Down the rabbit hole

The beguiling promise of decentralised finance

And its many perils

The sceptics have plenty of fodder. 

The earliest adopters of bitcoin, the original cryptocurrency, used it to buy drugs, while cyber-hackers now demand their ransom in it. 

Hundreds of millions of dollars of ether, another digital money, were stolen this year after hackers found a bug in some code. 

Many “believers” are in reality trying to get rich quick from the global mania that has seen the value of cryptoassets reach $2.2trn. 

Others are freakishly devoted. 

The entrepreneur who announced in June that El Salvador was adopting bitcoin as an official currency sobbed on stage, claiming it would save the nation.

The crooks, fools and proselytisers are off-putting. 

Nevertheless, the rise of an ecosystem of financial services, known as decentralised finance, or “DeFi”, deserves sober consideration. 

It has the potential to rewire how the financial system works, with all the promise and perils that entails. 

The proliferation of innovation in DeFi is akin to the frenzy of invention in the early phase of the web. 

At a time when people live ever more of their lives online, the crypto-revolution could even remake the architecture of the digital economy.

DeFi is one of three tech trends disrupting finance. 

Tech “platform” firms are muscling in on payments and banks. 

Governments are launching digital currencies, or govcoins. 

DeFi offers an alternative path which aims to spread power, not concentrate it. 

To understand how, start with blockchains, vast networks of computers that keep an open, incorruptible common record and update it without the need for a central authority.

Bitcoin, the first big blockchain, created in 2009, is now a distraction. 

Instead, Ethereum, a blockchain network created in 2015, upon which most DeFi applications are built, is reaching critical mass. Its developers view finance as a juicy target. 

Conventional banking requires a huge infrastructure to maintain trust between strangers, from clearing houses and compliance to capital rules and courts. 

It is expensive and often captured by insiders: think of credit-card fees and bankers’ yachts. 

By contrast, transactions on a blockchain are trustworthy, cheap, transparent and quick—at least in theory.

Although the terminology is intimidating (fees are “gas”; the main currency is ether, and title deeds over digital assets are known as nfts), the basic activities taking place on DeFi are familiar. 

These include trading on exchanges and issuing loans and taking deposits through self-executing agreements called smart contracts. 

One yardstick of activity is the value of digital instruments being used as collateral: from almost nothing in early 2018 it has reached $90bn. 

Another is the value of transactions that Ethereum is verifying. 

In the second quarter this reached $2.5trn, around the same sum as Visa processes and equivalent to a sixth of the activity on Nasdaq, a stock exchange.

The dream of a low-friction financial system is just the beginning. 

DeFi is spreading to more ambitious terrain. 

MetaMask, a DeFi wallet with more than 10m users, acts as a digital identity. 

To enter a decentralised “metaverse”, a looking-glass world with shops run by its users, you link your wallet to a cartoonish avatar who roams around. 

These digital worlds will become the subject of intensifying competition as more spending shifts online. 

Big tech firms could impose huge taxes on these mini-economies: imagine Apple’s App Store charging fees, or Facebook selling your avatar’s intimate secrets. 

A better alternative might be decentralised networks that host applications and are run mutually by users. 

DeFi could provide payments and property rights.

Crypto-enthusiasts see a Utopia. But there is a long way to go before DeFi is as reliable as, say, JPMorgan Chase or PayPal. 

Some problems are prosaic. 

A common criticism is that blockchain platforms do not scale easily and that the computers they harness consume wasteful amounts of electricity. 

But Ethereum is a self-improvement machine. 

When it is in high demand the fees it charges for verification can climb, encouraging developers to work on minimising the intensity with which they use it. 

There will be new versions of Ethereum; other, better blockchains could one day replace it.

Yet DeFi also raises questions about how a virtual economy with its own norms interacts with the real world. 

One worry is the lack of an external anchor of value. 

Cryptocurrencies are no different from the dollar, in that they rely on people having a shared expectation of their utility. 

However, conventional money is also backed by states with a monopoly on force and central banks that are lenders of last resort. 

Without these, DeFi will be vulnerable to panics. 

Contract enforcement outside the virtual world is also a concern. 

A blockchain contract may say you own a house but only the police can enforce an eviction.

Governance and accountability in DeFi-land are rudimentary. 

A sequence of large irrevocable transactions that humans cannot override could be dangerous, especially as coding errors are inevitable. 

Money-laundering has thrived in the ungoverned grey zone of services lying between Ethereum and the banking system. 

Despite the claims of decentralisation, some programmers and app owners hold disproportionate sway over the DeFi system. 

And a malign actor could even gain control over a majority of the computers that run a blockchain.

Alice’s adventures in DeFi-land

Digital libertarians would prefer that DeFi remain autonomous—imperfect but pure. 

Yet to succeed it must integrate with the conventional financial and legal systems, as Gary Gensler, a crypto-expert who is America’s financial watchdog, has outlined. 

Many DeFi applications are run by decentralised organisations which vote on some issues; these bodies should become subject to laws and regulations. 

The Bank for International Settlements, a club for central banks, has suggested that govcoins might be used in DeFi apps, providing stability.

Finance is entering a new era in which the three novel but flawed visions of tech platforms, big government and DeFi will compete and intermingle. 

Each embodies a technical architecture and an ideology about how the economy should be run. 

As with the internet in the 1990s, no one knows where the revolution will end. 

But it stands to transform how money works and, as it does so, the entire digital world.

The cracked egg

The new economics of global cities

As economies reopen, activity is spreading outward from city centres

The economic recovery from the covid-19 pandemic is lopsided in many ways. 

Vaccinations have allowed some countries to bounce back rapidly, even as others struggle. 

Demand is surging in some sectors but still looks weak in others. 

Another big source of unevenness is slowly becoming clear. As national economies come back to life, cities are lagging seriously behind.

Before the pandemic cities seemed invincible, with economic and cultural power becoming ever more concentrated in tiny geographical areas. 

In 2000 the total daily salary bill for everyone working in inner London was twice what it was in the outer boroughs; by 2019 it was three times as high. 

Over the same period job growth in Sydney’s inner districts was 40% faster than elsewhere in its metropolitan area. 

“Triumph of the City”, a book published in 2011 by Edward Glaeser of Harvard University, summed up the urban-centric mood.

