King Dollar Is a Deadly but Dangerous Trump Card in U.S.-China Fight

Powerful weapons can create blowback if the wielder isn’t on steady ground

By Nathaniel Taplin and Mike Bird


Limiting the ability of China’s banks to do business in dollars would be destabilizing to say the least. / Photo: jose luis gonzalez/Reuters .



Some aspects of the U.S.-China breakup will be expensive for America, but in finance China clearly has more to lose. The dollar remains the beating heart of the global financial system and control of the dollar-funding system is a formidable tool to punish adversaries.

Still, overuse of that tool by Washington carries long-term risks, which could be exacerbated by policy makers’ failures at home.



Curbing U.S. ownership of Chinese stocks has generated headlines but is more a matter of frustrating Beijing’s global ambitions than seriously damaging Chinese capital markets. The portion of China’s domestic A-shares held by overseas investors still amounts to only 3.5%.

The real bazooka for the U.S. would be sanctions against Chinese banks. Last year, three unnamed Chinese lenders were found in contempt of court over a probe into sanctions against North Korea, opening them up to the possibility of U.S. punishment. A proposed Senate bill also threatens penalties on banks that are complicit in undermining Hong Kong’s freedoms.


Limiting the ability of the country’s banks to do business in dollars would be destabilizing to say the least. Of the $2.215 trillion in international claims that China’s banks have overseas, 63% are denominated in dollars.

In the next two years, about $321 billion in U.S. dollar-denominated debt issued in China and Hong Kong will mature and may require refinancing. U.S. financiers, meanwhile, still have little meaningful exposure to the yuan.


Curbing Chinese banks’ access to dollars wouldn’t be cost free for the U.S., however. A sudden seizure in dollar-denominated trade finance for Chinese firms could plunge the world into an even deeper recession.

And while the dollar’s position at the center of global finance looks secure in the near-term, there are still long-term threats which—if unaddressed—could be exacerbated by the U.S.-China rivalry.

U.S. debt is attractive because it is safe, liquid and—compared with other developed economies—has for decades provided a decent yield. In the immediate savings-rich, deflationary post-Covid world, there is no reason to fear a shortage of buyers, even with rapidly rising deficits. Beijing is unlikely to sell its large holdings unless forced to: the resulting fall in the dollar would hit its exports at the worst possible time. And the Federal Reserve is once again adding to its holdings.

But over the long run, things could look different. A more divided, less efficient global economic system seems likely to be inflationary. And unlike euro debt, Chinese government bonds actually provide a decent yield: foreigners have bought about $200 billion worth since 2015. Meanwhile foreign buying of Treasurys has slowed. Foreign Treasury holdings have risen by just $652 billion, or 10%, since 2014 even though total public Treasury debt has risen about 30% since then. In the five years ending in 2014, foreign Treasury holdings rose by $2.5 trillion.



China’s creaky financial system could still fall apart, and the country faces myriad threats to its growth, from an aging population to a bloated property sector. Beijing will also need to prove it is committed to allowing bond buyers to sell in a pinch, given its history of tightening capital controls when trouble strikes.


But if China keeps growing faster than the U.S. and can establish a record as a reliable counterparty, more investors may begin to question why they should buy lower yielding U.S. debt—particularly those based in developing nations that already have China as their largest trading partner and may not be adverse to doing more trade in yuan.

China already does about 15% of its foreign trade in yuan. And weaponizing the dollar, as the U.S. has increasingly been inclined to do in recent years, risks harming its appeal as a haven asset.

All of this makes structural reforms to keep U.S. growth high in a more divided world—especially higher investment in science and education, immigration reform, and tighter trade links with friendly nations—all the more important.

Financial decoupling between the world’s two largest economies would undoubtedly punish the second-largest player far more than the top one—perhaps severely.

But in the long run, the best American offense is likely to be a good defense: reforms to address longstanding frailties at home which could undermine U.S. economic and military might.


The Stumble-Through Economy

By John Mauldin


We are on the horns of a dilemma, caught between the Scylla and Charybdis, a rock and a hard place, the devil and the deep blue sea, the anvil and the hammer. The walls are closing in. We’re in a tight spot.

All those metaphors (I could list more but will spare you) fit the present economic situation (some are now calling the omni-crisis) and I think will also describe the 2020s.

Thanks to forces that were already in motion and coronavirus as the trigger, we are out of good choices. Every possible fiscal, monetary, social, and political policy will have negative effects, some larger than others. All we can do is choose who gets hurt and in what ways. That’s a bad place to be, but it’s where we are.

This week’s Federal Reserve policy meeting gave yet more evidence that no one, even the mightiest central banks, can restore the growth to which we have grown accustomed. The best the Fed can do is (sorry to use more metaphors) keep the life raft afloat by continuing what they have done for decades.

And that’s the problem. In their effort to improve things/prevent pain, Fed officials past and present financialized the economy. That, along with more unintended consequences from government debt and regulatory interventions (all well-intentioned, you understand) brought us to where we are today. We can’t walk it back without a great deal of pain no one wants to take, including your humble analyst.

So we stumble into the life raft. That’s not nothing. As long as we’re afloat, we still have hope. We can do things that may help. But it’s not ideal.

We didn’t have to be here. But, like I said, we are here.

The next question is where are we going?

Today we’ll explore that question.

Wordy Intellectuals

In his 1999 book, In the Beginning… Was the Command Line, dystopian sci-fi and cyberpunk author Neal Stephenson (one of my favorites) said this:

“During this century, intellectualism failed, and everyone knows it. In places like Russia and Germany, the common people agreed to loosen their grip on traditional folkways, mores, and religion, and let the intellectuals run with the ball, and they screwed everything up and turned the century into an abattoir.

