The City on a Hill Besieged

The storming of the US Capitol by a mob egged on by President Donald Trump was a violent bid to disrupt the world's oldest democracy. But while it made for a truly dark day in US history, it need not become a defining day.

Ana Palacio



MADRID – In 1940, with Europe gripped by a war from which the United States remained aloof, US President Franklin Delano Roosevelt declared that the country needed to be “the great arsenal of democracy.” 

He meant it literally: he was appealing to Americans to “put every ounce of effort” into producing arms for European democracies, especially the United Kingdom, in their fight against fascism. 

But his words also carried powerful symbolic significance, positioning the US as the world’s leading democratic bulwark.

Fortunately, Joe Biden will assume the US presidency on January 20. 

But, as the shocking events of January 6 showed, it will take more than one person – and more than one presidential term – to overcome America’s longstanding challenges. 

On January 6, that stronghold was breached by a mob of Donald Trump’s supporters. 

Egged on by the president himself, they stormed the US Capitol, desecrating one of the greatest monuments to democracy, and forced Congress to halt the vote to certify President-elect Joe Biden’s Electoral College victory. 

It was the clearest manifestation yet of the malignancy of Trump’s presidency – and the threat its legacy poses to the American democratic experiment.

That experiment’s success has, historically, been based on three qualities, which Alexis de Tocqueville identified some 185 years ago: the vibrancy of its society, its citizens’ trust in and respect for institutions, and a forward-looking perspective that encouraged risk-taking and innovation. 

These qualities were lacking in Europe, which was weighed down by long and fraught history.

The erosion of these pillars of American democracy has been discussed extensively and often, especially since Trump’s election in 2016, to the point that all the attention devoted to it could sometimes seem excessive, even trite. 

But the events of January 6 show just how weak those pillars have become – jeopardizing the entire edifice.

In recent years, a steady stream of lies and misinformation has divided and dulled American society, and weakened respect for institutions. Under Trump, these trends went into overdrive. 

Unlike his predecessors, Trump never sought to inspire hope. Instead, he stoked and exploited people’s frustration and anger (partly driven by legitimate grievances).

With his famous slogan, “Make America Great Again,” Trump conjured a vision of a future that looked much like the past.

By labeling all criticism “fake news” and lying about voter fraud in the recent election, he decimated trust in US institutions, setting the stage for civil unrest.

Today, a stable democracy has become a chaotic and conflicted one, with a significant minority convinced of their exclusive right to govern. 

Members of this group claim to be “patriots” reclaiming a corrupted system. 

As they smashed the Capitol building’s windows, defaced offices, and stole property, they cried, “This is our house.”

But their actions were anything but patriotic. 

They certainly do not represent the forward-looking perspective that has long defined the American spirit. 

The waving of American flags sullied with pro-Trump messages (a violation of America’s “respect for flag” code) and even Confederate flags make that painfully clear.

In reality, the insurgents were seeking to prevent their duly elected representatives from doing their jobs. 

This was not “democracy at work.” 

It was a violent bid to disrupt the world’s oldest democratic republic. 

And it made for a truly dark day in US history. But it need not become a defining day.

After the Capitol was cleared and the mob dispersed, Congress reconvened to resume the certification process. 

When Senate Minority Leader Chuck Schumer took the floor, he recalled FDR’s description of December 7, 1941 – when Japan attacked Pearl Harbor – as a day that would “live in infamy,” adding that, “we can now add January 6, 2021.”

But Pearl Harbor didn’t break the US. 

On the contrary, it galvanized the country, spurring it to engage directly in WWII. 

“No matter how long it may take us to overcome this premeditated invasion,” FDR declared, “the American people in their righteous might will win through to absolute victory.”

The insurrection at the Capitol could be another such galvanizing moment. 

Leaders can no longer ignore the costs and risks of short-term thinking and political cynicism. 

On behalf of – and alongside – the American people, they must protect and fortify democratic institutions from subversive figures like Trump. 

As president, Biden, like FDR, must issue that call and lead the charge.

