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“Humanity’s 21st century challenge is to meet the needs of all within the means of the planet”*…

One evening in December, after a long day working from home, Jennifer Drouin, 30, headed out to buy groceries in central Amsterdam. Once inside, she noticed new price tags. The label by the zucchini said they cost a little more than normal: 6¢ extra per kilo for their carbon footprint, 5¢ for the toll the farming takes on the land, and 4¢ to fairly pay workers. “There are all these extra costs to our daily life that normally no one would pay for, or even be aware of,” she says.

The so-called true-price initiative, operating in the store since late 2020, is one of dozens of schemes that Amsterdammers have introduced in recent months as they reassess the impact of the existing economic system. By some accounts, that system, capitalism, has its origins just a mile from the grocery store. In 1602, in a house on a narrow alley, a merchant began selling shares in the nascent Dutch East India Company. In doing so, he paved the way for the creation of the first stock exchange—and the capitalist global economy that has transformed life on earth. “Now I think we’re one of the first cities in a while to start questioning this system,” Drouin says. “Is it actually making us healthy and happy? What do we want? Is it really just economic growth?”

In April 2020, during the first wave of COVID-19, Amsterdam’s city government announced it would recover from the crisis, and avoid future ones, by embracing the theory of “doughnut economics.” Laid out by British economist Kate Raworth in a 2017 book, the theory argues that 20th century economic thinking is not equipped to deal with the 21st century reality of a planet teetering on the edge of climate breakdown. Instead of equating a growing GDP with a successful society, our goal should be to fit all of human life into what Raworth calls the “sweet spot” between the “social foundation,” where everyone has what they need to live a good life, and the “environmental ceiling.” By and large, people in rich countries are living above the environmental ceiling. Those in poorer countries often fall below the social foundation. The space in between: that’s the doughnut.

Amsterdam’s ambition is to bring all 872,000 residents inside the doughnut, ensuring everyone has access to a good quality of life, but without putting more pressure on the planet than is sustainable. Guided by Raworth’s organization, the Doughnut Economics Action Lab (DEAL), the city is introducing massive infrastructure projects, employment schemes and new policies for government contracts to that end. Meanwhile, some 400 local people and organizations have set up a network called the Amsterdam Doughnut Coalition—managed by Drouin— to run their own programs at a grassroots level

You’ve heard about “doughnut economics,” a framework for sustainable development; now one city, spurred by the pandemic, is putting it to the test: “Amsterdam Is Embracing a Radical New Economic Theory to Help Save the Environment. Could It Also Replace Capitalism?

Kate Raworth, originator of the Doughnut Economics framework

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As we envisage equipoise, we might recall that it was on this date in 1791 that President George Washington signed the Congressional legislation creating the “The President, Directors and Company, or the Bank of the United States,” commonly known as the First Bank of the United States. While it effectively replaced the Bank of North America, the nation’s first de facto central bank, it was First Bank of the United States was the nation’s first official central bank.

The Bank was the cornerstone of a three-part expansion of federal fiscal and monetary power (along with a federal mint and excise taxes) championed by Alexander Hamilton, first Secretary of the Treasury– and strongly opposed by Thomas Jefferson and James Madison, who believed that the bank was unconstitutional, and that it would benefit merchants and investors at the expense of the majority of the population. Hamilton argued that a national bank was necessary to stabilize and improve the nation’s credit, and to improve handling of the financial business of the United States government under the newly enacted Constitution.

History might suggest that both sides were correct.

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“Exorbitant privilege”*…

Economic history books will commemorate the era we currently live in as the second wave of financial globalization, following the first wave during the Classical Gold Standard period. Our era is characterized by an unprecedented expansion of global financial flows. Partly, these flows form the counterpart to global value chains and the globalization of trade in goods and services. In the last few decades, however, they have been increasingly decoupled from the real sector. The financial infrastructure that enables this expansion is the international monetary system…

