Tag: economics

A decentralised solution

Did you know that there are still more than 700 million people in the world who live in extreme poverty? These people must scrimp, starve, and struggle to survive off less than $1.90 per day.

By 2030, the World Bank estimates that more than 90 percent of those people will be concentrated in Sub-Saharan Africa.

This is perhaps one of the greatest developmental failures of the modern world. Despite the continent’s expansive natural resources and increasing connectivity, foreign actors still feel it’s too risky to heavily invest in their markets.

Blockchain could be the key!

Bitcoin and “Blockchain” were created in the mass wave of distrust in banks after the 2008 financial crisis. Therefore, the technology enables individual, distributed data storage that could become the perfect evidence (trust) base and financial infrastructure for a developing country.

With the right implementation, Blockchain holds the potential to completely revolutionize and revitalize such economies, especially in Sub-Saharan Africa.

So, what is this Blockchain?

Blockchain is essentially a kind of decentralized database that allows you to have a safe, secure way to handle their data without the need for third parties.

For example, you could with Bitcoin, make or accept payments in real-time without needing a centralized bank.

“[It is] a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer,” said software entrepreneur Marc Andreessen.

“The consequences of this breakthrough are hard to overstate.”

Historic background

Until the mid-twentieth century, most of Africa was ruled under a colonial system meant to exploit the people and their natural resources for European benefit. Africans, in addition, were rushed into development according to European standards rather than homegrown ones.

The legacy of rapid development, distrust and corruption left behind an economic system failing to recover in the 21st century.

While the World Bank celebrates a decrease in global poverty levels, the number is expected to remain stagnant in Africa. Today’s poorest people are living in places with the least economic growth.

Sadly enough, poverty and lack of investment in many developing countries stem from how they were integrated into the world system.

The land was cut into countries according to European treaties and agreements, rather than by traditional and tribal land divisions. This situation worsened upon the handover of colonial power to so-called “democracies.” Power often shifted to the ethnic groups that former colonizers favoured.

Corruption multiplied in the form of bribes, political persecution, rigged elections, and a massive wealth gap. All of this still affects the wealth distribution and investment potentials of many developing countries.

Of course, this created a lack of trust in banks and government throughout much of Sub-Saharan Africa.

The perfect fit for Africa

During a 2012 study conducted in rural Western Kenya, Stanford University researchers waived the costs of opening basic savings accounts for a number of unbanked individuals.

While 63 percent of the subjects opened an account, only 18 percent of them used the accounts. This was likely due to three factors: a lack of trust in banks, unreliable service and prohibitive withdrawal fees.

Unfortunately, the prevalence of unbanked individuals in the informal sectors scares off foreign investors, who heavily rely on transactional evidence to make investments. Otherwise, pouring money into markets is too risky. That’s where Blockchain comes in.

How would it work?

Blockchain can host an entire evidence base of transactions, loan repayments, and asset titles. The technology is also decentralized and requires individual confirmation, creating an element of trust and transparency beyond traditional banking systems.

According to Victor Olorunfemi, Director of Products for Pan-African tech and crypto-exchange, KuBitX, Blockchain’s major benefits lie in “frictionless P2P and cross-border payments, transparent elections, land registry management [and] transparent crowdfunding.”

Let’s look at some of the different ways Blockchain could benefit developing economies, especially in Sub-Saharan Africa.

1. Creating financial infrastructure and accountability

According to a study by the Milken Institute, viable financial markets require consistent, accurate data on assets and credit histories. Luckily, Blockchain may fulfil these needs.

The use of Smart Contracts technology is ideal in areas lacking accountability, such as the real estate or land/agricultural sectors. In Africa, a lack of record-keeping practices often leads to “missing” or non-existent title deeds. In some cases, this is intentional.

Title deeds “go missing,” only to end up in the hands of benefactors other than the rightful owners. Smart Contracts could eradicate these issues through the use of special tokens that cannot be duplicated, changed or removed. See the article on tokenization.

Likewise, Bitland, a company in Ghana, currently helps individuals record deeds and land surveys. By resolving land disputes, Bitland creates more stability while accurately recording land asset data.

“There’s a massive number of people in the informal sector, but there’s not much data being collected on them right now.”
Merit Webster, co-president of the MIT Sloan Africa Business Club.

“That means you don’t have that credit history or payment history for them. If you have a decentralized approach to collecting data, you end up with more malleable data. [This] is very valuable for creating credit histories.”
The agricultural industry also has the potential to thrive using Blockchain.

“Blockchain could be used to track goods around the world. This allows farmers to earn a fair wage for their goods.”

Also, farmers could use record-keeping technology to streamline the supply chain and document resources. This would lead to better efficiency, lower transactional costs, and improved logistics.

2. Security in banking

According to the World Bank, there were 1.7 billion people with no bank account in 2017. This situation is worst in developing countries, especially African ones. For example, over 62 million of these people lived in Nigeria.

Besides, data from Google Trends reveal that Lagos, one of Nigeria’s biggest cities, ranks globally as the number one city based on the volume of online searches for Bitcoin (BTC). Clearly, for the city’s 21 million-odd people, there an immense interest in some form of an accessible payment system.

Of course, it’s unrealistic to expect bank branches to magically appear in every remote corner of the world. However, a digital database using Blockchain technologies has the potential to reach far beyond physical banks.

Ad: N26 Bank

Many Africans value trust and transparency. In developing countries, this lack of trust goes beyond the Internet. Developing countries with less industrialization tend to have higher levels of corruption.

This reduces national investment opportunities in the public sector and instills a lack of trust in centralized oligarchs handling an international investment.

Because its power lies within the community of users, Blockchain can combat these trust issues. All data logs and amendments must pass through this community and identification confirmation tests.

Blockchain technology also secures your data incredibly. Hacking and data breaches are all too common nowadays. In 2017, for example, around 3 billion Yahoo user accounts were stolen.

