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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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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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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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Current

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.   

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Current International

The USA elections and the reflection on the society

While the votes of the elections in the USA are still being counted, one thing is apparent. Donald Trump did surprisingly well. So well that he might even win the elections. No credible predictor or poll suggested that it might be a tight race. Trump was given an outside chance of between 3% and 15% of winning a second term. Now it looks like the odds are even, and the dream of a “blue wave” is shattered.

More worrying than a second term of a Trump presidency is what the election reflects on the society of America. One would have thought that a president who is accused of rape, who talked about groping girls, who paid less income taxes in the last 15 years than a primary school teacher and who blurs the lines of his own businesses and the state should have had a torrid time at the polls. There were so many books written about his chaotic style of management, his impulsive decision making and his love for dictators and kleptocrats, but hardly a word praising him.  He used teargas on innocent peaceful demonstrators for a photo opportunity and called true American heroes of his own party (like John McCain) cowards. Trump has lied too many times to count and seems to be a blatant racist. Instead of defending the ideals of the free world, America has become the laughingstock of the world.

Any president with that track record would have, in normal times, not had a chance to gain any support. Yet, because of the massively increased voter turnout, there are now probably more people who voted for Trump than in the last elections. That is astonishing and worrying. Do voters even care if their leaders have characters to look up to? Why do so many believe his blatant lies? Besides Trump, Majorie Taylor Greene won a seat in Congress. She is a believer and promoter of the QAnon conspiracies which are at best far-right wacky ideas which make the Nazi propaganda of the 1930’s look like a bad b-grade movie. Why do citizens believe in this non-sense and support leaders who clearly have lost the moral high ground? It is a dangerous slope when minorities are being singled out as delinquent, and the leaders viewed as “a messiah sent by God”.  Where is our society heading to?

But then should we be surprised when we live in a world where most do not read content that is longer than 280 characters, never mind a book. We adore stars not because of their acting talents, but because their willingness to expose their private live on TV. Life ambitions are not formed by your family and those you grow up with, but by complete strangers flooding you with posed pictures on Instagram. And your child makes more money in a year investing their pocket money in some arbitrary code called a cryptocurrency than you do working 5 days a week, 9 to 5.

It is a very turbulent world where we need leaders with a strong moral compass. Instead we are voting for clowns, Rambos, reality TV personalities and fools. It is a sad state of affairs.

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Eskom – how to turn around a ratings-killer

South Africa’s electricity producers pre-audited financial results show that they are living on borrowed time. What should the government do to avoid being dragged down by it?

Eskom the South African state-owned electricity producer and distributor, which effectively has a monopoly, briefed the parliament on their financial situation recently. The picture that emerged was not pretty.

Their debt increased to R488bn. The interest costs were R39.5bn but the operating cash surplus was only R36.2bl. This means that Eskom must borrow more to pay the interest portion on their existing debt. One does not need more than grade 4 maths skills to realise that this is not sustainable. Because the debt burden is equivalent to 12.5% of South African governments total outstanding debt, it poses are very real risk to the South African Government. The Credit Rating Agencies have identified Eskom’s debt burden as the single most important risk.

As the Investors view the South African governments fiscal situation as more unstable (because of the potential Eskom liability), the servicing of the South African government debt will become more costly. A 1% rise in the interest demanded would result in a R38bn increase is debt servicing costs for the South African government. It is more than what the government currently spend on Agriculture & Rural development or what they currently spend on Infrastructure.

To most South Africans it feels like the sinking of the Titanic – previously thought impossible or at least unlikely. As we are about to hit the iceberg, the music is still playing for the intoxicated tenderpreneurs, celebrating themselves and admiring their Captain. Under deck in the cramped quarters, most of the poor are passing their time by dreaming about a better future on the other side, only to be awaken by the thundering roar cause by the crash. As everyone scrabbles to abandon ship, it is once again the poor that find themselves last in line.

What to do?

Eskom is a product of the apartheid system. Since self-reliance was the driving force of capital allocation. Most power stations were built in the late 1970’s and early 80’s. Although many are due to retire over the next 20 years, the date can surely be pushed out by appropriate maintenance, something currently in very short supply.

