Econ Weekly (October 4, 2021)

Inside this Issue:

  • Yellen Yells Help: Congress, the Treasury Chief Pleads, Must Act on Debt Ceiling
  • Bounce of the Bonds: Treasury Yields Rising Again   
  • Gaming Higher: ActivisionBlizzard and the Rise of Video Games
  • Low Blow: Evans of the Fed Still Sees Risk of Not Enough Inflation
  • Bottleneck Nation: Top Reasons for the Semicon Shortage
  • Keys to the Seas: Nations Vie for Ocean Supremacy
  • The Antitrust Fuss: Where Did it Begin?
  • Rodent Returns: Are you Smarter than a Hamster?
  • And This Week’s Featured Place: Oklahoma City, Gobs of Jobs

Quote of the Week

“This is a transformative moment where Ford will lead America’s transition to electric vehicles and usher in a new era of clean, carbon-neutral manufacturing.”

-Ford chairman Bill Ford, announcing an $11b investment in new electric vehicle and battery production

Market QuickLook

The Latest

The final quarter of 2021 has arrived, with growth strong but uncertainties high. Will Congress avert a sovereign debt catastrophe? Will it pass two new spending bills? How will the Fed’s bond-buy tapering affect credit markets? As fiscal stimulus fades, will demand weaken? Just how entrenched are supply-side bottlenecks that are driving up prices?

Prices, sure enough, were again up rather sharply in August, as the Commerce Department’s latest inflation reading shows. Its PCE Index increased 0.4% from a month earlier, and 4.3% from a year earlier. Some of that was rising energy and food prices, but even excluding these items, the reading showed a y/y jump of 3.6%, well above the Fed’s traditional goal of 2%.

The Fed, to be clear, is now more amendable to tolerate a temporarily high bout of inflation, recalling the excessively low inflation of the pre-pandemic period. Some, like Chicago Fed president Charles Evans, think insufficient inflation is still a risk, notwithstanding the current supply-chain driven inflation—that’s a transitory phenomenon, the Fed believes. Supply chain problems should fade as companies adjust. But alas, they’re sticking around much longer than the Fed initially expected.

Evans shared his thoughts at an event hosted by the National Association for Business Economics (NABE), whose attendees also heard from Treasury Secretary Janet Yellen and Fed governor Lael Brainard. Yellen, for her part, made the pitch for Biden’s economic agenda, which—subject to intense negotiations currently underway on Capitol Hill—includes heavy investments in physical infrastructure, new approaches to taxation and efforts to alleviate childcare, eldercare and health care barriers to workforce participation. Yellen separately warned Congress that absent action on the debt ceiling, the Treasury will run out of money on Oct. 18.

Congress did pass a bill, signed into law by President Biden, that averts a government shutdown. But only until early December. In the meantime, interest rates on Treasuries have ticked up of late, mirroring a trend seen in February and March. Nobody knows exactly why—one reason could be the Fed’s plan to stop buying so many Treasuries each month, implying weaker demand. And remember the cardinal rule about bond prices: As prices go down (which happens when there’s less demand), interest rates go up. Also with the onset of autumn, oil prices have increased and stocks—notably tech stocks—have lagged.

The biggest news from Corporate America last week? That’s surely Ford’s decision to put a massive $11.4b behind its electric vehicle strategy. The company will build electric versions of its F-Series pickups—these are top selling vehicles in America—at a newly constructed mega-plant outside of Memphis, Tennessee, employing nearly 6,000 people. It will also build two battery plants in Glendale, Kentucky, south of Louisville, creating another 5,000 jobs. It’s been an odd year for America’s automakers, thrilled by strong demand and high profit margins but immensely frustrated by an inability to produce enough vehicles due to a severe semiconductor shortage. Ford’s investment, though, looks beyond the short-term supply crunch and further advances the industry’s dramatic shift away from climate-unfriendly gas-powered vehicles, eyeing an end to an era launched by Henry Ford himself. No less importantly, the selection of Tennessee and Kentucky reinforces another great trend of modern-day America: A southward shift in auto manufacturing from its origins in Detroit and the wider Midwest.