“Those wordy intellectuals used to be merely tedious; now they seem kind of dangerous as well. We Americans are the only ones who didn’t get creamed at some point during all of this. We are free and prosperous because we have inherited political and values systems fabricated by a particular set of eighteenth-century intellectuals who happened to get it right. But we have lost touch with those intellectuals.”

 
Now, given current events, I should note those eighteenth-century intellectuals who founded the US didn’t get everything right. They compromised with slavery, although some were vigorous opponents. They thought women shouldn’t own property or vote.

Most states required either the outright ownership of land or a certain net worth in order for white males to vote. We are still struggling to escape those legacies, but the Framers broke from the prevailing wisdom of their time in other beneficial ways. They were true revolutionaries for their times, and true intellectuals.

Far be it from me to say that intellectualism itself is bad. Pursuing knowledge and truth is important. The division of labor principle says we all benefit when some people make it their specialty. Problems arise when those people grow too enamored of their knowledge, become convinced of their own superiority, and seek to force their ideas on everyone else.

Thinking deep expertise in one area means expertise in many areas is how you get unintended consequences.

The latest example is in central banks, and especially the US Federal Reserve. The Board of Governors and the regional Fed banks employ hundreds, maybe thousands of highly educated economists. They do some useful work. They also develop ideas that may seem reasonable from their lofty perches, but unleash chaos they don’t even see, even after the fact.

It’s not just that central banks interfere with markets. They do that by their very existence. But they go even further by making capital flow inefficiently. Back in the 1950s, Joseph Schumpeter talked about capitalism’s “creative destruction.”

As economies grow and develop, the old ways have to step aside as better innovations appear. Automobiles couldn’t achieve their full potential as long as horses were still in the streets, along with 2.5 million pounds of horse manure a day in NYC.

The economy needed horses to step aside. The horse industry correctly saw a threat to its livelihood. This delayed the transition but couldn’t stop it.

That’s creative destruction.

Central banks have always interfered in this process, appropriately so at times, but this year they’re pushing their thumb on the scale (sorry, another metaphor) by actively subsidizing businesses and entire industries via bond purchases and other such programs.

That’s a problem in multiple ways but particularly for investors. My friend Jim Bianco stated it well in a Bloomberg TV appearance this week.

"If we're not allowing capital to flow away from bad ideas and towards good ideas and we're impeding that process with a price-insensitive buyer then we should expect that the traditional ways we invest won't work as well..."


But it doesn’t end there. The Fed’s intellectuals are now headed toward the kind of “yield curve control” (YCC) Japan has had for years. The main result has been to snuff out Japan’s bond market. Nominally, they still have one, but it doesn’t matter because the Bank of Japan simply dictates the “market” rate.

Now, Japan is doing relatively well. Its economy hasn’t collapsed. Maybe YCC will eventually achieve its goals. But it hasn’t happened yet and I see little evidence it ever will. Meanwhile, their debt keeps growing and their economy doesn’t.

But the broader point remains. It is not “capitalism” in any meaningful sense when people and businesses get bailed out of their mistakes. Repeatedly. Companies that should have failed become zombies, consuming resources and preventing innovation. The result is slow growth and inefficient capital allocation.

It gets worse. With interest rates arbitrarily low, it is now cheaper for large companies to buy their competition than to compete. Corporate debt rose from 250% of GDP to over 300% in the last 20 years. Many (not all) companies have mortgaged the future for stock buybacks and other financial manipulations, rewarding executives and shareholders in the short term. This is what I mean by financialization.

Financialization has short-circuited Schumpeter’s creative destruction process. Cheap money has rewarded those who have access to it and sharpened the divide between the haves and have-nots. Unintended, but very real.

Ah, but were companies harmed by coronavirus guilty of mistakes or just bad luck? Some of both. If you are smart enough to manage a large business, you should know the economy has cycles. You should know how to prepare for them: have cash reserves, use debt wisely, and so on. If you instead leveraged up on share buybacks in order to pad your own compensation, then yes, you made a mistake and you should pay for it. That is how capitalism works. Government’s role is to protect the vulnerable, not save the elites.

To use another metaphor, extinguishing every small brush fire lets undergrowth accumulate. Eventually, something ignites it and we have an inferno. That is where we are now. COVID-19 lit the fuel the Fed’s intellectuals protected for so long. We are seeing the results with a recession/depression OECD is calling (correctly, I think) the worst in almost a century.

But the Fed isn’t the only culprit.

Rocky Rollouts

Even before the pandemic, central bank chiefs were telling their governments, in effect, “We’re running out of bullets over here.” They were correctly recognizing that monetary tools, while powerful, can’t do everything. Fiscal authorities have to do their part, too. Tax and spending policies can accomplish things central bank policies can’t.

Fiscal policy must be executed correctly or it will be ineffective or even make matters worse. Tax hikes during a recession, for instance, rarely help.

The pandemic-related programs are even worse because political leaders, under pressure to “do something” in a crisis, designed them so hastily.

The “Paycheck Protection Program” is a good example. It sounded good in theory: Small businesses could get government loans, all or part of which would be forgiven if they spent it on payroll and certain other expenses. It was supposed to keep people off the unemployment rolls.

Yet the very same bill also raised unemployment benefits to a level far more attractive than the salaries many workers were making. Then PPP’s rocky rollout overlooked many businesses. Congress appropriated more money but it was too late for some.

