How ‘creative destruction’ drives innovation and prosperity

This defence of capitalism by Philippe Aghion and collaborators also stresses the need for regulation and a social safety net

Martin Wolf 

Thousands of densely parked and defunct ‘shared’ bicycles in the city of Zhengzhou. In ‘creative destruction’ terms, China is categorised as a ‘catch-up’ economy in contrast to the ‘frontier’ economy of the US © Zuma Press/Eyevine


Someone born in 1600 would find the world of 1800 quite familiar. 

But someone born in 1800 would find today’s world beyond comprehension. 

What explains this transformation? 

The answer is: market capitalism.

Why has market capitalism proved so dynamic? 

The answer is that it contains within it a powerful engine of change. 

That is not just economic freedom, though this matters. 

Nor is it science and technology, though that matters too. 

It is what the great Austrian economist Joseph Schumpeter called “creative destruction”.

Philippe Aghion, a professor at the Collège de France and the London School of Economics, has spent a distinguished career bringing Schumpeter’s model into the rigorous theoretical and empirical world of modern economics. 

In this important book, written with two collaborators, Céline Antonin and Simon Bunel, he brings his work to the wider public.

The result, The Power of Creative Destruction, is lucid, empirically grounded, wide-ranging and well-argued. 

It is also rather dry. 

But it does give a wonderful overview of the terrain. 

As the authors explain, the model of growth through creative destruction has three elements.

First, “innovation and diffusion of knowledge are at the heart of the growth process”. 

Growth is cumulative, because the innovators of today stand on the shoulders of all the scientists and technologists who went before them.


Second, innovators are motivated by the possibility of lucrative monopoly. 

Those rents need to be protected, through property rights, including rights over intellectual property.

Finally, innovation threatens incumbents, who will fight to repress it. 

Thus, “On the one hand, rents are necessary to reward innovation; on the other hand, yesterday’s innovators must not use their rents to impede new innovations.” 

Again, in assessing today’s debate on why growth has been persistently disappointing, the authors argue that a competition policy that protects entrants against incumbents is essential.

The book reports a vast quantity of empirical research, most of it recent, which shows how creative destruction works in practice. 

It shows, for example, that new businesses create a large proportion of new jobs. 

Many of these businesses and jobs then disappear. 

But the more intense this Darwinian process, the faster the economy grows.

The authors also note the distinction between “catch-up” economies, such as China, and frontier economies, such as the US. 

In the former, growth is more about investing in existing ways of doing things. 

But frontier economies can only grow by innovating. 

If incumbents are allowed to block competitors, a frontier economy is bound to stagnate.


On the well-known “middle-income” trap, the book argues that the key failure of such countries is to create the institutions that promote frontier innovation. 

It also argues that in today’s circumstances, in which sophisticated services can be technologically dynamic and internationally traded, it might be possible to develop without industrialising, as India has been doing.

Innovation is also path-dependent: incumbents build on what they know, while newcomers are willing to start afresh. 

If governments want to ensure rapid innovation in new directions, they need to motivate new players who are not trapped by past successes.

This is why the emergence of new industrial sectors almost always means the emergence of new companies. 

For this reason, a necessary condition for creative destruction is a financial system able and willing to invest in new companies. 

The book explains how the US benefits from a skilled venture capital industry, which knows how to nurture nascent businesses, and from a large base of institutional investors, who will support these companies as they grow.

The authors also argue that the impact of creative destruction is complex. 

The additional competition spurs innovation and productivity in frontier businesses, but kills off weaker ones. 

New fortunes tend to increase top incomes, worsening that aspect of inequality. 

But, they note, this is far better than the higher inequality created by lobbying directed at thwarting competitors.

On the great environmental challenges of our time, the authors insist that “de-growth” (a popular cause nowadays) is practically and politically unworkable. 

We can only innovate our way out of our dilemmas. 

But the right sort of innovation will not happen without guidance from incentives, regulation, government spending and pressure from civil society.

Of our era’s great environmental challenges, the authors insist that ‘de-growth’ is unworkable. 

We can only innovate our way out of our dilemmas

Globalisation is yet another vexed issue. 

The book concludes that protection is not the right answer to more competition from imports. 