When information is stored in the same place, hackers have one, easy target. In contrast, Blockchain is a distributed entity. This dissemination of data leaves it far less vulnerable to cyberattacks.

3. Fostering Entrepreneurship

Coupled with the Internet, Blockchain technology could be the perfect platform for aspiring African developers. Because the ‘source code’ is free of charge, skilled coders can adapt, create, and configure special applications, called DApps.

These are available on Crypto platforms and provided by companies like Ethereum, and a South African firm specializing in what they called the Keto-Coin.

Rather than waiting for governments to drag their feet trying to create jobs—individuals on the continent can form small firms that build and sell Crypto-based Apps locally or abroad.

“Despite the frictions and impediments mentioned,” said Olorunfemi. “Blockchain can still provide an avenue for promising African tech projects to access capital (FDI) via token offerings on digital assets exchanges.”

Many courses are even readily available online to quickly learn about new technology. Microsoft, for instance, offers a platform via Azure for you to build and learn about the Blockchain.

One-man shops in countries with unfavourable economic systems, like Zimbabwe, can also adopt smaller, stable, Cryptocurrencies to facilitate or payments. In cases of rampant inflation, they can temporarily act as a store of value or help you pay for things until your currency stabilizes.

As with the Venezuelan hyperinflation case study, Cryptocurrency intervention could help many developing countries troubled with economic instability.

There is also the option of Crypto-mining. But before you pull out the ‘high-consumption energy’ argument – think outside the box for a moment. What about energy sources that are free and available nearly 24/7? Like water and the sun!

The African continent is full of capable scientists and mechanical engineers. One could build special solar-powered energy centers to power Bitcoin-mining.

And without the expertise, governments or private companies could alternatively just invite Crypto companies with abundant financial resources to mine (cleanly) for a special tax/fee while creating jobs for the locals.

4. Elections

In addition to the financial side of things, Blockchain technology could help eliminate some forms of corruption. For example, many African countries’ elections are incredibly vulnerable to the social scourge. In some extreme cases, some officials change or forge written ballot votes to rig elections.

To combat this, Blockchain databases could record votes. This makes it nearly impossible to tamper with using Smart Contract technology. Having fair elections improves infrastructure, which then increases development and economic dependability.

Blockchain non-profit company Cardano, this year, has partnered with the Ethiopian government to battle these issues specifically.

5. Leapfrogging

While some might see Africa’s economy as underdeveloped, others might see it as a blank canvas well-suited for a large-scale implementation of Blockchain. Economic and governmental systems are shifting and slightly shaky in many Sub-Saharan African nations.

The challenge is to foster a rigid economic system to implement Blockchain.

Don’t just take our word for it—African nations have often implemented new, practical technologies before the Western world. Let’s look at the example of M-Pesa. Back in 2014, Americans and Europeans were amazed by Apple Pay’s launch.

However, this mobile payment system wasn’t exactly “new.” By that time, Kenyans had used M-Pesa, a very similar technology, for years.

“There’s a lot of opportunity to leapfrog the way the West developed and have these more unique African solutions, but it needs to come from within,” said Webster.

“It needs to come from entrepreneurs in the continent who want to implement these solutions. It’s important to engage people very early on. Systems incubated in the West don’t stand as great of a chance to work as African ones do.”

Concluding remarks

With the possibility of an experimental, large-scale takeover of Blockchain technology to improve African infrastructure, the nations there could leapfrog in development and growth.

This must begin internally. According to Olorunfemi, “Education—of policymakers and other stakeholders—which is often ignored has to be a critical factor in paving the way for the acceptance and adoption of new technologies and the accompanying investment.”

The results in Sub-Saharan African countries could help eliminate much of the world’s poverty. It would also remove remnants of mistrust and corruption left behind by the days of colonial exploitation.

While there are some obstacles to large-scale Blockchain implementation, we can’t think of a better benefactor than there. The possibilities for business using the Blockchain are endless!

To learn more about how to get started with Cryptocurrency mining or purchasing, visit our resources page for useful links and guides.

Additional input by Bobby Quarshie (BQ).

Citations: Christopher Lee and Jackson Mueller.

Swan, Melanie. “Anticipating the Economic Benefits of Blockchain.” Technology Innovation Management Review 7.10. Oct. 2017.

Bitcoin Lessons from Venezuela, Where Hyperinflation Reigns. Online Source: https://www.lathropgage.com/newsletter-237.html

29 July 2019
Modern-day Profit Hunters

Dealing with Cryptocurrency has its interesting dynamics. There are, however, many hidden facets making it still a mystery to the masses. Not knowing about it makes you prone to, get rich-schemes or outright scams.

We are all by now aware of the mania caused by the soaring prices and then, the subsequent decline that followed early this year.

What we don’t pay attention to, however, is just how complex it is to physically “acquire” and store these Cryptocurrencies.

Mining coins can be described very basically as the process where users “or miners” become part of a Cryptocurrency network. This by making hardware (processors & graphics cards) available to support that specific network’s operations.

As a miner, you contribute towards the working of the Blockchain. The technology requires millions of calculations to validate transactions into what are known as public ledgers.

Click here for more about how the Blockchain works.

There are three main ways to mine these coins but we will not be highlighting them in this post. The matter to be covered here, however, is the business aspect: how the Blockchain has created a new line of commercial entities and ‘profit-takers’.

These modern tech “enterprises” offer you a specific or cluster of altcoins and tokens as a reward for helping them maintain their Blockchain.

Sounds like a win-win situation right? Or is it?

Mining is hard

If you have actually looked into the methods of mining, you will discover that only those with high-end hardware are able to produce enough energy to power the Blockchain. This is called “hash power” or “hash rate”. This is kind of like horsepower for cars, but for PC processing.

There are sites that illustrate how to calculate potential profits such as one conveniently called ‘what to mine’.

The opportunity cost of operating the customized computer systems (known as Mining Rigs), will have to be offset with the cost of acquiring hardware such as the Antminer S9i. Then there are energy costs associated with running the rigs for long periods of time.

