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This is the Crisis that Monetary Policy Will Miss

Dubbed ‘The Great Lockdown’ in a recent IMF report, the sudden halt of the world economy has sparked an imminent recession unlike anything we have seen since the second world war.

The estimated loss of global wealth is $9T (equivalent of Germany & Japan’s economies falling off the face of the earth for an entire year) and IMF project a 6% decline in GDP across Europe & the US – twice that of the 2009 global financial crisis.

However unlike 2009, interest rates today are at record lows, rendering any change from here ineffective. This means we need to print money to generate liquidity and spend money to fuel growth, both of which are problematic.

Why do Interest Rates Matter?

Interest rates are set using Monetary Policy which refers to the actions undertaken to control the money supply of a given currency in an economy. In each case, a central bank determines the minimum interest rate in which a currency can be borrowed. Monetary policy is set by the European Central Bank (ECB) in the Eurozone and the Federal Reserve (Fed) in the US.

The lower rates are, the cheaper it is for businesses to borrow which then incentives investment and fuels economic growth.

It is one of two primary tools used to achieve macroeconomic goals and is fundamental in stimulating growth. Without strategic monetary policy, inflation can go out of control (currency loses value) or a recovery can be stalled. For this reason, the UK choose to set their monetary policy independent of the Eurozone via the Bank of England.

Where is Monetary Policy at Today?

Prior to the Global Financial Crisis, monetary policy across the west was in fairly good shape. At the beginning of 2008, interest rates were 4.2% in the Euro, 5.25% in the Dollar and 5.5% in Sterling. This meant that once the crisis hit, central banks were able to lower rates and effectively fuel growth to curb the downturn.

Today, 12 years on, rates are lower than ever; 0% in the Euro, 0.25% in the Dollar and 0.1% in Sterling. This gives central banks virtually no ability to use them to generate further liquidity using interest rates during this crisis.

To put it simply, borrowing money can’t get any cheaper than it is today meaning that central banks can’t reduce the cost of borrowing to tackle this downturn like they could in 2009.

As a result they’ve turned to what’s called quantitative easing (QE) to increase the money supply. This is another word for printing money and is highly contentious as it creates inflation (decrease in the value of money) which may go out of control if not strictly measured. As a result it has a very limited capacity to generate liquidity.

Outside of QE, economies are reliant on fiscal policy to restore growth.

Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, namely macroeconomic conditions such as growth. It is set at the domestic level by national governments. Although the 3 economies in question are aligned on the issue of low interest rates, they face different problems individually when it comes to fiscal policy.

European Policy is Limited

ECB rates have been at 0% since 2016. If they go any lower they will be paying people to borrow money,  if they go any higher the Euro Area will be shocked with tighter rates than have been seen in the last four years and economic recovery will be inhibited. So as it stands, the ECB can’t do anything for Europe with interest rates.

This means monetary policy is reliant on QE. Which has recently hit a major roadblock in Germany where a recent ruling stated that the ECB’s QE Program is excessive (destabilising) and that the German Central Bank must cease cooperation with the ECB in the next 3 months unless they can prove otherwise.

This puts the ability of the ECB to tackle a downturn in serious jeopardy. Given that Germany is responsible for a third of the Eurozone’s GDP, a cease of cooperation will make the ECB’s policy ineffective.

This means that Eurozone countries must turn to fiscal policy for stimulus.

In the EU, fiscal policy is primarily set at the domestic level – meaning it’s up to each national government to choose how they’ll spend their money. Undoubtedly there will be an effort to coordinate spending in Eurozone countries to minimise the downturn’s impact across the continent. However, such efforts have historically been politically contentious and will likely be no different this time round. Coordination means that smaller countries (Ireland, Greece etc.) will have to base their spending on that of the larger countries (Germany & France). If one country fails to emerge from stagnated growth, other Eurozone countries will feel the burden.

With nationalism on the rise in Europe over the last half decade, we may see sharp resistance towards EU intervention in fiscal policy decisions, threatening the stability of the Euro entirely.

