors can experience a double win as the value of the asset goes up while the real value of the related debt goes down. For savers and pensioners, this underlines the importance of avoiding bonds, and shifting to real assets and value equities which tend to outperform in inflationary times.Where possible, it makes sense to fix mortgage rates for longer while nominal interest rates are still at historically low levels and real interest rates will remain negative in the short to medium term. The losers from inflation are people on any kind of fixed income — such as annuities — and householders who rent rather than own. No perfect answers But there are no perfect investment antidotes to inflation and even property is not a foolproof protection, as experience in the late 1970s demonstrated. In my book That’s the Way the Money Goes, published in 1982, I chronicled how many large pension funds incurred huge losses in real estate. The ICI and Unilever pension funds, for example, took devastating hits from their investment in speculative property development in continental Europe, undertaken in both cases in joint ventures with dodgy entrepreneurs who had been severely criticised by Department of Trade inspectors. Back then, pension funds were minimally regulated and not required to reveal their finances. Fund managers were panicking as the retail price index reached a year-on-year peak of 26.9 per cent in 1975 and doing inadequate due diligence in their search for havens against the inflationary storm.Today, there is greater transparency and funds are so heavily regulated that the risk of such accidents is lower. But management matters. Property does not lift all boats during periods of high inflation. Note that there were no index-linked gilts in the 1970s. Yet today, paradoxically, index-linked securities fail to provide any protection against current 7 per cent inflation in the short run. This is because they are driven by relative real yields rather than inflation per se. That is, when the yield on nominal gilts rises closer to the rate of inflation the negative real yield falls. So the negative yield on index-linked bonds has to shrink to remain competitive, causing the price to fall. The longer the maturity, the greater potential for loss. Earlier this week the price of the 2068 index linked gilt was down more than 44 per cent since late November — an astonishing plunge. Investment returns in the first quarter of this year, when investors came to distrust the central banks’ claim that inflation was transitory, confirm this broad picture around winners and losers. According to consultants LCP, fixed-interest gilts delivered a return of minus 12.3 per cent, while index-linked showed minus 6.4 per cent. Overseas equities delivered minus 2.5 per cent, trading under the shadow of rising interest rates and the war in Ukraine. UK equities were positive at 0.5 per cent, no doubt reflecting the energy, commodity and financial services bias of the UK stock market, while commercial property led the field with a positive return of 4.6 per cent. Some protection in defined benefit funds The impact of inflation on pension scheme members varies according to the nature of the scheme and members’ individual circumstances. Defined benefit schemes, managing £1.9tn of assets at the start of the decade, provide good protection for those still in work because the pension promise is in most schemes related to final pay. For defined benefit scheme members their fund’s investment performance is thus of no great importance — unless, that is, the fund is in deficit and the employer is at risk of bankruptcy. If the sponsoring company becomes insolvent and the scheme does not have sufficient assets to meet its pension commitments the official Pension Protection Fund will provide a safety net. But for many the compensation provided by the PPF will fall short of the level they expected.Once retirement is reached there is a hierarchy of pension winners and losers. The biggest winners are civil servants and public sector workers whose defined benefit pensions are fully indexed. Where the retail price index is the yardstick they are arguably on a gravy train because the RPI is based on an outdated arithmetic formula (called the Carli index) which official statisticians claim results in systematic overstatement of inflation. Where trust deeds permit, pension schemes are now required to change the indexation benchmark to the more realistic consumer price index. But there is a residue of pension scheme members for whom the RPI will continue to deliver an unwarranted bonus, creating inequality within many funds. A further complication is that neither index may be representative of a given individual’s spending patterns. Very few private sector defined benefit schemes offer complete indexation of benefits. They usually incorporate an inflation cap, typically up to 5 per cent, so pensioners are dependent on trustees paying discretionary increases to shore up their living standards in a high inflation environment. The ability of trustees to do this is constrained by the high proportion of assets devoted to liability matching which involves pairing the timing of pension outflows with bond cash flows around the same dates.The Office for National Statistics estimates that at the end of 2019 nearly 70 per cent of direct investments in private sector schemes were in long- term debt securities of which three-quarters was in gilts. This means that the return-seeking portion of these portfolios, out of which discretionary pension increases can be paid, is limited. That could be a serious impediment to such increases if inflation were to go much higher. Defined contribution plans at the mercy of marketsWith defined contribution (DC) or money purchase plans, investment returns are crucial to the level of pension that scheme members receive. The latest pension survey by the ONS noted that there are now 22.4mn people in DC schemes compared with 18.3mn in DB. This reflects the closure to new members of countless private sector DB schemes as employers baulked at the cost supporting them. They