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Current International

This time it is different

As the impact of the Covid-19 disaster unfolds, the politicians and central bankers did not want to be caught napping. They unleashed a stimulus package that makes the 2008 Global Financial Crisis look like a b-rated warm-up act. But will there be unintended consequences?

Historically, Central Banks used the adjustment of interest rates as the main lever to stimulate the economy. As the economy grows too fast, and fears of inflation were emerging, central banks put the brakes on by increasing interest rates. And when the economy falters, they released the brakes again by reducing interest rates. That worked to some degree. Lower interest rates encourages companies to borrow money and invest it, while higher interest rates did the opposite. Central banks are not the only ones able to stimulate the economies, politicians can do it too. However, politicians generally have a noticeably shorter time horizon. Central bankers could afford to act independent and look at the long term.

Policies before the 2008 financial crisis were primarily focused on keeping inflation low. Inflation destroyed a recovering Germany in the early 1920’s and wreaked havoc across the world in the 1970’s. From the 1980’s onward most developed countries and more and more emerging countries began to control inflation by a combined effort of fiscal prudence and monetary restraint.

The war on inflation was seemingly a fading memory by the time the 2008 global financial crisis hit. But since the political response to the crisis was underwhelming, it was up to Central Bankers to come to the rescue. They lowered the interest rate to almost 0%, and where then seemingly running out of ammunition. That’s when the Fed Chairman Ben Benencke announced that the Fed will use their balance sheet, which in US Dollar terms is essentially unlimited, to buy US government bonds across the yield curve.

This would help in two ways. Firstly, the interest rate would stay low and the government can borrow as much as they want at low rates. Secondly, since they would buy bonds on the secondary markets ie from investors like banks and insurance companies, they would inject a lot of cash into the system. The cash could be used to invest in other projects.

Some investors with good memories were wary. Surely the increase in money supply would cause inflation? Not so. Since 2008, most developed markets were struggling to avoid deflation. Inflation is like red wine. You would want a glass a day, but a bottle is detrimental to your health. Economies do well when inflation is at about 2%, poorly when it is when it is below 0% and even worse if it is above 10%. It is the fastest way to lose the value of money, just ask any Zimbabwean.

Inflation has been the least of most economist concerns for years. During the early 2000 the rise of China because of their low cost of production has been a counterweight to stagnant wages in America and rising living expenses across much of the developed world. After the financial crisis, the excess spare available production capacity coupled with the efficiencies gained by better use of the internet and an ever better integration of high tech in normal production (like using robots in car assembly and drones to detect crops that need more attention for a higher yield) has kept a lid on inflation.

In effect of the Covid-19 crisis was truly unprecedented. In the last week of March, the weekly jobless claim was 6.8 million. Previously the weekly jobless claims in the USA reached about 600 000 during times of crisis. The US Federal Reserve Banks response has been equally dramatic. They started buying bonds again at an extraordinary pace. The effect on their balance sheet has been 3 times larger than during the global financial crisis of 2008. This has been met with the responses of the European Central Bank, the Japanese Central Bank and even some emerging market central banks. The politicians have also been much quicker to respond. Altogether, the response to the crisis has been more than 9 trillion US Dollars.

The difference to the financial crisis though is that this enormous injection of cash has not been met with a corresponding destruction in capital. During the global financial crisis of 2008, home prices collapsed and many property developments across the globe were abandoned because the developers went bankrupt. The glut of homes on the market meant that prices stayed low for long and investment bank in the USA had to raise about U$ 300bl to fill the holes one their balance sheets.

This time it is a crisis in the lack of income, because so many economies were shut down. It has (not yet) led to a destruction of capital. Even though we probably won’t see the same record profits generated this year, the global total wealth (capital and income) has increased by the stimulus packages and therefore we could see a consistent upward pressure on inflation, maybe not now but probably in 3 years’ time.

While it is right to focus on retaining the livelihoods of everyone affected by the epidemic, it is prudent to keep an eye out for potential unintended consequences, especially when one of those is inflation.

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Current International

The bookies favorite – Donald Trump

It is hard to believe, but the betting market has one clear US presidential candidate: Donald Trump.