The better response is to support innovation and so promote new and dynamic businesses over older, uncompetitive ones. 

Yet the political acceptability of this depends on the existence of a safety net that is not tied to specific jobs.

More broadly, there is no trade-off between creative destruction and basic security for the population. 

On the contrary, people will be more willing to accept the former, if they enjoy the latter. 

The Danish model of “flexicurity” is, they suggest, the best approach.

Crucially, the success of creative destruction depends on the existence of an effective, non-corrupt, law-governed, competition-promoting state. 

This is possible only in a constitutional democracy, with an active civil society, independent institutions and free media.


Such a state plays a central role as macroeconomic stabiliser, subsidiser of basic science, promoter of applied research and development, investor in risky new technologies, financier of education and social insurance, and promoter of free competition.

This is, in brief, a subtle analysis of what has made capitalism such an incomparably successful — but also disruptive — economic system. 

The system’s success depends on striking a balance not only between the competitive economy and social stability but also between letting capitalism rip and protecting it from the predatory capitalists.

Schumpeter himself feared capitalism would perish. 

So far, he seems to have been wrong. 

Another possibility is that democracy will die, as plutocracy allies with demagoguery. 

Either way, the civilisations of the contemporary high-income democracies would perish. 

By promoting a better understanding, this book could, with wisdom and luck, help us avoid that fate.


The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations, by Philippe Aghion, Céline Antonin and Simon Bunel, translated by Jodie Cohen-Tanugi, Belknap Press, RRP$35/ £28.95/ €31.50, 400 pages


Martin Wolf is the FT’s chief economics commentator


How ‘creative destruction’ drives innovation and prosperity | Financial Times (ft.com)

The man with the straw hat

Pedro Castillo is on the verge of becoming Peru’s president

The left-wing outsider will inherit a country split down the middle


Pedro castillo often began his campaign rallies by saying, “I come from el Perú profundo [the heartland, in effect], from a modest family.” 

He went on to tell his life story. 

Born in a remote village in the Cajamarca region of the Andes to illiterate peasant farmers, he paid for his studies to become a teacher by selling ice creams on city streets. 

As a union leader, he travelled to forgotten towns and villages. 

That story resonates with the poorer half of the country. 

And it has taken him to the verge of his country’s presidency—but only by the narrowest of margins.

With the count in the presidential run-off election held on June 6th almost complete, Mr Castillo (pictured above, centre) had won 50.2%, a lead of just 70,000 out of 17.5m votes over his conservative opponent, Keiko Fujimori. 

She claims fraud, but has presented little evidence. 

International observers found none. 

The electoral authority has still to adjudicate some 300,000 disputed votes and will take days to arrive at an official result.

None of this seems likely to undo Mr Castillo’s surprising victory. 

He campaigned on a populist-leftist platform, promising a more statist economy and a constituent assembly to write a new constitution—the blueprint used by leftist leaders in Bolivia, Ecuador and Venezuela to entrench themselves in power. 

But Mr Castillo will inherit a country split down the middle, both geographically and socially, and he has a weak mandate.

Peru has a taste for electing outsiders. 

But none had as little political experience or knowledge of the world, or stood on such a radical leftist platform as Mr Castillo. 

In his only previous bid for elected office he stood in 2002 for mayor of a small town in Cajamarca and lost. 

In mid-March he was little known, although he led a three-month teachers’ strike in 2017. 

In a fragmented field of 18 candidates in the election’s first round, he topped the ballot, but with just 15% of the total vote. 

He campaigned the old-fashioned way, sometimes on horseback, always with his trademark farmer’s hat of cream palm-fibre. 

He drew on the networks of the teachers’ union, of the churches (his wife is evangelical; he is Roman Catholic) and of the rondas, the vigilante groups, originally against rustlers, that are a local power in the Andes.

Ms Fujimori and her allies warned against “communism”. 

But Mr Castillo embodies change in a country crying out for it. 

His slogan was “no more poor people in a rich country”, a reference to Peru’s mineral wealth, which he claims is not shared around enough. 

“Why did we have to wait for the pandemic to reveal the precariousness of the state?” he asked, saying that health care and education should be the right of all Peruvians. 

The country has suffered the world’s highest death rate from covid-19 relative to its population. 

