Tail risks

A surge in inflation looks unlikely

But it is still worth keeping an eye on


In 1975 Adam Fergusson, a journalist on the Times, published a book called “When Money Dies”. 

A history of hyperinflation in Germany in the early 1920s, it was written with an eye to what was going on in the then-present day. Inflation in Britain was not at the prices-soaring-day-by-day levels seen in the Weimar Republic. 

But in 1975 it reached an unprecedented 24%—grim enough for Fergusson’s warning that the experience of inflation was “totally absorbing, demanding complete attention while it lasts” to hit home.

Rapid, continuous increases in prices arbitrarily take wealth away from savers and devalue people’s wages. It is not just the purchasing power of a unit of currency that is eroded; it is the trust in a reliable future on which contracts and capitalism depend. 

From the early 1970s to the 1980s more than 50% of Americans said “inflation or the high cost of living” was the single biggest problem facing the country.

But by the 1990s the beast seemed to be vanquished. Average rates dropped; so did the number of “inflation surprises” in which the rate spikes (see chart 1). 

When “The West Wing”, a television show, gave its fictional president a “secret plan to fight inflation” in 1999 it was as a joke, not a plot point. 

True to Mr Fergusson’s belief that the experience of living with inflation is “forgotten or ignorable when it has gone”, his book fell out of print.


It was republished to acclaim at the end of the 2000s, when post-financial-crisis stimulus packages increased government debt prodigiously, and “quantitative easing”, the process by which trillions of new dollars would be created, started to hit its stride. 

Many worried that the stage seemed set for prices to surge in a way which had not been seen for a generation.

They did not. Over the 1970s rich-world inflation averaged 10% a year. In the 2010s the rate stayed stubbornly below 2% a year. 

That is one of the reasons that the small but vocal band of economists and investors that is once again worried about excessive price rises is by and large being ignored. 

The agenda for a big conference on central banking to be held in February has copious space for financial instability, climate change and inequality but barely any for inflation—despite taking place in Germany, a country which, since Weimar, has all but fetishised sound money.

Indeed a modest rise in inflation, rather than giving central bankers the vapours, would have them sighing with relief. In recent years, and most dramatically during the worst of the crisis this spring, the threat of demand-sapping deflation loomed large, especially in the euro area and Japan. 

Some want central banks to aim for inflation higher than the 2% target that most of them use, and America’s Federal Reserve has already said that it wants to overshoot its 2% target in the recovery to make up for recent shortfalls. 

Recent experience suggests that may be hard: interest rates close to zero have left monetary policy hard-put to push inflation back up even to 2%.

Look behind you

But if it is easy to ignore the prophets of doom, it may not be wise. If 2020 has a lesson, it is that problems which many in the world had broadly stopped worrying about can rear up with sudden and terrible force. 

And those sounding the alarm today are right to point out that the circumstances of the covid pandemic do not offer a simple re-run of 2009’s false alarm.

Some of today’s inflationistas predict a possibly high but transitory spike in prices as consumer spending bounces back from the pandemic. On December 3rd Bill Dudley, who was until 2018 a vice-chairman of the Fed’s interest-rate-setting committee, warned Bloomberg readers that sharp price increases might be necessary “to balance demand with the available supply, which the pandemic has undoubtedly diminished.” 

The next day David Andolfatto, an economist at the St Louis Fed, warned Americans to “prepare themselves for a temporary burst of inflation.”

Others warn of more persistent inflationary pressure. Economists at Morgan Stanley, a bank, predict “a fundamental shift in inflation dynamics” in America, with inflation rising to the Fed’s 2% target by the second half of 2021 and going on to overshoot it. After a typical recession such a rebound takes three years or more. 

The most pessimistic group warns that complacent or distracted central bankers will allow such pressures to go unchecked, leading to a decade of stubbornly high inflation comparable to the 1970s.

Three main factors are deemed to be at play: the after-effects of the stimulus measures taken by governments to cope with the pandemic; demographic shifts; and changes in policymakers’ attitudes towards the economy.

Take the stimulus packages first. Monetarism, which was the dominant economic ideology over the period in the 1980s during which inflation was squeezed out of rich-world economies, sees the root cause of inflation as an excessive supply of money. On that basis the fact that nearly a fifth of all the dollars in existence have been created this year clearly looks perturbing. 

Central-bank balance sheets in America, Britain, Japan and the euro zone have risen by more than 20% of their combined gdp since the crisis began, mostly to buy government debt. This new money is paying for enormous stimulus programmes, including wage subsidies, furlough schemes and expanded welfare benefits that put money in pockets and purses.

This money creation differs from the burst seen after the financial crisis—the burst which, despite warnings, triggered no surge in inflation. That earlier burst began during a prolonged credit crunch. This meant that the new money created by central banks was making up for money that was not being created by bank lending.

This time it is not just “base money”— physical cash and electronic reserves the quantity of which is under central-bank control—which has soared. Measures of “broad money”, which includes households’ bank balances, have, too. Lending to the private sector has risen sharply as firms have borrowed cash to continue operations. 

After 2009 the broad-money supply rose slowly; today it is spiking (see chart 2).

The private sector will thus find itself flush with cash as vaccinated economies reopen. Households and firms may remain cautious, sitting on their accumulated savings. But amid the joy of reopening they may instead go on a spending spree, making up for all the time not spent in theatres, restaurants and bars during 2020. 

That would result in a lot of money chasing goods and services that might not be in ample supply, resulting in a period of inflation that would tail off as the purchasing power of the money involved fell, bringing things back towards the status quo.

From the Black Death on

Researchers from the Bank of England who looked at 800 years of (admittedly patchy) records have concluded that inflation does typically rise in the year after a pandemic begins. 

A recent paper by Robert Barro of Harvard University and colleagues finds that the influenza pandemic of 1918-20 “increased inflation rates at least temporarily”. 

By the time the effects of the covid-19 pandemic are fully on the wane more firms will have joined the ranks of those which have already gone under and many of the survivors will be struggling to run at full tilt. 

Thus people’s willingness to spend could easily rebound faster than their opportunities to do so. There is already some evidence of bottlenecks where supply is falling behind demand. 

The price of shipping an object from one country to another has jumped in recent weeks, while the price of iron ore has risen by more than 60% since the beginning of the year.

This is the risk of which Mr Dudley warns. In the aggregate, though, investors seem unconvinced. The inflation expectations which can be derived from prices in financial markets have recently picked up a little thanks to the good news on vaccines and the prospects for a rebound in the world economy. 

But they still suggest that investors think next year’s inflation is more likely to be below the 2% central banks target than above it (see chart 3). 

Lars Christensen, a Danish economist, points out that this means there is a “clash” between the two best-known economic theories associated with the Chicago school. Milton Friedman said sustained growth in the money supply leads to inflation; Eugene Fama argued that market prices fully reflect all available information. 

“If you believe that we are going to have inflation now...the efficient-markets hypothesis would have to be wrong,” Mr Christensen argues.


Most economists side with the markets and Mr Fama. In general they no longer think about inflation as 1980s monetarists did (indeed even Friedman, late in life, admitted that modern central banking might have severed the link between the money supply and prices). 

Following the “New Keynesian” framework of the 1990s they believe that the underlying driver of inflation is a combination of the public’s expectations of price rises, which are self-fulfilling, and the health of the labour market. Both currently point to low inflation.

Neither survey data nor the financial markets suggest that the public expects dramatic price rises. And most forecasts suggest it will take some time for employment to find its pre-pandemic level, even in the economies which bounce back most quickly. 

Goldman Sachs, a bank which has been especially bullish about the prospects for the American economy, does not expect the unemployment rate to fall below 4% until 2024. And America’s economy is expected to recover faster than most. 

Relatively high unemployment—in the jargon, an “output gap”—will give firms little incentive to increase people’s wages, and thus little need to raise prices. A “projected large output gap should push global core inflation 0.5% percentage points below its pre-crisis levels next year”, argue economists at JPMorgan Chase, another bank.

So even if there is a spending boom, there will be plenty of economic slack around to accommodate it. Some economists bridge the two views, predicting that the economy will get back to speed in fits and starts, some perhaps inflationary. But for most, high joblessness and contained inflation expectations make forecasting continued low inflation a no-brainer.

What, though, if the New Keynesian view is missing key parts of the story? In “The Great Demographic Reversal”, published last summer, Charles Goodhart, a former member of the Bank of England’s monetary-policy committee, and Manoj Pradhan of Talking Heads Macro, a research firm, provide an alternative view of the past decades’ low inflation. 

It was not, they say, the result of a correct diagnosis of the problem leading, in the hands of independent central bankers, to appropriate monetary policy. Rather, it was driven by global demography.