The UK still has to deal with Brexit

With interest rate constraints the UK has also resorted to QE, recently announcing a £200bn purchase of UK government and corporate bonds. However, they still need to finalise Brexit agreements before they leave the Customs Union and Single Market by the end of the year. This may be prolonged but will inhibit fiscal policy going forward.

Limitless QE and High Debt in the US

Similarly to the ECB, the Fed can do little with interest rates to aid growth from here,  turning to QE as for liquidity generation. However, it has slightly more independence than the ECB when it comes to its monetary policy. As a result, they’ve announced a limitless QE program. This effectively means they will print as much money as they believe is necessary to achieve their macroeconomic targets. The stock markets have reacted well to this announcement as it increases the likelihood of high returns. However, the stock market is not the economy, printing money has historically never been favourable and if the Fed isn’t careful they may devalue the dollar beyond their capacity to control it.

To destabilise matters even further, US officials have announced that they are considering writing off some of their debt to China. Such a move would be catastrophic for their credibility and will send the bond market into panic, this would be unprecedented.

Aside from issues with QE, fiscal policy in the US is also under constraints. As it stands, the US national debt is at a record $25T. This has more than doubled since 2008 and stands around $75,757 per person. Evidently, this is becoming less sustainable as time goes on and seriously calls into question how the US government can reliably borrow any further

In either case, an effort to restore growth now will be paid for in the near future. Undoubtedly, the debt is a long-term issue to be faced by millennials, of whom are currently already burdened with $1.6T in student loan debt (owed by 40 million borrowers). Whichever approach the government chooses to adopt, it will make the macroeconomic situation increasingly unsustainable. If the government are not responsible today, the US public will have to pay for it down the line.

In essence, to reboot the economy, the US government will need to spend more money, mounting on their ever growing, unsustainable debt which may lose all its value should QE go out of control.

The Outcome

In Europe & the US monetary policy is restricted to QE as a mechanism for generating liquidity. This is limited at best and destructive at worst.

The West will have to fight this battle without the monetary tools we’ve had in the past – which means national governments need to strategically set their fiscal policies to coordinate a quick recovery across both continents.

In Europe, this involves a coordinated effort among distinctively different economies who are each faced with their own problems and political pressures. In the US, it likely requires an increase in the ever-growing national debt which will have to be paid for at some point in the future. It is hard to imagine a sustainable “V Shaped” recovery in such a global climate. If there is, it will entail a lot of borrowing.

Economics can be convoluted and politics can be misleading, which has taken this conversation out of mainstream news reports. Monetary policy will not be able to help us out of this crisis and extensive efforts to do so could make it worse. Fiscal policy will take on all the responsibility for recovery, which implies increased debt and a need for smart spending.

Whether or not the economy gets back on its feet next year, interest rates will eventually have to rise, and government debt will eventually have to be paid back. In order to do so, we need long term strategic vision and strong underlying growth. If not, we may see the demise of the Euro over the next decade and potentially the Dollar.

The sooner we recognise this, the better we can act. The longer we ignore it, the less we can do.

Landing in Trouble: Ryanair's Position Amid Coronavirus Meltdown

By Robert Tolan

Friday saw Ryanair CEO, Michael O’Leary, announce a temporary 50% pay cut for all employees, including executives, in an effort to bolster its balance sheet amidst the uncertainty of the situation sweeping the world. Given the trajectory of its share price, now €8.81, a sobering 50% decline compared to its January price, the terrain ahead may be looking worse for shareholders.

O’Leary’s decision was merely an attempt to slow down the bleeding that started last week as deaths from Corona virus soared. International travel has now been brought into question which brings problems of its own for air travel within Europe’s Schengen area, the largest revenue maker for Ryanair, and indeed uncharted territory for free movement. As the European economy is stuck in gear for the foreseeable future, O’Leary has hinted at the possibility of future redundancies.

