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Bracken Bower Prize 2020: excerpts from finalists’ proposals

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Edited excerpts from the book proposals of the three finalists for the 2020 Bracken Bower Prize, backed by the Financial Times and McKinsey.

New Money

How central bank digital currencies could transform the economy — and why you might not want them to

By Stephen Boyle 

Facebook was coming for their money. On June 18 2019, the social media group launched a digital currency called Libra that aimed to do nothing less than “reinvent money and transform the global economy”. With 2.7bn people already using one of the group’s apps across its Facebook, Instagram and WhatsApp brands, financial analysts believed it could realise up to $19bn additional revenue by 2021, in part because it would allow those users to send money to each other easily without ever leaving Facebook’s ecosystem.

What took insiders by surprise when the announcement came was that, while spearheaded by Facebook, it was from the newly minted Libra Association, a consortium of 28 organisations including major brands like Visa, PayPal, Uber and Spotify. Hidden behind the technocratic language of an “efficient medium of exchange for billions of people around the world” that would “grow into a global financial infrastructure” was a promise, or, depending on your point of view, a threat: what we have done for social media, music, and taxis we are going to do to money. 

The difference from those industries that had already been “disrupted”? This time they were going after the state, and the state was not going to throw open the doors to its vaults without a fight.

The official response was abrupt, and coming from the reserved and academic halls of central banks and abacus-obsessed finance ministries, unusually forthright. The Bank of England’s globally respected Canadian governor Mark Carney (dubbed the George Clooney of finance by his fellow central bankers — they don’t get out much) described it as having a “very wide range of issues” to resolve. France’s finance minister, Bruno Le Maire, put it most starkly when he said “the monetary sovereignty of the state is in jeopardy”. Digital currency had hit the mainstream, and the state was mounting a fightback.

This is the story of the response the Libra announcement sparked, and how it breathed life into a radical idea that has the potential to upend the relationship between individuals and money, tear up the banking system as we know it, and unleash a world of innovation. This is the story of central bank digital currencies.

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To understand why the announcement was treated with such consternation, we need to take a step back and think about what money really is.

In the economy at the moment there are three different types of money — cash, bank deposits, and central bank reserves — and they all have different qualities and features. The idea behind a central bank digital currency is an alluringly simple one: to create a fourth type of money. It would be electronic state money that could be held directly with the central bank. While intuitively this may feel similar to a commercial bank deposit at the moment, this seemingly simple change has the potential to radically reshape the economy. If individuals and businesses could hold money directly with the central bank, there would instantly be a system with the advantages of state money, like cash, and the advantages of easy transactability, like bank deposits.

Better still, it would come without their downsides. You would no longer need to physically carry around cash. And you’d no longer be carrying the risk of lending money to a bank, like you do when you deposit money into a bank account.

One of the functions of a currency is to make it easy for people to trade with each other, and there are real opportunities to improve cross-border trade. Gathering all of the money in the economy in one place could create an ecosystem effect where multiple providers all invest in new propositions. With the right controls and incentives, this could allow everything from “smart contracts” that execute themselves — like your electricity meter reading itself and paying your bill for you — through to apps that help manage your money better, to academic insights that predict GDP ahead of time. With so many advantages it is easy to imagine people abandoning commercial banks in droves unless the central bank limits the amount you can place in your account.

But risks abound. Now the state would have a single log or ledger of every transaction that you, and everyone else in the economy had made. How would you feel about the state being able to check that you had paid your taxes and weren’t skimping on VAT? Had paid a subscription to Pornhub premium last month? Had paid £30 at regular increments along with dozens of other people to someone who seemingly didn’t have a job, with a little herb emoji in the payment details? You might delight in no longer giving money to your bank for a paltry return, or no return at all. But what if you came to buy a house as a first-time buyer, and your bank no longer had any deposits? Perhaps your rate of interest would be higher and your payments would be more expensive. Perhaps they wouldn’t be able to finance it at all, leaving you stuck with your landlord that refuses to fix the boiler. Banks might not be popular, but without an alternative we might just find we miss them after all. 

