China Versus the World

An Emboldened Beijing Seeks to Consolidate Its Power

Beijing is ruthlessly expanding its power. But resistance is growing around the world -- and Germany will soon play a key role.

By Georg Fahrion, Christiane Hoffmann, Laura Höflinger, Peter Müller, Jörg Schindler und Bernhard Zand

The Galwan Valley in the Himalayas is located at an altitude of 4,000 meters (13,123 feet). It is a remote area where the slopes are covered in snow all year round. Last week, the valley made an appearance on the global political stage.

China and India, the two most populous countries on the planet faced off along their -- disputed -- Himalayan border. The exact location of where one country ends and the next begins has long been unsettled. Indeed, the two countries went to war over it in 1962.

As the two nuclear-armed states clashed, at least 20 Indian soldiers were killed on the night of June 15. There were also reports of deaths on the Chinese side.

For the first time in almost half a century, the rivalry between the two neighbors has cost human lives. No shots are said to have been fired. Patrols in the area generally don't carry firearms. Both governments are apparently aware that they could easily trigger a world war.

The soldiers may have beaten each other to death with stones and clubs. Some are said to have fallen into a ravine during the fighting.

The incident shows how quickly the situation in Asia can escalate and how a cold war can turn into a hot one at any given moment, despite the high level of caution.

In the Galwan Valley, claims and interests collide. On the one side, there's the People's Republic of China, which is expanding its power in the region. In late April, while India was preoccupied with a worsening coronavirus crisis, the Chinese army is said to have moved troops into the border area and encroached on Indian territory in several places. At least that's what the government in New Delhi says.

On the other side, there are countries like India that don't want to put up with China's expansionism.

It isn't only the Chinese-Indian relationship that's tense. Resistance against China is growing in many parts of the world. Conflicts sometimes take place openly, as in the case of India, and at others covertly.

"What we are seeing now is just the beginning of a global backlash," says Indian geostrategist Brahma Chellaney.

Decoupling From China

Beijing's growing strength is leading to a "fundamental shifting" of the global balance of power, says NATO Secretary General Jens Stoltenberg, adding that in the future, the Western military alliance should cooperate more closely with "like-minded countries," such as Australia, Japan, New Zealand and South Korea.

NATO must "stand up for a world built on freedom and democracy, not on bullying and coercion." Stoltenberg didn't have to mention China by name. Everyone knows who he meant.

At the center of the global struggle for power are the United States and China, an old superpower and a new one. Their rivalry has even spilled over into the search for a coronavirus vaccine.

Ever since Richard Nixon was president in the 1970s, Washington has pursued a policy of rapprochement with Beijing. The U.S. aimed to integrate the formerly isolated and impoverished empire into the international system, in the hope that China would align itself with the West. In economic terms, this formula is known as "change through trade." Every successive U.S. administration has more or less adhered to this approach -- until Donald Trump came along.

In 2018, U.S. Vice President Mike Pence delivered a speech at the Hudson Institute in Washington that marked a departure from traditional politics. He accused China of expansionism, unscrupulousness and an uninhibited display of power. "We will not be intimidated and we will not stand down," he said.

Today, Washington no longer speaks of rapprochement, but of "decoupling" from China.

The U.S.' change of course was preceded by a shift in awareness on the Chinese side. For a long time, the country had followed the directive of the reformist politician, Deng Xiaoping. "Taoguang yanghui," it went: "Hide your strength and wait and see." But as early as the global financial crisis in 2007, the notion has been spreading in China that its own system is not only equal to the West's, but perhaps even superior.

Provocative Acts

At a Communist Party conference in 2017, Chinese President and party leader Xi Jinping made it clear that he thought China's moment had arrived. He proclaimed a "new era" in which the People's Republic would move "to the center of the world stage."

The American sinologist Orville Schell recently argued in an essay that Trump's policy of "America First" and Xi's "Chinese Dream" of re-emerging as a global power would be difficult to reconcile. Schell's take is that a new Cold War is all but certain. At best, it could be limited, not prevented.

This antagonism has also forced other countries to pick a side. And even though many players may feel alienated by Trump's misguided policies, hardly anyone is prepared to get behind China.

Many people in India have long felt threatened by their big neighbor, and not only since the conflict in the Galwan Valley.