have thereby shifted the risk of pensions funding to the employees, although they continue to pay contributions into DC schemes. Because this switch from DB to DC is relatively recent, gross assets of DC schemes were only £146bn at the end of 2019. So 94 per cent of the total gross assets in occupational pensions in the UK are still held in DB schemes. Most DC money is in pooled funds. While members are offered a menu of investments from which to choose, the majority go for a default lifecycle option. For most of an employee’s career this will involve a bias towards growth assets such as equities. Much of this will be in passive funds that match market indices. So for the purpose of beating inflation, scheme members have a binary dependence on market movements and the skills of active asset managers. Then, as retirement approaches, the portfolio is rebalanced towards so-called safe assets such as nominal and index-linked gilts.For those in the period between de-risking and retirement this ineptly and misleadingly named de-risking process is a formula for value destruction at a time of rising inflation because interest rates rise and bond prices fall. As mentioned earlier, the scope for capital loss in index-linked gilts is considerable. Of course, scheme members who are about to make the shift away from a growth bias today will have the benefit of cheaper bond market valuations after the recent inflation-induced falls in gilt prices. Yet there is a strong likelihood of further falls if gilt market yields revert to anything remotely near historical norms. Rather than taking cash or converting their pension pot into an annuity most scheme members taking the default option will end up with a drawdown arrangement where they can take money out of their fund at times of their own choosing to suit their retirement needs. The asset allocation at retirement will usually consist of a mix of equities and bonds.The big worry then is whether stagflation — a combination of inflation with low growth — will play havoc with the portfolio because low growth is bad for equities while inflation is bad for bonds. The benefit of portfolio diversification may therefore be lost. Central bank policy switch raises big questionsToday’s DC scheme members are substantially at the mercy of policy driven markets. After years in which asset prices have been artificially inflated by the asset buying programmes of the central banks — quantitative easing — central bankers have changed gear. In the past fortnight the US Federal Reserve and the Bank of England have raised interest rates while the European Central Bank is widely expected to raise rates in July. All three are expected to shrink their balance sheets, withdrawing their buying power from the bond markets.Signals from the Fed weigh heavily on global markets including the UK. According to former New York Federal Reserve president Bill Dudley the Fed wants a weaker stock market and higher bond yields to help tighten financial conditions in the face of soaring inflation. The move to quantitative tightening will raise a big question as to what level of yields will be needed to attract non-central bank buyers to fund high government spending after the pandemic. Another question is how far inflation expectations have become entrenched or “de-anchored” in the jargon. The big lesson from the 1970s was that if central banks do not act fast to curb surging inflation and expectations become unmoored it takes a bigger recession to cure the inflationary disease. Today’s high inflation numbers suggest that they have left remedial action very late. Engineering a soft landing will be an intricate and dangerous balancing act. Misery for annuity holdersThat brings us to the bottom category in the hierarchy of pensions winners and losers. This concerns DC scheme members who have converted their pension pot into fixed annuities over the past dozen years. In effect, they have been stiffed twice over by the central banks. First, because quantitative easing led to overblown bond market prices and thus dismally low yields from which to pay annuities. Second, by going slow in their assault on inflation the central banks have further undermined the real value of already low annuity incomes.Fortunately, the number of DC annuitants will be very low because so many scheme members have taken the default lifecycle drawdown option. But that will not mitigate the misery of those who, not unreasonably, sought a secure and predictable retirement income. However, the scope for accidents among those who have gone the drawdown route is now very high because of the uncertainties created by soaring inflation. Working out the need for cash in retirement is a challenge in non-inflationary times. Now it is even tougher, with the additional worry that a shortage of care home workers could mean that the cost of late life care will rise much faster than consumer price inflation. With the cost of living crisis raging, workers’ pension contributions will be harder to keep up. Former pensions minister Sir Steve Webb points out that there is a real risk that cost of living pressures may lead workers aged 55 and over to take advantage of “pension freedoms” legislation to raid their pension pot before they reach retirement age. In a letter to The Times, he says that with a growing number of workers getting no inflation protection from their workplace pension, the role of the state pension will become even more important. So will the need for next year’s state pension increase to properly compensate for inflation. Inflation reallocates riskTo return to Lenin, capitalism is not at risk from today’s inflationary pressures. But the hierarchy of pensions winners and losers demonstrates the random and arbitrary way in which risk is being reallocated within society. With so many DC scheme members putting too little into their pension pots to secure a half decent retirement income even before this burst of inflation occurred, a looming retirement poverty problem will now be exacerbated. That underlines the imperative need to bring inflation back under control. More

