The great interruption continues

Leaders should now be asking how we create the strongest feasible recovery

Martin Wolf

James Ferguson illustration of Martin Wolf column ‘The great interruption continues’
© James Ferguson


The IMF’s World Economic Outlook Update for June is not a cheerful document. Yet it does contain a cheerful point: the second quarter of 2020 should be the nadir of the Covid-19 economic crisis.

If so, the challenge is to produce the best possible recovery.

The downgrade of the IMF’s forecasts since April is large, with global growth forecast at minus 4.9 per cent this year, down from minus 3 per cent in April.

Next year’s growth is forecast to be 5.4 per cent.

Global output is, as a result, expected slightly to exceed 2019 levels in 2021.

Yet, in the fourth quarter of 2021, the gross domestic product of high-income countries would still be below levels in the first quarter of 2019.

Output would also be some 5 per cent below levels implied by pre-Covid-19 growth trends.

We have been living through what the Bank for International Settlements in its latest annual report, calls a “global sudden stop”.

The International Labour Organization states that, globally, the decline in work hours in the second quarter is likely to be equivalent to the loss of more than 300m full-time jobs.

The IMF rightly stresses these uncertainties: the duration of the pandemic and additional national or local lockdowns; the extent of voluntary social distancing; the severity of new safety regulations; the ability of displaced workers to secure employment; the longer-term impact of business closures and unemployment; the extent of reconfigurations of supply chains; the likely damage to financial intermediation; and the extent of further dislocations of financial markets.

Chart showing that the world economy may be past the worst


The policy response has correctly been on an unprecedented scale for peacetime.

The IMF forecasts that government debt will rise by 19 percentage points, relative to GDP, this year. Central bank’s policies have been no less astounding.

The support by the fiscal and monetary authorities is also revolutionary in nature.

Governments have emerged as insurers of last resort. Central banks have gone far beyond responsibility for banking.

Where needed, they have taken responsibility for the entire financial system. Indeed, with its interventions, including swap arrangements with other central banks, the US Federal Reserve has taken responsibility for much of the global financial system. Desperate times dictate desperate measures.

Under the management of Agustín Carstens, former head of the Mexican central bank, the BIS rightly endorses the actions of central banks. Its report explains that central banks have two objectives: “to prevent long-lasting damage to the economy by ensuring that the financial system continues to function” and “to restore confidence and shore up private expenditures”.

Chart showing that corporations will accumulate losses this year


This is not the end of massive interventions. It may not even be the end of their beginning. Huge uncertainties lie ahead. But, as Christine Lagarde, president of the European Central Bank, has recently noted, quoting Abraham Lincoln, “The best way to predict your future is to create it”.

So how should we create the future we should want, one in which there is the least possible damage and the strongest feasible recovery into an economically sustainable future? That is the task leaders should now be approaching.

For the immediate future, the important challenge remains to minimise the damage to health and the economy done by Covid-19.

To achieve this, strong co-operation remains essential.

Chart showing that government debt and deficits are set to rise more than during the global financial crisis


This will be particularly important for emerging and developing countries, who still need substantial help. The IMF has already agreed programmes to help 72 countries in two months.

Yet, despite the improvement in financial markets, debt relief and additional official support will be required in the months and, almost certainly, years ahead.

As lockdowns end and economies recover, it will also be essential to shift policies towards promoting recovery and vital to avoid the mistake of the period after the 2008 financial crisis, by switching too soon from support towards fiscal consolidation and monetary tightening.

Continued aggressive fiscal and monetary policy will be needed to bring idle resources back into use and shift economies towards new activities.

The new economy into which we emerge will — and should — be different from the old one.

It will need to take advantage of today’s technological revolution towards virtual and away from constant physical interaction. It will also need to provide the people who have been most hard hit with a better future.

It will need to accelerate the shift towards a more sustainable economy.

Chart showing that monetary policy response has been enormous


By sustaining demand, policymakers can make such shifts far easier. Yes, there are some risks consequent upon doing this.

But they are far smaller than the political and economic outcome of another round of austerity borne by the beneficiaries of public spending.

This time must be different.

Above all, government is back, as is a desire for competence. Anti-government politicians have been able to turn their own failures into an argument: who would trust a government run like this? But those with eyes can see that it does not have to be like this.

The contrasts between Angela Merkel’s Germany and Donald Trump’s US or Boris Johnson’s UK are just too glaring. Maybe this disaster will bring one benefit: we will find not just that government is back, but that the demand for sensible government run by competent people is back.

That would not make such a calamity worth having. But one should never let a crisis go to waste.

Human beings can learn from painful experiences. Let us do so.

What to Do If You “Missed” the Boat on Gold

By Andrey Dashkov, analyst, Casey Research



2020 is the year of the gold bugs.

If you’ve been following along in the Dispatch, this shouldn’t be a surprise. Our Casey Research experts have been pounding the table on gold and saying a new bull market is coming.