In early June, India and Australia announced an agreement by which the two nations would grant one another use of their military bases. The U.S., Japan, Australia and India -- known as the "Quad" in geopolitical parlance -- could hold joint military exercises in the Indian Ocean for the first time in over 10 years.

The countries have been alarmed by developments in the South China Sea, where there has been a growing number of incidents in recent months. Within a short period of time, Beijing officially incorporated islands there into Chinese administrative districts, carried out geological exploration work in Malaysian waters, the Chinese coast guard rammed a Vietnamese fishing boat and a Chinese corvette aimed at a Filipino warship.

Hanoi, as well as the otherwise reserved governments in Manila and Kuala Lumpur, protested.

The U.S. sent three aircraft carriers to the region. The last time the U.S. Navy displayed such strength in the Indo-Pacific was three years ago. Last week, a U.S. military aircraft also flew over Taiwan, a country that is critical of Beijing and with which Washington maintains exceptional relations. China, which considers Taiwan a part of its own territory, called the maneuver a "provocative act."

Strained Relations

It's likely no coincidence that the conflict between China and the West is coming to a head when the world is distracted by the coronavirus, a disease that first broke out in China of all places.

Shi Yinhong, a professor of politics at Renmin University in Beijing, believes that on the one hand, China is feeling battered and oppressed by accusations of having caused the pandemic, and hit by the collapse of its economy. On the other hand, the leadership in Beijing also sees the crisis as an opportunity to expand its power. Their logic is such: We may be weak, but the others are currently much weaker.

The rhetoric of Chinese diplomacy has changed significantly. Back in the 1990s, some Communist Party members sniped at the Ministry of Foreign Affairs, calling it the "Ministry of Traitors," because its diplomats were supposedly so respectful toward the West. Today, the so-called "Wolf Warriors" call the shots there. This new generation of foreign policy makers gets its name from a patriotic blockbuster in which a cool Chinese fighter faces an American mercenary -- with an impressive arsenal of weapons and catchy sayings.

One representative of the new line is Zhao Lijian, who was promoted to Foreign Ministry spokesman after distinguishing himself as a polemical Twitter user during a deployment in Pakistan. In January, China's ambassador to Sweden, Gui Congyou, compared journalists who criticized China to lightweight boxers foolishly provoking a heavyweight.

Not all Chinese diplomats supported his confrontational style. But moderates like Cui Tiankai, China's ambassador in Washington, are being marginalized, or they're on their way to retirement. "Almost all of our foreign relations are in a bad way," says policy professor Shi Yinhong.

Sometimes things escalate beyond mere snappy comments. China at times also uses hard economic pressure to impose its will on its opponents. Australia, whose most important trading partner by far is China, is feeling the effects of this. The government in Canberra had demanded an independent investigation into the outbreak in Wuhan.

As a result, Beijing banned the import of beef from four Australian slaughterhouses and imposed an 80-percent tariff on Australian barley. Chinese tourists were also warned against traveling to Australia due to an alleged threat of racist attack. Most recently, China's Ministry of Education advised students not to study in Australia.

Canberra's attitude toward China has tended to only cool relations further. "We are an open-trading nation," said Prime Minister Scott Morrison, "but I’m never going to trade our values in response to coercion from wherever it comes."

Political Headwinds

Nowhere is China's determination to instrumentalize the coronavirus crisis for its own benefit more evident than in Hong Kong. In May, Beijing announced that it would impose a new security law on the former British crown colony. This would allow China's Ministry of State Security to operate on Hong Kong territory for the first time.

Critics view this not only as an end to freedom of expression in Hong Kong, but also as a breach of the international treaty between China and Britain in which they agreed that the city should enjoy a "high degree of autonomy" until 2047.

On Wednesday, the foreign ministers of the G-7 expressed in a joint statement their "grave concern" about China's actions.

Above all, it's the former colonial power Britain that is under pressure. As late as 2015, then-Prime Minister David Cameron was still raving about an impending "golden era" of relations between Britain and China. Beautiful photos of Cameron and Xi were staged, showing them sipping lukewarm ale in a pub in the English countryside.

Cameron's successor, Boris Johnson, describes himself as "sinophile" and went to great lengths as the mayor of London to attract Chinese investors. But now, he feels compelled to take a clear position.