The Route 1 Corridor running through New Jersey remains central to the lucrative pharmaceutical industry, where Merck—based near Newark—announced promising trial results for an anti-Covid medicine. On the opposite side of the country, Google’s financial sector ambitions took a step backward as the company abandoned plans to offer bank accounts. Walmart’s health sector ambitions, by contrast, moved a step forward with a new announcement on electronic health records. The nation’s largest company also closed a deal to sell $2b worth of “green” bonds to achieve its goal of 100% renewable energy by 2035 and zero emissions by 2040. Separately, New York’s Blackstone—the world’s largest owner of real estate—turned a big profit by selling a Las Vegas hotel it bought seven years ago.

Stay tuned for the September jobs report this Friday. Markets and policy makers will be watching that with a close eye. Then comes the start of Q3 earnings season the following week, led by the nation’s biggest banks.

Tweet of the Week

Highlights from last week’s annual meeting of the National Association for Business Economics (NABE):

  • Treasury Secretary Janet Yellen spoke to Congress last week, all but begging and pleading legislators to raise or suspend the debt limit. She also made the same point at the NABE event just outside of Washington, held in person this year. The main purpose of her NABE address, however, was to advocate for President Biden’s Build Back Better agenda now working its way (however tortuously) through Congress. The economy is recovering, she assured, but still faces major risks, including longterm structural shortcomings that need to be addressed now, while interest rates are extremely low. One of these is rising income and wealth inequality, driven by factors like declines in worker bargaining power, inadequate childcare options, a low minimum wage and most recently lack of broadband access. From 1948 to 1973, she said, median family income kept up with labor productivity. Since then, it hasn’t, leading to much greater concentration of wealth, alongside lingering disparities in living standards among different racial and ethnic groups. U.S. government spending on research and education, meanwhile, has been falling as a percentage of GDP, allowing other countries to advance in key industries—China, she notes, has more than twice as many electric vehicles as the U.S. Speaking of low-emission vehicles, climate change is one problem that must be dealt with now. Another is the prevalence of ultra-wealthy Americans evading federal taxes, leaving Washington unable to invest in infrastructure that businesses need to survive and thrive. The Build Back Better plan looks to address these shortcomings by allocating money to both hard infrastructure (i.e., upgraded energy, broadband and transport networks) and people infrastructure (housing, education, health care, childcare and eldercare). The agenda also includes tax reform that seeks to reverse a long trend of capital benefitting at the expense of labor. Such measures, in the aggregate, will help boost the economy’s productivity, Yellen insists, by improving, for example, female labor participation rates (which were declining even before the pandemic). But will all this new fiscal stimulus overheat the economy, at a time when inflation is already running high? No, she argues, in part because it won’t add to national debt—the measures will be funded through growth and revenue increases. Evoking the Progressive movement before World War 1 and during the Great Depression, Yellen urged support from Congress: “There’s no better time than today to act boldly.”
  • Chicago Fed president Charles Evans spoke as well, spending much of his talk on the Fed’s new policy framework allowing for a period of overshooting inflation. The big question is whether the public’s inflation expectations will change, unleashing a destabilizing upward spiral in prices. Evans doesn’t see any meaningful evidence of that yet. On the contrary, he’s more concerned about the opposite problem: “I’m more uneasy about us not generating enough inflation in ’23 and ’24, than the possibility we will be living with too much.” The consensus of economist forecasts clearly sees lowish inflation beyond 2022, reflecting a belief that today’s rising prices stem from a temporary supply side problem that will eventually correct itself. “It doesn’t feel like a monetary-induced inflation,” Evans said. He harkens back to the days of repeatedly undershooting inflation targets pre-Covid, a tendency he thinks remains relevant. He separately said the unemployment rate would likely dip below 4% “before too long.”
