This is the first article in a series of three.
What feels wrong with the following?
2020 has been a stellar year for dire revelations. An almost 250-year-old democracy can be brought to its knees in one presidential term. A global $100 trillion economy can be ground to a near standstill by a Corona-type virus, barely 100 nanometer in size. Ensuing economic stimulus imperatives, financed by Quantitative Easing, can lead to global Central Bank balance sheets expanding to $23.2 trillion, causing further debasing of the major world currencies.
2020 saw a record-breaking number of named tropical cyclones (30) in the U.S., eclipsing the previous record of 28 in 2005, the year of Hurricane Katrina. The cumulative damage of 285 significant U.S. weather and climate disasters in the last 40 years now exceeds $1.875 trillion, putting a strain on financial institutions worldwide.
The fiscal 2020 U.S. budget deficit stands at $3.3 trillion.
Global leverage to all sectors, excluding banking, stands over $210 trillion, an increase of 70% since 2008, and sits at an all-time high of close to 270% of GDP.
Despite the global pandemic, the gaping budget deficit, the apogee in international indebtedness, the major debasing of currencies, and the ever-larger looming climate risk, the total market capitalization of the S&P 500 exceeded $30 trillion. Intangible assets now command over 90% of the S&P 500 market value.
The sustainable nature of those market data is difficult to tally with this intangible asset magnitude, with U.S. and global income inequality on the rise (see the evolution of the GINI-coefficient), with increasing social justice tension, deep-rooted political unrest and, eventually, threatening physical climate risks.
Natural hedge strategies may involve investors seeking refuge in Bitcoin and physical gold. The more than 10-fold meteoric rise in Bitcoin value since January 2020 brought the total market cap of all crypto-currencies above $1 trillion. At approximately $60,000 per kg, the total market capitalization of gold converges towards $12 trillion. The relative value trade still holds momentum potential. These moves may offer shelter for a few but won’t alter the calamitous outcome for the masses.
What are our real deficits?
In the economic process, we failed to assign value to and protect our commons‘ integrity, meaning cultural and natural resources such as clean air, water and soil, accessible by all citizens. As a society, already for some time, we lost the moral compass of the common good. We took democratic principles as the bedrock for a well-functioning and sustainable economy for granted. We reneged on the societal contract which benefits communities and nations as a whole. We questioned the banks’ money creation prerogative and its subsequent carbon price agnosticism in its capital allocation process far too late. We made an abstraction of holistic climate risk management and contingency planning. We failed to strengthen societal resiliency by ignoring climate change, the societal plight towards the underprivileged and unsustainable consumption patterns.
We squandered a prime organizational acumen (with an inability to re-allocate, during the pandemic, production resources from the ancillary to the urgent, procure trusted voting infrastructure, and distribute vaccines in a timely and seamless fashion…) to the benefit of social media platform addiction. Our pursuit of short-termism lead to favor pharmaceutical share buybacks and dividends instead of investing in much needed pandemic health research and development and immunity enhancing protocols. Our non-tempered belief in international trade entailed domestic production being outsourced, resulting in fragile supply chain management, with 90% of vital U.S. medical supplies coming from just one country.
We failed to see the forest for the trees by pursuing monolithic growth and allowing excessive consolidation and concentration to prevail (top five listed companies represent more than 17% of the S&P 500 index, and the top four global banks (all Chinese) constitute about $15 trillion in assets).
What do we need?
There is a need to re-prioritize and re-assign value to our commons and sustainable assets. There is a need to re-allocate capital, incorporating a fair price for carbon, waste, and pollution. There is a need to incentivize and reward healing, regenerative, protective, and innovative efforts. Such altered practices would address the prevailing multi-headed crisis, characterized by climate change-related imperatives, the public health (COVID-19) pandemic, distrust in democratic institutions and international trade, burdening inequality and social injustice tensions, and finally, the burgeoning debt risk and financial market uncertainty.
There is a need to incorporate the 2015 Paris Agreement as our economic and industrial compass.
A promising initiative in this regard is the Regenerative Crisis Response committee, launched by former Federal Reserve Governor Sarah Bloom Raskin, who will explore what levers exist to steer fiscal and monetary policy toward lasting sustainability.
From a monetary perspective, two currency concept types could support grand ambitions. The first one involves central banks using Central Bank
First, each country’s Central Bank could design its CBDC to be expressed in their fiat currency. The primary purpose would be to facilitate the payment execution of one of the following: universal basic income, stimulus payment, or a (climate) calamity support intervention. The payments could be targeted, via mobile phones, towards citizens resident in specific (economically depressed) areas or weather impacted regions, for purchases of a wide range of pre-determined goods and value eroding over time to foster overall circulation velocity. There are many such projects already underway. The Federal Reserve Bank of Boston has announced a collaboration with MIT in August of last year to research the different digital currency options.
But several other Central Banks are engaged with similar research projects (Nederlandsche Bank, Bank of England, Central Bank of Canada, Sveriges RiksBank, European Central Bank, Singapore Monetary Authority, et al.)
But the prime solution would be centered around a new anchor or pegged currency in the form of a stable coin, the IMF Climate Coin.