Unregulated Digital Cryptocurrencies VS Regulated National Currencies: Is There a Danger?

 

Unregulated Digital Cryptocurrencies VS Regulated National Currencies: Is There a Danger?

by Dr. Rodrigue Tremblay

(Author of the book about morals "The Code for Global Ethics" and his book about geopolitics "The New American Empire")

"I have arrived at the conviction that the neglect by economists to discuss seriously what is really the crucial problem of our time is due to a certain timidity about soiling their hands by going from purely scientific questions into value questions." Friedrich Hayek (1899-1992), (in a conversation, on Feb. 9, 1978).

"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." Milton Friedman (1912-2006), (in 'The Counter-Revolution in Monetary Theory', 1970).

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner, which not one man in a million is able to diagnose." John Maynard Keynes (1883-1946), (in 'The Economic Consequences of the Peace'. 1919, Ch. VI, pp. 235-236).

A few years ago, after the 2007-2008 financial crisis, some clever people, whose identity is hidden behind the appellation of 'Satoshi Nakamoto', devised a decentralized electronic system of payments, which is independent of the existing traditional banking system. It is based on a new form of digital 'currencies' or 'electronic currencies', the 'cryptocurrencies'. Some observers have called the cryptocurrency innovation a sort of a new 21st Century digital gold rush.

The supply of a given electronic cryptocurrency is backed by a mathematically constrained scarcity and by a ledger technology that prevents counterfeiting. The demand is supported by a speculative faith of some buyers that other buyers are going to push the price of that cryptocurrency higher and higher. Cryptocurrencies can only be transacted and used as a means of payment within the narrow framework of an electronic network of decentralized registers, which are supported by powerful computers and the Internet.

There are presently as many as 7,000 such digital or virtual cryptocurrencies on the Web, and they serve as a playground for big and small speculators, besides being used as a convenient conduit to make international money transactions, in total anonymity. Even private companies, such as Facebook, are considering launching their own commercial cryptocurrency.

· The Bitcoin was the first cryptocurrency using the blockchain technology

The first cryptocurrency surfaced in 2009 with the Bitcoin, a decentralized and international private digital 'currency'. It is the product of the application of a relatively new computerized technology, the blockchain. In order to limit the supply, the maximum stock of Bitcoins in existence was mathematically and electronically set at 21 million units, so that any increase in demand, once that threshold has been reached, must involve the exchange of existing Bitcoin units or coins. This tends to push prices higher and higher.

· The complicated process of creating cryptocurrencies

The blockchain technology is a  computerized technology using chains of blocks containing data that allow information to be stored and transmitted through a large number of computers spread around the world.

Because of the speculative nature of each cryptocurrency market, its price, such as the price of one Bitcoin in dollars or other traditional currencies, is very volatile. It can fluctuate widely within a short span of time. This conveys the risk that big speculators, with access to large amounts of money and sophisticated trading techniques, could game the system and impose big losses on smaller or inexperienced speculators.

To a certain extent, the world of cryptocurrencies can be assimilated to an unregulated online casino for speculators, and this could lead to the creation of a speculative mania. The cryptocurrency craze is somewhat reminiscent of the Tulip mania in Holland in the 17th Century. At one time, for example, a single rare tulip bulb could be worth more than the price of a house!

· A serious problem: the process of creating cryptocurrency units requires huge amounts of energy

There is an important technical drawback to the process of creating cryptocurrency units: It requires enormous amounts of energy. As more and more cryptocurrency transactions need to be computerized, the network of computers required to solve the complex blockchain calculations must increase, along with the energy it takes to run them.

For example, a study done at the University of Cambridge, in the U.K., concluded that the network of computers used by operators or 'miners' in the process of generating units of the first cryptocurrency, the Bitcoin, consumes more electrical power, in one year, than that used by the entire country of the Netherlands, a country of over 17 million inhabitants.

As the cryptocurrency phenomenon continues to grow, it will require more and more computers to complete one cryptocurrency transaction, and each transaction will end up consuming more and more energy. For instance, a few years ago, a single Bitcoin transaction required as much electricity as 80,000 Visa card transactions. Nowadays, according to the Digiconomist website, a single Bitcoin transaction uses as much electricity to complete as 735,121 Visa transactions, (or 55,280 hours of viewing time on YouTube). And this is increasing on a daily basis. Such a heavy reliance on energy could severely threaten the long-run economic sustainability of the current process of cryptocurrency production.

· Economist Friedrich Hayek's libertarian principle of privately issued fiat currencies

Beyond the technical jargon, it is worthwhile to  know that the idea of having an international system of private money or monies, free of government interference, is an old libertarian dream. It is based on the belief that the private self-interest of competing private entrepreneurs can lead to a general welfare superior to that of government intervention, even when this involves the creation of money.

Indeed, in 1976, economist Friedrich Hayek (1899-1992), of the Austrian school of economics, published a pamphlet entitled The Denationalisation of Money, (with a refined version, published in 1978). Hayek advanced the radical idea that sovereign governments should forgo their central bank's legal monopoly to issue national currencies and leave the issuance of money to private entrepreneurs.

However, at the time, the idea of having competing private currencies was not well received.

Some saw in it the transfer, to private operators, of the public revenues that governments and their central banks receive in the money creation process, called seigniorage. Others feared that the idea of having multiple private currencies used as means of payments would create confusion and chaos in the economy.

It was also thought that private issuers of money would have an incentive to issue too much of it, and thus create inflation and a loss of purchasing power for the users. Many also anticipated that in times of financial crises, governments could not adequately intervene to stimulate production and employment, through an aggressive monetary policy, etc.

Some of these criticisms were the same arguments invoked in the 1930s to abandon the gold standard, a rigid commodity-based monetary standard, which tied national currencies to gold. It was thought that such a system had contributed in causing the Great Depression (1929-1939).

