2020, the year of the Truths?

For sure, 2020 will make history. An unprecedented breaking wave has caused a health and economic crisis that has paralysed the entire world and shaken some established beliefs. At a time when the US stock market is close to its historic peak of January 2020 and while the FED predicted a record unemployment rate for May affecting 20% of the working population, racial riots have exploded in the United States and seem to have all the ingredients to turn into a social revolt questioning the very functioning of liberal capitalism. 

At the same time, President Emmanuel Macron appointed a commission of renowned international economists, chaired by Nobel Prize winner Jean Tirole and former IMF chief economist Olivier Blanchard, to rethink the global economy by addressing the three major challenges of climate change, inequality and demographics. 

As the pace of events accelerates, it is increasingly difficult to make sense of the incessant mass of often contradictory information that we receive on a daily basis and which is unfortunately neither filtered nor properly interpreted. It is therefore necessary to analyse the logic of a given sequence of events. This article represents my personal interpretation of current events without pretences that it is the only truth.  

COVID-19, an open-air experimental lab?

How is it possible that something infinitely small, invisible to the eye, can paralyze the infinitely large for several months?

This is exactly what we are experiencing right now: an unprecedented crisis caused by a virus is turning the world into a huge open-air laboratory for new societal experiments.

And the winner is… the GAFAMs 

It is surprising to see that New York State Governor Andrew Cuomo has appointed a champion of artificial intelligence, ex-Google CEO Eric Schmidt, to organize the deconfinement of Big Apple. 

Eric Schmidt is officially praising the benefits of the online world to New Yorkers: online health, online school and university, online work... In short, social distancing has no better allies than the digital technologies offered by the GAFAMs (Google, Apple, Facebook, Amazon and Microsoft), whose current stock market performances show they are the main beneficiaries of this crisis. On June 15, all the GAFAMs to the exception of Google were at their historical high and represented 20% of the total capitalization of the main US stock index, the S&P 500. On that day, Microsoft's valuation alone was equivalent to the total valuation of the main French stock index, the CAC 40. Translation: investors anticipate that Microsoft's future earnings will be equivalent to all the future earnings of the 40 largest French companies. How is this even possible?

Be patient, 5G is coming! 

While the GAFAMs are looking to create new usages and to fill us with digital content requiring more bandwidth, the United States do not allow Huawei to deploy its equipment on their territory, even though it offers the best 5G technology. They think the ears of the Chinese telecom giant's antennas are too powerful and could spy on them thus representing a major threat to national security. 

They are not the only ones to think so: the city of Brussels refuses to install 5G and France will deploy it everywhere except in so-called sensitive areas such as the arsenal of Brest, the aeronautical region of Toulouse and the city of Paris. 

In fact, it does not matter if the rest of the French people are listened to and watched. What happens to the GDPR law, which is supposed to protect personal data, if we can all be listened to by Chinese antennas or monitored by the Cloud Act, the 2018 American law authorizing security services to force US digital platforms to communicate any individual's personal data wherever it is without informing anyone beforehand? 

Furthermore, the French government took advantage of the state of health emergency to validate the bill No. 2020-320 of 25 March 2020. In other words, during the state of health emergency, the relay antennas of mobile operators can be installed without informing the municipalities of their number or location and without prior agreement from the National Frequencies Agency, which is responsible for managing all radio frequencies in France. It is therefore the four mobile operators who can unilaterally decide on their installations and who can, at the same time, anticipate the arrival of 5G. 

It is estimated that this technology will consume twice as much energy as 4G, partly due to the increase in the number of shorter range, higher frequency base stations. Is this really compatible with the need to decarbonize our economy? And frankly, do we really need more video content and new services on our mobile phones to live better?

Greenhouse gas emission (GHG) will decrease in 2020

This crisis makes it possible for the first time ever to experience a world with virtually no production during several months. The IMF estimates a 3% drop in world GDP for 2020, which breaks down into -6.1% for developed countries and -1% for emerging countries, with China growing by 1.2% though. The world has never experienced this.

This decline in GDP is accompanied by a decrease in GHG emissions into the atmosphere. The International Energy Agency expects a total decrease in emissions of 8% in 2020 compared to 2019. This is what we should collectively do every year until 2050 to achieve the Paris Agreement in its 1.5°C version. 

As we will not have a COVID every year until 2050, we will have to be much more ambitious in the forthcoming economic recovery. This is why it is essential that the European "Green deal" be even greener than initially planned. The measures of the European plan revealed on 27 May are a step in the right direction but by far not enough.