The US remains a great country – and I don’t mean by Trump’s definition. 

It is rich in ingenuity and admirably resilient. And its society remains committed to progress – and willing to fight for it. 

The latest sign of that came the day before Trump’s failed putsch, with the victory in runoff Senate elections in Georgia – a traditionally conservative state – of two Democrats, Raphael Warnock, an African-American pastor, and Jon Ossoff, a Jew, over Republican incumbents who sought to discredit Biden’s victory.

Restoring faith in democratic institutions must be among Biden’s top priorities, and not only for the sake of the US. Countries worldwide still need the US to act as an arsenal of democracy and a source of inspiration and guidance. 

If Biden embraces that cause, the disgraceful assault on the Capitol could be remembered as a turning point for democracy, rather than a harbinger of its terminal decline.


Ana Palacio, a former minister of foreign affairs of Spain and former senior vice president and general counsel of the World Bank Group, is a visiting lecturer at Georgetown University. 

The Dollar’s Decline in Global Reserves: Fact or Fiction?

Greenback’s share of foreign-exchange reserves has slipped, but there are reasons to believe it will bounce back

By Mike Bird

The real dollar exposure of major central banks is likely higher than it looks. / PHOTO: GARY CAMERON/REUTERS


In the third quarter of 2020, the dollar’s share of global foreign-exchange reserves slipped to its lowest level in almost a quarter of a century. ´

But don’t let the figures fool you: The greenback is as central to the global financial system as it has ever been.

International Monetary Fund data shows the dollar’s share of reported reserves fell to 60.5% in September. 

The drop has been magnified in nominal terms due to the currency’s depreciation over the past year. 

But even accounting for that, the real dollar exposure of major central banks is likely higher than it looks.

What’s more, that exposure likely rose again in the fourth quarter.


After adjusting for currency-market movements, Goldman Sachs notes that dollar holdings actually rose more than euro, Japanese yen, Chinese yuan or British pound holdings in the third quarter.

At 5.9% of global reserves, the share of the yen is high compared with recent decades. But that increase actually disguises dollar demand. 

Many large yen holders are trying to acquire more dollars through currency swaps. 

That popular trade has led to a surge in foreign purchases of short-term Japanese government bonds.


Most central banks don’t break down their holdings in depth, but the unusually transparent Reserve Bank of Australia does. 

It held around $6.8 billion in U.S. dollar-denominated securities as of June, an amount that almost triples when its derivatives exposure is taken into account. 

Its roughly $3.7 billion in yen reserves is cut in half after the same calculus.

Asian central banks were also vacuuming up foreign exchange in the fourth quarter of 2020. 

China’s and South Korea’s reserves rose at the fastest rate in seven and 10 years, respectively. 

Taiwan’s rose at the fastest rate on record in November—and then again in December.

We don’t know exactly how much of that is dollar-denominated, but the greenback will probably be well represented. 

The increase in purchases is likely meant to counteract a rally in their currencies, primarily against the dollar. 

Research by Exante Data shows central banks were already purchasing more dollars than other currencies as the year came to a close.

Narratives suggesting the dollar declined in importance last year after the Federal Reserve’s actions in February and March played the central role in preventing global financial meltdown are suspect. 

The dollar’s share in reserves is likely to recover to reflect that reality.

Short-Term Unsustainable 

Doug Nolan



Outstanding Treasury Securities began 2008 at $6.051 TN, or 41% of GDP. 

Treasuries ended 2019 at $19.019 TN, or 87% of GDP. 

And then, in only three quarters, Treasuries surged another $3.882 TN to $22.900 TN, or 108% of GDP. 

We must wait a few weeks for the Fed’s Q4’s Z.1 report, but the federal government posted a fiscal deficit of $573 billion during this period, likely pushing outstanding Treasuries to near $23.5 TN, or about 110% of GDP. 

Since the end of 2007, Treasuries have inflated around $17.5 TN – approaching a three-fold increase.

For years now, I’ve listened as Washington politicians and central bankers admit to the obvious – that the trajectory of our federal debt is unsustainable – while invariably arguing it was not the time to be concerned or address it. 