For some thirty years, after the Bretton Woods agreement of 1944, the world was placed under a gold-exchange standard, with the U.S. dollar remaining tied to gold, and most of the other national currencies tied to the U.S. dollar, with fixed exchange rates. However, after the first oil shock of 1973, the gold-exchange standard was itself replaced by the current monetary system of fiat money, i.e. a system of flexible government-regulated currencies, issued by a central bank that oversees the banking system. It is usually connected to other national currencies through flexible exchange rates, so as to maintain equilibrium in the external balance of payments.

· Governments of major countries could begin competing between themselves in adopting official digital currencies and possibly ban private cryptocurrencies altogether

Some ten countries have already banned trading in private cryptocurrencies. This includes: China, Iran, India, Bangladesh, Morocco, Thailand, Uganda, Zambia and Nigeria. The last country to do so is Turkey. Turkey's central bank recently announced that it is outlawing the use of private cryptocurrencies, such as the Bitcoin, in payments for goods and services, a ban that took effect last April 30. It warns speculators that cryptocurrencies present "irrevocable risks", as the market is volatile and there is a lack of oversight. It also cited their use in "illegal actions due to their anonymous structures". No doubt that other countries will follow their example.

Conversely, the governments of major nations have either announced that they intend to set up their own official digital currency or are studying the possibility to do so. For one, the Chinese government has announced its intention to launch an international digital Yuan, possibly to be in full operation for the Beijing Winter Olympic Games of Feb. 2022. Obviously, the new Chinese digital currency for international use could eventually represent a challenge to the U.S. dollar as the preferred reserve currency, and to counteract the practice of various American administrations to impose economic and financial sanctions on other countries for political purposes.

More generally, the advent of a digital Yuan could force other governments to get involved in creating their own international digital currencies. Already, the U.S. Fed has announced that it is studying the potential costs and benefits of developing a digital dollar. No doubt that other governments in the U.K., Europe and Japan would likely follow suit with digital versions of their own currencies, such as a "Britcoin", a "Eurocoin", a "Yencoin", etc.

A world of legal public digital currencies, traded internationally, could be just around the corner, even if money and capital markets are far from being able to operate with digital currencies. Nevertheless, such a purely monetary development could have profound effects on the existing private digital cryptocurrencies. Over time, it could also upend the international and domestic payment systems.

· Conclusion

The future may have in store a growing reliance on digital money, possible public digital currencies issued by a few major central banks. It should be obvious that if governments begin to compete in creating their own digital currencies, this could pose a serious challenge to the current cryptocurrencies in existence, the latter facing a real regulatory threat.

Similarly, in such a futuristic digital context, if it were to materialize, this would raise the issue of how to preserve individual economic freedom, when all financial transactions can be recorded and made available to governments, allowing them to track people's incomes, spending and investment in real time.

It would be ironic if the libertarian monetary innovation of private cryptocurrencies, designed to free users from government interference, were to lead to a world of public digital currencies. Governments would then have even more power over people than today. A resurgence of barter could ensue.1

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1. A book of fiction that foretells such a political plot is The Patriot Conspiracy, 2012,  (also found here).

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International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Monday, May 10, 2021.

*** To receive new postings of Dr. Tremblay's articles, 

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The Clash Between Central Bankers and Investors Over Inflation and Interest Rates

 

The Clash Between Central Bankers and Investors Over Inflation and Interest Rates

by Dr. Rodrigue Tremblay

(Author of the book about morals "The Code for Global Ethics" and his book about geopolitics "The New American Empire")

"Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal making generates, and the press loves the stories that colorful promoters provide. At a point, the soaring price of a promoted stock can itself become the 'proof' that an illusion is reality. Eventually, of course, the party ends, and many business 'emperors' are found to have no clothes." Warren Buffett (1930- ), America investor, (in his annual letter of Saturday, Feb. 27, 2021).

"All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment." John K. Galbraith (1908-2006), Canadian-born American economist, (in 'A Short History of Financial Euphoria', 1994).

"When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretend payment." Adam Smith (1723-1790), Scottish economist, father of modern economics, (in 'The Wealth of Nations', 1776, Part V, p. 1012).

Over the last few weeks, investors' sentiment about future inflation and future interest rates has changed. It seems that complacency about inflationary pressures in some parts of the economy is coming to an end.

Even during the economic slowdown brought about by the economic impact of the pandemic, some prices are clearly on the way up. Besides the exuberance in the financial sector where stock and bond prices are frothy, some important prices in the real economy are also strongly increasing.

· Sustained price pressures in some important economic sectors

For example, oil prices have increased by more than 50 percent since last year. Construction material prices (lumber, copper, steel, etc.) have skyrocketed by as much as 73% in one year. Because of a strong demand and higher construction costs, real estate prices and rents are rising. For instance, the median home price in the U.S. increased 15% in 2020, while average house prices increased 23% in Canada, during the same period. Food prices have also increased 3.8% in the U.S. and 2.3% in Canada in 2020, and are likely to continue their trend upward in 2021. Even some of the extra liquidity injected into the system has found its way into the cryptocurrency craze, a phenomenon reminiscent of the Tulip mania in Holland in the 17th Century!

The only place where there seems to be little inflation is in the official measures of inflation. In the U.S., the all-items Consumer Price Index (CPI-U) rose only 1.4% in 2020. Even the Producer Price Index (PPI) is up only 1.76% from one year ago. [N.B.: In Canada, the figures are 0.7% (or 1.3% for the CPI excluding gasoline) and 1.4% for durable goods, in 2020].

· Currently, the actual inflation rate could be severely underestimated by official figures

Three factors can explain the low inflation reported by official figures. First, one must realize that official inflation indexes are lagging indicators, because important shifts in consumer spending patterns are adjusted every two years. Therefore, during the 2020 pandemic, even though consumers did substantially alter their consumer spending, that shift has not yet been reflected in the official inflation measures.

Secondly, some important sectors (tourism, travel, hotels, restaurants, retail, art and culture, etc.) did experience substantial drops in demand, production and employment, and the prices of their services have declined, artificially pushing the official inflation indexes down. It can be expected that prices in those depressed sectors will bounce back, maybe with a vengeance, once the economic recovery takes hold.

