Discussions on the Fed Put

Doug Nolan

Market focus this week turned to troubled healthcare legislation, with the GOP Friday pulling the vote on the repeal of Obamacare. This “Republican Catastrophe” (Drudge ran with a Hindenburg photo) provided a timely reminder that Grand Old Party control over the presidency and both houses of congress doesn’t make it any easier to come to a consensus for governing a deeply-divided country. The reality is that it’s a highly fractious world, nation, Washington and Republican party – and the election made it only more so. Perhaps Monday’s sell-off was an indication that reality has begun to seep back into the marketplace. If repealing Obamacare is tough, just wait for tax reform and the debt limit.

CNBC’s Joe Kernen (March 20, 2017): “For a guy that was there trying to deal with the housing Bubble - that would be the other thing that people would bring up to you. That you don’t know what low rates are really doing. You don’t know where the next dislocation is going to be. You’re not seeing a lot of benefits from zero, and who knows if you might be inflating something somewhere that comes home to roost in the future. That’s probably what they’d say: ‘You must know there’s nothing on the horizon then.’”

Neel Kashkari, Minneapolis Federal Reserve Bank president: “It’s a very fair question and people point to the stock market’s been booming. And my response to those folks is, we care about asset price movements if we think a correction could lead to financial instability or financial crisis. If you think about the tech Bubble - the tech Bubble burst. It was not good for the economy – obviously it hurt. But there was no risk of a financial collapse, not like the housing Bubble. So, the difference is the housing market has so much debt underneath it. It’s much more dangerous if there’s a correction. If equity markets drop, it’s going to be painful for investors. But there’s so little debt relative to housing, it doesn’t look like it has a risk of leading to any kind of financial crisis. So, our job is to let the markets adjust.”

Less than an hour later Kashkari appeared on Bloomberg Television: “Some people have said we should be raising rates because markets are getting hot – and the stock market keeps climbing. I think we should only pay attention to markets if we believe it could lead to financial instability. So, go back to the tech Bubble, when tech burst it was painful for the economy; it was painful for investors. But it did not lead to any kind of economic collapse or financial instability. So, if stock markets fall it’ll hurt investors. But that’s not the Fed’s job. The Fed’s job is not to protect stock market investors. We have to pay attention to potential financial instability risks, and the fact is there’s a lot more debt underlying the housing market than underlying the stock market. That’s why the housing bust was painful for the economy. A stock market correction will probably be a lot less painful.”
Neel Kashkari these days provides interesting subject matter. It’s no coincidence that he’s been discussing shrinking the Fed’s balance sheet while also addressing the “Fed put” in the stock market. I’m sure Kashkari and the FOMC would prefer that market participants were less cocksure that the Fed stands ready to backstop the markets. Too late for that.

The Fed is not blind. They monitor stock prices and corporate debt issuance; they see residential and commercial real estate market values. Years of ultra-low rates have inflated Bubbles throughout commercial real estate – anything providing a yield – in excess of those going into 2008. Upper-end residential prices are significantly stretched across the country, also surpassing 2007. They see Silicon Valley and a Tech Bubble 2.0, with myriad excesses that in many respects put 1999 to shame. I’ll assume that the Fed is concerned with the amount of leverage and excess that has accumulated in bond and Credit markets over the past eight years of extreme monetary stimulus.

The Fed is locked into a gradualist approach when it comes to normalizing rate policy. At the same time, they must of late recognize that speculative markets might readily brush aside Fed “tightening” measures. This might help to explain why the Fed’s balance sheet is suddenly in play. And it’s not just Kashkari. From Bloomberg: “Fed’s Kaplan Says MBS and Treasuries Should Both Be Rolled Off” and “Bullard Says Fed in Good Position to Allow Balance Sheet to Fall.” From Reuters: “Cleveland Fed President Says She Supports Reducing the Balance Sheet.” And from Barron’s: “Fed's Williams: Balance Sheet Shrinkage Could Begin Late this Year.” And my favorite: “Fed’s Kashkari: Everyone on FOMC ‘Very Interested’ in Balance Sheet Policy.”

I struggle taking comments from Fed officials at face value. Kashkari shares a similar revisionist view of the Tech Bubble experience to that of Ben Bernanke, Alan Greenspan and others: Basically, it was no big deal – implying that Bubbles generally don’t have to be big deals. They somehow banished 2002 from their memories.