And their predictions are paying off. Gold has soared almost 20% this year, while the S&P 500 has barely recouped its losses from the March crash.

If you’re new to this story, it’s easy to think that you might have missed the boat.

But nothing could be further from the truth. You still have plenty of opportunities to get positioned as this gold rally gains momentum. And I’ll prove it to you below… along with an easy way to take advantage…

Gold’s Just Getting Started

Gold started grabbing attention in August last year, when it finally broke out of the doldrums and hit $1,500 an ounce. Since then, it’s climbed 21% to about $1,812 – less than $100 off its all-time high of $1,895.

But this is just the beginning. Gold still has plenty of room to run… and could easily break through to an all-time high this year. And that might not be the end.

After all, gold rallies aren’t short-term events. They last years. For example, in gold’s last rally during the financial crisis in 2008, the metal didn’t reach its peak until 2011.

image

Over those three years, gold rose 168%. The current rally is only one year old, and so far, gold is up 40% since May 2019. So it has plenty of upside from here.

And thanks to the COVID-19 pandemic, gold is about to get a boost…


How COVID-19 Will Lift Gold

The economic effects of the pandemic and the resulting lockdowns have been devastating. With unemployment on the rise and businesses slowly dying off, governments around the world have been forced to borrow enormous amounts of money to provide aid.

The U.S. said it would borrow up to $3 trillion in the current quarter to fight the economic impact of the virus. That will push the budget deficit to at least $3.7 trillion this year, up almost four times compared to 2019.

This is a huge amount of debt in a short period of time. And the only way the government can sustain it is by printing more money and keeping interest rates low.

Printing more money will dilute the value of the U.S. dollar. So it will take more dollars to buy the same amount of goods.

At the same time, the Federal Reserve will keep interest rates low so the government can continue paying interest on its debt. That means assets like Treasury bonds aren’t as attractive to investors.

Bond prices, including those of Treasurys, go up when interest rates go down. There’s an inverse relationship between the two.

That results in investors fleeing Treasury bonds and paper money. And they’ll likely turn to gold.

Unlike Treasurys and U.S. dollars, gold has a lot of upside ahead of it, and it’s historically protected people’s wealth during an economic crisis.

We’ve seen this before. As you can see in the chart below, interest rates and the price of gold are inversely correlated. When interest rates drop, gold zooms higher. Take a look.

image


So there’s plenty of reasons to believe that gold will continue rising. If you’re looking to add some exposure, consider buying physical gold first.

But if you really want to take advantage of this boom, there’s another method you should be aware of…

Gold Stocks Are Still a Solid Bet

Gold mining stocks are an excellent way to profit from this bull market. And the main reason is that they give you leverage to gold’s rising price.

In this context, “leverage” refers to the relationship between the price of gold and the share prices of gold miners. When gold moves an inch, these stocks can move a mile.

For example, say the price of gold rises from $1,300 to $1,400. That’s roughly an 8% gain. If you own physical gold, you’re up 8%.

Now say it costs a mining company $1,250 per ounce to mine the gold. At a gold price of $1,300, the company has a potential profit of $50 on each ounce of gold.

However, if the price of gold rises only 8% to $1,400, the company’s profits per ounce increase by 200% ($1,400 – $1,250 = $150 profit per ounce). That could push the company’s stock higher by 40%, 50%, or more – all because of a small move in gold itself.

We’re already seeing this in action. Gold miners are up 27% so far this year, while gold is up 18%.

But like we said before, just as gold still has plenty of room to run, so do miners. That means it’s not too late to position yourself for profits.

So however you look at it, we’re in the early innings of a prosperous gold market.

To make the most of it, consider buying bullion or a gold exchange-traded fund (ETF) like SPDR Gold Trust (GLD), which closely tracks the price of gold itself. It’s a convenient way to get exposure to gold without actually holding the metal.

And if you’re looking for exposure to gold stocks, check out the VanEck Vectors Gold Miners ETF (GDX), which holds a basket of major gold miners.

Just remember to position size appropriately. And never invest more than you can afford to lose.

3 Scenarios for Playing the Coronavirus Economy in the Second Half

By Lisa Beilfuss


Floor traders returned to the New York Stock Exchange in May after the coronavirus forced a rare shutdown of physical trading operations. / Brendan McDermid/Reuters 


The U.S. economy added a more-than-expected 4.8 million jobs in June. Yet nearly 20 million Americans remain out of work.

The June jobs report brings to a close the first half of 2020 with the same dissonant note that has been so familiar during this extraordinary year. The coronavirus pandemic, which has sickened 2.6 million Americans and killed over 128,000, brought swaths of the U.S. economy to a virtual halt and threw it into recession, knocking the S&P 500 down 34% into a bear market.

The stock market then called the recovery before the economic data started to corroborate it, with the S&P 500 re-entering a bull market and now within striking distance of pre-virus prices.