Thirdly, the prices of oil and gasoline were very depressed during most of 2020, and they have since bounced back. Higher energy prices will most probably filter into future measures of inflation.

My tentative conclusion would be that official measures of inflation have seriously underreported the true inflation rate experienced by consumers during the 2020 pandemic.

Many investors have also reached that conclusion. They have realized that the easy-money monetary policies pursued by central banks to boost inflation toward the 2% threshold may have been pushed too far, and that interest rates have been kept ultra low for too long.

This does not mean that more fiscal stimulus is not needed to help workers who have lost their job because of the pandemic and may have trouble going back to their old line of employment.

· The clash between central bankers and investors

That is why there has recently been a clash between central bankers and investors about where inflation and interest rates are going to be, once the pandemic is a thing of the past and the economic recovery is well on its way.

The clash pits central bankers, who have been gradually pushing interest rates to ultra low levels with easy-money policies over the last 10 years, and investors, who fear that the after-pandemic economic rebound could be stronger than expected and lead to a resurgence of inflation.

This was epitomized last Thursday March 4, when U.S. Fed Chairman Jerome Powell ruffled investors by declaring that he had no plan to raise interest rates, i.e. not until labor-market conditions are consistent with "maximum employment and inflation is sustainable at 2 percent". The Governor of the Bank of Canada Mr. Tiff Macklem also seems to subscribe to Mr. Powell's thesis.

What is the basis for such a clash of perceptions? Essentially, there is a disagreement about how much excess supply there really is in the economy and  how robust the economic recovery will be after the pandemic has been vanquished.

On the one hand, central bankers would prefer to keep interest rates on the floor until the economy reaches its full employment level and a higher moderate rate of inflation is attained. On the other hand, investors remember that central banks are known to procrastinate and wait too long to tackle inflationary pressures, ending  up overshooting their inflation targets. Indeed, if central bankers wait too long to address inflationary pressures, sooner or later they must step on the monetary brakes, and interest rates shoot up, causing market disruptions.

The pre-1980 period, when central banks waited too long before fighting the creeping inflation, is a good example. In 1980, they pushed interest rates way up, and this brought about the deep 1980-1982 economic recession. [N.B.: In the U.S., the Fed funds rate hit 21% in June 1981, while in Canada, the Bank of Canada interest rate peaked also at 21%, in August 1981.]

Many investors believe that economic conditions are currently reminiscent of what happens after a war, when governments have built up huge debts, and there is a strong pent up demand on the part of consumers who wish to resume spending. By the end of the pandemic, they are forecasting a stronger economic rebound than the one some central banks are expecting.

· The Central bankers' rationale to keep easy-money policies a bit longer

Central bankers presently have two fears, which may explain why they would prefer to keep interest rates ultra low for a few more years.

First, the Fed sees that there are still 10 million fewer jobs today, in the United States, than there were in March 2020. [A similar soft labor market prevails in Canada, as there were 858,000 fewer jobs in January 2021 than in February 2020.] Central bankers think that some structural damage has been done to their economies, especially in the service sector and among young workers, and that it will take time to bring back full employment.

Secondly, the high levels of debt worldwide preoccupy central bankers. Indeed, they see the global financial system becoming overloaded with debt, at all levels, governments, corporations and consumers. They fear that any rise in interest rates would increase the burden of debt service and reduce aggregate demand and, possibly, trigger a financial crisis and an economic recession.

· Total global debt is historically very high

Global debt, private and public, is well on its way to reach the unsustainable threshold of 400 percent of global Gross Domestic Product (GDP) in 2021. When interest rates begin rising, this could cause havoc in many ways. Paradoxically, it was the artificially low interest rates of central banks that encouraged such over-indebtedness. And today, those same central banks find themselves trapped in their past policies, and they fear that if they reverted to normal interest rates, it could trigger a global debt crisis.

Indeed, in the aftermath of the Great Recession of 2008, central bankers were very innovative in finding new ways of accommodating politicians who wanted, all at the same time, large tax cuts, higher fiscal deficits, super low interest rates, and faster economic growth, without inflation. This was too good to last for very long.

Central banks in Europe, the U.S., and Japan began to load their balance sheets with government bonds and other financial assets, in the hope of controlling both nominal and real interest rates, and, in so doing, boost economic growth. For example, since March 2020, the NY Fed has been buying $120 billion in Treasury bonds in various maturities and mortgage-backed securities each month, in order to keep interest rates ultra low.

The U.S. Fed's balance sheet of financial assets, which was less than $1 trillion in 2008, now stands at $7 trillion. The Bank of Canada's balance sheet stood at C$51 billion in 2008 and now is at C$573 billion. - Central banks can do that (i.e. inject large quantities of new money into the economy), for a while, provided that deflationary pressures are such that inflation does not result. If interest rates start rising, the entire policy could begin unraveling.

Attempts to keep interest rates ultra low in such an environment could simply be impossible, without creating unsustainable financial bubbles.

· What could happen if central bankers keep interest rates ultra low for too long?

If central bankers nevertheless attempt to keep nominal interest rates artificially low by increasing the money base and the money supply, it would be like adding fuel to the fire. This will create even more inflationary expectations.

Since the mission of central banks is to prevent excessive inflation from taking hold, while keeping employment high, they have to be careful and make sure that an easy-money policy does not generate strong inflationary expectations.

Already, the unorthodox and unprecedented monetary policy implemented during the last decade has created huge financial bubbles in real estate, in the bond market and in the stock market, with little positive influence on the overall real economy.

It's possible that central banks have been pursuing short-run financial and economic gains at the cost of serious long-run financial and economic pain. Indeed, if they were to persist in creating bigger and bigger financial bubbles, sooner or later, the day of reckoning will take the form of financial crashes.

· Will consumers' extra savings lead to more spending after the pandemic?

