Pondering the New Secretary of the Treasury 

Doug Nolan


The U.S. Goods Trade Deficit jumped to a then record $76 billion back in July 2008. A few short months later, financial chaos unleashed the “great recession” economic crisis. 

Traditionally, large trade deficits are evidence of loose monetary conditions and resulting unsustainable spending patterns. 

By May 2009 – only 10 months from an all-time record – the Goods Trade Deficit had shrunk to a seven-year low $35 billion. It’s worth noting, as well, that M2 money supply expanded $253 billion, or 3.1%, during 2009.

Fast forward to the current crisis period. M2 has surged $419 billion in only six weeks. 

Over the past 38 weeks, M2 has expanded an unprecedented $3.60 TN, with year-over-year growth of $3.785 TN, or 24.7%. October’s Goods Trade Deficit was reported Wednesday at $80.3 billion, lagging only August’s record $83.1 billion. Last month’s Trade Deficit was actually 21% ahead of pre-crisis October 2019. 

No doubt about it, this crisis period is unique. More than three Trillion worth of Fed liquidity injections coupled with more than a Three Trillion fiscal deficit has thrown traditional crisis dynamics on its head. In this New Age Crisis backdrop, financial conditions have actually dramatically loosened. 

Money supply has skyrocketed, and stocks have gone on a wild speculative moonshot. 

Corporate bond issues surged to new records. And, as noted above, booming imports pushed the Goods Trade Deficit to an all-time high. At $170 billion, the second quarter Current Account Deficit was the largest since 2008.

The bloated services sector has accounted for a majority of historic job losses. Massive stimulus has bolstered spending on goods – which has led to the rapid recovery of imports. Home sales have boomed, with the strongest house price inflation in years.

It’s only fitting that stimulus-induced “Terminal Phase” Bubble excess now engulfs the housing sector as well. That asset inflation and Bubble excess run rampant in the throes of crisis should have us all worried.

Bear markets, recessions and even crises are fundamental to capitalistic systems. While painful, wringing excess out of Financial and Economic Spheres is essential to long-term soundness and vitality. And the sooner the better. 

Wait too long and policymakers won’t risk reining in Bubble excess. Such analysis sounds hopelessly archaic these days, as excess, distortion and structural impairment compound in perpetuity. 

Central banks have made the conscious – and fateful - decision to abrogate Capitalism’s adjustment and cleansing processes. A solid case can be made we’re at the most dangerous phase of the Bubble period: financial and economic fragilities (associated with decades worth of excess) ensure central bankers push extreme stimulus measures while turning a blind eye to outrageous excess.

Various thoughts come to mind when I ponder Janet Yellen. I recall one of her early press conferences. It was Jon Hilsenrath’s (of the Wall Street Journal) turn to pose a question to the new Fed chair. 

A beaming smile came across Yellen’s face, which struck me as unusual in that circumstance. But, mainly, it conveyed an endearing warmth and sincerity. She’s not the typical Washington operator. A career academic, she can at times appear naive. 

Yellen is certainly not a financial markets person. I don’t distrust her (which distinguishes her from her two predecessors). 

Janet Yellen as the new Secretary of the Treasury is being universally well-received by the markets. She is proven – a consummate dove. And it’s difficult not to admire her – such a long and distinguished career along with a notably humble, amiable and compassionate demeanor. 

But in my commitment to accurately chronical history – determined to counter historical revisionism – there’s a salient aspect of Yellen’s career that should not be overlooked: Her failure as Fed chair.

Chair Yellen assumed the reins from Ben Bernanke in January 2014. Recall that the Fed took extraordinary measures – including expanding its balance sheet by $1 TN - in response to 2008 Crisis Dynamics. Yellen was Fed vice-chair when the Fed in 2011 publicly formalized it’s “exit strategy” from extreme monetary stimulus. 

Rather than normalize, the Fed fatefully again doubled the size of its holdings to $4.5 TN by October 2014. Fed assets expanded $500 billion during Yellen’s first year at the helm of the Federal Reserve – when there was a strong case for the Fed shrinking its balance sheet

The S&P500 returned 32.4% in 2013 and another 13.7% in 2014. The small cap Russell 2000 returned 38.8% in 2013 and added 4.9% the following year. The Nasdaq 100 returned 36.9% and 19.4%. M2 expanded about 6% in 2014. 

At 7.15%, growth in Consumer Credit rose at the strongest rate since year 2000. 

Business debt expanded 6.7% in 2014, the briskest pace since booming 2007. After peaking at 10% in late-2009, the Unemployment Rate ended 2014 at 5.6%.

The Fed slashed rates to zero (zero to 0.25%) on December 16, 2008. Janet Yellen was in charge for a full two years before the Fed finally made a baby-step 25 bps adjustment off the “zero bound” in December 2015. 

The Yellen Fed then procrastinated a full year before taking its next little step. Rates were only at 1.25% when Yellen departed the Federal Reserve in February 2018. The S&P500 returned 67.3% during Yellen’s term as Fed chair, with the Nasdaq100 doubling in four years of exceptionally loose financial conditions.

The Bernanke Fed (with Yellen as vice chair) should have moved to commence the monetary policy normalization process. I always assumed Bernanke was hesitant to risk reversing his ultra-loose monetary course for fear of imperiling the “Bernanke doctrine” and its centerpiece of exploiting the securities markets as the primary mechanism for system reflation. It is not easy to explain why Yellen remained so timid in starting “normalization”. 

It’s not hyperbole to call the Yellen Fed’s delay in pulling back extraordinary stimulus as an epic policy failure. Jerome Powell assumed control of the Fed with the intention of finally moving forward with rate normalization. But it was too late. The Fed had badly missed its timing. The Powell Fed ratcheted rates up to a still low 2.25% by December 2018 – and the wheels were coming off. 

A highly speculative and levered securities marketplace can function only so long as financial conditions remain ultra-loose. Predictably, market structure evolved profoundly during a decade of unprecedented monetary stimulus and Fed support. 

Trillions flowed into the perceived safe and liquid (“money-like”) ETF complex. 

Trillions of levered speculative holdings accumulated at home and abroad. Moreover, loose finance coupled with faith in the Fed’s liquidity backstop ensured mounting excess throughout the derivatives complex. 

The S&P500 suffered a 15% swoon in December 2018, with somewhat larger losses for the Nasdaq100 and the small cap Russell 2000. Perhaps more importantly, instability erupted in corporate Credit. Powell was widely criticized for raising rates that December in the face of market instability. 

I commended him at the time for his effort to weaken the markets’ dependence on the “Fed put.” Markets, however, would have no part of it. 

A decade of excesses and latent fragilities has done their damage. Markets castigated Powell into immediately reversing course – into announcing his “pivot.” 

And rather than slacken, the Fed “put” emerged more powerful than ever. The episode confirmed what the markets had already assumed: Bubble excess and associated fragility had reached the point of no return. 

The Fed was hamstrung by an epic Bubble and associated systemic fragility. Power had shifted decisively to the financial markets, with the Federal Reserve’s subservient role relegated to shielding and pacifying an increasingly unstable system.

