Category Archives: Deep Dive

Platforms Outperform Their Competitors – Here’s Why

By Jan Keim

Maybe you have heard the following statement by Tom Goodwin already: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.”. Clearly, when looking at the many examples of platforms disrupting industries, there is something interesting going on. Let’s dive deeper into the logic behind the so-called platform economy.

The Fundamentals

Traditional business models are designed around buying some sort of raw material, manufacturing a product and selling it to customers, or gathering people to deliver services. When looking at digital business models, this logic does not apply. Multisided platforms, or “matchmakers” as they are sometimes called, provide one or multiple groups of people with access to other groups of people and facilitate the interaction. At least one group of people perceives the facilitation of the interaction with another group as value they are willing to pay for. For example, Uber drivers can earn money by getting connected to riders via a platform, a service both groups value. Drivers benefit from the frequency of rides, and riders benefit from availability, transparent pricing, and transparent quality due to the rating mechanism.

The interdependence of demands has long been ignored in business, until Geoffrey Parker and Marshall Van Alstyne published the first peer-reviewed article on this topic in 2000. Since then, many platforms have emerged and pushed the boundaries of different industries, including hospitality, retail and transportation. But what exactly makes such platforms better than traditional businesses?

Network Effects, Curation and Excess Value

As middlemen, platforms benefit from the value created by letting groups of people with specific needs interact with each other to satisfy those needs. This means that platforms facilitate the exchange of goods, services or social currency (e.g. “likes”). For multisided platforms, network effects are crucial to their business models. There are two types of network effects that either can be positive or negative: same-side or cross-side network effects.

  • Positive same-side network effects come into play if an increase in participants on one side creates additional value for the same side. An example of this is WhatsApp, where users benefit from more people they can chat with.
  • Negative same-side network effects happen if additional players on the same side have a negative impact on the others, e.g. on a marketplace like eBay where people try to sell substitute goods to the same customer group.
  • Positive cross-side network effects happen when one group benefits from an increase of participants on the other side. Marketplaces such as Amazon create value for customers not only because of the delivery of goods, but also because the selection of goods is much bigger compared to traditional retailers.
  • Negative cross-side network effects, while rather rare, refer to a decrease in value for the opposite side should an additional player enter the other group. An example of negative cross-side network effects is advertisement, where more advertisers may have a negative impact on the user experience.

Network effects, in fact, are so important to a platform business that some companies are willing to pay one side to attract the other side. For example, companies like Sony (PlayStation) or Microsoft (Xbox) sell their gaming consoles at a loss. However, the more people own a certain console, the more attractive game development for those consoles becomes, which represents a main revenue stream for Sony’s and Microsoft’s gaming divisions.

Because effective matchmaking is the key to generating value, curation is a core competency in the platform economy. Curation refers to a mechanism that ensures successful matchmaking. Such mechanisms may consist of rating systems, filters or algorithms. Curation ensures that a customer on one side finds the right partner on the other side. If a platform business fails to ensure effective matchmaking, chances are high that the business fails. Imagine what would happen if Airbnb keeps failing at showing you available rooms that match your budget and location preferences, or if Amazon kept showing you irrelevant products without the possibility to filter based on what you are looking for.

Multisided platforms rely on technology for value creation. The technology enables platforms to deliver four sources of value that would not exist without them, so-called “excess value”. Customers benefit from access to value created on the platform (e.g. videos on YouTube), producers benefit from access to a community (e.g. Airbnb), and both sides benefit from tools and services that facilitate their interaction (e.g. Kickstarter) as well as from the curation mechanism that enhances the quality of their interactions.

The Chicken-and-Egg Problem

When deciding on building a multisided platform, there is one key challenge that many start-ups fail to overcome: the chicken-and-egg problem. Each group on a multisided platform depends on the presence of the other group(s). Without both groups on the platform at the same time, the value proposition cannot be delivered. Therefore, when starting off, a platform business needs a strategy on how to attract all relevant sides so that effective matchmaking can take place. There are different strategies a platform business can use to overcome this dilemma, for example:

  • The Micro-Market Strategy: By making the platform accessible to Harvard students only, Facebook overcame the chicken-and-egg problem by targeting a tiny market of members that already interacted with each other on campus.
  • The Big Bang Adoption Strategy: Tinder launched at a frat party at the University of Southern California. Within a short period of time, the company was able to attract a high volume of sign-ups immediately.
  • The Follow-the-Rabbit Strategy: Amazon started off as an online retailer to build a database of users and producers. Later, the company pivoted into a platform that helped producers and consumers match with each other.