If China follows through with its new security law, Johnson said London would have "no choice" but to offer 12-month visas to the nearly 3 million Hong Kong citizens who either hold or are entitled to a British overseas passport. It would offer those people a "route to citizenship."

Other signs are also pointing to conflict. For one, there's the fact that Britain is reviewing its January decision to involve the Chinese network equipment supplier Huawei in the expansion of the British 5G network. China's ambassador to the United Kingdom, Liu Xiaoming, threatened that if the British were to exclude Huawei, Chinese companies could cancel the construction of a nuclear power plant and a new network of tracks for high-speed trains on the island.

U.S. Secretary of State Mike Pompeo jumped at the news: If China backed out, he promised, the U.S. would happily pick up the slack.

From Competitor to Rival

China is encountering political headwinds not only from governments, but from parliaments as well. The Conservative member of parliament Tom Tugendhat, the chairman of the foreign affairs committee, founded the China Research Group in the British parliament.

Its members are critical of China and have been lobbying for months to push back Chinese influence in many spheres of British life. "China is challenging the rules-based international system," says Tugendhat. "We must defend it."

An international group of parliamentarians who banded together in early June as part of the so-called Inter-Parliamentary Alliance on China wants to achieve a similar effect. Co-chairs include representatives from such diverse camps as Republican Senator Marco Rubio, an American, and Reinhard Bütikofer, a German member of the European Parliament with the Green Party.

"Of course, you have to work with China," says his party colleague, Omid Nouripour, a member of the German parliament who is also involved. "Nevertheless, this initiative was overdue. The system question is no longer concealed, but clearly expressed from the Chinese side."

Even the European Union, which has long been lenient toward China, is now showing a greater willingness to assert itself. In 2019, the European Commission for the first time stopped describing China merely as an economic competitor, but as a "systemic rival." The EU's chief diplomat, Josep Borrell, in May called for Europe to be "more robust" toward China.

This is already happening, too, at least in economic terms. After some spectacular takeovers of European companies by Chinese groups, over which there was substantial public outcry, new rules for reviewing investments designed to ensure greater transparency have been in force since April 2019.

Last Wednesday, EU Competition Commissioner Margrethe Vestager presented her new white paper. It contains proposals for how the EU intends to act in the future against companies from third countries, such as China, that use state subsidies to undermine the EU's internal market.

Germany Steps Up

EU negotiators are also getting closer to their goal of reaching a long-planned investment protection agreement with Beijing. It is intended to provide EU companies in China with relatively fair market access and competitive conditions.

One crucial thing the agreement calls for is an end to forced technology transfers, says EU Trade Commissioner Phil Hogan. Foreign companies that want to produce in China must show the Chinese their technology.

The agreement would be an important step. The EU often has a hard time sending powerful signals to China -- whether over human rights or combating the pandemic.

That's why German Chancellor Angela Merkel wants to develop a unified European stance toward Beijing. She has declared Europe's China policy to be one of the central themes of Germany's EU Council presidency, which will begin July 1.

Merkel is toeing a fine line. Under no circumstances does she wish to follow the U.S. on its path toward decoupling. "A policy that attempts to isolate China is not in the German and European interest," says Norbert Röttgen, the chairman of the Foreign Affairs Committee in the German parliament.

At the same time, Germany is also becoming more critical of China and its ambitions for world power.

The question is whether the chancellor is the right person to lead the charge. Her critics consider her a silent advocate, arguing that her policies are one-sided and oriented toward the interests of German businesses.

Last week, the German government published its draft program for the EU Council presidency, which, compared with an earlier version, takes a somewhat sharper tone. Germany wants to demand "more reciprocity in all policy areas" from China. It also stresses the importance of European "values." But what that will mean in concrete terms remains to be seen.

"Angela Merkel is trapped in an outdated perception of China," says Nils Schmid, the foreign policy spokesperson for the Social Democrats in the German parliament. "The Chancellery hasn't heard the gong yet."

The Only Way Out Is Either Hyperinflation Or Defaulting To The Fed

by: Michael A. Gayed, CFA
- The amount of US and global debt has massively increased in a matter of months.

- The debt was unmanageable before - global debt-to-GDP was at an all-time high in January.

- Maybe defaulting to the Fed is the answer no one is talking about.

The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital.