The Fed was cutting rates again by July (2019), and the Fed’s balance sheet was again inflating in September. Despite stock prices at record highs and unemployment at multi-decade lows, the Fed was compelled to adopt “insurance” monetary stimulus to counteract late-cycle vulnerability in “repo” and other short-term funding markets (for leveraged speculation). 

The Fed’s 2019 stimulus exacerbated speculative excess, forging a marketplace keen to disregard myriad risks including an advancing pandemic. Market excess, distortions and the incapacity for self-adjustment contributed to March’s near market meltdown. 

From a July 2017 Reuters report: “U.S. Federal Reserve Chair Janet Yellen said... she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.” 

The Yellen Fed failed to recognize the massive accumulation of speculative leverage outside of the banking system, along with fragilities that would force the Fed and global central bankers to resort to grotesque pandemic response monetary inflation.

November 24 – Financial Times (James Politi and Colby Smith): 

“Shortly after Joe Biden picked Kamala Harris to be vice-president in August, Janet Yellen, the former US Federal Reserve chair, briefed the pair on the slump triggered by the coronavirus pandemic and what they could do about it. 

According to one person…, Ms Yellen told the Democratic ticket that interest rates were low and likely to stay there for a long time, creating considerable fiscal space for new stimulus and investment. The intervention was well-received by Mr Biden and Ms Harris, whose economic plan calls for billions of dollars of government spending. Now Ms Yellen, 74, is set to be nominated by Mr Biden to be the next US Treasury secretary, handing her a second act at the pinnacle of American economic policymaking.”

Do low rates essentially create unlimited capacity for deficit spending? Or is this a crazy late-cycle dynamic whereby Fed largess is distributing ropes for our federal government, the leveraged speculators, corporations and the U.S. household sector to hang themselves? 

It’s difficult for me to believe that Secretary Yellen will avoid having to contend with a historic financial and economic crisis. And Wall Street is quite comfortable that Yellen is precisely the right individual to work intimately with the Powell Fed to orchestrate whatever crisis response necessary to sustain the greatest Bubble in human history. 

The scenario of the Federal Reserve knee-deep in partisan political muck – with its credibility and reputation soiled in the eyes of at least half of a deeply divided nation – seems more likely by the week. 

A Democratic defeat in victory

If Joe Biden’s party cannot wrest power from the Republicans now, when ever will it?


Besides donald trump, the election’s big loser was the Democratic Party. Having been predicted to win a governing trifecta, it retained its House majority with around six fewer seats, won the White House by a nerve-jangling margin and has probably fallen short in the Senate. 

Joe Biden can expect to sign little legislation as a result. 

He may be constrained in his cabinet appointments. If he nominated as attorney-general Stacey Abrams, the hero of his probable win in Georgia and a hate figure on the right, for example, Mitch McConnell might give her the Merrick Garland treatment.

Unlike the president, Mr Biden’s party is already reckoning with its failure. Bruised members of the centre-left—a faction that includes almost all the party’s candidates in the battleground states—blame the activist left for making them seem radical and untrustworthy. The left, in particular its 31-year-old standard-bearer, Representative Alexandria Ocasio-Cortez, is hitting back.

A leaked record of a meeting between House Democrats last week—before Mr Biden’s victory had been called—included angry exchanges between the two groups, which have continued on social media and in the pages of the New York Times. Abigail Spanberger, a narrowly re-elected Virginian moderate, warned that the party must resolve among other things “to not ever use the word socialist or socialism again”. 

Ms Ocasio-Cortez, a proud democratic socialist, responded by suggesting the centre-left losers didn’t understand how to campaign on social media (unlike her, presumably, with her 10m Twitter followers). Moderates were outraged.

Understandably so. The Democratic losses were in spite of a huge cash advantage and against a Republican opponent that over the past four years appeared to have given up on governing. The Trump party passed no major law besides a tax cut. It has no health-care policy. Yet Democratic candidates ran behind Mr Biden almost everywhere. 

And there are signs—beyond what Ms Spanberger and other battleground Democrats heard from their constituents every day—that the party’s perceived “radical leftism” was a big reason why. The Democrats lost most ground with two groups that have a special loathing of socialism, Cuban-Americans and Venezuelans. Their shift to the Republicans cost the Democrats two House seats in Florida and Mr Biden the state.

Ms Ocasio-Cortez says this is wrong because it is unfair. No Democrat ran on socialism, “defund the police” or other leftist slogans, she notes. Any damaging impression to the contrary was confabulated by right-wing attack ads—which Democrats should therefore do more to counteract. 

Point by point, she is right. But as a proposed solution to the Democrats’ problems, it suggests that “aoc”, who won her own district in Queens by a comfortable 38 points, has little conception of how hostile the battlegrounds have become for Democrats.

That chiefly reflects the imbalances in the electoral system, which mean that Democrats, the most popular party, need to filch votes from the other side in a way that less-popular Republicans need not. 

Democrats’ inflated—as it turned out—hope for this election was to ride an anti-Trump wave big enough to compensate for the over-representation of rural, conservative voters in the Senate and electoral college that is the cause of the imbalance. 

Some hoped the president’s unpopularity might even give them a big enough Senate majority to reform it. Instead, the Republicans’ structural advantage appears to have grown so large as to have dashed even the Democrats’ more modest expectation of power.

Mr Biden is on course to win the election by more than 5m votes, but the presidency by less than 100,000 across a handful of increasingly conservative states. Wisconsin—the indispensable last component in his electoral-college majority, which he won by a whisker—is more than three points more Republican than the country at large. 

That is a measure of Mr Biden’s achievement; it may also suggest how unrealistic it was for Democrats to have counted on adding Senate seats in even more conservative states.

If all the battlegrounds continued on their current electoral trajectory, North Carolina and Texas, where they had such hopes, might not turn Democratic until after the ageing, white rustbelt has become so reliably Republican that Democrats will have lost their five Senate seats there. Having approached the election hoping to win sufficient power to reform the system, Democrats are now contemplating a bleak struggle to stay competitive in it.

The early Democratic feuding is mainly a response to the grimness of that prospect. Ms Ocasio-Cortez makes herself an easy target for the aggrieved centre-left. Her claim that Democrats mainly need a better Facebook strategy is as dilettantish as the “defund the police” insanity she signally failed to disavow. 

The election also suggests the left’s bigger idea to change the political tide, by weaning working-class voters off right-wing identity politics with populist economic policies, may be no more feasible. An electorate that has embraced Mr Biden personally but rejected his agenda as too radical seems unlikely to warm to the left’s actual radicalism. 

Yet that was already off the menu, following Mr Biden’s thumping win in the Democratic primaries. The dejection of battle-hardened moderates such as Ms Spanberger chiefly reflects the overthrow of their more promising effort to break the partisan deadlock.

Change the record

If the left dreams of moving America with the power of its ideas, the centre-left places its hope in compiling a solid governing record. 

The evidence of previous bouts of populism suggests there is no better way to re-establish the centre. It is also a bolder approach than the Sandernistas allow. 

The Democrats’ historic weakness, devastatingly exploited by the Tea Party movement, is its reputation for defending bad government against small government. The centre-left’s commendably daunting ambition is to compile a reputation for modern, effective government. But to do that, it must have power. 

And Mr McConnell is likely to give it none.