What the Future Holds

Looking at the success stories of platform businesses, it is not far-fetched to assume that further disruption of industries will take place in the future. Traditional businesses should ask themselves how they can react and possibly benefit from platforms in order to avoid being pushed out of the market. In fact, some big and traditional brands have already started implementing platforms to create additional value for their customers, such as Nike with its NikePlus platform, or Under Armour with MyFitnessPal and Endomondo.

Acknowledgement

This article is based on the content delivered by Conor Foley during the Digital Business Models module at Trinity Business School. Conor is studying for a PhD in the area of digital business models. His particular area of interest relates to multisided digital platforms and the way in which they achieve sustained competitive advantage and accelerated growth.

Commercial Law’s Fear of Electrocution – An Analysis of the Law’s Reluctance to be Energetic in Deeming Energy as a “Good”. Is Change a “Good” Idea?

By Luke Gibbons

It is unquestionable that commercial entities, would not function without energy supply. Further, as Bridge outlines, “there is no doubt that energy…[can be] bought and sold”. (Benjamin’s Sale of Goods,9th.edn.2014). Thus, the fact the judiciary and legislator have failed to clarify whether such constitute “goods” under the Sale of Goods and Supply of Services Act 1980, and therefore, accrue heightened remedial availability than “services”, while providing no definition of “services”, and as White states, no principled reason why this protectionism to goods exists, is abhorrent.(White,Commercial Law,2nd.edn.2012).

It is regrettable that a definition requiring tangibility, from a period when energy was not paramount is stifling jurisprudential and legislative development, as “there are …difficulties attributing to energy … legal qualities of… physical objects”.(n1) Consequently, a multijurisdictional solution has developed, distinguishing “bottled” from “flowing” energy, as held in Bradshaw v Bothe’s Marine[1973]35.DLR.(3d)43, with the former being deemed “goods”. Although unfavourable in an already uncertainty area, it is submitted, such may be necessary. This is contended as Part IV of the 1980 Act only implies “terms” akin to “conditions” implied to sale contracts, if a contract is held to be for supply of services, and following Carroll v An Post National Lottery[1996]1I.R 433, a narrow view of  such is proffered. Thus, one contends, if this distinction was not held, there would arguably be no protection for commercial entities who buy “bottled” energy, as such may not be deemed a service, and also, not be subject to the proposed Consumer Rights Bill 2015.

Further, it is argued, the definition’s impact is exacerbated, as energy is considered a “good” in many Statutes such as, the Consumer Protection Act 2007. In spite of such, one must question, to remedy this arbitrary distinction, is it feasible for energy in general to be deemed a “good” under the 1980 Act, now that “services” are offered protections?

It is arguable, the dearth of cases may warrant maintaining the status quo. Furthermore, it is contended, if energy constituted a “good”, s.35 may be invoked, deeming acceptance by “use”, being an act inconsistent with the seller’s ownership. However, it is noted, as such is expressly subject to s.34(1) allowing for reasonable inspection, and as such allows operation, subsequent to Benstein v Pamson Motors Ltd[1987]2.All.ER.220, the “use” of energy uncovering a “latent defect” for instance, may give rise to more favourable remedies to “buyers”.

Nevertheless, a determination that energy is a “good” may arguably detrimentally effect remedial availability. Currently, in energy being a “service”, implied terms are “innominate terms”, warranting damages or termination depending on the breach’s seriousness, as denoted from Hongkong Fir Shipping v Kaawasaki Kisen Ltd[1962]2Q.B..26. However, it is contended, if deemed a “good”, claims would likely be made under s.11(3) of the 1893 Act, arguing; if some energy was consumed prior to rejection, a partial rejection occurred, and thus, implied conditions would be converted into warranties, with damages being the only remedy. Further, although White requests allowance of partial rejection as in the UK, it is argued, such would not assist as energy would likely be subject to the “commercial unit” exception. Thus, the only solution to this quandary may be “freedom of contract” in allowing such, although as monopolised energy suppliers are often the dominant party, this seems unlikely.

