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People and MarketsComment

UK inflation, what has helped emerging markets, Google does insurance


This week in Keeping Tabs: the prospect of financial repression in the UK, an easier passage for emerging market central banks, and Alphabet partnering up with Swiss Re.

How much inflation should we expect in the UK? Economist George Magnus reckons it could form a useful strategy for the country when it works to reduce its debt.

He points out that the most politically expedient way to reduce debt could be financial repression, in this case keeping interest rates at rock bottom while permitting inflation to erode the debt away.

Of some of the alternatives to this form of debt reduction, he says default would be “for most of us, politically unacceptable”.

And the government may not be prepared to go down the route of higher taxation. He says this is “possible and politically viable if imposed on those whose votes do not count much, for example, the top 1%, and companies. No amount of higher tax on these groups, however, will suffice to make a meaningful difference to the state of public finances.

“By now, any rise in the tax burden designed to do this has to be general.”

Turning to emerging market countries, Piroska Nagy-Mohacsi of the London School of Economics writes for Project Syndicate that central banks have enjoyed a lot more flexibility in this crisis than in the past, through their ability to implement measures like quantitative easing and monetising government deficits.

She says this is because of the actions of their counterparts in advanced economies. Those central banks have alleviated pressure through swap lines and repo facilities. And their own loose monetary policy has spilled over into emerging markets, which have benefited from capital inflows after the market crash.

“Emerging market central banks’ additional room to manoeuvre will last for as long as advanced economies’ monetary policies remain sufficiently expansionary,” says Nagy-Mohacsi. “The chances for that are high in the near and medium term.”

However, with this freedom comes risks. “Central bank asset purchases that go beyond government bonds will raise concerns about transparency and accountability,” she says.

Meanwhile, for a long time people have discussed how big tech giants might try to muscle in on financial services.

In this regard Keeping Tabs was interested in some news from the insurance sector, where a sister company to Google is teaming up with Swiss Re, as Steve Evans at Artemis examines.

Google’s parent Alphabet has a subsidiary called Verily, which in turn has created a new subsidiary called Coefficient Insurance Co. Coefficient is entering the stop-loss insurance market, backed by Swiss Re. Stop-loss coverage is used by employers that do not otherwise take out insurance for workers’ health plans. Instead, the stop-loss coverage kicks in when they face a particularly large claim or number of claims.

According to Verily’s press release: “Coefficient will leverage Verily’s core strengths integrating hardware, software and data science and will also leverage Swiss Re Corporate Solutions’s risk knowledge, distribution capabilities and reputation in the employer stop-loss market.”

Evans writes: “The reach of Google itself, being embedded into so many of our lives, is perhaps the bigger deal here, long term and especially if this partnership expands.”

He continues: “The application of advanced technology, data, tools like sensors, and other high tech innovations, alongside customer-friendly product design methodologies and efficient sources of reinsurance capital, are set to enable re/insurers to make better use of their balance sheets.”

At the same time, Alphabet appears to have decided it makes sense to work with a well established insurer, rather than go alone. There may be a read-across here for the banking sector, too.