Knut Wicksell was a late nineteenth century Swedish economist who late in his career elucidated some wonderfully simple insights about the basic rates of interest that impact entrepreneurs, savers and borrowers in a market-based economy. His framework effectively undresses any economic cycle to its bare essentials. Given the distortions in monetary policy in the US, Europe and Japan since the acute phase of the 2008 financial crisis, Wicksell's insights are relevant for those seeking to understand how this economic cycle ends and the investment consequences which flow from the denouement. For Wicksell, the "natural rate of interest" was the rate that causes savings and investment to broadly balance. It corresponds over the long term to an "equilibrium level", like the purchasing power parity exchange rate between two currencies. His other key measure was the "market rate of interest" which corresponds to companies' long term borrowing cost. As Wicksell saw it, economic cycles tend to be driven by the spread between these two fundamental rates of interest. When the market rate is too low compared to the natural rate, the cost of capital is too cheap. The result will be capital misallocation, leading eventually to a decline in the economy's structural growth rate. In contrast, when the market rate is too high compared with the natural rate, capital is too expensive and an economy cannot grow. The result will be a bust, especially if overall indebtedness has risen sharply. From this basic conceptual insight, Charles has spent recent years developing his own "Wicksellian" framework into a practical asset allocation tool that allows recession markers to be identified along with key thresholds that indicate when investors should be in, or out of risk assets.

Stagnation or Bust?

Charles Gave

Gavekal Books

Empires usually start off as road-building exercises. Which explains why, in Europe, everyone says that “all roads lead to Rome”.
The reason empires like to build such arteries is to pull in commodities cheaply to the heart of the empire, and push out, at minimal cost, higher value-added finished goods to the periphery.
With this analogy in mind, the world seems to increasingly be splitting along three empires:
• The USA with its protectionist and isolationist president
• Europe, whose territorial expansion seems to have stalled at the borders of Russia.
• China, with its “One Belt, One Road” ambitions, a thinly disguised plan to tie Eurasia and Africa into China’s economic orbit.
Clearly, Xi Jinping is on an imperial kick and, for him, in the 21st century, all roads must lead to Beijing.
But building roads is the easy part of any imperial roll-out.
Once the roads have been built, the safety of the goods and people travelling along them has to be ensured without creating resentment.
Moreover, the empire must decide in which currency trade is taking place.
Can China remain dependent on the willingness and ability of the American banks and government to fund its imperial ambitions ?
Besides the fact that building an Empire on somebody else’s dime makes no sense, in the past couple of decades (Asian crisis of 1997, mortgage crisis of 2008, Taper Tantrum of 2013…), American banks have shown repeatedly that they were not reliable partners when it came to funding Asian trade. To be credible, an Empire must have its own reserve currency.
The aim of this book is to think through the consequences of a world which increasingly seems to be splitting up into three zones, each with its own reserve currency, its own fiscal policy, its own ambitions and perhaps even its own supply chains.
To go further: http://www.clashofempires.info

Clash of Empires: Currencies and Power in a Multipolar World

Charles Gave & Louis-Vincent Gave

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Stagnation or Bust?

Clash of Empires: Currencies and Power in a Multipolar World