Furthermore, retention of title clauses are hallmarks of sales contracts, as such provide remedies for sellers, when “goods” are sold on credit. Although, White contends such are common where “goods” are consumed before credit periods end, the recent case of PST Energy v OW Bunker Ltd[2016]UKSC23 held, in relation to fuel, one cannot obtain title to something that no longer exists, so it cannot be a transaction with such at its heart. Thus, it is argued, in undermining a key remedy when buyers become insolvent, and a foundation of credit arrangements, this holding encapsulates why deeming energy as “goods” is unworkable.

It is submitted, due to the difficulties outlined, the Sales Law Review Group’s recommendation to hold implied terms for services as “conditions” in legislation should be adopted. Although, it is noted, this may not fully remedy the remedial deficit offered to “services”, such would allow commercial users of differing energy forms, seek relatively equal remedies bringing some homogeneity to the law.

No Basis for “Basis of Contract” Clauses! Time to Abolish?

By Luke Gibbons

The judicial unease lamented in Keating v New Ireland Assurance [1990]2.I.R.383 surrounding “basis of contract” clauses is well founded.  However, it is contended, that this disapproval is frivolous, as notwithstanding such, these clauses are upheld by Irish courts. This allows insurers, often the more powerful contracting party, convert a pre-contractual representation into a warranty, and thus, gives the insurer a right of repudiation. It is argued, this consistently leaves the insured bearing the loss, and in so doing, undermines the premise on which insurance is based, that being, protecting against future losses. Furthermore, it is submitted, that the rationale used by the courts in upholding these clauses is flawed and in deeming such as valid, the courts are running the risk of ironically circumventing the materiality burden in misrepresentation and nondisclosure, as developed by said courts to protect the insured.

In Keating, the recognised rationale in validating these clauses was freedom of contract. Although, this seems infallible, as two legal entities are willingly entering an agreement. It is contended, that in the insurance context, such does not consider the idiosyncratic reality of these transactions, and ultimately, the inherent imbalance of power between the parties. One argues such, as every business, no matter how powerful, is required to have insurance in some respect. Therefore, it is submitted, as these entities must enter into contracts with insurers, often having no choice in so doing, and not being subject to the EC (Unfair Terms in Consumer Contracts) Regulations 1995; the courts in upholding “basis clauses”, on the grounds of freedom of contract, are failing to acknowledge this inherent imbalance in commercial insurance agreements. The insured is not free to enter into a contract at all, the insured must enter into a contract to avoid future losses and being in breach of relevant law.

As held in Keating, non-disclosure or misrepresentation can only render a contract void if such facts are deemed material, and it is proven that these were known to the insured during declaration. However, “basis clauses” differ, and as denoted from Keating, any undisclosed information, no matter how insignificant, if under a “basis clause” may lead to repudiation. Although post-Keating, “basis clauses” must be outlined in clear terms and if ambiguous the contra proferentem rule shall apply, such judicial intervention is inadequate. It is submitted, the holding, by confirming the validity of “basis clauses”, still arguably allows insurers use suchto circumvent the burden of proving materiality, and ultimately, undermine a threshold designed to protect the insured.

Thus, it is undisputed that reform is needed, however, the question still lies: should “basis clauses” be unlawful? There is some credence in the New Zealand approach, which incorporates a “materiality test” in accessing non-disclosure and misrepresentation under “basis clauses”; much like the approach to warranties in this jurisdiction and the guidelines promulgated in Irish self-regulations. It is argued, that on one hand, this would bring homogeneity to the treatment of warranties, and ultimately, ground “basis clauses” in their foundational origin, that being, as Foss states, “[use] …with…clauses permitting the insurer to avoid the policy… [due to] …material misstatement” (‘Good Faith and Insurance Contracts’ 2010). However, on the other hand, the plaguing question of what is material would still exist. Furthermore, is it contended, that if such is adopted, insurers would cease using “basis clauses” anyhow, as such would not have the “trap[ping]” effect they are designed to have, as described in Zurich General Insurance Co Ltd v Morrison [1942]2.K.B.53. However, reliance on insurers ceasing use and the unpredictability surrounding materiality is too uncertain a basis upon which insurance law should develop.