With Treasuries blowing right through the 100% of GDP milepost – and likely poised to reach 125% within the next year or two – there’s no time like the present to recognize our nation is in serious fiscal trouble.

Senator John Thune (from Yellen’s confirmation hearing): 

“I’m going to try and roll a lot of thoughts and questions into sort of one big package here. 

But the one thing that concerns me that nobody seems to be talking about anymore is the massive amount of debt that we continue to rack up as a nation. 

And, in fact, the President elect has proposed a couple trillion dollar fiscal plan on top of that which we’ve already done - which would add somewhere on the order of about $5.3 trillion to deficits and that’s according to the committee for responsible budget of which you have been a board member.

That’s 25% of GDP, and it would move the additional debt above 100% debt to GDP - which is a category that we haven’t been in literally since the 1940s. 

And, so, what I’m concerned about is we seem to have no concern now about borrowing money in the short-term, and the argument is that interest rates are low. It’s like free money. 

It’s not. It has to be paid back.

And at some point, the risk/return ratio, that people who are lending us money are going to say, is not sufficient for the risk, and they’re going to demand a higher interest rate. 

That will happen at some point. Interest rates will start to normalize, and we have to refinance at a higher interest rate. And pretty soon the interest on the debt exceeds what we spend on even national security for our country.

Republicans traditionally have believed that we ought to reduce spending, we need to reform entitlement programs, that we need to have policies in place that create greater growth in the economy. All of which make the debt look smaller by comparison. Democrats have argued we need more revenue, more taxes…

But I just want to know what you think. Because I know in the past you’ve expressed concerns about the debt and the deficit. 

The two previous administrations have not been very interested in entitlement reform. We have not only the debt that we’re adding in the short-term because of the pandemic, but we have structural problems that are long-term that are going to continue to drive that debt higher in the future.

What your thoughts are with respect to reforming entitlements? 

With respect to the amount of the debt situation that we find ourselves in right now? And when is it enough? When is it too much? 

When do we hit that point where the thing starts to collapse? 

That’s what really concerns me. 

And nobody is talking about it really in either party anymore. It was something that used to occupy a lot of our discussions in the past, but nobody seems to care much about it.

And, for me, that is a huge warning sign on the horizon. The fact that we have an ever-growing deficit, an ever-growing debt and no apparent interest in taking the steps that are necessary to address it.”

Janet Yellen: 

“Senator, I agree with you that it’s essential that we put the federal budget on a path that’s sustainable. 

And that we’re responsible and make sure that what we do with respect to deficits and debt leave future generations better off. 

But the most important thing, in my view, that we can do today to put us on a path of fiscal sustainability is to defeat the pandemic, to provide relief to American people. 

And then to make long-term investments that will help the economy grow and benefit future generations.

To avoid doing what we need to do now to address the pandemic and the economic damage that it’s causing would likely leave us in a worse place fiscally and with respect to our debt situation than taking the steps that are necessary and doing that through deficit finance. 

We really have to worry about scarring due to this pandemic, of workers and the loss of small businesses that can really harm the long-run potential productivity of our economy and leave us with long run problems that would make it difficult to get back on the growth path that we were on.

And it’s really critically important to provide this relief now. And I believe it would be a false economy to stint. 

But over the longer term, I would agree with you that the long-term fiscal trajectory is a cause for concern. 

It’s something we will eventually need to attend to, but it’s also important for America to invest and invest in our infrastructure, invest in our workers, invest in R&D. 

The things that make our economy grow faster and make it more competitive and it’s important to remember that we’re in a very low interest rate environment. And that’s something that existed before the pandemic hit: interest rates were low even before the financial crisis of 2008. 

This has been a trend in developed economies, you can see it across the developed world, and it represents structural shifts that are likely to be with us a long time.

So, although the debt to GDP ratio has increased, it’s important to note that the interest burden of the debt - interest as a share of GDP - is no higher now than it was before the financial crisis in 2008 in spite of the fact that our debt has escalated. 