Still, the economy is far from normal and will take a long time to absorb the millions of unemployed workers who will hold down consumer spending, threaten corporate profits, and weigh on strained state and local budgets. What’s more, the viral threat remains, casting a cloud over the economy and markets.

The conversation over recent months, at least as far as economics and markets go, has been dominated by a debate over the shape of the recovery. There is the V-camp, the U-camp, and the W-camp. Some have gotten more creative, calling for something resembling a Nikeswoosh or a reverse square root sign (√, in reverse).

We began the second half of 2020 with hope building that the recovery will resemble a V, as lockdowns in many parts of the country were relaxed sooner than predicted and consumers have shown a willingness to return to normalcy despite the pandemic.

But these improvements have come at a cost. Covid-19 cases are surging, prompting companies and states to reverse or delay reopenings and giving consumers a renewed sense of caution. The pandemic’s course and the responses to it will determine what happens to the U.S. economy over the back half of the year and beyond.

While hiring in May and June showed momentum in a recovery from the worst of the pandemic lockdown, says David Kelly, chief global strategist at J.P. Morgan Asset Management, “investors should recognize that we are still very far from a healthy job market and that a recent resurgence in the pandemic will make further progress slower.”

To try to piece together a second-half outlook for the U.S. economy and stock market, Barron’s looked to a half-dozen strategists. Here’s what they say.

Bear Case

Against a backdrop of slower progress, it’s easy to get bearish. While economic data over the past month have mostly surprised to the upside, suggesting the recovery began earlier and has been more robust than anticipated, data are lagging. Already even the June jobs data are stale given the resurgence in coronavirus cases and reopening rollbacks.

Over the past week, Arizona, California, Georgia, and Texas all reported a record number of daily Covid-19 infections. California is closing bars and indoor dining again in many of its counties, and New York City said it would delay its reopening of indoor dining.

On top of the uncertainty around the virus—the continuation of the first wave, the magnitude of a second that many believe will come this fall, and the timing and efficacy of a vaccine—is a laundry list of other interconnected unknowns. Will schools and day-care centers open in the fall, or will working parents continue to lack child care?

Will Congress extend the enhanced unemployment benefits, set to expire July 31, that have helped plug the hole in household income and spending? Will state and local governments receive adequate aid to fill budget gaps given the loss of tax revenue? And of course there is the presidential election in November.

The unusual degree of uncertainty confronting consumers and investors may constrain economic activity for the rest of the year and keep a lid on the stock market, says Brian Singer, head of dynamic allocation strategies at William Blair.

“My outlook isn’t disastrous, but I’m not terribly optimistic, either,” Singer says, adding that we’ve probably seen stock-market highs for the year. He says much of the trouble in the economy isn’t so obvious, given that small businesses hit hardest by the pandemic aren’t publicly traded, meaning much of what’s driving the economy isn’t driving the market.

Daily data from Opportunity Insights, part of Harvard University, show small-business revenue hasn’t much improved since reopenings began in earnest, while the number of small companies open are down 16% from January. At this point, it’s fair to assume a chunk of businesses not open have closed permanently.
Strategists say a bear case would feature a delay in a widely available Covid-19 vaccine until 2022 and strict, coordinated lockdowns to stem coronavirus cases that pick up this fall. A much deeper economic contraction and potentially another stock market correction would follow.

Under its bear-case scenario, Morgan Stanley has minus 10.2% penciled in for its 2020 gross-domestic-product forecast. Oxford Economics has minus 17.2% for its bearish projection. Meanwhile, Michael Kantrowitz, chief investment strategist at Cornerstone Macro, predicts a 20% decline from current levels in the S&P 500 in his bear case.

That would translate to roughly 2500 and make stocks in the defense, utilities, and consumer-staples sectors more attractive while consumer discretionary and industrial stocks would become unattractive, he says. Katerina Simonetti, a senior portfolio manager at UBS private wealth management, estimates 2800 for the S&P 500 by year-end should everything go wrong.


Base Case

We’re not inclined to get too pessimistic just yet. The strategists Barron’s interviewed aren’t counting on a bear-case scenario, either. Kantrowitz, for example, puts 50% odds on his base case and splits the rest between his bull and bear cases.

Base-case scenarios across Wall Street share a few assumptions. First, the coronavirus is something Americans will have to live with for an extended period. Second, the Federal Reserve will continue to do whatever it takes to support the economy and financial markets. And third, Congress will pass additional aid to households and businesses to the tune of at least $1 trillion.

Under her baseline scenario, Simonetti sees a gradual lifting of lockdown restrictions coupled with the existence of a vaccine or therapy by fall, and the mass production of a treatment by mid-2021. Together, that would lead to a sustainable economic recovery by the third quarter of this year and a return to normal activity by the end of the first half of next year. She in turn expects S&P 500 earnings to improve by the end of 2020, adding up to a target for the index of 3300.