On any normal weekday, Dubai’s food delivery riders would be up and out early, but in recent days, banks of motorbikes have been parked outside their budget dormitories. “They are all sleeping,” said one doorman in Bur Dubai, the central district where many cram into apartments.Food delivery riders for Talabat, a unit of Germany’s Delivery Hero, have gone on an illegal strike to protest over their low wages as the rising cost of living sparks widening unrest among the poorest workers in the Gulf entrepôt, a playground for some of the world’s richest people. The rare outbreak of industrial unrest in the Gulf state comes as fuel prices have soared since the Russian invasion of Ukraine. This has slashed the take-home pay of riders, who purchase their own petrol. With inflation hitting other products such as food, living standards are declining for workers who eke out a living on slim salaries. “The salaries are too low and petrol is too high. This is a problem — everyone stopped work,” said one rider at Talabat, who did not want his name to be published. Last year he “made Dh2,500 ($681), now it is Dh1,500 [a month].” The Talabat walkout, which has hobbled the app’s service in the country, comes after a strike this month in Dubai by employees of rival operator Deliveroo prompted the UK-based firm to drop plans to cut salaries and extend working hours. Talabat riders have called for an increase in their basic pay from Dh7.50 per food order to Dh8 or Dh9. The company said it was open to discussions “through the right channels, and in a constructive way”. Talabat, which uses 20,000 riders nationwide, said riders had gross average earnings of about Dh3,500 a month, with about 70 per cent of riders up until last week expressing satisfaction with their pay. “Yet, we understand economic and political realities are changing constantly, and we will always continue to listen to what riders have to say,” it said in a statement.Strike action and unionised labour are outlawed in the UAE, where the authorities are quick to snuff out any display of dissent, whether related to politics or economic conditions. From construction to retail, migrant workers form the backbone of Gulf economies, most of whom travel from south Asia with the aim of remitting funds back to their families. “To strike in the UAE things have to be desperate, so this is a sign of how difficult things have got for delivery drivers with recent fuel cost rises,” said James Lynch, a founding director of FairSquare, a human rights research group.One rider, who pays Dh300 a month for a bedspace in a room shared with 11 others, said desperation over the cost of living crisis overshadowed their concerns about potentially breaking the law. “We aren’t blocking the roads,” he said. “We are just staying home.”Over the years construction workers have staged intermittent strike action and taxi drivers have also been known to stop work in protest at conditions. Dubai police riot squads have broken up or threatened such protests and the leaders of strike action have previously been deported. The labour protest comes as broader economic activity in the UAE surges, thanks to an influx of new residents since the pandemic started, the entry of wealthy Russians since the Ukraine war broke out and sky-high oil prices that have boosted the Gulf’s hydrocarbon-dependent economies. This new demographic of high rollers, including rich expatriates and cryptocurrency billionaires, has supported the market for property, luxury retailers and high-end restaurants across the city.But the blue-collar majority of Dubai’s 3.5mn population are struggling. Long queues have appeared outside petrol stations on the eve of government price rises, which are set every month in line with global prices. Monica Malik, chief economist at Abu Dhabi Commercial Bank, forecasts inflation rising to 3.9 per cent this year from a forecast 0 per cent in 2021. While subsidies on utilities and food have helped limit the impact, “the sharply higher energy prices are feeding through and impacting household spending patterns,” she said. Previously low inflation before the pandemic means price rises are now more keenly felt. Petrol, for example, has risen 87 per cent since 2017 while the price of milk is up 50 per cent over the same period.Many riders, not just those at Talabat, say that the decline in their take-home pay is a blow to their families in south Asia who depend on their remittances and also face rampant inflation. “Our work is too dangerous and hard — I can’t walk at the end of my 14-hour shifts,” said Mohammed, a striking Talabat rider on Thursday. “But God decides when I die and will provide.” More