And, of course, interest rates can increase. Eventually we have to make sure that primary deficits in the budget are sufficiently small - that were on a sustainable path. But right now, our challenge is to get America back to work and to defeat the pandemic.”

The new administration’s view that Washington needs to be “on war footing” to win the battle over a once-in-a-century pandemic is understandable. 

The unemployment rate is currently 6.7%, businesses are failing, and there is even serious food insecurity in the U.S. For some perspective, the unemployment rate averaged 6.5% during the 20-year period 1980 to 1999. 

This has been a terrible human tragedy, though there is light at the end of the tunnel. 

Millions of individuals and businesses are suffering mightily for no fault of their own. 

It’s terribly unfair, it sickens us, and as a nation we want to do what we can to rectify this injustice. Meanwhile, we are on trajectories that ensure a future crisis will see an even greater percentage of our population suffering mightily for no fault of their own. 

Dismissive talk of an unsustainable long-term debt trajectory disregards myriad frightening short-term trajectories – Fed assets, federal debt, system Credit, “money” supply, stock prices, option trading volume, etc.

The pandemic is not close to my greatest worry. 

These days I have greater fear for the runaway Credit Bubble. 

I worry about the mania that has enveloped the stock market. I fear consequences of a historic debt crisis in already contentious social and geopolitical backdrops.

February 2, 2012 – Politico (Josh Boak): 

“Federal Reserve Chairman Ben Bernanke told a congressional panel Thursday that shrinking the deficit ‘should be a top priority,’ saying that spending projections over the next decade are ‘clearly unsustainable.’ 

Stressing that the budgetary threat did not emerge from the past three years alone of $1 trillion-plus budget deficits — with a fourth expected for 2012 — meant to ease the recession and aid the recovery, Bernanke warned the debt could explode over the next 20 to 30 years to levels that could paralyze the economy. 

The government faces an aging population, fast-rising health care costs, and a failure to close the gap between taxes and spending.”

Between Bernanke’s 2012 “clearly unsustainable” comment and the end of his chairmanship in early 2014, the Fed expanded its balance sheet by over $1TN. 

The Yellen Fed added another $1 TN in 2014 – to $4.47 TN – fateful monetization in a non-crisis environment. Importantly, the Fed and global central bankers fundamentally altered market function. 

Treasury yields, for example, became divorced from expanding federal deficits. 

The Federal Reserve essentially granted Congress a blank checkbook, and the world will never be the same.

A critical issue gets zero attention these days: The pandemic struck as our nation – much of the world – was at a dangerous late-stage in a historic Bubble. 

We could not have been more poorly positioned. 

Washington will add in the neighborhood of $6 TN of debt over a couple years – part pandemic but much in response to Bubble Economy structural fragility. The Fed will expand its balance sheet upwards of $5 TN in a two-year period - part pandemic but more to sustain an increasingly erratic financial bubble. 

Egregious Monetary Inflation ensures Financial Bubble and Bubble Economy fragilities grow only more acute.

We’re in the throes of the greatest monetary inflation in U.S. history. 

Things have come home to roost – we just haven’t realized it yet. 

Fed liquidity is masking deep structural impairment, while Trillions necessary to stabilize a fragile Bubble Economy only push the runaway financial Bubble to more precarious extremes. 

Traditionally, it was Federal Reserve doctrine to “lean against the wind” to at least ensure monetary policy was not exacerbating excess. 

The Fed some years back proclaimed it would not use rate policy to contain asset inflation and bubbles, choosing instead so-called macro-prudential measures. 

So how is our central bank reacting these days to such conspicuous excess: Well, it’s radio silence as they continue to pump $120bn of new liquidity monthly.

For too many years the Fed was content to disregard asset inflation and bubble dynamics. 

The fixation on tepid consumer price inflation has lacked credibility. 

The reemergence of “global savings glut” nonsense has been pathetic “analysis,” especially as unparalleled speculative leverage ballooned around the globe. 