The most likely picture includes a stock market that chops sideways from here as social distancing remains strict and reopenings stop and start, Kantrowitz says. Unemployment will remain in the double digits through December, and economic data will look less impressive as the virus lingers and bursts in activity from April’s bottoms fade.

“We’re still in irrational exuberance territory for equities,” he says, adding that the S&P 500 trading at such an expensive multiple against this backdrop makes stock-picking more important after a long boom in passive index investing. The forward price/earnings ratio for the S&P 500 is at 22.1, not far off its peak in 2000.

The Number of Covid-19 Cases Is Rising. What Comes Next.

He’s not alone. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, predicts the S&P 500 trades between 2900 and 3200 for the rest of the year and is telling clients the index is expensive, crowded, and increasingly concentrated in a small handful of tech names.

“We’re just not interested in owning the S&P 500,” Shalett says. That’s despite Morgan Stanley’s conviction in a deep V-shaped recovery over the next four to six quarters. The market anticipated a lot of the good news we’ve gotten, and now corporate earnings need to catch up, she says, encouraging stock-picking in areas leveraged to the economy.

Instead of owning the S&P 500, Shalett favors financial, materials and energy stocks because they’re cheaper than the broader market while leveraged to the economic recovery and correlated with rising inflation. (Strategists agree inflation will remain at bay over at least the next two quarters—some say much longer—before beginning to bubble.)

Kantrowitz, meanwhile, prefers industrial and consumer discretionary stocks under his baseline scenario for the second half and is betting growth will continue to outperform value, while Simonetti likes mid-caps across telecom, health care, and food.

Bull Case

While we’re not overly pessimistic, it might be a good time for bulls to rein in their optimism. Their case for the economy and stock market assumes the worst is behind us. Rising Covid-19 case numbers in states that reopened early and subsequent reopening rethinks are casting doubt that a bull scenario can be achieved.

To get there, strategists say it would take a vaccine that is widely available before the end of 2020—as opposed to mid-2021—coupled with a second wave of infections in the fall that is much smaller than the first.

Simonetti says her bullish scenario, which she considers unlikely, includes an S&P 500 target of 3500. “In our upside scenario, everything is going right,” she says, leading to a return to “absolutely normal” activity by the fourth quarter of this year. Even then, she expects unemployment to remain above 10%, despite ongoing stimulus efforts and improving corporate earnings that would be part of such a scenario.

Data from Appleshow mobility across the country has improved significantly since April, the only full month of nationwide lockdowns, mostly thanks to increased driving that is offsetting declines in walking and the use of public transportation.

Strategists at Morgan Stanley say their bull case includes faster reopenings and greater mobility, which would lead to a normalization of economic activity. If all that were to happen, they say U.S. GDP would be down 2.1% for 2020.

The Catch-22 is that achieving such a scenario relies on a robust recovery that itself risks more infections and renewed shutdowns. On this front, Cornerstone’s Kantrowitz says two numbers he’s watching are raising red flags. The rising positivity rate, or the percentage of people testing positive, is leading to higher hospital occupancy rates that could trigger more shutdowns, he says. Given how much of the increasingly tenuous recovery the market has priced in since March lows, Kantrowitz doesn’t see the S&P 500 above 3400 even under his best-case scenario.

There is more to the idea that there’s a bearish lining in a bullish scenario. Peter Boockvar, chief investment officer at Bleakley Advisory Group, says that if there’s a vaccine by October, the stock market will love it. But the bond market won’t, potentially triggering a rise in global interest rates that would make relatively high stock market valuations harder to justify and ballooning corporate, household, and government debt balances more problematic.

A vaccine that arrives sooner than later will help bring back demand, but it would also bring forward inflation pressures, he says, effectively transforming a bullish outcome into a bearish one.

“We’re going to get through this, but how many jobs will come back, how many businesses will reopen, how long before we get back to [pre-virus] GDP and earnings per share?” Boockvar asks. “The market has had a hall pass, looking past bad data and focusing on the reopening.”

He added that investors have to consider changes in consumer behavior and the possibility that companies will try to do more with less.

Whether the U.S. economy takes off from here or stumbles through the end of the year, there is one thing strategists agree on: The S&P 500 is likely to trade in a pretty tight range for the rest of 2020.

It’s from there that things will get more interesting, as the unknowns piling up reveal themselves.

Face Masks Really Do Matter. The Scientific Evidence Is Growing.

New research suggests that face coverings help reduce the transmission of droplets, though some masks are more protective than others

By Caitlin McCabe


Tompkins Square Park in New York City, which is entering the final phase of reopening Monday.
PHOTO: NATALIE KEYSSAR FOR THE WALL STREET JOURNAL)


Face masks are emerging as one of the most powerful weapons to fight the novel coronavirus, with growing evidence that facial coverings help prevent transmission—even if an infected wearer is in close contact with others.