  • Fed Board Governor Lael Brainard, a potential candidate to succeed Jerome Powell as board chair, addressed topics ranging from the debt ceiling (“The American people have had enough drama over the last two years.”) to labor markets (one-third of missing jobs post-pandemic are from the leisure and hospitality segment) to cryptocurrencies (stablecoins present a meaningful run risk, akin to a bank run or a money-market-fund run). She’s hopeful that labor participation rates will increase as the Covid threat eases—it’s “too early to call a structural shift” on participation. In addition, she called attention to climate-related financial risks, something many companies have highlighted as well.
  • Labor market: Regarding the work-from-home phenomenon, the University of Chicago’s Steven J. Davis studied resulting productivity gains, concluding that about three quarters of the estimated total are coming from avoiding commutes.
  • Health Care: One major takeaway from a panel discussion on health care? There’s been a big increase in telemedicine during the pandemic. Economists hope it will inject some productivity and cost efficiency into a notoriously bloated industry. In a separate discussion, Dr. Jeffrey Gold of the Nebraska Medical Center expressed optimism about health care technology, highlighting areas like diagnostics, therapeutics and vaccines which—during the Covid crisis—were “dramatically catapulted into the future.” In still another panel—this one about small business—economist Susan Woodward used Intuit QuickBooks payroll data to show that health care was one industry barely affected during the 2008-09 housing crisis. Early during the pandemic though, much of the sector saw big job losses, led by hits to offices providing the most “in-your-face” services, like dental and eye care.
  • Sara Johnson of IHS Markit remarked that global and U.S. growth trends are surprisingly coordinated. She sees both growing by close to 6% this year. That factors in an expectation of easing Covid stress at the tail end of the year, as positive trends in recent weeks suggest. Next year will bring waning fiscal support, Fed tapering, gradual interest rate increases, declines from peak housing prices, possible impacts from labor scarring and ongoing supply strains but also gradual improvement in labor markets, increased vaccine distribution, strong household balance sheets, pent-up demand for services like travel, a still-accommodative monetary policy, business inventory restocking and moderating inflation. She also notes the favorable environment for corporate capital spending, underpinned by cheap and easy credit. What about the big spending bills that Congress might pass? They’d add demand, Johnson says, but the spending would be spread out over a long period—the infrastructure bill for its part would see just $50b a year or so over ten years.
  • Digital Currencies: Carmelle Cadet, CEO of EMTech, sees potential for a central bank digital currency to help with financial inclusion, enabling services to people without bank accounts. Policy implementation would be more effective too, as when trying to reach more people when distributing stimulus checks.
  • Housing: Jerry Konter, CEO of Konter Quality Homes in Savannah, Georgia, says his input costs are up roughly 20% this year. But much of his revenue comes from fixed contract pre-sales. That creates an unusual situation where it actually benefits the company when people cancel their contracts—Konter can then turn around and sell the home at a higher price. He mentions the “missing middle,” referring to people who can’t afford to buy a house but don’t quite qualify for government support. That’s after a decade in which entry-level housing was undersupplied. Demand overall however remains strong, albeit cooling a bit. And it should stay solid for a long time with the large millennial generation now forming households. Konter shared some thoughts on the U.S. housing shortage, pinning some blame on the Dodd-Frank law that’s constrained construction financing. What’s more, embracing technology has “never been a strong suit of the housing industry.” The sector needs more immigrants to address a labor shortage. And building codes have added costs, thus reducing the supply of new homes and forcing people to live in older and less climate-friendly homes. “That’s not the way to net zero.” He criticized the way in which codes are adopted, alleging influence by manufacturers lobbying to tighten standards to sell new product. As for supply chain headaches, they’re indeed many. He mentions storm-impact windows that normally take about ten weeks to get. They now take about 20. On the other hand, plywood is now readily available where earlier this year it wasn’t. It’s hard to predict, he says with a sigh, what will be affected at any given moment.
  • Other hot topics of discussion at the NABE event: The labor market and its post-pandemic future was the subject of multiple sessions. Others dealt with the critical energy, transport and health care sectors. Panelists discussed government finance topics ranging from federal debt to state and local fiscal health. Climate change and China never strayed too far from the conversations. Same for the challenges of income inequality and ensuring diversity and inclusion.