Most power stations should be sold to private investors, who generally have better incentives to get the best long-term performance out of the Assets.

At the same time, Eskom should offer new owners 10 year and 20 year off-take agreement, thereby giving the power producers certainty over future cash flows. It would also make it easier to fund the purchase of the power stations, because the off-take agreements should be bankable. This would also go a long way to attain the Governments stated goal of creating 400 black industrialists.

Eskom might retain a few power generators, primarily the diesel turbines and the pumped storage systems which only come in service when there is a peak demand, as well as Koeberg, the nuclear power station.

The two main reasons government often sites as why they should not privatise the power stations are senseless. The first one is that they will not be able to control stable power generation. It could hardly be worse than in the current situation. The private sector will be incentivized to supply as much and as consistent electricity as possible, because that’s where they generate their profit. If they don’t do it, somebody else will.

The second reason often cited for not privatizing is that the sales price is probably below what it had cost them, especially their two newly build monsters. That is probably true. Any project that has been overcapitalized will not be worth as much as all the inputs combined. That is the result of bad capital allocation and poor project management.

But getting anything to reduce the debt burden is surely much better than the never ending increasing of the debt burden.

Just look at what private sector companies have done when faced with unsustainable high debt burdens, like EOH, Aspen and Tongaat Hulett. The management sold anything that did not fit into their recovery strategy and used the proceeds to slash their debt.

Eskom would then make a margin on selling on the electricity through their grid. Since they retain the distribution network, the government can make sure that they fulfill their promise of connecting every household to the grid and providing electricity to every South African. Finally the poor would actually benefit from Government policies.

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Current International

The dark side of online shopping

During the Covid-19 induced lockdown, one industry has been doing particularly well. Online retail. Is this the new holy grail for shopping or are does it come with nasty side effects? Are the costs fully priced in?

Besides offering the convenience of shopping from home, online shopping has two big advantages. The first is that the selection offered is much bigger than a brick and mortar shop. Companies like Amazon have got a vast selection of items to spend cash on. The second advantage is that the products are often cheaper than those bought in a physical store. In times like these, cheaper is exactly what most consumers want. The increased demand of goods bought online during the lockdown was so enormous that the e-commerce giants had to hire thousands of new employees. But it was not only the dominant internet retailers that benefited from the shift to online purchases. Thanks to Shopify, building an e-commerce website was within the reach of almost anyone.

The advantages for companies selling their wares online are obvious. They no longer need to rent expensive shop floor space, but cheaper industrial warehouses are adequate. They also do not need to worry about changing their displays and using expensive shopfront props and designers to make their shops inviting. Now they only need to hire a few whippersnappers to create a few new graphics. The armies of bored sales agents and shop assistants are replaced by a handful of call centre agents, mostly outsourced to the cheapest bidder somewhere in the emerging world. And the stock control is much simpler because there is no need for an internal distribution system. The products go directly from the warehouse to the consumer. And best of all, the consumer saves money and time – in theory at least.

The effect on the business landscape has been dramatic. In the USA, 9 300 brick and mortar shops closed in 2019. That number would surely increase dramatically this year, partly thanks to Covid-19. Bloomberg, a financial data provider, estimates that number of shop closures in the USA will be about 25 000 in 2020. Worldwide we have seen a similar trend, although not as dramatic yet. But that will change. The world is evolving and so should businesses. The intense focus on price and efficiency may seem like an undisputed benefit to customers and therefore society, but is that so? Are we counting the full costs of the changes?

Although our capitalistic system has been the greatest driver of innovation, sometime the change did not incorporate all the costs though. Cheap coal fired power stations bring down the cost of electricity by ignoring the costs of the air pollution. Similarly, cheap flights are only possible by not including the costs of the harm of the exhaust fumes. The growing appetite for cheap red meat is partly to blame for the deforestation of the Amazon rain forest. The impact of the deforestation has not been included in the cost calculations because, like the examples above and so many other instances, the costs are external or social costs. It is difficult to allocate the cost to an individual. The cost might not even be borne by a specific country, but by the whole world society. It is not hard to determine who originated the costs, but it is hard to determine who the money should be paid to. So how does the shift to online retail fall within this category?

