Category Archives: Opinions

Stagflation, Falling Markets And Low Disposable Income: The Next Recession Will Be A Though One

Just like The Golden Investor predicted in the 2020 case study The Golden Manifesto, the central bank expansion drift of the balance sheet does not come without consequences. It is easy to print money and spill liquidity in the system to suppress interest rates and prevent another crash, however reversing this policy is a more delicate process which asks for patience. As inflation surges in the low-interest rate Western economies, the ECB and FED find themselves in a though position in which raising interest rates would probably dampen inflation but put burden on some highly indebted companies and countries that depend on low interest rates. While the current energy crisis that is a result of in-stable energy supply and the Russian war in Ukraine is responsible for the current awkward financial position, the extreme risks these central banks took the last decade following the financial crisis of 2008 will come to light.

“This time we did the exact opposite, we spoiled excess money supply in the economy
just to reach our inflation targets and to boost the economy. Nothing has happened, the ten
times higher monetary base has led banks to sit on cash and has only boosted real estate and
stock markets to all-time highs. The Golden Investor is afraid for a Paul Volcker scenario
since this unconventional central bank policy will lead to inflation at the wrong time.”

The Golden Investor – Case Study II – 18 March 2020

As interest rates surge low-income groups with low-disposable income could be squeezed out financially, which could cause a wave of economic slowdown as consumer confidence and welfare is still a key stone for most economies functioning. Countries like Italy that are heavily con-stringed with Northern European financial institutions could default on government debt amid this fast-rising interest rate environment as the expansion of the balance sheet of the ECB has finally ended. Bond markets have lost more than five percent of their value year-to-date, this is unprecedented in a bad sense. This paves the way for the next financial crisis that will highlight the extreme vulnerability of the heavily globalized state of most developed economies.

Figure 1 – Corporate Bond Market Selloff

The Wage-Price Spiral Explained

If the inflation stays at this high level, this will need to be compensated in wages. However, The Golden Investor does not believe in the so-called wage-price spiral that suggests that this will cause even more imminent inflation. Yes, this would cause inflation however at the end of the day it is the same consumer that bears the costs of inflation, while companies rarely share excess profit in times of economic up-turns. That being said, wage increases will probably hurt SME’s more than globalized multinational companies which generally have the highest profit margins due to scale and tax advantages. Therefore, policy should be aimed at finding the right balance between accepting higher inflation and dividing the burden between consumer and the corporate sector.

In this environment not much can be gained in financial markets for retail investors. Commodities and energy assets could prove to be a safe-haven and amid falling markets Virtu Financial and Flow Traders tend to generate large profits, just like they did during the corona downturns. Other more passive options that can be considered is leveraging the appreciation of the Swiss franc (CHF) versus the euro and dollar as Switzerland is one of the least energy dependent developed countries.

Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.

Greenflation: Lowest Income Groups Hit The Hardest By European Energy Crisis

Starting from September onwards energy analysts warned for potential energy shortages due to lower than expected generation of energy by windmill parks at sea. Especially the United Kingdom, Denmark and Spain were forced to ramp-up coal and gas-fired electricity plants were called in to make up the shortfall from wind. This has caused prices for coal and gas to rise to extreme highs in recent months as the shortage lasted and widened. However, due to the sudden need to generate energy using fossil fuels the prices for carbon allowances went through the roof as well causing even higher energy prices. Operating costs for power plants have gone up tremendously to unseen levels in decades. Even though this is exactly the function of the EU emission cap-and-trade system, this has further increased prices in the already hot energy markets.

Figure 1 – Energy Prices in the UK remain elevated

Governments Should Incorporate Energy Reliability In Their Green Strategy

Many governments in Europe have decided to limit the burden on households by covering part of the costs. This is the first time where the necessary push for green energy has caused side-effects burdening individuals and governments with rising bills. The end is not in sight, but governments should be aware of the necessity to provide stable and reliable energy systems in its green transition strategy. In this way, lowest income groups who spend most of their income will get squeezed out. Consumer authorities expects that energy prices for households will rise over 50 percent on average this year, an unmanageable rise in cost for lowest income groups.

Lowest Income Groups Are Hit The Hardest From Current Inflation

In the United States the price of food rose by 6.1 percent compared to a year ago, while the average energy price jumped by 33.3 percent in November. These price increases do not affect all households in the same way because the consumption baskets of high-income and low-income households differ. Because of variation in the composition of consumption bundles, a Wharton University study finds that higher-income households had smaller percentage increases in their total expenditure. This is because higher-income households spent relatively more on services, which experienced the smallest price increases. On the other hand, lower-income households spent relatively more on energy whose prices had large increases.

The same is the case in Europe where energy prices are elevated as well and will trickle down into food prices as manufacturers face rising costs and will try to use this correction to also improve their own profit margins. Therefore, even though energy prices have been dropping due to the increased energy supply from Russia and other parts of the world and the still relatively soft winter, the damage is already done and will most likely become visible in supermarkets as well in 2022. Analysts expect inflation to come down as government expenditures relating to corona have come down, while central banks have been hinting towards several interest rate hikes and tapering efforts to soften the current inflationary pressure.

Eurozone inflation hits new record as energy and food ...
Figure 2 – Inflation in the Eurozone on a record high

It is hard to assess and quantify which income group is hurt the most by rising inflation. However, a fact is that stock markets have seen double digit percentage increases, partly due to excessive quantitative easing programs by central banks. The highest income group benefits the most from rising stock markets as they simply have the most disposable income. That is the same reason why poorer people feel a much heftier burden of rising inflation even if their purchasing power would be affected by the same percentage. People with the lowest income are the socioeconomic group that find it hardest to purchase a home, and real estate seems to be one of the best inflation hedges. On top of that, low income groups often have much lower savings that means that inflation surges will directly impact their consumption abilities.

The Worst Has Yet To Come

Within this topic the potential harsh side effects of rising interest rates and quantitative tapering remain out of the discussion, while these factors could mean that economic growth could drop significantly as well. While the aging of the baby-boom generation will put increased pressure on government finances that have to rely on a lower amount of workers for their tax income, a major problem that slowly will dampen the economic prosperity seen in the last decade.

Meanwhile also other commodities have seen major price spikes last year, like aluminium, copper and oil. All these assets face investment shortages, while gas and oil explorations have been going down due to lower investment in fossil fuels. The push for alternative energy sources has come at a cost of energy security which next to the surge of demand has pushed prices higher in almost all physical assets. It has to be seen whether more hawkish central bank attitudes will dampen these price surges or whether 2022 will see lasting inflation.



Should the United States “Shrink the Gap” with Europe by Increasing Childcare Subsidies?

Let’s look today at one of main arguments for Biden’s tax-and-spend agenda.

A column in the New York Times, authored by Spencer Bokat-Lindell, suggests that the United States needs to increase government spending on child care to “shrink the gap” with other nations. The main evidence for this proposition is a chart showing the United States at the bottom, see Figure 1 below.

Figure 1 -Child care spending across the world

The obvious goal is to convince readers that the United States is doing something wrong. And that comes across in the text of the article. If you’re active on social media there’s a decent chance you came across this chart, about how much less the U.S. government spends on young children’s care than other rich countries. The infrastructure and family plan that President Biden proposed and that’s now being negotiated in Congress is an attempt to shrink the gap through four key policies: a federal paid family and medical leave program, an extension of the child tax credit (in the form of a monthly payment) that debuted this year, subsidized day care, and universal pre-K.