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The state fightback against Libra worked. Cowed by the fierce criticism, many of the early backers started to run from the nascent currency. But the fear it sparked was real, and the response is still filtering through the system. It is likely to have a profound and long-lasting catalytic effect.

The worry stemmed from how realistic it was that consumers, fed up with traditional banks, unenamoured with the state, and often less concerned with privacy than policymakers are, might have chosen to abandon state currencies and bank deposits in droves. To keep the state’s monopoly on money intact, plans for digital currencies have accelerated and are the talk of the global financial system. The Bank of England issued a consultation paper in early 2020. The Bank for International Settlements has an active working group in place, and Sweden and China are both exploring their own differing implementations. Not since we moved away from the gold standard to fiat currencies has there been such a radical moment for money.

Stephen Boyle leads the data design team at Lloyds Banking Group

Waiting on Medicines

Our reliance on medications to shape our future

By Rola Kaakeh

Dr Patel, a critical care physician, was paged to attend an urgent meeting in the emergency room of a large academic medical centre. The hospital just received news that they will no longer be able to obtain critical medications that are part of the intubation kits. Without a definitive resolution date to this shortage, the hospital called together the different individuals needed to manage this crisis. 

Dr Patel walks into the room with 10 professionals, including pharmacists, nurses, physicians, informatics representatives, purchasers, and hospital administrators, all working to minimise disruptions to patient care. She mentions that she uses the medications (rocuronium or succinylcholine) in rapid sequence intubation for her patients. She prefers rocuronium, based on her experience and clinical data, but will occasionally use alternatives. She is asked to make the necessary but difficult decisions to best allocate the remaining quantity on hand. Who will get the medication? How will they manage the adverse events of not having the medication? This new shortage is added to the growing number of shortages that Dr Patel and her team have been experiencing for months — including an existing normal saline shortage, vital in most hospitalised patients. Troubled, she asks, “How can we be short of normal saline, and it’s just sterile saltwater? Why are we still having these issues?”

Almost daily, we read headline after headline regarding medications — from issues such as the drug shortages crisis, the opioid epidemic, to numerous other problems related to lack of, or overdosing of, medications. Our reliance on medications has and will shape our future — either positively or negatively. While access to healthcare has been a priority topic for decades, understanding the challenges and opportunities to access medications has now taken centre stage. 

Medications consume a significant amount of healthcare expenditures in both developed and developing markets. Total US prescription spending alone is comparable to the full economies of some developed countries. There are tens of thousands of prescription drug products approved for marketing. However, as a society, we are struggling to provide equitable access to all medications needed globally. The World Health Organization has estimated that 2bn people globally still lack access to essential medicines. With hundreds of medications already in short supply for years, crises (like pandemics) have further exposed the limitations of our vulnerable and global pharmaceutical supply chains. We have yet to develop an international consensus, used by everyone, to address the critical issue of equitable access to medications.

Global economies, devastated by recessions caused by Covid-19, are waiting on a vaccine to accelerate their path towards recovery. Every day, millions of people worldwide anxiously await the news of the approval and delivery of a Covid-19 vaccine. The speed at which the potential vaccine clinical trials have been conducted, reviewed, and approved is unmatched in history. It’s unlike anything we’ve seen before.

But on the brink of this new vaccine, will our vulnerable pharmaceutical supply chain be able to withstand the massive demand that awaits? Everyone in the world that fits the criteria for a vaccine will need access to it. We’ll need billions of doses before we start seeing a glimpse of getting back to “normal”. Two billion doses, at least, within months of approval. These numbers do not consider the demand for any other medications that will play a role in treating and preventing Covid-19. The reality that we are not immune to any future pandemic has pushed us to re-evaluate our processes to design future systems that will enable access rather than leave us in a scarcity situation.