In its current shape, [the international monetary system] has a hierarchical structure with the US-Dollar (USD) at the top and various other monetary areas forming a multilayered periphery to it. A key feature of the system is the creation of USD offshore – a feature that in the 1950s and 60s developed in co-evolution with the Bretton Woods System and in the 1970s replaced it. Since the 2007–9 Financial Crisis, this ‘Offshore US-Dollar System’ has been backstopped by the Federal Reserve’s network of swap lines which are extended to other key central banks. This systemic evolution may continue in the decades to come, but other systemic arrangements are possible as well and have historical precedents. This article discusses four trajectories that would lead to different setups of the international monetary system by 2040, taking into account how its hierarchical structure and the role of offshore credit money creation may evolve. In addition to a continuation of USD hegemony, we present the emergence of competing monetary blocs, the formation of an international monetary federation and the disintegration into an international monetary anarchy…

Americans tend to take the global primacy of the U.S. Dollar for granted (indeed, often complaining about the current account imbalances to which huge quantities of off-shore dollars lead). But there’s no mistaking that this system has been been hugely advantageous to the U.S. Yet, as Steffen Murau (@steffenmurau) explains, it may not last: “The evolution of the Offshore US-Dollar System: past, present and four possible futures.”

See also Mernau’s “International Monetary System” (from whence, the image above), and Ben Bernanke’s “The dollar’s international role: An ‘exorbitant privilege’?

* Valéry Giscard d’Estaing (then the French Minister of Finance; later French President), referring to the benefit that accrues to the U.S. as a result of the U.S. Dollar being the world’s reserve currency

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As we count our blessings, we might recall that it was on this date in 1890 that journalist Nellie Bly completed her 72-day trip around the world.

In 1888, Bly suggested to her editor at the New York World that she take a trip around the world, attempting to turn the fictional Around the World in Eighty Days into fact for the first time.  A year later, at 9:40 a.m. on November 14, 1889, with two days’ notice, she boarded the steamer Augusta Victoria, and began her 24,899-mile journey.

She brought with her the dress she was wearing, a sturdy overcoat, several changes of underwear, and a small travel bag carrying her toiletry essentials. She carried most of her money (£200 in English bank notes and gold in total as well as some American currency) in a bag tied around her neck.

Bly traveled through England, France (where she met Jules Verne in Amiens), Brindisi, the Suez Canal, Colombo (Ceylon), the Straits Settlements of Penang and Singapore, Hong Kong, and Japan.  Just over seventy-two days after her departure from Hoboken, having used steamships and existing railway lines, Bly was back in New York; she beat Phileas Fogg’s time by almost 8 days.

Nellie Bly, in a publicity photo for her around-the-world voyage. Caption on the original photo reads: “Nellie Bly, The New York World‘s correspondent who placed a girdle round the earth in 72 days, 6 hours, and 11 minutes.”

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“Don’t look for the needle in the haystack. Just buy the haystack”*…

Over the course of 2020, Elon Musk’s wealth skyrocketed from $27.7 billion to $147 billion. Musk even overtook Bill Gates, to become the second richest person in the world. This was a tremendous jump in fortune: Musk was only at 36th place in January 2020. Musk’s enrichment was mainly due to Tesla’s rising stock price (TSLA:US), which surged from $86 in January to $650 in December. Tesla is currently one of the ten most valuable companies in the US stock market. 

In an already record-breaking year, Tesla’s largest and most rapid increase in valuation came in November, due to its announced inclusion into the S&P 500 index, now scheduled for 21 December 2020. Within a week of this announcement, Tesla’s share price rose by 33%, as passive funds now have to invest more than $70 billion. This was a remarkable boost for stock of a company that many analysts say is already obviously overvalued.

Just a few weeks earlier, on 21 September 2020, Yinghang ‘James’ Yang was arrested for insider trading by the Securities and Exchange Commission (SEC). Yang was an employee at S&P Dow Jones Indices (S&P DJI), sitting on an index committee that decided about which companies were to be included and excluded from S&P DJI indices. Yang had used this insider knowledge, to trade options on these companies through a friend’s account, making almost $1 million in the process. The case is currently being investigated by US authorities.

While these seem like unrelated incidents, both these episodes in index committee decision making are part of a tectonic shift that has fundamentally transformed capital markets globally. That is, the move towards passive index investing — and the concomitantly growing power of index providers...

A wonderfully-clear exploration of the history of index funds and consideration of their implications: “It’s the index, stupid! Our New Not-So-Neutral Financial Market Arbiters.”