In recent decades the integration of China, Europe’s formerly communist east and other emerging markets into the global trading system provided the world economy with millions of new workers. As bosses found it ever easier to get their labour done in Guangdong or Bratislava the bargaining power of rich-country workers fell, and price rises to cover increased wages became a thing of the past. 

This fits the finding that much more of the low inflation seen in recent decades has come from stable or falling prices for goods that can have their site of production shifted than has come from services which have to be delivered in situ.


Things are now about to change, the authors claim. As populations in the rich world and China age, the number of dependents per worker will soar, creating a labour shortage in care industries. 

True, Africa and India have plenty of youngsters. But rich-world politics may further increase the barriers to their migration. Workers in the rich world will thus acquire more bargaining power; wages will rise and prices will rise accordingly. 

As well as reigniting inflation, these demographic forces will make Western countries more equal, Mr Goodhart and Mr Pradhan argue: another seemingly inexorable trend reversed.

It might seem that the recent experience of Japan, the rich country that has aged the most, puts paid to this idea. Inflation there has long been lower than anywhere else, despite Herculean efforts on the part of the Bank of Japan. 

Mr Goodhart and Mr Pradhan counter this argument by saying that a “global escape valve” stopped inflationary pressures in Japan from achieving much. 

Rather than stagnate, investment moved overseas as Japanese manufacturing firms took advantage of plentiful global labour. Cheap imports kept goods inflation down and the offshoring of manufacturing jobs reduced workers’ bargaining power.

In fact, though, wage growth in Japan’s manufacturing industries has been comparatively strong. What is more, the authors concede that Japan’s ageing population has not had quite the effect on the dependency ratio that might be expected—because many more elderly people are now working. The same phenomenon could yet contain inflation elsewhere.


The third argument for fearing a return of inflation is political. It rests on the idea that governments and central banks are becoming more tolerant of inflation, and that they will become even more so as the extent of the pressure on government budgets becomes apparent.

Back in the 1970s presidents and prime ministers were happy to strong-arm central bankers into doing what they wanted. Inflation was tamed only after Paul Volcker proved the Fed’s commitment and independence by pushing America into recession to slow price rises. 

A new paper by Jonathon Hazell of Princeton University and colleagues argues that post-Volcker “shifts in beliefs about the long-run monetary regime” have proved more important than any other factor in conquering inflation. 

Their actions in recent decades have built up a firm expectation that central banks will respond to the prospect of inflation rising above its target with higher interest rates, regardless of what politicians and the public might want.

It is possible that these norms are weakening. In recent years there have already been greater attacks on the independence of central banks, such as President Donald Trump’s exhortations that interest rates should stay low. And during the pandemic the relationship between central banks and finance ministries has grown unusually close. 

After it ends, politicians will face the problem of the debts left behind. Where those debts are long-term, inflation would be a handy way to reduce their real value, easing the strain on budgets. 

Politicians may be more willing to entertain such an option for the reason identified by Mr Fergusson—that, after a long period of low inflation, people forget how awful it can be. A third of the people currently living in the rich world had not been born when average inflation last exceeded 5%.

Doubting the future

The Fed’s commitment to deliberately allow inflation to exceed 2% during the recovery is Exhibit A for this belief. Christine Lagarde, the president of the European Central Bank (ecb), emphasises her mandate is to “support the general economic policies” of the eu, as well as ensure stable prices. 

Central bankers everywhere now admit, if only under their breath, that as well as maintaining price stability they are also trying to keep governments’ long-term-borrowing costs low in order to facilitate fiscal stimulus. 

Should inflationary pressure start to rise while they are doing so, will they abandon that effort? Central banks which put up borrowing rates under the current circumstances would undoubtedly face opposition from the finance ministries that would pay the increased costs and suffer in subsequent elections. 

Inflationistas think that the politicians would win, as in many cases they constitutionally should. Central bankers’ independence is granted by elected politicians.

But this political argument, too, has its weaknesses. The ecb’s independence is protected by treaty, and even though it has become more willing to stimulate in recent years, it still exhibits a hawkish bias, tolerating inflation expectations that are well below target. 

Elderly people like to vote and tend to dislike inflation, argues Vitor Gaspar of the International Monetary Fund. That should limit any political pressure for higher inflation in ageing societies.

The doves and the markets currently have the better of the argument. But the case for reflation in the world economy is stronger than it was after the global financial crisis. 

A recovery from the pandemic that is untroubled by excessive inflation looks likely. But it is not guaranteed.

Will wealthy Americans cut the line for the Covid vaccine?

‘Lots of people will try to get it early — even if no one admits to it’

Gillian Tett

© Shonagh Rae


On Monday, I received a text from my healthcare provider, the NYU Langone Health medical centre in New York, with the cheery message: “The Covid-19 vaccine will be here in early 2021. We will contact you as soon as we have info about who can get it when.”

But there was a caveat: since the doctors at NYU Langone Health have no idea when that “info” might arrive, the text also urged me not to contact them — yet.

Even if those inquiries would mostly have come from the worried well, many healthcare providers in New York (and other regions) are reportedly facing a barrage of requests from the rich and powerful, desperate for access to the first round of vaccines. Indeed, the question of how to get a vaccination fast is sparking a welter of gossip in gilded circles.

The most ethical medical groups are trying to hold the line, to implement whatever distribution plan emerges as fairly as possible — even as uncertainty and anxiety mount. “It’s going to be chaos, or close to chaos,” William Haseltine, one of America’s leading medical experts, admitted to me this week. 

Or as Arthur Caplan, a bioethicist at New York University, told the STAT medical journal: “There absolutely will be a black market. Anything that’s seen as lifesaving, life-preserving, and that’s in short supply creates black markets.”

This issue is not unique to the US. However, the ethics are particularly tortured and emotive here for at least two reasons. One is the lack of any single-payer healthcare system. 

This is a country, after all, where 29 million people under the age of 65 lack medical insurance, but where the wealthy have access to cutting-edge treatments, concierge services and are able to amplify their access to the best doctors by taking seats on hospital boards.

There are numerous loopholes which could be exploited — or, to use the language of Wall Street, be prone to arbitrage

The other problem is fragmentation. The UK can roll out a plan because there is a single body in charge: the NHS. In the US, the vaccine will initially be distributed to states according to their share of the national population, and state officials will then decide how to run vaccination programmes. 

In some areas, such as New York, Mississippi and Kentucky, local officials have said they will delegate the rollout decisions to healthcare experts. In many other regions, local cities are expected to take charge.

That makes sense, given how short of resources — and expertise — most state governments are. But this fragmentation means there could be big variation in the tactics used, not least because federal guidance is vague. The Advisory Committee on Immunization Practices, for example, said last week that the first round of vaccines should go to nursing-home residents and carers, followed by essential workers and those who are vulnerable due to pre-existing conditions.

However, definitions of “pre-existing conditions” may vary. As could the concept of “essential worker”. In states such as New York and Illinois, for example, financiers and bankers were defined as essential workers during Covid-19 (which gave them the right to go into the office). So were journalists. The net result, then, will be numerous loopholes which could be exploited — or, to use the language of Wall Street, be prone to arbitrage.

This is even more likely to happen given that the White House itself has given cultural signals that appeared to sanction the idea that the rich and powerful can get better access than others. When Donald Trump got Covid-19, he proudly declared that he had taken experimental drugs that were unavailable to most ordinary Americans.

Will wealthy Americans use their economic and social capital to cut the line? Some say no. One financier in his eighties who sits on a major New York hospital board told me this week that he would “absolutely not”. 

Another New York luminary in his fifties, who also sits on a hospital board, said that he was so appalled by this idea that anyone who does should be “named and shamed”. 

Meanwhile Haseltine derides the idea as not just “utterly unethical” but also “dangerous”, if there is a black market in untested vaccines.

However, almost nobody I spoke to about this would talk on the record — precisely because the issue is so emotive. “Lots of people will try to get it early — even if no one admits to it,” a real estate developer told me.

Could the incoming administration of president-elect Biden change this? Possibly: those such as Haseltine are begging them to create a centralised plan with clear guidance. Some people around Biden are urging him to embrace the “name and shame” tactic as well.

But don’t hold your breath that the Biden team can fix the issue. 

Quite apart from the fact that they will not be in office until late January, they are confronting a system where profound health inequities have become not only entrenched but also culturally normalised. 

The only thing unusual about the looming vaccine row, in other words, is that it could reveal these iniquities with surprising clarity — and in a manner that is likely to provoke a sense of unease and alarm even among the rich.

