#Weekly #Review - Financial Markets & Economics: Commentaries by Fabian Wintersberger

Have you ever heard of the Cobra-Effect? It describes how a certain measure to solve a specific problem leads to various unintended consequences, worsening the situation. The effect was firstly described by German economist Horst Siebert's book The Cobra-Effect,  who used the analogy to show the consequences of wrong economic incentives, or put otherwise: Well meant is poorly done . The story Siebert told goes like this (and I am not sure if this actually happened): Back in the days when the British Empire was reigning in India, the country suffered from a vast plague of cobras. A local British governor tried to solve this problem and offered a premium for every cobra delivered to local authorities. In the beginning, everything went according to plan: People started to hunt cobras and delivered them to the authorities. However, after a brief period, the government found out that the total amount of cobras had increased instead of decreased. How so? In prospect of income, people sta...

It was 1958 when Mao Zedong, Chairman of the Chinese Communist Party and Founding Father of the Peoples Republic of China,  initiated Chinas Great Leap Forward . Mao's goal was to transform the Chinese economy from an agricultural economy into an industrial economy and make China one of the big global players.  Three-quarters of all Chinese have worked in agriculture back in those days, and a n expansion of agricultural production was challenging due to the lack of further cultivation areas. For this reason, the Communist Party wanted to promote industrialization.  Mao took a decentralized approach: The municipalities should push local industrial development forward to produce a) agricultural tools and b) machines. Mao ordered masses of workers to quit their agricultural jobs to shift to working in industrial production.  Especially concerning steel production, Mao's goals were ambitious. Within a couple of years, so was his plan, China should become one of the leadi...

We all move inside bubbles. Most of our opinions are in line with those of the people we interact with daily. Social media shows us the articles we agree on, and on Twitter, we follow people who share a similar view of the world. It is true, everyone prefers to read things that support his opinion on the world than otherwise. Nobody likes to question his own standpoint. Nevertheless, questioning his own point of view is something we should do regularly. Only if we do that, we can test our outlook on things and learn. Either we have better arguments to propose our standpoint or change our view if the counterargument is clearly better. It is no shame to be wrong; it is terrible to stay wrong consistently.  For today's commentary, I would like to discuss the argument, why I and the majority of my opinion-bubble is wrong, and inflation will indeed be transitory. At the beginning of the summer, I've already discussed Jeff Snider's and David Rosenberg's arguments, who continu...

In what a crazy environment we are living! There’s no day where you don’t wonder about crazy price movements in the markets.   Still, many people argue that those price movements are solely a result of supply-chain bottlenecks, a Russian president withholding gas from Europe and China, or other factors. Maybe they’re right, and partly they indeed are. But there is another story to tell here… That is why I love the model of supply and demand. Although there are many criticisms to it, like it makes unrealistic assumptions that don’t withstand reality, it puts down so nicely why the current inflationary pressures were inevitable given the response by central banks and governments. Below I want to discuss what I mean. In 2020, governments told their people to stay at home and stop working from one day to another. As people did not go to work, production in the affected sectors fell, and usually, no work means less income and thus lower demand. Therefore, the price level would have rema...

The Empire of Ancient Rome is always an excellent way to start whenever you want to find out something about similarities between Empires. This is true for the rise of Spain, followed by the height of the British Empire, the current world leader, the US, and especially the European Union.  In my opinion, one can find some interesting parallels between those two and, given that they happen at the same ground, just at another time, it makes it even more interesting to look at it. Ancient Rome was reigning over Europe; it was the political center of the world. The European Union is a merger of several national states; Brussels is the political center ( although most policies are made in Berlin, Paris, or Rome ).  However, there is a difference: While the destiny of Ancient Rome is already in the books, the destiny of the EU is still open. As Mark Twain once said: History doesn't repeat itself, but it rhymes . That is the way we should compare those two eras.  Of course, I kn...