Message in a bottleneck

Global supply chains are still a source of strength, not weakness

Resilience comes not from autarky but from diverse sources of supply


For the best part of a week, the Suez canal was blocked by a 200,000-tonne metaphor. 

The Ever Given is not just one of the world’s biggest container ships, it is also the emblem of a backlash that accuses globalisation of going too far. 

Since the early 1990s supply chains have been run to maximise efficiency. 

Firms have sought to specialise and to concentrate particular tasks in places that offer economies of scale. 

Now, however, there are growing worries that, like a ship which is too big to steer, supply chains have become a source of vulnerability.

A semiconductor shortage is forcing car firms to idle plants all over the world. 

China has imposed a digital boycott of h&m, a Western retailer that appears unwilling to source cotton from Xinjiang, where the Communist Party is locking up Uyghurs and pressing them into forced labour. 

The European Union and India have clamped down on vaccine exports, disrupting the world’s efforts to get jabs into arms. 

As they battle the pandemic and face up to rising geopolitical tensions, governments everywhere are switching from the pursuit of efficiency to a new mantra of resilience and self-reliance.

It makes sense for supply chains to be more robust. 

When national security is at stake, governments have a role in making supplies more secure. 

Yet the world must avoid a stampede back from globalisation that would not only cause great harm, but also create unforeseen new vulnerabilities.

One complaint against globalisation is that it concentrates production and eliminates buffer stocks. 

Supply chains encompass some of the most sophisticated forms of human endeavour. 

The iPhone relies on Apple’s manufacturing network, straddling 49 countries; Pfizer, a vaccine champion, has over 5,000 suppliers. 

But the relentless pursuit of efficiency has led to low inventories and choke-points. 

At the start of the pandemic, voters and politicians were horrified by the scramble for foreign-made face masks and testing-kits. 

Over half of advanced semiconductors are made in a few plants in Taiwan and South Korea. 

China processes 72% of the world’s cobalt, used in electric-car batteries.

 McKinsey, a consulting firm, reckons that a single country has monopolised the export of about 180 products.

Such dependence is particularly threatening when geopolitics is becoming more confrontational. 

The decay of international trading rules makes countries more wary of relying on each other. 

During the pandemic, countries have passed over 140 special trade restrictions and many have quietly tightened their screening of foreign investment. 

Following the neglect of problems such as how to tax tech giants abroad and whether to impose levies on carbon-intensive imports, countries are tempted to take matters into their own hands. 

As the contest between America and China intensifies, there is a growing threat of embargoes, or even military conflict. 

Under Donald Trump, America undermined the global trade regime and President Joe Biden is unlikely to expend much political capital on rebuilding it.

Against such a backdrop, governments have a role in securing supplies—but it is a limited one. 

They can support research and development, including for new energy sources. 

Beyond this, subsidies and domestic preference are justified only when a vital input relies on a monopoly supplier that is subject to potential interference by a hostile government. 

Some rare minerals fall into this category, hand-sanitiser does not.

The risk is that countries go beyond minimal intervention—that, in the slogan of Narendra Modi, India’s increasingly protectionist prime minister, they get “vocal for local”. 

On February 24th Mr Biden ordered a 100-day security review of America’s supply chains. 

On March 9th the eu said it would double its share of world chipmaking by 2030, to 20%, which followed a pledge to be self-sufficient in batteries by 2025. 

Last year Xi Jinping launched “dual circulation”, aimed at insulating China’s economy from outside pressure. 

Such pledges are vague, but the preference for domestic jobs and manufacturing and promise of subsidies could mark a point at which the world shifts away from free trade and open markets.

Such a lurch towards autarky would not be justified. 

One reason is that government-administered, domestic supply chains are even less resilient than global ones. 

For all its drama, the saga of the Ever Given will be only a blip in the trade statistics. 

As demand surged in the pandemic, China’s mask output rose by ten times. 

After the panic buying of beans and pasta, the $8trn global food supply-chain rapidly adapted, keeping most supermarkets stocked. 