Simply put, there are few factors not currently considered that count against online retail. For one, it is not an even playing field. An online retailer reach is unconstrained by geography. They can operate across borders and even across different continents. As such, their headquarters can conveniently be located it in a Tax haven. The value of intangibles, such as their brand is also hard to quantify, and they would be able to structure their company in such a way that most of the profits are made in the most least taxed country. That is very hard to do with brick and mortar shops. They typically pay their Taxes where they operate, and as such contribute to the fiscus of their host government.

A second problem is that shopping centres normally have at least one, sometimes more anchor tenants. They might be a big grocery shop, pharmacy, hardware store or department store (although they are going our of fashion fast). The idea is that those well-known shops draw a lot of customers, who need to do their regular shopping there. The small shops surrounding the anchor tenant are line shops and might be anything from mom-and-pop shops to boutique fashion stores, bookstores, delis, food outlets or hobby shops. These are small businesses, owned by an individual, families or small companies. They rely on the foot traffic going past their shopfront. If the big anchor tenants close because they face unprecedented pressure from big online retailers, the small line shops would surely not survive. The evidence can be seen in the USA which is littered by abandoned shopping centres.

The third point is more philosophical. We, the human race are social creatures. We crave human interaction. Solitude leads to destitute. While it is easier to order your groceries from the comfort of your own home, it takes away one more crucial point of human interaction. We also forgo the subtle knowledge we get from talking to our local butcher about the best cuts, or from the advice we get at our local DIY store. We would not act on the recommendations of the in-store beautician, but rather on computer or AI generated suggestions.

Not only do brick and mortar shop employ more people from our community, spend more Taxes in our community but they serve as meeting points, places where we exchange ideas and do what we need to do most – interact with other people. Those are big costs not included in online purchases.

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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

Let’s hope we got this right

This post was originally published in early May

To fight the Covid-19 epidemic though, decisions had to be made. Now, a few months in, the cost of the measures become clear. It is devastating, but according to the politicians and scientists this is the only way to prevent more deaths. Let us hope they are right.

Never before have so many US citizens filed jobless claims so quickly. At the beginning of February the US unemployment rate was near a historic low, but by the end of March, the weekly jobless claims figures were 10 times higher than the peak during the world financial crisis of 2008. Some countries, especially those in emerging markets have performed worse.  Being jobless is devastating. Unemployed become despaired, depressed and suicides go up. Those who managed to keep their jobs are often forced to take a pay cut or unpaid leave. Small business owners must make very tough decisions if they want to survive. Many of their corporate clients have not paid their invoices, at least not in full, in order to preserve their own cash. During the second half of March the Federal Reserve Bank had to quickly step in and provide extra liquidity as many medium to large companies drew all their credit lines available to them. The US Dollar strengthened while emerging currencies collapsed, making it much more expensive for the needy to import medical equipment and supplies. Closer to home, many industries were brought down to their knees. The whole film industry is standing idle, affecting thousands of freelance artists and artisans. Restaurants were ordered to close, many will never re-open. The tourism sector is decimated and is unlikely to recover until travellers have got the confidence that they will not get infected. The side effects of the fight against the Covid-19 virus are brutal, but all policies had one goal in mind, to save lives.

The Covid-19 coronavirus was spreading fast and is killing people.

Experts reminded us of two previous Corona Virus epidemies, the Middle East Respiratory Syndrome (MERS) and the Bird Flu, both of which had remarkably high fatality rates. It was estimated that at least 2 million would die in the USA, and worldwide the figure would be in the tens of millions. Here in South Africa, it was estimated on the 23rd of March that up to 1 million lives would be at risk within the following 40 days. As the fatality models were updated with more accurate data, the mortality came down significantly. It is not clear how accurate the models would be, because the most important measure to epidemiologists, the percentage of the population that has been infected, has not been determined. Instead everybody relied on tests confirming if a patient currently has the virus. That might be useful to doctors (even though there is no medicine for the disease), but not for epidemiologist. Very few ever questioned the models used, as no one wanted to be responsible for thousands of deaths. Let’s hope we used the right models to predict the development of the epidemic.