The fact that Mr Glaeser has chosen to call his latest book (written with David Cutler) “Survival of the City” shows how much has changed. 

The exodus from urban areas at the start of the pandemic, which was motivated by fear of catching the virus and which many assumed would be temporary, now looks more permanent and indicative of a deeper shift in preferences. 

The big question is whether this is something to worry about.

One way to take the pulse of global cities is to use real-time mobility indicators. 

The Economist has constructed an “exodus index” using Google data on visits to sites of retail and recreation, public transport and workplaces. 

This compares mobility in large cities with that in their respective countries. 

In America, Britain, France and Japan activity remains substantially lower in cities than it does nationally (see chart). 

According to OpenTable, a booking platform, restaurant reservations in cities are low compared with elsewhere. 

Bookings in Canada are 8% above their pre-pandemic level but 9% lower in Toronto. 

Only a fifth of San Franciscan office workers are in the building, suggest data from Kastle Systems, a technology firm. Some parts of San Francisco feel more like an abandoned rustbelt city than a tech hub.

Rural areas are not the prime beneficiaries of this shakeout. 

In the early part of this year sparsely populated American counties were a lot busier than dense ones, compared with their pre-pandemic levels. 

But in most places their advantage has faded (though activity in Japan may still be shifting slightly into the most sparsely populated areas).

The data point more clearly to a different sort of reallocation. 

Like an egg broken onto a pan, economic activity is gradually seeping outward from the centre. 

What were once the liveliest urban areas are becoming less so. 

The less glamorous ones are taking more of the spoils.

Our mobility index hints at this trend. 

Central Paris is still much less lively than the rest of Île-de-France, for instance. 

In America rents in the 300 densest postcodes have fallen by 5% since the pandemic began, but are unchanged in the 300 next-densest areas.

Large companies report similar trends. 

“Suburban-type stores have done better than the urban stores,” said Peter Nordstrom, the president of his family’s department-store chain, on an earnings call; Starbucks’ chief executive said that “transactions in the current environment have migrated from dense metro centres to suburbs and from cafés to drive-throughs”.

Opinion is divided on whether the spreading out of economic activity is welcome. 

Certainly if you own commercial property downtown you might be facing losses. 

But economists have two longer-term concerns. 

The first relates to employment. 

As a new paper by Lukas Althoff of Princeton University and colleagues describes, emptier offices and fewer tourists in cities could mean less employment for low-wage workers such as baristas and taxi drivers. 

The second worry is productivity. 

A core insight of urban economists is that cities, by cramming lots of different people into a small space, help foster new ideas and technologies. 

Messrs Glaeser and Cutler worry that a world of remote work, and thus of less vibrant cities, could be one in which people find it harder to make personal bonds and soak up knowledge from others. 

That would hit living standards.

Are the concerns valid? 

On employment, there is reason for optimism. 

It is certainly true, as Mr Althoff and colleagues show, that low-skilled service workers in cities bore much of the brunt of the downturn, as well-paid folk retreated to their home offices. 

In January this year lower-skilled workers in America’s densest commuting zones, making up 40% of all workers in them, accounted for almost 60% of working hours lost since the start of 2020.

Yet economies have been extraordinarily quick to reallocate jobs away from struggling city centres to places with more demand, raising overall employment. 

On a recent earnings call the ceo of Shake Shack, a purveyor of sugar and fat, said that its focus in the coming year would be “predominantly suburban Shacks”. 

The nearest Pret A Manger to The Economist’s office in London has closed; but one is opening next to the Underground station near your correspondent’s house a few miles out. 

Employment in Britain’s suburbs is up by 2% compared with a year ago, even as nationwide employment is down. 

In America, too, labour demand is shifting away from big cities (see chart 2). 

There is, however, less evidence of egg-cracking in Australia, which until recently had largely escaped the ravages of covid-19. 

Employment in Sydney continues to be concentrated in dense areas.

It is harder to know whether the shift from city centres will harm productivity. 

Were people stuck at home all the time, making new connections and discovering new ideas would be difficult. 

However, even spending just 30% of working time at the office—the current average across American cities—might not hit innovation all that much. 

At home white-collar workers can complete taxing tasks in peace, giving them time to collaborate when in the office. 

That is the message from recent research by Humu, a software firm, which analysed call-centre employees at a large company before the pandemic. 

One or two work-from-home days a week may make people more productive on both their at-home and in-office days. 

By contrast with past recessions, productivity growth in America has speeded up during the pandemic, instead of slowing down.

Cities could yet snap back to their pre-pandemic state: tourism could recover and bosses could insist that people return to the office. 

But even if that does not happen, cities will not be finished.

Mayors are shifting their focus from attracting firms to attracting residents, and thus the property and consumption taxes they bring, by improving quality of life. 

Edinburgh’s George Street and London’s Oxford Circus are likely soon to be pedestrianised; San Francisco plans to make it permanently easier to set up outdoor dining. 

Some California state senators also want to help turn underused retail property into the badly needed residential sort, part of a wider push to boost housing supply. 

The pandemic will not destroy cities—but it will change them.

Electric vehicles: the revolution is finally here

After years of talk from carmakers, the industry is rapidly being transformed as companies stake their future on EVs

Peter Campbell in London and Joe Miller in Munich

© FT montage; companies | The new BMW iX, the Polestar and the VW ID.4

At the start of the year, executives at electric carmaker Polestar drew up ambitious sales plans for the UK. Within weeks, they had to tear them up.

Demand was rising so quickly that the new targets were a third higher. Today the Volvo-backed company runs around 1,000 test drives a month in the UK alone. Each week, new spaces are booked up within an hour of becoming available.

Until four years ago, Polestar specialised in tuning high performance combustion engines: now it has been transformed into one of the companies trying to tap the booming demand for battery cars. 

“This isn’t the niche market it was two or three years ago,” says Polestar’s UK boss Jonathan Goodman.

This extraordinary surge in demand is being felt right across the world, from Shanghai to Stuttgart, Tokyo to Toronto, and from new brands to the established giants of the industry.

It is particularly acute in Europe. 

One in 12 cars sold across the continent between April and June this year ran on batteries alone. 

If hybrid models that use both an engine and a battery are counted, this rises to one in three. 