The Fed collapsed fed funds from 6.50% in December 2000 to an extraordinarily low 1.75% by the end of 2001. In the face of an escalating corporate debt crisis, the Fed took the unusual step of cutting rates another 50 bps in November 2002. Alarmingly, corporate Credit was failing to respond to traditional monetary policy measures (despite being aggressively applied). Ford in particular faced severe funding issues, though the entire corporate debt market was confronting liquidity issues. Recall that the S&P500 dropped 23.4% in 2002. The small caps lost 21.6%. The Nasdaq 100 (NDX) sank 37.6%, falling to 795 (having collapsed from a March 2000 high of 4,816). No financial instability?

Years later it’s easy to downplay consequences of the bursting “tech” Bubble. Yet there were fears of a deflationary spiral and the Fed running out of ammo. It was this backdrop in which Dr. Bernanke introduced unconventional measures in two historic speeches, the November 21, 2002, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” and the November 8, 2002, “On Milton Friedman’s Ninetieth Birthday.”

I revisit history in an attempt at distinguishing reality from misperceptions. Of course the Fed will generally dismiss the consequences of Bubbles. They’re not going to aggressively embark on reflationary policies while espousing the dangers of asset price and speculative Bubbles. Instead, they have painted the “housing Bubble” as some egregious debt mountain aberration. And paraphrasing Kashkari, since today’s stock market has nowhere as much debt as housing had in 2007, there’s little to worry about from a crisis and financial instability perspective.

Well, if only that were the case. Debt is a critical issue, and there’s a whole lot more of it than back in 2008. Yet when it comes to fragility and financial crises, market misperceptions and distortions play fundamental roles. And there’s a reason why each bursting Bubble and resulting policy-induced reflation ensures a more precarious Bubble: Not only does the amount of debt continue to inflate, each increasingly intrusive policy response elicits a greater distorting impact on market perceptions.

I doubt Fed governor Bernanke actually anticipated that the Fed would have to resort to “helicopter money” and the “government printing press” when he introduced such extreme measures in his 2002 speeches. Yet seeing that the Fed was willing to push its monetary experiment in such a radical direction played a momentous role in reversing the 2002 corporate debt crisis, in the process stoking the fledgling mortgage finance Bubble. And the Bernanke Fed surely thought at the time that doubling its balance sheet during the 2008/09 crisis was a one-time response to a once-in-a-lifetime financial dislocation. I’ll assume they were sincere with their 2011 “exit strategy,” yet only a few short years later they’d again double the size of their holdings.
From a friendly email received over the weekend: “I think the Bernanke doctrine ended up being wildly successful beyond anyone’s imaginings, even Dr. Ben’s.” This insightful reader’s comment is reflective of the positive view markets these days (at record highs) hold of “activist” central bank management. It may have taken a while, but it all eventually gained the appearance of a miraculous undertaking – reminiscent of “New Era” hype from the late-nineties. “Money” printing works – and all the agonizing about unintended consequences proved sorely misguided!

So easy to forget how we got here. We’re a few months from the nine-year anniversary of the 2008 crisis, yet there’s still huge ongoing global QE and rates not far from zero. It’s a monetary inflation beyond anyone’s imaginings, even Dr. Ben’s. To say “the jury’s still out” is a gross understatement.

There’s a counter argument that stimulus measures and monetary inflation got completely away from Dr. Bernanke - and global central banks more generally. Peak global monetary stimulus today equates with peak securities market values and peak optimism – all having been powerfully self-reinforcing (“reflexivity”). Global debt continues to expand rapidly, led by exceedingly risky late-cycle Credit growth out of China. I suspect that unprecedented amounts of speculative leverage have accumulated globally, led by excesses in currency “carry trades” and derivatives. “Money” continues to flood into global risk markets, inflating prices and expectations. Worse yet, excesses over (going on) nine years have seen an unprecedented expansion of perceived money-like government and central bank Credit (the heart of contemporary “money” and Credit). Meanwhile, global rates have barely budged from zero.