It would seem logical to expect that consumers, both in the U.S. and in Canada, and elsewhere, are going to spend at least part of their extra savings, once the pandemic is conquered. Such a pent up demand is another factor that could boost the economy in the next few years.

This could create a period of economic and financial euphoria with booming markets, fueled by the central bankers' wholesale printing of money, possibly leading into 2023-2024, (provided, of course, that there is no third wave of virus variants).

· Extra high public debts will bring about slower economic growth in the future

Because of the economic impact of the pandemic, many governments around the globe are more indebted than ever, even more so than after World War II, with public debts in advanced economies being over 120 percent of GDP, and growing.

Such a high level of over-indebtedness is bound to be a drag on future economic growth. This is because high public debts tend to push long-term interest rates up, and higher borrowing costs discourage private capital investment and hurt productivity. Extraordinarily high public debts may force governments to raise taxes to meet their ballooning debt service requirements, and this could also be another drag on future economic growth.

Conclusion

Economic conditions in most advanced economies, especially in the U.S. and in Canada, but also in Europe, are at a crucial juncture. There is hope now that the pandemic's economic drag is about to end, because of the widespread vaccination programs implemented in most countries.

However, is it possible that a fear on the part of investors that inflation could quickly rise during a strong economic recovery, might push long-term interest rates way up? Or will central bankers be able to stick to their policies of ultra low interest rates for another year or two? Both outcomes carry their own risks.

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International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Tuesday, March 9, 2021.

*** To receive new postings of Dr. Tremblay's articles, 

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© 2021 Dr. Rodrigue Tremblay

The Relationship Between Income and Wealth Disparities and Negative Real Interest Rates

The Relationship Between Income and Wealth Disparities and Negative Real Interest Rates

by Dr. Rodrigue Tremblay

(Author of "The Code for Global Ethics" and "The New American Empire")

"The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole." Carroll  Quigley (1910-1977), American historian, 1966.

"There are no nations. There are no peoples... There is no America. There is no democracy. There is only IBM, and ITT, and AT&T, and DuPont, Dow Union Carbide, and Exxon. Those are the nations of the world today... We no longer live in a world of nations and ideologies... The world is a college of corporations, inexorably determined by the immutable bylaws of business. The world is a business." Network, 1976, (a corporation executive talking in the American satirical drama film 'Network'.)

"By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens... By this method they not only conficscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some." John Maynard Keynes (1883-1946), British economist, 1936.

Has a forty-year trend reached an apex? Indeed, official measures of economic disparities are at an all-time high.

For example, in 2017, the three richest Americans (Bill Gates, Jeff Bezos, and Warren Buffett) owned more wealth than all the people in the bottom 50 percent of the U.S. population. And although income disparity has increased in most advanced economies, the United States is leading the way with levels of income disparities not seen since 1928, just before the Great Depression (1929-1939). All this is happening while the U.S. federal minimum wage has remained fixed at $7.25 an hour since 2009!

A question that begs to be answered is: to what extent can such a record inequality be traced back, at least partly, to the public policies that have been followed over the last forty years?

Since the early 1980s, indeed, governments and central banks in Europe, the United States and in other industrialized economies have adopted an unusual mix of fiscal policy and monetary policy. Governments became the de facto bankers of the corporate world through large tax subsidies. For their part, central banks have been busy creating bubbles in the stock and bond markets. Sooner or later, that house of cards is bound to crash.

For one, governments have relied less and less on progressive income and wealth taxes and more on regressive taxes to finance public spending programs. 

Secondly, central banks have  initiated round after round of money creation through a wholesale purchase of government bonds and other securities, such as mortgage-backed securities (MBS). This was labeled a process of 'quantitative easing' (QE), through which central bankers pushed nominal interest rates to the floor and real interest rates (adjusted for inflation) into negative territory.

In some European countries (Switzerland, Germany, the Netherlands and France) even nominal interest rates have turned negative for ten-year safe investments. Paradoxically, this means that some savers pay borrowers to accept their money. It's the world upside down.

Such a super-aggressive monetary policy has created unintended consequences for some classes of consumers—for retirees, students, etc.—whose incomes and spending fell. In many cases, they were forced to go deeply into debt, in order to sustain a livable level of consumption.

· Consequences of economic and financial globalization

Under the guise of financial and corporate globalization, governments became more and more responsive to the demands of international corporations, mega banks and rich individuals, to lower their taxes and to reduce regulations. Their argument was that this was a requirement to remain competitive and retain industrial investment at home. Moreover most governments abandoned domestic industrial policies and let corporate and banking world decisions structure their economies.

· The process of de-industrialization in advanced economies and the shift of the tax burden

Many large corporations found it profitable to abandon their domestic production base and began searching the world for the lowest wages they could find, while collecting the most advantageous financial inducements from local governments to locate new industrial investments. International free trade of goods and services, which is in general beneficial to all counties, was extended to encompass the more controversial concept of a free international movement of financial capital and of industrial capital.

In such an international context, national governments were forced to enter into a zero-sum game competition to lower taxes and regulation for industrial investors and to extend subsidies to encourage new investment and employment at home.

Over time, this resulted in two important structural changes.

First, some advanced industrial economies began a gradual process of de-industrialization, when large companies began moving their high-productivity manufacturing activities abroad. This was accompanied by a relative structural shift in domestic employment from the high-productivity manufacturing sector to the generally less productive service sector. Among the latter, some high-knowledge service industries have been paying above average wages, but some labor-intensive service industries are paying relatively low wages. As a consequence, over the last forty years, real wages in advanced economies have remained relatively stagnant.

All the while, some high-income earners and the super rich strata of the population benefited from huge tax deductions. The most recent example is the ten-year $1.5 trillion tax cuts passed into law, in December 2017, by the Trump administration. That measure slashed the corporate tax rate in the U.S. from 35 percent to 21 percent, but with few new benefits for the economy. Contrary to what was expected, many corporations used the tax returns to buy back their own stock shares, rather than to invest in new plants or machinery.