- Warren Buffett
When does the money run out? Does it? There is a massive public dilemma happening right now in the back of minds of economists around the world.
The general public is on board with bailing out unemployed citizens with massive monetary and fiscal stimulus, but they should also be concerned with what happens next and the long-term growth implications of current stimulus. After all, the money will not run out.
But we are borrowing from the future, and eventually, it must be paid back in one way or another. As I mentioned on the Lead-Lag Report, I see two probable outcomes, and neither of them is fiscal responsibility, higher taxes, and paying off the debt in a reasonable matter.
I think the only way the world, and the US, is going to pay back the unreasonable debt burden created is going to hyperinflation or defaulting to the Fed - the next great policy twist in Federal Reserve history.
A look at the global debt-to-GDP ratio does not give much comfort, either. It hit a record 322% in January, and the US debt-to-GDP was sitting around 107%. With an economic recession (numerator dropping) and increasing debt (denominator decreasing), what do you think will happen to these numbers when it’s all over? Up, up, and away! Just not in a good way.
This means that servicing and refinancing this debt overall is a tricky and expensive endeavor, and there already wasn’t room to move before. It’s easy for the consensus to forget that we do, eventually, have to raise interest rates. Right now, it’s like a Formula 1 racer with half-done tires with his pedal to the metal.
Eventually, he will have to slow down or the momentum will take him off course and he will crash and burn. This is akin to what the fiscal and monetary stimulus is doing - gas pedal pushed, but eventually, will have to slow down when inflation hits. Will it, is the only question - the Fed has promised zero rates through 2021 at this point, and possibly 2022.
How on earth will it fight inflation as it comes? We’re already seeing it creep up in certain sectors like groceries and staples. There’s a corner coming up in the next few years, and the brakes need to be ready.
With a sharp contraction in corporate earnings, combined with sharp and mounting job losses, the debt service burden was increasing, and the aggressive monetary and fiscal response was warranted.
Gross government issuance hit an all-time monthly record of over $2.1 trillion in March ($3.2 trillion including other sectors), an estimate of the global debt-to-GDP ratio increasing to 342% from the 322% mentioned before.
That is, if there’s only a 3% contraction in global economic activity this year, paired with net government borrowing doubling. Are we on the road to hyperinflation to pay off this debt? It is possible.
There just wasn’t enough policy space in interest rates before the crisis happened to boost the economy without printing extreme amounts of money. Look, it might not happen right away - in fact, we might see deflation first, especially if there’s a second wave of coronavirus that shuts down the economy again.
Will the Fed stop printing money when that happens? Not likely to be immediate. The US economy is addicted to stimulus. Look at what happened in 2018 when the Fed was selling off balance sheet assets and hiking rates - the market collapsed in December.
Coming out of the crisis, if, say, a vaccine is developed, with all this stimulus still in place, consumers are going to spend like crazy because governments have been footing the bill for them over the short term, they get their jobs back and continue to make money.
That is going to hike prices. Is that necessarily a bad thing? Debt is expensive, but not if there are hyperinflationary forces cutting the cost of it down. Maybe that’s the playbook here. Worked pretty well for Venezuela.
The other option that is not talked about much is what if the Fed just lets the government and corporations default to it? A happy reset, if you will. It would not be met well politically, but at some point, the Fed will want to raise rates. If we see extremely high inflation, the only defense is to raise rates - hard to do that when debt-to-GDP levels would throw you into a massive depression.
Why not let some “little” defaults happen to push the ultimate goal of fighting the nasty inflation bug.
The Fed is already buying corporate junk bonds, effectively putting worthless debt on its books, turning crap into Fed-backed instantly.
What if it would just “write it off” as Kramer and Seinfeld posited, so the Fed can hike rates without it affecting the debt-service ratios that will be too effective. America could be the next Greece. Wouldn’t mind some of those Ouzo shots right about now and retirement at 50, especially after this market.
We don’t really know how this all will work in practise; we only have economic theory. As the lockdowns have been a great scientific experiment to see if we can defeat a virus, the global monetary and fiscal stimulus run is the great economic experiment. Only the history books will know what happens next.
So, what to do? It would be amiss if you didn’t have some gold (GLD) exposure in your portfolio to fight the fiat currency expansion. If you’re a fixed-income investor, shortening up the duration by buying something like BIL or SHY might be better than shooting to the long end of the curve, given what interest rates do when inflation and expansion happen (hint: it’s not good for prices).
Stock markets have certainly been a good place to “hide out” in during this crisis, especially tech winners. Continue to add to names that are earning good money in bad times, and you might even want to add a bunch of junk bonds to your portfolio, since the Fed is just going to bail them out anyway (kidding, sort of). Look, the two ideas of hyperinflation and defaulting to the Fed are a bit of a stretch, I will admit.
But they look more probable now than ever before. The only other ways out are a massive hike in taxes to start paying down the debt, or GDP that grows exponentially so that remittances increase naturally. Neither of those look probable, in my estimation, at least in the short term, and the latter solution has inflation implications, as mentioned above. Prepare, don’t react.