Stakeholders from across industries have invested time, money, and expertise to develop the vaccine, but will these efforts continue once we create a vaccine? What about the other health conditions that burden our societies? We must not neglect the chronic, long-term diseases that are the leading case of mortality worldwide. At the minimum, we must ensure access to essential medications that are not just pandemic related. Our supply chain must be suited to meet both current and future medication needs to address chronic and acute conditions impacting our societies.

The World Economic Forum projects that Covid-19 will cost the world trillions of dollars, significantly more than the pricetag of prevention measures. But to design prevention measures, we must understand where we’ve been, where we are, and what we need to account for as we design our future systems. Will we ever ensure access to medications for all those who need them? How have we leveraged diverse stakeholders, clinical knowledge, innovation, and technology to create clinically appropriate interventions that meet individual needs, to address these pressing issues? Multidimensional solutions are required to tackle these multi-faceted questions.

An organisation’s ability to tackle today’s pressing issues, such as access to medications, is considered a pre-requisite to be competitive, prosperous, and agile in the future state of healthcare and public health. Tackling access to medications will require building capabilities in new topics, building resilient supply chains, increased diverse engagement and communication with various stakeholders — with a focused strategy and a receptive organisation to execute. 

Waiting on Medicines provides insights into the current landscape of access to medications and what the future holds. As a pharmacy leader, I will summarise the various approaches taken by communities, healthcare systems, and national and international economies and organisations to improve rational drug use and access to medications. I will explore how to design a future to improve access to medications. In the end, I will lead readers to better understand and more efficiently connect with the diverse stakeholders, resources, and processes needed to increase access to medications and drive improved health outcomes. Equitable access to safe, effective, high-quality, and affordable medications for all will be in our future — because our future depends on it.

Rola Kaakeh is chief executive of Salus Vitae Group and adjunct faculty at the Northwestern University Feinberg School of Medicine

Money Trees

Making the Business Case for Nature

By Siddarth Shrikanth

India’s natural ecosystems were on the brink. Decades of corporate greed and state mismanagement had fuelled an unsustainable cycle of extraction, with entire forests felled for timber and cleared for farmland. Many of the country’s mind-bogglingly diverse animals and plants faced the threat of extinction.

It was 1855, a year that few in the modern environmental movement remember: the year that the first “empire forest” was established in British India. In the following years, vast tracts of forests would be set aside across the country to slow the pace of destruction — and to ensure the sustainability of the colonial enterprises that depended on forest products. By the end of the 19th century, more than 10 per cent of the world’s land area would be set aside as “protected areas”. 

The East India Company, arguably one of history’s most rapacious corporations, can hardly be considered an exemplar of corporate responsibility. And the empire forest model had a number of grave flaws, including the forcible displacement of indigenous people who had been stewards of these forests for centuries. 

But the fact remained that the company recognised its dependence on ecosystem services and acted decisively to protect them. Even as it exemplified capitalism red in tooth and claw, its administrators clearly saw a financial rationale to conserving nature.

In the following years, however, conservationists took a different path. Appealing to higher ideals, they argued in favour of the many scientific, moral, cultural, and spiritual reasons to protect nature. The result was the birth of a modern environmental movement that achieved remarkable tactical gains while simultaneously imbuing people across the world with a sense of wonder in nature. 

But the pace of progress has remained far too slow to save our planet from the relentless pressures of capitalism. The WWF found in 2018 that animal populations had declined 60 per cent in just over 40 years, even as an area of forest the size of the UK was lost every year.

The fact that money matters remains as true as it was nearly two centuries ago, and conservationists have been far too shy about putting a price on the natural world. 

The time has come to proudly make the business case for nature. Faced with an escalating climate crisis, shareholder pressure and the threat of regulation, major companies have made a series of bold pledges to invest in nature. Carbon markets are maturing and recognising the central role that nature will play in meeting climate goals. Measuring progress on conservation outcomes is becoming easier with new valuation frameworks and technologies. Innovative business models are proving that our ecosystems can be worth more alive than dead.

But far more remains to be done on each of these fronts to turn nature into an investable, scalable asset class, rather than relegate it to a shrinking patchwork of protected areas at the fringes of the modern economy. Those who seek to defend the natural world must make the case that money really can grow on trees — or risk losing what remains of our precious natural world.