Therefore, in agreement with the Law Reform Commission, it is proffered, that the Australian approach be adopted, banning “basis clauses” entirely, as such is definitive, and in turn, champions certainty in commercial law. This is also advanced, as Buckley ((2005).12 Commercial Law Practitioner 10) laments, the current self-regulation is “inadequate”; a view solidified by CB Justice v St Paul Ireland (Circuit Court 25/11/2004).  Nevertheless, it remains to be seen whether the Oireachtas will stifle this unacceptable practice and remedy the unfortunate reality as described in Anderson v FitzGerald (1853)3.ICLR.475, that “basis clauses…[render the policy] not worth the paper upon which it is written”.

Do Commercial Lawyers Need To Get Smart?

By Jack Savage

Advances in technology are affecting all aspects of business. It is has created significant developments in productivity, efficiency, and innovation. Inevitably, the question must be asked as to whether new technologies should be integrated into the relationship between law and business. Law and particularly contract law plays a foundational role in all business transactions. Can smart contracts enhance current legal practice, does the potential to remove third parties from contracting individuals exist and at what cost?

What is a Smart Contract?

A smart contract is a self-executing, self-enforcing, blockchain contract in digital form. The agreement is written in code across a distributed, decentralised blockchain network. Transactions are transparent, traceable and irreversible.

How does it work?

The agreement is written in code across a distributed, decentralised blockchain network. Both lawyers and programmers are required to create a smart contract. “Logic 1 ” is input to the code, which then acts in a pre-defined manner. The contract operates based upon IF THEN Conditional Computer Programming Statements.

How do you enter a Smart Contract?

An encrypted code is sent to the other parties through a distributed network of ledgers (a “DLT”). The code is received by computers in the DLT and individually make an agreement on the results of the code of execution. The agreement is self-executed and recorded as the network updates the DLT. The execution is not controlled by an individual party and cannot be independently modified.

Potential Benefits

Efficiency and reliability are increased substantially when a process is automated and the need for a human input is removed. Eliminating the intermediary significantly reduces transactional costs.

Limitations

Although some contracts can be expressed by computers, limitations exist when performance is dependent on a subjective standard. Smart contracts are not effective at expressing or construing non-binary clauses such are “satisfaction” and “reasonable effort” clauses, which are a regular and necessary feature of contracts. These clauses allow scope for the unexpected. When such an intention is expressed in a self-executing smart contract the intention of the parties may not be realised. A smart contract can only be understood literally, an interpretative approach seeking to capture the “intent of the contract” is not possible. A human element allows the flexibility needed to capture human intention.

Shortcomings

A more technical point is the requirement of certainty of terms for a contract to be legally binding. It is not possible to identify the legal parties in an agreement in a smart contract. Smart contracts use public addresses (“Address”), which directs to a wallet, to form the agreement. Information extrinsic to the agreement is required to identify the parties. Smart contracts can participate with other smart transactions. This means that the address may direct to another smart contract. This creates a multi-wallet address controlled by various addresses. This multi-wallet address can then enter contract itself. Therefore, it is not possible to definitively state that a certain public address relates to a wallet and a particular owner.

Smart contracts are unable to access information outside of the blockchain. Information is verified and sent by Oracles. However, centralised oracles are vulnerable to being hacked as they are single points of failure. Oracles can malfunction and feed false information to the blockchain. Congestion can result in transaction delays. Although these risks can be mitigated by decentralisation, it is impossible to eliminate them. As smart contracts become more complex the inherent risks increase.

Opportunity

Smart contracts will disrupt a number of existing industries that exist in different regulatory frameworks. A consequence of this disruption will inevitably be the need for legal advice on regulatory compliance. Smart contracts will require legal counsel to ensure that any projects stay within the applicable regulatory parameters across the jurisdictions in which it operates.

The Future of Law

It is unlikely smart contracts will replace written contracts due to their inherent limitations and current shortcomings. However, smart contracts offer a number of clear advantages to written contracts. It is likely that a hybrid model smart contract which acts in tandem with written contracts will prevail. In the future lawyers may learn how to code smart contracts in order to draft both elements of agreements. Presently, it is likely that products and services will develop facilitating lawyers to draft enhanced agreements using both legal expertise and blockchain.

Blockchain eventually may provide a secure, efficient and fast platform for storing, accessing, and authenticating data, in addition to streamlining labour intensive legal processes like discovery.

Whilst Smart Contract and blockchain may change how law is currently practiced what resources are allocated. It is likely that the legal practice will be enhanced rather than diminished.

Impact Investing: The Way Ahead?