Banks Need a Pickup in Loans to Prosper

Things may improve for banks, but without loan demand, revenue growth will still be hard to come by

By Telis Demos

Bank of America executives suggested that the bank’s net interest income likely bottomed in the third quarter. / PHOTO: BESS ADLER FOR THE WALL STREET JOURNAL


Heading into 2021, it appears that things aren’t getting any worse for bank stocks. 

But it may be some time before they get much better.

Bank of America BAC -0.32% executives on Tuesday suggested that the bank’s net interest income likely bottomed in the third quarter, rising about 1% sequentially in the fourth quarter, and that the fourth quarter of 2021 will likely look much better than the first. 

JPMorgan Chase JPM -0.19% last week reported 2% quarter-over-quarter growth in net interest income, and expects a pickup in 2021 versus 2020. The two banks had reported 2020 declines of 11% and 5% in net interest income, respectively.

One reason for optimism, widely cited across banks, is how much cash banks can still shift into their securities portfolios. Even absent any pickup in loan demand, banks can continue to put cash generated by deposits into fixed-income securities that pick up more yield.

Still, the road to much improved interest income across banks isn’t straightforward. One challenge is that mortgages continue to be prepaid because of a surge in refinancing, which affects mortgage-backed securities. 

Bank of America cited this as having a significant impact on its net interest yield. Banks have so much cash to deploy that they can still make gains in yields net of this effect. But where mortgage rates go could be a huge swing factor.


There is certainly hope in the shape of the yield curve. 

Banks across the board noted the recent steepening of the curve, as long-term rates have risen, as a big benefit. 

For example, the spread between two-year and 10-year Treasuries is as wide as it has been since 2017. 

However, banks have reasons to be cautious about simply buying longer-term fixed-income securities, as this could cause them to miss out on future rate increases.

So even a steeper curve isn’t as much help as it could be unless banks add more loans, which can have floating rates or generate higher yields at shorter durations. And loan growth remains a wait-and-see prospect. 

Bank of America noted that commercial loans volume stabilized and halted their decline at the end of the fourth quarter, “providing hope that increased loan demand will soon follow.” 

Bigger stimulus may or may not help matters, particularly for consumers, who have used a lot of their payouts to pay down debts.

Meanwhile, banks may possibly have passed the peak in their Wall Street businesses. 

So far, big banks’ trading desks have reported less revenue in the fourth quarter than in the third quarter. 

This matches the typical seasonal trend, but bankers also were signaling that overall gains may be hard to come by in 2021. JPMorgan Chief Executive Jamie Dimon described the fight for growth in trading share, via scale and digitization, as “trench warfare.” 

Citigroup C -0.86% Chief Financial Officer Mark Mason said trading activity was still robust in January, but it will likely normalize going forward.

S&P 500 bank shares are now down just 10% from where they started 2020, but their multiples have actually expanded, from under 12 times forward earnings to nearly 14 times. 

That isn’t unreasonable, given the pent-up capital return that is forthcoming, albeit at an uncertain pace. 

But without some improvement in underlying loan conditions, banks are no longer much of a bargain.

The Costs of Merkel’s Surrender to Hungarian and Polish Extortion

German Chancellor Angela Merkel has been laboring under enormous pressure to prevent a veto of the European Union's 2021-27 budget and COVID-19 recovery fund. But the compromise she reached with Hungary and Poland is the worst of all possible worlds.

George Soros


NEW YORK – The European Union is facing an existential threat, and yet the EU’s leadership is responding with a compromise that appears to reflect a belief that the threat can simply be wished away. 

Prime Minister Viktor Orbán’s kleptocratic regime in Hungary and, to a lesser extent, the illiberal Law and Justice (PiS) government in Poland, are brazenly challenging the values on which the European Union has been built. 

Treating their challenge as a legitimate political stance deserving of recognition and a compromise solution will only add – massively – to the risks that the EU now faces.

I recognize and understand the enormous pressure under which German Chancellor Angela Merkel has been laboring. She has been Germany’s chancellor for 15 years and is now approaching retirement, in September 2021. 

With French President Emmanuel Macron temporarily distracted by the laïcité issue and other serious security concerns within France, Merkel has become something of the sole main decision-maker for the EU.

I also understand why the German chancellor does not want another country, Hungary, to announce its intention to leave the EU on her watch. That is reportedly what Orbán was preparing to do in recent days, because he cannot afford to have the sheer scale of his regime’s corruption exposed, which the EU’s “rule of law” conditionality for the disbursement of Union funds would invariably have done.

Orbán has stolen and misappropriated vast sums during his decade in power, including EU funds that should have gone to benefit the Hungarian people. He cannot afford to have a practical limit imposed on his personal and political corruption, because these illicit proceeds are the grease that keeps the wheels of his regime turning smoothly and his cronies in line.

Threatening to torpedo the EU’s finances by vetoing its budget was a desperate gamble on Orbán’s part. But it was a bluff that should have been called. Unfortunately, Merkel has, it appears, caved in to Hungarian and Polish extortion.

As I write, it seems clear that Merkel has brokered a compromise with Orbán and Poland’s de facto leader, Deputy Prime Minister Jarosław Kaczyński. The deal that Germany made with the EU’s two rogue member states, however, constitutes the worst of all possible worlds. The widely leaked text of the proposed compromise, to be embedded in the concluding statement of this week’s European Council meeting, has three fundamental flaws.

First, the declaration alters in substance and intent the text of the regulation that was agreed by EU institutions on November 5, weakening the rule-of-law conditionality considerably. Neither the European Commission nor the European Parliament, let alone the national governments that made the integrity of the regulation their main concern in the European Council, should allow themselves to be elbowed aside in this way.

Second, some provisions in the deal serve to delay the implementation of rule-of-law conditionality by up to two years. That would be a true coup for Orbán, as it would delay any possible action until after the next scheduled Hungarian parliamentary elections in 2022.

The reprieve would give Orbán’s Fidesz party ample time to change Hungarian laws and constitutional provisions, and allow Orbán to continue redefining what constitutes “public funds” in Hungary in ways that enable him to channel ill-gotten loot from public bodies into private “foundations” controlled by his cronies. The primary victims of the deal that Merkel has reportedly struck with Orbán will be the people of Hungary.

Lastly, the proposed summit declaration is a case of the European Council acting beyond its authority in constraining the European Commission’s ability to interpret and act on agreed EU legislation. That is a dangerous precedent, because it reduces the Commission’s legal independence and may very well contravene the Treaty on European Union, at least in spirit.

The deal, as it is understood to exist, is ugly and flouts the express wishes of the European Parliament. But because of the urgent need to use the €750 billion ($909 billion) COVID-19 recovery fund, the European Parliament may very well approve it.

All I can do is to express the moral outrage that people who believed in the EU as the protector of European and universal values must feel. I also want to warn that this compromise may severely dent the hard-won confidence that the Union’s institutions have gained through the creation of the recovery fund.


George Soros is Chairman of Soros Fund Management and the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of many books, including The Alchemy of Finance, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means, and The Tragedy of the European Union: Disintegration or Revival? His most recent book is In Defense of Open Society (Public Affairs, 2019). 

From Airbnb to Tesla, It’s Starting to Feel Like 1999 All Over Again. It May End the Same Way.

By Randall W. Forsyth

Airbnb shares soared 113% over the IPO price on the first day of trading. / Courtesy of Nasdaq


Maybe this time is different. Those words, supposedly the most dangerous to utter in the investing realm, came to mind amid the frenzied pops in the highly anticipated initial public offerings of the past week.

They recalled the wild IPOs at the end of the last century, when the public’s enthusiasm for all things dot-com had investors paying crazy prices for new stocks that often lacked earnings, revenue, or, in some cases, actual operations. After the calendar turned over to the year 2000—without the world descending into chaos from the Y2K computer bug, remember that?—the bubble popped, especially after Barron’s published its seminal cash-burn story that March, which showed that the dot-com kids were rapidly running through the liquid assets compliant capital markets had provided to them. 

As it turned out, the Nasdaq Composite had posted its top tick a bit more than a week earlier, although we only learned that in retrospect.

What is different this time is that the current highflying IPOs are coming from innovative companies that have become major businesses, nurtured by their private-market investors while attracting throngs of fans who wanted to become shareholders as well as customers. 

So they clamored for DoorDash (ticker: DASH) and Airbnb (ABNB), sending their shares soaring in their first day of trading by 86% and 113%, respectively, over their respective IPO prices.

So great was the frenzy that there was furious buying of the call options of ABB (ABB), the big European industrial company out of confusion with the ticker for Airbnb, our former Barron’s colleague Mike Santoli amusingly reported on CNBC. That wasn’t the first case of mistaken identity with a hot IPO. 