Just a few months ago, the Democrats and their presidential nominee, Kamala Harris were riding on a wave of enthusiasm. Their elder statesman, Joe Biden had just stepped aside. Within a few days, Kamala Harris took the reins and sped out of her starting blocks. She re-invented herself. She looked more confident, argued more assured and got endorsed by almost everyone (it seemed) . Kamala wasted no time and raised more money for her presidential campaign than Donald Trump did. She mobilized a grassroots movement that spread her message of hope and opportunity across the country. She surged in opinion polls, and the presidential elections were hers to win.

Donald Trump’s campaign spluttered. There were two assignation attempts on him, yet he struggled to stay in the news headlines. But then came two hurricanes and he knew how to take advantage of the chaotic aftermath. With misleading statements, false information and deepfake videos in his tailwind, he just sailed past Kamala Harris.

Why would a next Trump presidency be such a concern?

For one, Donald Trump is not in politics because he has deep-rooted fundamental political beliefs. He doesn’t care to protect the freedom of speech, enshrine human rights or defend the liberal freedom of democracies. Infact he would be hard pressed to explain what they mean.

Donald Trump is only concerned about one thing: Power. He will cosy up to autocrats if it makes him look powerful. He will bash businesses if that makes his supporters admire him. He will even break long standing alliances if it strokes his ego.

Therefore, the policies of his administration won’t be developed by him, but rather by those surrounding him. During his first presidency, the republican party made sure that he is (mostly) surrounded by grounded leaders, like generals or veterans of industry. They could slow-walk any braindead programs and advance more reasonable conservative policies. They had more measured approaches and even compromised when needed. This however is not good enough for the Alt-Right movement, which is the backbone of Trumps support. Just to make sure it doesn’t happen again; they spent 4 years preparing for the next presidency. For a glimpse into their thinking, just read through their “project 25” memorandum.

Secondly, Donald Trumps economic understanding is limited, as is his maths. One of the few policies that he is trumpeting aloud is that he wants to impose tariffs on almost everything. The levels of tariffs are arbitrary. The higher the better. However, it will be the US consumer who will have to pay for the additional tax. Trumps reasoning is that all products sold in the USA should be produced in the USA. This only demonstrates his lack of economic understanding.

The USA makes up about 25% of the worlds GDP. Simplistically that means, on average, the US also consumes 25% of all products. Some exports might sell more to America, some less. If the USA only makes up 5% or 10% of your companies’ turnover, you would be less inclined to build a factory in the USA just to capture that market. You would probably spend increased focus on fast growing countries like India. If however, the USA makes up a big slice of your turnover, you would want to heed Trumps dictate and open up a factory in America. Finding workers in an environment with a 4% unemployment rate will be very hard though, unless you pay up. Both scenarios will lead to inflation, which will lead to higher interest rates and once again, it is the US consumer who suffers the most of Trump’s policies.

Thirdly, other autocrats will take advantage of an inward-looking USA. They will stroke Trumps ego with a few small wins for Trump (like ending the war in Ukraine – on Putin’s terms though), but they will take the opportunity of disarray in the West to strike at more target. Putin could invade Moldavia, maybe Georgia possibly Lithuania. China will strike at Taiwan and North Korea might make a more concerted effort to harass South Korea. And what happens in Africa is simply irrelevant to Trumps team.

Under Trump, the USA will neglect its responsibilities as the world superpower and ignore its duties as the leader of the free world. Democracies will seem to be chaotic systems, in stark contrast with the highly regulated but severely curtailed autocratic systems.

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Current South Africa

NHI – just a mirage

True to form, just before elections South Africa’s ruling party, the ANC, promises whatsoever is needed to get more votes.  The last 30 years have proven that the promises count for little and end in failures. The latest such shambles happened yesterday. President Ramaphosa signed the much-critiqued National Health Insurance (NHI) into law. It is nothing short of a fairy-tale.

 The SA government analysed the medical environment in South Africa and determined that it essentially is a two-tiered system. The first is the public health system, funded by the state where the service is poor or non-existent, but it is essentially free to everyone. The second is the private health care system, which is world-class but only accessible to those who have got the means to pay for it (mostly via their private medical insurance). As such, the government wants to make the world class health system accessible to everyone by eliminating private medical insurance schemes and becoming the only buyer of health services (seeing it worked so well for all the communist countries). That is a mad.