Robert Redfield, director of the Centers for Disease Control and Prevention, said he believes the pandemic could be brought under control over the next four to eight weeks if “we could get everybody to wear a mask right now.” His comments, made Tuesday with the Journal of the American Medical Association, followed an editorial he and others wrote there emphasizing “ample evidence” of asymptomatic spread and highlighting new studies showing how masks help reduce transmission.

The research Dr. Redfield cited included a newly published study suggesting that universal use of surgical masks helped reduce rates of confirmed Covid-19 infections among health-care workers at the Mass General Brigham health-care system in Massachusetts.







His comments are the clearest message yet from the CDC, amid fierce debate over facial coverings, fueled initially by shifting messages from federal and global officials about their necessity and then by those espousing individual liberties.

Researchers from around the world have found wearing even a basic cloth face covering is more effective in reducing the spread of Covid-19 than wearing nothing at all. And many are now examining the possibility that masks might offer some personal protection from the virus, despite initial thinking that they mostly protect others.

Experts caution that widespread masking doesn’t eliminate the need to follow other recommendations, like frequent handwashing and social distancing.

In the absence of widespread availability of N95 masks—considered among the most effective but typically reserved for health-care workers—transmission can still be reduced with simple and affordable face coverings, the research shows. 

In a study published last month in the journal Physics of Fluids, researchers at Florida Atlantic University found that, of the readily accessible facial coverings they studied, a well-fitted homemade stitched mask comprising two layers of cotton quilting fabric was most effective for reducing the forward spread of droplets. 

The research was conducted using a mannequin’s head, an air compressor and a smoke generator that mechanically simulated a cough.

The study found that aerosol-size droplets expelled from the mannequin with the double-layered cotton mask traveled forward about 2.5 inches on average, and that most of the leakage escaped from gaps between the nose and face. 

Loosely fitting facial coverings, including a folded cotton handkerchief with ear loops, as well as a bandanna were less helpful, the study found. With those masks, droplets traveled on average about 1.25 and 3.5 feet, respectively. In contrast, the study found droplets traveled about 8 inches on average with an off-the-shelf cone-shaped mask.

Meanwhile, droplets from an uncovered cough traveled around 8 feet on average, though the study found that they could travel up to 12 feet—double the currently recommended social-distancing guideline of 6 feet. Leakage from a common disposable surgical mask wasn’t studied, though two of the study’s authors, Siddhartha Verma and Manhar Dhanak, said they are working on it.

“It was surprising in a good way to see that a homemade mask could do so well…that we don’t have to get a very fancy mask,” Dr. Verma said. “A cotton mask can be washed at home and dried. Reusability is becoming important as we go into this for the long haul.”

The amount of virus exposure might influence degree of sickness, according to a review of viral literature and Covid-19 epidemiology by Monica Gandhi, a professor of medicine at the University of California, San Francisco. 

She and her co-authors posit in the research, expected to be published this month in the Journal of General Internal Medicine, that masks provide an important barrier and could lead to a milder infection or even prevent one altogether. While cloth and surgical masks can widely vary, she believes some masks can likely filter out a majority of large viral droplets.

Amy Price, a senior research scientist at Stanford’s Anesthesia Informatics and Media Lab, maintains, in contrast, that the primary benefit of wearing a mask is to protect others and reduce Covid-19 transmission. She believes that, excluding N95 masks, multilayered masks with a slightly waterproof outer layer best minimize spread. 

She said rubbing the outer layer of the mask with a latex glove before donning it creates static electricity—which Stanford researchers believe can better prevent virus particles from passing from the mouth to outside of the mask.

Researchers are hopeful that more evidence about the personal protection masks could lead to more use in coming weeks. The CDC said the use of cloth face coverings while in public in the U.S. increased to 76.4% in mid-May, compared with 61.9% in April, according to internet surveys sent to roughly 500 adults each month.

Some Americans who have resisted wearing masks have cited health concerns. However, leading medical groups said in a joint statement Thursday, “Individuals with normal lungs, and even many individuals with underlying chronic lung disease, should be able to wear a non-N95 facial covering without affecting their oxygen or carbon-dioxide levels.” Exemptions should be at the discretion of a physician, the groups said.



An N95 mask at a factory in Mexico City, at left, and the creation of masks at Stitch House Dorchester in Dorchester, Mass. / PHOTO: JEOFFREY GUILLEMARD/BLOOMBERG, JOSEPH PREZIOSO/AGENCE FRANCE-PRESSE/GETTY IMAGES,


Researchers say the benefits of widespread mask use were recently seen in a Missouri hair salon, where two stylists directly served 139 clients in May before testing positive for Covid-19. 

According to a recent report published by the CDC, both wore either a double-layered cotton or surgical mask, and nearly all clients who were interviewed reported wearing masks the entire time.

After contact tracing and two weeks of follow-up, no Covid-19 symptoms were identified among the 139 clients or their secondary contacts, the report found. Of the 67 who were willing to be tested, all were negative for Covid-19.