No More Free-Lunch Bailouts

With governments spending on a massive scale to save industries and mitigate the economic fallout from COVID-19, they should be positioning their economies for a more sustainable future. Fortunately, far from remaining taboo, using state aid to change private-sector behavior has become common sense.

Mariana Mazzucato, Antonio Andreoni

mazzucato16_Abdulhamid HosbasAnadolu Agency via Getty Images_lufthansagermanycoronavirusbailout

LONDON – The COVID-19 crisis and recession provides a unique opportunity to rethink the role of the state, particularly its relationship with business.

The long-held assumption that government is a burden on the market economy has been debunked.

Rediscovering the state’s traditional role as an “investor of first resort” – rather than just as a lender of last resort – has become a precondition for effective policymaking in the post-COVID era.

Fortunately, public investment has picked up. While the United States has adopted a $3 trillion stimulus and rescue package, the European Union has introduced a €750 billion ($850 billion) recovery plan, and Japan has marshaled an additional $1 trillion in assistance for households and businesses.

However, in order for investment to lead to a healthier, more resilient, and productive economy, money is not enough. Governments also must restore the capacity to design, implement, and enforce conditionality on recipients, so that the private sector operates in a manner that is more conducive to inclusive, sustainable growth.

Government support for corporations takes many forms, including direct cash grants, tax breaks, and loans issued on favorable terms or government guarantees – not to mention the expansive role played by central banks, which have purchased corporate bonds on a massive scale.

This assistance should come with strings attached, such as requiring firms to adopt emissions-reduction targets and to treat their employees with dignity (in terms of both pay and workplace conditions).

Thankfully, with even the business community rediscovering the merits of conditional assistance – through the pages of the Financial Times, for example – this form of state intervention is no longer taboo.

And there are some good examples. Both Denmark and France are denying state aid to any company domiciled in an EU-designated tax haven and barring large recipients from paying dividends or buying back their own shares until 2021.

Similarly, in the US, Senator Elizabeth Warren has called for strict bailout conditions, including higher minimum wages, worker representation on corporate boards, and enduring restrictions on dividends, stock buybacks, and executive bonuses.

And in the United Kingdom, the Bank of England (BOE) has pressed for a temporary moratorium on dividends and buybacks.

Far from being dirigiste, imposing such conditions helps to steer financial resources strategically, by ensuring that they are reinvested productively instead of being captured by narrow or speculative interests. This approach is all the more important considering that many of the sectors most in need of bailouts are also among the most economically strategic, such as airlines and automobiles.

The US airline industry, for example, has been granted up to $46 billion in loans and guarantees, provided that recipient firms retain 90% of their workforce, cut executive pay, and eschew outsourcing or offshoring. Austria, meanwhile, has made its airline-industry bailouts conditional on the adoption of climate targets. France has also introduced five-year targets to lower domestic carbon dioxide emissions.

Similarly, many countries cannot afford to lose their national automobile industry, and are seeing the bailouts as an opportunity to drive progress toward the sector’s decarbonization. As French President Emmanuel Macron recently argued, “We need not only to save the industry but to transform it.”

While extending €8 billion in loans to the sector, his government is requiring that it turn out more than one million clean-energy cars by 2025. Moreover, having received €5 billion, Renault must keep open two key French plants and contribute to a Franco-German project to produce electric batteries.

As Renault’s major shareholder, the French government will be able to enforce these conditions from both outside and inside the company.

In some cases, governments have gone beyond conditionality to alter ownership models.