Instead of getting in on the 2019 IPO of Zoom Video Communications (ZM), which has become one of this year’s stay-at-home winning stocks, punters mistakenly chased penny stock Zoom Technologies (ZTNO) ahead of the former’s IPO.

What does recall the dot-com bubble era are the valuations accorded these IPOs. In his preview of the Airbnb offering last week, colleague Andrew Bary quoted New York University professor and tech entrepreneur Scott Galloway bullishly predicting a $100 billion market value—by the end of 2022. 

At the end of its first day trading on Thursday, its market cap already topped Galloway’s no longer outlandish projection, which was three times what had been estimated just a week earlier.

Another blast from that past is Tesla ‘s (TSLA) 50%-plus jump since Standard & Poor’s announced last month the electric-vehicle stock’s inclusion in the S&P 500 index. That recalled the 64% jump in then-dominant internet search company Yahoo! in December 1999 ahead of its addition to the benchmark index, just a few months before the Nasdaq’s peak.

S&P 500 index funds and portfolios that followed the benchmark will have to buy Tesla without regard to the stock’s value, as colleague Evie Liu reports. But the slavish adherence to this particular market gauge belies the tenet of index investing—that the efficient market distills the reasoned assessments of buyers and sellers of the value of a security. 

“Whether or not [Tesla CEO] Elon Musk will ever deliver autonomous driving, we are drifting closer to autonomous investing,” writes Jim Grant in the current Grant’s Interest Rate Observer.

Even if that’s the case, this episode demonstrates that the S&P 500 doesn’t represent the entirety of the U.S. stock market. 

For instance, the Vanguard 500 Index fund (VFIAX) has significantly lagged the Vanguard Total Stock Market Index fund (VTSAX), 15.64% to 17.8% in the year through Wednesday, according to Morningstar data. 

Over the past 12 months, the gap is 17.41% to 19.14%.

For his part, Musk decried the “M.B.A.-ization of America” to The Wall Street Journal this past week for U.S. corporations supposedly focusing too much on financials. 

Which is ironic given Tesla’s adept financial engineering, including its announcement this past week of a $5 billion sale of stock, its third equity financing this year, for a total $12 billion.

Musk’s criticism seems directed at those skilled at analyzing the EV maker’s income statement and balance sheet, such as Vicki Bryan, who pens the Bond Angle research letter. 

Tesla’s addition to the S&P 500 followed its reporting of a requisite four consecutive profitable quarters, which can be “traced entirely to energy credit sales plus noncash account and unusual items—none of which are its core business,” she writes.

These items provided a $1.6 billion boost to reported free cash flow of $1.93 billion in the four quarters through Sept. 30, which, however, ignored $100 million for solar-equipment capital expenditures and $1.1 billion in capex funded by leases. Taking all that into consideration, operations actually consumed more than $800 million in cash, she concludes.

The entire $9.18 billion year-over-year increase in reported cash, to $14.53 billion on Sept. 30, resulted from net borrowing of $1.5 billion and the sale of $7.7 billion in stock and equity equivalents, Bryan adds. The ebullient stock market, augmented by the index effect, provides the cheap capital to keep the Musk magic going.

That’s what’s different this time from the dot-com era. There seems to be a seemingly limitless font of money to be tapped by hypergrowth companies that promise to change how we work, live, and get around. 

The question is whether it will end differently.

The world economy

After the pandemic, will inflation return?

Low inflation underpins today’s economic policy. It is not guaranteed to last


Economists love to disagree, but almost all of them will tell you that inflation is dead. 

The premise of low inflation is baked into economic policies and financial markets. It is why central banks can cut interest rates to around zero and buy up mountains of government bonds. 

It explains how governments have been able to go on an epic spending and borrowing binge in order to save the economy from the ravages of the pandemic—and why rich-world public debt of 125% of GDP barely raises an eyebrow. 

The search for yield has propelled the s&p 500 index of shares to new highs even as the number of Americans in hospital with covid-19 has surpassed 100,000. 

The only way to justify such a blistering-hot stockmarket is if you expect a strong but inflationless economic rebound in 2021 and beyond.

Yet as we explain this week (see article), an increasingly vocal band of dissenters thinks that the world could emerge from the pandemic into an era of higher inflation. Their arguments are hardly overwhelming, but neither are they empty. 

Even a small probability of having to deal with a surge in inflation is worrying, because the stock of debt is so large and central-bank balance-sheets are swollen. Rather than ignore the risk, governments should take action now to insure themselves against it.

In the decades since Margaret Thatcher warned of a vicious cycle of prices and wages that threatened to “destroy” society, the rich world has come to take low inflation for granted. Before the pandemic even an ultra-tight jobs market could not jolt prices upwards, and now armies of people are unemployed. 

Many economists think the West, and especially the euro zone, is heading the way of Japan, which fell into deflation in the 1990s and has since struggled to lift price rises far above zero.

Predicting the end of this trend is a kind of apostasy. After the financial crisis some hawks warned that bond buying by central banks (known as quantitative easing, or qe) would reignite inflation. They ended up looking silly.

Today the inflationistas’ arguments are stronger. One risk is of a temporary burst of inflation next year. 

In contrast to the period after the financial crisis, broad measures of the rich-world money supply have shot up in 2020, because banks have been lending freely. Stuck at home, people have been unable to spend all their money and their bank-balances have swelled. 

But once they are vaccinated and liberated from the tyranny of Zoom, exuberant consumers may go on a spending spree that outpaces the ability of firms to restore and expand their capacity, causing prices to rise. The global economy already shows signs of suffering from bottlenecks. 

The price of copper, for example, is 25% higher than at the start of 2020.

The world should be able to manage such a temporary burst of inflation. But the second inflationista argument is that more persistent price pressures will also emerge, as structural disinflationary forces go into reverse. 

In the West and in Asia many societies are ageing, creating shortages of workers. For years globalisation lowered inflation by creating a more efficient market for goods and labour. Now globalisation is in retreat.

Their third argument is that politicians and officials are complacent. The Federal Reserve says it wants inflation to overshoot its 2% target to make up for lost ground; the European Central Bank, which announced more stimulus on December 10th, may yet follow suit. Weighed down by the need to pay for an ageing population and health care, politicians will increasingly favour big budget deficits.

Might these arguments prove correct? A temporary rebound in inflation next year is perfectly possible. At first it would be welcome—a sign economies were recovering from the pandemic. It would inflate away a modest amount of debt. Policymakers might even breathe a sigh of relief, especially in Japan and the euro zone, where prices are falling (though rapid changes in the pattern of consumer spending may have muddied the statistics).

The odds of a more sustained period of inflation remain low. But if central banks had to raise interest rates to stop price rises getting out of hand, the consequences would be serious. Markets would tumble and indebted firms would falter. 

More important, the full cost of the state’s vastly expanded balance-sheet—both governments’ debt and the central banks’ liabilities—would become alarmingly apparent. To understand why requires peering, for a moment, into how they are organised.

For all the talk about “locking in” today’s low long-term interest rates, governments’ dirty secret is that they have been doing the opposite, issuing short-term debt in a bet that short-term interest rates will remain low. The average maturity of American Treasuries, for example, has fallen from 70 months to 63. 

Central banks have been making a similar wager. Because the reserves they create to buy bonds carry a floating interest rate, they are comparable to short-term borrowing. 

In November Britain’s fiscal watchdog warned that a combination of new issuance and qe had left the state’s debt-service costs twice as sensitive to short-term rates as they were at the start of the year, and nearly three times as much as in 2012.

So while the probability of an inflation scare may have risen only slightly, its consequences would be worse. Countries need to insure themselves against this tail risk by reorganising their liabilities. Governments should fund fiscal stimulus by issuing long-term debt. 

Most central banks should start an orderly reversal of qe and instead loosen monetary policy by taking short-term interest rates negative. Finance ministries should incorporate risks taken by the central bank into their budgeting (and the euro zone should find a better tool than qe for mutualising the debts of its member states). 

Shortening the maturity of the state’s balance-sheet—as in 2020—must only ever be a last resort, and should not become the main tool of economic policy.

In praise of mothballs

The chances are the inflationistas are wrong. Even the arch-monetarist Milton Friedman, who inspired Thatcher, admitted late in his life that the short-term link between the money supply and inflation had broken down. 

But the covid-19 pandemic has shown the value of preparing for rare but devastating events. 

The return of inflation should be no exception. 