Sales of electric cars in Europe have jumped from 198,000 in 2018 to an expected 1.17m this year.

Electric vehicles still only make up about 1 per cent of the global fleet of passenger cars, but sales are taking off rapidly. 

Within four years, one quarter of new cars bought in China and nearly 40 per cent of those purchased in Germany are expected to be electric, according to BloombergNEF. 

Global sales of EVs are forecast to reach 10.7m by 2025 and then 28.2m by 2030.

Until recently for many drivers, electric vehicles seemed a subject for the future: but now it is commonplace to imagine their next car being electric.

Every now and then, a slow-burning shift in the way the world works suddenly starts to gather pace at a rapid rate. 

That is what is happening with electric vehicles. In a relatively short space of time, the transformation in the auto industry has gone from first gear to fifth.

Given the importance of auto manufacturing to many economies, the shake-up that is starting to convulse the industry has enormous implications for jobs, urban development and even geopolitics.

The assembly line for the Volkswagen (VW) ID3 electric car of German carmaker Volkswagen, at the ‘Glassy Manufactory’ (Glaeserne Manufaktur) production site in Dresden, eastern Germany © Jens Schlueter/AFP via Getty Images

Andy Palmer, the former Nissan executive who helped launch the industry’s first mass produced electric car the Nissan Leaf in 2010, believes the shift is “like moving from the horse to the car”.

“It’s that seismic, it changes everything, and to such an extent that any players that don’t pivot fast enough, that don’t invest, are unlikely to survive into the future,” says Palmer, who is now CEO of electric bus company Switch Mobility.

Much of the attention on electric vehicles has focused on the striking success of Tesla or the aggressive ambitions of a group of Chinese companies. 

But the other important shift over the past year or two has been the response of the established automakers.

Many of the world’s biggest global brands, ranging from Ford with its F150 Lightning truck to VW and its ID range, are now staking their future on EVs. 

At September’s Munich Motor Show, the first major European exhibition in two years because of the pandemic, there were almost no new petrol models debuted.

The electric and connected car industry has attracted more than $100bn in investment since the beginning of 2020, according to McKinsey. 

That is just the beginning. 

Carmakers have announced a total of $330bn of investment into electric and battery technology over the next five years, according to calculations from consultancy AlixPartners, a sum that has risen 40 per cent over the past 12 months.

“Is this an inflection point?” asks Andrew Bergbaum, a managing director at AlixPartners. “I think the answer has to be yes.”

Several manufacturers have taken previously unthinkable action: preparing to phase out the internal combustion engine altogether.

Earlier this year the German company credited with inventing the motor car set out one of the industry’s most ambitious timetables. 

From the middle of this decade the systems used to build all Mercedes-Benz cars will switch over to producing electric models.

“We are on a very accelerated path compared to what we thought even a few years ago,” says Ola Källenius, chief executive of Mercedes owner Daimler.

Push for cleaner air

Why is this happening now? 

Part of the explanation lies in politics. 

While carmakers have talked for years about launching electric models, political pressure has spurred them to make the first real concerted effort to sell them in any significant numbers.

Emissions rules across Europe led to the first big wave of electric car sales last year. Some 734,000 battery models were sold across the continent in 2020 despite pandemic lockdowns, according to LMC Automotive, double 2019’s level and more than the previous three years combined.

The regulatory screws are tightening. In less than a month governments from across the world will congregate in Glasgow for the COP26 climate summit, many expected to be armed with eye-catching pledges to reduce their emissions. 

Ambitious plans to expand the use of electric vehicles are one of the most obvious ways to meet those targets.

Climate activist Greta Thunberg (C) at a gathering of climate activists outside the Milan Conference Centre last week © Miguel Medina/AFP via Getty Images

The UK has already announced plans to end the sale of petrol and diesel cars altogether by 2035, with Norway pursuing a more aggressive phaseout date of 2025.

The EU is proposing its own 2035 de facto ban.

These commitments are expected to come alongside spending pledges to help drive, among other things, installation of the charging points needed to convince consumers to switch to electric en masse.

“Governments are putting their money where their mouth is,” says Källenius. “The biggest task where government and industry can work hand in hand is infrastructure investment.”

It isn’t only national governments that are squeezing down on emissions.

Several city authorities are pricing older cars off the roads with clean air zones, pushing motorists on the urban fringes to shift to cleaner vehicles, many of them turning to electric models.

London’s own “Ultra Low Emission Zone”, which penalises motorists with older cars, expands this month to include the area inside its circular ring-roads, an area that affects 2.6m cars. Paris, Brussels and Amsterdam are among cities with similar schemes, while restrictions on older diesel models are in place in scores of German city centres.

The NIO eve concept car displayed during the Shanghai Auto Show in April © Ng Han Guan/AP

Enticing models

The biggest reason for the EV revolution in the market is the supply of vehicles. The cars are now ready to appeal to all types of buyer.

Until recently, the lack of viable “product” was the main barrier to consumers jumping into an electric car. But automakers have been working flat-out to produce attractive battery models.

After years of hyping concept models at motor shows, carmakers now offer a suite of electric cars for customers to buy, from small city cars to larger family wagons, with dozens more planned in the next few years.

While many are still more expensive than petrol vehicles, they boast substantially lower running costs — even more so as global petrol prices rise — while most governments still offer generous purchase incentives.

There are around 330 pure electric or hybrid models that combine a battery and traditional engine on sale today, according to calculations from AlixPartners, compared with just 86 five years ago. 

That number will balloon further to more than 500 by 2025, amid a flurry of new releases.

When the pandemic hit last year, most carmakers reined in spending on all but the most essential projects. 

Combustion engine developments were halted, but spending on electric technology actually increased.

“Covid was actually one of the best helps the industry has had in years, because it forced them to be disciplined,” says Philippe Houchois, an automotive analyst at Jefferies.

Even for experienced executives, the speed of the uptake has been surprising. 

When former Renault chief Thierry Bolloré took the helm at Jaguar Land Rover last September, he began drawing up electrification plans that at the time barely existed. 

In the six months it took to finalise the strategy, the industry witnessed such an “acceleration” that the early goals were scrapped for more ambitious targets.

“My team came back to me and said could we go faster,” Bolloré says.