But why is it bad to be at the bottom of this list when all the nations above the U.S. have lower living standards?

I’ve repeatedly made the point that we don’t want to “catch up” to nations that have lower levels of prosperity.

But maybe this isn’t just about living standards.

The article also suggests that childcare subsidies are needed to avert demographic decline.

…Why does the United States have such an exceptional approach to family and child care benefits…? European and Latin American countries began enacting these policies…the end of World War II accelerated the process, particularly in Europe… “Part of it had to do with fears of demographic decline…the need to recover from those years and to ensure that there was a strong work force going forward,” Siegel told the BBC.

See Also

For what it’s worth, I agree that demographic decline is a major issue. Falling birth rates and increased life expectancy are a very worrisome combination for government budgets. Which leads to the hypothesis that childcare subsidies can help deal with this problem by enabling higher levels of fertility. That’s theoretically possible, I’ll admit, but we certainly don’t see it in the data. Here’s the chart from the New York Times, which I’ve augmented by showing fertility rates.

Figure 2 – Child care and toddler spending, including fertility rates

As you can see, the United States has a higher fertility rate than almost every other nation on the list, which certainly suggests that childcare subsidies are not an effective way of encouraging more babies. Moreover, U.S. fertility of 1.71 is higher than the OECD average of 1.61. And when you compare the United States to peer nations (“OECD rich nations” and “EU-15 nations”), the fertility gap is even larger, 1.71 to 1.52.One moral of the story is that government handouts are not an effective way of increasing fertility. And the other moral of the story is that it’s not a good idea to copy nations that are economically weaker.

Disclaimer: This is a republishing of Dan Mitchell’s personal work.



Renewing the Social Contract

Earlier this fall I read an article about the Danish response to the COVID-19 pandemic entitled “No masks, no distancing: Schools in Denmark defy COVID-19 -with success so far.” The article outlined how Denmark re-opened schools in August in as normal a fashion as possible and how, at least as of the time the article was published, they had not suffered a consequent spike in Coronavirus cases.

What stayed with me from the article was a sentence which attributed the relative success of the Scandinavian countries in navigating the pandemic to their robust social contract.What is the social contract? Stripped to its essence, it is the agreement whereby the people consent to give up some of their individual liberties in exchange for the order and security provided by their government.

Like all contracts, the social contract defines a relationship, which, like all relationships, is built on trust. In order for the relationship to work, the people need to trust their government to govern responsibly, while the government needs to trust the people to behave responsibly in return.

When both parties can trust one another in this way, liberty can flourish. As perhaps first expressed by the Chinese sage Lao Tzu over two thousand years ago and most memorably expressed by the American poet Henry David Thoreau, “the best government is that which governs least.”

However, when neither party trusts the other, the relationship between the ruled and their rulers frays. As it frays, liberty dissolves in an acid environment of both greater regulation and enforcement on the part of government and reflexive disobedience and even defiance on the part of the people. Both tendencies have been on full display during the recent fracas sparked by the Adamson BBQ restaurant’s decision to remain open for business in defiance of renewed lockdown orders in Toronto.

While overall the level of trust and cooperation between Canadians and their governments through the pandemic has been high, the fact that tightened restrictions in the face of rising case numbers are being challenged by people who question even relatively unobtrusive measures such as mask-wearing is troubling. As much as we may wish it were otherwise, contagious diseases can only be contained if everyone works together under the direction of trusted leaders.Going forward, then, if we are to beat the pandemic and meet future crises effectively as a nation, we need to restore trust and the social contract. How can this be done?

As restoring trust in any relationship hinges on the actions of the more powerful party, it is up to governments to take the initiative. As a first step, they need to commit themselves to discovering and reporting the facts of the pandemic without resorting to censorship. Nothing makes people suspect that governments are hiding something more than censorship (which, in our time, often takes the form of de-platforming).

As a next step, governments must commit to contextualizing the facts so that intelligent, measured pandemic responses are possible. For instance, the rising numbers of reported COVID-19 cases are at first glance very alarming. However, this alarm subsides when one considers that many more people are being tested now than in the spring. In a similar vein, while every death even partly attributable to COVID-19 is a tragedy, a tighter focus on ICU hospitalizations and deaths and the demographic characteristics of those most at risk can help us craft responses that best protect the vulnerable while simultaneously minimizing the economic and social costs (including isolation and its associated mental health effects) of blunt measures such as lockdowns.

Governments also need to take responsibility for errors made in the early stages of the pandemic, and commit to doing better in the future. For instance, while China locked down the city of Wuhan on January 23rd, travelers arriving from China (and from abroad in general) were not required to quarantine when they entered Canada until the end of March. If we had closed our borders even by mid-February (by which time the seriousness of the virus was apparent), thousands of lives could have been saved. Similarly, the failure to adequately protect the residents of long-term care facilities in March and April needs to be acknowledged and corrected.

Finally, and perhaps most crucially, governments need to take responsibility for, and commit to reversing, the poor decisions made in the years leading up to the pandemic which made all of us, but most especially the poor and aged, vulnerable. Why has Canada’s ability to manufacture essential medicines and medical supplies been allowed to atrophy? Why were staff in long-term care homes often working part-time in two or three locations? Why have business and household debt levels risen (and savings fallen) to the point where people are facing bankruptcy after only a few months of reduced income?

Clearly, we need to stop relying on global markets and increased borrowing (by governments, corporations and households) to fuel economic growth. Going forward, we need to promote domestic manufacturing, establish job and income protections for low-wage workers, and impose strict limits on bank lending for property in order to keep housing costs and commercial rents affordable.

Crises expose our weaknesses and exacerbate pre-existing divisions. While they can drive a society to fracture, they can also cause nations to reinforce the social contract. Just as the crises of the Great Depression and WWII forged the social solidarity that supported the “30 Golden Years” of the postwar period, so too may this crisis inspire us to make our societies more fair, more transparent and hence more resilient so that we may successfully face the challenges which surely await us in the years to come.

Disclaimer: This is a republishing of Bryce McBride’s personal work.

Solidarity To Italy Is Dependent On Northern European Understanding

It’s the 1st of July 2020, I order a coffee at an empty restaurant terrace in Rome. The woman running the restaurant tells me that she is not open for business yet, but still brings me the cappuccino I ordered. After talking to her for about half an hour it becomes quite clear that the corona lockdown burdens weigh heavy on normally thriving Italian small businesses. The restaurant holder tells me that she had to fire her main chef who has been working and living with her for twenty years. After finishing my coffee I leave a five euro bill on the table, but almost offended the woman refuses to let me pay: “This one is on me, but believe me the rest of Rome will suck every last penny out of you”.