Successes of initiatives such as Pascal Canfin' s call for a green recovery alliance and the SBT’s call for Uniting Business and Governments to Recover Better are encouraging. It is also reassuring to see that on the other side of the Atlantic CEOs are organising themselves to call on Congress to rebuild a more resilient and sustainable economy. Beyond these fine intentions, we must now move into an accelerated action.

A priori, we can conclude that a drop in GDP is automatically accompanied by a drop in GHG emissions. The question is whether the decrease of GDP is a sine qua non condition for the decarbonation of the economy or whether a decoupling is possible between an increase in GDP and a decrease in emissions.

While the proponents of the decay of growth assert the inevitability of the GDP/GHG emissions tandem, large multinationals such as L'Oréal and Unilever manage to increase their sales while reducing their emissions. 

The "collapsologists" anticipate a collapse of the thermo-industrial civilization by basing their reasoning on the finiteness of resources and the damage caused to nature. Their convictions are based on a field of possibilities that could not in itself evolve.   

However, there is probably another way to produce energy that would not consume natural resources and would not pollute. 

Towards a new world view

The vision of a world fully connected from the infinitely small to the infinitely large

There are two opposing world views. 

The vision of a disconnected world that is still widespread in our societies is based on the philosophy of Cartesian reductionism and the dualism that separates body and mind. Reductionism considers, for example, that the universe is composed of material objects that are totally disconnected from each other and can be represented by a two-dimensional mathematical model, whereas nature has at least three dimensions, which inevitably leads to certain limitations in theoretical analysis. Yet it governs the bulk of modern physics research and benefits from almost all the public funding allocated to this research.

Conversely, the recent emergence of unified physics offers a vision of a fully connected world where all objects, from the infinitely small to the infinitely large, are interdependent and participate in the integration of the whole.

Free Energy

At the end of the 19th century, Nikola Tesla, the father of alternating current, spoke for the first time about free energy and wireless electricity. Tesla filed more than 300 patents, some of which foreshadowed current innovations such as mobile telephony and the electric car. His genius was not accepted by mainstream scientists and his research laboratory was burned down twice. His work has since been taken up by several scientists, including Paramahamsa Tewari in India who created the Space Vortex Theory capable of producing clean energy for free.

“Alternative" scientists with a vision of a connected world are increasingly interested in the ability to produce energy from vacuum resonance. The vacuum would then be an inexhaustible source of clean energy.

Research related to a connected world view does not receive any public funding

Because the vision of a connected world disturbs scientific conformism, the resulting basic research must today be entirely financed by private funds that are more difficult to find. This is what Professor Luc Montagnier, winner of the 2008 Nobel Prize in Medicine, experienced when he became interested in the memory of water, a revolutionary theory that is beginning to be accepted by the scientific community. Water has a memory!

The current crisis is awakening more and more consciences that are uniting to reinvent the future. Profound structural changes will rapidly emerge, challenging the liberal capitalist system and excessive globalization.

Economic theory can no longer explain reality 

We need to change the economic indicators that are not representing the world anymore

Major economic indicators no longer reflect the reality of the world. A GDP that does not take into account the negative externalities associated to production, nor the notion of happiness or mental health of a population no longer objectively means anything. 

If we were to change the way we calculate it, we would probably have declining GDPs and declining stock prices instead of the historical highs reached last January in the US.  

Similarly, inflation does not reflect the real at all since it does not take into account, for example, the cost of rentals in its calculation in Europe. The inflation currently stagnates at around 1 % in Europe and should rather be around 3-5% should we include rentals in its calculation.

Moreover, the classical economic theory cannot explain the negative interest rates we are experiencing today. 

To be able to make informed decisions, it is important to have the right indicators at hand. Without them, it is difficult to envisage a long term coherent economic planning, which is more necessary than ever today. 

Stock markets are totally disconnected from reality

In short, the goal of liberal capitalism is to maximize the value of a company at any cost. It’s always striking to see that when a redundancy plan is announced following a restructuring, the stock price of that company soars. A human drama then turns into very good news for shareholders. Is this moral and ethical?  

A stock price is calculated as follows:   

Stock price = ∑_NIn/(1+WACC)^n

Where:

-       NIn=Net income of the company in year n

-       WACC= Weighted Average Cost of Capital

The WACC is an average between the cost of equity and the cost of debt. Today, low-risk companies such as Microsoft have a very low WACC because interest rates are very low.