According to recent projections from the University of Washington’s Institute for Health Metrics and Evaluation, the Covid-19 death toll in the U.S. would rise to more than 224,000 by Nov. 1. The number is based on expectations that Covid-19 mandates will continue to be eased until rising cases prompt shutdowns again in some places. 

Almost 140,000 people have died from Covid-19 in the country so far, according to data compiled by Johns Hopkins University.

Yet if 95% of the U.S. population began wearing masks, the expected death toll would drop by more than 40,000 cases to about 183,000 people, according to IHME.

Wearing a mask is “one of the most urgent things we can do to get our country under control,” said Melanie Ott, director of the Gladstone Institute of Virology. “We’re all waiting for the vaccine, we’re waiting for therapeutics, and we’re not there.”

“We have masks, we have social distancing, and we have testing,” she continued. “But there’s not much more in the toolbox here.”

The debt toll

The poorest countries may owe less to China than first thought

Still, China lends more than the members of the Paris Club combined




The four-lane, 62-km toll road being built between Masiaka, a business hub in Sierra Leone, and Freetown, the country’s capital, promises shorter journey times, fewer accidents and smoother drives. It is nonetheless controversial.

Awarded to China Railway Seventh Group, the project added over $160m to the country’s foreign debt, according to the China-Africa Research Initiative (cari) at Johns Hopkins University. The work has suffered delays, which the company blames on the pandemic and the need to compensate property owners, reports the Concord Times, a local newspaper. The firm has also complained that some lorries pass by the toll booths, not through them.

Projects like these have mushroomed across Africa and other developing countries in the past 15 years. “It’s no secret...China is by far the largest bilateral creditor to African governments,” said Mike Pompeo, America’s secretary of state, earlier this month, blaming it for creating an unsustainable debt burden.

Plenty else is, however, secret. China does not typically divulge how much it has lent to whom or on what terms. Nor is it a member of the Paris Club of government lenders, which tries to co-ordinate debt forgiveness among its members, making sure that no lender takes advantage of the magnanimity of another.

Many, therefore, have wondered how China would play its part in the debt-relief initiative agreed in April by the g20 group of big economies. That initiative will allow 73 of the world’s poorest countries to delay payments on loans from g20 governments, freeing up resources to fight the pandemic. China, a prominent g20 member, signed up. But would it offer the same terms as the others? And if so, how would they know? Proving China is doing its bit is hard if you do not know how much it has lent.

Recent weeks, however, have yielded a pleasant surprise. To help monitor the g20 initiative, the World Bank told its board it wanted to reveal more data about the government debts of the eligible countries. Though its board is dominated by its bigger shareholders, including China, the bank’s plan faced little resistance. And so after cross-checking its numbers, the bank has now disclosed what eligible governments owe to bondholders, multilateral bodies, private foreign lenders and other governments.

The countries covered by the data owed $104bn between them to China at the end of 2018. The total includes soft loans from China’s government, semi-soft loans from “policy banks”, such as China Development Bank, and profit-seeking loans from state-owned commercial lenders. The same countries owed $106bn to the World Bank and $60bn to bondholders.

The data, say Deborah Brautigam and Yufan Huang of cari, are a “gold mine”. Prior to the release, they had to scour public announcements of loan pledges, cross-checked with reports from Chinese embassies or ministry documents in the borrowing country. Their work fed into a broader set of estimates by Sebastian Horn and Christoph Trebesch of the Kiel Institute for the World Economy and Carmen Reinhart of Harvard University, who in May became the World Bank’s chief economist.

In addition to aiding research, the data should also help the public in developing countries, says David Malpass, the World Bank’s president. Governments—and “this is not unique to developing countries”—sometimes enter into contracts that do not serve the public interest, he points out. Transparency “helps align” these contracts with “the interests of the people”.



The new figures confirm Mr Pompeo’s observation that China is by far the biggest bilateral creditor to Africa, and in many poor countries elsewhere (see chart 1). It accounts for about 20% of the total foreign debt owed by the 73 governments eligible for the g20 initiative (and about 30% of their debt service this year).

That is more than all of the Paris Club lenders, including America, Britain and Japan, combined. But it is also smaller than the estimate of over 25% based on figures from Mr Horn, Ms Reinhart and Mr Trebesch. Indeed their estimates for individual countries often exceed the bank’s by large margins (see chart 2).




What explains the gap between Ms Reinhart’s research and her new employer’s data? Some of it may reflect the difference between announcements and disbursements. Just because China says it will lend money, does not mean the entire sum is paid at once (or ever). B

ut even when Mr Horn, Ms Reinhart and Mr Trebesch look at the bank’s figures on commitments, rather than incurred debt, they find some loans missing, suggesting incomplete data.