America — a nation out of joint

The award-winning writer on the legacy of four years of Trump and confronting the US’s historic divisions

Marilynne Robinson 

© Ed Ruscha’s ‘Our Flag’ (2017), courtesy of the artist and Gagosian, and currently on show at the Brooklyn Museum, New York


All the world knows that America is involved in an election, gigantic but so far orderly. 

Like the demonstrations against police brutality that filled the streets for days this summer, the scale of the turnout proves that the public are watching. However engrossed in their own lives, they do rise up from time to time to intervene in the course of public life.

The sheer massiveness of particip­ation in this election will make it cathartic and clarifying. The people are doing what must be done to put their authority beyond doubt, overwhelming by sheer numbers the possibility of fraud that could affect the outcome. 

Even if this great act of civic engagement ends in endless legal disputes, and even ultimately in the disaster of Donald Trump’s re-election, at least we have been assured now that the fundamentals of democracy are in place. Our national life can go on.

I think about this election by trying to think beyond it, by trying to imagine America as it might be after the ballots are counted, and after the long weeks have passed until Joe Biden’s inaugur­ation, should he have won. This is, as they say, the best-case scenario, an orderly transfer of power in response to the results of a presidential election. 

At the time of writing, Biden appeared to be inching towards victory, although it was still possible that Trump had won and would stay in the White House legitimately. But we all know that Trump is immune to embarrassment and shame, and seems to have little respect for law.

In his address on Wednesday, he refused to commit himself to abide by the election results, introducing the possibility that he would create a crisis utterly without precedent in our history. He appeared ready to justify this act, should he need to, by discrediting as “fraud” the process of election.


Trump supporters heckling vote-counters at TCF Center in Detroit this week © AFP/Getty Images


Anyone who follows the news is aware that voting rights continue to be a fraught issue, vulnerable locally to the kinds of manipulation that Trump’s own party has engaged in for years. Still, the basic integrity of the system has been assumed, its results treated as the people’s verdict, as they must be if the country is to function as a democracy. 

Thus I have named two crucial aspects of our government that have been shown to be vulnerable to disabling, and are already in some degree disabled because our system has not anticipated a politics that proceeds from contempt for history, precedent and law.

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Trump is a novel problem and an opportunist, but he plays on and has exacerbated longstanding problems. The United States has been making a decision about itself as grave as any it has faced since 1860, the year Abraham Lincoln was elected. This is true in part because the conflicts of that time were never really resolved and have been stirred back to vivid life by Trump and his party.

One great difference between the crisis of 1860 and this one is that back then the issue was clear, at least to the South, which responded to Lincoln’s plurality — he did not win a majority, the popular vote being split between three major candidates — by seceding. There is one irreconcilable question dividing the South from the North that has retained its essential character as it has spread beyond its regional bases. 

It is: which is more pious, more virtuous? This is an evasion, of course. The argument against slavery, led by northern churches, was a moral argument, inevitably. The South defended itself against the charge of flagrant wickedness by claiming that it, as a culture, was moral and pious in a degree that put the North to shame.

This self-characterisation has stuck. If the demographics of these states are tested against the biblical standard that the righteous will be known by their works, there appear, to a northern eye, to be important discrepancies to do with poverty, life expectancy and so on.

A Trump supporter holds aloft a Bible at a campaign rally in Gastonia, North Carolina in October © AP


But the point here is that this matter of relative piety does not yield itself to political discussion. It is really one more form of religious prejudice. The other side is seen by the “religious right” as deficient metaphysically, perverse, not finally to be trusted or embraced. 

Trump hates the people he should hate: the progressives, the critics, the reformers, journalists, those who bring moral standards to bear on public affairs. He has answered a wave of revulsion at the death of George Floyd by wordlessly flourishing a Bible. This is proof enough to one version of piety that he is on the side of the angels. 

For them there are no rules but consensus among themselves. Trump and his loyal Evangelicals have proved this.

The American civil war truly is the past that is not past. Lately, questions have arisen about all the revanchist statuary and insurrectionary battle flags. Monuments have fallen, old villains slain in effigy. This is a liberal victory. 

On the other side, groups of men with bad hair and enormous weapons identify with the Confederacy and taunt the civic order with their rebel swagger. They shore up Trump, seconding him in his contempt for the elites and the “deep state”. These latter-day Rebs have not made much disturbance at the polling places, as it was feared they might do. This is much to their credit.

Still, the times are out of joint. I have only recently understood the power of this metaphor. There is a kind of connective tissue that joins cause to consequence — a king dies and his son succeeds him. 

But a joint can be wrenched. Connections that seem firm can turn out to be surprisingly fragile. It is crucial to American government that the president does not criminalise his opposition. Trump does this obsessively. 

The president is supposed to speak candidly to the American people about the issues facing the country; Trump lies and distracts, exciting his loyalists with pernicious nonsense taken from the web or Fox News. He fractures alliances and declares his love for dictators. 

All these inversions have created in effect a parody government presided over by a Lord of Misrule. There is a kind of genius in it all. Who else would have recognised that the postal system was a great contributor to the coherency and effect­iveness of any number of important social programmes, and the vote as well? Why skirmish over social security and Medicare? Just fire the mailman.

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Hard as it is to imagine, a little portrait bust of Trump will appear on those calendars that commemorate US presidents, and others coming after him. He will have given them a terrible lesson in the amount of harm that can be done. 

There is a little comfort to be found in all this, in the fact that until now we have been able to trust our presidents well enough not to have felt the need to protect our defining institutions against them. 

Our vaunted separation of powers worked pretty well for as long as respect for the project of constitutional government restrained ambition, opportunism, egoism, nepotism, fact­ionalism and personal animosity.

Protesters attempting to pull down the statue of Andrew Jackson near the White House in June © Getty Images


We have learnt that when a president epitomises these disruptive energies and more, the Constitution begins to seem fragile indeed. Another president could restore in practice the norms on which the system has depended. 

There are many people who know the conventions of American democratic behaviour from recent experience. It is easy to forget that Trump has been in power not yet four years.

Nevertheless, these years have shown us an America we have not reckoned on, a Trumpism that will be a problem for any better president. Societies can be overrun by pathological excitements, as we all know. Thugs and authoritarians find each other. 

They bond over a shared sense of grievance and they stoke their resentments by means of conspiracy theories. There is a notion abroad these days that Christianity is under attack in America, which brings to mind the disgrace the religion has suffered so often in the past from the excesses of its self-proclaimed defenders.

Other tales in circulation now bear a disturbing resemblance to the blood libel that inflamed hostility to the Jews of Europe before the second world war. The internet entity called QAnon presents hideous accounts of the victimisation of children that seem to overwhelm the expectation of normality and predictability that we ordinarily bring to our thoughts about other people. 

The McMartin pre-school panic of the 1980s was a non-political demonstration of the power of the remotest possibility that children might be suffering intolerable abuse. As a corollary, there must be adults demonic enough to engage in the abuse and stealthy or powerful enough to conceal it.

Among persons so debased, any apparent virtue is in fact a ruse. Reconciliation or compromise would amount to sanctioning their corruption. Only contempt and outrage could be appropriate in the circumstances. Speaking of people as conspiratorial groups or classes — Democrats, Hollywood — protects these accusations from rebuttal. 