Your profit would, therefore, be the balance of the costs versus the revenue involved in mining coins.

The mining profit = revenue (quantity multiplied by the price of the coin in local fiat currency). Then subtract the cost of the mining devices + annual electricity costs (measured in local currency per KWh).

The problem with going at it alone is that it is very hard to break even. You are also faced with a conundrum: the more powerful your hardware is, the more electricity it consumes.

It also takes a lot longer to acquire the coins which you are awarded by the respective blockchain network after successful hashing is completed.

To make it worth your while you would hope that the coin you mine’s market value exceeds the costs of the monthly/annual electricity bill.

Value proposition

There a now hundreds of these so-called Crypto/Tech companies spurting up by the day. Their modus operandi: to relieve you of the burden of the high electricity and hardware costs. This in exchange a monthly or once-off fee.

In return, they promise to mine coins and provide you with daily or monthly profits. They can do this because they presumably have more powerful mining setups and therefore, larger economies of scale.

Some of these establishments use big rooms, whole buildings or even warehouses to run thousands of mining rigs throughout the year.

The payments you make supposedly help them with maintenance costs and pay for the said electricity bills. They are also usually stationed in countries where the cost of electricity is very low.

You are likely to, however, run the risk of dealing with the occasional Ponzi-scheme – setup. Such companies dive at the opportunity to swindle those not familiar with Blockchain and Cryptocurrencies.

By dazzling you with the price increases and potential astronomical returns, they take your money and make a run for it!

You can also ponder, it is incredibly difficult and expensive to mine Bitcoin these days. If these setups are actually just people who have already made their millions from acquiring Cryptocurrency.

The acquisition naturally, would have been when they were dirt cheap, and are now offering the residue to make more profit off unknowing investors.

A working example

How it would work is: let’s say you owned 100 Bitcoins mined in 2010 for the opportunity cost of $100 each (cost of electricity). You then sold half at the height of the Crypto ‘bull-run’ in January 2018 when they were worth $19 000 each. You would have been $945 000 richer.

So, with almost a million bucks in the kitty and another 50 units of coins (which would be now worth a lot less); the natural inclination would be to look at ways to make the extra coins ‘work for you’.

And what better way than to be your own boss and head a Crypto company! You can with your new setup, sell off the residue of Crypto coins in bits for profits in cash.

This is likely what some of these companies offering you coins for an opportunity to get Bitcoins. This under the false pretence of partaking in a ‘mining operation’. Meanwhile, in reality, the actual mining probably took place almost a decade ago!

All in all, do stay alert and do your research before parting with your money to join a mining pool or Crypto investment scheme!

2 September 2018
Can’t Get No Satisfaction

In economic terminology, the term “utility” has not much to do with multifunctionality nor completing specific useful tasks.

It does in context, relate to the level of satisfaction or “completeness” one derives from the consumption of a product or service. For example, there is only so much pizza you can eat before feeling ill from satiety.

On a broader and more macroeconomics spectrum, our utility levels will also help determine how resources are allocated and consumed.

Definition

The concept, a brainchild of Daniel Bernoulli, has so many relevant connotations. As humans, we individually have a maximum biological boundary which when reached, signals absolute satisfaction. This in economic terms is called maximum (total) utility.

Total utility is the complete satisfaction that you can get from consuming all units of a specific item.

Economists are more interested in the changes in levels of utility or what is referred to as the marginal utility.

We will return to its application to the economy.

Applying utility

Incidentally, the utility has no formal unit of measurement – though we coined the term “utils”. These so-called utils equate a number to utility levels in a controlled sample experiment.

Understandably it can be quite a feat to quantify utility as it is based on human behavioural preferences. The closest we got to quantifying such was via the marketing concept of the consumer black box.

As an illustration, the concept can be applied to something as basic as eating a delicious meal.

Depending on how hungry you were, you would derive the highest utility from the first few bites of your meal.

As you progressed and depending on your appetite, each additional fork/ spoon, or handful would provide fewer levels of satisfaction. As you reach your stomach’s capacity (towards satiety) your utility diminishes.

This can be applied to the taste of the meal. It specifically explains why we tend to eat something sweet after a main (savoury) meal.

The appreciation of ice cream when you are starving would diminish quickly as you concentrate on filling up your stomach. This as opposed to enjoying the taste.

When compared to the running of an economy, governments and policymakers can determine which goods and services yield the most utility.

This helps them to consequently direct expenditure to identified priority areas (products/services).

It is a long term concept

Education, for instance, may not provide immediate utility (gratification) for scholars and pupils. However, when appropriately harnessed, could yield higher levels of satisfaction. This is when you enter the job market with better remuneration packages.

Tweaking education curricula, taking into consideration levels of utility to whip up your interest for the good or service. This should, therefore, be a prime focus for legislators.

Inputs such as maximum times you can concentrate and the length of study for a course should be offered without compromising the substance.

Without a doubt, there would be considerations, at a micro-level to assist in enhancing both marginal and total utility in the education sector.

Read more about fiscal policy and budgets here

More life-related uses

The concept of utility is a lot less ubiquitous as we think and relates to the unsavoury phenomenon of megalomania and why there is greed.
When levels of self-gratification diminish quickly, it takes longer for those with lower levels of marginal utility to reach a plateau of pleasure.

Drug addiction, sexual appetites, and fetishes would then kick-in. In such cases, people upgrade the “product or service” that they have already maximized utility in. At that stage, another level of fulfillment would be sought.

The utility applied to finances

It also explains why you lose a lot of money gambling or investing in stocks. The satisfaction of gaining more for a little outlay will often drive you to take more risk until a level of risk aversion kicks in.

High-risk investors “called whales” are now delving into the Crypto market to maximize their utility. They are diverting their funds from property and stocks into digital currencies like Bitcoin and Ethereum.