The Queen’s Speech this week paved the way for dozens of forthcoming parliamentary bills — but there was precious little to address the problem of soaring household bills. The absence of legislation for a windfall tax or any new measures to address the worsening cost of living crisis has left the government looking like it has run out of ideas, or simply doesn’t care. With calls for an emergency Budget growing louder by the day, leaders of consumer-facing businesses have been speaking up about how soaring inflation is hitting the UK’s consumer-led economy.This week, think-tank NIESR said 11.3mn households were struggling to make ends meet, predicting that 1.5mn were due to face food and energy bills greater than their disposable income. John Allan, chair of Tesco, said the UK was already seeing “real food poverty for the first time in a generation”, with customers routinely asking cashiers to “stop when you get to £40”. Allan, who is also president of the CBI, backs a windfall tax on energy companies, which is saying something. The head of Centrica hit back by saying this would be tantamount to “burning the furniture to stay warm” — just as the London Fire Brigade issued safety warnings against doing just that after a man looking to save money on energy bills unwittingly burnt down his house in the capital.The head of ScottishPower warned the government that time to rethink its existing energy support package was “running out fast”. As political pressure mounts, the Treasury has indicated it could announce more support in August, when the level of October’s energy price cap will be known.

If the cap rises to £2,900 this autumn, as ScottishPower predicts, up to 40 per cent of UK households could be in fuel poverty, spending more than 10 per cent of income on energy bills.The company suggests setting up a “deficit fund” to knock £1,000 off the annual bills of struggling households on prepayment meters or in receipt of means-tested benefits. This would cost a cool £10bn, funded by a £40 annual levy on everybody’s power bills for the next decade.Directing the most help to the poorest is how the chancellor should have targeted his existing help measures, but if average bills hit £2,900 the finances of middle-income families will also be horrifically squeezed. Is it right to deny them any help?It’s not like the Queen’s Speech hinted at any better solutions, other than “growing the economy” and boosting renewable power generation in years to come. In his speech on Tuesday, Boris Johnson, the prime minister, admitted it would be impossible to “completely shield people from the fallout” but the halfhearted promise to “continue examining what more we can do to ease the pressure over the coming months” just doesn’t cut it. With more households running deficit budgets, one thing we can be certain of is a huge increase in late payments, mounting arrears and bad debts that will blight the personal finances of millions for years to come. The finance bill in the Queen’s Speech should have contained more innovative measures to address this.To quote ScottishPower’s chief executive Keith Anderson, this crisis is hitting “people who have never found themselves in debt and have never struggled to pay the bills”. Many will rely on credit to bridge the gap. Credit card spending has soared, and this week the Financial Times revealed some hard-up households are resorting to “buy now, pay later” loans to cover rising energy bills.Overall levels of financial resilience are worryingly low. New research from PwC estimates 16mn UK adults would have to use credit to afford an unexpected £300 bill. However, more than 20mn do not meet the credit requirements of mainstream lenders (up from 16mn before the pandemic) making borrowing even more expensive for them. A series of scandals involving high-cost credit providers has taken out many subprime lenders, leaving people vulnerable to illegal loan sharks. With millions reliant on high cost credit to cover emergencies, it’s high time the government galvanised support for not-for-profit lenders, such as credit unions and community development financial institutions (CDFIs). They charge much lower rates of interest — but suffer from a lack of awareness (and lending capital). “More and more people don’t have a buffer, and are turning to community lenders when emergencies tip them into crisis,” says Theodora Hadjimichael, chief executive of Responsible Finance, the trade body for CDFIs. “We are seeing people from higher income levels and more working families, which shows the level of financial exclusion is increasing.” CDFIs can only lend if it’s affordable, but if customers are turned down for a loan, many will still try and help in other ways. “That could be using benefits checkers to make sure customers are claiming all the help they’re entitled to, referring them to energy charities or even formal debt advice,” Hadjimichael says.

Theodora Hadjimichael, chief executive of Responsible Finance

Currently the sector is tiny, lending about £36mn a year to 67,000 customers. Scaling it up is a cause the government — and high street banks — should be getting behind.Many customers are now referred to responsible lenders via “signposting relationships” with local authorities, housing associations and financial advice charities. “If mainstream banks signposted our services to all of their basic bank account holders, that would be a huge boost,” she says, adding that customers who build up a credit history with community lenders will be more likely to access mainstream credit products from their bank in future.With millions set to be knocked back by their banks in the year ahead, pointing rejected borrowers in the direction of non-profit lenders seems a sensible move — but there’s one problem. For community lending to work at scale, more lending capital is urgently required. In the UK, CDFIs don’t hold deposits, which gives them more flexibility in who they can lend to, but means they are reliant on external sources of finance to fund their lending. In the US, banks have an obligation to support community lenders — so why not legislate for this in the UK? The government could provide more capital via the dormant assets bill, which has already received royal assent. A consultation into how to use £880mn of cash in forgotten bank accounts and pensions will launch this summer and community finance initiatives deserve to receive a big chunk.It has set up Fair4All Finance to increase access; the financial regulator is supportive and as the sector starts to build more scale, the hope is impact investors could really get behind it too. But we don’t have time to waste. So I appeal to those with the most insight into the dire state of consumers’ finances — the heads of our retail banks. Why wait for the government to force your support? Show us that your corporate social responsibility programmes really count for something and get behind the community lenders today. Claer Barrett is the FT’s consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb More