If one celebrity should somehow manage to prove a negative and exonerate himself, he can be seen as an exception. If one celebrity is effectively slandered, he is proof of pervasive corruption. Religion that creates a stark line between us and them, saved and other, readily accommodates this kind of thinking.




A Trump supporter wears a QAnon sweatshirt at a rally in Staten Island, New York, on October 3 © Getty Images


It is said that Americans now hate each other. This is an important source of animosity. 

An assumption of basic decency in others makes it possible to sustain an open society. 

Now too significant a faction in our population are instead drawn in by the same primitive excitements of fear and outrage that once burnt heretics and witches. I can find no way to assure myself that a truly reasonable debate over real issues can be had in this country at this time, while the president continues to give legitimacy to crank theories that impute vile motives to critics of his government.

Looking at the matter from the other side, I am haunted by these libels, by the fear that their potency will increase until they overwhelm politics. Americans are always very ready to react with cynicism to the word “politics” — but these are the channels through which our differences have been negotiated in the past, the gist and genius of our founding documents. 

How can anyone, once convinced of the truth of these lurid stories, be dissuaded? To allude to them in any detail is to give them a larger life. They involve paedophilia, a crime especially suited to being made the burning coal that inflames the credulous imagination. 

Perhaps this species of indignation allows people careful of their virtue to entertain thoughts they would otherwise forbid themselves. Perhaps the libels arouse something like panic, a focus on the emergency, the purported crime, to the exclusion of other kinds of awareness that might dismiss it.

And maybe this anxiety of mine, that dangerous irrationality has gained a purchase on the thinking of an import­ant fraction of the American people, gives any evidence of this trend an importance that it does not have. 

To the extent that I see this mentality emerging in any group, I lose respect for them and I lose hope of having a meaningful conversation with them. So I also am a part of the divisiveness that plagues our democracy.

There is an old habit of fear in this country, ancient in the South because it is hard to trust anyone to whom you have done and are doing grievous harm. After the civil war, the defeated side triumphed. 

The hopes of Reconstruction were not only defeated but forgotten and the American memory was seduced by juleps, hoop skirts, Uncle Remus and fear. If Lincoln had not been assassinated, we might have lost him too. 

Grievous harm continued in various forms and the same fear flourished and spread and blurred the distinction between North and South that the war might seem to have hardened.


Demonstrators on the march in New York this week, urging election officials to ‘count every vote’ © Zuma Press/eyevine


There were alarms about immigrants and anarchists, then the great fear of communism and its sponsor, the Soviet Union, a fear ingrained in the public for decades as a matter of government policy. Interestingly, the fear has outlived its rationale. Now tales of the sort that Senator Joseph McCarthy told the nation about communists having infiltrated the government are told about decadent elitists.

Russia may well be doing what it can to discredit and subvert our elections today, but the alarm that would have been aroused by these intrusions in earlier decades is focused now on a supposed conspiracy of paedophiles, embedded in our government as were the old Reds, though with less obvious motives. Presumably no special credentials are required to run a child sex ring from the basement of a pizza parlour, as certain distinguished members of the Democratic party were accused of doing.

The larger point is that Russia, whose misfortune it is always to appear as a looming threat, and often to be one, is now behaving aggressively, making a shrewd assault on our democracy and at the same time canoodling with our president, whose intentions where elections are concerned seem broadly the same. Meanwhile, our flag-bedecked super-patriots are in a froth about a sinister cabal made up of the president’s critics. None of this makes any sense at all.

These strange trends in our public life are too influential, too like dangerous movements in other times and places, to be ignored. But in all fairness, the electorate were offered two hard choices — to try to restart the economy, or to concentrate fully on controlling the Covid-19 pandemic. These options are not so much at odds as they are sometimes made to seem. 

Actually controlling the virus would make possible a normalisation of the economy once and for all. On the other hand, most voters have dependants or dread the thought of becoming dependants. They know that nothing is more essential to their health and the health of their families than paying the rent. 

Opening the economy prematurely might well prove disastrous, but keeping it shut down will present immediate problems with difficult solutions, like crowding or eviction. If Congress had passed a relief bill, as it certainly should have done, this might have been a very different election. Certainly voters took into account the fact that no support was coming.

Despite all, my compatriots in their scores of millions waited hours in patient lines, masked and distanced, to perform the political act that makes the profoundest sense. God bless America.


Marilynne Robinson’s most recent novel ‘Jack’ is published by Virago

Europe’s looming cash crunch

How bad it gets for businesses in the euro area depends on governments’ response.

Claire Jones

     © Bloomberg


Are almost a quarter of the euro area’s businesses on the brink of a serious cash crunch? 

Euler Hermes, the credit insurer, thinks so. 

Via a note published earlier this week:

We expect a heavy cost for Covid-19 sensitive sectors across the Eurozone, which could see average operating losses of -15% to -20% in 2020 compared to pre-crisis levels. In the absence of prolonged fiscal policy support or an aversion to taking on more debt, this could dry up cash buffers, putting around 24% of Eurozone companies (or more than 4.1 million) at risk of a cash-flow crisis next year.

Here are the countries that will be most affected:

So are we about to see cash crunches trigger a wave of bankruptcies? Not necessarily.

If companies want to take on more debt, then we’d be quite confident that banks or other backers would provide it, simply because the European Central Bank has been – and, in our view, will continue to be – pretty aggressive in responding to tighter credit conditions. 

The problem is companies don’t seem to have quite drunk policymakers’ Kool Aid. From the ECB’s latest poll of Access to Finance of Enterprises, which came out earlier this week:


A larger number of euro area [smaller and medium sized enterprises] saw the general economic outlook as an obstacle to the availability of external finance (-41%, from -30%). 

This assessment was broadly based across countries but was most clearly seen in the responses from SMEs in Austria (-57%, from -31%), Finland (-50%, from -44%) and Portugal (-49%, from -29%). In addition, SMEs indicated that they expected the availability of bank loans to deteriorate over the next six months (a net -16%, from -11%).


On the fiscal response, the credit insurer wants to see less red tape in Germany as regards the Kurzarbeit scheme, under which up to 80 per cent of wages for staff working shorter hours can be covered:


In Germany, Kurzarbeit has already been extended until end-2021 for a total cost of EUR40bn. 

For most programs, no additional amounts will be announced as large amounts remain untapped. 

However, the modalities and bureaucratic hurdles should be revisited and adjusted to improve take-up. 

This concerns in particular the corporate bridge support and the emergency aid for micro-businesses and sole traders, for which a combined EUR75bn have been set aside but only EUR15bn used.


They also want the government here to extend the horizon for applying losses to future revenues, in order to lower companies’ tax burden. 

Though asking Germany to go easy on bureaucracy sounds like a bit of a non-starter to us. Ahem.

In France, they’d like to see more tax relief:

A decisive moment for French companies might come in Q2 2021 when the next production tax payments are due, combined with the quarterly installments of other payment taxes, which could further widening the profitability gap with the European peers. 

We estimate that the EUR20bn production tax cut will bring only +1.5pp of additional margins to French companies. 