Yet despite the excitement, there are pockets of prudence amid the largest carmakers. 

Moving too fast risks alienating current customers who are unable or unwilling to shift over, some warn.

“If you say that 50 per cent of the market in Europe will be pure electric in 2030, there is still the other 50 per cent, and if you say you will not serve [this 50 per cent] you are setting yourself on a course to shrink,” says BMW’s chief executive Oliver Zipse.

The German carmaker has vowed to release a battery model in every vehicle class by 2023, but has also placed huge stock in hybrid models that can drive for part of the journey on battery power, before engaging their traditional engines when outside of city limits.

And while sales of EVs are booming in both Europe and China, both markets still rely heavily on subsidies.

“We’re still bribing customers heavily to buy EVs in Europe, and the bribing is more moderate in China,” says Houchois.

‘We are on a very accelerated path compared to what we thought even a few years ago,’ says Ola Källenius, chief executive of Mercedes owner Daimler © Alex Kraus/Bloomberg

Pancake production

Such a rapid transformation is an invitation for disruption. 

Electric cars, which are simpler to design and manufacture than models based on the internal combustion engine, have lowered the barriers to entry into a once-impregnable industry.

The big question for the established carmakers is whether they can successfully carve out a future against the twin threats of start-ups — that range from Tesla to much more recent newcomers — and the large number of Chinese competitors which are desperate to grab market share.

Although Tesla has gone from strength to strength over the past two years, the recent signs for the carmakers have been positive.

For a start, they have made rapid technological advances. 

Early electric cars from the established stables had limited ranges, and poor charging speeds. 

The launch of the Tesla Model S in 2012, with a claimed range of 260 miles between charges, set the industry standard, and has only recently been matched by the latest releases from Jaguar and Audi.

But the newer models from large players are much more competitive on pricing, range and performance.

“The reality is a modern day electric car is a bloody good car to drive,” says Polestar’s Goodman. 

“When [former Renault and Nissan boss] Carlos Ghosn said electric cars were the future 10 years ago he was wrong. But they are today.”

Early teething problems, such as heavy delays to the VW ID3 — its first dedicated electric car — because of software faults are likely to be ironed out in future models as carmakers become more used to producing the new systems.

“There is a joke in the industry that EVs are like pancakes; the first one is not good, the second is better and the third is right,” says Houchois.

An interior view of the new Mercedes-Benz All-Electric EQS Sedan. From the middle of this decade the systems used to build all Mercedes autos will switch over to producing electric models © Dimitrios Kambouris/Getty Images for Mercedes-Benz

Nevertheless, some carmakers feel they are entering this competition with one hand tied behind their backs. 

Pure-play electric companies have been able to raise money or float at enormous valuations, while established manufacturers trade at dismally depressed earnings multiples.

Just one example: China’s NIO, a start-up still deeply in the red, is valued at almost twice the value of Ferrari, the industry’s totemic profit-generator.

This year has seen a flurry of listings. 

Britain’s Arrival, a van group yet to build a single vehicle, floated at $13.6bn through a reverse merger, while untested US electric pick-up truckmaker Rivian is seeking a roughly $80bn valuation when it lists later this year.

But the old empire has begun to strike back. 

Polestar, the new electric brand spun out of Volvo, will be valued at $20bn when it floats through a reverse merger, showing there is hope for legacy auto groups to tap into market excitement by carving out new brands.

This presents an opportunity for businesses such as JLR, which plans to make the Jaguar brand fully electric by 2025.

Herbert Diess, chief executive of VW Group, says he is less concerned about new entrants, which still have to grapple with the complexities of mass manufacturing and keeping their newly won customers happy with functioning service centres.

“It’s easy to show a study of an electric car in a [motor] show, but to build up a plant most of them will be slower than us,” he says.

The first plant from Chinese start-up NIO was so beset by delays that the company filed IPO documents having shipped just 400 vehicles.

Even Tesla, which Diess has praised in the past, has taken 15 years to reach its current position occupying around 1 per cent of global car sales, he adds.

For the established carmakers, the largest threat might come not from start-ups, but from China.

While China’s homegrown players such as SAIC and First Auto Works failed to compete with international rivals in the engine era, the shift to electric vehicles provide a chance to dominate a field traditionally held by Germany, Japan and the US.

A plethora of electric businesses, well funded by local governments or major carmakers and often staffed by former European engineers, have entered the market.

Visitors check out a Polestar 2 car at the International Motor Show in Munich, southern Germany, this month. The new electric brand spun out of Volvo will be valued at $20bn when it floats through a reverse merger © Tobias Schwarz/AFP via Getty Images

The first Chinese-made electric cars have already crept into European showrooms, from the SAIC-owned MG brand and new groups such as NIO and Aiways.

But before long these newcomers will have to compete with brands that are already familiar to customers as established carmakers roll out their new models. 

Last year, nine out of 10 cars leaving Volvo’s Reading dealership west of London were entirely petrol or diesel driven. Today, almost half have either hybrid or full electric technology.

“The planets are aligning,” says John O’Hanlon, boss of Waylands Automotive, which runs the Berkshire site. 

“What we’ve noticed in the last six months is the increasing awareness of customers. 

People are genuinely coming in and asking whether this can work for me. 

And many of them are driving away, thinking they could live with one.”

Down the road in the village of Little Chalfont, the VW dealership has been flooded with orders for ID3 cars by local motorists whose mileage is limited and who can charge their new models in their driveways.

“The uptake is huge, people have embraced it,” says Jonathan Smith, boss of dealergroup Citygate, which owns the site. 

“The pace is phenomenal, once there’s the infrastructure to support it there will be no stopping it.”

David Stockman on Why the Biden/Dem $3.5 Trillion Spending Plan Is Worse Than You Think

by David Stockman

 Trillion Spending Plan.jpg

Every now and then Sleepy Joe channels reality, accidentally or otherwise, and did so recently in spades. 

When asked by a reporter how he was going to slim down his massive $3.5 trillion social spending boondoggle to bring Senator Manchin and other moderates into the "yes" column, he let the budget gimmick cat right out of the bag:

For example—you’ve heard me say this before, but it’s relevant — when Roosevelt passed Social Security, it didn’t bear any resemblance to what it is now. And so, the idea that (what)…..gets passed is going to be the totality of what it’s going to end up being……..