While arguments rage over how to allocate doses, global networks stand to supply 10bn shots of brand new vaccines this year. 

Self-reliance sounds safe, but politicians and voters must remember that their meals, phones, clothes and jabs are all the product of global supply chains.

The call for self-reliance also misconstrues the balance between the costs of interdependence, which are brief and visible, and its benefits, which trickle in month after month unheralded. 

The lost efficiencies and expense of duplicating shared production chains would be ruinous: firms have $36trn invested abroad. 

The build-up of costs, as domestic firms were protected from competition by subsidies or tariffs, would be a hidden tax on consumers. 

And after all that, a policy of self-reliance would end up penalising countries too small or poor to host advanced industries. 

If manufacturing ends up concentrated at home, even big economies would be exposed to local shocks, lobbying and the shortcomings of their own producers, as America may discover with Intel.

Strength in numbers

Resilience comes not from autarky but from diverse sources of supply and constant private-sector adaptation to shocks. 

Over time, global firms will adjust to even long-term threats, including tension between America and China and the effects of climate change, by gradually altering where they make fresh investments. 

This is a perilous moment for trade. 

Just as globalisation begets openness, so protection and subsidies in one country spread to the next. 

Globalisation is the work of decades. 

Do not let it run aground.

The Individual Failings of Economics

In recent decades, economics has gone from defining itself as a set of questions to defining itself as a set of methods, all based on individuals making decisions. By doing so, it has undermined its own ability to make progress.

Ricardo Hausmann



CAMBRIDGE – Economics could advance enormously if it relaxed one of its most precious assumptions: methodological individualism, or the idea that any explanation needs to be related to individuals making sensible decisions. 

This requirement puts the discipline at a huge disadvantage vis-à-vis the natural sciences, because it prevents progress in understanding the relationship between the micro and the macro.

Bold, specific, and usually alarming predictions about automation and coming job losses obscure a basic fact: the future remains uncertain. 

Whether technology is used to liberate or enslave us is always ultimately the responsibility of the humans in charge.

Physics explains all behavior by assuming some fundamental laws at the (very) micro level. 

Quarks give rise to protons and neutrons, which, together with electrons, generate atoms, in turn giving rise to molecules and macro-molecules such as DNA, genes, and proteins. 

These produce cells, multicellular beings, and whole ecosystems that live on a planet that rotates around the sun. 

In theory, one should be able to explain all of this by going back to the fundamental laws of particle physics. 

In practice, this is not only impossible but also unnecessary, facilitating progress.

We know about all of these levels because scientists looked into them and described them in as much detail as possible, enabling other scientists to explain them in terms of lower-level determinants. 

Each layer can somehow be related to the layer below, all the way back to quarks and electrons.

Whereas going back one step is not easy, but often doable, going forward even one step is hard. 

We can work out the amino acid sequence of a protein from the gene that codes for it, but we still are unable to establish what three-dimensional shape the protein will take, which is fundamental to determining its function.

Making things even harder is a phenomenon known as emergence, whereby a next-level property does not exist at the previous step. 

Diamonds and graphene have very different properties, for example, but are chemically identical. 

Neurons give rise to consciousness, but only at the level of millions of networked neurons; we would never have guessed it by looking inside the neuron.

Contrast this with economics today. 

Methodological individualism requires that all phenomena ultimately be explained in terms of individuals making decisions they have sound reasons to make. 

Studying regularities in aggregate data – typical of macroeconomics before the 1970s – is thus uninteresting if these cannot be grounded in rational individual behavior.

As the Nobel laureate economist Robert Lucas argues, governments could not trust these regularities to be stable if they based policies on them, because individuals would respond to those measures in ways that would undermine the regularities. 

The data might suggest a trade-off between inflation and unemployment, but if governments tried to “buy” less unemployment through a bit more inflation, people would change their inflation expectations in ways that would make the whole exercise futile.