Hence, fiscal policy will need to do more to avoid a wave of layoffs and insolvencies in France.


We know less about the likelihood, or otherwise, of this. But our suspicion is that more debt might remain companies’ best bet. 

The big question is whether, after such a dispiriting year, they’ll be optimistic enough to bite, or whether they’ll just give up and go out of business. 

The World Should Watch Japan’s Attempts to Save Its Struggling Banks

Low, zero and negative interest rates make banking a low-profit game. Japan’s attempts to get its lenders to merge and cut costs are worth paying attention to.

By Mike Bird

The Tokyo skyline. Other countries should take note of Japan’s moves to help ailing its banks. / PHOTO: PHILIP FONG/AGENCE FRANCE-PRESSE/GETTY IMAGES


Japan is trying to encourage mergers among its ailing regional banks by introducing a sweetener for those that cut costs. Other advanced economies should pay attention: Rock-bottom interest rates mean Japan’s present is likely to be their future.

The Bank of Japan is offering commercial lenders an extra 0.1 percentage point in interest on their deposits with the central bank if they reduce their overhead ratio by certain benchmarks, or merge or integrate their businesses.

After 30 years of falling and even negative interest rates, many of Japan’s regional lenders have share prices of 0.2 to 0.3 times their book value—levels that would have been considered catastrophically low even a few years ago.

A marginal shift in interest rates on accounts held with the central bank might not sound like much, but Moody’s Investors Service rightly notes that given regional banks had an average return on assets of just 0.14% in the last fiscal year, an extra 0.1 percentage point return on large cash balances is nothing to sniff at.

It isn’t the only measure Japan is taking. Later this month, a new law exempting regional banks from normal antitrust considerations comes into force. A merger between Kyushu-based Eighteenth Bank and Shinwa Bank was held up for years by regulators before finally beginning operations last month.

If paying so much attention to small lenders worth little in financial markets seems unusual, it’s worth remembering that without a healthy financial system, it’s far more difficult to implement monetary policy: Banks in distress may not respond to interest-rate signals in predictable ways.

Smaller lenders elsewhere don’t all face the same constraints. Some in the U.S., for example, have serious exposure to the troubled energy sector.

But any institution that relies on interest income is going to be squeezed continually if rates remain low for an extended period, as bond market prices clearly expect them to. 

With less fee income, similar issues are likely to present themselves in regional lenders around the world.

European policy makers should be paying particularly close attention, given their similar desire to consolidate the banking sector.

Banking policy can’t be expected to solve a problem that is fundamentally macroeconomic: Japan’s sluggish nominal growth has required the low interest rates that have hollowed out lenders’ bottom lines. But it can ameliorate the situation significantly.

Breaking down barriers to mergers and offering additional financial incentives to pursue them won’t fix what ails the sector, but it may well encourage more activity, something other countries might want to make a note of. 

The Lost Cause of the Trumpocracy

Donald Trump's insistent denial of reality following his loss in the 2020 US presidential election threatens to do still more damage to American democracy, even though it comes as no surprise. Like the southerners who never could get over their loss in the American Civil War, Trump has nothing left but his own mythomania.

Elizabeth Drew


WASHINGTON, DC – Joe Biden’s clear defeat of President Donald Trump, announced on Saturday, November 7 after four days of counting, is – a week later – still not enough for Trump to affirm Biden’s victory. 

Biden’s win supposedly ended what had been called the most consequential US election of modern times, but for reasons of his own, Trump is still holding out.

Under the guise of insisting that he was the victim of voter fraud – he has been advertising for months that he’d make this argument if he lost – Trump is denying Biden, and the country, the chance to begin an orderly transition of power. 

That Biden is the most experienced person in modern history to enter the presidency will help, but he faces the toughest situation confronting a new president since Franklin D. Roosevelt took office in 1933, in the midst of the Great Depression. Given the raging pandemic and economic collapse, Biden’s challenge may even be more difficult.

Most of Trump’s opponents recognize that the election didn’t fulfill their ardent desire for an overwhelming repudiation of a president they despise. They must also face the fact that Trump retains an exceptionally large following. Almost ten million more people voted for Trump this time around than in 2016. 

The Democrats fared much worse in the elections for the Senate and the House of Representatives than the polls had predicted (they were wrong again), with the Senate probably remaining in the hands of the Republican master strategist Mitch McConnell – unless the Democrats sweep two run-off elections to be held in Georgia in early January.

The most alarming conclusion about Trump’s presidency is how perilously close the United States came to a breakdown of its constitutional system. If Trump had succeeded in his efforts to reverse the election (clearly futile from the outset), US democracy could have been destroyed. 

So perhaps the biggest lesson from Trump’s presidency is how fragile the US Constitution is, and that timorousness before those who would undermine it enhances the dangers.

It may take a while before Trump’s genuine, if feral, political talent is fully understood. Trump succeeded in politics largely by appealing to Americans’ basest instincts and exploiting the country’s ingrained racism. The first words he uttered as a candidate were a vicious denunciation of Mexican immigrants as rapists. 

Trump understood, as do his fellow “populist” leaders around the world, that a great many people are drawn to bombast. He also benefited from his P.T. Barnum-like showman’s instincts; the image of Trump and his wife descending a golden escalator in 2015 is indelible.

Though he was politically damaged by it, Trump didn’t pay the price he deserved for his disastrous mishandling of the pandemic, because he understood, and played upon, the contempt that many of his supporters have for “experts.” 

He pressed for policies reflecting his understanding that people didn’t want to be secluded in their homes; that parents wanted their kids back in school; that small businesses wanted to reopen; and that a lot of people don’t want to be ordered to wear a mask.

Being spectacularly denied another term as president, the greatest reversal of Trump’s life, has landed him in the camp of those he holds in the most contempt: “losers.” 

Although Trump is far from the first presidential candidate to take a loss badly (some never get over it), his reaction has been volcanic (though he has largely been cooped up in his office or playing golf). 

The sham campaign that Trump is running ostensibly to nullify the vote is clearly intended to avoid that “loser” tag. If, in the process of salving his ego, Trump delegitimizes not only the election but the American political system, so be it.

Trump continues to wield government power until the inauguration on January 20 next year, which gives him many opportunities for mischief. On the Monday after the vote, he began a purge of the Department of Defense, dismissing Secretary of Defense Mark Esper with a tweet and replacing him with a relatively inexperienced loyalist. 

Other senior Pentagon officials have also been sacked and replaced by people Trump trusts more.

Do the sackings simply reflect Trump’s ample capacity for spite, or is there a darker plan afoot? Esper, for example, had openly opposed Trump’s desire to use federal troops to put down violence in the streets of what he terms “Democrat-run” cities. 

There is also a brutal internal war within the administration over declassifying intelligence that Trump believes will absolve him of the charge that he received Russian help in 2016.

Because Trump remains the dominant force in their party, Republicans – some with an eye on the 2024 presidential election – are reluctant to object openly to his tearing at the sinews that hold the country together. Trump’s eschewing of the ritual congratulatory telephone call to Biden – thus setting an example for other Republicans – was the least of it.

It’s clear that Trump and his allies are up to something larger. On the eve of Barack Obama’s first inauguration in 2009, Republican leaders met in the Capitol and decided on the unprecedented goal of defeating his every initiative as president. Trump is going further, appearing bent on crippling Biden even before he’s sworn in.