The saying too much of a good thing is inevitably bad for you applies. It can be countered by diversifying the things that deliver pleasure or satisfaction to you.

This is to ensure that you do not maximize utility on them too quickly and lose interest. Worse case, you end up delving into the dangerous territories of addiction.

Economists need to be relevant, more than ever before. They also need to formulate a means to measure and quantify utility or provide “utils” for at least, the most common goods and services.

With such a strategy, policy-making, product pricing, and the efficient allocation of resources would be more effortless.

11 July 2018
Criminal mindedness

One fundamental and often ignored view within economics is that humans have the propensity to display irrational behaviour in the decision-making processes.

Based on this notion, one can conclude that we have a fundamental tendency to act corruptly and be generally criminally-inclined except maybe the virtuous few.

How advanced our economy or society is, depends on what measures or incentives we enforce to deter or punish criminals.
In most cases, we find that in countries where punishment is severe (e.g. in Central Europe or Nigeria), the criminals end up moving to less strict countries.
The economics of crime, especially violent crime experienced in countries like South Africa and Brazil, is something that requires adept research if anything is to be done.
In the US, studies were conducted to access the impact of legalized abortion on the level of crime. This was discussed in detail in a best-selling book by Levitt and Dubner’s called Freakonomics.
The study found that legalizing abortion (seen by many as legalized killing equivalent to death sentences) reduces the level of drug abuse and subsequently other criminal activity.

The real problem

Perhaps there is no relevance here but for instance, abortion is legal in South Africa yet a high crime rate prevails. So, what’s the problem then?
Part of the problem lies in the fact that the incentives/benefits of committing crime far outweigh the “costs” and chances of being caught and convicted by the judiciary.

John Nash through his renowned works (well at least amongst economists), devised what he called “game theory” or “the prisoner’s dilemma”.
Cheating occurs through degrees of severity from a classroom test or examination all the way to the plotting and execution of murder or indirectly killing individuals by selling users addictive drugs.
Then you have your white-collar crime such as insider trading, corporate espionage (unlawfully acquiring recipes, formulas, and technologies from rival companies).
Or simply ‘cooking the books’ or siphoning off profits from a company’s coffers.
Nash’s rationale for such cheating behaviour boils down to the attitude of: ‘if I don’t, someone else will, and leave me with the short end of the stick – so given the option, I’ll always cheat’.
His explanation is one ‘formally proven’ reason for human ‘irrational’ behaviour – or rather, could we say it is rational if the outcome is to favour the decision-maker in the short or long term? This is instinct is innate in human behaviour of not such a few.

Crime and law enforcement

Back to the subject of crime: higher than usual levels has often been blamed on the poverty caused by poor and exclusionary fiscal, social and monetary policies.
There are of course more layers and underlying factors unique to the history of political climate and resource allocation.
Further studies (such as that in the Freakonomics book) need to be carried out such as the potential effects of police presence in deterring crime in the diagram below:
Police officers per 100,000 population by regions and sub-regions (medians)

Source: www.unodc.org

Also, highly recommended if you are a law enforcer, economist, government official, or student, is a book entitled Economics of Crime by Erling Eide, Paul H Rubin & Joanna M Shepherd.
This book covers the theory of public enforcement including probability and severity, fines and imprisonment, repeat offenders, incentives of enforcers, enforcement costs and enforcement errors.
It might shed some light as to how criminally-inclined people can be dealt with once and for all. Because as we know – whatever government is doing to fight crime now is clearly not really working!

“When crimes are left alone long enough to fester, a second economy is borne.”

The proceeds from a ‘secondary’ economy because of criminal activity never benefit society. Even though people like Pablo Escobar were seen by locals (in his Colombian town) as philanthropists, their assistance came at a price. Such contributions which are naturally tax-free generally are referred to in economics as ‘social ills‘.
A third market is formed – one comprised of the need to feel secure.

Dealing with the scourge

But fighting fire with fire (with more guns & police who are sometimes corrupt themselves) will not alone solve the problem.
Criminals simply become more aggressive when met with a more confrontational approach as seen in South Africa. The Jeppestown (Johannesburg) shoot-out in 2006 for example, left several police officers and criminals dead.
It’s time to get ’smarter’ about crime and look to the accuracy and conclusive study of human behaviour and the use of incentives.
As crimes continue to ravage communities, cities and countries, we can question why government officials have relatives who own or have stakes in security companies.
It basically places less of an ‘incentive’ for officials to do much about crime.
So, conceivably, those with such vested interests in the third economy would need to be weeded out of the system for crime to be curbed.

That would be the first major step in order to bring about some rationality to society.

17 May 2018
The fuss about trade disputes
What does a small-scale farm-holding, two presidents, some tech companies, and their respective local currencies all have in common?

The answer might be obvious if you have been paying attention to the so-called trade war between China and the US in the news lately.
But why is it of concern and what are the far-reaching implications for the rest of the world?

Active involvement in international trade is a vital sign of your country’s financial health and boosts its Gross Domestic Product (GDP).

GDP measures the value of all goods and services produced in a country. From raw materials (input costs) to value-added (assembly and skilled labour costs) to come up with final goods or services.

And though “domestic” implies that this refers to your country’s internal economy, the contributions can be extended from a services perspective.

This occurs when your country places emphasis on or relies on income from Foreign Direct Investment (FDI) to help boost its economy via its GNP. GNP is a similar measurement but slightly different from GDP as it incorporates.

Importance of trade

Fact is, all our goods and services come from unit price or costs that arise from the initial extraction of raw materials.

These then undergo production leading to the product or service of intrinsic value for both local and international (via exports) consumption.

An ideal situation for your country is to export more than it imports to maintain a positive balance of trade. So basically more money flowing in than out.

The trade surplus is then plowed into your economy via the fiscal budget. It can supplement a shortage of funds raised from domestic taxes.
The opposite, which isn’t always a bad thing, (trade deficit) would have to be managed and nursed like any other loan.