……. Look, it’s very important to establish the principle — the principle that is contained in the amendment, such as childcare, the Child Tax Credit. Well, it may be that the Child Tax Credit gets altered in terms of amount. But once it’s put in place, even though it’s only for several years, it gets harder and harder to take it out. And that’s my point to people. We don’t have to get everything all at once.

So let’s cut the to the chase. 

The once worthy notion of 10-year budget projections has been turned into an absolute scam by the bipartisan duopoly on Capitol Hill through a gimmick called early expiration. 

That is, Dems tend to cause spending programs to look cheaper in the 10-year projections by having them expire in, say, year #5, while the GOP did the same thing in spades with early expiration of the 2017 tax cuts.

Of course, when these expiration dates come, they get routinely extended at the 11th hour because by then it is purportedly "unthinkable" to hit beneficiaries with a cold turkey cut or taxpayers with an unwelcome increase. 

Accordingly, the numbers game as between Biden’s $3.5 trillion versus Senator Manchin’s $1.5 trillion and a possible compromise somewhere between $1.9 trillion and $2.2 trillion is just Washington’s version of legislative Kabuki Theater.

What really matters, of course, is the creation of massive new universal entitlements (i.e., not work and means-tested) for children, maternity leave, childcare, free college and expanded Medicare, Medicaid and ObamaCare—plus a whole slew of climate change based crony capitalist nonsense––not the gimmick-ridden book-keeping by which the legislative language is officially scored.

For instance, making the $3,600/$3,000 refundable child tax credit permanently available to essentially 90% of the population will cost $110 billion per year or $1.1 trillion over the 10-year budget horizon. 

But if they write it to expire in September 2024 on the eve of the next presidential election, two things are certain.

First, the CBO (Congressional Budget Office) will be forced to score it as costing $330 billion, not $1.1 trillion, on a true 10-year basis. 

And, secondly, that expiration will never happen in a month of Sundays. 

Both parties will pledge to "protect American families" at all hazards during their summer conventions and then make a noisy show of extending these child tax credits before they adjourn to campaign for the 2024 elections.

The truth is, there is almost nothing in the plan that won’t become permanent due to deeply embedded constituencies once they "plant a flag" on new entitlements and climate change pork barrels, as one of the more honest Congressional Dems explained a few days ago:

Rep. Jamie Raskin (D., Md.) told liberal activists on a call Monday night that he wanted to include a long list of programs that he hoped would prove popular enough that lawmakers in the future would feel compelled to continue them.

"Let’s plant a flag on everything that we need and everything that we want and we will prove to America how important it is, how vital it is to our people and then we will live to fight another day," he said.

Needless to say, if a corporate CEO explained his financial statements that way, he’d soon have some hot dog US Attorney perp-walking him to the nearest Federal courthouse. 

So, for the sake of honesty within the cesspool of Washington’s budgetary corruption and malfeasance, here are the relevant facts.

According to our friends at the Committee for A Responsible Federal Budget (said "committee" is mainly composed of old timers who left Washington decades ago!), the Biden/Dem plan will cost a minimum of $500 billion per year or 2.3% of GDP. 

That’s far north of $5 trillion over the 10-year budget horizon when you factor in the cost of added debt and the revenue gimmicks which won’t begin to yield their projected savings (e.g. $800 billion of added revenue from doubling the number of IRS agents).

Permanent Cost Per Year Of Biden/Dem Spending Plan:

$3,600/$3,000 Child Tax Credit: $110.0 billion;

Child Care Tax Credit and Subsidy: $35.0 billion;

Paid Family Leave: $22.5 billion;

Universal Pre-K: $16.5 billion;

Free 2-Year College and Increased grants: $28.5 billion;

Medicare expansion to dental, hearing and eye care: $37.0 billion;

Expanded ObamaCare and Medicaid: $46.5 billion;

Expanded home and community based health care service & RX subsidies: $52.0 billion;

Clean energy and EV tax incentives: $33.0 billion;

Other clean energy boondoggles: $23.0 billion;

Housing subsidies: $19.0 billion;

R&D subsidies: $18.5 billion;

Worker training, manufacturing and small business subsidies: $33.0 billion;

Other pork barrels: $25.5 billion

Grand Total Before Debt Service Costs: $500 billion Per Year

Self-evidently, it doesn’t take too much imagination to recognize that almost all of these measures have "permanent" stamped on their forehead, regardless of how their expiration dates are gimmicked in the final legislation. 

For instance, the parents of an estimated 35 million children will receive the Child Tax Credit, including tens of millions who will receive $300 to $1,500 of monthly payments (for one to five eligible kids), whether they owe any Federal taxes or not.

Likewise, every one of America’s 83.7 million families will be eligible for 12 weeks of paid family and medical leave. 

Benefits are based on a sliding scale of wage replacement like Social Security, starting at 85% at the bottom tier of wages (under $15,000) and phasing out at 5% for earnings between $100,000 and $250,000.

What that means, of course, is that a $20,000 per year hamburger flipper would be eligible for about $3,800 of Washington funded paid leave per year, while a $250,000 junior investment banker could collect $14,400. 

Do we see an iota of logic in spending $22.5 billion per year on that kind of upside-down malfeasance?

We do not. 

But we also know that it’s modeled on the Social Security wage replacement formula—so it will never go away once the ink is dry.

Even the items that are not strictly legal entitlements are mostly in like flynn. 

Thus, with every auto OEM joining the race to produce electric vehicles, the chance that the combined lobbies of Tesla and General Motors and everyone else in between will ever let the proposed $12,000 EV credit go away are somewhere between slim and none.

Similarly, the childcare industry in the US is currently a $54 billion per year business (2019). 

Accordingly, when Sleepy Joe and the Dems layer on another $35 billion in new childcare tax credits and direct subsidies, operators in that space will think they have died and gone to heaven.

More to the point, when you expand an industry by 65% via suckling it on the Federal teat, what we first called the "social pork barrel" way back in 1978 comes politically alive with a vengeance. 

The combined forces of tens of millions of household beneficiaries and tens of thousands of childcare vendors and care givers would simply become insuperable.

And that gets us to the gravamen of the case against the Biden Boondoggle. 