The economics profession thus developed models with strong micro foundations, centered on individuals making rational decisions and responding to well-understood incentives. 

To make progress while abiding by these requirements, economists had to simplify or dumb down the layers of interaction between the individual and the aggregate outcomes they were trying to explain. 

One common way to do this is to assume that all individuals are identical, or that they are heterogeneous in predictable ways. 

But requiring all economic explanations to be based on individual behavior is like attempting to explain global warming with quantum physics.

Fortunately, this methodological approach is crumbling. 

At the micro level, behavioral economics has dented belief in the assumption of individual rationality. 

In a series of papers, Harvard’s Xavier Gabaix has shown that all the basic tenets of both micro and macroeconomics change a lot if we assume that there are limits to agents’ rationality. 

Likewise, Gabaix’s Harvard colleague Joseph Henrich argues that the way people make decisions is not universal, but rather depends on a society’s culture.

More to our point is the issue of going from decision-making individuals to the aggregate level. The extremely talented late Harvard economist Emmanuel Farhi, working with UCLA’s David Baqaee, showed that we need to consider the (unexplained) input-output structure of production in order to understand macroeconomic fluctuations: we cannot just derive it from individual representative agents.

Similarly, Harvard’s Pol Antràs (with co-authors) has recently been reconstructing the theory of international trade by assuming that the world is organized through global value chains instead of standard markets. 

This apparently minor assumption makes huge differences both in theory and in terms of trade-policy implications. 

We are barely starting to understand what it means in practice, because, up to now, we had not bothered to collect the requisite firm-to-firm data.

Seen from this perspective, the neoclassical theory of economic growth looks quaint. 

Its main contribution, in the words of the Nobel laureate economist Paul Romer, is to show how hard it is to ground long-term growth in theory. 

Alas, neoclassical theory has been next to useless for any practical purpose, mainly because it blatantly disregards the meso-structures that exist between individuals and aggregate economic outcomes.

Fortunately, some researchers have tried to uncover these meso-structures, using big data with network science and other techniques. 

For example, they have identified complex structures of skill complementarities and patterns of relatedness within and across industries, technology classes, and scientific areas.

These studies show that meso-structures matter for how cities and countries grow, and how technologies develop. 

Given the current orthodoxy, these papers have been unpublishable in economics journals, because they cannot show how these structures are linked to individuals making decisions under constraints. 

But they have been published in prestigious scientific journals such as Nature and Science, as well as in the Journal of Urban Economicsand Research Policy. 

As a result, other researchers can ask questions about how these meso-structures arise from, say, individual decision-making.

In recent decades, economics has gone from defining itself by the questions it asks to defining itself by the methods it uses. 

By restricting its approach to methodological individualism, it has undermined its own progress.



Ricardo Hausmann, a former minister of planning of Venezuela and former chief economist at the Inter-American Development Bank, is a professor at Harvard's John F. Kennedy School of Government and Director of the Harvard Growth Lab.

DISORDER WILL COME – AS CONFUCIUS WARNED

By Egon von Greyerz




When bubbles burst, we will discover how very few superior men there actually are – as defined by Confucius:

“The superior man, when resting in safety, does not forget that danger may come. When in a state of security he does not forget the possibility of ruin. When all is orderly, he does not forget that disorder may come. Thus his person is not endangered, and his States and all their clans are preserved.” 
– Confucius

Superior man can exist at many different levels in society, not necessarily linked to money or investments. 

There will be many people without money who are prepared at an intellectual or psychological level. 

These people are probably the happiest since sadly many wealthy people worry about their money all the time rather than enjoy it.

In this piece I am talking primarily about preparedness in relation to one’s wealth.

PS Important Postscript at the end of the article.

FOCUS ON WEALTH PRESERVATION

The investors we meet in our business are people who are risk averse and therefore very much focus on wealth preservation. 

These investors buy physical gold because they are concerned about the excessive risks in markets. 

They want to protect and insure their wealth against unprecedented financial and currency risk. 