Firstly, the only reason why we have such a big and well-functioning private healthcare system is because the government failed to manage the public health care system. The local clinics have not enough doctors, yet young qualified doctors sit around at home struggling to find employment. The buildings are not maintained, and the patients need to sit in long ques to get treatments. The provincial health MEC’s are completely out their depth, and their department is out of talent. When one reads about the horror stories of the Tembisa Hospital, it becomes very clear that most state clinics serve as a cash generator for a handful of dubious contractors and suppliers. Instead of fixing the public health care system, the ANC would rather pull down the private healthcare as well.

Secondly, the reason why only the wealthy can afford private healthcare is because they are able to afford the pricey health insurance premiums. The private medical aid plans are expensive because the regulator does not allow cheap plans to be sold. Across the border, in Namibia, the cheapest Medical Aids cost about R500 per month while the cheapest in South Africa cost three times that, and only because the regulator prescribes minimum benefits.

Thirdly, we have a world class private healthcare system because the rich don’t mind paying exorbitant fees. Thus, the most talented doctors can earn in South Africa what they are able to earn anywhere else in the world. However, most of the rich world is desperate for more qualified doctors and nurses. So, if the SA government thinks they can force the medical professionals to work for less, they will be mistaken. They will just emigrate, and thus their know-how will leave as well. The patients will be worse off because the doctors are not available anymore. Young medical professionals will be worse off because there is a lack of knowledge transfer, and the state will be worse off because they will collect less income tax. Everyone loses, no one wins.

Fourthly, a centralized insurance system has not worked anywhere in the world. The NHS in the UK is a disaster, Obamacare is much more expensive than first predicted and the centralized systems of China and Russia might as well be abandoned. A national insurance could only work in very well regulated environments where the government is trusted. Neither could possibly apply to the ANC government.

Fifth, the funding gap is so large, that the only way to pay is for the Taxes to increase. By world standards, the Taxes in South Africa are already excessive, but clearly the government sees no problem in taxing the population a lot more. Why? Thanks to the poorly managed transport system, unreliable electricity, and militant unions the little bit of economic growth we have experience has mainly been through the consumer sector. A consumer with less money in the pocket will not be able to buy as much, hence the ANC government would have finally managed to shrink every sector of our economy. Thus, the little bit of growth we have had over the last 15 years will completely evaporate and most South Africans will be poorer than they have been in 2005.

Sixth, the fund that will accumulate in the NHI will be so big, and the “suppliers” so many that in no time it would resemble a cesspool for corruption. The state capture inquiry showed know how quickly funds are siphoned off by crooks. Instead of providing healthcare for everyone, the NHI will provide billions in cash for a few. Typical.

It is disheartening to see the ANC turning to populist measures when they struggle to explain to their voters why they deserve to govern again. Instead of improving the state hospitals and clinics, they rather want to bring the private sector down. It is possible to improve the public health system, just look at the Western Cape, which is run by the official opposition, the DA.

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Current

The curious case of the Chinese housing slump

For at least 20 years there has been speculation that the housing market in China is heading into a bubble territory, but rapid urbanization and economic expansion proved the doomsters wrong. There seemed to be a limitless appetite for new accommodation. Newly prosperous Chinese didn’t only buy properties to live in. They also bought second and third apartments because they found it hard to invest their excess saving in the underdeveloped and restricted financial industry of China. The rising prices lured in ever more speculators and ever higher geared property developers.

The party is over now. The housing bubble has burst. The property prices have decreased by about 35% or more over the previous two years.   That is about the same as the decline experienced during the 2006 – 2008 US housing market crash. Yet the wider financial fallout in China has been subdued. Why?

A steep decline in property prices has almost always caused havoc in the banking system. Yet we have not heard of any bank in China in trouble. Part of the reason for that is because no one in the world saves as much as the Chinese. Yet the overall consumer debt in China has been rising sharply over the last 15 years, which suggest that more and more property purchases were funded by obtaining credit from financial institutions. The banks are well funded and could probably absorb a modest decline in the property market. However, such a massive collapse of the property market would be hard to absorb for even the best capitalized banks.

The government had a few other tricks up its sleeves. For one, the financial institutions did not need to recognize some bad debts if they held on to them. The banks also sold portfolios of poorly performing loans to Funds whom the banks lend the money to buy the non-performing loans. By removing the non-performing loans, the banks look stable. Then there is the only lightly regulated shadow banking industry that is so murky that no one knows how much money they have lost because of the property crash.