Ministers have delayed a long promised enterprise strategy that would have set out plans to drive growth and boost private sector investment in the UK as it emerged from the coronavirus pandemic.Business secretary Kwasi Kwarteng has been working on the plans to encourage entrepreneurship and support small business expansion since last summer to address concerns that the British economy had become too dependent on state subsidies after Covid hit two years ago. Kwarteng had previously said he was hoping to publish the document by the end of last year. “I hope to land an enterprise strategy in the next six months and then spend the rest of the parliament delivering,” he told the FT in August.However, it never materialised and instead officials have recently paused work on the strategy, according to three people familiar with the situation, sparking dismay among business groups who want the government to focus on supporting growth at a time when confidence is faltering. The enterprise strategy was seen by officials as part of the plan to replace the industrial strategy, which despite business sector support was killed off by the government last year. Kwarteng had dismissed it as too vague, calling it “very, very broad”.Officials said work on the new enterprise strategy has stopped to focus resources on more pressing issues such as dealing with rising energy costs, adding that it could restart at a later date. One ally of Kwarteng said the minister had deliberately pushed the publication of the strategy beyond the next Budget — expected in November — to ensure that it will include some new financial pledges: “It would have been [just] words otherwise.”Craig Beaumont, chief of external affairs at the Federation of Small Businesses, said it would be “very disappointing” if the government stopped work on the strategy. He said small businesses needed help to grow as they faced rising costs and the burden of late payments. “We need to create a new generation of entrepreneurs in the UK.”The CBI said that the “private sector has a substantial role to play in the government meeting its ambitions and create growth across the country,” adding: “Businesses are looking for good reasons to get investing and this strategy should help, so we hope the details [of the strategy] are published sooner rather than later.”The government has already stripped the legislative timetable for the next parliamentary term of some businesses-focused policies. The long-awaited employment bill was not included in this week’s Queen’s Speech, while reforms to audit and digital competition were only included in draft form.Officials said those bills were delayed to make room for more urgent legislation including an energy security bill to ease the path to “net zero” by 2050 and an economic crime bill to tackle money laundering. Tuesday’s Queen’s Speech also included financial services regulations to boost investment in the UK, as well as to give the new infrastructure bank a statutory footing as it sets out to invest billions of pounds in UK assets.In a statement, the business department said: “The government remains fully committed to supporting businesses and creating the best conditions for enterprise to flourish right across Britain.”  More

A steep sell-off that gained momentum this week starkly illustrated the risks of the experimental and unregulated digital currencies.SAN FRANCISCO — The price of Bitcoin plunged to its lowest point since 2020. Coinbase, the large cryptocurrency exchange, tanked in value. A cryptocurrency that promoted itself as a stable means of exchange collapsed. And more than $300 billion was wiped out by a crash in cryptocurrency prices since Monday.The crypto world went into a full meltdown this week in a sell-off that graphically illustrated the risks of the experimental and unregulated digital currencies. Even as celebrities such as Kim Kardashian and tech moguls like Elon Musk have talked up crypto, the accelerating declines of virtual currencies like Bitcoin and Ether show that, in some cases, two years of financial gains can disappear overnight.The moment of panic amounted to the worst reset in cryptocurrencies since Bitcoin plummeted 80 percent in 2018. But this time, the falling prices have broader impact because more people and institutions hold the currencies. Critics said the collapse was long overdue, while some traders compared the alarm and fear to the start of the 2008 financial crisis.“This is like the perfect storm,” said Dan Dolev, an analyst who covers crypto companies and financial technology at the Mizuho Group.During the coronavirus pandemic, people have flooded into virtual currencies, with 16 percent of Americans now owning some, up from 1 percent in 2015, according to a Pew Research Center survey. Big banks like Northern Trust and Bank of America also streamed in, along with hedge funds, some using debt to further juice their crypto bets.Early investors are still probably in a comfortable position. But the rapid declines this week have been especially acute for investors who bought cryptocurrencies when prices surged last year.The fall in cryptocurrencies is part of a broader pullback from risky assets, spurred by rising interest rates, inflation and economic uncertainty caused by Russia’s invasion of Ukraine. Those factors have compounded a so-called pandemic hangover that began as life started returning to normal in the United States, hurting the stock prices of companies like Zoom and Netflix that thrived during lockdowns.But crypto’s decline is more severe than the broader plunge in the stock market. While the S&P 500 is down 18 percent so far this year, Bitcoin’s price has dropped 40 percent in the same period. In the last five days alone, Bitcoin has tumbled 20 percent, compared to a 5 percent decline in the S&P 500.Crypto Experiences a Broad Collapse1-year change in the value of cryptocurrencies