Now legislators have changed some of the main features and are talking about yet more changes, which may be good, but the instability greatly complicates planning for businesses that already have enough headaches.

They can’t use the money effectively unless they know the rules, and the rules keep changing.

That’s the story of many government programs. They have worthy goals but prove less useful once implemented. Yet they still generate debt. That wouldn’t be so bad if the debt at least bought tangible public benefits. We may laugh at China’s debt but China at least has great airports and railroads. Here, we just give away cash to favored groups, who often use it to buy unproductive goods.

John Maynard Keynes was actually right when he said governments should run surpluses in good times so they can spend more in downturns. Nowadays we just spend more, all the time, and even more in the occasional rough stretches.

The result: more debt, staggering amounts of it, that must at some point be repaid. Debt is future consumption brought forward. You balance the scale by spending less in the future, which is why we talk about “burdening our grandchildren” with debt. Unproductive debt reduces future growth, which is yet another way our children pay for our spending today.

It has reached the point where these future generations can’t bear much more. Our grandchildren have their hands full. So do our children.

Which means, if we want to keep spending, we must pay for it ourselves. Which raises the question, not just in the US but all over the developed world, with what?

The answer seems to be with ever-rising debt and increasingly with monetization by the central Banks.

The Devil and the Deep Blue Sea

Let’s look at a few facts. Some 40 million Americans lost their jobs in the past few months. There’ve been temporary bans on home foreclosures, with many mortgages given six-month extensions, extensions on student loans, rental evictions have been temporarily banned.
 
An extra $600-a-month federal unemployment benefit helped replace the lost income for many. For some, the unemployment benefit is more than they were making prior. It actually sparked the largest monthly household income jump ever. Who knew?


 
Savings have actually risen to 33% of income, at least for the short term, which of course is the highest ever on record. All this is the result of legislation passed over the last two months and multiple trillions of dollars spent.
 
According to the US Debt Clock, total US government debt is now $26 trillion, plus $3.2 trillion state and local debt. Federal debt will almost certainly reach $30 trillion in 2021 from a combination of increased spending and reduced revenues.

Most of those temporary benefits will expire soon. Federal unemployment goes away July 31. The various loan extensions/foreclosures/evictions also begin to come back in the third quarter. The theory is that the economy will be back, everyone will have their jobs, and that life can go on.

Except no one really believes that theory. Maybe, with luck, we can be 90% back. But that is still a major recession from where we were in 2019.

The OECD and others say it will take five years or more to fully recover.
 
It is easy to imagine 10% unemployment at the beginning of next year. A lot of small business just won’t come back. Some large businesses, too.

Take Hertz. Please. The company now plans to do a stock offering even while it is filing bankruptcy. I read this morning that disclosure documents say that the stock will “ultimately be worthless.” (H/T Peter Boockvar) However, management would be derelict if they didn’t take advantage of the insane stock price.

Hertz will survive. Someone will buy it and with a bankruptcy-reduced debt structure it should do well. It will just be smaller, with fewer employees. That story will be repeated often over the next few years. Same song, different company.

Congress is working on yet more multi-trillion-dollar bailouts to try to keep things moving along. I think it is safe to assume Washington will do everything possible to minimize pain prior to the November election. After that, all bets are off.

So, we are headed toward a really awkward moment. At some point in the future, probably post-election, some combination of people are not going to get what they think they should, and whoever it is won’t be happy. How is that going to work? Not well, I’m afraid.

Fourth Turning

Now consider where we are with the pandemic. Conditions are improving in Europe and Asia. New Zealand seems to have eradicated the virus after weeks with no new cases. In the US, hard-hit New York and New Jersey are on the mend. Cases are rising in some other states, which was expected as lockdowns ended. Now the challenge is to minimize the spread.

At the same time, the pandemic is just getting started in Latin America and Africa. And even in the places where it is under control, economic conditions are not remotely back to normal. Many are still staying home (and rightly so, if they are in a vulnerable group).

It is unclear when large events can return. That means the airline seats, hotel rooms, restaurant meals, and other things associated with conventions and travel will also remain unsold.

That, alone, adds up to a major recession. And this is assuming the virus doesn’t resurge and we get a vaccine fairly soon.

That leaves us in a bad spot, just as Neil Howe’s Fourth Turning period approaches its peak in the coming decade. We are at the point in his generational cycle when society’s institutions are shaken, and sometimes destroyed and replaced.

George Friedman points to the latter half of the 2020s as a similar cyclical peak, for different reasons. They both agree the next decade will be highly volatile and tumultuous.

Having talked with both Neil and George, they both still see the true problems developing in the latter part of this decade. That coincides with my own concept of The Great Reset, centered around the accumulation of debt.

I have repeatedly demonstrated how large amounts of debt reduce potential GDP growth. We are now past the point of no return. I know Paul Krugman and others say it doesn’t matter, but the data says otherwise.

The world is now run by a cadre of intellectuals (call them elites or whatever) who have theories about how the world should work and are intent on implementing those theories. We will explore it further in the future, but these theories will aggravate the economic divide. Raising taxes on “the rich” won’t have the beneficial results they expect. We’re way past that point.

I don’t see how we get through this without significant pain. I also don’t know how to reconcile that with present political structures. People don’t typically vote to bring pain on themselves, nor do they react kindly when they perceive the winner wants to hurt them.

At the same time, I’m still hopeful. We have been through harsh recessions, pandemics, and political polarization before. We have seen Fourth Turnings before. They aren’t fun. Yet we always get through them. Not without losses, both financial and personal, but the world survives, society rebuilds, and life goes on.