Bank capital buffers aren’t working

Regulators must rethink overlapping Basel III requirements before the next crisis

Lars Rohde

The Danish central bank. For many of the largest Danish banks, and their counterparts in Europe, the early triggering of banking insurance measures means that their capital buffers cannot properly absorb heavy losses © Fabian Bimmer/Reuters


The way bank capital requirements are designed has changed for the better since the 2008 financial crisis. 

Yet, regulators are becoming increasingly concerned that here, as in many aspects of life, too many cooks may spoil the broth. 

We must all review our regulations to make sure that the capital buffers can serve their purpose and genuinely allow banks to absorb losses when the next crisis hits.

Bank business models are complex and so is the regulatory landscape. Lenders have to comply with a wide range of requirements and meet them all simultaneously. Each one targets specific risks, but the interaction among them might render some of them futile in practice.

That is the case for banks’ capital buffers — a cornerstone of post-2008 financial regulation. Banks were asked to build up extra capital to allow them to maintain lending during sharp economic downturns. 

However, many cannot fully draw down these buffers because they find themselves breaching other requirements first. International regulatory bodies must urgently address this problem of limited buffer usability.

Here is the problem: under the Basel III regulatory framework adopted after the crisis, bank capital requirements consist of both minimum requirements and capital buffers.

Minimum requirements are “hard” mandates that send a bank into resolution when breached. Capital buffers, on the other hand, are “soft” requirements that allow banks time to try to recover. 

If the buffer is breached, the bank’s ability to pay dividends and bonuses is restricted until its capital stock is rebuilt.

Ideally, capital buffers should work like a fire sprinkler system, seeking to contain a fire before the emergency services move in. Just as effective sprinkler systems buy time for firefighters to put out the flames, capital buffers create leeway for banks so they can continue to provide credit to the real economy even in times of economic distress.

To continue the comparison, a prudent property owner may still want an insurance policy on top of any fire prevention measures. And a prudent society probably still wants to sustain a well-equipped fire department, no matter if all properties have state-of-the-art sprinklers. The destruction caused by a great fire is simply too large, as history has shown.

Likewise, even if measures such as mandatory capital buffers may help contain the impact of adverse shocks to banks, a prudent society may still want an insurance policy against potentially disastrous rare events. 

That means setting up a way to wind down failing banks properly without using taxpayer money. In banking regulation, such an insurance policy is called MREL, the minimum requirement for own funds and eligible liabilities. This aims to ensure that bank shareholders and creditors bear the losses of when banks go bust.

Banks need to fulfil the mandatory capital buffer requirements and MREL simultaneously. But that is where the problem lies: when the fire alarm sounds, you want the sprinkler system to start before the fire trucks arrive. 

Similarly, banks should be able to use their capital buffers long before being put into resolution mode. This is currently not the case for all banks. 

For many of the largest Danish banks — as well their European peers — MREL quickly becomes the binding requirement well before the capital buffers are depleted. 

This means that the capital buffers cannot fulfil their purpose and contain the fire.

To make matters worse, MREL is not the only overlapping requirement. The introduction of a binding leverage ratio requirement next year will further reduce capital buffer usability. 

In practice, this means banks will not be able to use as much of their buffers as intended by the regulation.

The Covid-19 economic shock is the first big crisis since the full implementation of the Basel III capital buffers. So far, banking sector losses have remained lower than feared. 

That is primarily due to unprecedented government measures to alleviate the strains from the sharpest plunge in economic activity many countries have ever experienced. 

Unlike in 2008, this crisis did not emerge from economic imbalances or from too much risk-taking in the financial sector.

But that is no excuse for entering the next financial calamity unprepared. 

In light of what we have learnt from this experience, it is time to review the regulatory framework so that capital buffers can better serve their purpose.


The writer is governor of Danmarks Nationalbank

Lebanon’s Failed Political System

The system is weak by design and never found sure footing besides. 

By: Hilal Khashan


Lebanon is celebrating its centennial in 2020, a year defined by existential economic crisis made worse by a pandemic and endemic political paralysis. The country was awkward from the start. 

France’s high commission for the Levant announced its creation in 1920, three years before the League of Nations named France its mandatory power following the Lausanne Treaty. 

It’s ironic that France, Europe’s most secular nation, chose to create the world’s only confessional system, but it didn’t have much of a choice: The only proposal they received came from the Maronite Church since Muslims, mostly the Sunnis, refused to accept the Lebanese entity and preferred to merge with Syria. 

The state that followed came without foundations and so is now sinking into lawlessness and strife.

Corruption and Accountability

In 1926, a group of Christian business elite drafted Lebanon’s Constitution, which removed most state prerogatives to the country’s various sects. It rendered the religious groups unaccountable and unanswerable, literally granting politicians immunity from prosecution. 

The founders of Lebanon adopted rentier capitalism, invented Phoenician nationalism and dubbed the system they created the “Lebanese miracle.” Rather than wanting to create a Lebanese nation, the founding fathers wanted to preserve the identities of the country’s sects. 

The constitution entitled sects to private education and deliberately created a weak public education system that turned most students away. Students never learned the meaning of the state, such as it is. In short, sectarian affiliation subverted national identity, to the detriment of society writ large.



Lebanon’s first president after independence was Bishara al-Khoury, who was best known for his corruption and financial mismanagement. He rigged the parliamentary election of 1947 so that he could serve a second term in office. 

Massive demonstrations forced his resignation in 1952. Since then, the political elite acquired the skills to resist public demands for accountability and ignore foreign requests for reform. 

Al-Khoury's successor, Camille Chamoun, took sides in the Arab Cold War and, in addition to his own corruption, alienated a broad cross-section of Lebanese citizens. He invited a mini-civil war, yet he lasted his full term in office. 

His presidency set the standard for impossibility of reform in Lebanese politics.

Without accountability, corruption flourishes. 

When former Prime Minister Rafik Hariri took office in 1992, for example, he was worth less than $4 billion. By the time he was assassinated in 2005, he was worth $16 billion. 

His successor, Fouad Siniora, made $5 million as vice governor of the central bank but had accumulated more than $1 billion when he left office in 2009. (Some $11 billion of government assets were unaccounted for by auditors.) 

The U.S. recently sanctioned Gebran Bassil, leader of the Christian-majority Free Patriotic Movement, for alleged corruption. He has been in charge of the lucrative Ministry of Energy, directly or indirectly, since 2009. 

He has not been able to clear himself from accusations of charging millions of dollars to ministers and parliamentary deputies he places in office. The size of his wealth is not even known.

These are hardly victimless crimes. Lebanon has spent $42 billion on electricity since 1992, accounting for 50 percent of public debt, without solving its supply problem. 

There is still extreme rationing, with daily power outages of more than 12 hours, which jumps to 18 hours during winters and summers. Most Lebanese households pay two monthly electrical bills, one to the government and another to private providers. 

Private electricity production is a thriving business that operates on heavily subsidized diesel generators and yields $1.5 billion profit shared by owners, municipalities and government officials. 

Subscribers receive low voltage at exorbitant costs, and everybody breathes carcinogens and teratogens. Public debt is roughly $95 billion, which exceeds 160 percent of gross domestic product, making Lebanon the most indebted country in the region in terms of debt-to-GDP. 

The budget deficit between 2004 and 2017 reached $45 billion, compared to $3.4 billion in 1993.

 

Lebanon's Ballooning Public Debt


In March 2020, Lebanon defaulted on its debt when it failed to pay a $1.2 billion installment on its eurobonds. 

Alvarez & Marsal, a management consulting firm, canceled an agreement to perform a forensic audit on the central bank because its governor, citing banking secrecy, denied it access to specific accounts. 

Negotiations with the International Monetary Fund (IMF) on a rescue plan collapsed after 16 rounds of talks. IMF representatives concluded that their Lebanese negotiators did not show a genuine interest in reform. 

One representative said that when talking to members of the Lebanese negotiating team, he felt he was negotiating with gangsters, not statesmen concerned about their country. Depositors’ dollars went to maintain the Lebanese pound-to-dollar exchange rate and to finance the government's fiscal deficit through the direct purchase of eurobonds. 

The central bank’s financial engineering maneuvers earned the local banks billions of dollars of interest at the depositors’ expense in what amounted to a state-sponsored Ponzi scheme. (In all, it squandered 75 percent of the depositors’ $127 billion.)

There are plenty of other instances of evading responsibility. The massive explosion at the Port of Beirut in August was caused by a shipment of 2,750 tons of hazardous ammonium nitrate that had been stored unsafely at a hangar since 2012. 

A senior customs officer recently died under mysterious circumstances after divulging sensitive information to investigators about the people responsible for storing it despite warnings about its imminent explosion. 