Another reason for the gap may be that the bank excludes some debt owed by state-owned enterprises and special-purpose vehicles but not guaranteed by the government. In other contexts the bank does consider scenarios in which state-owned firms fail or public-private partnerships sour, requiring the government to step in. Counting these as public debt brings the bank’s estimates closer to the Horn-Reinhart-Trebesch figures.

Such thought experiments could sometimes stretch the definition of public debt, though. The financing raised for Sierra Leone’s controversial toll road, for example, is supposed to be repaid from toll, not tax, revenues. It would only burden the government if those tolls fell short. The World Bank does not seem to count it as government debt—but it is included by cari.

The bank’s figures for Chinese lending are not always below outside estimates. For Burkina Faso, the Central African Republic and Liberia they are much higher. This, reckons Ms Brautigam, is because they include loans from Taiwan.

China’s critics, including Mr Pompeo, may suspect that its true lending is higher than the bank suggests. But even they would not want to chalk up to the People’s Republic what is properly owed to Taiwan.

The Fed's Death Blow to Private Savings

by David Stockman



International Man: People have been warning of impending fiscal and monetary doom for a long time.

What is different now that will finally usher in the day of reckoning?

David Stockman: It is self-evident that the solution to a state-imposed supply-side shutdown of the economy is not more counterfeit money, erroneous price signals, inducements to rampant speculation and moral hazards, and further zombification of the main street economy.

Once upon a time, even Washington politicians feared large, chronic public debt, and not merely because they were especially intelligent or virtuous. We learned that in real time during 1981, when the deficit hawks among the GOP Senate college of cardinals nearly shut down the Gipper’s supply-side tax cuts out of fear of mushrooming deficits.

To be sure, these dudes didn’t know Maynard Keynes from Emanuel Kant, but they did know that Uncle Sam has exceedingly sharp elbows and that when he becomes too dominant in the contest for funds in the bond pits, private households and business borrowers get bloodied and crowded out.

That is to say, in the days before massive central bank monetization of the debt, there was a natural counter-balancing constituency in the equations of fiscal politics. We heard from them, too, in our congressional days when the car dealers, feed mill operators, tool and die shops, building contractors, restauranteurs and countless more main street businessmen of the Fourth Congressional District of Michigan let it be known loud and clear that Jimmy Carter’s big deficits were doing unwelcome harm to their bottom lines.

Nor was there any mystery as to why. Aside from the short-term expedient of foreign capital inflows that come at a heavy long-term price (chronic trade deficits and offshoring of production and jobs), the only honest source of funding for government deficits is private savings.

And when the latter—defined as household savings and retained corporate profits in the GDP accounts—are meager to begin with, an eruption of government borrowing squeezes out private investment completely, while raising the carrying cost of all existing floating-rate debt.

As it happened, by 1981, the US was already slouching toward the Big Squeeze of too little national savings and too much government borrowing. At an annualized run rate in Q2 1981, for instance, net private savings totaled $378 billion compared to net federal "dis-savings" (viz deficits) of $87 billion.

Thus, Uncle Sam was already absorbing 24% of savings, which would otherwise be available for investment in private sector growth.

The rest is history with a few twists along the way. As it happened, during the 1990s, the last generation of fiscal hawks in Washington got its revenge against the foolish abstractions of the Laffer curve and the bogus claim that you can grow your way out of large structural deficits.

On two occasions, therefore, first when George Bush the Elder moved his lips and signed a bipartisan deficit-reduction bill that included both spending cuts and tax increases and then when Bill Clinton did the same two years later, the Reagan structural deficits were substantially closed.

On top of that came two more fiscal windfalls. The first was a temporary fall in defense spending owing to the Soviet Union’s disappearing into the dustbin of history long before John Bolton and the rest of the neocon warmongers found a new enemy in Saddam Hussein and the basis for the massive defense buildup needed to conduct wars of invasion and occupation.

At the same time, Greenspan’s first round of madcap money printing, which generated a huge windfall of capital gains revenues in the late 1990s, touched off a tech-based stock market boom. So, there were three consecutive budget surpluses at the turn of the century, and that did mightily, albeit temporarily, relieve the "crowding out" effect of large government deficits.

During Q4 2000, for instance, private savings posted at a $458 billion annual rate, and that was accompanied by an actual $150 billion federal surplus.

At the time, so-called advanced thinkers in Washington, like Alan Greenspan, even began gumming about the possibility that the federal debt would be fully paid off in about 10 years’ time.

And then the Fed would have allegedly found itself unable to conduct monetary policy. Heaven forfend, there would have been no government paper available to monetize via purchases from Wall Street dealers paid for with digital credits plucked from thin air!

A high-class problem, that, but it is not one which remotely materialized. The next round of Greenspan money pumping blew up the housing and credit markets, even as two unfinanced GOP tax cuts and two unfinanced wars brought back the Reagan deficits with a vengeance.

Thus, by the eve of the financial collapse in Q4 2007, private savings stood at $618 billion (annualized rate) while the structural deficit (it was not cyclical because the economy was then at practical full employment) had ballooned to $324 billion.