The Fed was determined to sit back and keep financial conditions ultra-loose year after year, as if this would not promote historic debt growth, speculative excess and structural impairment.

Comments from Yellen and others suggest that low rates conveniently push potential issues far out into the future. 

Yet the problem is here and now; it’s acute – and the coronavirus is not the most pressing problem. 

The stock market mania is raging out of control. Debt growth is spiraling out of control. 

The Fed and global central banks are trapped in desperate inflationism. 

The Fed is poised to expand its balance sheet – add liquidity – to the tune of $1.5 TN this year with no regard for rampant asset price inflation and Bubbles. 

The trajectory of too many key metrics has gone parabolic, ensuring tremendous systemic damage is inflicted in a short period of time. And now the new administration has control of the blank checkbook and is determined to us it.

A day trader's mentality has taken over our nation. There’s no long-term thinking or planning; everything is short-term focused. 

Ultra-loose financial conditions are supporting economic recovery. 

And while there are superficial short-term benefits, the costs to longer-term system stability are momentous. 

Washington is gambling with our nation’s future.

We’re witnessing today the consequence of the Fed and Washington’s disregard for asset inflation and Bubbles. 

At this point, aggressive stimulus is self-defeating. Zero rates stoke speculative excess in equities and corporate Credit. 

QE feeds liquidity into market Bubbles. 

Massive fiscal deficits inflate corporate earnings (and traders’ on-line accounts), while becoming instrumental to the bullish narrative and mania. 

I wish the Biden administration nothing but success. 

I hope Yellen is right, because the next four years are critical for our nation. 

Our government today confronts major crises – the pandemic, unemployment, inequality, divisiveness and social instability, global competitiveness, climate change, mounting geopolitical risk and more. 

They have an aggressive agenda, and I would expect nothing less. 

And I don’t fault the administration for believing they will operate free of fiscal constraints. 

I just can’t get over my fear that Washington is exacerbating the greatest risk to our nation’s future. 

M2 “money” supply has inflated a shocking $4.0 TN in 46 weeks – or 32% annualized. 

We’re witnessing the greatest monetary inflation the country has ever suffered – with nary a protest. 

The Credit Bubble is inflating the fastest ever. 

Arguably, stock market speculation is the most precarious since 1929. 

We’re witnessing the greatest redistribution of wealth in our nation’s history.

And when this Bubble eventually bursts, we’ll confront the terrible reality that the greatest expansion of non-productive debt ever fueled history’s greatest destruction of wealth. 

Yellen: “The smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs.”

I hate being this pessimistic. 

But in no way do the long-term benefits of massive deficit spending today outweigh the cost. 

Current market and economic structures ensure resources are poorly utilized. 

The securities markets are today a powerful mechanism for resource misallocation and wealth-destruction. 

And I see Trillions of deficit spending generating limited sustainable economic benefit. 

Meanwhile, “acting big” will further fuel “Terminal Phase” excess, with terrible long-term consequences.

Yellen: 

“Well before COVID-19 infected a single American, we were living in a K-shaped economy, one where wealth built upon wealth while working families fell farther and farther behind.”

This “K-shape” is fundamental to Bubble Economy structure and a key manifestation of inflationism and resulting Monetary Disorder. 

As we’ve witnessed now for going on 10 months, throwing massive stimulus at the current structure exacerbates both Bubble excess and inequality.”

Yellen: 

“The world has changed. In a very low interest-rate environment like we’re in, what we’re seeing is that even though the amount of debt relative to the economy has gone up, the interest burden hasn’t.”

History will not be kind. 

A $3 TN plus annual deficit in the past would have been recognized as foolhardy if not negligent. 

It’s playing with fire. 

Washington has pushed things much too far – the most extreme debt growth and the most extreme Federal Reserve debt monetization. 

We’re witnessing an unprecedented late-cycle runaway expansion of risky non-productive debt – too much of it held by leveraged speculators. 

Market backlash is inevitable and overdue. 

I just don’t see market forces remaining inoperative indefinitely - supply and demand will matter again. 

The quantity and quality of system credit will prove momentously important.