By Abigail Fernandes

On September 20th and 27th , millions of people took to the streets to strike for climate action. This mass protest was a way of expressing a public sentiment that “Business as usual is no longer an option”. However, Charities and Governments around the world do not have enough capital to meet the challenges faced by the environment. Where then can we find enough capital to help the government tackle this issue? One of the best solutions to this ever-existing crisis is “Impact Investing’. The term was coined more than a decade ago but begun to gain momentum only since the last year. It refers to an agreement entered into by entrepreneurs, companies, organisations and philanthropists to invest in markets that create a social or environmental impact and generate returns. This in turn creates a win-win situation for the environment and the investors at large.

Why Impact Investing Now?

The benefits of Impact Investing are manifold. The future of human beings and the environment are interdependent. The temperatures of our planet are rising, and the icebergs are melting and the on area that is bound to get impacted is our ‘Big Businesses’. As rational beings we need to have a strong compulsion to protect our dying planet that has so much to offer. Impact Investing ensures that businesses are held accountable for the activities undertaken. Institutional Investors can see to it that the companies that they invest in are minimising risks and maximising opportunities that are presented by climate change. Thus, enabling a cleaner and greener environment. Investing in sectors like solar energy and wind power can put an end to the use of fossil fuels and help companies find new efficient ways of meeting the energy needs of the society. A greener future can be good not only for the planet that we live in but also to our wallets. A 2018 study by GIIN found that more than 90% of impact investors reported that their investments were meeting or surpassing their projections.

Growth Avenues for Impact Investing

With the growth of Impact Investments rapidly increasing, some of the best options for impact investing are iShares Global Clean Energy ETF, First Trust ISE Global Wind Energy Index Fund, Gree Mutual Funds like Amundi, Calvert Green Bond Fund, Brown Advisory Sustainable Growth Fund. These investments have a proven track record of positive returns while being beneficial to the society. The growth in these avenues is only going to increase as people now have the option of investing in hedge funds, private foundations, banks, pension funds, and other fund managers. Another way of investing is by adding a Donor Advised Fund (DAF) to one’s impact strategy. An investor gets a multiplier effect on his investments while investing in a DAF. The Fund invests only in companies that create a social impact and then those investments give back up to two to five percent returns to the DAF.

The US municipal finance sector is need of environmental impact bonds as climate change has become very important to protect their community from the bad effects of climate changes. Environmental impact bonds offer a solution to this problem. These securities are municipal bonds that transfer a portion of the risk involved with implementing climate adaptation or mitigation projects from the public agency on to the bondholder.

A good example for this is quoted from an article in The Harvard Business Review regarding a $25 million bond issued by the municipal water board in Washington, D.C. in 2016.The water board used the bond to fund the construction of green infrastructure to manage stormwater runoff and improve water quality. The return to investors is linked to the performance of the funded infrastructure, which allows DC Water to hedge a portion of the risk associated with both constructing green infrastructure and, once it’s in place, how well it works. Investors receive a standard 3.43 percent semi-annual coupon payment throughout the term of the tax-exempt bond. Towards the end of a five-year term – at the mandatory tender date – the reduction in stormwater runoff resulting from the green infrastructure is used to calculate and assign an additional payment If the results are strong (defined in three tiers; tier 1 being best performance) the investors receive an additional payment ($3.3 million) – bringing their interest rate effectively to 5.8 percent. If the results are as expected, there is no additional payment. And if the infrastructure underperforms, the investors owe a payment to DC Water ($3.3 million) – bringing the interest rate to 0.8 percent.

The Verdict

Impact Investing is and will be the future. However, investors should choose not to invest in companies that have a negative impact on the environment. The more investors give importance to impact investing, the better companies with a mission of environmental sustainability will perform. Hopefully this should encourage more and more environmental conscious investors to grow their investments and improve the world in one motion. Thus, rewarding businesses for their commitment to a higher calling.