Seriously, you can look at every similar past cycle and if all you focus on is the pain, you miss the incredible businesses and opportunities that developed at the same time. That’s what I expect this time, too.

The Stumble-Through Economy

I coined the term “The Muddle-Through Economy” in the early 2000s to describe what I saw as the economy of the next decade. I kept repeating it this last decade. Sadly, it is time to retire that term. I don’t think we muddle through in the 2020s. It will be more like Stumble Through.

By that I mean the market volatility, political polarization, global discord, and transformational technology and business changes will at times seem overwhelming. Governments will change their priorities with each election cycle. Continuity will become a thing of the past. We will long for the good old days of 2% growth.

But the point is that we’ll get through. The world won’t end, and if you pay attention, there will be opportunities all around. But those are topics for later letters. Stay tuned. And by the way, you really should follow me on Twitter.

Puerto Rico and the Gym

Like most people, Shane and I have been staying home, in our case here in Dorado Beach, Puerto Rico. For us it has not been that much different, as I have worked from home for a long time, when I’m not on the road.

The one thing I really do miss is the gym. This morning we awakened to the announcement that Puerto Rico will finally begin reopening in phases. Theoretically, I should be back in the gym next week. I intend to be more diligent as I can see what a few months without a gym does to me. It is not a pretty sight, though I’ve been doing online workouts with my trainer from Dallas. Getting old is not for sissies.

I have never had any real gym equipment at my home, preferring to go to the gym. For whatever reason, my wife has an 18-pound pink kettle bell. There is only so much you can do with an 18-pound pink kettle bell. I am really looking forward to once again meeting Brother Iron and Sister Steel, which is also a great book by my friend and one of the greatest bodybuilder/trainers of all time, Dave Draper. His stories of the original Venice Beach bodybuilding scene (he was a contemporary of Arnold Schwarzenegger) are worth the price of admission. Just thinking about it inspires me to do just one more rep.

Have a great week! And here’s hoping we can all find a gym!

Your hoping to do more than stumble through the dark analyst,



 
John Mauldin
Co-Founder, Mauldin Economics

Jair Bolsonaro’s populism is leading Brazil to disaster

If life were a morality tale, the Covid-19 antics would turn Brazilians against the populist president

Gideon Rachman





On a visit to Brazil last year, I had a chat with a prominent financier about the parallels between Donald Trump and Jair Bolsonaro.

“They are very similar,” she said, before adding: “But Bolsonaro is much stupider.” This answer took me aback since the US president is not generally regarded as a towering intellect. But my banker friend was insistent. “Look,” she said. “Trump has run a major business. Bolsonaro never made it above captain in the army.”

The coronavirus pandemic has reminded me of that observation. Brazil’s president has taken an approach that is strikingly similar to that of Mr Trump — but even more irresponsible and dangerous. Both leaders have become obsessed with the supposedly curative properties of the antimalarial drug hydroxychloroquine.

But while Mr Trump is merely taking it himself, Mr Bolsonaro has forced the Brazilian health ministry to issue new guidelines, recommending the drug for coronavirus patients. The US president has squabbled with his scientific advisers. But Mr Bolsonaro has sacked one health minister and provoked his replacement to resign.

Mr Trump has expressed sympathy for anti-lockdown protesters; Mr Bolsonaro has addressed their rallies.

Sadly, Brazil is already paying a high price for its president’s antics — and things are getting worse fast. Coronavirus hit Brazil relatively late. But the country has the second-highest infection rate in the world and the sixth-highest recorded Covid-19 deaths.

The number of deaths in Brazil, which accounts for roughly half the population of South America, is now doubling every two weeks, compared with every two months in the hard-hit UK.Brazil’s economic and social make-up means that the country will be severely hit as the pandemic accelerates. The hospital system in São Paulo, Brazil’s biggest city, is already close to collapse.

With large parts of the population living in crowded conditions, and without savings, mass unemployment could lead to hunger and desperation over the coming months.

But is it fair to blame Mr Bolsonaro?

The president, who was sworn into office on January 1 2019, is obviously not responsible for the virus — nor for the poverty and overcrowding that make Covid-19 such a threat to the country. He has also not been able to prevent many of Brazil’s governors and mayors from imposing lockdowns in local areas.

But by encouraging his followers to flout the lockdowns and undermining his own ministers, Mr Bolsonaro is responsible for the chaotic response that has allowed the pandemic to get out of hand. As a result, the health and economic damage suffered by Brazil is likely to be harsher and deeper than it should have been.

Other countries facing even tougher social conditions, such as South Africa, have had a much more disciplined and effective response.If life were a morality tale, Mr Bolsonaro’s coronavirus antics would lead Brazil to turn against its populist president. But reality may not be so simple.

There is no doubt that Mr Bolsonaro is in political trouble.

His popularity ratings have tumbled and are now below 30 per cent; some 50 per cent of the population disapprove of his handling of the crisis. The support he once enjoyed from mainstream conservatives — who were desperate to see the back of the leftwing Workers’ party — is now crumbling away.

Sergio Moro, his popular corruption-fighting justice minister, resigned last month. Mr Moro’s allegations about the president’s efforts to interfere in police investigations were sufficiently explosive to provoke the Supreme Court into opening an investigation that could lead to his impeachment.Weekly podcast

But impeachment in Brazil is as much a political as a legal process. The misdemeanours that led to the removal of Dilma Rousseff as president in 2016 were fairly technical. It was more significant that Ms Rousseff had sunk to a 10 per cent approval rating in the polls and the economy had suffered a deep recession.