Bloomberg: 

“‘The most important thing we can do is to defeat the pandemic, to provide relief to American people and to make long-term investments that make the economy grow and benefit future generations,’ said Yellen… Failure to address the crisis now ‘would likely leave us in a worse place fiscally,’ she said.”

The most important thing for our nation is to see a return to some semblance of fiscal and monetary sanity. 

I’m all for sound long-term investment, something our nation desperately needs. 

I’m not sure what we have to show for the $17 TN of Treasury debt accumulated since the last crisis. 

And it’s inexcusable that we came into the pandemic in such a fragile position – fiscally and in terms of the financial Bubble. 

My biggest fear is materializing. 

When this historic Bubble bursts, a major crisis will unfold with our nation’s finances in complete shambles. 

The Fed’s “money printing” operation has gone parabolic as it desperately attempts to sustain an unsustainable Bubble. 

Treasury debt growth has gone parabolic as Washington tries to sustain an unsustainable economic structure. 

The system is on a trajectory that ensures a crisis of confidence – and I don’t see this as some long-term concern. 

This is an issue of short-term unsustainability. 

Washington has employed massive fiscal and monetary stimulus despite ultra-loose financial conditions and booming markets. 

The big crisis commences – the unsustainable is no longer sustained - when financial conditions tighten and the financial Bubble bursts. 

The time for “acting big” is in a post-Bubble backdrop and definitely not while the Bubble is inflating madly.

A blueprint for America’s economic recovery

Here’s how the next US president — hopefully Joe Biden — could fix things

Rana Foroohar 

   © Matt Kenyon


If America is lucky, within a few days, we will have elected Joe Biden as president. 

If Donald Trump goes, I suspect the majority of the country will breathe a sign of relief, literally. 

Whether or not one agrees with the president’s policies, his divisiveness and vitriol are among the reasons that researchers have found correlations between Mr Trump’s spell in power and things like rising anxiety levels, cardiovascular problems and even preterm pregnancies (especially among Latinas) in the US.

There couldn’t be a better time for the “caring economy” that Mr Biden has advocated. Politics under the current administration are literally killing us.

I say this as a Democrat, but also as someone who believes that this administration did one thing right — it exposed the fact that neoliberalism, characterised by the laissez-faire model of economic development, is dead.

For the past four decades, under both Republican and Democratic administrations, America has bought wholesale into the idea that as long as capital, goods and labour could travel unimpeded across the globe, everyone would benefit. 

This philosophy has failed, putting liberal democracy itself in jeopardy.

Neoliberal policies, including financial deregulation and trade deals that looked good on paper but didn’t take into account the human cost, decreased inequality at a global level. But they also created huge pockets of economic and social pain in many countries. 

That pain resulted in the politics that we have today. Capital travelled freely, all right — the world’s financial assets are now more than three times larger than the real economy. Goods were relatively mobile. 

But most people, and jobs, were not. The problem for policymakers is that people vote.



We can no longer deny the fact that the fortunes of multinational companies and those of workers do not rise in tandem. 

Markets are not perfectly efficient. Politics and people matter. 

The world is a messy place and it is becoming more complicated, as the US, Europe and China become separately orienting poles for different countries, each with separate political economies.

China isn’t going to become more like America, particularly in the wake of the 2008 financial crisis and Mr Trump’s disastrous handling of Covid-19, which is as good an advertisement for autocracy as the Communist party itself could come up with.

Indeed, economic figures never really indicated that it would. According to Gavekal Research, the state sector has been roughly stable as a percentage of the economy in China (between 25 and 28 per cent) for the past two decades. 

Rhetoric about privatisation and liberalisation rises and falls, but the Chinese have a system that will remain firmly controlled by the party, and be run in the interests of their country, which is now a producing and consuming nation to rival the US. 

The “one world, two systems” problem will be with us for a long time to come.

What should the next US president do to respond to all these changes and challenges? 

Certainly not engage in an ill-advised and poorly designed trade war coupled with corporate tax cuts. As economist Paul Krugman lays out, the result has actually been an increase in trade deficits. 