Rome, the vibrant and historical capital city of Italy is empty. Whereas the Northern part of Italy was severely hit by the first corona wave, in Rome not much had happened yet at that time. In summer most Italians living in Rome flee the city as high temperatures steer the inhabitants towards the close-by beaches and mountains. Normally tourists fill-up their places during the hot summer days, but this year it is all different, the city is empty. The local newspaper reported that where normally three hundred thousand tourists visit Rome everyday, now only a thousand tourists come and spend there money. Despite the almost full re-opening in June 2020, the terraces are empty or closed. When visiting the Vatican Museums it becomes even more clear that indeed there are almost no tourists in town. Most visitors seem to be Italian, and the normally long waiting line is non-existent, making it feel like entering through the wrong entrance. The tourism industry in Italy, which made up about 13 percent of Italian GDP in 2019, could have lost up to one hundred billion in 2020 estimations suggest.

In August I decide to leave my studio apartment in the city center and start living in one of the most wanted neighborhoods for Italians in the city, San Giovanni. Where the old historical city center is almost fully inhabited by tourist or expats, San Giovanni is one of the neighborhoods relatively close to the city center where there are still many Italians. When showing a Dutch friend around in the neighborhood he confidently says: “this most be one of the bad neighborhoods, right?”. His comment is telling for the uninformed Northern European perspective on Italy. In countries like Austria and the Netherlands politicians tend to portray Italy like lazy people, fueling criticism on the ERDF funding for underdeveloped, mostly Southern European, regions who benefit less from the European integration than highly educated Northern regions. Northern Europeans tend to think of Italy as holiday destination and have a distorted view on how life is for many Italian inhabitants. The reality is different, with youth unemployment rates during corona surging to around 33 percent, much higher than the 9 percent in the Netherlands.

“If the mafia earns on it, it is no problem”

Not according to plan I end up living with five low-educated hospital workers who just started working at the San Giovanni Hospital in Rome. My new flatmates, all in the end of their twenties just started living in Rome, but their stories and perspectives tell much about the insecurities many Italians have to live with. One of the first things I notice is that they tend to speak in their own rural dialect from Abruzzo, the province next to Lazio. I have a hard time to understand what they say, but as I learned many regions have their own dialect and this is one of the reasons why there seems to be such a division between the North and South of Italy, especially since Northern Italians tend to look down on “terroni”, a common referral to low class people from the South. When asking why they decided to move to Rome their answer is clear: “We used to work from four in the morning to five in the evening in the burning sun planting seeds, while getting paid fifty euros a day, the 1300 euros a month as hospital worker in the air-conditioning is not that bad”. Personally I know high-school kids who earn a higher hourly wage, which makes it even more disturbing how ignorant many people think of Italians. The real problem is not the laziness of the people, it is the failing Italian governance that is heavily undermined by mafia practices. During the summer some clubs and festivals in the South of Italy re-opened as if nothing had happened. When I asked someone about it, I got a straight but clear answer: “if the mafia earns on it, it is no problem”. However, under huge political pressure even the clubs down South closed down again at the end of August.

Figure 1 – Party scenes in Lecce last summer

My flatmates did not have time nor energy to party. All of them worked every day on daily changing eight hour shifts, either in the morning, afternoon or during the night. After two weeks they started working “la lunga”, the long one, referring to their occasional seventeen hour shifts from 2 PM to 7 AM the next day. Interestingly, to save money they slept together in the same room in the same bed as two of them were nephews. This is the reason why many young Italians often stay living with their parents as living alone is unaffordable for many of them. In Northern nations the situation is much different, as certain levels of prosperity tend to be treated like a right rather than a privilege. When being accustomed to living in such circumstances, it is easy to overlook the already wretched conditions of the Italian social state. The question is how much liberal nations want to support struggling nations in their efforts to maintain a certain level of prosperity.


Even the OECD Finds that Class-Warfare Taxes Lead to Lower Incomes

I’m not a big fan of the Organization for Economic Cooperation and Development. Simply stated, the Paris-based international bureaucracy represents the interests of governments, and that means the OECD often pushes policies that serve the interests of politicians at the expense of taxpayers and consumers.

But there are some good economists at the OECD. They’re apparently not allowed to have any role in policy, much to my dismay, but they occasionally produce very good research studies. Such as the 2016 study that showed how many European welfare states would enjoy big increases in prosperity if they reduced the burden of government spending. And the pair of studies that concluded spending caps were the most effective rule for sensible fiscal policy. Or the study admitting that competition between governments leads to better tax policy.

Today, let’s look at another example of sensible analysis by OECD economists. In a study published in late 2017, Oguzhan Akgun, Boris Cournède and Jean-Marc Fournier examined how different types of taxes impacted economic performance. Lo and behold, they found that it’s good to have lower tax rates on businesses and it’s good to have lower tax rates on workers.

“The present paper looks at the long-term effects of tax shifts on inequality and output for an unchanged size of government. …This study uses econometric analysis to provide estimates of distributional and output effects that can be expected based on the track record in OECD countries. …The main findings emerging from the analysis are: …Higher marginal effective rates of corporate income taxation are linked with significantly lower long-term output levels. …Greater progressivity in the upper half of the income distribution, in the form of higher tax wedges on above average income earners, is linked with lower long-term output. …taxes on net wealth are found to be associated with lower output levels, in line with the literature on their distortive effects.”

Here’s the key visual from the OECD study. The top half shows how many nations could enjoy significant gains in disposable income if tax rates were lowered on workers with above-average incomes. The lower half shows how many nations also could enjoy gains in disposable income

The obvious takeaway is that the study shows that Biden’s class-warfare tax agenda will be bad for American competitiveness and American prosperity. There are many other findings in the study, not all of which I like, and not all of which make sense. For instance, the authors want us to believe that death taxes may actually have a positive impact on the economy.

“Greater reliance on inheritance and gift taxes appears to be output-enhancing by comparison with other revenue sources.”

I realize the study is only claiming that such taxes are less damaging than other taxes, but it still doesn’t make sense since death taxes directly drain capital out of the economy’s productive sector. The study also look at the impact of various tax changes on “inequality,” leading the authors to give a negative assessment to some tax cuts even if those reforms would increase the well-being of those with lower incomes.

I’ll close with two other findings from the study, both of which are more to my liking. First, they find that consumption taxes (such as the value-added tax) hurt the economy, but not as much as income taxes. “Consumption taxes entail some disincentive effects, which are generally found to be weaker than those of income taxes”. Second, green taxes hurt the poor more than they hurt the rich as “environmental taxes can increase inequality”.

For what it’s worth, the OECD nonetheless wants a big energy tax on American families (thus confirming once again that there’s a disconnect between the left-leaning political types who are in charge and the professional economists who do real research).

P.S. Even if some OECD economists do good work, American taxpayers should not be subsidizing the group.

Disclaimer: This is a republishing of Dan Mitchell’s personal work.



The Future of Aviation? It’s Starting Now!

What I want to tell you about now is the start of something new. A start of sustainable aviation. Against the backdrop of a rapidly increasing global drive to combat climate change initiated by the Paris agreement in 2015, the goals and actions of this one sector remained veiled in obscurity. Flying was not mentioned in the agreement as there seemed at that point no way to achieve sustainable aviation. But by now, even aviation has caught up to the reality of 2021, in which becoming sustainable is inevitable for survival. In this feature, I want to take you along in the advent of sustainable aviation.