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Why does this matter? As climate change has risen up the agenda, the world has seen encouraging progress in some areas including renewable energy and zero-emissions transportation. But cutting emissions dramatically will simply not be enough: nearly every pathway to net-zero emissions by 2050 involves deploying negative carbon solutions at an unprecedented scale. 

But for all the hype surrounding carbon capture, natural carbon sinks remain our best bet. In the US, for instance, they could absorb a fifth of annual emissions and bring myriad other benefits. It is no wonder then that natural climate solutions — including forest restoration, soil carbon sequestration, regenerative agriculture and ocean protection — have become a key area of focus for businesses and governments as they seek to slow the pace of the climate crisis. Spurred on by investor pressure and undeterred by the Covid-19 crisis, many now believe we have reached a tipping point in financing such investments in natural capital. 

The coming tsunami of capital presents a once-in-a-generation opportunity for conservationists to demonstrate once and for all that our planet is worth more alive than dead. But doing so will require them to abandon old taboos and partner with the capitalists they rightly fear. Equally, corporations and governments must do more than throw money at the problem: they will need to collaborate on creating robust carbon markets, new valuation frameworks, technology-enabled transparency tools, and business models to make this vision a reality.

Siddarth Shrikanth is a joint MBA/MPP candidate at the Stanford Graduate School of Business and the Harvard Kennedy School, where he focuses on economic and policy solutions to the climate crisis



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Wall Street stocks trail European equities ahead of Fed meeting

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Stocks on Wall Street lagged behind European peers ahead of a two-day US central bank meeting that will be closely watched for clues on the future path of monetary policy.

Wall Street’s S&P 500 index was down 0.2 per cent at lunchtime in New York, retreating from an all-time high that the benchmark hit on Friday, while the technology-focused Nasdaq Composite index climbed 0.4 per cent.

Core US government debt sold off on Monday, taking the yield on the benchmark 10-year US Treasury note up 0.03 percentage points to 1.5 per cent. This followed a rally last week in which investors banked on the Federal Reserve looking past high US inflation to maintain its pandemic-era support for financial markets.

The Fed is widely expected to maintain its $120bn of monthly bond purchases when it meets on Tuesday and Wednesday. These asset purchases, which have been followed by rate-setters in Europe and the UK, have lowered the yields on government bonds, reducing corporate borrowing costs and boosting the appeal of riskier assets such as equities.

But after a rapid recovery of the US economy fuelled by coronavirus vaccines and President Joe Biden’s massive stimulus programmes, some analysts see the Fed’s policymakers bringing forward their predictions of the first post-pandemic interest rate rise.

“We expect the Fed to upgrade its outlook for growth and materially revise up the inflation forecast,” Tiffany Wilding, US economist at the bond investment house Pimco, said in a research note. “We think the majority of Fed officials will also pull forward their projections for the first rate hike to 2023 [from 2024].”

Headline US consumer price inflation hit 5 per cent in the 12 months to May. Jay Powell, Fed chair, has maintained that the rises are a temporary effect of the US economy reopening after coronavirus shutdowns. “But others are concerned inflation is more structural,” said Marco Pirondini, head of US equities at Amundi. “I’d say it is 50-50 on either side.”

A rise in used car and truck prices, after a global semiconductor shortage lowered production of new vehicles, accounted for about a third of the increase in May’s CPI, according to the Bureau of Labor Statistics.

US wages could also “go up in a more sustained way”, Pirondini said, after Biden signed an executive order in late April to increase government pay, pressuring private industry to also raise salaries.

Across the Atlantic, the pan-regional Stoxx Europe 600 gained 0.2 per cent to another record high with energy the top-performing sector following a further lift in oil prices.

Brent crude climbed as much as 1.3 per cent on Monday to $73.64 a barrel, a two-year high for the international oil benchmark.