Mr Bolsonaro’s ratings are still way above Ms Rousseff’s nadir. And while the economy is undoubtedly heading for a deep recession and a surge in unemployment, his anti-lockdown rhetoric may buy him some political protection. Oliver Stuenkel, a professor at the Getúlio Vargas Foundation in São Paulo, says, “What Bolsonaro wants to do is to disassociate himself from the economic crisis that is approaching.”

The social isolation measures that Mr Bolsonaro decries, may actually help him politically. They could prevent the mass demonstrations that provided the impetus for the drive to impeach Ms Rousseff. And they will make it harder for politicians to plot and bargain in the proverbial “smoke-filled rooms” — a process that is necessary to stitch together a successful impeachment.

Plotting over the phone is just not the same. Some politicians may feel that plunging Brazil into a political crisis is unseemly, in the middle of a pandemic.Yet national unity will not emerge while Mr Bolsonaro is president. In classic populist fashion he thrives on the politics of division.

Brazil is already a deeply polarised country, where conspiracy theories are rife.

The deaths and unemployment caused by Covid-19 are exacerbated by Mr Bolso­naro’s leadership. But, perversely, a health and economic disaster could create an even more hospitable environment for the politics of fear and unreason.

The virus detectives

Germany’s contact tracers try to block a second covid-19 wave

A low-tech technique that worked in Asia is working in Europe, too




IF YOU HAD fallen asleep three months ago in Germany and woken up today you might not immediately notice much amiss. In much of the country shops are bustling, museums have reopened, and any bar that can pass for a restaurant is pulling in custom. If the shuttered theatres and conference halls dampen the spirits, consolation may be found in the beer gardens, in full swing under the spring sun.

New covid-19 infections in Germany are now consistently below 500 a day. But as German states lift restrictions they must try to prevent a second wave. Masks are compulsory on public transport and in shops, and social-distancing rules remain in place (if often ignored). Borders and schools are partially shut. But perhaps most important in fighting contagion are Germany’s phalanx of contact-tracers—part detectives, part social workers, part medical auxiliaries and part data clerks.

Their work has three elements. First, to obtain from people who have tested positive for covid-19 a list of their recent contacts, and to categorise them. (Spending 15 minutes face-to-face with an infected person, for example, places you in a high-risk bracket.) Second, to alert those people and instruct them, if needed, to self-isolate for 14 days. Third, to check in with them periodically and get them tested, in some cases even if they show no symptoms.

In some countries contact-tracers work from home or outsourced call centres. In Germany they are housed in one of 375 Gesundheitsämter (public health offices), such as one in north Berlin recently visited by your correspondent. In a light-filled room lined with maps and charts, two dozen people (of a total staff of 98) were managing various aspects of the pandemic, from manning phones to tapping in data.

Doctors were on hand, ready to be dispatched to administer tests. The work has changed in recent weeks, says Lukas Murajda, head of the office: 80% of the contacts his team follows up are now in care homes for the elderly or other residential centres.

The Robert Koch Institute (RKI), a federal health agency, provides local offices with guidance and basic software to crunch their data. It has also recruited and helped train 500-odd “containment scouts” to help overloaded areas. But the offices retain considerable leeway to organise their own work. Some struggle to co-operate or share information, a task already hampered by data-privacy rules. (Certain information may only be shared via fax.)

But the advantages of decentralisation far outweigh the drawbacks. Health workers who know their regions are better placed to chase down infection chains in potential hotspots like meat-processing plants. Better-off health offices often ditch the RKI software and build or buy their own.

“That’s the beauty of it,” says Peter Tinnemann, an epidemiologist at the Charité University Hospital in Berlin. “Local workers adapt solutions to local circumstances.” Some regions are struggling to meet the federally mandated target of five contact tracers per 20,000 inhabitants.

But if they have seen no new cases for a week or more, they may see no reason to try.

There are valuable lessons in the history of contact-tracing, a technique long deployed to manage outbreaks of tuberculosis and sexually transmitted diseases. “People underestimate the nature of the work,” says Marcel Salathé, a Lausanne-based digital epidemiologist. Inexperienced tracers may be unprepared for interviewees who react defensively to intrusive questions, or who fear their answers will send friends to quarantine.

The two-day training of Mr Murajda’s recruits is limited to technical matters, though psychologists are on hand to help. Offices need multilingual staff to reach non-German-speakers. Most tracers read to their charges from prepared scripts, but the better-trained may deviate from it. Rather than ask directly about contacts, for example, they might jog interviewees’ memory by asking general questions about their social networks.

Having abandoned contact-tracing in March, only this week did Britain kick it back into gear. American states have also struggled to up their efforts. In Germany the Gesundheitsämter have long been underfunded; many in particular lack doctors, who can earn more in hospitals. Yet most offices maintained contact-tracing throughout the pandemic, even if understaffed spots in rural areas struggled when daily infections were in their hundreds.

Many pulled in furloughed colleagues, like teachers or librarians. Some called on the army. Baden-Württemberg, an especially hard-hit state, ramped up contact-tracing staff from 500 to 3,000 and never saw infections spiral out of control, says Manne Lucha, its social-affairs minister.

Manual contact tracing has its limits: even the most helpful patient will struggle to identify fellow passengers on a train. Like other countries, Germany hopes to automate some tracing with a mobile app using Bluetooth. Yet its development has been plagued by technical and data-privacy woes; officials now hope to launch it in mid-June.