The US has often criticized Germany for exporting a lot (cars, trains, and machinery) but not importing much. This is deemed not being ‘fair’ in trade practice. But trade itself arises from market forces, priorities, and consumer demand.

We all love a BMW, Audi, and Mercedes Benz. So these German-made products will always be in demand compared to US car makes.
Who you chose to trade with gives rise to favourable balance of trade if you are engaged in a trade agreement or a trading bloc.

Why this is also a big deal

The demand for your country’s goods and services will directly impact the strength of its local currency. More trade means more of your currency is required to pay for goods and so its value goes up.

A strong local currency leads to stronger purchasing power for its citizens and residents. Comes in handy when you plan things like holidays, purchase goods online, invest or just send cash abroad as gifts.

So, you can see why a strong Dollar or Euro is always favoured and why sometimes drastic measures are taken to keep it that way.

“A higher demand for your country’s products has a direct positive impact on its currency and exchange rate”

A quick glimpse of the world in terms of the input costs for goods and services gives it a competitive edge when it comes to trade.
- US – intellectual property, services, weaponry.
- Germany – steel and engineering machinery giving rise to high performing automobiles.
- Many African countries – mineral resources such as oil, tobacco cocoa, and precious stones.
- Israel – military intelligence.
- South America – agricultural produce.
- India – IT and customer services.
- China – agriculture, building/(manual) labour, and of late technology.
The beef with China

The technology that China (no.2 on the list) offers the rest of the world is the subject of hot debate. The alleged theft of US intellectual property for tech gadgets and software by China.

This is one of several unfair trade practises and motives for why the US recently decided to start imposing heavier (punitive) tax-like increases on multiple goods imported by China.

These extra costs, referred to in trade terms as import tariffs, have a spill-over effect on the costs of production.

China then reciprocated by hitting the US with tariffs (on agricultural produce) causing the trade war that drives each country to protect its own economy.

The higher input costs naturally, lead to the price of your product going up and reducing its competitive advantage and demand. Higher input costs can also affect your local labour force for the worse too.

Factories, multinational corporations, and industries such as farms (both commercial and subsistence) will have to cut the cost of labour. In worse cases which we have seen, workers are laid-off in a heartbeat to stop or prevent accounting losses.

These factors would have hopefully been taken into consideration by the respective leaders before pulling the tariff triggers. Acting with emotions rather than looking at the far-reaching implications is irresponsible.

Have the talks of the trade war impacted productivity and the global trade economy? So far it’s just the stock markets (securities and commodities) reacting. Only time will tell.
22 April 2018
Nurture State Treasures

There are many schools of thought on how to manage natural resources. The idea that a non-renewable resource “gifted” by nature to a country is something that should be considered a once-off benefit shows how forward-thinking that nation is.

If your country happens to have a wealth of a mineral resource, should the current generation use it for their benefit alone or should future generations of the country also benefit?

This also raises prognosis into an important distinction is between wealth and income.

Defining wealth

A non-renewable resource is a good that can only be consumed once such as oil and gas.
They are distinct from renewable resources such as forests and fisheries in such a way that, if managed properly can give you a sustainable stream of income for all time.

Some non-renewable resources can, of course, be recycled, and most metals and some fossil fuels fall into this category.

A goldmine, for example, should be viewed as a source of wealth (and not just income and profits for the company mining the yellow stuff).
And while this sounds normative, no single generation has the mandate to spend that wealth in their lifetime.

The wealth must instead be preserved for future generations and only the income from that wealth be used by the current generation.

A shining example

Norway* (if not now one of a few) is the only country in the world that consistently applies the principle of intergenerational fairness.
The revenue that Norway contracts from oil and gas has since 1990 been collected in a fund that currently stands at over $1 trillion. This number is growing every second!

The wealth is converted into money and the value preserved. This (sovereign) fund is maintained for future generations, and only the interest earned from this wealth is used for the current generation.

In this way, all future generations will benefit from the ‘lucky situation’ of the country.

The Government Pension Fund Global is saving for future generations in Norway. One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population – Norges Bank (The managers of the public fund)

In intergenerational economic terms, this is the only correct way of using the non-renewable assets of the country. It is encouraging that other countries are looking to the Norwegian model.

Other ways of re-investing

A different school of thought is that some of the wealth can be invested to create future growth that will provide better sustainable income for the country.

Many Middle Eastern countries are prime examples. They invest the revenue in construction projects to create a platform for economic prosperity.

This is seen in the vast projects in the UAE cities of Dubai and Abu-Dhabi. They aim to produce sustainable income for the region when the oil runs out.

It is an interesting illustration of Say’s law – in which supply creates its own demand.

Will the investment in infrastructure enable these countries to sustain their level of wealth for all future generations or will they 200 years from now be vast cities in the desert. A legacy to a time where opulence and abundance purveyed?

Read more about sustainabilty and human irrational behaviour here.

In most developing countries, like most of Africa, there is no consideration for future generations. The wealth of non-renewable resources such as gold, platinum, and diamonds are used in today’s budgets. This is with little thought that this wealth could one day not be there and should not be spent now.

The wealth inherited from previous generations is used to finance an unsustainable level of consumption.

Conclusion

The main lesson to take from this is that a non-renewable resource can only be used once. It is a precious endowment that is bestowed upon the country by luck or good fortune and it is therefore selfish to use it on the current population.

It is not income, but wealth. This distinction is alien to most but is very important. Wealth is something that should be preserved.

The three basic options facing a country are: spending it, preserving it, or you can simply invest it in future sustainable growth.

The choice is ours.

*Revised and originally written by a Norwegian economist working for a Sovereign Fund company that has since moved to the Private Equity sector.

3 April 2018
Nine Reasons Why Globalization Can’t Be Permanent

We spoke about globalization in an earlier post on some general terms – citing that it has taken a different shape or evolved. This article below however, delves deeper and highlights on nine reasons why this evolution will be forced to happen.