Germany and France are acquiring or increasing (respectively) the state’s equity stake in airline companies, citing the need to safeguard national strategic infrastructure.

But there are also negative examples. The auto-industry bailout has played out very differently in Italy than it has in France. The FCA Group has convinced the Italian government – which has historically provided large subsidies to Fiat – to grant its subsidiary FCA Italy a €6.3 billion guaranteed loan with basically no enforceable conditions. FCA Italy is expected to merge with the French PSA Group by the end of this year, and the FCA Group itself is no longer even an Italian company.

Born in 2014 from the merger of Fiat and Chrysler, it is domiciled in the Netherlands, and its financial headquarters are in London. Worse yet, the company has a poor track record of keeping its investment commitments in Italy, which has fallen off the global map as an auto producer, both in terms of volume and electric vehicles.

In other negative cases, major companies and sectors have leveraged their monopoly or market-dominant bargaining power to lobby against conditionality, or have exploited central banks’ support, which tends to come with fewer or no conditions.

For example, in the UK, EasyJet was able to access £600 million ($746 million) in liquidity from the BOE, despite having paid £174 million in dividends a month earlier.

And in the US, the Federal Reserve’s decision to start purchasing riskier high-yield bonds has fueled moral-hazard fears. Among those standing to gain are US shale-oil producers, which were already highly leveraged and mostly unprofitable before the pandemic arrived.

Far from a step toward state control of the economy, conditional bailouts have proven to be an effective tool for steering productive forces in the interest of strategic, broadly shared goals.

When designed or implemented incorrectly, or avoided altogether, they can limit productive capacity and allow speculators and insiders to extract wealth for themselves.

But when done right, they can align corporate behavior with the needs of society, ensuring sustainable growth and a better relationship between workers and firms. If the crisis is not to go to waste, this must be part of the post-COVID-19 legacy.

Mariana Mazzucato, Professor of Economics of Innovation and Public Value and Director of the UCL Institute for Innovation and Public Purpose, is the author of The Value of Everything: Making and Taking in the Global Economy.

Antonio Andreoni, Associate Professor of Industrial Economics and Head of Research at the UCL Institute for Innovation and Public Purpose, is Visiting Associate Professor of the Fourth Industrial Revolution at the University of Johannesburg’s South African Research Chairs Initiative.

Corporate rescues should come with strings attached

Regulators should apply lessons learnt in 2008 from saving the banks

Patrick Jenkins

Ingram Pinn’s illustration of Patrick Jenkins column ‘Corporate rescues should come with strings attached’
© Ingram Pinn/Financial Times

If 2008 was the year of the bank rescue, 2020 is the year of the corporate bailout. As the macroeconomic repercussions of the coronavirus crisis begin to trump the health emergency, much has been made of the spiralling cost of saving swaths of the corporate world — a bill that dwarfs the bank bailouts. What no one is really talking about yet is the quid pro quo.

The popular backlash is certainly tame so far: a bit of sniping about companies paying executives or shareholders too generously, while accepting government furlough payments.

The policymaker backlash is less evident still. The idea that companies might have made themselves vulnerable to disaster through aggressive management, or that shareholders or regulators should intervene to de-risk them, has not even been raised. It should be.

By contrast, when world leaders bailed out the banks in 2008 with cheap funding and government equity, there was an outcry. Logical though the rescues were, because commerce as a whole cannot function without a banking system, there was a widespread perception that hundreds of billions of dollars had been handed to the undeserving rich.

The Occupy Wall Street protest movement was spawned. And the societal inequality that was compounded by the crash, and the policy response to it, spurred populist politicians across the western world.

There were injustices in the 2008 bailouts. Unscrupulous bankers did their reputations no favours by securing large bonus payouts when the ink was barely dry on the bailout cheques.

Many bank bosses, unhumbled by the bust-and-bailout experience, just redoubled their clout atop expanded institutions.

But for all the frustrated popular outrage, there was, as any banker would tell you, a significant programme of payback via the regulatory crackdown that followed.

Most banks are inherently leveraged institutions: they fund their lending by borrowing money — from depositors, bond markets and elsewhere. Very little of the money used in their operations is actually loss-absorbing shareholder equity.