Moreover, since labor is generally immobile internationally, the overall domestic tax burden on income, consumption and profits began to shift more heavily onto workers, consumers and middle class taxpayers, and away from large corporations and mega banks, and from rich investors. To alleviate such a taxation shift, governments were saddled with larger operating deficits and their national debt rose, even during prosperous times.

This has raised a tax fairness issue with the growing gap of income and wealth inequalities among different categories of taxpayers.

· A worldwide glut of savings, a decline in real investment spending and a shifting of profits and incomes to low-tax jurisdictions

The impact of economic and financial globalization and the constant rise in income and wealth inequalities since the 1980s—the latter having been exacerbated by the Great recession of 2008, and by the current pandemic crisis—has produced a glut of global savings (supply of funds) as compared to investment spending (demand for funds).

When too much saving is withdrawn from the operating economy and is not properly recycled into productive uses, this can lead to a drop in the circulation of money, even when the supply of money increases. If the velocity of money declines during a period of expansionary monetary policy, this can offset the increase in money supply and could paradoxically lead to deflationary pressures, at least for a while, and sluggish economic growth rather than to inflation and faster economic growth.

The glut of global savings is related to the growing concentration of income and wealth in favor of owners of financial capital and of super rich individuals. The fact that many trillions of dollars of such extra savings have ended up in offshore tax havens, sometimes under the veil of secrecy of cryptocurrencies, has undoubtedly played a role. It has also been a source of demand for bonds and other securities, resulting in higher bond prices and lower interest rates.

The building up of a glut of global savings among mega corporations and super rich individuals, who own most of the stock wealth, was occurring just as another phenomenon took place. Indeed, the 'baby boomers'—the generation born between 1946 and 1964 in the United States, and between 1947 and 1966 in Canada—felt obliged to increase their savings rate, in order to better prepare for their imminent retirement, and also, in part, because of the economic impact of the current pandemic on their spending and the low rates of return on their financial investments.

· Consequences of the half-century long rise in income and wealth inequalities

 As income and wealth became more and more concentrated, the financial sector tended to grow faster than the real economy. Such a structural change, past a certain threshold, can slow down economic growth and be a factor in creating financial crises. This was demonstrated when new esoteric financial products catering to the very rich led to the Great recession of 2008.

Some economists fear that the advanced economies of the Western world have entered into a prolonged period of "Secular Stagnation". Indeed, in many advanced economies, the expansion of the financial sector has been such that it has become oversized relative to the real sector. A too-high rate of financial sector growth relative to GDP may be a harbinger of future financial contractions.

· Conclusion

There is a link between the great disparities in income and wealth that we see today, in several industrialized countries, and the extraordinarily low interest rates that have become the curse of savers. And, as we have seen, the causal relationship goes both ways, one reinforcing the other. They both enriched an aristocracy of the super rich. How should governments go about breaking this economically and socially damaging relationship?

First, it would seem that there is a need to reorient fiscal policy toward equilibrating the tax burden and income inequality between high and low-income taxpayers, as well as re-evaluating consumption taxes. Maybe an international conference could be held to assist governments in coordinating their efforts in that direction, especially considering the growing reliance on tax havens.

Secondly, central bankers could find it appropriate to review the current policies of monetizing the public debt and the debts of other financial entities on a high scale. Besides evaluating their sustainability, they may also wish to take into consideration the high risk of creating dangerous bubbles and speculative manias in the stock and bond markets. indeed, history shows that when such financial bubbles burst, as they inevitably do, the real economy suffers badly in production and employment losses.

As for citizens, they should be careful not to vote for clueless and corrupt politicians who are bought and sold by special interests. They should demand that big money and dark money stop dominating politics and government policies. Theirs and their children's economic welfare depend upon it.

___________________________________

International economist Dr. Rodrigue Tremblay is the author of the book "The code for Global Ethics, Ten Humanist Principles" of the book "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Tuesday, February 9, 2021.

*** To receive new postings of Dr. Tremblay's articles, 

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© 2021 Dr. Rodrigue Tremblay

Donald Trump's legacy: Four Chaotic Years in the White House and a Tumultuous Departure

 

Donald Trump's legacy: Four Chaotic Years in the White House and a Tumultuous Departure 

by Dr. Rodrigue Tremblay

(Author of "The Code for Global Ethics" and "The New American Empire")

"Demagogue: one who preaches doctrines he  knows to be untrue to men he knows to be idiots." H.L. Mencken (1880-1956), American journalist and essayist, (in 'Minority Report', 1956, p. 207).

"Fascism: a form of far-right, authoritarian ultranationalism, which is characterized by dictatorial power, forcible suppression of opposition and strong regimentation of society and of the economy." Robert O. Paxton, The Anatomy of Fascism, 2005, p. 32.

[Democracy:] "...and that government of the people, by the people, for the people, shall not perish from the Earth".  Abraham Lincoln (1809-1865), 16th President of the United States, 1861-1865, in the Gettysburg Address, Nov. 19, 1863.

On Wednesday, January 6, 2021, the ugly face of fascism in action was seen in Washington D.C., when an unruly pro-Trump mob, incited and inflamed by an angry speech by outgoing President Donald Trump, stormed and rampaged through the U.S. Capitol, in an obvious attempted coup. This marked the lowest point in Mr. Trump's chaotic presidency, a presidency ending with an attempt to stoke the fires of insurrection in the vain hope of remaining in power.

Let us get some perspective.

Just a few weeks after his inauguration, here is what I wrote about Mr. Donald Trump and about what to expect from his presidency, in an article titled 'The Imperial Presidency of Donald Trump: A Threat to American Democracy and an Agent of Chaos in the World?:

"When 46.1% of Americans voted for Trump in November (2016) they did not know precisely 'what they were buying'. They did not expect that the promised 'change' the Republican presidential candidate envisioned and promised was going to be, in fact, chaos' and 'turmoil' in the U.S. government."

President Donald Trump and his administration did turn out to be a threat to American democracy and a source of chaos in the world.

