Here is our take on the articles summarized below: 

In an epoch marked by rapid changes in many aspects of life, the status quo has been challenged in nearly every field, for better or worse. For this week’s summaries, we look at four such areas: monopoly power, valuation, energy, and fiscal/monetary policy. Regardless of the eventual outcome, these conversations in themselves are likely to have monumental effects in the long term, shaping the course of the future. To stay on the winning side of these changes requires careful analysis and a diligent patience. We hope these articles provide the insights you need to practice these virtues.

The Battle to Break Up Big Tech Has Just Begun

Will Oremus, Washington Post

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Following the dismissal of an FTC antitrust suit against Facebook, the conversation around Big Tech’s monopoly power has picked up once again. Monday’s ruling, which stated the FTC had not made it clear that Facebook had acted monopolistically under current federal law, demonstrated to many the inadequacy of 20th-century antitrust legislation in the face of 21st-century business. This has produced a flurry of legislation looking to constrain Big Tech’s anticompetitive practices. One such proposal is the Ending Platform Monopolies Act, which would make it illegal for the largest Internet firms to offer products on their own platforms if it creates a conflict of interest. While this legislation seems unlikely to pass at this point, antitrust experts note that reining in Big Tech will likely take many years of legal battles, pointing to the 20-year duration of the first wave of trustbusting in the early 1900’s and the 9-year Microsoft antitrust case in the 1990’s. Neither side is likely to give ground easily, and finding the most constructive approach will be difficult. Still, the widespread push to “do something” about the power wielded by the world’s five largest companies and others like them has grown stronger with every passing year, and America’s legislators are starting to take notice.

Valuations Are Extreme. Stocks Can Still Go Up

John Authers, Bloomberg

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In the days following the markets’ “Covid crash” in mid-March of 2020, the incredible recovery in the equity markets that has taken place seems absurd. On the other hand, non-U.S. markets only recently topped their previous 2007 highs, with European companies lagging far behind their American counterparts (indeed, the disparity is so extreme that it stretches the applicability of the term “counterpart”). This discrepancy correlates with the relative earnings growth rates of the regions, with the U.S. outstripping both developed and emerging markets. As the dollar is likely to weaken, American investments will only be that much more attractive. This, combined with the strength of earnings in company valuations, means that stocks may still see gains even if their valuation multiples go down, provided they continue to create earnings. Such a scenario is by no means certain, especially given the worrying spread of the delta variant of the coronavirus and inflation concerns. But the lessons of the 2008 financial crisis indicate that even today’s inflated valuations still have some room to run if profits continue to expand. Whether this holds true will likely be seen in the wake of earnings season in the next few weeks.

Electricity is the New Oil 

Amy Myers Jaffe, Foreign Affairs  

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As the globe transitions towards renewable energy, electricity is going to play a bigger role in the world’s distribution of energy. Instead of relying on pipelines and tanker ships, we will need technologically advanced energy grids that link consumers to solar fields, wind turbines, hydro-electric generators, and geothermal power plants. Europe has already started expanding its energy grid through agreements like the Nord Pool, an auction-based electricity trading system that connects 9 national grids to improve energy security and reliability. Likewise, China has created its Global Energy Interconnection Development and Cooperation Organization to connect Chinese power grids to other Asian countries and maybe even as far as Latin America. While these are positive developments, larger grids clearly point to a greater need for protection against cyberattacks like the Colonial Pipeline incident which resulted in widespread shortages and pushed average fuel prices to their highest level since 2014.  

This transition to a world of distributed and digitized electric grids also presents a unique challenge for the U.S., who has been the guarantor of global energy security by protecting the seaborne oil and gas trade. Keeping sea-lanes safe for oil exports will no longer be as important and will no longer give the US the same geopolitical influence it once did, especially in the Persian Gulf. As the global energy environment changes, the US will have to reshape its role in the global energy system. As suggested by the author, Washington could do this by taking a lead in cybersecurity governance, creating new multilateral institutions to oversee electricity trading agreements, developing high-tech electric hardware and software, or expanding its hydrogen industry. If the US would like to maintain its position as an “energy security superpower,” it has to make a similar commitment to electricity as it did with oil.

The Evolving Nature of Central Banking: Where Next for Europe?

Francesco Papadia, Money: Inside and Out

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The Great Recession and Covid-19 crisis have changed the traditional central banking model which entailed an independent central bank whose primary objective was price stability and pursued said goal by changing interest rates. Furthermore, there was a clear separation in this model between fiscal and monetary policy, with monetary policy having the upper hand. Now, we are seeing a shift towards a central banking model where monetary policy strongly interacts with fiscal policy. To demonstrate the evolving nature of the European Central Bank (ECB) specifically, the author takes a look at some important lessons from European history. Italy and Germany had radically different central bank approaches with the former guided by Keynesian rules and the latter taking a more monetarist approach. Though monetary stability was better achieved by the Bundesbank than Banca d’Italia between the end of the Bretton Woods system in 1973 and the creation of the ECB, the ECB adopted characteristics from both central banks as it recognized that monetary stability does not only depend on the setup of a central bank but is also critically impacted by fiscal policy, wage behavior, and economic cultures.  

Where will we go from here? As the author explains, one possibility is that the world goes back to the old central banking model and we mark the last 15 years “an important detour”. On the other hand, we could find a new effective model or, as the author warns, we could find ourselves under a model of fiscal dominance. The author argues that an ideal scenario where “All is well” includes an independent central bank and sound domestic fiscal and wage developments. In this scenario, it doesn’t matter whether there are global inflation pressures or not because the central bank could intervene. We risk having a “Clash of the Titans” situation if the central bank is independent but domestic wage and fiscal developments are not sound, creating unavoidable tensions, unemployment, and inflationary pressure.