The Impact of Artificial Intelligence on the Agricultural Industry

By Jan Keim

Artificial Intelligence (AI) and its subsets, such as Machine Learning (ML), are among the most heavily discussed technologies, both in academia and in business. AI is predicted to fundamentally disrupt many areas of business, from cybersecurity to supply chain management. In fact, most people interact with some sort of AI on a regular basis, for example when using a chatbot or filtering emails. A 2018 study conducted by PricewaterhouseCoopers (PwC) estimates a worldwide Gross Domestic Product (GDP) growth by up to 14% by 2030 as a result of accelerated use of AI, with China growing its GDP by up to 26%, compared to Northern Europe with an expected growth of 9.9% and North America with 14.5%. The Organisation for Economic Cooperation and Development (OECD) forecasts a strong impact of AI, especially on manufacturing, with the potential creation of entirely new industries. The digitalisation of industry, commonly referred to as “Industry 4.0”, is a prime example of rapid change driven by AI. Technologies such as the Internet of Things (IoT), big data analytics, cloud computing, augmented reality (AR) and 3D printing underpin this process and may lead to the transformation of manufacturing into “a single cyber-physical system in which digital technology, internet and production are merged in one”, as the European Parliament Research Service puts it.

While AI certainly has tremendous potential to transform manufacturing, one industry that is less talked about in this context is agriculture, even though the agriculture industry is among the most relevant to populations’ daily lives. There are various applications of AI in agriculture already. However, most of these applications are limited to bigger farms, currently neglecting smallholder farmers. Three areas of application of AI in agriculture are outlined below:

Precision Agriculture

Precision agriculture refers to the observation, measurement and responses to variability in crops, fields and animals. By using AI to increase crop yields and animal performance, precision agriculture can reduce costs and optimise processes. For example, Blue River Technology, a U.S. based start-up that has been acquired by tractor giant John Deere in 2017, uses computer vision and AI to precisely apply herbicides, instead of spraying entire fields. This approach not only saves money, it also decreases the environmental impact of plant protection products by eliminating up to 90% of the herbicide volumes.

Field Monitoring & Harvest Forecasting

Analysing the current condition of fields has long been a labour-intensive challenge for farmers. By analysing drone and satellite pictures using AI, farmers are now able to receive accurate data on their fields’ condition, vegetation issues and problem areas. For instance, IBM’s Watson Decision Platform for Agriculture provides farmers with tools that alert them should there be threats from weather forecasts, soil conditions, evapotranspiration rates, or crop stress. This helps farmers improve crop protection and optimise crop yields, for example. Ultimately, field monitoring helps farmers estimate their agricultural yield and plan security measures accordingly.

Process Automation

The United Nations (UN) predicts that by 2050, 68% of the world’s population will live in urban areas. This will lead to a decrease in labour force in rural areas. By automating processes, easier risk identification, faster decision making and remote operations, AI can significantly reduce the need for labour in the agriculture industry and decrease labour costs.

While there are many benefits to using AI in agriculture, there are a few challenges that have to be taken into consideration while moving towards a more automated and AI-enhanced future. Firstly, many applications of AI, or digitalisation more generally, can be cost intensive, require technological knowledge and demand special infrastructure. While big farms can largely benefit from AI applications, smallholder farmers may be left behind. Hence, ensuring that smallholder farmers equally benefit from the technological progress is a crucial task for politics and science alike. Secondly, the AI-supported automation of agricultural processes tends to benefit countries with large farmlands, such as the United States, Germany or France. Yet, many smaller countries are dependent on agriculture, such as Togo, Sierra Leone or Guinea-Bissau. So far, trade barriers have helped some smaller countries to protect their agricultural sector. However, the advancing globalisation and increasing international trade may exacerbate such policy, which could endanger smaller countries’ agriculture. Thirdly, the technological development in agriculture tends to benefit developed countries. High wages in developed countries create a strong incentive to automate processes and thereby save labour costs. In developing countries with lower wages, this incentive is weaker. According to a discussion paper by McKinsey & Company, the automation could bring back production from poorer countries to developed countries, which would likely increase the lead of developed countries over developing countries.

AI can help farmers tackle some of the most pressing problems they face today. Therefore, the steady adoption of AI will most likely continue and ultimately become mainstream. However, to ensure a level playing field, policymakers, scientists and innovators need to make sure that neither smallholder farmers nor entire developing countries are left behind.

Impending Fiscal Gloom: Halloween’s Horror Story

By Peter Benson

The writing’s on the wall.

Warning signs of another global recession are seemingly ubiquitous, but it’s easy to dismiss them as just more meaningless bad news. Unfortunately, we may be feeling the combined effects of this bad news sooner than we think, perhaps even by the end of 2020.

