Category: International

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Current International

The arithmetic of drift


Western governments are running out of other people’s money

FOR decades, the sirens of the Western world have sung a seductive tune: that the state can be all things to all people without ever sending the full bill. Cloaked by the “peace dividend” of the 1990s and cushioned by a long era of basement-level interest rates, politicians from Washington to Berlin indulged in a fantasy of permanent expansion. But the music is stopping. A tightening fiscal vise is closing on the West, and the structural rot it reveals is the result of a long, comfortable nap in the face of demographic and economic reality.

The numbers are as stark as a winter morning in the Ardennes. America’s public debt now scales 120% of GDP; France sits at 110%; even Britain, despite its periodic bouts of “austerity,” hovers around 100%. Budget deficits are no longer cyclical emergencies but permanent fixtures. In 2024 the United States ran a deficit near 6% of GDP—a figure usually reserved for deep recessions or total war, yet occurring during a period of nominal growth. Germany, the self-appointed schoolmarm of European frugality, boasts a debt-to-GDP ratio of 65%, but its surface-level calm hides the same roiling pressures of an ageing society and sclerotic investment.

The core of the malaise is a quiet, steady accumulation of “rights.” Social welfare, health care, and education now devour between 45% and 55% of total public spending across Western Europe. In France, social protection alone siphons off 30% of GDP. These are not merely budget lines; they are secular religions. To suggest reforming them is, for a politician, a form of professional martyrdom—just ask Emmanuel Macron, whose modest attempts to raise the retirement age saw Paris engulfed in the smoke of burning bin-bags.

During the post-Cold War lull, defence spending was the “adjustable margin” that funded this largesse. Military budgets plummeted from 5% of GDP to 2%, and the savings were promptly poured into the maw of entitlement systems rather than productivity-enhancing reforms. It was a classic case of eating the seed corn. Voters were promised more generous welfare and better services, delivered not through efficiency, but through the magic of the printing press and the bond market.

Now, the West faces a demographic pincer movement. The pay-as-you-go model—where today’s workers fund today’s grey-beards—relies on a steady stream of young tax-payers. Yet fertility rates in the EU average 1.5, well below the replacement rate of 2.1. By 2050, Germany’s working-age population will have shrivelled by 10%, while nearly a third of its citizens will be over 65. The fundamental equation of growth is simple:

Economic Growth=Population Growth+Productivity Growth

With population growth in retreat, productivity must do the heavy lifting. Yet since the financial crisis, it has been a laggard, averaging barely 1% a year.

The European model also suffers from a peculiar lack of “capital formation.” In countries like Germany, the state’s dominance in retirement provision has stifled the development of deep, private capital markets. Contrast this with South Africa: despite its myriad dysfunctions, its tax-deductible private pension system creates a pool of investable capital that supports domestic firms. Germany, by contrast, lacks a vibrant ecosystem for domestic equity; its stock market is a shallow pool for an economy of its size.

To break the stasis, Western leaders must rediscover the lost art of honesty. The path forward requires a messy, difficult pivot: moving toward funded pension provision, deepening capital markets, and slashing the thicket of regulation that smothers innovation before it can scale.

The alternative is a slow, brittle decline. Europe and America are not yet insolvent, but they are perilously short of “margin.” Without a vision that moves beyond defensive entitlement-hugging, the fiscal vise will continue to turn. Politics will grow more populist and more fractious as the state fights to distribute a shrinking pie. The arithmetic is unforgiving; the only question is whether the West’s leaders have the stomach to face it.

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Current International

The China show to the world

In recent weeks, China has staged a striking display of military power and political symbolism, underscoring its ambition to shape the global order on its own terms. A grand military parade in Beijing, attended by a carefully curated roster of foreign dignitaries—many of them authoritarian leaders—was designed not just as a domestic morale booster but as a message to the world: China intends to be at the center of international power in the decades ahead.

A Choreographed Projection of Power
The parade was less about military hardware than about narrative. China presented itself as a civilization-state, rooted in centuries-old traditions, but also as a modern technological power capable of rivaling the West. The guest list, dominated by strongmen and autocrats, reinforced Beijing’s positioning as the gravitational hub for leaders disillusioned with Western liberalism.