All this was enough to bring Mr Castillo victory in much of the interior, as well as among Andean migrants in coastal cities.

Assuming his victory is confirmed, Mr Castillo faces an almost impossible balancing act of trying to govern pragmatically for the majority while keeping his radical base happy. 

This week he showed his first clear sign of moderation. 

“We will be a government respectful of democracy, the current constitution…[and of] financial and economic stability,” he told jubilant supporters. 

If so, that may bring an early clash with his own party, Perú Libre. 

An avowedly Marxist-Leninist outfit, its founder and leader, Vladimir Cerrón, is a doctor who is an admirer of Cuban communism and Venezuela’s dictatorship. 

Barred from running because of a sentence for corruption from when he was a regional governor, he recruited Mr Castillo only months ago. 

Mr Cerrón “is not totally intransigent but he will want to control things”, says a veteran activist who knows him.

During the campaign Mr Castillo gained the support of more moderate left-wingers. 

This week Pedro Francke, one of his new advisers, praised the central bank, promised to respect its autonomy, rejected price and import controls and said mines would face a tax renegotiation rather than nationalisation. 

Mr Castillo “knows the value of hard work and would never consider policies that would confiscate assets”, says Gonzalo Alegría, a former banker who is another new addition to his team.

To govern effectively, Mr Castillo is likely to have to look beyond his current advisers. 

The first imperatives for the new team will be handling the pandemic and ensuring economic recovery. 

Peru is fortunate that its caretaker president since November, Francisco Sagasti, has laid the basis for this after much mismanagement by his predecessor, Martín Vizcarra. 

Mr Sagasti has got vaccination going at an accelerating rate and organised oxygen supplies. 

Having contracted by 11% last year, the economy is rebounding. 

The World Bank forecasts growth of 10.3% this year. 

Some private forecasters think the figure could be as high as 13% provided politics is not too unstable.

Mr Castillo’s biggest political headache is likely to be the new Congress, which has a broadly conservative majority. 

On paper, he has the support of only 42 of its 130 members. 

And more than half of Perú Libre’s 37 representatives are beholden to Mr Cerrón. 

The outgoing Congress clashed with the executive and approved populist giveaways. 

Its replacement may not be much better. 

“We could be faced with a Congress wanting to make life hard for the president,” according to Luis Benavente, a political consultant.

Approving the setting up of a constituent assembly requires 66 votes in Congress and then a referendum. 

The demand for a new constitution is weaker in Peru than in Chile, which recently voted to write one. 

Candidates committed to an assembly won less than a quarter of the total vote in the first round. 

Many of the voters who backed Mr Castillo in the run-off did so only to stop Ms Fujimori. 

Peru’s Congress has developed a habit of impeaching presidents. 

If he is to last his five-year term, Mr Castillo would be wise to avoid a constitutional collision and settle for achieving some of the many reforms his country needs. 

Reversing the cultural revolution

Chinese parents are keen on a more Confucian education

So is the government, hoping it will boost patriotism and fill a moral vacuum



At first glance, Huaguoshan kindergarten in Zhuzhou, a city in the southern province of Hunan, looks much like any other nursery. 

Four brightly painted playrooms have buckets of building bricks and soft, coloured mats. 

But on higher floors, the classrooms are more spartan. 

Rice-paper lanterns and a row of black roof tiles running along the top of the walls evoke ancient Chinese architecture. 

Children wear powder-blue fleeces with the mandarin collars and frog fasteners of traditional jackets. 

Large portraits of Confucius hang on otherwise bare walls.

The kindergarten opened in September but already has a year-long waiting list. 

It taps into a growing nationwide demand for guoxue, or “national studies”. 

This usually involves learning classical Chinese thought, texts and morals, especially those associated with Confucius. 

Children at Huaguoshan are taught how to bow, how to greet each other politely in the street and how to sit attentively, with back straight and hands placed carefully in their laps. 

In one room they noisily stamp leaves onto muslin bags to learn an ancient dyeing technique. 

In others they recite poems, practise calligraphy, perform tea ceremonies and play Chinese chess. 

But, say teachers, mastering skills is secondary to building character. 