What signs am I talking about? Let me explain:

The Inverted Yield Curve

You may not have heard, but in December 2018, part of the U.S. Treasury’s yield curve (5 year – 2 year yield spread) inverted for the first time in nearly a decade. The yield curve is a graph that plots the interest rates of similar bonds with varying times to maturity. Put simply, the yield curve mirrors the outlook of investors on future economic prospects. If it’s curving upward, it means they expect long-term economic growth. If it inverts (curves downward), which it did, it means that the summer holiday you just booked may be in jeopardy. Find out more on that here.

A yield curve inversion is regarded widely as being positively correlated with a recession. The yield curve on 10 year – 2 year yield spreads inverted on 14th August 2019, and the last time it inverted in this fashion was in 2007. According to Reuters, an inversion has predated every recession in the past 50 years, offering a false signal just once in that time. It has previously taken up to 24 months for a recession to follow a yield curve inversion, so perhaps we still have time to wait. Time is ticking on that deadline, however, and all should be revealed by December 2020.

It is worth mentioning that a yield curve inversion should not be taken as gospel in and of itself. Some suggest that the data is skewed because of the U.S. Federal Reserve’s wholesale purchase of bonds to retain their balance sheet, and that the economy rarely moves in ‘lock-step’ with the stock market.

Who knows? Maybe our bank accounts will soon take a hit. Maybe they won’t. But the yield curve’s latest inversion, the strongest metric by which a recession can be predicted, simply cannot be ignored. At the very least, it serves as a wake-up call that it may be time we took a second look at our finances.

Brexit

You get the idea.

The European economic fall-out from a no-deal Brexit is as yet unknown but seemingly unquantifiable.

KPMG forecast that a no-deal outcome could shrink the British economy by 1.5%. A mere 1.5% drop isn’t too bad, right? Wrong. With a GDP that is valued to be in excess of $2.6tn, a 1.5% shrinkage of the UK’s economy would equate roughly to a loss of $39bn. To put that figure into perspective, the GDP of Latvia is estimated to be in the ballpark of $39bn.

That’s not to mention the repercussions of such an outcome on the Irish economy, and the knock-on effects globally. Ireland has traditionally relied heavily on the UK for exports, and although this reliance has eased somewhat in recent years, 9% of our total exports are still to our nearest neighbours. This is notwithstanding the World Trade Organisation’s latest ruling that has paved the way for a fresh round of U.S. tariffs on EU goods to the tune of $7.5bn.

Granted, this is a worst-case scenario. Recent legislation in the form of the ‘Benn-Act’ provides us with some solace. This Act forces the British Prime Minister, Boris Johnson, to advocate for an extension on the October 31st deadline if Brussels is dissatisfied with whatever deal is proposed. However, loopholes in this legislation have already been identified, and Johnson’s comments at the latest Tory conference that Britain will leave the EU ‘come what may’ paint a foreboding picture.

Perhaps it’s fitting that our fate may be sealed on Halloween. I, for one, will be dressing up as the world’s most recent judicial champion, Lady Hale.

Everything Else

  • The escalating trade war between the U.S. and China is not expected to end anytime soon;
  • Did you know Japan and South Korea are also embroiled in a trade war with global economic implications?
  • The over-valuation of housing isn’t just a problem in Ireland; there’s a global property bubble, the bursting of which could prove disastrous;
  • This week, sharp falls were recorded in the Asian, U.S., and European markets, signalling that a recession may well be due;
  • The result of the 2020 U.S. Presidential election could inject even more volatility into an already fracturing global market.

So there you have it.

Financial and economic warning lights are flashing, and if I were a government economist I’d be shaking in my boots.

What would another global financial crisis look like as we approach the end of the decade? In light of recent calls for a lower intake of domestic students, and without increased government funding, what would be the impact on Trinity? Would more cuts be implemented, or would our focus shift to further commercialisation? How would a country only recently getting back on its feet after years of economic turmoil, but still wildly indebted, fare in future?

My message is this: there is a strong possibility of another global economic downturn occurring within the next 15 months. Rather than rest on our laurels, here are some things we can do to prepare ourselves financially. They won’t provide us with total financial security, but they may soften the inevitable blow.

There are still a lot of variables at play, particularly in relation to Brexit, that may bring with them a slightly more positive outlook.

What’s certain, however, is that the hum of our global economy is slowing, and our ears must be pricked toward it. The writing on the wall is thickening, and thus we must read it.

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