Prices are through 6 p.m. Eastern time on May 12.Source: CoinMarketCapBy The New York TimesHow long crypto’s collapse might last is unclear. Cryptocurrency prices have typically rebounded from major losses, though in some cases it took several years to reach new heights.“It’s hard to say, ‘Is this Lehman Brothers?’” said Charles Cascarilla, a founder of the blockchain company Paxos, referring to the financial services firm that went bankrupt at the start of the 2008 financial crisis. “We’re going to need some more time to figure it out. You can’t respond at this type of speed.”The origins of cryptocurrencies trace back to 2008, when a shadowy figure calling himself Satoshi Nakamoto created Bitcoin. The virtual currency was portrayed as a decentralized alternative to the traditional financial system. Rather than relying on gatekeepers like banks to facilitate commerce, Bitcoin proponents preferred to conduct transactions among themselves, recording each one on a shared ledger called a blockchain.Prominent tech leaders including Mr. Musk, Jack Dorsey, a founder of Twitter, and Marc Andreessen, an investor, embraced the technology as it grew from a novel curiosity into a cultlike movement. The value of cryptocurrencies exploded, minting a new class of crypto billionaires. Other forms of cryptocurrency, including Ether and Dogecoin, captured the public’s attention, particularly in the pandemic, when excess cash in the financial system led people to day trade for entertainment.Cryptocurrency prices reached a peak late last year and have since slid as fears over the economy grew. But the meltdown gathered momentum this week when TerraUSD, a stablecoin, imploded. Stablecoins, which are meant to be a more reliable means of exchange, are typically pegged to a stable asset such as the U.S. dollar and are intended not to fluctuate in value. Many traders use them to buy other cryptocurrencies.TerraUSD had the backing of credible venture capital firms, including Arrington Capital and Lightspeed Venture Partners, which invested tens of millions of dollars to fund crypto projects built on the currency. That gave “a false sense of security to people who might not otherwise know about these things,” said Kathleen Breitman, one of the founders of Tezos, a crypto platform.But TerraUSD was not backed by cash, treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that linked its value to a sister cryptocurrency called Luna.This week, Luna lost almost its entire value. That immediately had a knock-on effect on TerraUSD, which fell to a low of 23 cents on Wednesday. As investors panicked, Tether, the most popular stablecoin and a linchpin of crypto trading, also wavered from its own $1 peg. Tether fell as low as $0.95 before recovering. (Tether is backed by cash and other traditional assets.)The volatility quickly drew attention in Washington, where stablecoins have been on regulators’ radar. Last fall, the Treasury Department issued a report calling on Congress to devise rules for the stablecoin ecosystem.“We really need a regulatory framework,” Treasury Secretary Janet Yellen said at a congressional hearing on Thursday. “In the last couple of days, we’ve had a real-life demonstration of the risks.”Stablecoins “present the same kinds of risks that we have known for centuries in connection with bank runs,” she added.Workers installing a cryptocurrency mining data center in Medley, Fla.Rose Marie Cromwell for The New York TimesOther parts of the crypto ecosystem soured at the same time. On Tuesday, Coinbase, one of the largest cryptocurrency exchanges, reported a $430 million quarterly loss and said it had lost more than two million active users. The company’s stock price has plunged 82 percent since its triumphant market debut in April 2021.A Guide to CryptocurrencyCard 1 of 9A glossary. More

Jerome Powell, whom the Senate confirmed to a second term on Thursday, said allowing rapid inflation to persist would be more painful.Jerome H. Powell, the Federal Reserve chair, said in an interview on Thursday that lowering inflation is likely to be painful but that allowing price gains to persist would be the bigger problem — squaring off with the major challenge facing his central bank as he officially starts his second term at its helm.Mr. Powell, whom Senators confirmed to a second four-year term at the head of the central bank in an 80-19 vote on Thursday, holds one of most consequential jobs in the United States and the world economy at a moment of rapid inflation and deep uncertainty.Consumer prices climbed 8.3 percent in April from the previous year, according to data reported on Wednesday. And while inflation eased slightly on an annual basis, it remained near the fastest pace in 40 years, and the details of the release suggested that price pressures continue to run hot.The Fed has already begun raising interest rates to try and cool the economy, making its largest increase since 2000 when it lifted borrowing costs by half a percentage point this month. Mr. Powell and his colleagues have signaled that they will continue to push rates higher as they try to restrain spending and hiring, hoping to bring demand and supply into balance and drive inflation lower.Mr. Powell suggested Thursday in an interview with Marketplace that an even bigger 0.75 percentage point interest rate increase, though not under consideration at the moment, could be appropriate if economic data come in worse than officials expect.“The process of getting inflation down to 2 percent will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels,” Mr. Powell also said. “That’s just people losing the value of their paycheck to high inflation and, ultimately, we’d have to go through a much deeper downturn.”Mr. Powell, who was chosen as a Fed governor by former President Barack Obama and then elevated to chair by former President Donald J. Trump, was renominated by President Biden late last year.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what the increases mean for consumers.State Intervention: As inflation stays high, lawmakers across the country are turning to tax cuts to ease the pain, but the measures could make things worse. How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Though he has been popular among lawmakers for much of his tenure, several Republicans and Democrats voted against the nomination. Senator Robert Menendez, Democrat from New Jersey, cited the central bank’s failure to promote Latino leaders. Senator Richard Shelby, Republican of Alabama, cited high inflation in opposing Mr. Powell, posting on Twitter that “we should not reward failure.”Inflation is likely to be the defining challenge of Mr. Powell’s second term. As Mr. Shelby’s comments suggest, the Fed has been criticized for responding too slowly to rapid price gains last year. Mr. Powell has emphasized that policymakers did the best they could with the data in hand.“If you had perfect hindsight, you’d go back and it probably would have been better for us to have raised rates a little sooner,” Mr. Powell said in his interview with Marketplace. “I’m not sure how much difference it would have made, but we have to make decisions in real time, based on what we know then, and we did the best we could.”With Mr. Powell’s confirmation, Mr. Biden has now appointed four of the Fed’s seven governors in Washington, putting his imprimatur on the central bank at a crucial moment.The Senate last month confirmed Lael Brainard, formerly a Fed governor, as Mr. Biden’s choice for the Fed’s vice chair, an influential position within the central bank.This week, the Senate confirmed two other new Fed governors — Lisa D. Cook and Philip N. Jefferson. Mr. Biden has also nominated Michael S. Barr as the new vice chair for supervision, and his confirmation hearing before the Senate Banking Committee is scheduled for next week.Ms. Brainard and Mr. Powell have long been aligned on policy, and the Fed’s newest governors — Ms. Cook and Mr. Jefferson — indicated during their confirmation hearings that they, too, are focused on fighting inflation. Fed officials view stable prices as a crucial building block for sustainable economic growth.Inflation F.A.Q.Card 1 of 5What is inflation? More