A child learns to “respect her rival and accept defeat” in chess; in the tea room, to “value what is fragile as you would a porcelain cup”.

After decades of worshipping foreign trends, many people are now interested in such traditions. 

Television shows include “Chinese Poetry Conference”, in which members of the public are quizzed on classical stanzas. 

Young people don traditional robes in public. 

At the heart of the trend is education. 

Frost & Sullivan, a data firm, estimated that the market for children’s guoxue education was worth 466bn yuan ($73bn) in 2018, almost double its value in 2014. 

Schools charge hefty fees. 

The organisation that runs Huaguoshan, a non-profit, also relies on donations. 

It promotes its educational philosophy on social media, with clips of its pre-schoolers reciting poems in traditional garb.

Revered for 2,500 years, Confucius was vilified during the 20th century. 

Guoxue fans speak of “a hundred-year gap”. 

In 1905 the failing Qing dynasty abolished imperial civil-service examinations based on the sishu, the four Confucian texts. 

Modernisers saw the beliefs as blocking progress.

The worst assaults were after the Communists came to power in 1949. During the Cultural Revolution, Mao exhorted people to smash anything old. 

Gangs of Red Guards swarmed Qufu, the sage’s hometown, and blew up his tomb. 

It was only in the mid-1980s, nearly a decade after Mao’s death, that the anniversary of Confucius’s birth could be marked once again.

Top down, bottom up

China’s return to tradition is driven in part by a sense of cultural loss. 

Many Chinese people are eager to rediscover their heritage, stripped away by decades of Communist rule. 

But it is also flourishing because it now meshes with official objectives. 

President Xi Jinping has done more than any other modern leader to elevate Confucian ideas. 

Soon after coming to power in 2013, Mr Xi visited Qufu, as emperors had done before him. 

He called for “new and positive roles” for Confucianism.

The ancient system of thought emphasises respect for authority, reverence for ancestors and deference to elders. 

Confucius taught that such values were essential to achieve moral excellence as an individual. 

Such upstanding citizens would form the basis for wider social harmony and political stability. 

Emperors used the philosophy to instil obedience. 

Mr Xi wants to do the same. 

Party leaders also approve of Confucianism because, unlike socialism, it is home-grown. 

It appeals to young nationalists who cheer the party’s call for wenhua zixin, or cultural self-confidence.

Strictly speaking, all primary and secondary students should be at state-regulated schools, though most kindergartens are private. 

Guoxue content, such as classical poems, has long been part of the state secondary-school curriculum. 

In 2014 more of it was added to the university-entrance exam. 

The number of classical texts to be taught in schools increased from 14 to 72. 

In 2017 the government put out guidelines for having a comprehensive guoxue syllabus in primary and secondary schools by 2025. 

In May the education ministry confirmed the plans, saying it was important for young people “to be formed into upright Chinese” with the patriotism “to serve the country”. 

State-approved guoxue classes would “enhance a sense of belonging to and pride in the Chinese nation”.

For many Chinese, the sage’s musings hold a different appeal. 

In neglected Confucian morals, educators see a set of values that may be a solution to modern social ills, just as some in the West turn to traditional Christian values. 

Jia Hong, who set up Huaguoshan and two other guoxue pre-schools, says, “Nowadays we hear about so much bullying and brattish behaviour.” 

Many think a lack of good manners is to blame. 

Three-quarters of the 200 children at Ms Jia’s kindergartens used to attend regular ones. 

She says parents remark on how Confucian rituals have calmed their children and helped them focus.

Many young parents believe that the national obsession with exams has distracted them from other forms of edification, says Cao Shenggao of Shaanxi Normal University. 

Some do consider the discipline instilled by guoxue, or mastery of the zither, say, as one more way to set their child apart in the educational rat race. 

Guoxue institutes often hint that their after-school classes can help boost test scores.

But many others see guoxue kindergartens, which are legal, and guoxue primary and secondary schools, which operate in a legal grey area, as a way to shield children from relentless competition, at least early on. 

Scandals have spurred the government to crack down on the shadier end of such schooling. 

In 2019 a boy died after teachers at his boarding school refused to take him to a hospital, insisting on using traditional medicine. 

Last year the founder of a guoxue camp that claimed to cure internet addiction was sentenced to three years in prison, after pupils were found to have been abused. 