The Aviation Sector Needs A Push For Innovation

The story starts with the Wright brothers, who in 1903 developed the first flying machine which was heavier than air. In the following years, as world wars engulfed the world, the airplane developed rapidly, as a tool of war it was indispensable. Between the 1960s and 1980s, the current commercial airplane market developed, as Airbus, a European consortium and Boeing, the consolidation of American manufacturers, developed a duopoly1. Meaning that those two firms produced more than 90% of all aircraft. This was detrimental for innovation, and in the past 40 years, airplanes have barely changed.

Often, what is required to achieve sustainable innovation is not guided by large incumbents. Newspapers did not develop the internet; Shell did not make the first solar panel; Volkswagen did not produce the first mass produced electric car. Especially within aviation and the Boeing-Airbus duopoly, neither firm needed to make a move as long as the other did not either. And becoming a radical new player in the field of aviation is next to impossible when you look at the time needed for development (10-15 years) and capital costs (multiple billions) required to build a commercial aircraft2. In short this meant that no innovation and thus no change was forced.

But now, starting in 2020, finally we are seeing change. Research reports3,4 on the feasibility and technical opportunities are arising, showing that the development of radically new propulsion systems and aircraft designs will be required to achieve sustainable aviation. Policy reports (often lobbied for by the industry itself, showing the lack of attention aviation receives from lawmakers) on European5 and national6 levels describe pathways to achieve sustainable aviation and set clear goals for 2030 and 2050. And finally, within the industry both large airplane manufacturers such as Airbus7, as well as airports such as Royal Schiphol Group8 are showing that they want to achieve the goal of net zero carbon emissions from aviation by 2050.

The next step is how. How can planes that fly with millions of liters of kerosine each year become sustainable in 30 years? The answer is long and nuanced, although it is well described in the papers I reference. In short, there are 3 possibilities currently.

Potential Sustainable Solutions

The first is electric aviation. Though initially leading, the weight to energy ratio as well as the density to energy ratio of batteries is currently very low. This means that to fly a large aircraft, you would need to bring along many batteries, which would add to the weight, which would require more power and therefore more batteries. This means that in the foreseeable future electric aviation is not feasible on a large scale (Figure 1). 

The second possible opportunity is SAFs9, which stands for sustainable aviation fuels. This can be anything from biofuels which are produced either from industry residuals or from crops, to synthetic fuels which are produced by combining captured carbon with green hydrogen10. However, these fuels cost enormous amounts of money to produce and are made with scarce resources such as captured carbon, hydrogen or industry residuals.

Figure 1 – Specific energy versus energy density of different battery types11

The final possible solution is building hydrogen powered aircraft. These come in two forms. Either the airplane engine burns the hydrogen in a modified turboprop engine (as has already been done by the United states military in 1956 as well as in the Russian Tupolev aircraft in 1989) or hydrogen can be used to produce electric energy in a fuel cell which in turn powers electric engines. If you want to read more about the science behind hydrogen powered aviation, check out Bjorn Fehrm’s blog. However, hydrogen is only feasible if we see radically new airplane designs and if the supply of green hydrogen increases.

Currently, the most feasible option is pursuing sustainable aviation fuels, as they are “drop-in” fuels that can be used within current aircraft. However, in the longer term to achieve cost efficient aviation that truly does not have a negative effect on the climate, hydrogen powered aircraft are vital (Figure 2). Finally, we must combine technologies, as the solution lies not in one quick fix, but in the combination of many.

Figure 2: Comparison of Hydrogen to Synthetic fuel (a sub-category of SAF)3

To conclude, the era of sustainable aviation is starting now. Start-ups such as Zero-avia and SkyNRG and research initiatives as student team AeroDelft show to be important catalysts in the process, but more importantly it will depend on systematic changes on the way we force innovation within aviation. Even though progress was made in the last few decades, in the first 40 years of innovation, aviation went from a wooden structure with canvas wings that flew for 4 minutes (wright brothers), to giant aircraft that became the most important weapon during the Second World War. Now we must create a similar change in just 30 years, and it is starting now.

Disclaimer: These comments on sustainable aviation are of Vincent de Haes personally. These comments reflect his personal opinion and thus does not necessarily reflect his employers opinion on the topic.


  1. Olienyk, J., & Carbaugh, R. J. (2011). Boeing and Airbus: Duopoly in Jeopardy?. Global Economy Journal, 11(1), 1850222.
  2. Markish, J. (2002). Valuation techniques for commercial aircraft program design (Doctoral dissertation, Massachusetts Institute of Technology).
  3. Clean Sky 2 (2020)  Hydrogen-powered aviation: A fact-based study of hydrogen technology, economics, and climate impact by 2050. 
  5. NLR, SEO Amsterdam Economics. (2021). Destination 2050: A ROUTE TO NET ZERO EUROPEAN AVIATION (Rep.). NLR-CR-2020-510. doi:  
  6. Ministerie I&W. (2020). Verantwoord vliegen naar 2050: Ontwerp-luchtvvaartnota 2020-2050 (Rep.). Ministerie van infrastructuur en waterstaat. 
  7. Airbus (2020) Airbus reveals new zero-emission concept aircraft. Airbus Home > Media:  
  8. Royal Schiphol Group (2020) Vision 2050 Storyline. Royal Schiphol group:  
  9. WEF (2020)  Joint Policy Proposal to Accelerate the Deployment of Sustainable Aviation Fuels in Europe A Clean Skies for Tomorrow Publication [White Paper] World Economic Forum:  
  10. E4Tech (2019). Study on the potential effectiveness of a renewable energy obligation for aviation in the Netherlands. Rijksoverheid:
  11. Ustolin, F., & Taccani, R. (2018). Fuel cells for airborne usage: Energy storage comparison. International Journal of Hydrogen Energy, 43(26), 11853-11861.

Sustainability Goals Should Be Targeted With An Interdisciplinary Approach

Since the start of the century several environmental programmes have been created to ensure wealth preservation for future generations. The main objective of the REDD+ programme is to reduce emissions from deforestation and forest degradation (REDD). Eighty percent of the Earth’s above-ground terrestrial carbon and forty percent of below-ground terrestrial carbon is in forests. In addition to the large contribution of deforestation and forest degradation to global emissions, combating both has been identified as one of the most cost-effective ways to lower emissions. The idea to take a look at the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries was first introduced during the Climate Change convention of the United Nations in 2005. The idea of mitigating climate change by reducing greenhouse gas emissions through sustainable forest management in developing countries has been a primary goal ever since.

The REDD+ projects try to have an impact through four different categories that together form the sought positive effect on forest governance. All these dimensions have different disciplinary characteristics that together attribute to this desired effect (Bayrak & Marafa, 2016). Environmental progress can only be made with the proper framework, particularly to prevent leakage, when the policy is shifting rather than resolving the environmental problem. The fact that countries with high rates of deforestation and forest degradation are also often those with various policy failures such as corruption and weak law enforcement (Visseren-Hamakers et al., 2012). Therefore, only legislative pressure won’t be effective to tackle deforestation.

The need for disciplinarity to tackle environmental problems has been acknowledged by Kwa (2005) who describes that the policy focus towards collecting data in this debate is a sign of this need. And it is not only scientists who are the driving force behind this trend, as the push for technology as a solution for environmental problems has been largely outside the scientific community. To ensure that policymakers take sustainability into account the role of appraisal frameworks should not be undermined by disciplinary-specific thoughts that limit the effectiveness of environmental appraisal (Gazzola et al., 2011). When interdisciplinary actors create shared spaces of discussion, this can strengthen practice and create innovative opportunities that accelerate the process of sustainability. In other words, knowledge spillovers function like catalysts in sustainable development.