Another senior customs officer faced the same fate in 2017 for reporting the matter. In both cases, the authorities blamed the murder on thieves. High-profile assassinations and explosions are almost never resolved, and the explosion at the port does not seem to be an exception to the rule. 

The prime minister and minister of finance decided to fire the head of customs, but the president refused to sign the decree. The president reasoned that indicting and punishing the Maronite head of customs and letting loose culprits from other sects would upset Lebanon’s sectarian harmony. 

To ensure sectarian balance, not only in allocating state resources but also in penalizing wrongdoers, an examining magistrate indicted the caretaker prime minister, a Sunni academic who has no political base of support, and three former ministers of public works, two Shiites and one Maronite.

Corruption and malfeasance are found in every aspect of public life. Every time it rains heavily in Lebanon's coastal cities, sewer systems flood because the wastewater drains are blocked. The Ministry of Public Works either can’t or won’t anticipate the problem. 

All traffic lights and observation cameras shut off last April after a dispute between the Ministry of Interior Vehicle Authority and Beirut Municipality over entitlement to revenues from parking meter fees, which halted the traffic management center's operations The stoppage resulted in a 120 percent increase in motor vehicle fatalities. Eight months later, the traffic lights were still off.

The prosecutor-general recently indicted eight retired army officers, including a former army commander, for embezzling public funds under the Illicit Enrichment Act, neglected since its implementation in 1999. 

The Lebanese army suffers from the same structural and behavioral problems that hamstring Lebanese politics It is doubtful if the prosecutor-general or military tribunal system would actually bring active military personnel to justice. 

Transparency International gave Lebanon a score of 28 on its corruption perception index. The average for sub-Saharan Africa is 33.

Unworkable Political System

Fouad Shihab, a former army commander, succeeded Chamoun as president in 1958. 

He carried out administrative and judicial reform and sought to achieve social justice. 

He introduced social security, organized state finances, and founded the central bank. 

Shihab abided by the law and the constitution and ensured that the army remained subservient to the political establishment. Shihab lost hope in Lebanese politicians of all stripes, who obstructed his project of establishing a state of institutions governed by law and order. 

Two years into office, Shihab concluded that the Lebanese people were not ready to abandon their corrupt leaders. In despair, he tried to quit the presidency, but public and private concerns over a resultant power vacuum convinced him that he should finish his term in office.

After the August explosion, many Lebanese looked to France for help. French President Emmanuel Macron failed to convince Lebanese politicians to rise to the occasion and initiate meaningful political and financial reforms. He could not hide his exasperation with and disdain for the inept political class. 

He said he was ashamed of their betrayal of their promise to form a new government and take concrete steps to resurrect the country's collapsed economy. On Dec. 2, France held a virtual donor conference with the United Nations to provide humanitarian aid to the Lebanese people independently of the government. 

Commenting on the conference proceedings, the head of the Maronite church said, “Don't the officials in Lebanon feel ashamed!”

Despite its appeal, political office in Lebanon comes at a high personal risk. Since independence, political life has cost two presidents, three prime ministers, and 15 ministers and parliamentary deputies their actual lives. 

The political system often comes to a standstill because of an inability to choose the president or prime minister. Since 1988, the presidency has been vacant for as long as 15 months. Choosing a prime minister is an arduous task, and it often takes up to a year after the parliament designates him to form the Cabinet. 

Social trust is low, and the culture of corruption is rampant, bold and unashamedly visible. 

Most people view the state as an inept, hostile and alien entity and prefer to minimize their interaction with it.

THEY’RE AMONG THE WORLD’S OLDEST LIVING THINGS. THE CLIMATE CRISIS IS KILLING THEM.

California’s redwoods, sequoias and Joshua trees define the American West and nature’s resilience through the ages. Wildfires this year were their deadliest test.

By John Branch

Photographs by Max Whittaker

Graphics by Veronica Penney


THEY ARE WHAT SCIENTISTS CALL CHARISMATIC MEGAFLORA, and there are few trees anywhere more charismatic than the three most famous species in California. People travel from around the world simply to walk among them in wonderment.

The giant sequoia. The Joshua tree. The coast redwood.

They are the three plant species in California with national parks set aside in their name, for their honor and protection.

Scientists already feared for their future. Then came 2020.

The wildfires that burned more than four million acres in California this year were both historic and prophetic, foreshadowing a future of more heat, more fires and more destruction. Among the victims, this year and in the years to come, are many of California’s oldest and most majestic trees, already in limited supply.





In vastly different parts of the state, in unrelated ecosystems separated by hundreds of miles, scientists are drawing the same conclusion: If the past few years of wildfires were a statement about climate change, 2020 was the exclamation point.

This past summer in the Sierra Nevada, a fire ecologist named Kristen Shive camped in one of the few remaining ancient groves of giant sequoias, among trees as old as the Bible. This fall she revisited the grove, and stood somberly among the dead.

“They’ve lived through literally hundreds of fires in their lifetimes,” Dr. Shive said. 

“Now we’re seeing them killed in one fell swoop.”

To the south, Drew Kaiser, a botanist, hiked through what had been one of the largest remaining stands of the Joshua tree, the otherworldly yucca, in the Mojave National Preserve.

Historically, the desert is not a place prone to rampaging wildfire. But Mr. Kaiser beheld a colorless moonscape dotted with the skeletal remains of collapsing Joshua trees. He estimated that 1.3 million had been destroyed in a single blaze in August.

“I love Joshua trees,” Mr. Kaiser said. “I can’t stand to see them go.”

Far to the north, near the Pacific Ocean, an environmental scientist named Joanne Kerbavaz inspected old-growth redwoods, the tallest trees on earth. She has been coming to Big Basin Redwoods State Park to roam the forests since she was a little girl.

“The smell of redwood in the summertime was the aroma of my youth,” she said.

In August, fire swept through 97 percent of the park, home of 4,400 acres of old-growth redwood trees. When Ms. Kerbavaz returned in November to clamber through the destruction, all sense of timelessness and continuity had been rearranged.

“The forest I saw as a kid will not be back for some time,” she said.

Giant sequoiaLee Rentz/Alamy

                          Joshua treeJoel Quizon/EyeEm, via Getty Images

       Coast redwoodKristen Piljay/Alamy

 

The enchantment that California’s forests provoke can be scientific or spiritual. For the state’s three famous plant species, it is probably both. The allure stems from each one’s unique blend of size, shape and age. Their heft, their height, their persistence. 

Their sheer audacity.

They are never found together. Yet they share an uncommon ability to silently stand there and elicit a reaction — gasps, giggles, photographs, memories. How many other trees can attract a crowd?

Resiliency is key to their magnetism. They survive where others would not. They stand their ground, with panache. Sequoias and redwoods can live thousands of years on their way to dwarfing most everything around them. Joshua trees are the most good-natured of desert plants, frozen in dance poses as they endure the harshest of environments with flair.

They have a timeless quality that can make their onlookers feel small and impermanent by comparison, the way a night sky does to stargazers. We know they will outlast us.

                    Kristen Shive, Save the Redwoods League.


That is why 2020 is particularly alarming. Each of these species already faced a rising onslaught of threats to long-term survivability, from drought to development, blanketed by the unknowable future effects of climate change.

But this year’s wildfires, fueled by a century’s worth of forest mismanagement and the quickening pace of global warming, threatened them like never before.

“Fire behavior is always, always, a product of fuels, weather and topography,” Dr. Shive said. “And we’ve had very excessive fuels and we are turning up the thermostat. So we’re really setting ourselves up.”

While there is not broad concern about any of the species going extinct — yet — 2020 injected a new sense of urgency.

Rather than lose one or two “monarch” sequoias in a year to old age, hundreds or thousands have been wiped out at once. Rather than the slow, almost imperceptible migration of the Joshua tree toward higher latitudes, more than a million were consumed in two days.

These losses, and the losses likely to come, are not something to be measured in mere acres. These are not mere numbers, not mere trees. To those who come from around the globe to bear witness, and especially to those in California, they represent something both bigger and more personal.

“Losing them changes the identity” of revered expanses of the American West, said Tadashi Moody, an environmental scientist for the California Department of Forestry and Fire Protection. “It changes our relationship to those places.


SEQUOIAS

SEQUOIA CREST, CALIF. — Until a few years ago, about the only thing that killed an old-growth giant sequoia was old age.

Not only are they the biggest of the world’s trees, by volume — the General Sherman Tree, considered the largest, is 36 feet in diameter at its base and 275 feet tall — they are among the oldest. At least one fallen giant sequoia was estimated to have been more than 3,200 years old.

They last so long that, historically, only one or two of every thousand old-growth trees dies annually, according to Nate Stephenson, a research ecologist for the United States Geological Survey.