The government has also banned the teaching of “feudal dregs”, such as Confucian texts extolling female submission.

Educators such as Ms Jia support the crackdown. 

But many popular guoxue schools for older children are keen to stay self-sufficient if they can, declining offers to work with local education boards. 

Tian Yu, a scholar of Chinese education based in America, finds that the schools appeal to certain parents as a way to avoid the political indoctrination of the state system. 

Guoxue educators say quietly that the revival of forgotten culture should come from the bottom up. 

But in a contest to define what counts as tradition, the party will always want to have a say. 

Peruvian Election, Still Undecided, Pushes a Democracy to Its Brink

The two presidential candidates are locked in a near tie. One claims fraud and is seeking to have tens of thousands of votes nullified. The other has called his supporters into the streets.

By Mitra Taj and Julie Turkewitz

Supporters of Pedro Castillo protesting in Lima this week. Credit...Ernesto Benavides/Agence France-Presse — Getty Images


LIMA, Peru — Peru has been through a year of profound turmoil: it cycled through three presidents, suffered one of the world’s highest coronavirus death rates and watched its economy shrink more than any in the region under the weight of the pandemic.

Many in the country hoped against the odds that the presidential election last Sunday would offer a new start. 

Instead, nearly a week after the votes were cast, Peru is again gripped by uncertainty.

The two candidates are locked in a near tie. 

One candidate is alleging fraud and calling for as many as 200,000 votes to be nullified — a move that would disenfranchise many poor and Indigenous voters. 

The other has called his supporters into the streets to defend those votes.

The tension is pushing democracy to the limit, analysts said, exacerbating the fissures running through a deeply divided society and raising concern about the country’s future.

The country is enduring “this nuclear war in which Peruvian politics has been plunged,” said the political scientist Mauricio Zavaleta, one in which politicians believe that “the ends justify the means.”

With 99 percent of votes counted, Pedro Castillo, a leftist former teacher with no past governing experience, leads Keiko Fujimori, the daughter of former right-wing President Alberto Fujimori, and a symbol of the country’s establishment, by about 70,000 votes. 

Mr. Castillo has won about 50.2 percent of the votes counted, Ms. Fujimori 49.8 percent.

But Ms. Fujimori has asked officials to toss out thousands of votes, claiming without concrete evidence that her opponent’s party has violated the voting system “in a systematic way.”

Electoral authorities and observers say there has been no evidence presented yet of systematic fraud, and analysts say Ms. Fujimori’s effort will likely fail to turn the results in her favor.

Electoral authorities have until Saturday to review requests from Ms. Fujimori’s party to nullify the vote tallies at 802 polling stations, where she is accusing Castillo supporters of various types of illegal activity, including changing vote counts in his favor.

The polling stations are in regions Mr. Castillo won with strong margins — mainly poor and historically marginalized rural Andean areas, including Mr. Castillo’s hometown.

By Thursday, a crowd of Castillo supporters had gathered outside the office of the national electoral authority. 

Some had traveled from far away, and said they were frustrated and worried that Ms. Fujimori was trying to steal the election.

“Defend the vote!” some chanted.

“These are the most disastrous elections that I have ever seen,” said Antonio Gálvez, 37, a taxi driver working by the protest. 

“Ms. Keiko Fujimori represents everything that is bad about Peruvian politics.”

Police officers guarding the national electoral authority on Thursday.Credit...Angela Ponce/Reuters


On Thursday, the crisis intensified when a prosecutor asked a judge to jail Ms. Fujimori, who is facing corruption charges related to a previous run for president.

Accused of running a criminal organization that trafficked in illegal campaign donations, Ms. Fujimori could be sentenced to 30 years in prison. 

Detained and released three times as the case proceeds, she is now accused by the prosecution of having contact with case witnesses, a violation of her release.

If she wins the election, she will be shielded from prosecution during her five-year term.

The election, and the tensions it has fueled, are exacerbating the divides in Peruvian society.

Despite consistent economic growth rates over the past two decades, Peru remains a deeply unequal and divided nation, with the wealthier and whiter population in its cities reaping most of the benefits of a neoliberal economic model put in place in the 1990s by Ms. Fujimori’s father.