* John C. Bogle, founder of the Vanguard Group and creator of the index fund

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As we watch the watchmen, we might recall that it was on this date in 1773 that a group of colonists known as the Sons of Liberty, disguised as Mohawk Indians, boarded three British tea ships and dumped 342 chests of tea (worth $18,000– over half a million dollars in today’s currency) into Boston harbor.  The provocation was the Tea Act of May 10, 1773, which allowed the British East India company to sell tea from China in American colonies without paying taxes apart from those imposed by the Townshend Acts— which American Patriots strongly opposed as a violation of their rights. Colonists objected to the Tea Act because they believed that it violated their rights as Englishmen to “no taxation without representation.”

The Boston Tea Party was, of course, a triggering event in the gestation of the American Revolution. Parliament responded in 1774 with the Intolerable Acts, which, among other provisions, ended local self-government in Massachusetts and closed Boston’s commerce.  Colonists up and down the Thirteen Colonies in turn replied with additional acts of protest, and by convening the First Continental Congress, which petitioned the British monarch for repeal of the acts– and probably more impactfully, coordinated colonial resistance to them.  The crisis escalated, and the American Revolutionary War began near Boston in 1775.

by-nathaniel-currier
The Boston Tea Party, as rendered by Nathaniel Currier

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“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning”*…

In the past few decades, the Gini coefficient—a standard measure of income distribution across population segments—increased within most high-income economies. The United States remains the most unequal high-income economy in the world. The disparity reflects a surge in incomes for the richest population segments, along with sluggish or even falling incomes for the poorest, especially during bad economic times.

At the same time, the middle class is shrinking. The percent of Americans in the middle class has dropped since the 1970s, from 61 percent in 1971 to 51 percent in 2019. Some have moved up the income ladder, but an increasing number are also moving down. The middle class has also shrunk considerably in countries like Germany, Canada, and Sweden, but other advanced economies have generally experienced more modest declines.

From the introduction to the Petersen Institute for International Economics report “How to Fix Economic Inequality?

Founded by Pete Petersen (Lehman Brothers Chair, Nixon’s Secretary of Commerce, and co-founder, with Trump supporter Stephen Scharzman, of investment giant Blackstone), and overseen by trustees who include Larry Summers, Alan Greenspan, and George Schultz, PIIE is hardly a “progressive” think tank. But they are worried: quite apart from its obvious humanitarian toll, inequality at the scales that have emerged is highly unlikely to be sustainable (even at the human cost that we’ve so far been willing to pay). Put more bluntly, it is ever more likely to torpedo the domestic (and large hunks of the global) economy and indeed to threaten the stability of democratic society.

Other sources suggest that they have very good reason for concern:

• Even as the stock market hits new highs, 26 million Americans are suffering food insecurity (See also: “The boom in US GDP does not match what’s happening to Americans’ wallets.”

• The distribution of assets in the US (and other developed economies, but most egregiously in the U.S.) is even more skewed than income: see data in the PIIE report and “The Asset Economy.”

• And lest we think that this issue is confined to the U.S., social democracies throughout the developed world are feeling the same pressures (albeit mostly less dramatically).

FWIW, your correspondent doesn’t have terrifically strong confidence in the remedies mooted in the PIIE report. Even as the authors recognize that the issues are deeply structural, they confine themselves to recommending (what seem to your correspondent) relatively timid and incremental steps– which, even if taken (and most require legislative or regulatory action) are more likely to slow the polarization underway than to reverse it.

But they are worth contemplating, if only to provoke us to more fundamental measures (e.g., here). And in any case, it’s telling– and one can only hope, encouraging– that determined champions of the very neoliberal economics that have gotten us here recognize, at least, that unless we change course, we’re speeding into a dead end.

* Warren Buffett

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As we agree that fair’s fair, we might recall that it was on this date in 2001 that Enron, once #7 in the Fortune 500, declared bankruptcy. Six months earlier, it’s stock had traded as high as $90; it closed November 30th at 26 cents, wiping out billions in wealth (a appreciable part of it disappearing from employees’ pension plans). At the time, Enron had $63.4 billion in assets, earning it the honor of being the nation’s largest bankruptcy to that date. (It would be surpassed by the WorldCom bankruptcy a year later.)