Therefore, the share price increases when future net incomes increase or when interest rates decrease or when net incomes increase and rates decrease.

The main explanation for the continued rise of stock markets from the previous crisis in 2008 to their January 2020 levels is the sustained fall in interest rates following the massive injections of liquidity in the market by central banks. The volume of money creation linked to public, private and households debts rose from 97 trillion USD in 2007 to 253 trillion USD in 2019, an increase of 260% in 12 years while the world GDP increased by 66% over the same period. In other words, there was 4 times as much debt to produce one additional unit of GDP. The difference does not go into inflation of prices of goods and services but rather in overvalued stock market prices, real estate prices, very risky structured products that were at the very origin of the 2008 financial crisis and most probably into corruption. In these cases, we talk about wealth creation.

History seems to be repeating itself in an alarming way. How can supervisory bodies and central banks let such a scenario whose outcome is already known, that of a speculative bubble which is going to burst, be repeated? 

Given that it will be difficult to have much lower interest rates and since companies have already borrowed massively at low cost to buy back their shares (USD 2,500 billion between 2016 and 2019), the only way to maintain growth of stock prices will be an increase of the expected earnings of corporations (numerator of our equation). This is exactly what is currently happening for the GAFAMs, which enjoy monopolistic positions contrary to the principle of perfect competition.

It is interesting to note the very strong disconnection between the US stock market and the rest of the world since 2010. For example, since 14/6/2010, the S&P 500 has risen by 172%, while at the same time the CAC 40 only grew by 27%. The US stock market reached its all-time high in January 2020 while the CAC 40 reached its highest level twenty years ago in August 2000. But why on earth do investors think that American companies will be more profitable on average than French companies in the coming years?

In an increasingly uncertain and unstable world, it is astonishing that stock exchanges are still so optimistic about the ability of companies to generate ever more profits in the future. Moreover, if inflation were correctly calculated, it would have a negative impact on prices of around 20%.

Furthermore, the recent interventions of the welfare state due to the COVID-19 crisis will have the effect to increase public deficits and therefore public debts that finance them will explode to unprecedented levels. Although sovereign debt is currently very cheap, it is reasonable to think that sooner or later rates will start rising again, which will increase the debt burden in a way that will be unbearable for some countries such as Italy, Spain and potentially France. 

Until the early 1970s, the French government financed its public deficit through the so called “Treasury circuits” at advantageous rates administered by itself. In particular, these channels included money creation by the central bank. But, under pressure from banking lobbies, it had to start "borrowing" its public deficit on the financial markets at much higher interest rates.

Could we not return to financing public deficits through pure money creation?

It seems healthy that a company issuing bonds to invest now in order to generate future profits pays an interest rate. But the question may arise for a state that borrows money on the markets to invest in public services in order to improve the general welfare of its population.

By reducing the money supply to levels compatible with the real economy, the risks associated with investments would be assessed much more rigorously and the speculative bubbles inherent to the system and benefiting only the fewest would be limited by construction. One solution would be to significantly increase the level of prudential ratios for banks, which would have to embed all their off-balance sheet activities.  

Europe is in danger and its future is at stake now

 The COVID-19 crisis demonstrated both Europe's inability to act in a united and coordinated manner and its excessive dependence on countries such as China, India or the United States.

European solidarity must prevail over law

It is very encouraging to see that France and Germany have taken the initiative of a European bond issuance of 750 billion euros to finance, through subsidies for 500 billion euros, the green recovery of the countries that have suffered most from this crisis. The great novelty of this bond is that it will be launched for the first time ever by the European Commission itself.

However, Austria, the Netherlands, Denmark and Sweden have already voiced their disapproval, arguing that the rich countries of northern Europe should not have to pay for the budget deficits of southern Europe. The European Commission has still some hard work to convince them in the coming weeks.

Until now, Germany has also been reluctant to show solidarity with the south, as shown by the May 5th ruling of the Constitutional Court in Karlsruhe, which went almost unnoticed but has far-reaching consequences. Indeed, in response to an initiative of German citizens fearing for their savings, this ruling not only calls into question the independence of the ECB, but also the primacy of the Court of Justice of the European Union by stating that "the Federal Republic of Germany does not recognise the absolute primacy of the application of European Union law" and that this primacy ends where the "constitutional identity" of the States begins.