    The threat of heads rolling within the company probably could have come a little sooner. The current debacle is not a cause but rather a symptom of deeper issues within the company. Consider the following facts; it traded at a high of €18.41 almost two years ago, the price has been down trending since, Ryanair has undergone a major re brand, profits have stagnated despite increasing passenger numbers and industrial relations issues have become a mainstay of the company.

 With €4bn in cash equivalents the company will not be able to weather the most adverse pandemic scenario, the European economy stalling well into the summer or even later, and so some sort of guillotine must be brought to the stage. The maverick O’Leary must return for his company’s fortunes to reverse.

    The more liberal of observers will say Ryanair ought to wait out for government support of some sort. This is entirely unreasonable. The government assistance Ireland could afford is not enough to keep a pan-European airline afloat and the EU’s bureaucracy and failure to codify an approach to assisting businesses in ‘black swan’ events such as pandemics mean neither fig leaf will come in time. Ryanair could find itself occupying the grave beside Flybe, which was offered government support that proved fruitless, if it is not careful.

    This would cost thousands of direct jobs and tens of thousands of indirect jobs. The cuts required in the short-term would amount to a few hundred job losses and indeed those people affected would be entitled to redundancy payments. Certainly this act could ease industrial relations woes for the time being as the seriousness of the situation facing the company strikes employees. Only then will investors change their minds on Ryanair and see value in the €8-10 range which will recapitalise the company.

    It is also advisable that O’Leary reduce the number of subsidiaries, now 11, to fortify the company’s financials. As significant amounts have been ploughed into the recently acquired Laudamotion and the 1-year old Malta Air, merging these, for instance, offers the most sensible way of achieving economies of scale. There appears to be far too many duplicate processes concerning HR and marketing across the group which must be eliminated for the company to once again become an investor favourite.

    Regardless of the action taken by Ryanair, it is becoming increasingly apparent the Irish economy needs activist investors for its most prominent companies to flourish. If it were US-based, it is unlikely it would have escaped the clutches of value hungry investors like Carl Icahn or David Einhorn. There is certainly plenty of value to be found in Ryanair, there is still a need for a low-cost airline, but the execution of the business model has deteriorated over the years. The best antidote to this is somebody willing to force the necessary, and in this case obvious changes, who is willing to take the decision O’Leary has in recent years shied away from. Failing this, thousands of jobs rather than a few hundred may be lost.

Striking the Balance: Will Hindsight Lead the Way?

By Sinéad Flynn

Overview

Innovation and technology are the most prominent buzz words for firms and corporations around the world. The next big idea, next invention, and next discovery are waiting to emerge. Society has evolved from the 1880s, where it was once thought by Commissioner of US Patent Office Charles Duell that “everything that can be invented has been invented” to new advances exploding at our fingertips without limits. FinTech has received a great deal of attention, and it’s only in its infant stages.  Marc Andressen notes that ‘internet companies might end up in 180 countries before they have 180 employees.’ Globalisation and technology have had a huge impact on markets, and the role of Fintech is just a new stimulation.

What is Fintech?

Fintech is a financial technology that aims to compete with traditional financial methods. Fintech can take the shape of crowdfunding, cryptocurrencies, or blockchain, and notably is expanding into new markets rapidly. While online banking has been prevalent for years, fintech adds a new dimension to the payment’s services. Within seconds, users are sending and receiving money faster than ever before. Fintech has begun to dominate our everyday lives where it is commonly seen with those who use Apple Pay or Samsung Pay or those that have sent funds via GoFundMe. The limits to what may be considered Fintech can be unlimited, where most start-ups are embracing technology to create innovative products and services. FinTech is emerging throughout trading, insurance, and risk management as well, which has appeared quite disruptive to these industries that haven’t changed for quite some time.

Opportunity or Threat?

While business may be booming, and the financial crash seems to be forgotten, how does commercial law interact with this fast-paced business environment? It is argued that fintech firms receive a competitive advantage and create an attractive space for investors when they comply with regulations. Cryptocurrency companies and those that are an unregistered seller of securities have been hit hard in the US by the Security and Exchange Commission. These fines have diminished confidence in these certain start-ups and created financial loss through settlements and fines. There are concerns that fintech firms are utilising their institutions to harbour illegal assets utilised for criminal activity. While fintech firms have been embraced for their revolutionary growth and modern methods to business in this age of technology, it must be approached with caution due to poor ethical choices being made at times.