In 2019-20, the U.S. Republican-controlled Senate could have convicted Donald Trump, after the House had impeached him. The numerous examples of abuse of power and of obstruction of justice, which were outlined in the Special Counsel Robert Mueller's report were undisputable. But, for obvious partisan expediency, the GOP-controlled Senate chose instead to acquit him in February 2020. In so doing, they shamed themselves in placing their party's interests above their nation's interests. It was left to the American electorate to complete the impeachment process of the sitting president, the third time an American president has been impeached, and they did just that on November 3rd 2020.

And presently, in his disgraceful way of leaving office, megalomaniac Donald Trump is as obnoxious and destabilizing as he was when he unexpectedly got into the White House. For weeks now, he has been focusing on trying to overturn Vice President Joe Biden's election with false voter fraud claims, even though Biden won the popular vote by more than seven million ballots and the Electoral College with a margin of 306-232--a 56,9% majority. This incredible show is now over, and President-elect Joe Biden will be the 46th president of the United States.

During his four-year mandate, President Donald Trump did not rise to the challenge of being the competent head of a democratic state. He has instead attempted to install an autocratic rule in American politics. If he had been reelected for a second term, it's a sure bet that it would have been impossible to constrain him, and American institutions would have been seriously threatened. That he has not succeeded in his quest for autocratic power is something to be appreciated by anyone who values democracy.

What will Donald Trump the politician be remembered for?

In his last days in office, President Donald Trump has left the U.S. government in a state of semi-paralysis

Just before Christmas 2020, lame duck President Trump decided to play the Grinch. Senate Republicans had reached a compromise with Democratic senators on a $900 billion Relief bill for 14 million American families whose jobless benefits were running out. Seemingly out of pure spite against his fellow Republicans, Trump refused to sign the measure, thus creating a major humanitarian crisis. Then abruptly, after Christmas, he signed the bill, ending the damaging situation he had just created.

All the while, Donald Trump was playing swamp politics in dishing out close to 100 presidential pardons, (94 as of Dec. 25, 2020), to well-connected convicted friends, political allies and relatives, and even to some convicted murderers.

Donald Trump has done more to divide the American people than anyone else in a century and a half

Under Donald Trump, the United States has been weakened and is more polarized than it has been for decades. Such a deep division is fostered by new technologies, which allow people to isolate themselves in their own information universes. But Mr. Trump's rhetoric of setting one group against another has also intensified such polarization and disintegration.

Donald Trump pushed the American justice system to the extreme by appointing hundreds of far right judges

It has been observed that Donald Trump's appointees to the bench stand out from other judges for their ultra-conservative views, even compared to those named by other Republican presidents. This could have a lasting effect on the judiciary for generations.

Far from reducing corruption, Donald Trump has intensified it

In 2016, candidate Trump promised to 'drain the swamp' of corruption in American politics. Not only did he not fulfill that promise, he made things worse. Some analysts even conclude that he has been the "most corrupt" president in U.S. history.

Faced with the worst pandemic in a century, Donald Trump stumbled

As far as the Trump administration's management of the Covid-19 crisis is concerned, the most that can be said is that it was not the work of a competent government. The President himself began by denying that there even was a crisis. In his words, it was only a 'normal flu'. Then, when it became impossible to negate reality, Mr. Trump claimed that the pandemic crises was a 'hoax' engineered by the Democrats. Even when a vaccine became available, the vaccination program fell short and was widely criticized.

Donald Trump pushed income and wealth inequalities in the United States to record levels

The Trump administration, through deregulation and huge tax cuts for the rich, has done much to exacerbate income and wealth inequalities in the United States. Official data indicate that income inequality is the highest on record. It's also higher than in any other advanced economy.

Similarly, the United States has wider disparities of wealth between rich and poor than any other major developed country. Today, wealth ownership in the United States is as heavily concentrated in the hands of a small minority of the population as it has ever been.

The record of the Trump administration's policies on the environment is dismal

On June 1, 2017, when Donald Trump officially pulled the United States from the 2015 Paris Agreement on climate change, he placed the U.S. government squarely on the wrong side of history. This could be the most irresponsible decision that Mr. Trump made during his term in office. However, President-elect Joe Biden has promised to rejoin the Paris Agreement on the first day of his presidency.

Mr. Trump adopted a host of other measures detrimental to the environment. As of mid-2020, the Trump administration had rolled back 64 environmental rules and regulations.

Trump's foreign policies have been isolationist, militaristic, destructive and divisive

In international relations, Donald Trump succeeded in antagonizing allies and foes alike. According to Pew Research, the image of the United States under the Trump administration has been tarnished around the world, reaching a record low in 2020.

President Trump unilaterally pulled the United States from major treaties negotiated by previous administrations, most often without consulting Congress or allies: besides the Paris climate change treaty, the Trump administration pulled out of the Iran nuclear agreement. It also pulled out of the Inter-Nuclear Forces (INF) arms control treaty with Russia. Mr. Trump often bypassed the United Nations, thus weakening the role of that institution in maintaining peace around the world.

It's true that a major war against Iran, Venezuela or China has so far been avoided; but through provocations and increased animosity between nations, Donald Trump has sown the seeds for such a major war in the future, especially a war with China over Taiwan.

Donald Trump's chaotic and scandalous departure from the White House is an attempt to sabotage the incoming Biden presidency

For many weeks, in a display of deranged behavior worthy of a banana republic, and in open violation of his oath to uphold the U.S. Constitution, President Donald Trump has refused to publicly concede the 2020 election to former Vice President Joe Biden. This undignified and petty attitude has shown how much the man can be mean-spirited and a sore loser.

This was amply demonstrated on January 2, when unbelievably, President Trump openly begged, pressured and threatened Georgia's secretary of state, Republican Brad Raffensperger, into 'finding him 11,780 votes' in order to overturn the official electoral result in that state. (N.B.: Mr. Trump initially lost the presidential race in Georgia to President-elect Joe Biden by 11,779 votes; however, the result, after a final recounting, is that he lost by 12,670 votes.)