When the pandemic ripped through Peru, it exacerbated those social and economic gaps, hitting hardest those who could not afford to stop working, who lived in cramped conditions, or who had limited access to health care in a country with a weak safety net.

The elections played along the same economic, racial and class lines, with Ms. Fujimori drawing most of her support from urban areas, and Mr. Castillo finding his base in the rural highlands, home to more mixed-race and Indigenous Peruvians.

Mr. Zavaleta, the political scientist, said he thought the chaos of the election, including Ms. Fujimori’s attempts to overturn votes, had “deepened the differences between Peruvians.”

“And I believe that it will have relatively long-lasting effects,” he went on.

Outside the election authority on Thursday, Max Aguilar, 63, said he had traveled hours by bus, from the northern city of Chimbote, to defend Mr. Castillo.

“We believe that the far right has already had enough time to show us that things can be better — and they haven’t done it,” he said.

“So we, the people, are saying no, that is enough. 

And we are betting on a change. 

We have a lot of confidence in Professor Castillo.”


Sofía Villamil contributed reporting from Bogotá, Colombia.

When economic tribes go to war

The Biden administration’s fiscal plans are attracting criticism from former Democrat advisers

Gillian Tett

    © Efi Chalikopoulou


Five decades ago an economist at the University of California Los Angeles called Axel Leijonhufvud wrote a comic essay about his discipline that investors should read as they watch the Biden administration.

Entitled “Life Among the Econ”, it described the profession as if an anthropologist were observing a traditional community “in the far North”. 

It noted that the “Econ” culture was marked by “extreme clannishness” and “xenophobia”, with particular “distrust and contempt” for the “Polscis and the Sociogs” (the tribes of political scientists and sociologists).

But there were also fierce status battles between different “castes” of Econ, Leijonhufvud noted, adding that “juniors” only achieved power by impressing “elders” via the creation and ritualistic display of elaborate “implements called ‘modls’” (models).

“The facts (a) that the Econ are highly status-motivated, (b) that status is only to be achieved by making ‘modls’, and (c) that most of these ‘modls’ seem to be of little or no practical use,” were distinctive cultural traits, he concluded, lamenting “the trend toward making modls more for ceremonial than for practical purposes”.

At the time, these wry observations prompted both hilarity and irritation among real life economists, not least because other academic disciplines can be just as clannish. (The tribe of cultural anthropologists that I come from is as bad.)

But the points about status matter now, as the Biden administration tries to introduce its multitrillion dollar fiscal programme.

Ever since the details first emerged, they have attracted entirely predictable criticism from the political right. 

For instance, Glenn Hubbard, formerly chief White House economic adviser to President George W Bush, says that such spending will undermine productivity and that President Joe Biden is lying when he claims these plans will not entail huge tax increases.

What is more surprising, though, is that some former officials in previous Democratic administrations have attacked the plans too. 

Steven Rattner, who worked in the Obama administration, views Biden’s plans to expand the government’s role as “worrisome.”

The most striking voice of criticism, however, has been that of Larry Summers, Treasury secretary in the Clinton administration. 

This week he accused the Federal Reserve of “dangerous complacency” about the risks of its ultra-loose monetary policy. 

He has also branded Biden’s plans a dangerous mistake, arguing they are far too excessive in scale and create a “very substantial” risk of inflation.

Three of the economists shaping the White House’s economic policy — Cecilia Rouse, Jared Bernstein and Ernie Tedeschi — disagree. 

Bernstein and Tedeschi issued a memo last month explaining why. “Summers is flat out wrong,” Bernstein declared.

Summers replied that the memo “failed to address the calculations” that make him (and others) worried, specifically what their models predict about inflation and the output gap. 

And he says that the maths cannot be ignored because economics is a “quantitative field.”

Hubbard agrees. 

“I do worry from the way the Biden administration is talking about policies that economists just aren’t very involved at all,” he notes. 

“It is a concern for the economics profession.”

What should people outside the “Econ” tribe conclude from the fight? 

One obvious point is that an ideological battle has erupted about whether there should be a bigger role for the state in the US. 

A second, less obvious, issue is that a tussle over epistemology is under way too.