Even then, technology can only support manual contact tracing, not replace it, says David Holtgrave, dean of the school of public health at the University of Albany, in New York state.

Germany’s virus detectives have plenty of work ahead.

Feds Calm Coronavirus Hysteria With Stimulus Money

By Bill Bonner


Week 13 of the Quarantine

SAN MARTIN, ARGENTINA – What a delight it is to be an American! What a spectacle!

No matter how stupid, malignant, ignorant, or evil you are… there’s always someone – a member of Congress, a Nobel Prize-winning economist, or the president himself – who is an even bigger jackass than you are.

And no matter how dumb any idea you may have… there’s always a large part of the public that will believe it.

Knucklehead Ideas

Human history is largely a story of myths, lies, and delusions. They made possible some of our greatest achievements… and our biggest disasters.

The Egyptian pyramids wouldn’t exist, for example, if large groups of people had not believed something that was untrue. They thought Pharaoh was divine… and that they should build monuments to him.

As it happened, they devoted nearly the entire economic surplus of the rich Nile Delta to putting up huge piles of stone in his honor.

And would civilization ever have reached such giddy heights as it did before the French Revolution… had not the masses accepted “aristocratic privilege” as a fact of life?

Then again, World War II wouldn’t have happened without Hitler’s “Übermensch” delusion. It proved to be great fodder for the History Channel, but resulted in a world war with 60 million dead. And it left Germany in cinders… and the master race crushed under the heel of Untermensch foreigners.

We are always asked to believe what isn’t true. Though rarely have we been asked to believe so many knucklehead ideas all at once.

But here at the Diary, money is our beat… so let’s stick with that.

Feds on the Case

In response to the hysteria over the coronavirus, the authorities shut down the economy. And now, they say they can “throw the switch” and turn it back on again… and things will go back to “normal” in a matter of weeks…

Stocks were already at all-time highs in January 2020, when the virus arrived on the scene. In the panic that ensued when the virus spread around the world, they sold off. And for good reason – companies are not worth as much when the revenues stop coming in.

But then, the feds were on the case… with a $2.2 trillion bailout bill… nearly $3 trillion in new money-printing… a $4 trillion national debt increase… and, coming soon – another $1 trillion in “stimulus” spending.

The stock market soared, rising 45% from its bottom in March. Investors said they were “looking through” the horrible news – 20% unemployment… a federal deficit at 20% of GDP… 20,000 business failures… rents unpaid… mortgages in default – to the bright future on the other side.

A “V”-shaped comeback is on the way, or so they say. It will be like a “rocket ship,” says POTUS.

In other words, they were buying the dip based on the idea – obviously fraudulent – that Federal Reserve governors can deftly guide the economy to a prompt, full recovery… and that printing-press money will make assets more valuable.

The trick, of course, is to keep a clear head about it. Some myths are useful. Some are sinister, even lethal.

And some myths, no matter how absurd, can be played for profit. Some people must have prospered from building the pyramids, for example, even if it meant a lifetime of hard labor for the common man.

And many people made money in World War II, too, even while millions of common soldiers were shot to bits when they went “over the top.”

A Good Strategy

Today, a shrewd speculator might think he is one of the lucky ones. He might anticipate the flood of money coming into the stock market from the Federal Reserve. He might figure he can catch the rising tide.

But watch out. Yesterday, the water level dropped suddenly. This morning, the selloff has reversed. Tomorrow, who knows?

But some things are more predictable than others. As the situation on Main Street worsens (bankruptcy filings are becoming more frequent than new COVID-19 cases), the Federal Reserve will surely double down on its hallucinations.

The gambler might confidently expect the Fed to open its floodgates once more – with even more trillions of fake money. Here’s Reuters:

The U.S. Federal Reserve on Wednesday signaled it plans years of extraordinary support for an economy facing a torturous slog back from the coronavirus pandemic, with policymakers projecting the economy to shrink 6.5% in 2020 and the unemployment rate to be 9.3% at year’s end.

Stocks go down; the Fed prints more money. Simple enough.

“Buying the dip,” could turn out to be a good strategy.

Gigantic Fraud

But… our hypothesis is that the myth of money-printing is ruining the U.S. economy, undermining its social stability, and corrupting its government. Today, people in the Wall Street economy have the Federal Reserve to thank for much of their wealth. Like French aristocrats before the Revolution, they’re happy with the two-system system.

And while quick-witted speculators might be able to turn a profit by gaming the system and front-running the Fed, we urge caution.

Eventually, if we’re right… there will be Hell to pay. There will be no monuments – like Cheops or the Sphinx – for tourists to admire 1,000 years from now.

Instead, there will just be the sordid, sorry history of a gigantic fraud…

…the chaos, destruction, and poverty…

…and the sad stories of the speculators who forgot to leave town before the tumbrils started to roll.

We Are Hong Kong

With his recent decision to impose a draconian new security law on Hong Kong, Chinese President Xi Jinping has ridden roughshod over the Joint Declaration and directly threatened the city’s freedom. Defenders of liberal democracy must not stand idly by.

Chris Patten

patten115_Anthony KwanGetty Images_hongkongprotest


LONDON – In my final speech as Hong Kong’s governor on June 30, 1997, a few hours before I left the city on Britain’s royal yacht, I remarked that, “Now, Hong Kong people are to run Hong Kong. That is the promise. And that is the unshakable destiny.”

That promise was contained in the 1984 Joint Declaration, a treaty signed by China and the United Kingdom and lodged at the United Nations. The deal was clear, and the guarantee to Hong Kong’s citizens was absolute: the return of the city from British to Chinese sovereignty would be governed by the principle of “one country, two systems.” Hong Kong would have a high degree of autonomy for 50 years, until 2047, and would continue to enjoy all the freedoms associated with an open society under the rule of law.