The danger that Trump presents to the American republic, if not the world, won’t disappear after January 20. At that point, there are no inhibitions on him other than those imposed by his ambitions. 

One worry among current and former intelligence officials is that, though Trump didn’t pay much attention to his intelligence briefings, he possesses information that would be of great interest to America’s adversaries. 

Might some of them be willing to help bail him out from the deep financial hole he’s in (he must soon begin repaying $400 million in personally guaranteed loans)?

Trump out of power will have other worries, too. Even if he pardons himself before leaving office, that will save him only from federal prosecutions. He would still be vulnerable to prosecutions stemming from investigations underway in various states.

The astonishing outburst of jubilation that broke out across the US – and in countries around the world – following Trump’s defeat was a testament to how frightened people have been by his presidency. The relief may be premature. Axios reported recently that Trump has already discussed with aides the possibility of running for president again in 2024.

This might well be a Trumpian ruse. As of now, Trump seems more focused on creating another “lost cause” myth – like the self-glorifying one concocted by unreconstructed Southerners after the US Civil War. 

Such incendiary mythology could prove useful to Trump in countless ways in the years ahead, including keeping him relevant and on TV. It may be a long time before the US and the world have seen the last of Donald Trump.


Elizabeth Drew is a Washington-based journalist and the author, most recently, of Washington Journal: Reporting Watergate and Richard Nixon's Downfall.

domingo, noviembre 29, 2020

THE MONEY DOCTORS / THE ECONOMIST

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The money doctors

The asset-management industry is at last sorting the quacks from the true specialists, argues John O’Sullivan


In march 1868 a prospectus appeared for a new kind of money-market scheme. The Foreign & Colonial Government Trust would invest £1m ($5m at the time) in a selection of bonds. For £85 an investor could buy one of 11,765 certificates giving an equal share. 

The trust promised a 7% yield. Its aim was to give “the investor of moderate means the same advantages as the large capitalist in diminishing the risk of investing…by spreading the investment over a number of different stocks.” The modern asset-management industry was born.

A week later The Economist ran a leading article broadly welcoming the new trust. But—setting the tone for 150 years of financial punditry—it quibbled about the selected bonds. A chunk was allocated to Turkey and Egypt, countries that “will go on borrowing as long as they can, and when they cease to borrow, they will also cease to pay interest.” 

Fears were expressed that Europe was disintegrating. “In lending to Italy, you lend to an inchoate state; and in lending to Austria, you lend to a ‘dishevelled’ state; in both there is danger.”

The trust was the brainchild of Philip Rose, a lawyer and financial adviser to Benjamin Disraeli. His idea of a pooled investment fund for the middle class caught on. In 1873 Robert Fleming, a Dundee-based businessman, started his own investment trust, the First Scottish, modelled on Rose’s fund but with a bolder remit. It was largely invested in mortgage bonds of railroads listed in New York. 

The holdings were in dollars, not sterling. And whereas Rose’s trust was a buy-and-hold vehicle, the trustees of the First Scottish reserved the right to add or drop securities as they saw fit.

Rose’s trust survives to this day, but asset management is now a far bigger business. Over $100trn-worth of assets is held in pooled investments managed by professionals who charge fees. The industry is central to capitalism. 

Asset managers support jobs and growth by directing capital to businesses they judge to have the best prospects. The returns help ordinary savers to reach their financial goals—retirement, education and so on. 

So asset management also has a crucial social role, acting as guardian of savings and steward of firms those savings are entrusted to.

It is a business unlike any other. Managers charge a fixed fee on the assets they manage, but customers ultimately bear the full costs of investments that sour. Profit margins in asset management are high by the standards of other industries. 

For all the talk of pressure on fees, typical operating margins are well over 30%. Yet despite recent consolidation, asset management is a fragmented industry, with no obvious exploitation of market power by a few large firms and plenty of new entrants.

In many industries firms avoid price competition by offering a product distinct from their rivals—or, at least, that appears distinctive. Breakfast cereal is mostly grain and sugar, but makers offer a proliferation of branded cereals, with subtle variations on a theme. 

Asset management is not so different. Firms compete in marketing, in dreaming up new products and, above all, on their skill in selecting securities that will rise in value.


The industry has not performed well. Ever since a landmark paper by Michael Jensen in 1968, countless studies have shown that managers of equity mutual funds have failed to beat the market index. Arithmetic is against them. 

It is as impossible for all investors to have an above-average return as for everyone to be of above-average height or intelligence. In any year, some will do better than the index and some worse. 

But evidence of sustained outperformance is vanishingly rare. Where it exists, it suggests that bad performers stay bad. It is hard to find a positive link between high fees and performance. Quite the opposite: one study found that the worst-performing funds charge the most.

Why do investors put up with this? One explanation is that investment funds are more complex than breakfast cereals. At best they are an “experience good” whose quality can be judged only once consumed. 

But they are also like college education or medical practice: “credence goods” that buyers find hard to judge immediately. Even well-informed investors find it tricky to distinguish a good stockpicker from a lucky one. Savers are keen to invest in the latest “hot” funds. 

But studies by Erik Sirri and Peter Tufano in the 1990s show that, once fund managers have gathered assets, those assets tend to be sticky. They are lost only slowly through bad performance.

Firms have a fiduciary duty to act in the best interest of customers. Securities regulators (eg, the Financial Conduct Authority (fca) in Britain and the Securities and Exchange Commission (sec) in America) oversee asset managers. 

Unlike banks, which borrow from depositors and markets, asset managers are unleveraged and so not subject to intensive rules. 

The assets belong to beneficial investors; they are not held on a firm’s balance-sheet. 

The thrust of regulation is consumer protection from fraud and conflicts of interest. It does not prescribe investment strategies or fees. An investigation by the fca in 2016 found that investors make ill-informed choices, partly because charges are unclear. 

The problem of poor decision-making is most acute for retail investors. But even some institutional investors, notably those in charge of small pension schemes, are not very savvy. 

Around 30% of pension funds responding to a survey by the fca required no qualifications or experience for pension trustees. Investors are a long way from the all-knowing paragons of textbook finance theory.

Medical manners

A paper in 2015 by Nicola Gennaioli, Andrei Shleifer and Robert Vishny argued that fund managers act as “Money Doctors”. Most people have little idea how to invest, just as they have little idea how to treat health problems. 

A lot of advice doctors give is generic and self-serving, but patients still value it. The money doctors are in the same hand-holding business. Their job is to give people the confidence to take on investment risk.

In asset management, as in medicine, manner and confidence are as important as efficacy. “Just as many patients trust their doctor, and do not want to go to a random doctor even if equally qualified, investors trust their financial advisers and managers,” say Mr Shleifer and his co-authors. 

This may explain why investors stick with mutual-fund managers even in the face of only so-so performance. As long as asset prices go up, a rising tide lifts most boats in the asset-management industry—including a lot of leaky vessels.

But the seas are getting rougher. Over the past decade, investors have placed more capital with low-fee “passive” funds. These funds invest in publicly listed stocks or bonds that are liquid—that is, easy to buy or sell. The most popular are “index” funds, run by computers, that track benchmark stock and bond indices. 