Striking the Balance

Countries such as Ireland that rely on a great deal of foreign direct investment must adequately strike the right balance between attracting new business, but also ensuring the system is not abused. Research shows that there is no specific legislation designed to regulate certain services that fall under this broad FinTech category, besides those concerning the Central Bank of Ireland and minimal EU Regulations. Ireland is a lucrative location for start-ups and businesses looking to set up a European hub, as they have more freedom to do so while then receiving this passport into the European market. Diversity in our financial markets reflects this growing desire to explore alternative mechanisms to enhance society. While research is ongoing for the limitations and effects FinTech firms bring to the table, these initiatives are looking primarily to law firms to structure and protect their interests.

A Closer Look

If one narrows the analysis of Fintech into electronic payment companies, the Payment Services Regulation 2018 will apply. This Regulation has effectively created a more level playing field for fintech start-ups to enter the market and develop their technology services further with an overall aim to increase competition for the benefit of consumers. At the moment, it is argued here that the EU is fully embracing these innovative and competitive practices. If one assumes that the market will regulate itself and that the legislature should be more laissez-faire, then more relaxed regulations should be welcomed. While this may be worrisome to those that appreciate the traditional style of banking and finance, this is ultimately a positive step, as time and time again, traditional banking models and financial institutions of the past have failed multiple sectors leading to dire losses.

Has the Balance Been Struck?

The right balance must be struck in order to protect investors, but also to facilitate this necessary development. The Central Bank of Ireland is conscious that there is a lack of legislation specific to Fintech entities, and that it has assumed the role as the main regulator where able. This leaves investors and innovators in a precarious spot. In one regard, there is little law guiding their activities, but in turn, this allows them to receive the freedom necessary to develop and surpass imaginable limits on their ventures. While the Payments Services Regulation may increase accountability and reporting, this may not be enough to accurately analyse how these institutions are operating.

What Next?

The embrace of the change in the financial markets may be a positive step, and a mechanism that may prevent future economic crashes and downturns as new perspectives and ways of managing the financial sector are introduced. Consumers must be wary for that this partially unregulated ecosystem may produce detrimental effects that hindsight may prove useful.

Demi’s Basic Business Questions: What is Commercial Awareness?

This week instead of looking to myself for the answer to your questions, I looked to you for the answer to the meaning of Commercial Awareness. Commercial awareness is a phrase I’ve been seeing lately all over commercial law applications and all over financial and professional services sectors too. My idea of commercial awareness has always been wishy-washy and recently I’ve wanted to gain a more succinct definition.

To achieve my objective, I asked a few students from Trinity and UCD how they would define commercial awareness. 

I spoke to students from business backgrounds who gave exhaustive responses:

 “Being cognisant of the way businesses operate and affect our lives and how we affect businesses” (1st Year BESS), 

“..being able to tack together different current affair stories and making real sense of them for your industry,” (2nd Year Law and Business)

“..understanding the external environment that impacts the specific industry, i.e the Political. Economic, Social, Technological, Legal and Environmental factors (PESTLE)..” (1st Year Global Business)

I also spoke to law students like myself, who kept things short and simple:

“..an understanding of how businesses work”

“Knowledge of a business or company, which is important if you want to get recruited by that company!”

I spoke to older students whose responses were.. interesting, to say the least:

“It means being aware, commercially of course.” (3rd Year Biomedical Sciences)

“Being able to tell the difference between all the ads or commercials on TV” (3rd Year Children’s and General Nursing)

Not only was I able to get student insight, I was able to get some industry perspective on commercial awareness too. My application for Legal Cheek’s Commercial Awareness Question Time with Matheson, Barbri, Pinsent Masons and Arthur Cox was successful so I was invited to attend the event at the Law Society.