From finance to art, blockchain enthusiasts have long claimed the technology can transform a range of industries. But, now, lawyer Martyn Huckerby believes the technology could help solve the global supply chain crisis.Huckerby is head of competition law at Tiang & Partners, a Hong Kong-based law firm. And, recently, he led a team of lawyers as they helped establish the Global Shipping Business Network (GSBN), which was launched last year with the aim of increasing digitisation in the global logistics industry.“There are a lot of challenges in the [shipping and logistics industries] at the moment,” he says. “The founding members [of GSBN] have seen an opportunity.“It is the kind of thing most lawyers would like to have the chance to work on. And it is something that will hopefully help the world,” he adds.

The global supply chain certainly needs assistance. From the outbreak of Covid-19 to the war in Ukraine and China’s recent lockdowns, a string of extraordinary events has upended the system that ensures the smooth movement of goods across the world.GSBN’s aim is to use blockchain to build a repository of digital data on global trade flows that will help “streamline operations across the entire supply chain”.To try to achieve this ambition, Huckerby and his team had to tackle a number of legal and regulatory obstacles, not least because some of the founding members are Chinese state-owned companies.“The supply chain is a very fragmented market with participants who largely rely on paper,” explains Bertrand Chen, chief executive of GSBN. He believes digitising logistics will speed up trade. “The biggest issue is: how do we share the data?”Blockchain — a technology typically associated with cryptocurrencies — is a catch-all term for a type of encrypted digital ledger used for recording transactions.GSBN, whose membership comprises eight shipping and port oper­ators across the world, hopes to use it as the backbone for a secure database that various businesses can contribute to, and draw insights from.From supermarkets across the world struggling to fill shelves to carmakers waiting for parts, fractures have emerged quickly in the network of manufacturers, shippers and financial institutions that work together to deliver goods. By helping these businesses to work col­laboratively, GSBN believes that its technology may “simplify global trade for all”.However, the prospect of some of the world’s largest shipping and port groups pulling together to share proprietary data was always likely to raise questions about the project’s compliance with competition laws.

Convincing US regulators to get on board has been a particular challenge, given nervousness among officials in the country about the integration of Chinese technology into international infrastructure. GSBN, based in Hong Kong, counts Chinese state companies Cosco Shipping and Shanghai International Port Group among the alliance, for instance.“In the context of the political environment, we had to tread very carefully,” Huckerby says. But he notes that GSBN received the go-ahead in July 2020 from the US’s Federal Maritime Commission, which regulates international ocean transportation.Addressing regulators’ concerns was made more complicated by the Covid pandemic. Because GSBN is international in scope, Tiang & Partners had to ensure the project was compliant with a range of national antitrust laws — and, in one case, that meant testimonies being given to Chilean authorities via video chat.The use of a technology so closely associated with crypto was also likely to make regulators wary. “Because GSBN is based on blockchain technology, we are dealing with issues the competition regulators have not seen before,” says Huckerby.