Line chart of Indices rebased showing UK’s travel and leisure stocks trail wider market

Elsewhere in the region, the UK’s travel and leisure companies lagged behind the wider market on reports that the planned lifting of Covid-19 curbs in England on June 21 would be delayed by the UK government.

The news left the FTSE 350 Travel & Leisure sector down 1.4 per cent compared with a rise of 0.2 per cent for the broader FTSE 350 index.

The dollar index, which measures the US currency against peers, dipped 0.1 per cent. The euro was up 0.2 per cent against the greenback, purchasing $1.212. Sterling was up 0.1 per cent at $1.411.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday



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BNP under fire from Europe’s top wine exporter over lossmaking forex trades

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BNP Paribas is facing allegations that its traders mis-sold billions of euros of lossmaking foreign exchange products to Europe’s largest wine exporter, the latest accusations in a widening controversy that has also enveloped Goldman Sachs and Deutsche Bank.

J. García Carrión, founded in Jumilla in south-east Spain in 1890, is in dispute with the French lender over currency transactions with a cumulative notional amount of tens of billions of euros. It claims the lossmaking trades were inappropriately made with one of its former senior managers between 2015 and 2020, according to people familiar with the matter.

BNP is one of several banks facing complaints from corporate clients in Spain over the alleged mis-selling of foreign exchange derivatives, which pushed some companies into financial difficulties.

Deutsche Bank has launched an internal investigation of the alleged mis-selling that this week led to the departure of two senior executives, Louise Kitchen and Jonathan Tinker.

An internal investigation at JGC found that BNP conducted more than 8,400 foreign exchange transactions with the company over the five-year period, equivalent to about six each working day.

That level of activity was far higher than what the company would have needed for normal hedging of exchange-rate risk on international wine exports, the people said, adding that the Spanish company had shared the results of its internal probe with BNP.

While the vast majority of the lossmaking trades related to euro-dollar swaps that moved against the bank, some were in currency pairs where JGC has little or no operations, such as the euro-Swedish krona.

As a direct result, the €850m-revenue company made about €75m of cash losses in those five years, while BNP could have made more than €100m of revenue from transactions, the people added. Many of the deals were made through trading desks in London.

Executives have demanded compensation for at least some of the losses, arguing that BNP’s traders or compliance department should have spotted and reported the disproportionately high level of transactions and profits from a single client, according to multiple people with knowledge of events.

JGC says the deals were designed as bets on currency markets, rather than for hedging, and is considering a lawsuit to try to recover some of the money, one of the people said.

“BNP Paribas complies very strictly with all regulatory obligations relating to the sale of derivatives and foreign exchange instruments,” the bank said in a statement. “We do not comment on client relationships.”

JGC declined to comment.

Separately, the Spanish wine producer is suing Goldman Sachs in London’s High Court for a partial refund of $6.2m of losses caused by exotic currency derivatives. Goldman has maintained the products were not overly complex for a multinational company with hedging needs and were entered into with full disclosure of the risks.

In Madrid, the wine company has also brought a case against a former senior executive who was responsible for signing off the lossmaking deals. JGC alleges this person conducted the deals in secret and covered them up internally by falsifying documents and misleading auditors.

In the London lawsuit, JGC alleges its executive was acting “with the encouragement and/or pursuant to the recommendations” of Goldman staff “for the purposes of speculation rather than investment or hedging”.

Deutsche Bank has been investigating for months whether its traders in London and Madrid sidestepped EU rules and convinced hundreds of Spanish companies to buy sophisticated foreign exchange derivatives they did not need or understand.

The Financial Times has reported that the German bank has settled many complaints brought against it in private and avoided going to court.

People familiar with the matter told the FT that the departures of Kitchen and Tinker were linked to the probe into the alleged mis-selling, which appears to have occurred in units that at the time were overseen by the two.

The bank declined to comment. Kitchen and Tinker did not respond to requests for comment.



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Will the Fed dare to mention tapering?

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Will the Fed dare to mention tapering?