It is so well written, it covers all salient points and asks all the right questions – such as what we have pondered on the validity of GDP as a measure of success. The Intelligence Quotient (IQ) has of late been questioned as the main determinant of intelligence in the advent of Emotional Intelligence (EQ) and soon Artificial Intelligence (AI). Likewise, we must question the accuracy in the way the success (or disguised failures) of a nation is presented, and what we are told is required for this success to materialize.

We especially loved this analogy of the current world situation and if anything is to be taken from this article, this is it:

Again kudos to the author Gail Tverberg for this in-depth piece (featured on her website on 31 Jan 2018). In it, Gail touches on issues such as a population growth, a growing wage-disparity, heavy energy consumption, and the demand for cheaper alternative energy:

Read about the 9 reasons here: https://wp.me/p3dRG-b4w

Also read more on how Globalization has evolved here

Hope you enjoy it as much as we did, and that it has the same effect it had – getting one to think outside the box and look at the big picture.

31 March 2018
Piggybacking on company shares

It is clear that the business of share trading and its intricacies still create a dark cloud for many of you. This is, however, a rather unnecessary element of sophistication.

It is only fair to, therefore, delve in and break it down by discussing not just the way to trade, but the whole point of it.

While trading may seem like something only smart people engage in, this is, however, not the case.

What are shares?

The first thing to understand is that shares (referred to as stocks) entitle the holder to have part ownership in a company.

So, if you own a share in, Amazon, Manchester United, or a Cryptocurrency company like Ripple – you literally OWN a part of that company.

You are basically co-owning with other stakeholders of the company. This with the hopes that the people who run it will increase the monetary value of your shareholding by making the company a success.

Now your share will determine what level of control (decision-making) you have when it comes to the company’s operations.

Naturally, owning just one, ten, or even 1000 shares of Amazon (a hefty $1400 each today), still does not entitle you to have a say in how it is run.

As the majority shareholder, you would probably be the company owner (chairman/founder) or one of its board of directors. To gain such a majority shareholding and full control of a company, the minimum number of shares you would need would be 51% of all shares issued. Good luck obtaining that many!

The rationale for issuing shares

But let’s take a further step back and unravel why shares are issued in the first place. Your company (hopefully) has value because of its ability to generate revenue. This makes it a constant target for investors in a capitalistic market. Wealthy individuals carefully monitor its value to brace for a potential takeover or for just a piece of the pie.

To get listed on a stock exchange your company will decide how much of its equity to publicly issue as shares. You can even issue shares to raise more capital to help grow your business.

This form of equity will be backed against your total assets (and its debts) on the balance sheet. So hypothetically, a company with 100 Euros worth of assets and liabilities has 100 Euros worth of (owners) equity.

This basically enables you to determine its net worth at a given point in time.

The easiest way to remember this is through this basic accountant’s formula:

Total Owner’s Equity (OE) = Assets (A) + liabilities (L).

The shares are accounted for in the OE and are issued in denominations based on various factors. This helps to provide you with an indication of the relative strength (or weakness), or potential growth rate of the company.

What do they tell us?

The (snapshot) total value of the company is thus determined by its share price multiplied by total number issued. This is referred to as its market capitalization. There are several other measures and tools to evaluate the general health of a company.

Rising share prices, though always good, does not always necessarily mean that the company is great value for money. This is because share prices can also be undervalued or overvalued.

Shares for large companies are naturally offered in millions and via an initial public offering (IPO) from as little as one cent (penny stock), or much more (depending on its valuation). Thereon, it can rise astronomically to what was quoted for Amazon earlier.

Where to get them

The open market or local bourse is where you can buy and sell shares at specific times depending on side of the world it is located.

Obtaining shares come with additional costs (brokerage fees, commission, interest payments in cases of leverage buying, etc.). Depending on the terms and conditions in the overall market (regulations), but more specifically, on the company or broker offering you access to shares.

A good company share will also give you a return on an annual dividend. This is basically a share of the company’s profits over and above its share price.

It is a good idea to include high dividend-yielding shares like Coca-Cola, in your trading portfolio – if you can afford them.

Influencers

Once you purchase your stake in the company, you will naturally, even if you don’t have a controlling say in how the company is operated, take a keen interest in the company’s activities.

Everything it does whether internal operations or outside for that matter, will have an impact on its valuation.

Naturally, investors follow the age-long rule of common sense: buy when the price is low. If you missed the IPO and the price dips, you can always get in at a good (low) price. The stock market runs like a rollercoaster – you just need the right time to hop on!

“Unless a company goes belly-up, a share-stock price that is going down is actually going up – in the long run.”

Obviously, the price (trend) is not always upward and one must be prepared to weather such storms. You shouldn’t have to be continuously focusing on the price after thorough due diligence on your chosen company.

Read more about Due Diligence here

Choosing a good stock and leaving it to work is the best advice you will get. This is because you can become emotionally attached to the performance of the shares and that can affect your mood.

There are also a lot of trading tools to help prevent a total meltdown if the company folds-up. This can be due to external factors like fraudulent scandals or government intervention. Keep tags now and then – this is important.

The recent events and scandal faced by Facebook saw it lose a significant amount (billions of dollars) in it the value of its share price.

Read more about investing here.

Short-selling of shares/stocks

There are also ways to “have your bread buttered both ways” in investing. This is where the concept of short-selling comes in.

So, while we all inclined to bet on a company’s stock to go up – there are groups of investors who bet the other way. They have the hopes (based on indicators) that the price will rather drop.

This seemingly dubious form of trading is perfectly legit but comes, naturally, with an even higher level of risk. If the price increases in favour of all ‘normal’ long-term investors – the short position starts losing money. You may even have to fork out more to cover the amount borrowed to make the short-sell in the first place.

Short-selling is, therefore, if you are inexperienced and ill-informed!