In recent decades, mainstream economic thought has tended to assume that the economy functions like a machine in a lawlike and predictable fashion with a single equilibrium around which activity fluctuates, but to which it ultimately reverts.

Summers comes from this mainstream tradition. 

But the White House trio view the economy as a complex, evolving system without any single equilibrium. 

They think the “rules” can be changed by active policy decisions and micro-level qualitative trends.

Then there is a third interpretation of events: that a status war, of the type described by Leijonhufvud, has erupted. 

Economic thinking in Democrat administrations has up to now been dominated by “elders” such as Summers, his ally Robert Rubin and a tribal network of juniors whom they mentored. 

But now a new group is in the ascendant.

Might this status shift be temporary? 

Could the power pendulum swing back if Summers’ criticism turns out to be right? 

Perhaps.

But until then the key point is this: investors should not assume that the recent past of economic thinking among Democrats is a straightforward guide to the future.

Biden is trying to reshape the economy, as described in a striking speech by Treasury secretary Janet Yellen (a rare economist who tries to straddle all tribal castes). 

And the White House is quietly seeking to remake economic thought at the same time.

Leijonhufvud, who is still an emeritus professor at UCLA, at the age of 87, should write “Life Among the Econ — part two”.

For Gold Miners, Cash is King

BY JOHN RUBINO 


From Katusa Research:

Since the start of the year, central banks have purchased over 4 million ounces of gold.

April was a big month for central bank activity. 

Over half the amount of gold purchased in 2021 was in the month of April alone.

In April, central banks acquired 2.45 million ounces – worth over $4.3 billion.

Gold reserves in central banks continue to appreciate and are at the highest levels since the World Gold Council began keeping track in 2000.

Take a look…


But central banks aren’t the only ones bolstering their balance sheets these days…

Gold Producers Balance Sheets: The Healthiest Ever?

After a decade of continuously declining cash reserves, gold producers are flush with cash today.

In fact, the gold producers have never had more U.S. Dollars on their balance sheets than they have today.

In fact, over the last 15 months, at the sector level, cash reserves have more than doubled.

Today the cash positions for North American listed precious metals companies are over $27 billion. 

And thanks to strong gold prices, I expect them to climb even higher.



$1,850 Gold = Fat Profits for Gold Companies

This dramatic boost in cash reserves is primarily due to the current gold price and lack of new large production projects by the industry as a whole.

Gold producers kept operating costs in line all through the mid-2010s when gold prices were depressed. 

In doing so, they’ve all now been provided with the opportunity for rapid profit margin expansion.

Going back to as far as 2007, EBITDA margins have never been as high as they were in Q1 this year.


A delicate balance of debt and equity optimizes returns to both debt and equity holders. 

These improving profit margins have led to gold producers reducing debt on their balance sheets.

Total debt has declined over 28%, from $40 billion in 2014 to $28 billion as of March 2021.


Margins are up and debt is down, so…

Here’s What This Means for Gold Stocks…

Strong gold prices mean faster payback of capital for miners.

This improves asset valuations and supports higher share prices.

Strong profit margins and declining debt profiles set the stage for gold producers to improve shareholder returns through 2 major ways:

Improve alignment with shareholders through increased dividends and buybacks.

After a decade of paltry distributions to shareholders, investors will be demanding cash being returned to them instead of to corporate pockets. 

This is a similar situation to what we’ve seen in the oil patch over the past 12 months as companies fight to keep shareholders invested.

And eventually…

Acquisition targets.

Income that’s not returned to shareholders should be reinvested into growth opportunities (either organic or acquisition). Strong gold prices provide support for takeovers and incentivize companies to grow through acquisition.

Gold Merger Mania: About to Heat Up?

Transaction volume in 2021 is off to a slow start…

But given the balance sheets and strong gold prices, more deal volume is likely in the second half of the year and into 2022.

global precious metals merger & acquisition volume

And as deal volume picks up, I believe there’ll be a premium paid for deposits in +SWAP Line Nations.

The reason is two-fold:

1) There’s less jurisdictional risk in +SWAP Line Nations. 

No miner wants their mine nationalized, nor do they want to give up +25% for free to the government. 

As a shareholder you shouldn’t either. 