The underlying problems have not gone away. If there is negative equity in some of the properties, then someone is going to have to take a loss at some stage, unless there a remarkable boom in property prices. That is unlikely. Declaring bankruptcy, especially for private individuals is almost impossible. This means that the over-leverage drag will carry on for years to come. The most likely scenario is that the property sector will just bumble by at 0% growth for decades to come.

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Current

The world Gini

I recently read an article in the British Press on how the installation of Rooftop Photovoltaics Solar Panels (PV’s) in South Africa makes the society even more unequal. It is an attention grabber, and poorly informed article.

Firstly, the electricity price that Eskom, the South African power utility, is allow to charge, is set by a national regulator. At current prices, foreign investors are falling over themselves to get their hands on Independent Power Producer contracts, because the return on their investment is to attractive. That means that there is not much pressure to increase electricity prices, no matter how many private households install PV’s on their roof.

Secondly, there are much fewer periods of load-shedding because private individuals and companies generate their own electricity, instead of relying on the intermittent supply of Eskom. Less load-shedding leads to more productive economy, which leads to more job creations. That is good news for the youth, where every second one does not have a job.

More importantly, it is a bit rich for a foreign journalist to criticize the increased use of solar panels for home electricity generation, because it will increase the Gini coefficient. The worlds Gini coefficient has increased dramatically over the last 15 years in favor of the developed markets. The whole of Europe and North America has experienced a boom in housing prices fueled by an almost 0% interest rate environment. In contrast, residents of developing countries are charged double digit interest rates when they wanted to purchase a home.

It wasn’t only the property market that sparked a wealth boom, but the stock markets shot the lights out. Should they have not benefited from the stock market boom or the housing bubble, they were at least sure to find a job. Unemployment rates across the rich world were at all time lows. Many companies are desperate for more workers. In some countries there were two to three jobs open for every person looking for work.

All of this is a good thing, obviously. And I am not arguing that it happened at the expense of the developing nations. However, we know that a country with a small middle class and a high disparity in wealth is an unstable one. And therefore, a world with a widening divide between the rich and the poor nations is going to be an unstable world.

Immigration is a topic that often decides elections. The hope of making their lives worth living will always draw the desperate people of poor countries to the rich ones. Unless the developed countries take their responsibilities as world citizens seriously, tensions will increase.

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Current

Israel Hamas – not for us

The war between Israel and Hamas is dominating the headlines. Not a day goes by without the pictures detailing the horrendous bombing raids on Gaza appearing in our newsfeed; not a day goes by without a news statement by the Israeli government justifying their act.

It all started on the 7th of October when Hamas soldiers managed to cross the border into Israel and committed some of the most horrific act of violence against mostly unarmed civilians. There are stories abound of women being raped, sometimes In front of their kids, arbitrary people being abducted, and men, women and children killed in cold blood. There was apparently one particularly gruesome story where a Hamas soldier tried to behead his captive but couldn’t find anything sharp enough to cut his neck off, but he nevertheless persisted and eventually savaged the head off. This is the definition of horror. One can’t begin to imagine the pain the parents of the captive must have felt.

In response to the brutal attacks, Israel decided to launch the biggest counter attacks since the 1967 six-day Arab-Israeli war. It Started with a bombing campaign that seems very indiscriminate. Many civilian structures were flattened. Most Palestinians are running out of food and water. There are reports of whole families being wiped out because of the bombing campaigns. The people of Palestine are trapped in a living nightmare.

Nobody wins when there is war. There can never be a justification to kill someone daughter or son. No least a political validation. The citizens always hurt the most. They are just used as pawns by megalomanic politicians. Benjamin Netanyahu, the hawkish Israeli Prime Minister who portrays himself as a strongman, had a laps in judgement of Hamas. It turned out that the border was poorly defended, and that even though they knew that Hamas was using child labourer to dig the tunnels, did nothing about it.

The Hamas leaders don’t even stay in Palestine, but apparently live a lavish life in Qatar and Turkey. Yet they use a combination of threats of violence and bribes to cement their power in the Gaza strip. Even though Iran supports Hamas, they don’t care about the Palestine people, otherwise they would have sent money to build schools and universities. Instead, they send money to buck rockets. The other Arab states have not offered to take in any of the Palestine refugees. Why?

And yet it seems to be that the general world population is expected to take a side. There have been many demonstrations worldwide, often for the plight of the Palestine but also against the rise of antisemitism. There has been no demonstration for peace.