Such a quixotic request to an official in exercise to cheat and to invent votes was made during an hour-long recorded phone call made by the President, in a mob-style tone, and published by the Washington Post. It was a desperate and mind-blowing last-ditch attempt, and possibly also an illegal one, to subvert the electoral process and to strong-arm a change in the outcome of the Nov. 3 election in his favor. Luckily, Mr. Raffensperger didn't buckle.

U.S. courts have roundly dismissed Trump's legal challenges to the November election results. His last attempt in the state of Georgia was even seen by most as absurd and a manufactured crisis. 

If Donald Trump had intentionally wanted to sabotage and undermine the Biden presidency by not accepting the official results of the November election, he would not have acted differently. In so doing, however, Mr. Trump has created a dangerous precedent. His temper tantrums and his numerous court challenges of the election results have demeaned and done a lot to delegitimize the American electoral process. It has damaged the reputation of the United States around the world, and it has cast a long shadow on the future of American democracy.

On Monday Dec. 28, 2020, even as staunch a supporter of Donald Trump as the New York Post headlined an editorial with a clear message to Donald Trump: "Mr. President... STOP THE INSANITY.

That says it all!

Conclusion

The conclusion is inescapable. President Donald Trump's legacy is a pile of rubble.

The American people were more than justified in voting Mr. Trump out in November 2020. In 2016, he didn't really deserve to be elected in the first place, since he received 3 million fewer votes than his democratic rival, Ms. Hillary Clinton.

The pathetic display that Donald Trump demonstrated after his electoral defeat by openly clinging to power indicates that he went into politics not to serve but merely to please his ego. That's not the type of politician a democracy needs. Probably Donald Trump's worst political crime has been to promote violence in American politics for his own narrow personal advantage.

If Mr. Trump had known any history, he might have imitated outgoing President Grover Cleveland (1837-1908). Indeed, in the 1888 election, after winning the popular vote but losing the Electoral College to Republican Sen. Benjamin Harrison (1833-1901), Cleveland wrote a personal letter to president-elect Harrison "to assure you of my readiness to do all in my power to make your accession to office easy and agreeable."

Now the damage is done. Donald Trump's name will forever be associated with demagoguery, violence and anarchy.

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International economist Dr. Rodrigue Tremblay is the author of the book "The code for Global Ethics, Ten Humanist Principles" of the book "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Wednesday, January 6, 2021.

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© 2021 Dr. Rodrigue Tremblay

The Foundations of Canada's Mass Immigration Policy

by Dr. Rodrigue Tremblay, Emeritus Professor of Economics, Université de Montréal

(Author of the books "The Code for Global Ethics", and "The New American Empire")

"Economic thinking about immigration is generally quite superficial. It is a fact that in different [rich] countries, reproducible national capital is on the order of four times yearly national income. As a result, when an additional immigrant worker arrives, in order to build the necessary infrastructure (housing, hospitals, schools, universities, infrastructure of all kinds, industrial facilities, etc.), additional savings equal to four times the annual salary of this worker will be needed. If this worker arrives with a wife and three children, the additional savings required will represent, depending on the case, ten to twenty times the annual salary of this worker, which obviously represents a very heavy burden for the economy to bear." Maurice Allais (1911-2010), French economist, Nobel Prize in economics in 1988, (in his book 'Nouveaux combats pour l'Europe', 1995-2002', Paris, 2002, 502 p.)

"You cannot simultaneously have free immigration and a welfare state." Milton Friedman (1912-2006), Emeritus Professor of Economic, University of Chicago, August 20-22, 1999.

"What is the role of the Canadian government [in regards to immigration]? If it follows the recommendations of immigration advocates, it makes policies to maximize world welfare and its goal should be high, if not unlimited immigration. If its policies are to maximize the welfare of the native [Canadian] population, immigration policies should be designed to eliminate the fiscal burden [of between $20 and $26 billion a year] so that only positive economic benefits occur through immigration." Herbert Grubel (1934- ), Emeritus Professor of Economics, Simon Fraser University, (in a Fraser Institute Report entitled 'Canada's Immigrant Selection Policies: Recent Record, Marginal Changes, and Needed Reforms', 2013)

Last October 30, without much fanfare, the minority Canadian government of Justin Trudeau announced its intention to not only refuse to lower the annual numbers of legal immigration, in these times of a serious pandemic crises and of a crushing economic slowdown, but rather to increase them substantially over the next three years.

Indeed, Federal Immigration Minister Marco Mendicino announced that his department is raising legal levels of immigration to Canada to reach 401,000 people by 2021; 411,000 in 2022; and 421,000 in 2023. Remember that these levels were 310,000 in 2018; 330,000 in 2019; and 340,000 in 2020.

If one compares these levels to those of the last two years, the new immigration targets would represent a 25 percent increase, a substantial jump from former levels, which were already judged to be very high. The Federal Minister of Immigration made those announcements in an interview with Bloomberg.

A few days later, on Monday, November 2, Mr. Mendicino doubled up on his intentions and told Bloomberg that the Trudeau government also plans to speed up the path to permanent residency and to citizenship for more than 1 million temporary foreign students, foreign workers and asylum seekers now living in the country.

Since it is widely believed that there will be a general election in Canada next year, is it possible to make a connection between this intention by the Liberal minority government to make it easier for so many temporary residents to qualify to eventually vote in the coming election?

Let us recall for the record that the Liberal government of the day, a few months before the Quebec referendum of October 1995, also granted residency and citizenship, in advance, to tens of thousands of newly arrived immigrants, so the latter could vote in the referendum.

It may be useful, also to note that a recent Bloomberg-Nanos Research poll, published on November 6, indicated that 83 percent of Canadians were opposed to increasing immigration levels at this time. Indeed, the poll revealed that only 17 percent of Canadians wanted an increase in the immigration levels, while a plurality of 40 percent wished these levels were reduced, and 36 percent said they wanted to keep the 2019 status quo.