In developing countries, there is less room for non-imminent problems to be integrated into policymaking. This poses a problem to environmental policies, which often are characterized by long term goals as the environmental movement is not yet fully driven by market dynamics, e.g. by profits. However, as the environmental impact of foreign capital flows still lacks investor transparency, environmentally friendly investors that can afford long term considerations, lack the capability for environmental appraisal. The key is to connect the locals with foreign investors through the development of environmental feedback programmes. This demands an environmental strategy that is able to tackle problems by actively including the population to create environmental conjunction with society (de Abreu, 2009). Therefore, more disciplinary principles are required to back the REDD+ and other environmental projects for the world as a whole to tackle these problems. However, the success of REDD+ is highly dependent on its ability to compensate forest dependent communities for using forests in a sustainable manner.

One of the pillars of the REDD+ impact are the institutional objectives. Bayrak & Marafa (2016) show that despite the trend of decentralization of governments around the world, REDD+ schemes benefit from operating on a more national level as it leads to scale and coordination advantages. Moreover, developing countries tend to be more prone to corruption on the local level. However, as civil support for these types of projects is vital for the success rate of the REDD+ projects, a gradual move towards a more national approach is advised. This clearly underscores the necessity not only to look at the administrative and theoretical business approach but also to include the necessary perspective from social sciences like psychology and especially sociology to understand the will of the people and to understand their perspective and essential role in this ongoing challenge.

Raising public awareness and the right institutional framework is challenging in developing countries where institutional power is weak. Therefore, a multilateral interdisciplinary approach is necessary to be able to effectively implement environmental policies in those countries. And as the issue of environmental problems can only be defined as being interdisciplinary in itself, it is only logical that the solution should be developed through an interdisciplinary approach.


  1. Bayrak, M. M., & Marafa, L. M. (2016). Ten years of REDD+: A critical review of the impact of REDD+ on forest-dependent communities. Sustainability (Switzerland), 8(7), 1–22.
  2. Visseren-Hamakers, I. J., Gupta, A., Herold, M., Peña-Claros, M., & Vijge, M. J. (2012). Will REDD+ work? The need for interdisciplinary research to address key challenges. Current Opinion in Environmental Sustainability, 4(6), 590–596.
  3. Kwa, C. (2005). Interdisciplinarity and postmodernity in the environmental sciences. History and Technology, 21(4), 331–344.
  4. Gazzola, P. (2011). Can environmental appraisal be truly interdisciplinary? Journal of Environmental Planning and Management, 54(9), 1189–1208.
  5. Kwa, C. (2005). Interdisciplinarity and postmodernity in the environmental sciences. History and Technology, 21(4), 331–344.

Understanding the Affordability Crisis

To answer the first question, while higher taxes are also a problem, the core of the crisis is clearly housing. To illustrate the crisis using an example I know well, in 2000 I bought a home (which needed some work) in an inner suburb of Montreal for $155 000. My teacher’s salary, at $48 000 per year, was just under 1/3 of the home’s price.

This past summer I checked and learned that same semi-detached house now costs $560 000. Meanwhile, the current salary of a Montreal schoolteacher with the same level of experience I had in 2000 is $60 000, which is not even 1/9th of the cost of the house. Clearly, there is no way a teacher today could afford to buy the house I bought 20 years ago.

However, teachers and other public servants like policemen and firefighters need to live in large cities. To allow them to do so, their salaries have had to rise. In order to pay their salaries, taxes have risen. Nevertheless, as we can see from the example above, public sector workers like teachers are still falling behind. Workers and entrepreneurs in the private sector facing the double whammy of higher housing and premises costs (whether to buy or rent) and higher taxes and fees have clearly fared even worse.

As higher taxes are largely, then, a consequence of higher home prices, understanding the tendencies in human nature and the recent changes in bank lending practices driving up home prices becomes vital.

Looking at human nature first, housing is what economists call a positional good. Where we live and in what sort of house is an important indicator of status. As we are a status-conscious species, it follows that most people will do (or borrow) whatever it takes to live in the ‘right’ sort of house in a desirable neighborhood. As the number of people wanting to purchase such homes is greater than the number available for purchase, such homes will go to those willing and able to pay more than others, pushing up prices.

In the past, however, conservative bank lending practices nonetheless managed to keep a lid on home prices. Prospective buyers/borrowers were routinely frustrated by lending officers constrained by strict rules. Up until the 1990s, purchasers needed to put down at least 10% as a down payment, with 20% being the customary amount. Further, loan repayments could only be amortized over 20 years. Finally, mortgages would only be approved if the monthly payments comprised no more than 25% of pre-tax household income.

Over the years, though, these rules have been loosened. It is now customary for first-time homebuyers to put down just 5%, thanks to Canada Mortgage and Housing Corporation (CMHC) mortgage insurance. As well, amortization periods are now up to 25 years (down from a period in 2006 where they could be up to 40 years in length). Finally, monthly debt payments may now consume up to 40% of household income.

Predictably, these looser lending standards have led to a vast increase in borrowing to purchase property. Unfortunately, while the individual home buyer may feel that greater access to credit makes desirable homes more attainable, because everyone has such access it merely serves to push up prices. And so, we have the current affordability crisis (turbocharged, one might add, by almost 20 years of extraordinarily low interest rates courtesy of the world’s central banks and, in Canada and other desirable nations, record levels of immigration).

However, just as war is good for the arms merchants selling weapons, so too has the battle for desirable homes been good for the banks issuing mortgage loans.

Banks love mortgage loans. As noted by economists like Dr. Michael Hudson and Richard Werner, over 80% of all bank lending is for property, because it has zero cost and almost zero risk. It has zero cost because when you take out a mortgage, the bank simply creates the money you are borrowing out of thin air with a few strokes on the computer keyboard (as admitted by the Bank of England’s Andrew Haldane in 2014). It has almost zero risk for two reasons. First, while businesses regularly go bankrupt and default on their loans, people will move heaven and earth in order to make their mortgage payments to keep their homes. Second, even if over-stretched households do begin defaulting on their mortgages, it is a relatively simple matter for the banks to stem the tide by loosening standards further and offering them yet more credit.

However, while extending more credit may work in the short run, in the long run the continued expansion of mortgage lending causes a greater share of household and national income to flow to the banks in the form of mortgage interest payments and a lesser share to flow to the businesses and workers producing and selling goods and services. Here we come to the heart of the matter: the affordability crisis is the inevitable consequence of the banks taking advantage of their ability to lend without cost to saddle households with odious debts. As the payments to service these debts are now squeezing enough wealth out of the productive economy to significantly depress spending, employment and income, it is time for action.

Any meaningful solution to the affordability crisis will obviously need to address the banks directly, which is something I will explore in a subsequent article. As Lord Acton put it so memorably, “The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”

Disclaimer: This is a republishing of Bryce McBride’s personal work.