Today I see far more complacency with this than ever before. 

Yet there’s a never-ending barrage of headlines for increased royalties, taxes and government takes.

2) High quality deposits are hard to come by. 

Average grades are dropping and have forced miners into the -SWAP Line Nations. 

This makes those deposits located in safe jurisdictions that much more valuable.

So, what’s the best way to identify which deposits – and which companies – will be at the top of each gold mining major’s shopping list?

You could sift through hundreds of technical documents and spend years traveling to remote areas while completing thousands of hours of due diligence…

Or you could take the easy route. 

Vrbo Isn’t Airbnb’s Problem

Airbnb has a host problem, but not because of Vrbo

By Laura Forman

A Vrbo ad on YouTube says its guests book bigger places than on Airbnb./ PHOTO: VRBO


The battle over hosts between Expedia’s EXPE -0.61% Vrbo and Airbnb ABNB 2.35% seems to be in full effect, but the reality is that Airbnb has bigger fish to fry.

Vrbo has been luring Airbnb’s hosts for months now with ads that suggest its platform is more lucrative, something Airbnb has denied. 

In March, following a pilot period, Vrbo launched a program to attract Airbnb’s top hosts by offering increased visibility of new properties and transferring their review score from Airbnb’s site so hosts can join its platform with immediate status.



It seems to be working. 

Vrbo said it has had several thousand hosts participate in that program, which has led to sizable increases in booking value and nights booked per listing for those hosts. 

Neither platform outwardly discourages cross-listing, but it is time-consuming and somewhat convoluted, such that many hosts with a single property don’t do it without the help of a manager.

While data from short-term rental analytics platform AirDNA shows Airbnb has increased its overall active listings over the past 12 months, travel-news publication Skift reported Airbnb lost nearly 1 in 10 single-property hosts in the 12 months ended March 31, citing data from vacation-rental data provider Transparent. 

That data shows single-property hosts made up more than 70% of Airbnb’s total host population at the end of the first quarter.

As demand comes back, it is clear that Airbnb has a host problem. 

Some worried about sharing their homes during a pandemic; others were angered by the company’s decision to offer guests refunds for canceled bookings when it set in. 

Vrbo published guidance for hosts, but let them ultimately negotiate refunds themselves.

But in the grand scheme of things, Airbnb matters much more to Vrbo than vice versa. Vrbo says it has over two million listings, though not all of them are active. 

Airbnb says it has 5.4 million active listings.

Skift reported that Vrbo spent more than 10 times what Airbnb did on U.S. advertising in the first two months of the year, citing data from Kantar Media. 

Expedia doesn’t break out financials for Vrbo, but it spent 53% of its revenue in the first quarter on selling and marketing. 

Airbnb spent less than 26% of its revenue on its equivalent line item that quarter, even including the launch of its first large-scale marketing campaign in five years.

Vrbo has historically focused on the U.S. market, where the short-term rental market is undeniably hot right now. 

Jeff Hurst, president of Vrbo and marketing co-lead of Expedia, said this has been the best start to a year Vrbo has ever seen. 

But it is possible that Vrbo’s new hosts are making more money than usual right now because of the increased promotion they are getting, which is temporary. 

When that fades and business normalizes, hosts who switched rather than cross-listing could go back to Airbnb.


For now, Airbnb’s more international footprint is a hindrance. 

AirDNA data shows three of Airbnb’s 10 largest countries had year-over-year declines in active listings across all short-term rental platforms in February. 

Specific to Airbnb, the data also show its active listings are still down significantly in many major urban cities world-wide, where its business is the strongest. 

In places like New York, Toronto and Beijing, both available and active listings on its platform declined from February 2020 to April 2021, suggesting the loss of some of those listings could outlast the pandemic.

It makes sense that U.S.-focused Vrbo is thriving right now: Of the 10 largest countries for short-term rentals for Airbnb, only the U.S. posted growth in April versus the same month in 2019, according to AirDNA. 

Global demand was still down 31% on that basis.

That, not Vrbo, explains why Airbnb is rushing now to solve its host problem. 

As vaccination rates tick up world-wide, Airbnb is on the cusp of its own boom—but it has to have the yurts, treehouses and Airstreams onboarded to host it.