The German judges believe that the ECB, independent of political power, is overstepping its mission to contain inflation (objective set at 2%) when it resorts to Quantitative Easing by buying public debts in a manner that does not comply with the "principle of proportionality", which is supposed to reflect the weight of each Member State in its capital. However, when it "monetises" public debts, the ECB allows certain states to finance themselves at rates well below market rates. For example, at the end of 2019, the ECB had purchased around 30% of total French public debt, whereas the French Central Bank holds only 17% of its capital.

Some countries would therefore be favoured by the Quantitative Easing. Theoretically, the purchase of public debt should lower rates, which is against the interests of German savers and, in fact, all European savers.

The ECB has until August 5th to explain this lack of proportionality. If the answer is unsatisfactory, then the Bundesbank will most probably resell the government bonds it holds in order to raise rates to protect German savers.

This legal episode must be followed very closely to see whether the political solidarity shown by Germany will be followed by the facts or whether the law will prevail at the risk of imploding the European system by pushing out countries whose public debt-to-GDP ratio is reaching dizzying levels, such as Italy, where it is expected to be around 160% in 2020 and where, as we well know, anti-European populism is gaining traction.   

The re-industrialisation of Europe is as necessary as imperative

It is now important to create a coordinated program for the re-industrialisation of Europe to not only make it self-sufficient in strategic areas such as health, agriculture, energy, digital platforms and data, but also to shorten supply chains. In addition, this relocation will have a beneficial effect on GHG emissions because energy and production processes are less carbon intensive in Europe than in Asia.

Relocating production locally will make it possible to revive forgotten skills and develop employment. Notwithstanding the first effect of increased costs for companies, their risks will be reduced. The quest for profit has for too long justified the priority of the lowest price to the detriment of a holistic approach to risk. The current crisis offers a moment of truth that is an opportunity to reverse this trend.

The notion of fair value is at the heart of success. To achieve this, the revaluation of low-wage earners is essential because "low-wage" earners have a marginal propensity to consume much higher than others and this is exactly what the economy needs to boost demand.

In addition, differentiated taxation could introduce a reduced VAT on locally produced goods and thus mitigate the impact of the rise in labour costs in the final price. 

Time to regain European sovereignty 

In the 1990s, the United States developed a whole legal arsenal that enables them to sanction companies that violate their national laws when they use the dollar as a means of payment. Moreover, these laws allow them to read anyone's email as long as the email addresses are registered in the US. Who does not have a Facebook or Linkedin account? 

French companies such as BNP Paribas, Total or Technip have had to pay huge fines to keep their license to operate in the US because they violated the embargo imposed on Iran by them. Also by using one of these extraterritorial laws relating to the payment of kickbacks that the US Department of Justice (DOJ) put pressure on Alstom's top executive management by threatening them with imprisonment if they did not agree to sell part of their company to General Electric.

This American hegemonic superpower has the effect of vassalizing, by law, their competitors in the world. And there are many of them.

The time has therefore come to regain sovereignty through economic intelligence. 

Both the bill to create a sovereign fund to support French companies in strategic sectors, and the recent call launched by a group of French tech entrepreneurs "For Immediate Digital Freedom, Sovereignty and Security" aimed at freeing ourselves from the dependence on the global platforms promoted by the GAFAMs are indicative of an awareness and economic necessity if we do not want our know-how of excellence to disappear to the benefit of our competitors.

As such, the Economic Warfare School created in 1997 trains students to be able to respond to international business practices which sometimes lack ethics and morality.  

Moreover, the BRICs (Brazil, Russia, India and China) have already started to trade with each other in their national currencies in order to circumvent the supremacy of the dollar in international trade.

For example, China, the world's largest oil importer, launched a crude oil futures contract in 2018, denominated in yuan and convertible into gold. This contract represents a major upheaval affecting international trade. Indeed, oil exporting countries sanctioned by the various US extraterritorial laws such as Russia, Venezuela or Iran can now directly sell their oil to China in yuan which is convertible into gold.

With the revelation of certain truths, 2020 is a pivotal year in the 21st century. Challenging certain theories that are deeply rooted in our societies is an opportunity to collectively reinvent our future that will have to be more just and respectful of our individual freedoms.

Raising awareness of societal issues and the emergence of a new connected world view will accelerate the structural changes necessary for a better life together and more equitable sharing of the wealth created by a more responsible capitalism.

As the Nobel Laureate in Physics Niels Bohr said, "Every great difficulty carries within it its own solution. It forces us to change our way of thinking in order to find it". 

It is high time to change our reading of the system and act differently to create the harmonious world of tomorrow.