If the opposition parties in the House of Commons do not object to the decisions of the current Liberal government, the result would be that Canada would welcome, in just three years, more that 1.2 million new immigrants while many Canadians are out of work. This would translate into a level of immigration, for example, that would exceed half of the population of the City of Montreal. One can imagine the economic, social and political consequences of such a phenomenon, in such a short time.

Again, to put things in perspective, consider that the projected level of legal immigration to the United States has been set at 601,660 people for the year 2021. As the populations of Canada and the United States will approach 38 million and 332 million respectively, at the end of this year, this would mean that by 2021, Canada would accept almost six times as many legal immigrants per capita as the United States.

If Canada were to accept the same proportion of immigrants, relative to its population, as the United States, its levels of legal immigration should instead be in the range of 66,000 to 135,000 per year, not the more than 4000,000 immigrants each year that the minority Trudeau government is planning.

On must add to the above figures the influx of refugees, and considering the Trudeau government's "no border" policy on refugees, the annual levels of total immigration to Canada could easily rise to 500,000 per year. This would translate into a migratory inflow equal to 1.3 percent every ten years, a rate of increase unheard of in any industrialized country. With the current policy of super massive immigration, the Canadian population could double every 45 years, a dramatic demographic transformation.

The current liberal government should explain why its immigration policy is, at this time, the most massive of any industrialized country, and why it is a policy of sharply increased immigration, rather than being adapted to the country's difficult economic situation.

Mass Immigration and a Replacement of Population?

According to Statistics Canada, considering the very high yearly levels of immigration recorded in recent years, the percentage of the foreign-born population to the total Canadian population is expected to reach 24.5 percent next year, in 2021.

Under the realistic hypothesis of high immigration levels, the percentage of the population born abroad in relation to the total Canadian population should approach 30 percent in 2031. This would be the highest percentage in 160 years, the period during which data are available.

A great shift is also expected as to the origin of immigrants to Canada in the coming decades. Statistics Canada has estimated that by 2036, the proportion of immigrants born in Asia could reach around 56 percent of new immigrants, up from the proportion of 44.8 percent observed in 2011.

Conversely, only around 16 percent of future immigrants to Canada would be coming from Europe, a drop by half from the 31.6 percent recorded in 2011. This could have the look of a population replacement policy.

Mass Immigration when a Country is a Free Trade Economy

It should be understood that labor needs are by no means the same when an economy is in a free trade situation, as it has been the case with the Canadian economy since 1988. In fact, Canada has concluded three important free trade treaties in the last thirty years. The first was concluded with the United States in 1988; the second with the US and Mexico in 1994, and the latest, the new Canada-United States-Mexico Agreement (CUSMA), came into force on July 1, 2020.

For the Canadian economy, access to the large American market is a natural substitute for a protectionist trade policy and for the need to have a rapidly expanding domestic market. In such an environment, economic growth is more dependent on exports and on productivity gains, rather than on mass immigration of foreign workers. Only a targeted immigration policy, based on skills, is really then necessary, depending on the specific requirements of expanding industries.

Private Interests behind the Canadian Mass Immigration Policy

In Canada, the pressure in favor of ever increasing immigration levels originates from three main sectors. These are identified interest groups who benefit from mass immigration but do not necessarily bear the costs.

a) The professional services that are offered to individuals who wish to immigrate to Canada. The providers of such paid services constitute a powerful lobby in favor of ever increasing immigration.

b) Low productivity and low wage industries competing with imports, and the construction industry.

The advent of free trade has meant that labor-intensive industries, such as textiles, have seen their outputs gradually replaced by imports. Likewise, some industries with  little mechanization, such as the service industries, may have trouble raising their productivity. For the latter, paying low wages to employees is a way of remaining profitable.

One sector that benefits from the flow of immigrants is the group of the construction, real estate and housing industries. They benefit from the increased demand for housing and higher prices, especially in large metropolitan areas.

c) Political parties and organizations that need foreign support to ensure partisan or political success.

It could happen that a particular political party or an organization could profit financially or electorally from an increasing flow of foreigners. These would be private interests, which may or may not coincide with the general interest of the country.

A Mass Immigration Policy may result in a Chronic Labor Shortage: The Creation of a Vicious circle

The Canadian government's policy of mass immigration and of population replacement is not only about bringing in foreign workers to relieve identified labor supply bottlenecks in certain industries. It also encourages an inflow of economically dependents from abroad, (spouses, children, elderly grandparents, etc.). Such economically dependent immigrants inflate the overall demand for labor by creating an increased demand for goods and services, which could worsen labor shortages in some industries, such as the education, health and housing industries.

This could result in creating an endless spiral: The longer mass immigration endures, the more artificial labor shortages pop up in some sectors, and the more it becomes necessary to raise immigration levels, and so on!

 Conclusion

The excessive mass immigration and population replacement policies of the Justin Trudeau government are bound to erase the historical reality that Canada was founded and developed by two founding peoples, the French and the English.

Economically, these are also policies that go far beyond the real requirements of the Canadian economy. For example, rather than alleviate labor shortages in some identified sectors, it an easily result in creating labor shortages in many other sectors.

The economic arguments advanced to justify such policies of mass immigration and population replacement, in the current economic context of a crushing pandemic, high unemployment levels, a prolonged economic slowdown and a high level of indebtedness, are very weak and even, in some cases, fallacious and counterproductive. Such policies seem to be based primarily on ideological and political motives rather than on sound economic arguments.

Ideally, the Canadian federal government should hold a national referendum on this vital issue. This would shed light on all facets of the question. In the absence of a serious national debate, it could nevertheless be the duty of all political parties to take a clear position on these issues, which are binding on the future of the country.

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N.B. This is a condensed version of a longer article. To read the complete article (in French), please click here.

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International economist Dr. Rodrigue Tremblay is the author of the book "The code for Global Ethics, Ten Humanist Principles" of the book "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Sunday, November 22, 2020.

*** To receive new postings of Dr. Tremblay's articles, 

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© 2020 Dr. Rodrigue Tremblay