But with his recent decision to impose a draconian new security law on Hong Kong, Chinese President Xi Jinping has ridden roughshod over the Joint Declaration and directly threatened the city’s freedom. Defenders of liberal democracy must not stand idly by.

For over a decade after the 1997 handover, China largely kept its promise regarding “one country, two systems.” True, not everything was perfect. China retreated from its promise that Hong Kong could determine its own democratic government in the Legislative Council, and the Chinese government periodically interfered in the life of the city. In 2003, for example, it abandoned an attempt to introduce legislation on issues such as sedition – an odd priority in a peaceful and moderate community – in the face of mass public protests.

Overall, however, even skeptics conceded that things had gone pretty well. But China-Hong Kong relations started to deteriorate after Xi became president in 2013 and dusted off the playbook of aggressive and brutal Leninism. Xi reversed many of his immediate predecessors’ policy changes, and the Communist Party of China (CPC) reasserted control over every aspect of Chinese society, including economic management.

Xi toughened the party’s grip on civil society and universities, and cracked down on any sign of dissident activity. He demonstrated that his regime’s word could not be trusted internationally, for example by reneging on promises he had made to US President Barack Obama that China would not militarize the atolls and islands it was seizing illegally in the South China Sea.

Furthermore, Xi’s regime locked up over a million predominantly Muslim Uighurs in Xinjiang and obliterated signs of their culture wherever possible. And, of course, he tightened the screws on Hong Kong.

Last year’s protests in the city were triggered by the Hong Kong government’s attempt to introduce an extradition law that would in effect have removed the firewall between the rule of law in the territory and communist law in mainland China. The demonstrations were badly handled by Hong Kong’s police, whose behavior – including the unchecked use of tear gas and pepper spray – led a small minority of the protesters to resort to unacceptable violence.

An independent inquiry into the reasons for the demonstrations, the mishandling of them by the police, and the behavior of the demonstrators (the overwhelming majority of whom were peaceful) could have helped to calm the community and promote reconciliation. But the proposal was rejected out of hand. In last November’s district council elections, Hong Kong’s citizens showed whose side they were on by voting overwhelmingly for pro-democracy candidates who had supported the demonstrations.

The protests have stopped in recent months as a result of the city’s (successful) measures to combat the coronavirus. But the Chinese authorities clearly expected them to restart, for example to mark the June 4 anniversary of the 1989 Tiananmen Square massacre, and no doubt are worried that Hong Kong’s democratic parties would go all out for victory in the next Legislative Council elections in September.

This prospect plainly terrified the Chinese government and the hardline officials that it recently put in charge of the territory. The latter had already asserted their determination to curtail Hong Kong’s autonomy and had interfered at will in matters that should have been left to the city’s government and legislators.

Xi’s government has now struck its heaviest blow yet. Taking advantage of the world’s current focus on fighting COVID-19 (whose rapid global spread is in part the result of the CPC’s secrecy and mendacity), China’s rubber-stamp parliament has now bypassed Hong Kong’s own legislature and imposed a national-security law on the city. The law covers unspecified crimes such as sedition and secession, and would allow China’s version of the KGB, the Ministry of State Security, to operate in Hong Kong, presumably using its customary methods of coercion.

But what is the alleged national-security threat that Hong Kong poses to China’s Communist regime? China’s leaders fear the very things they promised to Hong Kong in the Joint Declaration, namely the rule of law and the freedoms it protects. The city represents everything Xi’s regime hates about liberal democracy, which is why what is happening there is not only a huge challenge for Hong Kong and its people, but also a direct threat to open societies everywhere.

The world simply cannot trust this Chinese regime. Liberal democracies and friends of Hong Kong everywhere must make it clear that they will stand up for this great, free, and dynamic city. Following China’s announcement of the new law, over 512 parliamentarians and senior policymakers from 32 countries have signed a statement supporting Hong Kong. The city’s freedom and prosperity are at stake; so are the values and interests of open societies around the world.

As the co-signatory to the Joint Declaration, the UK has a special responsibility to show leadership. For starters, Prime Minister Boris Johnson should ask for Hong Kong to be put on the agenda at next month’s G7 meeting. He might find inspiration in advice found in the Analects of Confucius: “A gentleman would be ashamed should his deeds not match his words.”


Chris Patten, the last British governor of Hong Kong and a former EU commissioner for external affairs, is Chancellor of the University of Oxford.

How Do You Decide if Children Can Play Together Again?

As always, parents must weigh the risks, look at what the experts say and make decisions based on their own level of confort.

By Perri Klass, M.D.


Children played with bubbles in Washington Square Park in Manhattan over Memorial Day weekend.Credit...TheStewartofNY/Getty Images



As some parts of the country “open up” and families venture beyond their households, parents are faced with hard decisions about what children can do. There are no official guidelines, so I asked smart and experienced pediatricians from around the country what questions they are getting from parents, and how they’re answering them. Spoiler alert: There are no easy answers.

“I’m getting it every day in my office: what do we do, we can’t stay home forever, we need some activities,” said Dr. Sally Goza, the president of the American Academy of Pediatrics, who is a primary care private practice pediatrician in Fayetteville, Ga. “I try to explain to parents, this virus is not gone, it’s still here, we need to be smart in how we go about being around other people.”