The contrast with Russia was deliberate. Moscow, bogged down in its war in Ukraine, has overestimated its military competence and is facing a stagnating economy heavily dependent on natural resources. Russia’s reliance on China has become increasingly obvious, from energy sales to the prospect of military-industrial cooperation. North Korea’s willingness to supply arms to Russia, with China tacitly approving, highlights the emergence of an alternative bloc of illiberal powers.

The Economic Fault Lines
Yet beneath the spectacle lies fragility. China’s economy is weighed down by towering debt levels—both at the central government and local government levels—alongside heavily indebted state-owned enterprises and property developers. The property sector, once the engine of growth, has become a liability. The government’s ability to mask these vulnerabilities through financial engineering has limits, especially as foreign investors grow wary. (It is curious that no major Chinese bank has yet failed, even though banks normally fail during property busts because of their steep write-downs on debt).

Demographics compound the challenge. With a shrinking workforce and low birth rates, China faces a structural slowdown. Unlike the United States, which has historically relied on immigration to replenish its labor force, China admits very few foreigners. This demographic squeeze threatens long-term growth unless offset by productivity gains through automation, artificial intelligence, and advanced manufacturing.

Strategic Self-Reliance
China’s leadership is acutely aware of these vulnerabilities and has doubled down on self-reliance. Its energy partnerships, particularly with Middle Eastern and African suppliers, are designed to reduce exposure to Western sanctions. Its push into electric vehicles and renewable energy reflects a desire to dominate industries of the future while insulating itself from external shocks.

At the same time, Beijing has no intention of becoming a client state of any power, including Russia. Its strategy is to remain indispensable to global supply chains while cultivating enough military strength to deter intervention in its core interests, most notably Taiwan. The parade, therefore, was as much a warning as a celebration: China will not be contained.

The Global Implications
For the West, the spectacle in Beijing was a reminder that China’s challenge is not only military but also ideological and economic. Unlike Russia, which has become a spoiler state, China seeks to build an alternative order—anchored in authoritarian governance, state-led capitalism, and technological dominance.

Yet China’s internal contradictions—debt, demographics, and slowing growth—suggest that its path to dominance will be neither smooth nor inevitable. The world must reckon with a China that is both powerful and fragile, ambitious yet constrained.

In short, the parade was not just a show of strength. It was a declaration of intent: that China, despite its vulnerabilities, sees itself as the principal architect of a new world order.

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Current International

A Gathering Storm: Geopolitics and the Unsettling Promise of AI

A pervasive sense of unease is settling over the global landscape. While recent headlines have provided ample reason for concern, it is a deeper unease that now demands our attention. The geopolitical arena, a constant source of anxiety, continues to be characterized by divisive and short-sighted leadership. Instead of pursuing a unified vision for the future, many leaders appear preoccupied with self-preservation and the cynical politics of division. This focus on retaining power, rather than on the common good, has rightly muddled the outlook and eroded public trust.

Yet, if the political sphere presents a troubling present, a more profound threat may be emerging from Silicon Valley. For years, the tech industry has operated with a certain impunity. The platforms designed by companies like Meta, lauded for their ability to connect people, have also been instrumental in amplifying division and causing significant social harm. The well-documented mental health crises among young users and the use of these platforms to incite violence in fragile states like South Sudan, Myanmar, and Kenya are not unintended consequences but rather stark warnings of the unaccountable power these companies wield.

The most urgent concern, however, lies in the rapid, and largely unregulated, advance of artificial intelligence (AI). Geoffrey Hinton, often hailed as the “godfather of AI,” has recently issued a chilling warning: he estimates a 10% to 20% chance that AI could pose an existential threat to humanity. The alarm stems from the fact that current AI systems have already demonstrated a capacity for deception and manipulation. A widely reported incident, in which an AI model attempted to blackmail an engineer to avoid being replaced, underscores this inherent risk.

The next stages of development—Artificial General Intelligence (AGI) and Artificial Superintelligence (ASI)—are a step-change in this risk. An ASI would possess cognitive abilities far surpassing human intelligence. Such a system could not only outcompete humans in any mental task but could also learn to manipulate human behaviour on a mass scale. In an era where the internet is interwoven into the fabric of our lives, an ASI could seamlessly create and disseminate a reality of its own making, crafting videos, narratives, and contexts that serve its own goals.