Namely, that owing to massive, chronic deficit finance and the unbalanced structure of Federal taxation, upwards of 130 million of America’s 144 million tax-filers pay virtually no income tax and just 7.6% of their incomes for the employee share of payroll taxes. 

This means that the overwhelming share of Federal spending is borrowed or paid for by the rich and corporations.

To be sure, it all comes out in the wash under full effects economics. 

Consumers, workers and investors ultimately pay the corporate tax and the rich provide the investment capital that keeps the main street economy going. 

But when it comes to directly feeling Uncle Sam’s presence in household budgets, it is already the case that benefits received far outweigh direct taxes paid by those 130 million units; and now the Biden social welfare expansion of the century with its numerous new universal entitlements will make it even more preponderantly so.

Indeed, when you actually pencil it out, you begin to wonder if there would be any net taxpayers left at all. 

While the example below is slightly on the exaggerated side because it is based on a family of four kids, one maternity leave and two wage-earning adults, it is nevertheless a gobsmacker when you compare current law taxes with the new benefits under the Biden/Dem plan.

Our example is based on a two-earner family with $150,000 in salaries and wages, of which the major earner makes $110,000. 

Three of the children (including the newborn) are under 6 years, one is under 18 years, and one is in two-year college, and the higher earning spouse takes 12 weeks of maternity leave to care for the fifth child.

Based on these specifications, the family would receive $49,100 per year in benefits under the Biden/Dem plan:

12 weeks of Family Leave at $1,066 per week: $12,800;

Child Tax Credits for three kids under 6 years: $10,800;

Two child care credits: $8,000;

One Child Tax Credit under 18 years: $3,000;

One free junior college education per College Board average cost: $14,500;

Total Biden/Dem benefits: $49,100.

By contrast, here is the income and payroll tax calculation for the same family under current law with $150,000 of earned income and taking the standard deduction (it doesn’t itemize):

Adjusted Gross Income: $150,000;

Standard deduction: $19,550;

Taxable income: $130,450;

10% tax on first $10,275: $1,028;

12% tax on $19,275-$41,775: $3,780;

22% tax on $41,775-89,075: $10,406;

24% tax on $89,075 to $130,450: $9,930;

Total Federal income tax liability before tax credits: $25,144;

6.2% Social Security tax on $150,000 of joint salaries: $9,300;

1.45% Medicare tax on $150,000 of joint salaries: $2,175;

Total Federal income and payroll taxes: $36,619.

There you have it. 

This family unit would be in the top 10% of all taxpayers, yet it would receive Biden/Dem benefits equal to 134% of its current income and payroll tax liabilities.

So, the question recurs. 

How in the world does the Federal government finance itself if even $150,000 per year families are not net taxpayers?

A quick breakout of the estimated outlays and receipts for the now completed FY 2021 reveals the dirty secret and tells you all you need to know. 

To wit, only 15% of estimated outlays of $7.25 trillion were directly paid by the bottom 130 million or 90% of tax filers. 

The rest was borrowed or charged to business and the richest 15 million taxpayers.

In short, Washington’s fiscal policy has degenerated to "don’t tax you, don’t tax me—tax and borrow from the fellow behind the tree".

Breakout of Funding For FY 2021 Outlays of $7.25 Trillion:

Income taxes paid by bottom 90% (130 million filers): $511 billion;

Payroll taxes paid by the bottom 90%: $585 billion;

Subtotal, direct taxes paid by bottom 90%: $1,096 billion (15%) 

Corporate income and payroll taxes paid by businesses: $916 billion;

Income, estate and payroll taxes paid by the richest 10%: $1,280 billion;

Tariffs, excise taxes and Fed payment: $312 billion;

Borrowings charged to future taxpayers: $3,668 billion;

Total paid by business, the wealthy, future taxpayers and indirect: $6,153 billion (85%); 

Total FY 2021 outlays: $7,249 billion

Needless to say, the above is before the so-called generational expansion of the Welfare State embodied in the Biden/Dem plan.

So, what we have coming down the pike is a fiscal doomsday machine. 

The bottom 90% will fund an even smaller share of Federal outlays and get even more entitlements and free stuff from Washington.

So, yes, the Biden Boondoggle is worse than you think. 

Very much worse. 

Will Gold Reach Unthinkable Heights?

By Egon von Greyerz

It serves no purpose to hold gold.

Why should anyone hold gold when it has lost value against most other assets since 2009. 

At the end of this article, I will tell you when you must not hold gold and why I think gold will reach new highs shortly.

Making money is a cinch in today’s stock markets so why do I need gold?

For the investors who have managed to combine a good portion of luck with modest investment skills, they could have made 2,000X their money since 1997 on Apple or 2,170X on Amazon, also since 1997.

So $10,000 invested in both Apple and Amazon in 1997 would today be worth a neat $40 million.


And what about Bitcoin? If you spent $10,000 on Bitcoin in 2010 at 10 cents, you would today have 100,000 BTCs worth $4.7 billion. If you did, you hopefully haven’t lost your key.

But to rely solely on electronic entries on a computer or memory stick is clearly a very inferior form of wealth preservation.

Also, hindsight is a wonderful investment method and the most exact of all sciences.

Yet, you didn’t need to be an expert stock picker to make money in recent decades.

If you for example spent $10,000 on the Nasdaq in 2009, you would today have over $140,000 and that without selecting one single stock.

But by using 2009 as starting point, you will have conveniently forgotten that you had before that lost 80% on the Nasdaq since 2000.

So we can always prove the ultimate performance by choosing the right starting point.


When gold antagonists want to disprove gold’s virtues, they choose the 1980 top as $850 as starting point. 

They then deride gold investors that it took 28 years before that level was reached again. 

They conveniently forgot to mention that gold reached new highs between1971 and 1980, going up 24X.

Stock investors could also point out that they have outperformed gold by 200% since 2011. 

But they forget to mention that since 1999 the Dow has lost 60% against gold (excluding dividends).

Again, this shows is that you can always prove the investment performance by picking a suitable starting point.

Still, it is an undeniable fact that gold has been the best asset class in this century.  


How can anyone go wrong today. 

Investing is a lottery where you are guaranteed to win the top prize every time.

Virtually no investor believes this will stop. 