Not only could corporations continue to play the capital shell game and move money around the world rather than investing it in the US, but policymakers failed to think through how tariffs themselves might work in the current economic paradigm. 

No company is going to suddenly build a bunch of factories in the US if they don’t believe in the fundamental growth prospects and stability of the nation. And they don’t need to, because most new businesses in the digital age don’t require that kind of investment.

What the US needs is not a blame game with China. It is serious work at home. If elected, Mr Biden should be frank with the American people and say what we already know in our gut to be true. 

Education has not kept pace with technology, a key reason productivity and growth has lagged behind. 

The US healthcare system is costly and inefficient. Roads, bridges and broadband systems need upgrading. Mr Biden’s multitrillion-dollar plan to invest in all of this is smart, because it would increase the value of human capital — the key resource of the 21st century economy. 

Companies should be able to depreciate investment in people as well as machines, as they do now.

Republicans will hypocritically try to scupper this by claiming that debt matters. For decades now, they’ve cut taxes but not budgets. They have tolerated high deficits when the GOP controls the White House. 

Ultimately, debt does matter. But the only thing that will reduce US debt levels is a combination of private austerity (already happening at the consumer level) and gross domestic product growth.

Why America's next housing crisis threatens Trump's re-election

A trickle-down, neoliberal asset bubble fuelled by easy monetary policy will not create that. We need a productive bubble, encouraged by federal underwriting of basic research in high growth technologies such as clean energy, quantum computing and artificial intelligence. 

We also need strong antitrust enforcement to make sure the Big Tech groups don’t monopolise these key sectors. That would seed subsequent investment by the private sector.

This is basically the Biden plan, and it’s a no-brainer. The question for the US, and ultimately the world, is whether Democrats will have a chance to implement it.

 A Fragile Recovery in 2021

Although 2020 ended with a flurry of announcements reporting promising results in COVID-19 vaccine trials, there is little reason to expect a robust economic recovery anytime soon. Defeating the virus remains a monumental task, and the wounds inflicted by the pandemic will not heal easily.

Nouriel Roubini


NEW YORK – By the end of 2020, financial markets – mostly in the United States – had reached new highs, owing to hopes that an imminent COVID-19 vaccine would create the conditions for a rapid V-shaped recovery. 

And with major central banks across the advanced economies maintaining ultra-low policy rates and unconventional monetary and credit policies, stocks and bonds have been given a further boost.

But these trends have widened the gap between Wall Street and Main Street, reflecting a K-shaped recovery in the real economy. Those with stable white-collar incomes who can work from home and draw from existing financial reserves are doing well; those who are unemployed or partly employed in precarious low-wage jobs are faring poorly. 

The pandemic is thus sowing the seeds for more social unrest in 2021.

In the years leading up to the COVID-19 crisis, 84 of stock-market wealth in the US was held by 10% of shareholders (and 51% by the top 1%), whereas the bottom 50% held barely any stock at all. 

The top 50 billionaires in the US were wealthier than the bottom 50% of the population (a cohort of about 165 million people). COVID-19 has accelerated this concentration of wealth, because what’s bad for Main Street is good for Wall Street. 

By shedding good salaried jobs and then re-hiring workers on a freelance, part-time, or hourly basis, businesses can boost their profits and stock price; these trends will accelerate over time with the wider application of artificial intelligence and machine learning (AI/ML) and other labor-replacing, capital-intensive, skill-biased technologies.

As for emerging markets and developing countries, COVID-19 has triggered not merely a recession, but what the World Bank calls a “pandemic depression,” leaving more than 100 million people back on the verge of extreme poverty (less than $2 dollars per day).

After going into free fall in the first half of 2020, the world economy started to undergo a V-shaped recovery in the third quarter, but only because many economies were reopened too soon. 

By the fourth quarter, much of Europe and the United Kingdom were heading into a W-shaped double-dip recession following the resumption of draconian lockdowns. 