In the boom years before the crash, banks and those who set their terms of trade had become blind to the growing risks that this created. By 2008, according to the Federal Reserve, the proportion of assets backed by equity capital had fallen below 5 per cent at the big US banks.

By last year, as regulators around the world toughened banks’ capital requirements, that US ratio had risen to 9 per cent.

Another post-crisis reform was to insist on closer ongoing scrutiny, particularly through the application of regular stress tests. Disaster scenarios are run through banks’ books to ensure buffers are strong enough.

A third area of regulatory tightening, applied most rigorously in the UK, involved new regimes to hold managers to account.Latest Coronavirus news
 The Covid-19 crisis will be a big test of these new regulations, as the full force of economic decline and mass unemployment weighs on banks’ balance sheets in the months and years ahead. However deep the recession proves to be, it is clear that banks are far better buffered than they were going into the global financial crisis — and may yet come through this one more or less intact.

Many companies will not — and for the same underlying reason that banks failed in 2008: excessive leverage. It is easy to dismiss the pandemic as a freak event that no one could have foreseen. But the triggers of most crises are unpredictable. The key is to be able to withstand the storm.

Corporate leverage is not just about aggressive financing. The whole system of corporate “best practice”, involving just-in-time deliveries, minimal inventory and the use of gig workers in place of expensive permanent staff, is an exercise in operational leverage.

Add to that the growing financial gearing evident across the corporate world. According to Goldman Sachs, the ratio of net debt to operating profits across the S&P 500 has soared to nearly 2.2, more than double the 2008 level, when finance companies are excluded. Corporate leverage will have spiked far higher given the collapse in profits and extra debt taken on during the coronavirus crisis.

On January 7 this year, the Banque de France published a paper about the systemic risk posed by large companies and their increasing indebtedness — the same day incidentally that scientists in China isolated the new coronavirus.

Few could have imagined the extent of the global public health emergency and economic crisis that Covid-19 would unleash. But the vulnerability of the corporate world was obvious to anyone who paused to think, as France’s central bank did.

“To what extent can high debt levels among certain firms be considered a source of systemic risk?” its paper asked.

The study endorsed an earlier decision by French financial regulators to limit big banks’ exposure to the most indebted companies, on grounds of systemic risk. Other markets have a less interventionist culture. But it may be both feasible and desirable to go further than the French.

Bank regulation was toughened when it became clear that public funds were needed to prop up a systemically vital sector. Now companies have been granted a similar handout, and been proved systemically vital as employers and drivers of the economy, there is a strong argument to take a similar regulatory approach: curtail aggressive leverage, stress test regularly and hold managers accountable.

Beethoven and Now

Thoughts In and Around Geopolitics

By: George Friedman

I know nothing about music. I can’t play an instrument, nor can I read music. My singing appalls even me. Yet music has defined my life.

When I hear a song it conjures in me, as it does in others, a particular place on a particular night with a particular person.

Or it conjures a phase of my life. Cyndi Lauper’s songs remind me of the time when I said to hell with duty. “Girls Just Want to Have Fun” is gender neutral.

Edith Piaf’s “Non, Je Ne Regrette Rien” – “No, I Do Not Regret Anything” – reminds me of a thing that had to be done but ought not to have been done. When I hear the Christian hymn “Let There Be Peace on Earth,” I think of my wife and the choices we’ve had to make.

Music is the sound that happens to be permanently linked to a memory, and the memory fixed to an emotion that I felt then. The emotions can be exuberant or thoughtful, but they are always tinged with sadness. They all speak of the past that I cannot forget but cannot relive.

I discovered the music that will always remind me of this time: Beethoven’s “Pathetique.” It is a somber piece but not sad. It tells me that time is not of the essence, and it invites me to think deeply, or as deeply as I can.

And then it breaks into a tempo, with a sound that admits that time is of course of the essence.

And then it breaks into a strange celebration of life, not of its finitude but of the passions that should be embedded there.

Today, time has slowed, and our mood is somber. Thanks to quarantine measures imposed because of the COVID-19 pandemic, we live the same day over and over again until we cannot remember what day it is. We search for an exit, but there is none. We look for something different only to discover that mere difference doesn’t redeem the day.

The sense of rebellion we feel subsides, and we accept that time isn’t of the essence any longer.