The Current Monetary System Is Outdated And Over-Dependent On Commercial Banks

Since the failure of the Bretton-Woods system where gold acted as a fundamental backstop to currencies, the financial world has developed a lot. The digitalization has created many opportunities, but has also enabled the introduction of many unnecessary and complex systems. The price of gold is almost a thirty-fold of its nominal value in the seventies, back when it had an essential function as insurance against potential monetary expansion by central banks. However, the value of gold as assurance of trust and protection against financial repression was found inferior to the negative consequences of a fixed gold standard; the money supply should grow when productivity grows, a gold standard could cause a credit crunch and therefore negatively influence potential growth. Moreover, a gold standard is more prone to deflation which severely harms economic activity as wages and prices are sticky on the short run.

However, since the seventies fiat currencies have created large financial institutions, which are driven by commercial incentives, but hold an essential public function as creators of money. A role which is severely entangled with their function as credit facilitators, creating a conflict of interest where they reap the benefits of economic booms, but are protected by governments in recessions. Since the last financial crisis it became clear that both banks and governments are not always as resistant as was thought. This created the necessity for central banks to intervene, a development that seemingly resolved the last financial crisis, but actually only postponed the necessary real revolution needed in the financial system.

Commercial Banks Are The Big Winners Of Money Creation

To explain this we need to take a look at how the financial system works. The first thing to understand is that cash is different than money deposited at the bank. Banks deposits’ current function is to safe-harbor assets of the public. A bank deposit is a loan to the bank, that directly benefits from having this excess liquidity. With this deposit the bank, allegedly, can loan out new money to people in need of money through loans. Interestingly, under the current zero interest rate environment bank deposits yield close to zero or zero (interest). However, as banks hold a monopolistic role in the economic systems as facilitators of digital transactions, people have almost no choice but to stall money at the bank. Here is where it becomes more interesting, because the same banks can offer mortgages at significantly higher interest rates for people in need of money. The increasing concentration of banks has created a situation where every new loan, and thus new money has a large chance to flow back into the bank’s balance sheet as there are not many options for the money to be deposited elsewhere. Newly created money by commercial banks is enabling profits through still relatively high interest rates paid by lenders to the bank, but is also partially flowing back into different bank deposits of the bank, that at the moment pay-out no interest at all.

This is where banks in their essence make their profit, but also creates a vicious cycle of unlimited profits for banks as a result of their ability to create money. This effect is often described as marginal, as there are also costs related to offering digital payment systems as provided by the banks, however it is believed to create large net profits for banks. How large these profits are is hard to estimate as commercial banks lack transparency on the amount of costs related to this service. It seems clear that this lack of transparency is most likely due to the profitable nature of this scheme. But there is yet another factor playing a role here that undermines the interest of the public. This is where the money multiplier comes to play a role, a very disputed phenomenon.

The Money Multiplier Effect, How It Actually Works And What Is Wrong With It

Old economic theory explains the money multiplier effect as follows: If a bank receives an amount of 100 dollars, with a reserve ratio of 10 percent set by the central bank, it can lend out 90 dollars to potential clients, effectively creating 90 new dollars. This continues up to a point where, under this reserve ratio, almost ten times the base money can be created. However, as many bankers and economists have pointed out, it works differently.

The first thing that is wrong with this model is that banks do not have to wait for deposits before they can start lending out money. It also assumes that the central bank has complete control over how much money is created in the real economy, by either adjusting the amount of base money or changing the reserve ratio for banks. What actually happens is more complex than the old model describes.

At the end of every day banks net-out the amount of money being transferred from one bank to the other, by doing so reducing the amount of transactions. More importantly, it is not cash that is being transferred, it are central banks reserves which are an equivalent of cash for commercial banks. Because the amount of money actually being transferred at the end of the day is only a margin of all the transactions made, banks do not need to hold large excessive reserves to fund all these transactions.

However, when banks do not hold enough central bank money at the end of the day they can lend money from other banks on the inter-bank market, also known as the LIBOR market, The London Inter-bank Offered Rate. It is an interest-rate average calculated from estimates submitted by the leading banks in London. In other words, as banks can get extra reserves from this inter-banking market if necessary, they can sell new loans, effectively increasing the money supply, without having to worry about holding too little reserves. However, it should be noted that this assumption only holds if all banks create new loans at roughly the same pace. This means that banks can increase the money supply without needing extra central bank reserves. What went wrong in the financial crisis, is that banks had underestimated the risks involving mortgage-backed securities which created large suspicion within this inter-bank market. Central banks all over the world had to create extra central bank reserves so that each bank had enough reserves to be able to survive without the need of the inter-bank market. What this has created is a system where in order to safe economies new debt has to be made by banks because the central bank has absolutely no control over how much money is created.

Quantitative Easing Plays An Essential Role In Maintaining This Unhealthy System

Central banks only tool left at this zero interest rate environment is to flush commercial banks with cash to make sure they atleast do not have to worry about lack of liquidity. However, in return for extra central banks reserves banks send over bonds to the central bank. Before the corona crisis this was mainly done through government bonds, driving down interest rates at which countries can issue new debt. However, since the corona crisis also corporate bonds and private debt has been bought up in quantitative easing programmes. Essentially this has created a system where debt holders get the financial opportunity to create new debt to refinance old (bad) debt, simply postponing an inevitable bust.

The Problem With The Current Banking System, Where It All Comes Together

Just as when bank loans are issued bank deposits are created, bank deposits are destroyed when the debt is re-payed. Thus decreasing the total money supply in the economy for other firms wanting to pay down their debt or interest charges on their debts. Firms with debts still on their balance sheets are now potentially in trouble, since the money available to pay these remaining debts has contracted, while the debts themselves have not. The only way to get out of a recession within the current monetary system is to supply new money to service existing debts. However, as central banks have absolutely no control over the money supply, new debt has to be created in order for this to work. The current recession is escaped, but only by loading the system down with ever more debt, ensuring that each subsequent recession will be more serious than the last one. Money is put into circulation as bank loans; meaning that if we want to have more money we also need more debt. At some point then, debts will grow so large relative to the money supply, that the money to service interest on them can no longer be transacted causing a collapse of the system. However, we are still far from such a reckoning, but this does not take away the necessity to change the system as we know it.

Figure 1 – Private debt has increased tremendously over the past decades

There Is A High Need For An Independent, Non-Profit Deposit Bank For The Public

The above mentioned potential dangers emphasize the need for a deposit bank where people can store their cash without having to take the risk involving holding a bank account. Commercial banks, the current intermediaries have maneuvered themselves into a position where they can reap the profits, while being backed by the government in times of failure, thus creating a situation where commercial banks can make profits while the public effectively takes on the risk. As the creators of money the banks have the power over who gets loans and who does not, while being essential for the public for making digital transactions. While the main incentive for banks is to make profits, this creates a huge conflict of interest. And while at the same time productive workers, a.k.a. non-financial workers effectively pay for this self-fulfilling bust time after time.

