Thursday’s links

  1. What if the Fed Can’t Raise Interest Rates? Why Near-Zero Is the New Normal. – Barron’s
  2. Central Bank Digital Currencies Will Fix Bad Policy – Bloomberg Economics
  3. Fed official says it may be time to begin tapering debate – FT
  4. Term premium in US bond markets back in positive territory – Bloomberg
  5. Which Reflation Are You? – Snider at Alhambra
  6. Tsunami of cash threatens to pin funding rates at zero until 2022 – Bloomberg
  7. House Prices Are Soaring. Rents Are Flat. What Does It Mean for Inflation? – Barron’s
  8. Why demand for Fed’s reverse repo facility is surging again – MarketWatch

Monday’s links

  1. Glut of cash in US financial system pressures Fed policy rate – FT
  2. First warning sign in global commodities boom flashes in China – Bloomberg
  3. Grantham thinks we are in a big, multi-asset market bubble and there is going to be a monstrous crash – FT Unhedged
  4. Why Economics Is Failing Us – Bloomberg Economics
  5. The Fed Should Say It’s Ready to Rethink – Bloomberg Editorial
  6. Fed’s Brainard Warns Private Cryptocurrency Could Fragment Payment System – WSJ Central Banking
  7. Serious inflation is coming and the time to start addressing it is now – Telegraph

Book review: The Great Rupture

I recently read “The Great Rupture – Three Empires, Four Turning points and the Future of Humanity – Do we need to be free?” by Viktor Shvets, the Hong Kong based Managing Director and Head of Asia Pacific and Global Strategy at Macquarie Group. The book was published in June 2020, so it came out just as the Covid-19 pandemic was starting to ravage countries around the world.

Shvets has written a thoroughly thought-provoking book that I’ve been recommending to the Anson Funds team, as well as to friends and associates. He also recently summarised the book’s main points in a Bloomberg Odd Lots podcast, Inflation and the Next Financial Crisis.

Some of the main points that I gleaned from the book, the podcast, and other reviews [a] that I read include:

  • Shvets believes that capitalism as we know it is dead, but we don’t yet know what will come next. Whatever emerges (or is emerging) to replace capitalism will be quite different, potentially dystopian or utopian. Shvets points out that capital is no longer behaving the way it’s supposed to in a capitalist system, and neither is labor.
  • Shvets argues that the world was effectively set on this new course almost fifty years ago, in 1971, as US President Nixon ended US dollar’s convertibility to gold and moved to a floating exchange rate regime. That move unleashed forces that ushered in an era of increased leverage and asset price inflation, both of which led to increased financialization of the economy. In recent years, instead of being merely an intermediary, the finance industry has grown to become the world’s largest industry. Coming at the same time as the dawn of the Information Age, this “self-re-enforcing merger” of technological disruption and financialization “is creating a brand new world.”
  • “In a capitalist economy capital is supposed to be scarce. Capital is supposed to be allocated very carefully. That’s why we have the capital asset pricing model, we have discounted cashflow models, etc. In our world today capital is abundant; in fact we are drowning in capital.
    • Depending on how you define capital and to me there has to be a holistic definition, we have at least $300 to $500 trillion of capital.
    • That’s at a minimum five, maybe 10 times the global economy or global GDP.
    • We are drowning in capital. It’s not evenly distributed, it’s not fairly distributed, but nevertheless there is no shortage of capital. And we continue to create more capital than we need,” Shvets said.
  • “In industrial economies capital was created in line with economies. Today we’re creating four or five times more capital than economies require every year.”
  • ‘Increasingly we (humans) are irrelevant’
  • Earlier periods of industrialisation–in the 18th, 19th, and 20th centuries–were periods of very high capital requirements for the likes of roads, factories, machinery, and power plants. Now, in the early 21st century, the world is primarily driven by intangible capital, not by tangible capital.
  • “It’s IT, it’s software, it’s social capital, it’s digital capital. Those areas do not require a great deal of capital investment, they’re actually relatively capital light. 
    • And intangibles behave completely different to conventional tangible capital.
    • For example, if you run a Coca-Cola bottler and you run out of capacity, you must build another factory. But if you’re the Coca-Cola company producing the recipe, it can be multiplied billions of times without any degradation.
    • And so intangible capital has a much larger scale,” says Shvets.
  • “In the Information Age we have limited capital requirements and yet we are flooded with capital.”
  • “The same has happened with labour. In industrial societies labour needed to be trained, it needed to be skilled. That’s why there was a huge premium on college education. And the reason for that [was] as machines were improving we were their brains. In the Information Age increasingly we humans are increasingly irrelevant,” says Shvets.
  • “So in a world where capital is not the same, in a world where labour is not the same, capitalism or liberal capitalism as we know it, tends to disintegrate.
    • So the question then becomes how do you deal with that?
    • What drives it is a mixture of technological evolution and financialization that we’ve done over the last four decades. And that leads us into a very different world.
    • I call it the Black Hole because we are approaching a Black Hole. What lies on the other side of the Black Hole is unknown.”
  • Shvets says over the past 500 years societies that have granted their citizens ever wider economic and political freedoms, with an independent judiciary and independent adjudication of disputes, have had the recipe for success. This mixture has provided the freedom to exchange views, the freedom to explore, the freedom for people to do what they like in their own interests.
  • “[This] really underpinned our capitalist economies for five centuries. In the Information Age it might be different.”
    • He argues that the leadership in China, Russia and Turkey now believe, that with the help of computers, the central allocation of resources might be better than a free market.
    • “So the view is we can actually do allocation of resources centrally and therefore the free market is not as critical anymore at generating free market signals.”
    • Shvets says we’re not quite there yet, but over the next ten or 20 years computational capacity will continue to improve.
    • “For the first time we now have artificial intelligence (AI) making real contributions to science and inventiveness. For now, humans are still the critical drivers of inventiveness, but [in] the next couple of decades that might not be so. And so the question then becomes if I restrict the professor of Beijing University from accessing Google Scholar or exchanging views with other people in his field, do I really suffer? And the answer increasingly [is] you might not be,” says Shvets.
  • “So one of the key questions is in the next ten to 20 years is will we be in a position that technology will create illiberal–maybe even brutal–societies that will no longer suffer from the stagnation of ideas, the stagnation of inventiveness, the lack of prosperity, and maybe people may even be happy in such societies.”
  • How to avoid ‘the dark corner’
    • The way to avoid this “dark corner,” Shvets argues, is to mimic Germany’s so-called “Iron Chancellor” Otto von Bismarck who created the first welfare state in the modern world in the 1880s. Bismarck’s unemployment benefits and pensions took a lot of sting out of social inequality, wealth inequality and income inequality, and pacified societies, says Shvets.
    • His policy recipe for today’s world includes
      • a universal basic income,
      • changes to competitive regulations,
      • an overhaul of education and skilling, and