How are we supposed to take side in a conflict that goes back to biblical times? Clearly, it is a very complicated scenario. There are too many issues to address them all. There does not seem to be any reasonable of justifiable outcome in sight. Yet, it is time to stop killing innocent civilians. It is time to imagine how the region could look like in 20 years’ time, and then come up with a plan on how to get there. Both parties must stick to that plan.

Healing will take time, but it is possible. It has been done before, just look at Norther Ireland or South Africa. One needs to start with respecting each other as human beings. Then stop shouting but rather listen. Listen to what the general population wants. Listen to what they need. But that can’t be done with the current leadership in Israel, and it can’t be done with the current leadership of Hamas and Palestine. They need to step down.

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Current International

Is ChatGPT really the holy grail?

A new internet phenomenon has taken the world by storm. ChatGPT has managed to get 100 million subscribers in a far shorter period than any other App ever launched on the internet. The reason is clear. It has revolutionized the search function on the web. ChatGPT uses clever Artificial Intelligence (AI) algorithms to come up with human like answers to any question you might have. You can ask ChatGPT which small car would be the most suitable for yourself. You could also ask for a suggestion on where to spend the next family beach holiday. You can even request something much more complex and comprehensive, such as writing a short story about a topic in the style of Hemingway.

Instead of giving a list of websites which might contain the answer you are looking for, it converses and gives a very authoritative answer.

The applications are plenty, the benefits seem endless (hence the many copycats). Most students probably love it because they spend minutes rather than hours doing their assignments. It will be used to replace call centers (however if you have that unique query you will still be stuck with no answer and no one to ask). I can also imagine that professional fields like law, consulting and medicine can be streamlined using chat bots resembling ChatGPT. Because it uses mathematical formulas to take a set of information to predict the next set of information the technology could be used in the Pharma industry to try and predict new viral outbreaks or even formation of new viruses.

In this excitement of a reimagined search functionality, it is easy to forget about the darker side. Three flaws stand out.

Firstly, a system that can write code could surely be taught how to write its own code for itself to change itself on a constant basis. Imagine regimes like North Korea with their enormous army of programmers. They might use the technology to write destructive computer viruses that constantly change and learn form the way it is being countered. This is an immense destructive force that will cause chaos from anything like airports to power generators.

Secondly, these AI systems rely on the information available. In the case of most search chatbots, it relies on the information available on the internet. If a conversation with your computer chatbot becomes the dominant form of getting information, who will bother to publish new information if that would only be “stolen” by the Chatbots. Regulators should force the internet search companies to cite the pages where the Chatbot got the information used from.

Thirdly and most importantly, the AI revolution has been hailed as a boon for productivity.  That might be so. Countries like the UK are desperately looking for an advantage to make their economy more productive. Integrating these AI functionalities are going to have a similar affect to the introduction of personal computers. The trouble is that even though we have seen some real productivity gains over the past 30 years, it coincided with an increase in the Gini Coefficient worldwide. The real beneficiaries of that gain in efficiency are those with capital. They will get a higher productivity per unit capital deployed.  Yet a stable socio-economic and political environment can only exist with a broad middle class.

The development AI chatbots reminds me of the early days of social media, where the quest to find long lost friends was so strong that any possible shadier sides would be ignored. In Hindsight we were gullible. Very few other inventions have caused more harm to the human race in so many forms as has social media. From a rise in depression among the youth, to online bullying and attacks on the personal integrity – all because of social media. It didn’t stop there though. Fake news caused our societies to be more divided than ever. Governments, like that of Myanmar used social media to co-ordinate attacks of the Rohingya. Minority views were made to seem like the majority view, and majorities thought they were in the minority. Most were afraid to speak out. When Facebook and the likes were created, no one thought that they could cause to harm anyone. Yet they have. So will AI chatbots.  

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Current

The Ukraine war one year on – why everyone should pay attention

As the war in the Ukraine is turning one year old, most Western media are headlining the dreadful milestone. Before the war, Russia used the pretense of a war-games with Belarus to build up a massive military presence at the border to Ukraine. The on the 20th of February the Russian army crossed the border into the Ukraine and began what the Kremlin called the “special military operation”. The true reason why Putin decided to begin an armed conflict with its sovereign neighbor can only be speculated about. Officially he wanted to “de-Nazify” the country (whatever that means). He, and most other western leaders, thought it would probably be a quick war. They were mistaken have miscalculated the Ukrainian tenacity to fight for their independence.