Like ourselves, these investors consider physical precious metals, stored outside a fragile banking system, as the ultimate form of wealth preservation.

But investment gold represents less than 0.5% of world financial assets. 

This means that a minuscule percentage of investors insure their wealth in gold. 

This is clearly surprising bearing in mind that over 5,000 years gold is the only money that has survived.

INFLATION IS COMING

There are of course other real assets like land and property that have held their values very well over time. 

As we expect major inflation in food prices, agricultural land is likely to do well in coming years. 

As I have pointed out in recent articles, we are already seeing high inflation in agricultural and other commodities. 

See chart below.



BOND YIELDS DO NOT REFLECT THE MASSIVE RISK

But commercial and residential property is a different matter. 

The incessant creation of credit since 1971 has driven property prices ever higher. 

In addition, central banks have given borrowers the best leg up ever by charging virtually nothing for money.

In Switzerland for example you can get a 15 year fixed mortgage at a fixed rate of 1%. 

This is like handing out money for free.

But low interest rates in no way represent the generosity of governments or central banks. 

Instead it is the consequence of their profligate spending.

With incessant deficit spending, governments must finance the new debt at virtually no cost to avoid default. 

That is why we are seeing $18 trillion of negative yielding government bonds with no Western borrower paying above 2% for any maturity.

How absurd rates are is reflected by for example Greek versus US rates for 30 year bonds. 

Greece just launched a 30 year massively oversubscribed bond issue at 1.95%. 

For comparison, US 30 year bonds yield 2.36%. 

Both these borrowers are virtually bankrupt but it is absurd that a very financially weak Greece can borrow at a lower rate than the US.

So the government bond market is biggest bubble of them all. 

That won’t stop it from expanding further.

Just take the US. 

When Trump was elected in November 2016, US debt was $20 trillion. 

Based on history I forecast that it would reach $28t in January 2021 and $40t in 2025. 

At the time most market observers found this forecast preposterous but sadly they hadn’t studied history which told us what would happen.

US GOVERNMENT DEBT $50 TRILLION IN 2025

Based on the current situation of the US economy and the forecasted deficits and credit expansion, $40 trillion in 2025 is too low and we are now looking at a US debt of $50t.

Remember that when Reagan took over in 1981, US debt was under $1t. So 44 years later the debt is forecast at $50t in 2025. 

That is an astounding compound annual growth rate of 28% of US debt between 1981 and 2025. 

And this figure doesn’t include potential defaults in credit or derivative markets which could increase the $50t exponentially. 

Total US debt of $84 trillion can never be repaid and nor can it be serviced at non-manipulated market rates.

When bubbles burst, the domino effect is incalculable. 

In addition to debt default of $10s of trillions, derivative defaults, which are very likely, could add $100 of trillions and more.

I am sure that the Fed and other central banks are already cranking up the printing presses or expanding the memory of their computers to cope with all the additional zeros.

HYPERINFLATION IS A CURRENCY EVENT

There are a number of respected market observers who believe that we will not see high inflation or hyperinflation. 

In their analysis they conveniently avoid the currency effect.

As I point out regularly, every single event of hyperinflation in history has arisen as a result of the currency collapsing. 

It is not the increase in demand for goods and services, nor central bank interest rate policy that causes hyperinflation.

No, it is the total mismanagement of the economy and the consequent debasement of the currency that creates hyperinflation.

Just look at the table below. All the major currencies have lost 80-86% in real purchasing power (gold) since 2000 and 96-99% since 1971 when Nixon closed the gold window.

And if we look at a hyperinflationary economy like Argentina, the Argentinian Pesos has lost 99.99% since 2000.



FEW ARE PREPARED FOR DISORDER, RUIN OR HYPERINFLATION

Whether it is ordinary people or the so called experts, everybody believes ruin won’t happen to them. 

Therefore they are not in a Confucius state of preparedness for the coming economic and currency collapse.

Let me describe a very recent anecdote about hyperinflation in Europe. 