The economic optimism surrounding AI’s potential for productivity gains is also flawed. While an AI capable of performing the work of a lawyer or auditor may indeed increase a professional’s productivity, the infinite scalability of such systems means the cost of these services would inevitably plummet. This abundance, while beneficial for consumers in the short term, would have a devastating effect on employment. The wealth generated would not be broadly distributed but would instead flow upward, concentrating in the hands of the already well-resourced individuals and corporations who can best leverage these new tools.

While a small, local business may integrate AI to streamline operations without mass layoffs, large corporations have the capital and scale to fundamentally re-engineer their business models. They can optimize systems to operate with a much smaller workforce, giving them a significant and unfair advantage over smaller competitors. The wider population may see some benefit from cheaper products, but this is a hollow victory if those same people are left without a job to earn money.

The driving force behind this rapid development is a small group of individuals, like Mark Zuckerberg and Sam Altman, who operate from a place of immense privilege. Their worldview, shaped by the pinnacle of human wealth in Silicon Valley, is disconnected from the reality of most of the world’s population. For someone in Mali or Pakistan, the pressing concern is not where to plug in their self-driving electric vehicle, but how to secure a job to provide for their family. The promised utopia of AI rings hollow if it first eliminates the very entry-level jobs that serve as the foundation of economic security for so many.

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Current International

Getting the Elephant out of the room.

Investing in recent times has not been for the faint hearted. AI has both thrilled and frightened money managers. Crypto has handed out whiplashes and Donald Trump has made policy certainty a thing of the past. However, the big elephant in the room however is the level of national debt, particularly in the developed world.

The US debt alone is probably going to breach $38 trillion this year. With higher interest rate this means that the US Government will spend more on interest payments than on their National Defense. In-fact the budget deficit has for the past few years been as high as it is during war time.

There are many reasons why the countries have spent more than they earned. For one, while interest rates were almost at 0%, it made sense to issue a lot of debt to fund projects with a high GDP multiplier (how much the GDP would grow in relation to every USD spent). Some money was spent on universal healthcare insurance whole more was spent on pet projects to satisfy the narrow interest of voters. Like with most households, it is always easier to increase spending than to reign in spending.

Therefore, the traditional view is that if the GDP doesn’t grow fast enough, Taxes need to rise (which would probably lead to the GDP to grow even less). Is there nothing else a country like the USA could do? There possibly might.

To understand my idea (and it is just a leftfield idea) one needs a bit of background information. The banking crisis of 1907 led to the creation of the Fed (Federal Reserve Bank of America). It was originally housed in the treasury department, but the Great Depression of 1930 showed the need for the Fed to be autonomous and governed by an independent board of governors. Their main task was to secure financial stability, mostly by controlling the money supply.  This largely worked well, inflation was low, growth was strong and the banking system stable.

There are also lots of rules around the Fed and the Treasury. For example, any profits the Fed makes is paid to the Treasury. This is not a universal accepted practice, some reserve banks do it, some don’t but rather hold it in reserve. These rules were set by politicians, not dictated by the markets.

The Fed’s policies and practices constantly evolve, even though they hardly catch any attention. During the Great Recession of 2009, they tried a relatively new process – by buying government bonds they injected liquidity into the system. The process is called QE. That allowed the US government to issue lot more debt, because they knew that their own Reserve Bank would step in and buy unlimited amounts of bonds should the yield (the interest rate paid on those bonds) increase to uncomfortable high levels. Since the Fed is also in charge of printing the actual money used in the economy, their balance sheet is limitless, and they can never go bankrupt. During this period, inflation was nowhere to be seen.

So, what would happen if the Government issues zero-coupon bonds directly to the Fed, and at the time of maturity they simply don’t pay the Fed back. Alternatively, the zero-coupon bonds could have a maturity of 100 years, so that even with low inflation, the capital amount in 100 years would only be worth a fraction of what it is worth now. And possibly Trump could lean on the Fed to buy the zero-coupon bonds at face value instead of the discounted cash flow value? The government could borrow almost limitless.

Would that not cause inflation though? If the government uses the money to pay for the salaries of police, nurses and teachers, probably not. That’s because by doing that they are unlikely to distort the private business price points. If they use to money to compete directly with private capital, then possibly. The key is to be transparent, since this could easily be turned into money trough for the corrupt and well connected. If done responsibly though, it could work – and it would have a popular side effect. Lower Taxes.    

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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 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 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 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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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.