Fire always was a frequent visitor to sequoia groves, but rarely a threat. Mature sequoias are virtually fireproof because the bark can be several feet thick. The crowns, the top where branches and needles are, are so high that they stayed above the fray of fire, out of harm’s way.

Until now.

Dr. Stephenson was home in Three Rivers, Calif., this summer as the Castle Fire raged in the nearby mountains. Ash and debris fell from the sky, big enough to be identified.

“I could go, ‘Oh, there’s a fir needle, that’s incense cedar, that’s oak, that’s a pine,’” Dr. Stephenson said. “Then I saw a piece of giant sequoia ash, and that really drove it home. I thought, ‘Oh, no, I bet some of those sequoias, their crowns are burning.’”

Giant sequoia groves


Since 2015, nearly two-thirds of the roughly 48,000 acres of giant sequoia groves have burned — about half of that since August. The amount of groves burned in the past five years is double what had burned in the previous century.

But it is not just the number of fires or acres they consume. Fires are burning bigger, hotter and higher than ever. A historic drought from 2012 to 2016 and huge infestations of bark beetles killed millions of trees in the mixed-conifer forests of the Sierra Nevada, leaving them behind as kindling.

Within those dying forests are the remaining giant sequoias, in roughly 70 groves speckled in the California mountains, rooted in the fray. Today’s fires are so big, so hot, that they can create their own weather systems, whipping up fire-spreading winds and creating columns of heat and smoke tens of thousands of feet high.

“The apocalyptic chickens are coming home to roost, way sooner than we thought,” said Christy Brigham, the resource manager at Sequoia and Kings Canyon National Parks, home to dozens of the remaining sequoia groves and many of the biggest trees in the world. “We are seeing impacts now that we thought we would see in 50 years.”

The Stagg Tree, considered the fifth-largest tree in the world, was saved this year, perhaps by sprinklers.


In some ways, sequoias depend on fire. Their egg-sized cones are glued shut by resin, and extreme heat from fire dries them out and spreads seeds, like flakes of oatmeal, across the forest floor.

In the centuries before California was settled, scientists believe, about 4 million acres burned in a typical year, mostly in tiny freckles across the landscape — including in sequoia groves. They were a combination of natural fires that generally burned themselves out and prescribed fires managed by indigenous people.

Researchers studying a 1,400-year history etched into the rings of tree cores found evidence of fires at least every 30 years among sequoias. The forensic evidence stops about 100 years ago, as fire became seen as a threat to be suppressed, not part of a cycle to be managed. The forests thickened.

There is consensus among scientists that California must, in part, burn its way out of the current predicament with more prescribed fires — controlled, low-level burns designed to prevent catastrophic blazes later. But setting fires intentionally is a sticky undertaking, given all the jurisdictions and the landscapes crowded with people.

“We probably are never going to get back to 4 million acres of healthy, wonderful fire each year,” Dr. Shive said. “But we need to pick priority areas.”

Bark beetles have killed millions of trees in the West. Now they are being found in giant sequoias, an ominous sign.


Prescribed burns are easiest, though not easy, in remote locations like national parks. Sequoia National Park, the nation’s second-oldest, has been doing them since 1968, longer than any national park in the West.

The program was long considered a model of forest maintenance, at least before this year’s fires devoured parts of the national park. Now, the few hundred acres of prescribed burns in a typical year have proved little match for today’s megafires.

“Now, I’m like, ‘Dude, that is not good enough — we need to rethink this whole thing,’” Dr. Brigham said. “If we can have 16,000 acres of sequoias burn up in a wildfire in a single year, we cannot go 200 acres at a time. It’ll be all burned up in uncontrolled wildfire before we’re done.”

On a late-October afternoon, Dr. Stephenson toured a grove that included the General Grant Tree, the world’s third-largest. A wildfire swept through a portion of the grove in 2015, after park officials had prescribed a burn to one side of a hiking trail.

                  Nate Stephenson, a research ecologist, in Grant Grove.


That trail now serves as a stark dividing line. On the side that had been recently burned, just one of the 111 old-growth sequoias was killed. On the other side, about 30 percent of the large sequoias were dead, along with most other big conifers.

“Prescribed fire is so good at reducing damage when wildfires come,” Dr. Stephenson said.

Dr. Stephenson said that giant sequoias can suffer 90 percent “crown scorch” — extreme heat that does not consume the needles, but turns them brown and lifeless — and still survive. What is killing the trees now, he and others said, are flames that reach the crown at the top — torching the crowns, like a giant matchstick.

Damage is mounting.

In 2017, fire swept through the Black Mountain Grove in Sequoia National Forest, killing nearly a third of the 183 old-growth sequoias that were surveyed. About the same time, a nearby blaze killed almost half the 104 mature sequoias in the Nelder Grove.

The starkest example in 2020 might be in Alder Creek Grove, one of 19 groves to burn this year. It is home to 483 ancient sequoias with a trunk diameter of six feet or more, among them the Stagg Tree, thought to be the fifth-largest in the world.

Alder Creek had been the last major stand of sequoias in private hands. The Save the Redwoods League, founded in 1918 to protect redwood forests (and, increasingly, sequoias), bought the 530-acre grove for $15.7 million just last year.

Giant sequoias share the forest with other large conifers, often dwarfing them, and historically stayed above the fray of most fires. That has changed.


Dr. Shive, the league’s chief scientist, spent much of this year surveying the rugged property and pondering the grove’s long-term health.

In September, the Castle Fire crept nearby, paused on a ridge, and swept through in a matter of hours.

In October, Dr. Shive wandered through blackened parcels, counting dead old-growth sequoias. There were at least 80, and some areas had not yet been surveyed. Across the range of giant sequoias, this year’s death toll could be in the thousands.

The Stagg Tree survived, perhaps in part because firefighters had hastily run hoses and turned on sprinklers at its base. But it will take more than sprinklers to fight off the likely destruction to come to the giant sequoias.

“They are literally irreplaceable,” Dr. Shive said. “Unless you have 2,000 years to wait.”


JOSHUA TREES

MOJAVE NATIONAL PRESERVE, CALIF. — On the August day when fire broke out on Cima Dome in the Mojave National Preserve, the California desert already was making international headlines. The thermometer at nearby Death Valley had reached 130 degrees, the highest temperature reliably recorded on Earth.

As photos of tourists smiling at the thermometer ricocheted around the world — a paradoxical bit of gee-whiz glee on a day portending a dire future — a million Joshua trees were on fire.

Cima Dome is a broad mound, a gentle and symmetrical arc on the vast desert horizon. It is visible from the interstate connecting Los Angeles and Las Vegas. Scientists considered it home to the world’s densest concentration of Joshua trees.

“To the untrained eye or the person not familiar with this region, most wouldn’t even notice it as they go by at 90 m.p.h.,” said Todd Esque, a desert ecologist for the United States Geological Survey. “But for those who do know, this is a huge loss.”

Joshua trees — a yucca, not a tree, named by Mormon settlers — already teeter toward trouble. Their range is shrinking, and they are not well-suited to outrun the quickening pace of climate change. Scientists worry that future visitors will find no Joshua trees in Joshua Tree National Park, the way some worry that Glacier National Park will be devoid of year-round ice.

“It’s a possibility,” Dr. Esque said.




Now wildfires, scarcely a threat historically, are taking out huge swaths at once, aided by climate change and invasive grasses.

The Dome Fire consumed 43,273 acres and killed most of the estimated 1.3 million Joshua trees it burned, according to Mr. Kaiser, the vegetation program manager for Mojave National Preserve.

“Cima Dome was a model for where the Joshua tree could persist for the next 100 years,” Mr. Kaiser said. “It was a beautiful, lush, decadent Joshua tree forest. But they’re wiped out.”

While there are plans to replant the millions of dead with thousands of young Joshua trees, “It’ll never come back like it was,” Mr. Kaiser said. “Not with climate change.”

Joshua trees can grow more than 40 feet tall with spiky, Seussian eccentricity. They typically live about 150 years.

But their range is shrinking faster than the trees can spread to more livable climes — higher in elevation and latitude, generally. The species is thwarted by slow migration (their large seeds, once transported by ground sloths that are now extinct, do not travel far from where they fall) and the overall population appears to be aging. Even at Cima Dome, there were relatively few young Joshua trees.

Drew Kaiser examined a Joshua tree burned in the Dome Fire, partly turned white by a fire-induced fungal bloom.


“Once you get an adult Joshua tree, they’re somewhat impermeable to anything but fire and bulldozers,” Dr. Esque said.

Those are persistent threats, too. Humans chop down Joshua trees to make room for neighborhoods, roads, even solar farms. And with Joshua trees often sharing the landscape with ranching, invasive grasses are fueling more fires than ever.