Last year, in a small town in Ticino, (Italian part of Switzerland) I dined with my wife and friends in a small restaurant. 

The owner came up to me and said he knew me. 

It appeared that he followed my articles and interviews. 

He told us he fled from Yugoslavia in the 1990s. 

He and his family had lost an important part of their money during the 1992-94 hyperinflation.

The annual level of inflation in Yugoslavia in January 1994 reached 116 billion percent!

Below is a 500 billion Yugoslav Dinar note.

Fortunately the restaurant owner had some savings in gold and this allowed him to start afresh in Switzerland. 

He told our friends never to keep any money in the bank but to only hold physical gold.

So this former Yugoslav man was prepared for the “possibility of ruin”, as Confucius warned, and told us that he would never trust the banking system again.



EPIC OVERVALUATION OF STOCKS

My friends who were at the restaurant still don’t hold any gold. They like 99.5% of investors believe that trees grow to heaven together with stocks and property.

Based on the stock market in the last 40 years, most investors could of course not avoid making money. 

Therefore very few are in a Confucius state of preparedness and will be totally taken by surprise when the next major crash starts.

Initially they will expect central banks to save them again. 

But when the V recovery doesn’t happen and the market just continues down, most investors will ride the market all the way to the bottom.

I would be surprised if markets in the next few years fall by less than 90% like in 1929-32.

The Buffett indicator of market cap to GDP is now giving us a major warning. 

As the graph below shows stocks are now at an all time high valuation in relation to GDP.



If we look at the Shiller Cape index, it is now at a historical high (excluding the Dot Com bubble) and 2X the historical average. 

Yes, overbought positions can extend but the subsequent crash will be long and vicious.

SELL STOCKS AND BUY GOLD – A SEMINAL DECISION



Finally another picture that reminds us of Confucius’ warning that “danger, disorder and ruin may come”.

The Dow peaked against gold in 1999. 

The ratio came down from 44 to 6 or by 87% in 2011. 

We have now seen a 10 year correction with the compliment of the Fed and massive money printing combined with credit expansion.



The rise in the Dow could end tomorrow or we could see a continued meltup for a limited period. 

Regardless, the time for Confucian preparedness is now and here.

We know that stocks are massively overbought on every measure. 

To catch the last few points of the rise is an extremely dangerous exercise that could lead to ruin.

Now is the time to take profits in stocks and protect your assets from total annihilation.

As I showed in last week’s article, gold is today as cheap in relation to money supply as it was in 1970 at $35 and as cheap as in 2000 when gold was $290. 

The short term correction in gold is now finishing and the next move up will be the strongest for a few years.

The rise in gold and fall in stocks will mean that the Dow will fall another 99% (see chart above) from here to reach the long term trend line (not shown).

So getting out of stocks and holding physical gold will not only be a seminal decision but it will also heed 2,500 years of wisdom that Confucius taught.

POSTSCRIPT

Since this article was written, a small hedge fund has lost $30 billion due to ludicrous risk taking in the derivatives market. 

Banks like Credit Suisse will also lose billions. 

I have consistently warned readers about these dangers. 

The whole derivative $1.5 quadrillion timebomb is at risk. 

More about this in the next article. 

Remember Confucius’ warning!

The Case for Open Land-Data Systems

In countries where accurate, accessible land records are not maintained, it is the marginalized and vulnerable who are the worst affected by corruption and covert land grabs. But the ongoing revolution in information and communications technology provides unprecedented opportunities to digitize land records and open them to all.

Tim Hanstad


SEATTLE – Last month, a former Zimbabwean cabinet minister was arrested for illegally selling parcels of state land. 

A few days earlier, a Malaysian court convicted the ex-chairman of a state-owned land development agency of corruption. 

And in January, the Estonian government collapsed amid allegations of corrupt property dealings. 

These recent events all turned the spotlight on the growing but neglected threat of land-related corruption.