And even in the US, where there is less political appetite for new pandemic restrictions, 7.4% growth in the third quarter is likely to be followed by growth of 0.5% at best in the last quarter of 2020 and in the first quarter of 2021 – a mediocre U-shaped recovery.

Renewed risk aversion among American households has translated into reduced spending – and thus less hiring, production, and capital expenditures. 

And high debts in the corporate sector and across many households imply more deleveraging, which will reduce spending, and more defaults, which will produce a credit crunch as a surge in non-performing loans swamps banks’ balance sheets.

Globally, private and public debt has risen from 320% of GDP in 2019 to a staggering 365% of GDP at the end of 2020. So far, easy-money policies have prevented a wave of defaults by firms, households, financial institutions, sovereigns, and entire countries, but these measures eventually will lead to higher inflation as a result of demographic aging and negative supply shocks stemming from the Sino-American decoupling.

Whether major economies experience a W- or a U-shaped recovery, there will be lasting scars. The reduction in capital expenditures will reduce potential output for good, and workers who experience long bouts of joblessness or underemployment will be less employable in the future. 

These conditions will then feed into a political backlash by the new “precariat,” potentially undermining trade, migration, globalization, and liberal democracy even further.

COVID-19 vaccines will not ameliorate these forms of misery, even if they can be quickly and equitably administered to the world’s 7.7 billion people. But we shouldn’t bet on that, given the logistical demands (including cold storage) and the rise of “vaccine nationalism” and disinformation-fueled vaccine fears among the public. 

Moreover, the announcements that leading vaccines are over 90% effective have been based on preliminary, incomplete data. According to scientists I have consulted, we will be lucky if the first generation of COVID-19 vaccines is even 50% effective, as is the case with the annual flu shots. Indeed, serious scientists are expressing skepticism about the claims of 90% effectiveness.

Worse, there is also a risk that in late 2021, COVID-19 cases will spike again as “vaccinated” people (who may still be contagious and not truly immune) start engaging in risky behaviors like crowded indoor gatherings without masks. 

In any case, if Pfizer’s vaccine is supposed to be the key to our salvation, why did its CEO dump millions of dollars of stock on the same day that his company announced its breakthrough test results?

Finally, there is the great political event of 2020: Joe Biden’s election to the US presidency. 

Unfortunately, this will not make much of a difference for the economy, because obstruction by congressional Republicans will prevent the US from implementing the kind of large-scale stimulus that the situation demands. 

Nor will Biden be able to spend heavily on green infrastructure, raise taxes on corporations and the wealthy, or join new trade agreements like the successor to the Trans-Pacific Partnership. 

Even with the US set to rejoin the Paris climate agreement and repair its alliances, the new administration will be limited in what it can accomplish.

The new cold war between the US and China will continue to escalate, potentially leading to a military clash over Taiwan or control of the South China Sea. 

Regardless of who is in power in Beijing or Washington, DC, the “Thucydides Trap” has been laid, setting the stage for a confrontation between the established but weakening hegemon and the new rising power. 

As the race to control the industries of the future intensifies, there will be even more decoupling of data, information, and financial flows, currencies, payment platforms, and trade in goods and services that rely on 5G, AI/ML, big data, the Internet of Things, computer chips, operating systems, and other frontier technologies.

Over time, the world will be firmly divided between two competing systems – one controlled by the US, Europe, and a few democratic emerging markets; the other controlled by China, which by then will dominate its strategic allies (Russia, Iran, and North Korea) and a wide range of dependent emerging markets and developing economies.

Between the balkanization of the global economy, the persistent threat of populist authoritarianism amid deepening inequality, the threat of AI-led technological unemployment, rising geopolitical conflicts, and increasingly frequent and severe man-made disasters driven by global climate change and zoonotic pandemics (that are caused in part by the destruction of animal ecosystems), the coming decade will be a period of fragility, instability, and possibly prolonged chaos. 

The year 2020 was just the start.


Nouriel Roubini, Professor of Economics at New York University's Stern School of Business and Chairman of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is NourielRoubini.com, and he is the host of NourielToday.com.