Why The Central-Bank Digital Currency (CBDC) Is A Potentially Good Development

In this article we have mainly talked about central bank reserves as main store of value, but also cash plays an important role. However, the role of cash has been decreasing due to the digitalization of the financial sector. In other words, people use cash less and less. This has stimulated the amount and percentage of assets held on bank deposits, creating a situation where banks have almost complete power over the financial system and over the public. As only commercial banks can hold central bank reserves, the number showed on bank accounts is merely a made-up number and has no backing at all. By pushing cash out of society banks effectively try to create a situation where there is no possibility for bank-runs anymore, taking away the risk of insolvency. But also taking away the only real risk over which the bank has almost no control over. Central banks have finally been aware of this undesired situation, recently the ECB started to research the possibility for central-bank digital currencies that could take away much of the power of commercial banks.

The solution it creates to the commercial banks’ monopoly over the people’s money, taking away large chunks of the too-big-to-fail risks, also brings along a potential danger. When too many people will move their assets into the CBDC-system, banks will be forced to raise interest rates on their bank deposit facilities to attain enough credit to finance their loans to the public. This would mean that banks will also raise interest rates on their loans, therefore destroying potential economic growth.

On a side note: it should be pointed out that more than 75 percent of the created money since the start of fiat money has gone to the financial and housing sector. Effectively raising inequality and crowding out non-capital holders on the housing market. This vicious circle has been supported by vast amounts of quantitative easing necessary to support commercial banks in the current system, which only strengthens this vicious circle.

Figure 2 – Mean and median real house prices, 1870–2012

Central-bank digital currencies can make it easier for digital payment companies to enter the market, creating a healthier digital payment sector that is not dependent or dominated by one monopolistic company. More importantly, the ever-ongoing battle of central banks to create inflation will be made way more easy by the ability to directly transfer money as central bank to the public.

However, the biggest risk is that with the introduction of central-bank digital currencies central banks could more effectively induce negative interest rates on the public, as cash is likely to be taken out of the system. This brings along a large responsibility for central banks to act responsible and independent of government officials or bankers, something that is easier said than done. This requirement should not be underestimated as it could undermine the functioning of the whole system. Moreover, digital currencies are prone to cyber-attacks, which unlike robberies on cash reserves could turn-off or glitch the whole economic system at once, a big danger. Here is where blockchain potentially could offer a solution.

There Is No Easy Solution, But Alternatives Deserve A Chance

Deposit banks and central-bank digital currencies both deserve a chance in the effort to decrease to power of commercial banks over the public economy. It is time to separate the payment sector from the financing sector and we have to take away the ability to create money from commercial banks whose only incentive is to create profit.

Governments have been slow to act on the digitalization of the financial sector, but there is a desperate need for a revolution. The current evolution of the monetary system is broken and mainly beneficial for those at control of the financial sector. It is not the government, nor the central bank with the control over the economy, it are financial institutions that continue to rule the economy. At the same time the public remains to wear the burden of a decades-long liberalization of the financial sector that thrives for profit for capital holders, instead fighting for the common good. A terrifying and disastrous conclusion in this already frightening time of a massive health crisis, which will be an excellent excuse for bad actors to wave-off responsibility. As long as this system is not changed bad actors will shake their hands with cash retrieved from workers who actually did add value to society.


  3. Boot, A. W. A., Bovens, M. A. P., Engbersen, G. B. M., Hirsch Ballin, E. M. H., Prins, J. E. J., De Visser, M., & De Vries, C. G. (2019). Money and Debt: The Public Role of Banks. Retrieved from
  4. Bank of International Settlements. (2020). Central bank digital currencies : foundational principles and core features, (1), 26. Retrieved from

Money Is Not Wealth

A common and understandable misconception is that money is wealth. After all, aren’t people with a lot of money considered wealthy? However, while wealth and money are often found together, they are very different in their character and importance.

Wealth is in most respects more tangible and therefore easier to understand than money. Useful goods and services and, perhaps more crucially, the productive resources needed to create useful goods and services, are wealth. A loaf of bread is wealth, as are the farms, factories and human labour and ingenuity that are needed to grow and process the crops necessary to produce it.

Money, meanwhile, is best understood as a tool used to transform wealth from one form into another. For instance, your skills and ability to perform work are a form of wealth. So is the food you eat. The money paid to you in wages which you in turn pass along to the grocery store performs the simple yet crucial task of efficiently transforming your labour into food.

“Creating trillions of dollars of new money will not create the skilled labour or the other productive resources needed”

From this, it should be clear that the amount of wealth in an economy is much greater than the amount of money, as wealth only periodically and for a short time period turns into money before, usually, being turned into another form of wealth. To illustrate, imagine a small business owner who retires and sells their business. He or she is unlikely to keep the sale proceeds in their bank account or under their mattress. Instead, they will probably use the money to invest in other businesses (either directly or through the stock market) in order to generate income for their retirement. And, of course we all know that it seems like no time at all before our pay packets are transformed into food, housing, gasoline and the other necessities of life.

However, from the late 1990s the quantity of money in the economy has grown much faster than either wealth or economic output. Since the onset of the COVID-19 pandemic, this growth has accelerated enormously, even as economic lockdowns have caused output to fall. 

Does this growth present any potential danger? The fact that we have not suffered from noticeable consumer price inflation has led to speculation that perhaps there is no limit to how much money governments can create to finance socially desirable objectives such as infrastructure renewal, a shift towards renewable energy or universal child care.

This thinking, though, makes the elementary mistake of mistaking money for wealth. Creating trillions of dollars of new money will not create the skilled labour or the other productive resources needed to achieve these ends, especially as in modern times most new money is created by banks issuing loans for property and other forms of speculation. Instead, at best it will simply direct wealth and productive resources away from those most able to use them wisely into the hands of those most likely to mismanage them. At worst, it threatens the viability of productive enterprises altogether.

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To illustrate with an example, let’s return to our small businessperson. If a large quantity of new money were to enter the economy during the time in which he sold up, the price of alternative forms of wealth would be sure to rise. Rising stock markets even amidst the economic wreckage wrought by the pandemic and associated lockdowns are evidence of the impact of money creation on asset prices. Unfortunately for our retiree, his or her money, generated from the sale of real wealth, is now competing with newly-created money, created from nothing, to purchase income-generating assets. Their business wealth will not, therefore, be able to purchase as much wealth in other forms as would have been the case had new money not been created.

More troublingly, though, wealth is being reallocated away from a person who has demonstrated his or her ability to create and preserve wealth and towards people who, as well-connected insiders with access to unlimited sums of newly-created money, have every incentive to be reckless.

And so we have the situation now facing Canada and much of the rest of the developed world. Once-productive industrialized economies have, over the past 40 years, seen much of their wealth pass under the control of those large corporations, private equity and venture capital firms with privileged access to money. However, rather than using this money to invest in innovation and growth to create additional wealth, these new owners have chosen instead to loot the firms they control by compelling them to load up on debt in order to buy their own shares on the stock market.

While this has made both earnings per share and executive bonuses soar, it has also made firms more indebted and vulnerable to economic shocks as well as less innovative and productive. Wealth built up over decades has been squandered, and in the process income and wealth inequality have grown to such a degree as to threaten social stability. 

As the insolvency specialist Roy Adkin put it in the documentary “Pandora’s Box – The League of Gentlemen” (directed by Adam Curtis): “The economists seem to think that the whole of the problems can be solved by money, by the use of money, rather than the creation of wealth. But they’ve never really got anywhere near it. So I would ask the question: Who’s money? What money? Where’s it coming from?”