Companies

  • ActivisionBlizzard: What’s the most overlooked industry in the global economy? How about gaming? According to the market intelligence firm IDC, as reported by MarketWatch, worldwide revenues from video games reached nearly $180b last year, bigger than the global film and North American sports industries combined (and bigger than the GDP of Hungary). Central to the sector are tech giants like Microsoft, maker of the Xbox console. For Apple, gaming generates roughly 70% of its total App Store revenue. Gaming is important to Google, Facebook and Amazon too. But the Big Tech Big Five are hardly dominant. No less important are companies like Santa Monica-based ActivisionBlizzard, which earned a gargantuan 42% operating margin on $2.3b in revenue—just in the second quarter alone! Much of this revenue comes from subscriptions and game sales, but in-game advertising is a growing source as well. The company employs nearly 10,000 people, developing, publishing and distributing video games. It also runs e-sports leagues and tournaments, some of which draw more viewers than the Super Bowl. Some 400m people worldwide play its games, with three big franchises accounting for most of the firm’s profits. One is Call of Duty, whose mobile version alone should produce more than $1b in consumer spending this year. Another is World of Warcraft. And the third is Candy Crush, the highest grossing game franchise on U.S. app stores. Currently, ActivisionBlizzard is in the news for unfortunate reasons, paying $18m last week to settle a federal lawsuit alleging workplace harassment against female employees. Management pledged to address the issue going forward. It also, importantly, faces frequent criticism for the violent content of its games. In the meantime, the gaming industry faces the prospect of slowing somewhat after a pandemic-plagued year in which people spent more time in their homes. Will they stop playing as many video games as they start travelling and eating out again? From 2017 to 2020, ActivisionBlizzard estimates, the gaming industry’s revenues grew 17% a year on average. The company is dependent on console, app store and social media platform companies like Sony, Apple, Google, Microsoft and Facebook. It’s also dependent on retailers like Walmart, Amazon, BestBuy and Target. Perhaps not surprisingly, some on Wall Street have recommended that one of the tech giants—Apple perhaps—should buy ActivisionBlizzard. The latter separately downplays concern about China’s crackdown on game playing, noting the country produces just 5% of its business. Gaming, incidentally, hasn’t migrated to cloud computing as much as other software, simply because of network latency demands—response times need to be near instantaneous for games to work properly. 5G mobile communications will help in that regard. Looking farther beyond, video games have become virtual worlds that some see as templates to even more encompassing virtual reality—what Facebook calls the Metaverse.

Sectors

  • Semiconductors: At an online event hosted by the Semiconductor Industry Association, Dale Ford of the Electronic Components Industry Association listed eight key reasons for current supply chain headaches: climate, politics, shipping constraints, the pandemic, trade wars, labor shortages, raw material shortages and growing demand. Transportation disruptions, he concludes, is the number one reason for record-long delivery lead times. One of the big themes of the event was that developments like electric cars, 5G, the internet of things and green energy augur well for the future demand of semiconductors, which is on its way to becoming a trillion-dollar industry (it was about $450b in 2020 following 7% annual growth). The U.S. currently has a 47% share of sales but manufactures just 12% of all chips—this was 37% in 1990. John Pitzer of Credit Suisse sees artificial intelligence leading to new use cases for semicons, just as 4G telecom led to all-new business models like ridesharing. Dan Hutcheson of VLSI Research said shortages are easing this fall. The panelists also discussed efforts to make industry supply more resilient, and China’s inability (so far) to produce leading technology, leaving it reliant on western companies like ASML of the Netherlands.