Uncle Sam, therefore, was now absorbing 52% of net private savings.

Needless to say, it only got worse from there, with government dis-savings reaching a $1.37 trillion annual rate at the bottom of the Great Recession in Q1 2010, which amounted to fully 95% of private savings of $1.44 trillion.

Thereafter, of course, the macro-economy experienced a simulacrum of recovery. By Q4 2013, the cyclical elements of the deficit had been reduced modestly, causing annualized borrowing to fall to $531 billion or 38% of net private savings of $1.39 trillion.

But under even the primitive Keynesian theories of the 1960s, the deficit was supposed to keep shrinking from there through the top of the business cycle, if for no other reason than to reload for the next downturn.

That didn’t happen, of course, because the Congressional GOP commenced a new fiscal game with the Obama White House and the Capitol Hill Dems. To wit, the Dems were relieved of any demands for serious entitlement cuts, and both sides got goodly increases in annual discretionary appropriations for defense, domestic pork and welfare, alike.

Accordingly, the deficit widened to $707 billion by Q4 2016, representing nearly 50% of net private savings of $1.48 trillion.

And then today’s fiscal calamity really incepted. Along came along the king of debt, who made a mockery of the traditional notion that late in the business cycle is the time for fiscal consolidation.

Indeed, the "fix it in the good times" mantra with which Fed Chairman Powell so hypocritically importuned his congressional interlocutors during his recent testimony was literally shit-canned by the Donald’s born-again Lafferite advisors.

Mnuchin, Kudlow and the rest told him, incongruously, that the economy would grow its way out of the gratuitous $1.7 trillion late-cycle tax cut of 2017 and the giant defense increases that have been added since.

Alas, as the business expansion approached its record 128th month during Q1 2020, did Powell and his merry band of money printers pound the table on behalf of the above advice?

They did not.

In fact, when the surging federal deficit hit an annualized rate of $1.225 trillion in Q3 2019, it was now absorbing 68% of private savings. And this was at the very time that the Fed was completing its half-hearted attempt to normalize its balance sheet, having reduced it from a $4.5 trillion peak in 2015 to $3.75 trillion by August 2019.

But that’s all she wrote. After relentless attacks by the low-interest man in the Oval Office and an interest rate uprising in the repo pits in September when the old crowding out equation came back into play, the Fed returned to bond buying with a vengeance, thereby preventing honest price discovery from rearing its head one final time.

Of course, even the practical Keynesians of the 1960s and 1970s had a reason for the idea that the fiscal equation should be put in some semblance of order at the top of the business cycle. Namely, the possibility that an unexpected economic or fiscal dislocation from war or pestilence could erupt, thereby leaving policy makers in an especially unpleasant bind.

Alas, then came COVID-19, the horrible malpractice plot of the Donald’s doctors and the folly of Lockdown Nation, as eagerly implemented by his Dem opponents in mayors’ and governors’ offices of blue-state America.

So, on the eve of a plunge that is likely to be recorded as a thunderous 40% shrinkage of GDP in the current quarter, the Donald and his GOP henchman had maneuvered the federal fiscal equation into a very not "good place," to use the specious expressions of Powell himself.

During Q1 and 128 months into the longest expansion cycle in US history, the federal deficit posted at a $1.344 trillion annual rate or 72% of net private savings of $1.875 trillion.

Viewed through the lens of subtraction, that meant there was only $500 billion of net private savings left to accommodate a federal deficit that has now mushroomed by an additional $2.7 trillion from its Q1 run rate.

So, it is no wonder that the panicked money printers in the Eccles Building threw caution and sanity to the wind by printing $2.86 trillion of new credit during the last 90 days.

Having fostered $78 trillion of public and private debt over the last three decades due to relentless interest rate repression and falsification of financial asset prices, the fools in the Eccles Building dare not let interest rates normalize or reflect the true state of supply and demand for private savings.

They have essentially green-lighted a final burst of fiscal mayhem in the months ahead via the expedient of monetizing any and all US Treasury borrowings.

Still, the long-delayed reckoning beckons. The federal budget deficit will equal 19% of the GDP this year and remain well above 10% of the GDP for years to come. Yet, even at 5% of the GDP run rate of the federal deficit in Q1 2020, there was no room left in the inn.

That is to say, net national savings, which represents private savings less the government deficit, has been reduced from 10% of GDP during America’s salad days of growth and middle-class prosperity in the 1950s and 1960s to just 1.4% of GDP today.

That is, after a 50-year trek to the rock-bottom, there wasn’t remotely any headroom to absorb the Donald’s insane double-digit deficits.

So the Fed will, apparently, just keep desperately printing fiat credit, hoping to prevent a bond market implosion.

Stated differently, the Eccles Building has become a financial doomsday machine—even as the fools domiciled there feverishly pray to JM Keynes himself for a miracle.