      • a massive new Marshall Plan for the least developed parts of the world.
    • Alongside this Shvets says there needs to be a decreased reliance on pure monetary levers, which should be replaced with neo-Keynesian and potentially Modern Monetary Theory tools. These policies are needed to reflect humans’ diminishing importance in the Information Age, Shvets says.
  • “On the margins, humans and labour are contributing less and less. The labour component continues to decrease as a proportion of any product or service that we generate. Over the next ten to 20 years this process will accelerate even more.”
  • He points out that we don’t feel the pain of people who have been through similar massive changes in the past, but we are set to experience something similar ourselves, with some people already doing so through the rise of the gig economy.
  • “The first Industrial Revolution was basically cotton production and steam power and railways.
  • The second Industrial Revolution was much larger. It was chemicals, pharmaceutical industries, internal combustion engines, electricity, it was refrigeration, mass communication.
  • Now the third Industrial Revolution or Information Age is even wider. It’s everything we do, it’s everything we look at, it’s everything in our economies and societies. So when people say we’ve been through this before, true, but we don’t feel the pain of the people who had to go through it because it was so long ago,” says Shvets.
  • “And this time we’re not just removing muscle we’re removing brains as well.
    • And so the importance of new concepts such as a universal basic income guarantee is to ensure that in a world where there is a diminishing contribution of labour and humans, humans are given dignity to pursue the life that they want to pursue and find alternative means of self satisfaction.
    • If it’s not work what is it, is it sports, is it religion, is it arts, is it doing something else?”
  • In terms of regulation, an important issue is how we manage data, how we manage data privacy, who controls data, and how it’s used. Because AI and data are “morality free.” They can be just as easily used for good as they can be used for evil. So we need to change how we control the data, how we regulate the data. It should not be based on non-monopolistic rules of damage done to consumers or businesses. It should be done more to encourage a thousand flowers to bloom, thousands of ideas to bloom–rather than trying to control and corral it.”
  • Since technologies can be used to control societies, one of the big questions of the book is to ask “Do we actually need to be free in order to be prosperous, happy, and innovative?”
  • In terms of a new Marshall Plan for the least developed countries, Shvets suggests more than one billion people could potentially be on the move over the next couple of decades from Africa and other developing regions to the developed countries.
  • “We really only have two choices. Either we open our homes to them, or alternatively we’ll try to make them stay at home. And the only way to make them stay at home is a massive Marshall Plan, very similar to what the United States did from the late 1940s to the early 1960s in places like Germany, Italy and Japan. It has to be enlightened, not commercially based transactions. This money will never get repaid. Its return is lower migration, lower social risk, lower geopolitical risk, and lower healthcare risk because these are the places where pandemics more likely than not will originate,” Shvets says.
  • “In order to finance all of this increasingly we need to understand that Modern Monetary Theory, or combining or fusing fiscal and monetary levers, is the only way forward. As it is $500 trillion of paper that we already have outstanding globally will never be repaid anyway. All we’re doing now is doing controlled default rates. At the end of the day connecting fiscal spending to central banks in some form and eliminating the connection with debt, is the only way forward. Not because it’s necessarily the right capitalist answer, it’s because capitalism no longer exists.”
  • According to Shvets: “Given current monetary and fiscal conditions, many policies that are being discussed today, from higher corporate taxes, to restrictions on share buybacks, to restrictions on CEO compensation, increased capital gains taxes, wealth taxes–are not needed in order to finance government spending. Increasingly, governments will be funded directly through central banks. These policy options are primarily designed to create what people would believe to be fairer, or more equal societies. They are policy choices that can help move us away from dystopia towards utopia.”
  • “Over the next several decades it’s going to be a very difficult transition. There will be tensions within countries, between countries, it might lead to wars. But eventually this new combination of technology and financialization, might actually end up in the right spot.
  • Meanwhile, Shvets sees the current COVID-19 pandemic as a dislocation that accelerates these expected changes. COVID-19 forces us now to accept that there need to be fundamental changes in the way in which our economies are operating and in the way financial markets are operating. And the pandemic thus paves the way–as these dislocations always do–to quite a different world. Hopefully a much better world than the one that preceded it.

NOTES

[a] Author and Macquarie strategist Viktor Shvets on the impact of the Information Age and financialization, and how they are creating a different, new world by Gareth Vaughn dated 3-Sep-2020

Friday’s links

  1. Fed officials are debating ways to tame money-market volatility, including with a tool known as a Standing Repo Facility – WSJ
  2. When economic tribes go to war – FT Opinion
  3. Number of 401(k) and IRA millionaires hits record one year after Covid, Fidelity says – CNBC
  4. U.S. Housing Market Has a Bottleneck That’s Even Bigger Than Lumber – Bloomberg Odd Lots
  5. Great Inflation Expectations Won’t Save the Fed – WSJ Opinion
  6. Powell advances Fed work on possible ‘digital dollar’ – FT