To Chen, though, the technology is key to the project’s success. “Blockchain is actually the most inefficient way to store data — we don’t want to do it if it’s not essential,” he says. But the encryption technology ensures that GSBN management cannot read the data and that authorised users will “only see the data they are supposed to see”, he explains.In July 2021, GSBN announced it had launched a service called Cargo Release in China. It said that, by eliminating the need for the exchange of paper documents, the time taken to process forms to release cargo in Shanghai has been cut from two to three days to less than three hours. The service has since been rolled out across south-east Asia and in Rotterdam, the EU’s biggest port.More recently, GSBN has announced the launch of a finance advisory group with Singapore’s DBS, HSBC bank, and Bank of China, to consider how banks can use its data for risk assessment when providing financing to the shipping sector.GSBN’s products are still in the early stages, but both Huckerby and Chen argue that blockchain has a long-term role to play in global supply chains. With other blockchain projects for the shipping industry in the works, however, there is no guarantee that GSBN’s project will emerge as the blockchain tool of choice.“It does not have to be us, we are not that arrogant,” says Chen. But, he adds: “We believe that long term, the industry has to adopt some form of technology. Blockchain has to stay in the industry”.Case studies:Creating new standardsEnabling business growth More

The US-China trade war started with fusillades of rhetoric. When former president Donald Trump first imposed tariffs on China, in 2018, he levelled a string of accusations at one of America’s biggest trade partners.Beijing, he said, had stolen intellectual property, erected market barriers, forced technology transfers from US companies and manipulated the value of its currency.Four years on, the rhetoric has subsided. Now, the trade war between the world’s two superpowers is characterised more by intricate legal work than by volleys of invective across the Pacific. And the activity is particularly intense in two areas: technology and finance.These are no small matters. The Rhodium Group, a consultancy, calculated that, at the end of 2020, the total value of two-way equity and bond holdings between China and the US was some $3.3tn — suggesting that, if financial decoupling really takes hold, the fallout would be significant.“Washington has traditionally taken a very liberal approach to financial globalisation but a new era of strategic competition with China has led to a redrawing of national security boundaries,” the Rhodium report said.Roger Robinson, president of RWR Advisory Group, a Washington, DC-based consultancy, sees a growing rift in US-China financial relations. “We are increasingly in an adversarial position vis-à-vis Beijing and it is necessary now to consider how we diversify away from the country,” he observed on a recent FT podcast.

“Over the past 20 years, not one Chinese company (listed in the US) has been compliant with US federal securities laws,” Robinson said.China does not allow the US Public Company Accounting Oversight Board (PCAOB) to conduct inspections of audits performed in China, meaning that some 270 Chinese companies listed on US exchanges are not subject to US accounting regulatory oversight.However, China is now showing signs of complying. Fang Xinghai, vice-chair of the China Securities Regulatory Commission (CSRC), said in April he was “very hopeful” a deal could be reached with US regulators in the near future. If this transpires, the threat of delisting from US exchanges that hangs over US-listed Chinese companies will start to dissipate.If not, the delistings are due to start in 2024. The US Securities and Exchange Commission added 80 Chinese companies this month to its list of firms liable to be removed from US exchanges, under the Holding Foreign Companies Accountable Act. Retailer JD.com, coffee chain Luckin Coffee, and electric vehicle maker Li Auto are among those on the list.The other big legal issue casting clouds over the future is the highly interlinked US-China technology supply chain. A welter of US laws and regulations aims to reduce America’s dependence on China in some areas while, in China, a drive for technological self-sufficiency — backed by recent laws — is also taking effect.So far, though, this decoupling remains largely in prospect rather than in reality. Paul Triolo, senior vice-president of business consultancy Albright Stonebridge Group, says China’s position as the largest, most efficient and lowest cost point in the global supply chain makes it hard for US manufacturers to shift their operations out of the country.“Probably, over the next five years, you are going to have about 5 or 10 per cent of advanced manufacturing move out of China,” says Triolo.He adds that alternative manufacturing hubs, such as Mexico, do not measure up in terms of the quality of goods produced or the responsiveness of service. The costs of shifting capacity out of China are also high. “You have to think about the investment that [such a shift] would require,” he says.

Nevertheless, several legal provisions exist for the US either to punish Chinese companies or prevent them from accessing US technology. These include the commerce department’s “entity list”, which uses legal sanctions to punish those deemed to be “bad actors”.In addition, the defence department has a “Communist Chinese military companies list”, whose shares may not be bought by US investors, and the treasury department has a “Specially Designated Nationals” list, which can be used to enact asset freezes and bans on travelling to the US or conducting business with US entities.But perhaps the most influential weapon in this tech war is Cfius, the Committee on Foreign Investment in the United States, which reviews investments into the US and can block those it deems undesirable. Since its operations were beefed up in 2018, with the Foreign Investment Risk Review Modernization Act, direct investment by Chinese tech firms into the US has fallen virtually to zero.Similarly, the Export Control Reform Act, also passed in 2018, aims to prevent sensitive technologies falling into Chinese hands. The commerce department continues to approve the vast majority of licences to export technology to China, but its denial rate has doubled in recent years. More