The Commercial Awareness Question Time taught me the wide range of issues that commercial awareness encompasses. It ranges from having an in-depth knowledge of what the implications of Brexit are on the legal sector to knowing that a company is a brand that has to sell and distinguish itself from competitors. 

Nearing the end of my search for “commercial awareness”, I’ve come to the realization that commercial awareness is as broad or as succinct a definition as we want it to be. It really is as simple as taking a little time out of your week to become “..aware, commercially of course” by following some financial institutions, newspapers or even keeping up with my Basic Business Questions.

If you have any more Basic Business Questions you are interested in me tackling, please do not hesitate to email me at dadenira@tcd.ie

Yours in Learning,

Demilade

Demi’s Basic Business Questions: What is Corporation Tax?

We often see headlines about Ireland’s low corporation tax – some are critical, others ecstatic about it. A pretty common question people have is what exactly is corporation tax, and how does the tax big corporations like Google and Facebook pay affect someone like me, the average college student. The aim of the following article is to give a bite-sized introduction to corporation tax and give some guidance on whether it is to be loved or hated.

Firstly, a definition. Corporation tax is the tax companies pay in countries they are resident in on the profit they earn from their business. In Ireland, the tax is at 12.5%, significantly lower than other countries. The average corporation tax rate in Europe is 25.3%, for example. 

Similarly to when we looked at why it is not feasible to print more money in order to combat financial crises, we are brought back to one of the fundamentals of economics – the law of demand. Generally, when something costs more money, less people want it. When something costs less, more people want it. Pretty reasonable, right?

The law of demand can easily be applied to our low corporation tax scenario. If it costs less money to make profits in Ireland (due to the low corporation tax), more corporations will want to set up here. It is argued that this is a positive phenomenon as it leads to Ireland becoming an international hub for multinational companies. Where there are increased companies, there are increased jobs. This reduces the number of skilled young people, university graduates etc. emigrating in search of work. Increased employment boosts the Irish economy and is often something to smile about. 

However, on the other side of the coin, those who are against our competitively low corporation tax level make strong arguments. They point to the profits that corporations such as Twitter and Facebook make and suggest better use for those profits, such as contributing to social welfare schemes. It is also argued that we are putting ourselves at an advantage at the expense of fellow European countries. The discrepancy between corporation tax rates is so high that it is a significant challenge for them to compete. This can be seen as unethical. 

There are numerous points to be made on either side of the debate but it is up to you decide where your opinions lie. 

If you have any more Basic Business Questions you are interested in me tackling, please do not hesitate to email me at dadenira@tcd.ie

Yours in Learning,

Demilade

Demi’s Basic Business Questions: Why Can’t We Just Print More Money?

Money makes the world go round. The converse is also true. Lack of money can make the world stop. This is the reality for many – their worlds are at a standstill because of a lack of money. Because of poverty.

Ending poverty is one of the United Nations’ Sustainable Development Goals to be achieved by 2030. According to the UN, 700 million people live in extreme poverty. Sometimes, grave situations like these cause business newbies like myself to ask the question, “Why can’t we just print more money?”. Unfortunately the solution is not that simple.

Printing more money may be a possible quick fix, but it is only sustainable temporarily. Printing more money can make poor countries even poorer in the long run.

Money is worth the value we give it. If people didn’t believe money to be valuable and accept it in exchange for goods and services, it would simply be like another piece of paper.

Inflation refers to a general increase in the price level of goods and services. This can be caused by increased money in circulation or by people’s incomes rising. The more money readily available, the easier it is to buy things and the more people will want to buy things. Businesses are profit driven and will increase their prices as people can now afford to pay more while not increasing their supply . This is the law of demand – as price increases, demand decreases. More money does not mean less problems, more money simply translates to higher prices. 

We are not the only ones who have flirted with this idea of printing more money in order to increase the standard of living. In order to fulfill the payment of reparations after the war that had made them poor, Germany in 1922 printed money. On the surface it seemed like an excellent idea. In reality, however, they could not have been more wrong. This led to hyper inflation, meaning prices were so inconceivably high that money became next to worthless. It was not uncommon for people to use their money to burn fires. 