Whatever the reason for starting the war was, the facts remain clear. Russia invaded Ukraine. Bar two minor targeted attacks, Ukraine has not launched any attack on Russian sovereign ground. Russia has used its large artillery capacity to destroy whole villages and towns. It didn’t look like the destruction was aimed at purely military installations. Many residential buildings were hit by missiles, hospitals were truck and townhalls were destroyed. Pictures of cities such as Mariupol remind of those taken of Dresden after the bombing campaigns, everything destroyed.

Yet the reality is that most of the worlds population don’t care, or at least say that they are unaffected. According to them, the bigger focus should be on the China – USA fractious relationship. They are mistaken.

For one, the Chinese president, Xi Jinping is watching the battle closely. If the West support is fading, then surely it will fade too if China attacks Taiwan. Also, if the West is not able to replenish its weapons supply quickly, then he only needs to stretch out the war with Taiwan to make the promise of new ammunition a fantasy.  Once China invades Taiwan, the trade between the USA and China will collapse. Each will shower the other with sanctions, import duties and restrictive rules, and it will take decades for those to unwind. This will impact most businesses in most parts of the world.

Secondly, the Ukrainian war is not simply a war between to sovereign countries. It is a war between a thriving democracy and an autocracy governed by a ruler who has bent every rule to stay in power for the last 22 years. The one side defends free speech, a society where every one is equal before the law and a government that upholds human rights. The other silences any critics of the leadership, controls the propaganda in the press and  locks up opposition politicians on trumped up charges. Those who don’t care about the war in the Ukraine should decide in which society they would rather live, a free and fair one or one controlled by a single person, because the winner of the war will dominate the political landscape everywhere.

Thirdly, all those leaders with atom bombs or ambitions to build one are paying close attention. Putin is making the threat of a nuclear strike. No one knows how real this threat is, but if the West gives in, countries like North Korea will copy the playbook. A nuclear bomb will become the ultimate bullying tool.

Lastly, the war misses an even greater picture. For as long as humans have lived in tribes, there have been wars between them. Boundaries and countries borders have changed many times, because of war. One of Putin’s reasons for invading was that there is a region which was dominated by Russian speakers. That might be so, but that is no reason to start a war. We must come to accept that borders are lines on a map that outline a country. Most were set not by the current inhabitants, but often for arbitrary reasons. We have a much bigger problem to tackle, however. Climate change will unleash desperate times all over the world, from the farmer affected by drought in Kenya, to flooding victims in the Philippines and inland shipping companies in Europe. No one will escape the impact of the fast-changing weather. Money spent on the wars and the money spent on increasing ammunition supplies is money not spent on fighting climate change. It is a zero-sum game. It is time for everyone to understand that climate change is coming, it will be disruptive, it will be devastating and it will change the way humans are living. We have the ability to reduce the impact, but only if we have the money to spend on it. It is a waste spending such on wars.

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Current

Foreign policy failure of US

Exactly 20 years ago, the USA invaded Afghanistan under the pretext of fighting international terrorism. The tried to hunt down Osama Bin Laden, then the head of al-Qaeda, who was wanted for his involvement in the 9-11 attacks. In the process the USA also overthrew the Taliban, an extreme conservative Muslim organisation that was ruling the country. 

Ever since then, the USA had thousands of troops on the ground in active combat. It has been estimated that the war cost the USA 2 trillion US Dollars, which is the equivalent of 100 times Afghanistan’s GDP of 2019. Now, 20 years later, the US abruptly withdrew from their longest war in history, just to give the country back to the Taliban. It is astonishing, that all that effort lead to nothing. But it is not without precedence. The Vietnam war also only served as the backdrop for countless brutal and horrific movie scripts, it served nothing else. When the USA withdrew, they left a country in ruins and countless American families grieving their lost sons. 

This doesn’t only highlight that the USA is incapable of leading a war, but that they have a misjudged attitude towards international policy making. They are supposed to be the leaders of the free world. They are supposed to encourage the spread of liberal ideas, such as the principle that everyone is equal before the law, that everyone should have the freedom of speech, enjoy a free press, be able practice the religion of their choice and be able to work in a free market economy. Women must enjoy the same privileges as men, and children must be protected and not prayed upon. If need be, the USA must step in to defend those principles.  That can not be done with bullets and rockets, but by conquering the heart and minds.