The industry’s big winners have been indexing giants whose scale keeps costs down and fees low. The two largest, BlackRock and Vanguard, had combined assets under management of $13.5trn by the end of 2019. The losers were active managers that try to pick the best stocks.

High fees have not disappeared. The boom in passive investing has spawned its antithesis: niche firms, run by humans, in thinly traded assets charging high fees. A growing share of assets allocated by big pension funds, endowments and sovereign-wealth funds is going into privately traded assets such as private equity, property, infrastructure and venture capital. 

What has spurred this shift is a desperate search for higher returns. The management of private assets is an industry for boutiques rather than behemoths. 

But it has its own big names. A quartet of Wall Street firms—Apollo, Blackstone, Carlyle and kkr—have captured much of the growth in assets allocated to private markets.

The shake-up in asset management owes a lot to macroeconomics. The investors who snapped up certificates in Rose’s trust were dissatisfied with 2% interest in the money markets. Today investors would sell their grandmothers for such a yield. Interest rates in parts of the rich world are negative. 

In Germany and Switzerland, government-bond yields are below zero across the curve, from overnight to 30 years. Inflation is absent, so ultra-low interest rates are likely to persist. 

The expected returns on other assets—the yields on corporate bonds, the earnings yields on equities, the rental yield on commercial property—have accordingly been pulled down. The value of assets in general has been raised.

The steady decline of long-term rates is a nightmare for pension funds, because it increases the present value of future pension promises. Industry bigwigs often blame the Federal Reserve and other central banks. 

But interest rates have been falling steadily since the 1980s. There are deeper forces at work. The real rate of return is in theory decided by the balance of supply and demand for savings. 

The balance has shifted, creating a bonanza for asset managers, whose fees are based on asset values.

There are competing explanations for the savings glut. Demography is one: people are living longer, but average working life has not changed much. More money must be salted away to pay for retirement, with much of the saving taking place in the years of peak earnings in middle age. 

A bulge in the size of the middle-age cohort has pushed the supply of savings up. Another factor is the growth of China and other high-saving emerging markets. At the same time, the demand for savings has fallen. 

When Robert Fleming set up his investment trust, enterprises like railways were capital-intensive. Today the value of firms lies more in ideas than in fixed capital. Big companies are self-financing. 

Small ones need less capital to start and grow. The upshot is that more money is chasing fewer opportunities. Investors are responding by trying to keep fund-management costs down and putting more money into private markets in hopes of higher returns than in public markets. 

This response is reshaping the asset-management business.

This special report will consider the outlook for the industry and ask what it means for the economy, for the stewardship of firms, for capital allocation and for savers who place their trust in the money doctors. 

It will examine whether China’s untapped market can be a source of renewed growth. 

A good place to start is with the forces shaping the industry’s elite. 

Investors should take heed of the inflation chatter

Don’t be blindly addicted to free money and risk a shock when conditions change

Gillian Tett

© Ingram Pinn/Financial Times


There are two pieces of good news to celebrate in markets this week. The first is obvious: a fairly effective vaccine for Covid-19 is emerging from Pfizer and BioNTech. Anthony Fauci, the leading US infectious diseases expert, told the Financial Times he expects a second one soon, too.

This has unleashed hopes of an end to the coronavirus lockdowns in 2021. Investors have duly started positioning themselves for economic recovery: the 10-year Treasury yield has edge up towards 1 per cent and the share prices of value stocks have jumped, while those of many tech groups have declined (the latter were considered the primary beneficiaries of lockdowns).

However, the second piece of good news is not so self-evident, and many policymakers would not label it that way at all: there is rising market chatter about the idea that long-dormant inflation risks could return.

This week Goldman Sachs warned clients that a key theme of 2021 will be a sharp steepening of the yield curve, which charts the difference in short-term and long-term interest rates, amid inflation concerns. 

British asset managers Ruffer and Willis Owen are talking about this too. They cite charts of 20th-century financial history that show how prices usually jump after recessionary shocks, usually because of government reflation measures.


So are some government officials. “I do think investors need to start thinking about inflation again,” Wilbur Ross, US commerce secretary, told me this week. Mr Ross does not expect to see “runaway inflation”, but he does think that a zeitgeist shift around inflation is looming and it could spark market repricing. 

This could make investors more wary about bonds, particularly given how many of them the government must sell to cope with yawning deficits.

Officials at the Federal Reserve would beg to differ; indeed, many might deride this chatter as dangerous. After all, they say, the data does not show any price pressure now: the core consumer price index in the US fell sharply during the pandemic and is now running at about 1.6 per cent.

Thelatest US figure might be an understatement. This week economists at the IMF suggested that global inflation has been undercounted by about 0.23 percentage points during the pandemic because statisticians have not updated their consumption metrics to reflect how the lockdown has changed spending patterns.

However, even if “real” US inflation is nearer to 2 per cent, that remains within the Fed’s target range, particularly given that Jay Powell, Fed chair, said in August that 2 per cent is no longer a ceiling, but simply an average target over time.

Moreover, Fed officials do not see higher inflation on the horizon. That is partly because they expect demand to stay weak for some time: as Mr Powell explained last week, they think the spread of Covid-19 will suppress consumer activity for the foreseeable future. His British counterpart, Andrew Bailey, echoes this view.

The other reason that Fed officials think the 20th-century inflation patterns are unlikely to reappear is digitisation. Even before the lockdowns, consumers and corporate executives were becoming more adept at shopping online for services, goods and labour, stoking global competition. The pandemic has significantly intensified this. 

If digitisation suppresses labour costs in many sectors for the foreseeable future, it will keep inflation low.

They are probably quite right, unless, of course, a new outburst of protectionism causes digital integration to collapse. This does mean that the current inflation chatter might be overstated, but the sheer fact that investors are talking about these risks is actually a good, not bad, thing.

In the past few years markets have become dangerously addicted to a one-way bet. Inflation pressures had seemed so unexpectedly muted before the pandemic that investors started to act as if they would never return. 

Then Mr Powell promised in September to keep nominal interest rates at rock bottom levels until 2023. Since then, investors have become even more addicted to free money, or, more precisely, real interest rates that were in effect negative.

This has encouraged complacency around long-term risks in bond markets. It has also sparked the creation of some funky financial structures. Special purpose acquisition companies are a case in point: Spacs have boomed this year. 

Financiers tell me that investors like them because the structure not only offers a possible long-term equity market upside but also a short-term warrant with a yield slightly superior to T-bills. 

Many investors know perfectly well that zero-rate bets will suffer if interest rates suddenly rise. But they also know — to paraphrase the banker Chuck Prince right before the financial crisis — that financiers have to keep dancing if the free money music keeps playing.

That’s why this week’s inflation chatter is good news. It seems unlikely that rapid price growth will in itself pose a risk to the real economy any time soon. What could pose a risk is if the market remains blindly addicted to free money and then experiences a shock when conditions change.

If investors start shifting their portfolios now to embrace a less unbalanced vision of the future, this will help reduce that danger. Fed officials would be foolish to prevent this; whatever happens with a Covid-19 vaccine.