Jeff Skilling, Enron’s CEO served 11 years in prison on several counts of fraud; Andy Fastow, Enron’s CFO, would served about 5 years. Chairman Ken Lay was also found guilty, but died before his sentencing. Enron’s accounting firm, Arthur Andersen (at the time a leader among the “Big 5”), which at least “missed” the egregious fraudulent practices in their audits of Enron, was effectively forced to dissolve after the scandal.

Published a year before the scandal broke

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“Like the elite of ancient Egypt, most people in most cultures dedicate their lives to building pyramids. Only the names, shapes and sizes of these pyramids change from one culture to the other.”*…

“Corporate personhood” is– justifiably– a hot topic in the U.S. By dint of a questionable precedent and the legal superstructure that’s grown atop it, corporations here now have have the rights enjoyed by individuals (including the “free speech” right to make unlimited political contributions to PACs) even as they are free of many of a “real” person’s responsibilities.

But there corporations in other countries that are, in a very meaningful way, actually a person. The ever-illuminating McKinley Valentine points us to the intrigue surrounding one of South Korea’s leading chaebols (enormous conglomerates controlled by a single owner/family):

… if, like me, you enjoy mystery and conspiracy and watching too many political thrillers until they permanently damage your brain you will find this story fascinating.

A thread by John Yoo. He’s far from the only person talking about it, but he sums it up really well.

Chairman of Samsung is probably dead but we are all pretending he is alive because if he dies, the country will probably go into an economic death-spiral.

Samsung usually accounts for 20% of the exports of the entire country of South Korea. As a single group, it’s a conglomerate with either large or controlling market share in tech, construction, finance & insurance, hospitality, security, travel, food, retail producing 12% of GDP.

Almost $1 in every $5 in the country brought in from abroad is by Samsung.

[McK paraphrase: a whole ecosystem of suppliers and purchases has built up around Samsung, and is completely reliant on it. These would fail within months if Samsung collapsed] [not a whalefall situation, apparently]

Enter Korean tax code. Korea has 50% inheritance tax on assets above $2.5m. When Lee Gunhee dies, his family will owe the government $7b.

It is a fact that Chairman Lee Gunhee suffered a heart attack in 2014 and was hospitalized. Nobody but close family members have reported seeing him. People who claimed he was dead have either disappeared or been arrested.

When his death was reported in 2014, the entire country flipped and the story was deleted because the news site said that the whistleblower disappeared.

It’s been five years and nobody can tell us his condition with certainty. Nobody has seem him…

“The chairman of Samsung is almost certainly dead.” Do read the entire thread. And do consider following McKinley’s newsletter, The Whippet.

For more on the Samsung saga, see here (the source of the photo above); and for an explainer on chaebols, here.

* Yuval Noah Harari, Sapiens: A Brief History of Humankind

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As we stew over Succession, we might wish a stony-faced Happy Birthday to “the greatest actor-director in the history of the movies” (quoth Roger Ebert); Joseph Frank “Buster” Keaton was born on this date in 1895.

As a young vaudevillian, Keaton met silent star Fatty Arbuckle.  Keaton borrowed Arbuckle’s crew’s camera, took it back to his boarding house, disassembled and reassembled it, then returned to ask for a job.  He was hired as co-star and gag man on “The Butcher Boy”– and soon became Arbuckle’s “second director” and his entire gag department.  Keaton soon earned his own unit, and began churning out two-reelers.  Leo McCarthy (director of Charlie Chase, Laurel and Hardy, the Marx Brothers, Mae West, and others) recalled, “All of us tried to steal each other’s gagmen. But we had no luck with Keaton, because he thought up his best gags himself and we couldn’t steal him!”

From 1920 through 1929, Keaton made Our Hospitality, The Navigator, Sherlock Jr., Seven Chances, Steamboat Bill Jr., The Cameraman, and The General— gems all.  Indeed, Henson collaborator Orson Welles considered The General to be, “the greatest comedy ever made, the greatest Civil War film ever made, and perhaps the greatest film ever made.”

With the advent of sound, Keaton’s career took a sideways turn.  While he appeared in a number of feature films, guested on many television series, and even served as an advisor to Lucille Ball on I Love Lucy, he was never again the monster star that he had been on the silent screen… which adds to the power– and the poignancy– of his penultimate role: the lead in the only movie written by Samuel Beckett, the (nearly) silent Film.

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Written by LW

October 4, 2020 at 1:01 am

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