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Current International

The Arguments against Cryptocurrencies

Why I would sell any cryptocurrencies now.

As you all know, I am no fan of crypto currencies. I have been proven wrong for long, but I have not changed my mind. The reasons are many, but the urgency to avoid any crypto currencies has only increased. This is not any investment advice but rather my opinion.

The  crypto bubble is shaping up to be the biggest financial bubble ever, probably even exceeding the US housing bubble in 2007/8. Contrary to the housing bubble, when this one blows up there are only shattered dreams and broken promises left behind (the housing bubble still had brick and mortar which was not valued at zero).

Bitcoin, the first and most dominant crypto currency, is everything it pretended not to be. It was supposed to be cheaper to do transactions than through the traditional banking system, but it is very expensive. As usage of Bitcoin increases, the transaction fees are going to increase.  Each transaction also takes an extraordinarily long time to be processed, because of the internal transaction approval process. While Bitcoin approves one transaction, a company like Visa manages to do 10 000.  One of the big critics of “fiat” currencies (or traditional currencies like the Rand, USD, Euro, etc)  was that central banks had the power to print new money, thereby creating money out of nothing. In contrast new Bitcoins are created by solving a mathematical formula with a finite possible solutions. But because of the steep rise in the Bitcoin price, users use their Bitcoins in fractions. The problem is that you can always do an infinite amount of divisions of a number, therefore the real supply of Bitcoin as a medium of exchange is infinite. And by its very nature, the value created by Bitcoins and other cryptocurrencies is out of thin air. There was no more efficient use of capital, it is just a belief that someone else would pay more for one coin tomorrow than you have paid today.

Bitcoin was also heroed as the ultimate safeguard of wealth because every transaction is recorded forever in its blockchain, therefore in theory at least, each coin would always be possible to trace. For such a “safe” asset it is amazing to hear how often they get stolen by hackers attacking and stealing wallets. The blockchain does not seem to discourage the underworld from using it as a means to extract ransoms.

The volatility of Bitcoin is a further failure for it to qualify as a currency. Imagine you are a distributor of imported goods, and all the trade is in Bitcoin. You place the order when one Bitcoin is trading at $15 000, but by the time you receive the goods it is at $25 000, you will be out of business very quickly. That’s why, in general, over a long period, currencies appreciate or depreciate by the inflation differential between two countries plus a bit of country specific risk. Even these small swings put a lot of pressure on the margins of importers and exporters, using a currency that swings wildly is like a death knell.

You might argue that Bitcoin was the first, and therefore has got a few teething problems that are addressed by the 8 000 plus Cryptocoins and Tokens listed today. Some might have tried, but largely failed. The volatility of the value of Bitcoin was addressed by the invention of stable coins. But they are flawed because no stable coin is backed 100% by a single currency. If it is not, it can never move in unison with the currency. If it is backed by a basket of assets, then you have a big allocation risk and possibly a counterparty risk. Both are unsuitable to keep anything stable. Many “stablecoins” are only backed by a fraction of a fiat currency, making them highly volatile especially when it comes to a downturn.

Some Cryptocurrencies do offer an interest rate, so that the holding cost is not purely negative. However, an interest rate above 2% in the USA is hardly achievable, so anything higher than that is doubtful, unless obviously it is issued in its own currency. This leads us to one of the biggest problems with Cryptocurrencies: most issue volumes are entirely at the issuer’s discretion. Whoever invented the cryptocurrency can decide how much to issue, which is precisely what Bitcoin initially tried to avoid.

There have been some remarkable innovations made in the Cryptocraze: the technology of blockchains is a game changing innovation for the safekeeping of documents in a digital world. I could imagine it being used in the title deeds office or in the personal medical fields. Adjustable personal contracts, where a money transaction is coupled with an individual contract that is automatically recorded makes the field of money lending a lot more personal, streamlined and quicker. You would rather want shares in the companies that issue the cryptocurrencies than own the issued currency. Why? Simply put, you are stuck in a legal limbo if you own the currency and expect a return based on the performance of the company. As a shareholder you are the provider of capital and in turn have certain rights and obligations, as a debt provider you have a contractual legal framework to back your claim. It is uncertain if there is any legally enforceable obligation towards Cryptocurrencies issuers. It might just be the cleverest way to finance a new start-up.