When the Covid-19 epidemy started in China, the response from the Chinese government was remarkable and quick. The city of Wuhan was locked down, extra hospitals were built in a week, school kids were sent home and the whole economy was shut down. These stories made us wary of this deadly disease. And our suspicions were confirmed when it spread quickly to the northern parts of Italy, where hospitals resembled war zones. Politicians were scrambling for ways to stop the spread of the virus. Even though personal hygiene, including frequent washing of hands and not touching the face has been the gold standard to prevent respiratory virus infections, governments decided to go further. Their response was modelled on the same draconian measures that China took. Schools were closed, factories were shut down, Mines were ordered to stop mining and businesses asked their employees to work from home. Disturbingly though, no extra special measures were put in place to protect those who were clearly the most at risk of dying – those in the old age homes. All the measures helped to flatten the curve of infection.

As the countries are opening their economies up again, it is a good time to reflect. Not to appoint blame, but to determine if the measures taken have the desired impact? A repeat of the hospital scenes of Italy were seen at the Elmhurst hospital in New York. Completely overrun and stretched on all kinds of resources the health workers did a remarkable job with the tools they had. The NHS in the UK was also getting busy, as did some of the hospitals in Spain. But non were as overrun as those in northern Italy or New York, not even those in the southern parts of Italy. We have not heard of shortages of beds in Germany, Netherlands or Australia. Even the developing world did not show any of those chaotic scenes. Here in South Africa, the Life Healthcare Group reported that their hospitals have an average occupancy of 40%, and that their losses amount to a few hundred million already.

 As virus tracers in the Netherlands and Iceland have not found a single transmission from child to parent, we must ask if it is the right policy to keep the schools closed as log as possible. They are facing an ever-daunting task in trying to catch up on the lost schooldays, or more likely redo the whole school year, since anything learned at the beginning of the year will be forgotten by now. Children from richer families would possibly have had some lessons on-line, via Zoom or Microsoft Teams, but it is once again the children from the poor communities that will suffer more. Let us hope the closing of the schools brought more relief than it will cause pain.

Now, 40 days on from when president Ramaphosa was advised that up to 1 million citizens could be at risk, we have only had 6 336 confirmed cases and 123 deaths. The strict lockdown surely had something to do with it, but such a huge variance could also indicate that the models used were wrong. And a flat curve does not matter to the starving and hungry, who cue for kilometres in the hope of getting a food parcel. It also does not matter to the immigrants around the world who are at best ignored and in many cases excluded from any relief efforts. For the people in need this crisis is just about survival, about living or dying. After all, flattening the curve does not mean that people do not get it. The same amount of people get the virus, just over a longer time period, giving the hospitals a chance to cope. Are we better off because of the lockdown? Perhaps, but at an increasing social cost.

As the Covid-19 death toll in the USA surpass that of the 2017-2018 death toll of the seasonal influenza (when 61 000 died according to the CDC), it is obvious that Covid-19 is a very deadly disease. But possibly not as bad as was first expected. Recent antibody tests (which determine if a person has had Covid-19) in the USA suggest that the estimated infected population is between 50 and 80 times higher than first assumed. It might thus be that we are experiencing the tail end of the outbreak, and the only reasons we find increased cases is because every nation is increasing their testing ability. The more you test, the more you will find. These are theories which still must be proven. As with much else about Covid-19, much is uncertain. The economic suffering though is not uncertain. Numbers out this week will show the damage done.

UNICEF has warned that because of the intense focus on Covid-19, 4 million children will miss out getting vaccinated against polio, measles, diphtheria and hepatitis. The World Health Organisation has cautioned that the estimated deaths of Malaria will go up by 300 000 to reach 700 000. Let hope we have the right Covid-19 strategy, knowing that every one of those extra Malaria deaths is because it saved millions from dying from Covid-19. Let us hope we have got this right.