Giant jab

What a vaccine means for America’s economy

Although the coronavirus is spreading unchecked, there are grounds for optimism



On november 9th the end of the coronavirus pandemic came into tantalising sight. Pfizer and BioNTech announced that their vaccine was more effective than expected. 

Investors’ hopes for a stronger economy sent stockmarkets soaring. Ten-year Treasury yields neared 1%, levels last seen in March.

Even before the vaccine news broke, the speed of America’s economic bounceback was exceeding forecasts and surpassing others in the rich world. In April the imf reckoned that gdp would shrink by 6% in 2020. 

It now projects a decline of 4%. Unemployment peaked at 14.7% in April; in June the Federal Reserve had expected it to still be around 9% by the end of the year. It went on to fall below that rate only two months later. In October it stood at 6.9%.

Can a vaccine accelerate the economy’s return to its pre-covid state? The coronavirus is still spreading unchecked, with the burden often falling on the poorest. But many economists had also worried that the pandemic would leave broader economic scars that take time to heal. Here, a look at firms’ and households’ finances offers grounds for optimism.

The resurgence of the virus will put a dampener on the recovery in the months before a vaccine becomes widely available. Infections are rising so rapidly that, in the admittedly unlikely event that current trends were to continue, 1m Americans a day would be catching the disease by the end of the year. 

Renewed local restrictions on activity seem inevitable. That will lower some types of economic activity and could in turn increase the number of people who have lost their jobs permanently.



Still, it seems unlikely that America will enter a double-dip recession, as Europe is expected to. For one thing, it probably will not impose lockdowns as severe as those in Britain, France or Germany. 

High-frequency indicators, including The Economist’s analysis of Google mobility data, suggest that America’s recovery has slowed compared with the summer. But it has not gone into reverse, as it has in Europe. 

And the vaccine could boost the economy in some ways even before it becomes available. Torsten Slok of Apollo Global Management, an asset manager, argues that “households and firms are going to plan ahead, for example by booking travel [and] vacations”.

On the current growth path, at the turn of the year there will still be 10m fewer jobs than there would have been without the pandemic. Output will be some $700bn, or 4%, lower than otherwise. Most forecasters reckon that income per person will not exceed its pre-covid level until 2022, if not later. 

But growth will accelerate as jabs are administered. Everything from theatres to public transport will feel safer. That will further revive the labour market. Before the pandemic over a fifth of workers were in jobs involving close proximity to others.



There are other reasons to think America’s recovery may be faster than after previous recessions. History suggests that recoveries are sluggish when downturns leave deep economic scars. The financial crisis of 2007-09 cast a long shadow over subsequent years in part because of its chilling effect on bank lending, for instance. 

This time around, the effect of school closures on children’s education will be felt for decades to come. But in many other respects there is less evidence of lasting economic damage. 

A wave of bankruptcies and permanent closures has been avoided—especially of small firms, which employ half the workforce. And families’ finances have been resilient.

Start with small firms. At one point in April nearly half of them were closed, according to data from Opportunity Insights, a research team based at Harvard University, as shelter-in-place orders forced closures and fear of the virus prompted people to stay at home. Six months on, many firms are still struggling. 

In early October nearly a third of small firms reported that the pandemic had a large negative effect on business, according to the Census Bureau. One quarter of small businesses remain closed.

But these closures may not become permanent. Total commercial bankruptcy filings are running below their pre-pandemic trend, not to mention the levels of the last recession. 

Such data are not perfect, because not every firm that closes down files for bankruptcy. 

A new paper by economists at the Fed brings together many different measures of “business exit”, and finds “somewhat mixed” evidence that more businesses have gone bust in 2020.

But these unlucky outfits do not appear to represent a large share of employment. In addition, this bankruptcy ripple seems unlikely to turn into a wave. The share of small firms very late on their debt repayments is currently about half its level in 2009. 

Moreover, although the number of active businesses fell during the first wave of the pandemic, it has recovered almost all the lost ground, suggesting that new firms may have come up in place of exiting ones.

Firms’ resilience helps explain why unemployment has dropped much faster than expected. The share of unemployed Americans who say they have lost their job temporarily remains unusually high. Such workers expect to be recalled to their old employer, pointing to further declines in the unemployment rate.

What explains small firms’ surprising resilience? It seems hard to credit America’s business-focused stimulus measures. So far less than $4bn (or 0.02% of GDP) has been doled out by the Fed’s Main Street Lending Programme, which is supposed to channel funds to small and midsized enterprises. 

Economists are also underwhelmed by the Paycheck Protection Programme (ppp), which provided loans to small businesses that are turned into grants as long as recipients do not sack their employees. 

A paper by David Autor of the Massachusetts Institute of Technology and colleagues found that “each job supported by the ppp cost between $162,000 and $381,000 through May 2020”. But this money was poorly targeted: a lot of it was lapped up by firms that planned to continue operating, come what may.

Other factors are more important. Many small firms have managed to trim their outgoings. A recent paper from Goldman Sachs, a bank, finds that in May rent-collection rates fell to 10% or less for firms such as cinemas and gyms. A growing number of landlords now set rent as a percentage of tenants’ revenues, an arrangement that was uncommon before covid-19.

But perhaps the biggest reason for the lack of small-business carnage relates to consumer spending. In September retail sales were more than 5% up on the previous year. Americans appear to have tilted their spending towards small firms over large ones, on the premise that they are less likely to catch covid-19 in places with fewer people. 

The latest figures from JPMorgan Chase, a bank, show that credit-card spending in early November was only marginally lower than it was a year ago.

This relatively sturdy consumption in turn reflects the second factor behind the lack of scarring this time around: resilient household finances. Compared with other rich countries, America has directed more of its fiscal stimulus towards protecting household incomes. 

The federal government sent out cheques worth up to $1,200 per person and temporarily bumped up unemployment benefits by $600 a week. That is not to say that the disadvantaged have not been badly hit: some measures of deprivation have risen sharply. But viewed in aggregate, the financial security of households has proved remarkably stable.

A survey by the Federal Reserve found that 77% of adults were doing “at least OK” financially in July 2020, up from 75% in October 2019, before the pandemic struck. Between March and September households saved 19% of their gross income, up from 6% during the same period the year before, thereby accumulating $1.3trn (6% of gdp) in extra savings.

The stockpile gives consumers a buffer for the coming months, and should help support economic growth. In part for that reason, another blowout stimulus package may not be needed now that a vaccine is near. Lawmakers from the Democratic Party have pressed for spending of $3trn or more. Injecting money into the economy could well hasten the recovery. 

But another $1trn a year in stimulus may be enough to restore normality, assuming that by the start of next year the gap between America’s current and potential GDP may be around 4% of output, and that increases in government spending will translate somewhat less than one-to-one into extra gdp, as the evidence currently suggests.

A lot could still go wrong. Stringent lockdowns, European style, could still derail the recovery. Stimulus may not be passed at all. Either would worsen the economic scars that have so far been minimised, for instance by making it harder for the 3.6m Americans who have been unemployed for more than six months to find work. 

America’s many layers of government could delay the distribution of vaccines, just as they have botched the allocation of covid-19 tests. 

But households and businesses, at least, are in better shape than you might have feared.