Money is a tool. It performs a useful service when it facilitates the exchange of different forms of wealth. However, it is not wealth. Under our current monetary system, though, the power of money has grown to the point where it is no longer a servant of wealth but instead its master and destroyer. Given this, the continued and accelerated creation of money, while sold as a means by which we might create a better society, is more likely to lead us in precisely the opposite direction.

Disclaimer: This is a republishing of Bryce McBride’s personal work.

The K-Shaped Recovery Is A Symptom Of Rising Inequality

After months of discussion, analysis and rumors it is starting to look like we finally got our V-shaped recovery. For how long this stock market recovery will last remains uncertain. Many countries struggle to see pre-corona economic activity. Among the most struggling countries are the United States and the United Kingdom, both countries have had problems containing the COVID-19 spread. Even though economic activity in the U.S. is far below pre-corona levels, stock markets have recovered and the NASDAQ even saw new all-time-highs last month. In Europe stock markets have also recovered, but PMI levels stagnated in August. They even dropped in many countries, suggesting that the current rate of economic recovery could be stagnating. The Purchasers Managers index is a good forward indication of what could be ahead of us. While stock markets thrive, we should not forget that these rallies are a direct result of an unprecedented amount of quantitative easing of central banks and major spending of governments. But as the stimulus packages dry out and government debt surges, it remains questionable if the real economy can leave the financial intensive care.

Figure 1 – PMI Levels Stagnated In August

The Stock Market Recovery

Last few months stock markets have recovered tremendously. The narrative is easy: even though this corona outbreak is temporary, it has boosted many tech companies that offer online services rather than in-person transactions. The idea is that many of these companies will continue to thrive due to permanent shocks, even if all limitations are lifted. However, much of this tech hype is dominated by mega-tech companies. The FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) saw their revenue grow extensively, excluding Google and Facebook whose growth slowed down due to lower ad revenue. However, it are these mega companies that pushed the stock markets up. Investors looking for yield use these stocks as alternative to low yielding safe-havens. The Russell 2000, the U.S. small cap stock index is still -4% percent lower year-to-date. While in the same time Amazon and Apple respectively saw their stock market value grow up to +76% and +59% percent, and even after the latest correction they continue to outperform. These companies even outperformed the largest gold miner Barrick Gold (GOLD), which share price rose significantly after gold hit all-time-highs and was further supported by the Warren Buffet effect; the 90-year-old investor announced it had taken a stake in the company a month ago. When comparing the above mentioned stocks with the NASDAQ and Russell 2000 index, even the NASDAQ-gains look minor.

Figure 2 – Big Tech Outperforms Big Gold

Figure 2 provides a great overview of how insane the latest bull run was and makes the recent correction look minor. There are several explanations for this strange disparity of financial markets with the economic reality. The corona outbreak emergency packages of central banks have supported financial markets and the economy. While at the same time interest rates are locked down at zero creating a favorable environment for new debt issuances, in which especially innovative and funding hungry tech companies tend to thrive. Many companies have issued new debt to lock-in the low interest rates for the long term. Companies use this overflow of liquidity to increase their cash position for the future, even though many business models and revenues are hard hit and still need to recover. Many of this cash flow is directly and indirectly related to the unprecedented amount of quantitative easing of central banks, especially since the FED has increased their balance sheet immensely, buying-up everything from junk bonds to ETF’s. The immense rise of the gold price reflects this unprecedented situation of central bank quantitative easing.

More is yet to come, the euro has appreciated much since the FED announced it changed its inflation target to an average instead of a stable 2 percent. This suggests that inflation is allowed and may overshoot in the future and new quantitative easing could be on the way. The ECB is expected to increase their stimulus package to further support struggling economies, in an effort to depreciate their currency against the dollar to retain a favorable exchange rate to stimulate exports. However, this creates a race to the bottom of central banks, in the end no one will prevail. It is the perfect time to consider stepping into crypto currencies and precious metals as central banks continue to underestimate the inflation of stock markets and real estate prices in their inflation target calculations.

Unemployment Expectations Are Not Looking As Bright

Meanwhile unemployment in the U.S. is still sky high at 8.4 percent, while the Eurozone saw it’s unemployment rise slightly to 7.9 percent. However, these numbers are slightly different from reality since there has been a great outflow of people in the labour force since the start of the pandemic. When accounting those 3.7 million people who left the labour force in the U.S. since the start of the pandemic, the latest unemployment rate number would actually have been 11.1 percent. Moreover, it is important to look at what companies will do to those who currently are on temporary furlough. MGM Resorts announced that they would fire 18.000 employees on furlough in an effort to offset the losses and drop in revenue due to the corona outbreak. Update: Disney (DIS) has also announced to permanently lay-off 28.000 employees after their revenue boosting theme parks remain closed under the coronavirus outbreak.

This corona shock will be the perfect experiment to analyze the different employment laws and policies experiencing simular temporary shocks. The ability to compare the protectionist Eurozone to the more liberal United States has never been as easy as now.

The most open economies in the Eurozone saw the biggest increase in unemployment rates. The Netherlands and Estonia saw its unemployment levels rise 1.1 and 3.3 percent respectively since last year. Open economies outside Europe like Australia and Canada saw their unemployment rise 2.26 and 4.5 percent respectively since last year. Canada’s minor drop in unemployment in July could signify that the road back to pre-pandemic unemployment levels could be longer than expected. Part-time re-employment outpaced full-time hiring in July, showing that companies are not too confident about the future just yet. And as governmental support is slowing down, the K-shaped recovery will eventually become more and more visible, portraying the unsustainable situation in which recovery is only destined for the capital holding and high-educated part of society, while low wage workers stay in economic uncertainty. The BLM-movements are a symptom of the poor trap and the rising income inequality. In a country where wealth defines status this turns into an unbearable situation of societal anger.

The Rise In Inequality Is A Long Run Trend

Since the 1970’s technology has changed the world, but even though productivity rose, hourly wages did not rise as much. The profits of this increased productivity have largely gone to companies and shareholders, while especially low wage workers saw their real wage decline over the decades. This is potentially one of the explanations why stock markets have risen as much as they did the last fifty years.

Figure 3 – Divergence Between Productivity and Hourly Compensation

When taking a further look at wages, the gap becomes even more visible and portrays the current situation in which those at the top saw significantly more increases in annual wages as those not belonging to the top ten percent earners. This divergence can be partially explained by rising globalization in which low educated people have seen competition of low wage workers from other continents, which has led to striking differences within western societies that are unsustainable on the long run.

Figure 4 – Cumulative Change Of The Top 1% Versus The Bottom 90%

The K-shaped recovery is just a symptom of the rise in inequality which has been developing over the last decades. Only this time the situation has come to light like never before, since economic downfalls and upturns in prosperity are experienced differently in these different wage groups. Real change could be made with policies that not only support large profitable companies and their shareholders, but with policies that support both households as struggling (but healthy) companies. Policies should be focused on saving people, not companies. Adding more restraining rules to corporations that use governmental subsidies could safeguard workers and support households. Capital gains of companies should be divided more equally. Currently the capital holding shareholders who had a marginal role in creating corporate profits benefited more than those who actually created these profits, which is something where new policies and laws should aim at more in order to tackle the divergence between different income groups.