But, of course, it is. It is not simply that life is short, but that it has so much to offer. And then you learn to celebrate the things you cannot have now, but in that celebration, as Beethoven teaches, there arises a sense of being that is distinct from doing.

You are drawn into yourself, and find the music that Beethoven tried to teach us. “Pathetique” is far from the pathetic. It is an invitation to see that the somber is the preface to the joyous, but that the work and discipline to achieve that is more difficult than contemplating the status of the Chinese navy. The latter has rules. Beethoven demands that you make your own rules.

That seems to me to be the nature of our moment. We do not know whether it will be long or short. It is in this moment that we live, and the music of the beginning is not that of the end.

This is a difficult and even terrible time. Arguing that it is not as bad as this or that moment is pointless. The moment in which we are living is what matters. The worst part of it is that we didn’t choose it; it chose us, and that is outrageous.

The issue facing us we know how to resist: by not going outside and living with the consequences. But even then we are helpless. Courage won’t save us, and fear really doesn’t protect us.

Beethoven has the virtue of being accessible to those without learning or even taste in music, such as myself. The opening to "Symphony No. 5" fills me with a dreadful anticipation.

"Symphony No. 9" and its "Ode to Joy" remind of the moments of delirious happiness before revolutions turn into monstrosities.

“Moonlight Sonata” draws out the rare moments that make a love affair a moment of redemption. And "Pathetique" reassures us that ennui and sorrow are a preface to triumph – and that is for me the music of this moment.

The virtue of feelings is that no one can tell us that we are wrong. What we feel is what we feel.

The virtue of Beethoven, for me, is that he evokes feeling, where there is much music that I can’t understand. I take meaning from The Doors because they remind me of a night I treasure.

But these are merely reactions. I rarely have time to consider these things. But now there is time, and that has transformed living.

One of the singular characteristics of the moment is that there is time, time in excess of what we might be able to bear. For some, this time is a period of reprieve from a life of endless urgency and activity. For them, this time may be a gift, a time to be free from the constraints of the urgent, to the consideration of the urgent. It is also a dangerous time.

With endless empty days, we have a chance to confront who we are and what we have been and what, because of the choices we made, we will never do. We may also confront, with our significant others, what we have been together, the answer to which may be the discovery of mutual loathing or the rebirth of the joy we once felt.

As humanity suffers from a host of maladies, this may sound like narcissism, but it is merely the inevitable outcome of the cessation of happening that these past few months have brought us, and which will likely continue for a long time. Our civilization has been built around doing, and doing is seen as a sign of our success.

Those who had failed in life were thought not to be busy. Those who were busy were in demand, and the demand for our time was affirmation of our worth.

Many of us remain busy today, but even the busiest among us have had the pattern of our lives changed. Most of us thrive in social life, be it tennis, dinner parties or getting drunk together.

Those moments now carry with them the possibility of disease and death, so we avoid them.

And so even for those who eagerly await a teleconference, time has changed its shape. More precisely, time has emerged, demanding that we fill it.

Importantly, this emergence of time is greater for the older than the younger among us, especially for the younger who have children who never cease to devour every moment. But for those who never had children or whose children now need little from their parents, their lives have vast gaps in them.

Beethoven is making a vital point. Life is difficult and tedious, and for many of us it will always be that. We all long to be free of constraints, to shape our lives, but that is an illusion. The most brilliant investor makes his money by aligning his actions with the market. Generals align their orders with the reality of the enemy they are facing.

Doctors align with the reality of nature. The brilliant can see what must be done before others, but in the end they are no more free for that. They are held in the constraints of the beginning of the “Pathetique” like anyone else.

They live life by its own rules.

When I play the songs I remember, and think of the things I was doing at the time, I realize what I didn’t know then: When I broke free of all responsibility, the constraints of life dictated the exit and the return.

When I heard Edith Piaf regretting nothing, regrets were too late. And when I heard the alien sounds of Protestant hymns and wondered whether I could live with them, the decision had already been made and there could be no other answer.

This is not a sense of helplessness. As the last movement of the “Pathetique” makes clear, the logical necessity of the music takes us to the logical necessity of our lives and times. What we feel does not matter to a virus. But it matters to us.

This for now is our life, and Beethoven is inviting us to listen to Cyndi Lauper. We may not be able to do what she says, but we can think, and that thought can be enough.