Markets

  • Labor: Quick update on unemployment from the Labor Department: In August, Nevada had the highest jobless rate of any state, at 7.7%. California (7.5%) and New York (7.4%) were next highest. All three have large leisure and hospitality sectors with heavy exposure to international tourism. And the lowest unemployment rate? The prize goes to Nebraska, at just 2.2%. 
  • Stocks: The latest edition of The Economist has a chart showing the composition of the S&P 500 stock index by sector. Technology alone, led by the Big Five (Apple, Amazon, Facebook, Google and Microsoft) accounted for nearly 40% of the S&P’s total value on Sept. 28th. Add consumer goods, finance, health care and energy companies, and that’s roughly 80% of the index by value.Crypto Trading: Feeling smart about all that money you made trading Bitcoin? Well, you’re no smarter than a rodent. Mr. Goxx, a crypto-trading hamster in Germany, earned a 16.6% return since June. His trades were based on the spins of a wheel in his cage, and on his selection of which tunnels to enter. He seems to like Ether—that’s one of his top holdings. But he should also have some humility. As Barron’s points out, cats and chimpanzees have at times outperformed professional investors too. In the period in which Mr. Goxx earned his 16.6% return, by the way, the S&P 500 returned just 4%.

Government

  • Antitrust Policy: It’s a hot topic in Washington right now: Should the U.S. be more aggressive in stopping firms from merging and cooperating, or even breaking firms up? Gregory Werden offers a useful historical perspective in his book: “The Foundations of Antitrust: Events, Ideas and Doctrines.” Speaking on the New Books Network podcast, he looks back at the Rockefeller oil empire, which formed at a time when corporate law was in its infancy, and private-sector corporations largely didn’t operate across state lines. Most corporations were local affairs, chartered by individual states to do business in that state. Indeed, before the late 1800s, there were powerful banks and railroads but otherwise no major industrial corporations with nationwide scope. This started to change after Rockefeller’s lawyers devised the concept of trusts, in which shares of a corporation were placed into a legal trust, controlled by whomever had majority ownership of the firm’s common stock. The oil baron’s main company would have its headquarters in New York City but control oil companies throughout the country: Standard Oil of New York, Standard Oil of New Jersey and so on. The result was a cartel in all but name, and one that other industries copied. Before long, there was a sugar trust, a tobacco trust, a whisky trust, etc., emerging from a consolidation wave in the last two decades of the 1800s. Into the picture stepped President Theodore Roosevelt and his successor President Taft. With public backing, they used laws like the Sherman Antitrust Act (1890) to break up numerous trusts, including the Standard Oil empire. Senator John Sherman, as Werden recounts, championed the law that bears his name to protect consumers. But he really wanted to accomplish that by lowering tariffs. This, alas, was a political non-starter at the time, hence his decision to pursue other means.

Places:

  • Oklahoma City, Oklahoma: Looking for a job? You might want to head for Oklahoma. In August, the state’s capital—Oklahoma City—had the lowest jobless rate in the nation among metro areas with more than 1m people. A month earlier, it ranked number two, behind only Salt Lake City. What’s behind Oklahoma City’s economic success? Start with the energy sector, now roaring back after a dramatic fall at the onset of the Covid crisis. Since the early 1900s, oil and gas have shaped the Oklahoman economy. Tulsa was once called the “oil capital of the world.” Cushing, an hour’s drive northeast of Oklahoma City, is today a hub for crude oil pipelines, and home to about 15% of all U.S. commercial storage capacity. Oklahoma City itself is home to Devon Energy, a big oil company that recently got bigger by merging with Tulsa’s WPX Energy. In 2020, Oklahoma ranked number four among U.S. states for crude oil and natural gas production, according to the U.S. Energy Information Administration. The annual value of its production last year: More than $3b, says Oklahoma’s Historical Society. Sure enough, when oil prices collapsed in the 1980s and 1990s, Oklahoma City suffered. The year 1995 was a symbolic low point, darkened by a major act of domestic terrorism in the city’s downtown. The first 15 years of the 2000s, however, brought a surge in people, jobs and oil money, not to mention heavy investment in downtown amenities—including professional sports franchises—that made the city a regional tourist draw. Things got tough again after the oil crash of the mid 2010s, slowing the pace of population growth. But still, the number of people in the metro area grew 12% during the decade, making it the nation’s 42nd largest by 2020. Oil and gas, however, don’t explain everything. The city’s aerospace sector is another reason Oklahoma City’s job market is so hot right now. The Tinker Air Force base alone employs about 24,000 people. The Federal Aviation Administration (FAA) employs another 7,000. Boeing, Pratt & Whitney and Northrup Grumman, all big defense contractors, are big employers. So are lesser-known military aerospace manufacturers like Kratos and Valkyrie, both producers of pilotless drones. Oklahoma City’s largest employer is the state government, always a solid and stable source of well-paid jobs for a city. The University of Oklahoma in nearby Norman is another anchor for the local job market. Same for hospitals and other health care facilities. Aside from Devon Energy, companies headquartered in the city include the retailers Hobby Lobby and Love’s, the fast-food chain Sonic and the fast-growing payroll software firm Paycom. In January, the city opened a $288m convention center, creating hundreds of new jobs. The new First Americans Museum opened just last month, honoring Oklahoma’s 39 distinct tribal nations (many forcibly moved there in the 19th century). Another lure for jobseekers is the city’s relatively low housing prices. Like practically everywhere else during the pandemic, home prices have increased, in Oklahoma’s City’s case by 14% in the past year, according to the Federal Housing Finance Agency (FHFA). But that’s one of the smallest gains among all big metro areas—Boise’s housing prices are up 41% (see the Sept. 20th issue of Econ Weekly). Jeff Seymour and Eric Long, both with the Greater Oklahoma City Chamber of Commerce, also attribute the economy’s recent success to a legacy of productive planning and cooperation between public and private leaders, along with successful investment of sales tax dollars. Taking a more expansive geographic view, Oklahoma City is just three hours by car from the booming Dallas-Forth Worth Metroplex, with the space in between fast filling up with people and homes. The entire Interstate-35 corridor in fact, is by some measures the fastest growing of what some demographers call a “mega-politan” region. As truckers and railroaders know, I-35 is one of North America’s busiest highways for freight transport, stretching from the Great Lakes port of Duluth to the busy U.S.-Mexican border town of Laredo, with metros like Minneapolis, Des Moines, Kansas City, Wichita, Oklahoma City, Dallas-Fort Worth, Austin and San Antonio along the way. Does all this position Oklahoma City to be the next Austin in terms of economic superstardom? Well, the one big thing still missing is a large-scale tech sector—much of Austin’s spectacular rise is thanks to companies like Dell, Apple, Tesla, IBM and Korea’s Samsung. Oklahoma City’s energy sector exposure, meanwhile, makes it still vulnerable to oil price slumps, not to mention the “great transition” to renewable energy. Alas, not every city can be Austin. But nor can every city have the best unemployment rate in the country. That distinction—right now—belongs to Oklahoma City.