When Federal Reserve officials convene on Tuesday for their latest two-day monetary policy meeting, questions over whether the central bank should start talking about tapering its $120bn monthly bond-buying programme will lead the agenda.

Since the US central bank last met in late April, several senior Fed policymakers, including vice-chair Richard Clarida, have cracked the door more widely open for a discussion about eventually winding down the pace of those purchases, which include US Treasuries and agency mortgage-backed securities.

The recent comments align with those referenced in the latest Fed meeting minutes, which indicated that “a number of participants” believed it might be “appropriate at some point in upcoming meetings” to begin thinking about those plans if progress continued towards the central bank’s goals of a more inclusive recovery from the pandemic.

Recent economic data support this timeline. Consumer prices in the US are rising fast, with 5 per cent year-on-year gains in May revealed in last Thursday’s CPI report — the steepest increase in nearly 13 years. Additionally, last month’s jobs numbers, while weaker than expected, still showed signs of an improving labour market.

Most investors still expect the Fed to only begin tapering in early 2022, with guidance on the exact approach delivered in more detail around September this year at the latest. Goldman Sachs predicts a more formal announcement will come in December, with interest rate increases not pencilled in until early 2024.

“The Fed is signalling they are going to start talking about it,” said Alicia Levine, chief strategist at BNY Mellon Investment Management. “They are softening up the market to expect [something] this summer.” Colby Smith

Are inflation risks rising for the UK?

Consumer prices in the UK have risen at an annual rate of less than 1 per cent for most of the pandemic due to low demand for goods and services and weak wage pressure.

However, with the recent easing of Covid-19 restrictions releasing pent-up consumer demand, the nation’s headline inflation figure doubled in April from the previous month.

When core consumer price inflation data for May are released on Wednesday, some analysts expect an even bigger leap, predicting that annual CPI growth will jump to the Bank of England’s target of 2 per cent.

Robert Wood, chief UK economist at the Bank of America, said such an inflation surge would add to the BoE’s hawkishness. He also forecast further rises later this year as commodity price increases continued to elevate energy and food costs.

Additional price pressure would come from supply chain disruptions and higher transport costs that push up input costs.

“The upside risks to our inflation forecast are growing from all angles,” said Paul Dales, chief UK economist at Capital Economics, who expected consumer price levels to peak at 2.6 per cent in November.

“The reopening may result in prices in pubs and restaurants climbing quicker than we have assumed,” Dales added, while labour shortages in some sectors, such as construction and hospitality, were also starting to push up wages and prices.

However, both analysts expect the increased price strain to be temporary.

“Once higher commodity prices have fed through to consumer prices, inflation will fall back again,” said Wood, forecasting that UK inflation would drop back below the BoE’s target in late 2022. Valentina Romei

Line chart of Annual % change on consumer price index showing UK consumer price inflation is set to rise above target

Will the BoJ keep its rates policy on hold?

Japan’s economic recovery has diverged from Europe and the US this year as it struggles with its Covid vaccination campaign and big cities such as Tokyo continue to be partially locked down under states of emergency due to the pandemic.

Although the nation’s wholesale prices rose at their fastest annual pace in 13 years last Thursday on surging commodity costs, Japan has otherwise faced a lack of price pressures compared with the US.

That means that when the Bank of Japan concludes its two-day meeting on Friday, analysts believe it will not alter monetary policy.

“I don’t expect any change in policy,” said Harumi Taguchi, principal economist at IHS Markit in Tokyo. “They increased flexibility in March and I expect they will continue to watch that.”

After a policy review, Japan’s central bank in March scrapped its pledge to buy an average of ¥6tn ($54.8bn) a year in equities, and the pace of its exchange traded fund purchases dropped sharply in April and May. The moves signalled a shift away from aggressive monetary stimulus in favour of what the BoJ termed a more “sustainable” policy.

“Japan is one of the few countries whose property prices have not risen, and since rent is a major component of the consumer price index, it is not likely to see much inflation ahead,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.

“Interest rates can remain extremely low, which in turn keeps the yen on a weak trend,” Vail added. Robin Harding

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday



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