While the Dome Fire was shocking in its scope and ferocity, it was not surprising to the scientists who know the area best. “This was just a fire waiting to happen,” said Debra Hughson, chief of science and resource stewardship at Mojave National Preserve.

For more than a century, until 2002, cattle grazed on Cima Dome. Among the legacy of livestock is invasive perennial grasses like red brome. Weirdly, though, those same grasses may have helped the Joshua tree flourish.

Young Joshua trees need a nurse plant to hide under, and the prickly, woody blackbrush — unappetizing to livestock — is a perfect partner. As cattle chomped on grass, leaving vegetation sparse enough to prevent potential fires from spreading, Joshua trees took hold on Cima Dome more than in other places.

                   Debra Hughson at the Mojave National Preserve.


“A lot of what we were calling a year ago ‘the largest and densest Joshua Tree forest in the world’ probably didn’t exist in the early part of the 20th century,” Dr. Hughson said.

And after cattle were banned, and the invasive grasses grew uninterrupted, “It was just waiting for a spark,” she said.

The spark came in August, with a lightning strike. With resources stretched because of so many other California fires, the Dome Fire spread uncontrolled. It jumped from Joshua tree to Joshua tree and across park roads and fire lines, fueled by winds that became swirling firenados.

In two days, the blaze had done almost unimaginable damage.

“I was preparing myself for the worst,” Mr. Kaiser said as he toured the burn area. 

“And it pretty much was the worst.”

One of the densest remaining stands of the charismatic yucca species “was just waiting for a spark,” one scientist said. It came, in an August lightning strike.


In late October, in spots that the fire did not reach or somehow missed, the desert grasses were the yellowed hue of fall. Unaffected green-spiked Joshua trees stood in kooky stances.

But from atop Teutonia Peak, a rock outcropping that rises above Cima Dome, the view was bleak. Most of the landscape was charred gray for miles in every direction. 

Tiny cars and trucks slithered on the interstate far in the distance, a dozen miles downhill. A sea of blackened Joshua trees, stripped of life, stood over the desert floor.

Life has a way of hiding in the desert, and a close examination revealed signs of green life poking through the sand. But a million Joshua trees will never rise again.


REDWOODS

BIG BASIN REDWOODS STATE PARK, CALIF. — Signs of hope can be hard to spot in the devastation of forest fire, but they come color-coded.

They were there in Big Basin park, among the old-growth coast redwoods torched six weeks earlier.

Redwoods, the tallest of earth’s trees, are the rare conifer that can resprout after catastrophic events, a secret weapon to longevity. Killing one with fire is difficult.

But it is not impossible.

Here and there, during a tour on a sunny November day, the emerald green of new growth poked out of the soil at the base of blackened trees that might otherwise be dismissed as lifeless. Some inspections required a skyward gaze to see upper branches already fuzzy with green sprouts, like Chia Pets.

Ms. Kerbavaz came across one giant called “Father of the Forest.” Redwoods can live 2,000 years, and this one was black to the top. But about 200 feet up, there were signs of life.

“It’s got green,” she called out to those climbing through the thicket behind her. “It’s not dead yet.”

Still, plenty of towering trees offered no such signal. The hope is that somewhere near 90 percent of the old-growth trees will live. But that means 10 percent were lost.

“If anything is programmed to survive, it’s the coast redwoods,” Ms. Kerbavaz said. “But I keep coming back to climate change. I think that’s the thing that changes the ground rules significantly.”


The extinction of redwoods is hard to imagine, with a cool, soggy range still measured in the millions of acres. The fear is for the relatively few remaining old-growth trees.

An estimated 95 percent of them were chopped down, mostly to fuel California’s building booms in the late 1800s and early 1900s. And while those that remain are mostly protected in places like national and state parks — Big Basin was California’s first state park, in 1902 — fire is the latest wildcard to their future.

“We only have 5 percent of the range left in old growth, which is so little,” Dr. Shive said. “Yes, they can sprout back, but how much can they take?”

In the Bay Area this year alone, she said, close to 10 percent of remaining old growth was burned. “And that’s one fire.”

The coast of northern California was long thought to be relatively immune to the kinds of fires now ravaging the state on an annual basis, with its misty forests, cool ocean breezes and midsummer fog. But recent fires, like the one that burned most of Big Basin park, shattered whatever illusions of safety and distance remained.

The Santa Clara tree in Big Basin State Park was severely scorched, but its green shoots offer a sign that it will survive.


“Suddenly, fire is part of the conversation in ways that it hasn’t been before,” said Lenya Quinn-Davidson, area fire adviser for the University of California Cooperative Extension, who lives near Redwood National Park.

The redwood, unlike its splintery cousin, the giant sequoia, is prized for its hard wood. The range has shrunk in the past 150 years from an estimated 2.2 million acres to 1.6 million acres. Some two-thirds remain in private hands, unprotected. Some is still harvested for timber.

The Save the Redwoods League was founded a century ago to try to stop the cutting of old-growth trees. The group eyes groves it wants to protect, raises money to buy them, and shepherds them to public parks and preserves.

With most old-growth trees in public hands, the mission increasingly involves purchasing younger redwood forests around them, creating a protective “buffer,” said Sam Hodder, the league’s president.

“We’re doing what we can to put those forests on the trajectory to be the old-growth forests of the future,” he said.

The goal, Mr. Hodder said, is not to turn old redwood forests into outdoor museums, but to maintain a range of vital ecosystems, partly as a hedge against climate change. Redwoods and sequoias, he said, “store more carbon per acre than any other forest system in the world, by a long shot.”

Research has indicated that there have been centuries of regular fires in redwood forests, sometimes every decade or two and most likely set by indigenous people looking to occasionally clear space for other plants. It is unusual to find an old-growth redwood without obvious fire scars at the base.

Redwoods, unlike their cousin the giant sequoia, can resprout from their roots, a key to their regeneration.


As if to provide more proof of its resilience, even when a redwood is chopped down it is not always defeated. Dead redwoods often sprout several more trees around the stump, a “fairy ring” that defines second-growth forests.

But those next-generation forests have less fire tolerance than old-growth forests, with their lower canopies and thinner bark.

And since redwoods share the forests with a broad range of species, from deciduous oaks to Douglas firs, the land can be thick with vulnerable trees and underbrush — potential fuels that can feed ever-bigger blazes.

Among the growing concerns is sudden-oak death, creating the potential for more deadwood to burn among the redwoods, not unlike the drought-stricken fallen pines now fueling fires in sequoia groves.

“Like a lot of California, our redwood forests are pretty departed from their historical condition and their more fire-resilient conditions,” Ms. Quinn-Davidson said. “All this brush, the understory, all the thick duff and fuels — I don’t think that’s what they looked like, historically, when they had more frequent fire.”

Big Basin may look that way in a few years. It is a wildly popular park, within a two-hour drive of millions of people, but likely will remain closed for at least another year until it is deemed safe for tourists to return.



Joanne Kerbavaz, the California State Parks senior environmental scientist. “I keep coming back to climate change.”


As Ms. Kerbavaz surveyed the heart of the park recently, climbing over fallen trees and practically spelunking into smoldering stumps, the buzz of distant chainsaws was punctuated by the occasional whomp of falling trees, deemed too weak to leave standing, near Highway 236, the scenic two-lane that cuts through the park.

Ms. Kerbavaz was among those desperate to save as many as possible, unsettled by the idea of losing 1,000-year-old trees to the whim of a road worker. One in particular she wanted to keep, not realizing how close it was to collapse.

“I was pleading for more time to assess,” she said. “And within a week it had fallen down.”

Near the burned-out headquarters of Big Basin is a loop trail through some of the park’s biggest redwoods, a path made largely impenetrable by the fallen trees.

Somehow, a sign at the trail head survived.

“The Amazing Ever-Living Redwood Tree,” the sign read.

The tree behind it had burned and toppled.

“Almost fire-proof!” the sign declared.

Almost.



Map sources: Save the Redwoods League; U.S. Geological Survey via the Southwest Biological Science Center; National Interagency Fire Center; Spatial Informatics Group. Note: The old-growth redwood data only shows trees on public lands. Old-growth trees on private land are not shown.

Designed and produced by Michael Beswetherick, Matt McCann, Jesse Pesta, Nadja Popovich and Rumsey Taylor. Additional work by Gabriel Gianordoli. Video by, from top: National Park Service — Mojave National Preserve; U.S. Forest Service — Sequoia National Forest; CAL FIRE CZU; National Park Service — Sequoia National Park; Save the Redwoods League.