Poverty is a pressing issue and it is imperative that we continue to generate solutions on how to tackle it. Unfortunately, money printing is not the one for us today. 

If you have any more Basic Business Questions you are interested in me tackling, please do not hesitate to email me at dadenira@tcd.ie

Yours in Learning,

Demilade

Meditree – Trinity Start-Up Tackling Administrative Inefficiencies in the Healthcare Sector

1) What do you do and how did you get started?

Abs and I were talking about how he is finding his start as a full-time doctor at the Galway University Hospital. He started mentioning a lot of bottlenecks in the workflows and how manual a lot of the document processes were. A second, more alarming factor, came from academic research experience of how hospital data quality becomes a bottleneck when trying to implement the latest technologies to healthcare domains. The data is usually either manually created or does not exist at all. This significantly inhibits innovation and improvement in the industry.

This concerned us about the future of Irish Healthcare. A nail in the coffin was figuring out that Ireland has been consistently falling in the rankings of the EuroHealth Consumer Index, currently being 22nd out of 36 countries. Worst of all, it’s the lowest of all countries in accessibility, and doing bad in several other metrics, including Patient rights and information. So we decided to combine our disciplinary knowledge (Computer Science and Medicine) to find ways of streamlining workflows for multidisciplinary teams in healthcare, all while maintaining data interoperability, reconciliation and security.

Our solution aims to provide healthcare professionals with an online platform to access, publish and collaborate on Multidisciplinary Medical Documents.

These medical records are persisted into a knowledge graph. This interconnected data allows healthcare professionals to gain further insights that they were not able to extrapolate before. Within the rampant age of big data, a solution to aid in the fundamentals of Organic Intelligence is critical, and we strongly believe that solution is MediTree. Our initial phase seeks to streamline the phlebotomist’s workflow. Meditree allows surgeons to set a recurring order for patients in need of regular blood tests. Blood test results are key in monitoring a patient’s recovery post-surgery. Meditree would then enable such requests to be sent directly to Phlebotomists, cutting out the lengthy, manual request process entirely, all while keeping a record for reconciliation and enhancing of analysis for future patients undergoing similar surgeries, e.g. Giving options of the most reasonable tests to give the current patient. Making the Records an ever-learning model.

2) Tell us about the team:

Uzair Qureshi – Masters student in TCD in Computer and Electronic Engineering. Uzair has worked at the ADAPT Research Centre as a Research Intern working on Linked Data Quality Assessment. He also worked at Mastercard Dublin as a Software Engineer, where he won their regional hackathon, the intern hackathon and filed a patent with them. He has also won JCIs Top Outstanding Young Persons 2018 and won an Innovation award from Engineers Ireland & ARUP. He has a great interest in Research and looking for domains of application for the latest advancements in technology.

Abd-Al Rehman Tahir –He finished his Doctorate from TCD Medicine, and has a breadth of knowledge in medical practices, having done rotations in several different hospitals for 3 years and now working full time as a Student Doctor at the Galway University Hospital. Mohammed Elsayed – Is a third year student at TCD Medicine with great experience in Medicine and a keen interest in Medicinal practice and research.

3) How far along your business plan are you now?

We are starting off with our research phase where we establish credibility in our solution and knowledge of the problem. This is being done through writing short articles highlighting the current plight of healthcare management and how we aim to solve it. We are currently working on writing a white paper on Data Interoperability Issues in Multidisciplinary Teams within Irish Healthcare.

4) Plans for the future?

We hope to become a trusted academic and research entity that would be working in unison with the Government Sector (using data to highlight and optimize usage of healthcare resources) , Hospitals (Helping healthcare professionals streamline their workflow by cutting manual processes and enhancing organic intelligence) and Academic Institutes (mediating the data for purposes of academic research which aims to enhance healthcare for the future ). Potential challenges run into HSE, and how to manage the integration process efficiently, we are learning more and more with how other programs are being initiated into hospitals.

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