Despite the “novelty” of the virus, these dilemmas are not entirely new — this is what parents do: weigh risks, look at what the experts say, figure out where your own level of comfort is, and then make decisions that affect the health and safety of the people you love best.

Making these decisions is going to involve choosing other families you feel you can trust. “There’s a certain amount of selecting out families with the same level of risk aversion,” said Dr. David Rubin, director of PolicyLab at the Children’s Hospital of Philadelphia.

“People are wondering how they sort of stick their toe in the water and try to re-engage outside of their homes,” said Dr. Terri McFadden, associate professor of pediatrics at Emory School of Medicine and medical director for primary care at Hughes Spalding Hospital in Atlanta. “I’m getting that especially for teens — the teens feel invincible, they don’t feel like they’re in any danger at all, and they’re itching to get out and interact with their peers.”

Still, she said in an email, “I caution families to be very careful about potentially exposing their children or themselves to Covid-19 while infection rates remain high. This is especially true for high risk groups that have been disproportionately affected, which is many of my patients: African-Americans, Hispanics and families with pre-existing conditions or elderly care givers.”

If you are contemplating a play date, taking into account all these risks, you will need good communication with the other parents. “A start would be, hi, our kids have been asking about getting together, and as you know, this is a complicated conversation right now,” said Dr. Dipesh Navsaria, an associate professor of pediatrics at the University of Wisconsin School of Medicine and Public Health. A parent could continue, “I wanted to start with an open conversation, see where you are, tell you where I am, and see if it’s possible to send a consistent message to our kids.”

And then you can get down to the details: indoors, outdoors, duration of contact, masks, food and drink, parental supervision to make sure that rules are observed. “I’m less worried about a parent or a business getting all the rules right, because we don’t know what ‘right’ is,” Dr. Navsaria said, “and more concerned about them being intentionally thoughtful.”

It’s not so different, he said, from the conversations that pediatricians advise parents to have with other parents about whether there are unsecured firearms in the house, or whether the pool is fully fenced and locked; it’s basically a conversation about whether you feel your child is safe at someone else’s home, in someone else’s care.

Don’t frame it so that the more restrictive parent is the bad guy, and try for an honest conversation that respects differences of opinion. Remember that other parents may have reasons you don’t know about to be more wary of possible infections. That’s what it means to present a consistent message to a child: This is about keeping everyone safe, and sometimes that means waiting a little longer. And if there’s going to be a play date with limitations, make sure the child understands what those limitations are, and rehearse the possible activities.

Families should not feel pressure to change their rules, even if they are living in areas that are opening up. If there is a vulnerable adult — or child — in the home, they may want to be more strict, rather than less strict, as others relax their restrictions. And not all children — or adolescents — are necessarily pushing for those in-person social contacts. We need to give each other time, and treat each other gently.

Take it step by step, Dr. Goza said. Start with carefully chosen contacts, and don’t jump right to large gatherings. “You spent all this time trying to isolate and social distance,” she said. “You don’t want to go out there and just blow it all.” The parents she’s talked to, she said, have been very conscientious, planning out social encounters with neighbors getting together outside for a barbecue.

Dr. Goza advised that parents encourage children to spend their time together outside, she said, to wear masks, to wash their hands regularly. Pools are probably relatively safe, she said, according to current thinking about transmission, but supervision is important, both because of water safety and to try to prevent kids from being too close together.

What about when family and friends disagree? “I say, if they don’t wear masks, I would try not to be in an enclosed place,” Dr. Goza said. “Wear a mask yourself, say, ‘I respect your opinion but we feel like we want to keep a bit of distance.’”

To reduce risk, everyone’s No. 1 piece of advice is that if there is going to be socializing, keep it outdoors as much as possible. Keep the time periods limited — maybe a short session outside in the afternoon, rather than a sleepover. Encourage hand-washing, send children with hand sanitizer, and yes, make it clear beforehand that masks are to be worn. If there’s going to be a meal together, meaning that masks will come off, kids need to be sitting far enough apart.

But if you decide you’re ready to relax your isolation, don’t expect the impossible. Dr. Navsaria cautioned parents “not to expect 100 percent hand hygiene and proper mask use, because children are children, and even older kids that quote unquote should know better.”

Dr. Rubin said, “It’s a good moment for teaching kids individual responsibility.” That includes asking older kids to be honest if they have relaxed the rules, which may mean, he said, that parents will want to practice some social distancing at home around adolescents who may be taking risks.

With adolescents, it’s important to review your family stands on alcohol and other substance use, and the ways they can affect judgment, and to talk frankly about sex in the context of social distancing.

Talk to your children about why this all matters, Dr. Goza said. “Give them science so they can understand why it’s so important, to protect them, protect their friend, protect their parents and grandparents and their friend’s parents and grandparents.”

“Not every lapse of self-protection activity is going to necessarily mean that the worst is going to happen,” Dr. Navsaria said. “We need to teach and redirect and guide with kindness and compassion, including our own kids, because everyone is doing the best they can.”

Pediatricians are also concerned that with children looking for summer recreation, but not supervised in camps or formal programs, there may be a higher risk of injuries, including bicycle-related accidents and trampoline mishaps, and especially drownings. No activities are completely risk-free, but taking precautions (bike helmets, locked gates around pools, proper adult supervision) and talking things through with your children can make everyone safer.

So here we all are, parents and pediatricians, trying to keep children as safe as possible, while letting them take some steps out into the world.

“Summer is going to be different,” Dr. Goza said. “We just need to be kind to each other — people are going to have different ideas, and we need to try to be considerate about what other people think, knowing we have to do what’s right for our families.”