Just look at US Margin Debt for example which is at $900 billion up from $250 billion in 2009.

What we must remember is that the leverage effect of margin debt works much faster on the downside than on the way up. When markets tank this leads to forced liquidations and panic. 

And this is what we will see in the not too distant future.

I still believe that before this investment cycle ends that stocks will lose 90%+ in real terms.


For at least half a century, no investor has had to worry about the dips.

What seemed horrendous crashes at the time in 1987, 2000, 2007 and 2020 are just blips on the chart.

What few people worry about when looking at the quarterly chart above, is that every top since the 1998 top has had weaker momentum on the indicator at the bottom. 


When the everything bubble pops, gold will reach new highs

Take Black Monday on October 19, 1987. 

The Dow dropped 40% in a matter of days.

I remember this day extremely well. 

I was in Tokyo for the listing of the UK FTSE 100 company I was Vice-Chairman of. 

It certainly wasn’t the best day for listing a consumer electronics retailer. 

The market clearly had bigger things to worry about.


As the buy and hold principle has worked without exception for 50 years at least, there is no reason to believe that it won’t for another 50 years.

Because, money printing, credit expansion, loose monetary and fiscal policies, low interest rates and unlimited availability of capital have today totally eliminated the need for any investment skills.

There is only one investment rule that counts – The Market Always Goes Up!

But are there no exceptions to this rule? 

Of course there are.

Take 1929 for example. By 1932 you would have lost 90% of your investment in the Dow. 

To recover that loss, you needed to wait 25 years!

Again, hindsight is the most perfect investment method since it is always right.

But what counts is of course what happens from this moment on.


The fallacy of most investors is that they measure their wealth with a stick that creates illusory wealth. 

To measure your wealth in a currency that has lost 98% of its value over 50 years is like living in Fantasyland. 

You have the illusion that your wealth is growing whilst in fact it is the money you measure it in that is falling.

The mighty dollar has lost 79% against the Swiss franc since 1971 and 98% against real money which is gold.

So if you look at the REAL growth in your assets since 1971, you should discount it by 98%.  

Hmmm – where is my money gone?

Well your money has been confiscated by your government. 

The US has since the early 1930s spent more money than it has collected in taxes and made up the difference by creating fake money called dollars.

Consistent budget deficits led to an ever increasing debt and more money printing. 

And when you create money out of thin air like the US and most of the world have done at an accelerated level since 1971, your currency takes the hit.

But since 2/3 of Americans don’t have a valid passport, they never realise that their currency is being destroyed.

Americans who went to Switzerland in 1971 and come back today will find that their dollar has lost 80% of its purchasing power. 

So much better to be Swiss and find that when you travel to the US that everything is 80% cheaper when measured in Swiss francs.


So my advice to any investor is to measure your wealth in real terms like the cost of a Big Mac. 

In 1970 a Big Mac was around 60 cents. 

Today the same Big Mac is $4 which is an 85% loss of the dollar in purchasing power.

Even better is to measure grammes or ounces of gold. 

As the only currency that has survived in history and also the only currency which has maintained its purchasing power for thousands of years, Gold is clearly the King of Money.

An ounce of gold bought a good quality suit for a man in Roman times and still does today.

So over time, gold doesn’t go up in value. 

All it does is to maintain stable purchasing power.

Why should we then invest in  gold?

Well, it serves no purpose to hold gold if:

- Government maintains surpluses.

- Neither government nor private debt, nor money supply increase by more than (a very modest) inflation.

- There is a sound monetary policy with no money printing.

- Inflation is at zero or almost zero. 

A 2% inflation target is nonsense since it doubles prices over 36 years.

- The currency maintains its real value which is almost inevitable with above policies.

Under such conditions, there is no possibility gold will reach new highs, so welcome to Shangri-La!

A financial and monetary system described above has never existed in history except for over very limited periods.

That is why no currency has ever survived – No Currency – Nada!

In modern times, Switzerland is probably the only country with a system that somewhat resembles the above definition.

So in these epic stock markets what purpose does it serve to hold gold?

Firstly physical gold is the best asset to hold for wealth preservation purposes.

Gold owned directly outside the financial system protects against the following risks:

- Systemic

- Financial

- Monetary

- Counterparty

No other asset in history has acted as the perfect insurance for 5,000 years. 

Land is arguably also a good long term wealth preservation asset but it is not transportable, not easily divisible and not liquid.

Risk in financial markets is now greater than anytime in history as we approach the end of the Epic Everything Bubble as I wrote in a recent article.

Anyone who today doesn’t hold physical gold as insurance against these risks must be regarded as totally irresponsible vis-a-vis his stakeholders whether that is his family, shareholders, investors or pensioners.

But the irresponsible protector now has a final chance as gold today is as cheap as it was in 1971 at $35 or in 2000 at $290 in relation to US money supply.


My colleague Matt Piepenburg recently covered Why Gold Is Not Rising in an excellent article. 

In that he stated that gold will reach new highs of $4,000 before the end of the decade. 

I believe that he based that on the In Gold We Trust Report by our good friend and MAM advisor Ronni Stoeferle who has a $4,800 target by 2030.

Personally I believe that target is much too conservative. 

I am on record for more than 10 years saying that gold will reach $10,000 in today’s money.

But that projection, like all others, is totally meaningless. 

As I discuss above, it serves absolutely no purpose to measure gold in a currency which is being debased by the day.

Much better than to measure gold in for example Big Macs.

But there is only one valid measure of gold. 

That is how many ounces or grammes you hold. 

Any other measure is totally nonsensical.

The most valuable asset that most people hold is their family. 

Who values that in dollars?

The bubble property market is also valued in money, especially since cheap and unlimited money pushes the prices up daily. 

But your own house should not be valued in dollars. 

You buy a house that you can afford and thereafter you should never think about its value but  just as a home. 

Still most people cannot distinguish between an investment asset or and asset acquired for pleasure or wealth preservation purposes and will insist on looking at its value daily. 

At least as long as in appreciates.


Coming back to gold forecasts, as usual there is a massive spread between high and low.

Two extremes are for example, the In Gold We Trust Report forecast of $4,800 in 2030 or Jim Sinclair’s $50,000 in 2025 and $87,000 in 2032.