So, you “buy” or rather borrow (leverage) the future value of the share/stock price usually at its apparent peak and hope that it will drop. You will continue to profit from the bet by as much as the share price continues to drop.

Earlier in the year, one such investor dubbed “50 Cent” bagged 200-million-dollars in a major shorting stint.

Shorting a stock is a complex, risky but highly lucrative method of balancing out a portfolio. A seasoned trader will, therefore, have several positions including some “buy” and “sell” positions on their chosen shares.

You should have various mechanisms (take profits and stop losses) set in place to execute their trades based on those positions.

Naturally, you wouldn’t just short a stock if you didn’t know something about what factors were to lead to a sharp/large drop in the share price.

But getting this right is often an exercise that straddles a fine line between being well-informed and intuitive and blatant insider trading.

The bigger picture

So, in summary, shareholding generally occurs when you acquire a stake in a business. You can own intellectual capital, founding rights, or be s a funder/seed investor to help start the business.

So why do companies issue out shares to the public again you might still ask?

Think of share listing as a way for your company to hold itself publicly accountable. is the ultimate branding weaponry in its arsenal and quest to exponentially increase its profits.

24 March 2018
Piggybacking on company success

After having several conversations which clearly highlight the fact that the business of share trading and its intricacies still create a dark cloud to many, and an unnecessary element of sophistication at that, it is only fair to (in true debunqed.com fashion) take a step back, delve in and break it down by discussing not just the way to trade – but the whole point of it. It can seem like something only smart people engage in. This is, however, not the case.

The first thing to understand is that shares (referred to in the US as stocks) entitle the holder to have part ownership in a company. So, if you own a share in, Amazon, Deutsche Bank, Coca-Cola, Manchester United or a Cryptocurrency company like Ripple – you OWN a part of the company. You are basically co-owning with other stakeholders of the company with the hopes that the people who run it will increase the monetary value of your shareholding by making the company a success.

Now your share/ownership will determine what level of control (decision-making powers) you have when it comes to the company’s operations. Naturally, owning just 10 or even 1000 shares of Amazon (which cost around a hefty $1400 each today), still does not entitle the owner to have a say in how it is run. The majority shareholder – which would probably be the company owner (chairman/founder) or its board of directors, depending on how the company is structured, will still have the overall say.

To gain a majority shareholding and therefore full control of a company, the minimum number of shares one would need would be 51% of the total issued…good luck obtaining that many!

But let’s take a further step back and unravel why shares are issued in the first place. A company has a value and within that context will always keep tags on the capitalistic market and carefully monitors its value to brace for a potential takeover or a consideration to sell.

So, to get listed on a stock exchange a company will decide how much of its equity to publically issue as shares and might even use it to raise more capital to help grow the business.

This form of equity will be backed against its total assets (and its debts) on its balance sheet. So hypothetically, a company with 100 Euros worth of assets and liabilities has 100 Euros worth of (owners) equity – which basically enables one to determine its worth at a given point in time.

The easiest way to remember this is through this basic accountant’s formula:

Total Owners Equity (OE) = Assets (A) + liabilities (L).

The shares are accounted for in the OE and are issued in denominations based on various factors to provide an indication of the relative strength (or weakness), or potential growth of the company. The (snapshot) total value of the company is thus determined by its share price plus number issued and referred to as its market capitalization. There are several other measures and tools to evaluate the general health of a company.

Rising shares, though always good will not always necessarily mean the company is great value for money as share prices can also be under- or overvalued. Shares for large companies are naturally offered in millions and via an initial public offering (IPO) from as little as one cent or more (depending on its valuation upon listing on the market) and rise to what was quoted for Amazon earlier – which along with the price of certain commodities are one of the highest per share currently available in the open market.

The open market of local bourse is where shares can be bought and sold at specific times depending on side of the world it is located – just like in a traditional marketplace.

Obtaining shares may come with an additional cost (brokerage fees, commission, interest payments in cases of leverage buying etc.) depending on the terms and conditions of the market but more specifically, on the company or broker offering access to the shares.

A good company share will also offer its holders in return an annual dividend – which is basically a share of the company’s profits over and above the share price. So, it is a good idea to include dividend-yielding shares in your trading portfolio if you can afford them.

Once you purchase your stake in the company, you will naturally, even if you don’t have a controlling say in how the company is operated, take a keen interest in the company’s activities as everything it does within its operations or outside ops for that matter will have an impact on its valuation, and therefore, the price of the share you own.

Naturally, investors follow the age-long rule of common sense and buy when the price is low. If you missed the IPO and dip in, the price is always a good time to even top-up for the long and eventual rise.

“Unless a company goes belly-up, a share-stock price that is going down is actually going up – in the long run.”

But the price as we know does not always go up and one must be prepared to weather such storms by not continuously focusing on the shares once you have done your due-diligence and purchased for the long haul. Playing blissful ignorance is the best advice you will get as one can become emotionally attached to the performance of the shares and have it affect your mood.

There are also a lot of trading tools to help prevent a total meltdown if the company folds-up due to external factors such as fraudulent scandals or government intervention – so keeping tags now and then is still required. The recent events and scandal faced by Facebook saw it lose a significant amount (billions of dollars within weeks) in it the value of its share price.

Read more about investing here.

There are also ways to “have ones’ bread buttered both ways” and this is where the concept of short-selling comes in. So, while we all would bet on a company’s stock to go up – there are groups of investors who bet the other way with the hopes that the price will rather drop.

This seemingly dubious form of trading is perfectly legit and comes, naturally, with a higher level of risk – that is if the price increases in favour of all ‘normal’ long-term investors – the short starts to lose money and will even have to fork out more for the amount borrowed to make the short-sell in the first place – not for the inexperienced and ill-informed!

So, you “buy” or rather borrow (with leverage) the future value of the share/stock price usually at its apparent peak (or bubble bursting price level) and hope that it will drop for you to profit from the bet by as much as it continues to drop. Earlier in the year, one such investor dubbed “50 Cent” bagged 200-million-dollars in a major shorting maneuver.