The great innovations made are also reasons why central banks all over the world are experimenting with their own virtual currency. They don’t like cash, because it is hard to trace and it is expensive. The blockchain technology addresses both problems. They are surely not going to allow any local rivals and I do expect Central Banks to crack down on many cryptocurrencies. In South Africa, our Reserve bank has already announced that any money taken out of the country via the unregulated Crypto market is seen as an illegal money transfer which bypasses the exchange control regulations, thereby making it a criminal offense. There is another reason Central Banks would want to control the Crypto issuers. An unregulated money supply leads to too much liquidity, which in turn leads to inflation, which is the biggest killer of wealth. Seeing that inflation typically affects poor people more, the Central Banks will have a moral obligation to intervene.

The Central Banks are not the only ones looking at the Cryptomarket critically. The Covid-19 epidemic has forced all governments to borrow heavily. Each finance ministry has got big holes in their budgets to fill, and taxing Cryptotrades seems very attractive. That means they are going to investigate much more closely if you hold any cryptocurrencies. If the same tax rules apply as those that apply in share trading, you will have to pay your marginal income tax rate on any profits made on each trade (assuming you hold the currency for less than 3 years). Tax avoidance is a criminal offence.

Lastly, the criminal underworld loves using Cryptos, and therefore the law enforcement agencies hate them. They are upping their game though and have been able to trace a few extortions paid. They are going to put pressure on politicians to come up with laws to control the use of Cryptos.

Dangers that lurk in the Cryptotrade and that the headwinds seem to get stronger, which is why it is a good time to exit any positions.

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The Biden years

All of president Trumps lawsuits will probably not change the outcome of the US elections. Joe Biden won the peculiar “electoral vote”, and contrary to Tump’s election, Joe Biden also won the popular vote by more than 5 million votes. Thus, on the 20th of January 2021, Joe Biden will be sworn in as the 46th president of the USA.

Now it is time to look ahead. What will Joe Biden be able to accomplish as president? I dare to predict what is certainly a very hazy future.

As soon as Joe Biden takes over the office, he will undo some of the slog done by Trump. He will probably re-join the Paris Accord on Climate Change and try and roll back some of the nastiest measures to control immigration. Biden might well reduce some of roadblocks installed by the trade war against China, and will reaffirm the US commitments to its Allies, particularly the NATO.

The Senate is likely to be controlled by the Republicans under Mitch McConnell and his merry men (and women). That will limit Bidens ability to pass big impact policies. The stimulus package to revive the economy is going to be smaller than hoped for by most Democrats. Further enhancements to the Obamacare Act will be limited and the frugal Republicans would rally against any reversals of Trump’s Tax cuts. The far-left wing of the Democrats, lead by Ocasio-Cortez, would push for more social spending. She wants to see her famous dream of a “green new deal” become reality and an increase the Taxes on the super-rich.

These strong forces require the most skilled negotiations and political wrangling.  Joe Biden is probably one of the most qualified to handle these delicate situations. But with one hand tied behind his back, and having been dealt a bad opening hand, the chances for proper changes are slim.

Bidens hand will change once the elections for 1/3 of the Senate seats are held in 2 years’ time. By then the Democrats should be able to convince the voters that, contrary to what Trump told them, they are not socialist or even communists. The Democrats should be able to gain more votes from the Latino communities in Florida and Texas.  Even some of the rural white voters could be convinced that the lies, or in words of the current administration “alternative facts”, are simply not true and the central core of the Democrats can be trusted.

The gain of full control in 2022 will be to little too late for Biden. There is simply not enough time to experience the effects of the legislations that Biden will be able to pass while in control of both houses. Mr Bidens age will also count against him in the next elections and the American people would likely choose a Republican president in 2024, if they manged to shake off the Trump baggage.

As a one term president, the real value of Joe Biden’s victory is going to be unappreciated. Joe Biden did not win because his new policies are going to make racial tensions disappear. He did not win because his legislations are going to make society more just and fairer. He did not win because everybody is now more equal.  Joe Biden’s victory was one of the most important ever. It shows that the truth trumps lies, that creating divisions in society only benefits those creating the divisions and that united is the best way to creating a better tomorrow.

Political leaders must be ideals that young kids look up to and aspire to be. They should reflect the best in human nature and defend the liberal values that previous generations have fought so hard for. They should be models’ citizens that feel honoured to be able to govern, not entitled to rule.   They should show empathy for those in need and stand up to bullying and hatred. It is all what Joe Biden is, and what Donald Trump was not.