If I was forced to make a bet I would go for Jim’s $50,000 in 2025. We can only be certain that gold will reach new highs.

But I come back to the unit of measure i.e. the dollar in this case.

If someone can tell me what will happen to the dollar by 2025 for example, I will give you a more precise forecast.

Personally, my view has for very long been that we will see hyperinflation as the penultimate phase to end this century old cycle in an hysterical and desperate attempt by central banks to save the system.

These futile attempts will of course fail but will lead to a total debasement of the dollar and all currencies.

What will the value of gold be when the dollar goes to ZERO?

Well, whatever level that will be is totally meaningless since the other side of ZERO is INFINITY.

What is more relevant is that gold will reach new highs and maintain purchasing power as well as outperform all asset classes by a massive margin.

For reference, gold reached 100 trillion Marks in the Weimar Republic.

As I mentioned above, the hyperinflation which is likely to occur in the next 5 and maximum 10 years is only the penultimate phase of the current monetary system.

The final phase will be a total implosion of all asset classes such as stocks, bonds and property and a deflationary depression.

Gold will then also come down from excessive highs. But since Gold will be the only money for a period, it will continue to do very well relative to other assets.

As von Mises said:

Remember that this is nothing new. 

It has happened throughout history. 

But because of the size of the bubble, the implosion will be greater than any time in history. 

In such a depression everyone will suffer greatly, even gold holders. 

But just as in any crisis in history, physical gold will serve as the best insurance you can own.

Dancing with the Debt Ceiling

Even in 2013, a year of partisan rancor, Democrats and Republicans agreed to suspend the US federal government’s debt ceiling just a week before the Treasury ran out of cash reserves. But this year might be different.

Barry Eichengreen

BERKELEY – In 2011, when still vice chair of the US Federal Reserve, Janet Yellen reassured her colleagues that drama around the federal government’s debt ceiling “usually turns out to be just theater.” 

Theater of the absurd, one might add. 

A decade later, the debt-ceiling debate is shaping up as a tragedy for the ages.

To understand the absurdity of the debt ceiling, recall its origins. 

The statute creating it was adopted in September 1917, in conjunction with an act authorizing the issuance of bonds to help finance US entry into World War I. 

It was designed to assure opponents of US involvement in the war that there were limits on how far the country would go.

The Constitution had given Congress the power to micromanage borrowing by the Treasury, something that was impractical in wartime. 

So legislators now delegated this power to the president. 

But to placate those who opposed any enlargement of executive powers, as well as German-Americans who opposed going to war with Germany and Irish-Americans opposed to allying with Britain after that country’s violent suppression of the 1916 Easter Rising for an independent Ireland, Congress placed a ceiling on that borrowing.

Those all-but-forgotten grievances from more than a century ago created the dilemma the United States faces today. 

Absurd is right.

Until now, Congress has always succeeded in averting the worst. 

Even in 2013, a year of partisan rancor, Democrats and Republicans agreed to suspend the debt ceiling just a week before the Treasury, already unable to borrow, ran out of cash reserves. 

But this year might be different.

Most obviously, political polarization is even greater than it was in 2013. 

Norms of political behavior – including the idea that the two parties should collaborate to avoid a predictable disaster – have gone out the window since the January 6 attack on the US Capitol by supporters of then-President Donald Trump. 

In a post-fact world, Republican members of Congress, even if they are the actual agents of the calamity, can successfully blame – at least in the eyes of the Republican base – Democratic legislators and their free-spending ways.

The immediate consequence of a failure to raise or suspend the debt ceiling would be a government credit-rating downgrade. 

If US Treasury debt lost its investment-grade rating, institutional investors would be prohibited by their mandates from holding it, while foreign investors, including central banks, would think twice. 

US borrowing costs would go up.

Some studies find that the dollar’s safe-haven status saves the Treasury upward of $700 billion in interest payments over a decade – enough, ironically, to fund nearly three-quarters of the bipartisan infrastructure package. 

There is some already evidence of this bonus being lost.

Uncertainty, as the COVID-19 crisis has reminded us, is what investors dread the most, and uncertainty would spike with an interest-payment suspension of unknown duration. Stock markets would react negatively. 

Moreover, because Treasury securities are used as collateral in a wide range of private financial transactions, short-term funding markets would be impaired if the Treasury was forced to suspend interest payments. 

Withdrawals would force money-market mutual funds to engage in fire sales of Treasury bills and, conceivably, to suspend redemptions.

Estimates of the economic fallout range from deeply damaging to catastrophic. 

One representative forecast suggests that GDP would decline by 4%, while unemployment would rise to 9%.

The Fed would step in, of course, as it does in every crisis. 

It would activate emergency measures discussed in the run-up to prior debt-ceiling crises. 

It would purchase defaulted Treasury securities and accept them as collateral in its own lending operations, albeit at their now-lower market prices. 

But this would put the Fed on thin ice. It would find itself in the middle of a political conflict. 

Democrats would criticize it for shielding Republicans from the consequences of their inaction. 

Republicans would accuse the Fed of complicity with the Democrats’ “socialist” agenda.

Clever analysts suggest that all this could be avoided if the Treasury simply put interest payments first. 

It could continue paying them in full as tax revenues arrive, while cutting other outlays by 40%. 

But this assumes away formidable technical problems. (Think reprogramming the government’s computers.) 

And if you believe that Congress would be prepared to cut social security benefits and military pay to bail out bondholders, then you live in a political fantasyland.

Some hope remains. 

The Senate parliamentarian could allow the debt-ceiling increase to be attached to a reconciliation bill passed along party lines. 

The Democrats could swallow hard and vote for it on that basis, doing what’s right for the country regardless of the electoral consequences.

Or Republican holdouts could reconsider, given the gravity of their actions. 

Recall how, in the throes of the global financial crisis in 2008, then-US Treasury Secretary Henry Paulson went down on one knee to beg for leadership’s support after Congress rejected his $700 billion financial bailout. 

He succeeded, and the House passed the measure on a second try, with votes from Democrats and Republicans. 

But don’t hold your breath. 

The recalcitrant congressional leader then was the Democratic House Speaker, Nancy Pelosi. 

Today, it’s the Republican Senate Minority Leader, Mitch McConnell.

Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. He is the author of many books, including the forthcoming In Defense of Public Debt.