Bold, specific, and usually alarming predictions about automation and coming job losses obscure a basic fact: the future remains uncertain. 

Whether technology is used to liberate or enslave us is always ultimately the responsibility of the humans in charge.

Such corruption can flourish in countries that are unprepared to manage the heightened demand for land that accompanies economic and population growth. 

Land governance in these countries – institutions, policies, rules, and records for managing land rights and use – is underdeveloped, which undermines the security of citizens’ land rights and enables covert land grabs by the well connected.

In Ghana, for example, the government keeps land records for only about 2% of currently operating farms; the ownership of the remainder is largely undocumented. 

In India, these records were, until recently, often kept in disorganized stacks in government offices.

Under such circumstances, corruption becomes relatively easy and lucrative. 

After all, when recordkeeping is nonexistent or chaotic, who can confidently identify the rightful owner of a parcel of land? 

As the United Nations Food and Agriculture Organization and Transparency International put it in a report a decade ago, “where land governance is deficient, high levels of corruption often flourish.” 

This corruption “is pervasive and without effective means of control.”

Globally, one in five people report having paid a bribe to access land services. 

In Africa, two out of three people believe the rich are likely to pay bribes or use their connections to grab land. 

Uncertainty about land rights can also affect housing security – around a billion people worldwide say they expect to be forced from their homes over the next five years.

Inevitably, the marginalized and vulnerable are the worst affected, whether they are widows driven from their homes by speculators or entire communities subjected to forced eviction by developers. 

Weak land rights and corruption also fuel conflict within communities, such as in Kenya, where political parties promise already-occupied land to supporters in an attempt to win votes.

But there is reason for hope. 

The ongoing revolution in information and communications technology provides unprecedented opportunities to digitize and open land records. 

Doing so would clarify the land rights of hundreds of millions of people globally and limit the scope for corrupt practices.

Robust land rights upheld by strong institutions not only strengthen housing security but also boost countries’ economic prospects, because people gain confidence to invest in land and businesses, and companies and individuals can use land as collateral to gain access to credit. 

Moreover, secure rights enable governments to increase revenue by collecting property taxes. 

And when land records are easily accessible for inspection, governments can be held accountable, ownership and use rights can be more easily protected, and land markets become fairer and more dynamic.

Given the benefits of open, accessible digital land records, it should come as no surprise that many countries, including India, Bangladesh, Sri Lanka, and Mauritius, are currently digitizing their land records or have recently completed this process. 

Other governments seeking to reduce corruption and make development more inclusive can follow four recommendations – drawn from a new report by the German development agency GIZ and a related Land Portal webinar – for documenting, digitizing, and opening their own records.

For starters, existing property records should be verified and upgraded before digitization. 

Digitizing the inaccurate or incomplete paper records that exist in many settings will only perpetuate the problem.

Policymakers should also ensure the active participation of women and disadvantaged groups. 

While a system that works for the vulnerable will also work for the well connected, the inverse is often untrue. 

These disadvantaged groups must play an active role not only in collecting the data (to build trust and ownership), but also in the creation and evolution of the land-records system itself.

Furthermore, to increase transparency and fight corruption, land data should be open by default. 

Any exceptions must be clearly justified as being necessary to protect the vulnerable. 

And while such an approach could be risky, these risks can be managed, for example by making vulnerable owners’ names available only to government officials above a certain rank.

Finally, systems should be fit for purpose and context. 

Current technological possibilities alone should not dictate the design of open land-data systems. Instead, governments should establish their goals and priorities, and create an open land-data system to fulfill their needs. 

It is also important to recognize that context matters – what works in one setting may not work in another.

To be sure, open land-data systems are no magic bullet. 

They guarantee neither transparency nor accountability. 

But forward-thinking governments should embrace these systems as crucial tools in the process of stamping out corruption and safeguarding the land rights of all members of society.


Tim Hanstad, CEO of the Chandler Foundation, is Co-Founder of Landesa and a Skoll Social Entrepreneur Awardee.