Shorting a stock is a complex, risky but highly lucrative method of balancing out a portfolio. A seasoned trader will, therefore, have several positions including some “buy” and “sell” positions on their shares for long and short terms with the various mechanisms set in place to execute their trades based on those positions.

One wouldn’t just short a stock if one didn’t know something about what was to come or what factors were to lead to a sharp and large drop in the share price. But getting this right is often an exercise that straddles a fine line between being well-informed and intuitive and blatant insider trading.

So, in summary, shareholding happens naturally when you acquire a stake in a business through ownership of its intellectual capital, founding rights, or status as a funder or initial investor to help start the business.

So why do companies issue out shares to the public again you might still ask… think of share listing as a way for a company to hold itself publicly accountable and thus is the ultimate branding weaponry in its arsenal and quest to exponentially increase its profits.

24 March 2018
Rare tangible coins

With all the talk of digital (altcoins) and Bitcoin, it is hard to even fathom the value or point of holding physical coins.

They are still nevertheless being minted so it will be quite a while before the clunky things are done away with.
Some coins, however, though not very publicized, still hold significant value – even as much as Bitcoins!
It reminds me of a time way back in 2006 while routinely wandering through the pages of a local magazine, I paused at an advertisement that caught my eye.
An institution dubbed the South African Coin Corporation was offering R100 000 (the present-day equivalent of $8400) for a 5 Rand coin with the face of Nelson Mandela engraved on the back.
Unable to contain my excitement at the prospect of being a couple of hundred thousand Rands richer, I rang up the number supplied at the bottom of the advert to claim my bounty. I had five of the coins.
Unfortunately, the coins were worth little more than their intended 5 Rand in value because they were ‘used’.

Coin dealers

The company required rare coins that had been untouched and uncirculated. The South African Mint in 2000/2001 minted and encapsulated a few of the 5 Rand Mandela coins and sold them to a few collectors. They are now valuable and had a high demand from overseas collectors.
The South African Coin Corporation was one of the many coin dealers in the country that dealt exclusively in graded, encapsulated rare (uncommon)South African coins.
For the past 18 years prior to my visit, the company traded in rare coins ranging from the Veld pond, the 1892 one penny to Krugerrands. All these coins come with (often) dramatic and important historical backgrounds.
“Roman emperors were printed on their coins and that’s how one could tell who ruled and through which period,” a senior broker and spokesman for the corporation explained.
“The coins encompass historical periods in time from the Anglo-Boer war to Paul Kruger, and the gold mines – the stories are all in the coins.”
The coins are graded on an internationally guaranteed system by two recognized American firms namely NGC and PCGS. They work on a grading system ranging from categories such as ‘good’, ‘fine’ and ‘uncirculated’.
The grading system helps to determine authenticity and originality of the coins – eliminating counterfeits and circulated coins. A ‘proof 70’ coin is basically a flawless coin and is worth a small fortune.
Lower and medium coins on average collect growth levels of 8% to 15%. Low-grade coins are basically coins that have been in circulation or ‘used’.
Therefore, a 5 Rand coin obtained from banks and shops (such as the ones I had at the time) are deemed as heavily circulated. Therefore it is only worth the printed value.

Point of interest

The industry was briefly brought into the spotlight about a decade ago with the record sale of the single fine ‘proof 69’ Mandela 5 Rand coin. It sold for a whooping 100 000 Rands (worth $13, 300 at the time).
A senior broker at the Coin Corporation carried out the record sale. “That specific coin was bought by an overseas investor,” he said.
The near flawless coin according to the company is earmarked to break the $100 000-mark in years to come when it becomes rarer. “And we are yet to see a ‘proof 70’ coin,” he added.
If that sounds impressive you will be further astounded to know that even lower grades of the coin such as the proof 66 5 Rand Mandela cost 735 Rands ($62) in 2006. It then commanded growth of over an astonishing 900%.
And like our digital friend Bitcoin, it shot up to 8500 Rands ($715) within a year in that year – spurred by speculation and the knowledge of its existence and intrinsic value.
Some of the lower grades (Proof ‘62s and ‘64s) are now currently worth about $200 – $300 today and can be bought off private investors via online marketplaces. Some banks like this German-based Bank called Netbank offers the option to invest directly in Krugerrands.

The US market has the largest rare coin markets in the world valued at billions and billions of dollars.

For those that are looking for something more secure and long term, there is only one trend with this type of investment – and it’s upwards. It does however, take a long time. A lot longer than holding shares/stock or the digital variation.

Market research is key

As with any trading instrument, industry experts caution investors about the use of the coins as investment vehicles.
It is advised that the coins were subjected to various grading tests and you have to ensure that you are getting the right price for the value of your coins.
As a potential investor in a coins, you need to have them valued professionally – preferably with any of the accredited coin makers.
The market for rare coins is also highly subjected to supply and demand factors. There is always a shortage of rare coins with a steady demand from collectors – so naturally, prices are generally always going up albeit slowly.
External factors (albeit not heavily) can also affect the value of your rare coin. Aspects such as the economic or even political climate of the country can corrode or improve your coin’s value.
So, just as we advised about researching Cryptocurrency for their intrinsic value, it is key to learn about the coins you plan to invest in. Furthermore, it is of greater value to have a collection of rare coins than just having one or two.
Many people, for instance, do not know that there are two types of Krugerrands because they look the same. One is mass produced – making it less rare and therefore less valuable.

Concluding

The main impetus behind investing in rare coins besides the diversification of your portfolio includes the fact that they add to your personal assets as it is free of capital gains tax.
It, therefore, serves as collateral or surety for bigger investments.
There are also perks such as the absence of hidden costs, administration costs and commission deductions – which are paramount ingredients of other forms of investments.
Once you purchase the coin, it is yours for the keeping – we are still holding on to ours! 😊

5 March 2018

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