Abroad

  • Oceans: Bruce Jones is the author of a new book entitled: “To Rule the Waves: How Control of the World’s Oceans Shapes the fate of the Superpowers.” Speaking on the Brookings Cafeteria podcast, Jones said 93% of the world’s data currently flows across fiber optic cables on the ocean floors. Something between two-thirds and three-quarters of all oil and gas is extracted from or transported by sea. There’s a large ocean-based fishing industry. And enormous container-carrying ships are a staple of global commerce. He worries though, that the importance of the oceans makes them a potential risk for conflict. Currently, the U.S. Navy plays a vital role in keeping the seas open to worldwide commerce. But this dependence makes China, whose economy is heavily dependent on imports and exports, uncomfortable. China is also determined to wrest control of Taiwan, which makes the western Pacific, Jones says, equivalent to what Eastern Europe was during the Cold War—i.e., the front lines of a potential military conflict between the Great Powers. This helps explain why America is now selling nuclear submarines to Australia. Climate change is heightening tensions too. Warmer seas are depleting fish stocks close to China, forcing its ships to fan further out across the globe, with its Navy following to protect them. The melting Arctic ice, furthermore, is opening new fishing opportunities, as well as new areas for oil exploration, further amplifying tensions among nations. The U.S. and China, Jones concludes, have many shared interests when it comes to what happens on the oceans. But there are plenty of flash points too. On a final note, he says U.S. engineering expertise will prove vital—and supportive of its influence—in helping the world adapt to climate change.

Looking back

  • The Domestic U.S. Slave Trade: Much has been written about the transatlantic slave trade, in which Africans were brought to the Americas. Less has been written about the domestic U.S. slave trade, in which slaves were traded within the country, typically from Virginia to fast-growing cotton plantations in deep southern states like Alabama, Mississippi and Louisiana. It’s the focus of Joshua Rothman’s new book “The Ledger and the Chain,” which he discussed on the podcast Ben Franklin’s World. In 1808, the U.S. actually banned the importation of slaves in 1808, before the textile industry began to boom, and by extension, before the value of free labor to pick cotton skyrocketed. In fact, slavery in the early 1800s wasn’t quite as controversial a political fault line as it would become after the textile/cotton boom. It might have even been possible to get rid of it then without having to fight a civil war. Instead, domestic slave trading became an entrepreneurial opportunity for some, including the principles of Frankin and Armfield, a company launched in 182. It would become, according to Rothman, one of the largest U.S. slave trading companies, and perhaps the It used skilled logistics to sail hundreds of people at a time, typically from its headquarters in Arlington, Virginia (then part of Washington, DC) around the coast of Florida to New Orleans. On the way back, the ships would carry cotton, sugar and other commodities. The firm had trusted relationships with bankers, merchants and planters throughout the lower South, offering them credit to purchase slaves. Debt-financed slave markets thus became an important part of the U.S. economy, with slave traders also representing an important group of customers for railroads and telegraph companies. The domestic slave trade continued right on through the Civil War, even toward the end when it became obvious that slavery would end.
  • Standard Oil: Gregory Werden’s book about antitrust policy (see the Government section above) describes the origins of Rockefeller’s empire, which began in Cleveland. There, his refineries had access to three different railroads serving the city, providing important negotiating leverage. In Pittsburgh, by contrast, competing oil refineries were hostage to the Pennsylvania Railroad monopoly. Later, refiners began shipping their products by pipeline rather than rail. So what did Rockefeller do? He built and acquired pipelines, eventually dominating the industry.

Looking ahead

  • Decentralized Finance: Should banks be worried? It’s early days in the cryptoeconomy, but there’s a giant wave of money and entrepreneurial talent behind new permission-less, blockchain-based financial applications. The examples are many, some focusing on lending, some on cross-border money transfers, some on insurance, etc. LoanSnap, based in California and backed by the Virgin Group, deals with the $11 trillion U.S. residential mortgage market, hoping to make it more investible and accessible to individuals, not just banks and governments. Today, people deposit their money at a bank like Wells Fargo, which pays virtually no interest. It then takes that money and buys mortgages earning perhaps 3.5% interest—Wells alone owns about $275b worth of mortgages, according to LoanSnap CEO Karl Jacob, speaking on the Modern Finance podcast. The Federal government owns $2.3 trillion worth. Jacobs describes his efforts to use tools like nonfungible tokens (NFTs) to represent portions of a property owned by an individual. Will ideas like these upend the mortgage market and break a core foundation of the ban business model? Nobody knows. But everybody’s watching.

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