Despite assertions to the contrary, the bursting of the “tech” Bubble unleashed significant financial instability. To orchestrate reflation, the Fed marshaled a major rate collapse, which worked to stoke already robust mortgage Credit growth. The collapse in telecom debt, an unwind of market-based speculative leverage and the rapid slowdown in corporate borrowings was over time more than offset by a rapid expansion in housing debt and the enormous growth in mortgage-related speculative leverage (MBS, ABS, derivatives).

Understandably, Kashkari and the Fed would prefer today to ween markets off the notion of a “Fed put.” It’s just not going to resonate. Markets will not buy into the comparison of the current backdrop to the “tech” Bubble period. The notion that today’s securities markets operate without major instability risk is at odds with reality.

Markets are keenly aware that the Fed’s balance sheet will be the Federal Reserve’s only viable tool come the next period of serious de-risking/de-leveraging. At the same time, Fed officials clearly want to counter the now deeply-embedded perception of a “Fed put” – that the Federal Reserve remains eager to counter fledgling “Risk Off” dynamics. And while its’s not surprising that markets hear Kashkari’s comments and yawn, things will turn interesting during the next bout of market turbulence. Expect the Fed to move hesitantly when coming to the markets’ defense, a dynamic that significantly raises the potential for the next “Risk Off” to attain problematic momentum. It’s been awhile.

March 20 – Financial Times (Robin Wigglesworth): “On Wall Street, bad ideas rarely die. They often go into hibernation until resurrected in a new form. And portfolio insurance — a leading contributor to the 1987 ‘Black Monday’ crash — is, for some, making a return to markets. Institutional investors are allocating billions of dollars to ‘risk mitigation’ or ‘crisis risk offset’ programmes that are designed to act as a counterweight when markets are in turmoil. They mostly comprise long-maturity government bonds and trend-following hedge funds, which tend to do well when equities plummet. But some analysts and fund managers worry that if taken to extremes, allocations to trend-following ‘commodity trading advisors’ hedge funds, in particular, could play the same role as an investment concept called portfolio insurance did in 1987, when it was blamed for aggravating the worst US stock market collapse in history. ‘There’s a big portfolio insurance industry that no one is talking about . . . CTAs are dangerously close to portfolio insurance,’ argues Robert Hillman, the head of Neuron Advisors…”
Writing flood insurance during a drought is an alluringly profitable endeavor. The “Fed put” has encouraged Trillions to flow into the risk markets. Trillions of “money” have gravitated to “passive” trend-following securities market products and structures. Yet the most dangerous Fed-induced market distortions may lurk within market hedging strategies. The above Financial Times article ran under the headline “Rise in New Form of ‘Portfolio Insurance’ Sparks Fears.” Fear is appropriate. To what degree has it become commonplace to seek profits “writing” various types of market “insurance” in a yield-hungry world confident in the central bank “put.” How much “dynamic hedging” and derivative-related selling waits to overwhelm the markets in the event of a precipitous market sell-off (concurrent with fear that the Fed has stepped back from its market backstopping operations)?

The speculative bull market confronted some Washington reality this week. The S&P500 declined 1.4%, the worst showing in months. The banks (BKX) were slammed 4.7%, with the broker/dealers (XBD) down 4.3%. The broader market was under pressure, with the mid-caps down 2.1% and the small caps 2.7%. It’s worth noting the banks, transports and small caps are all now down y-t-d. Curiously, bank stocks underperformed globally. Japan’s Topic Bank index was hit 3.5%. The Hong Kong Financial index fell 1.3%, and Europe’s STOXX 600 Bank index lost 0.9%.

Ten-year Treasury yields dropped nine bps to a one-month low (2.41%), as sovereign yields declined across the globe. Just when the speculators were comfortably short European periphery bonds, Spanish 10-year yields sank 19 bps, Italy fell 13 bps and Portugal dropped 15 bps. Crude prices traded this week to the low since November. The GSCI Commodities Index declined to almost four-month lows. Time again to pay attention to China? This week saw a “super selloff” in Chinese iron ore markets. Copper fell 2.2%, and the commodities currencies (Australia, Canada, Brazil) underperformed. Meanwhile, precious metals outperformed, with gold up 1.2% and silver rising 2.1%.

March 23 – Financial Times (Gabriel Wildau): “China’s financial system suffered a cash crunch this week as new regulations designed to curb shadow banking caused big lenders to hoard funds, highlighting the danger of unintended consequences from official moves to lower their debt. Analysts have warned of rising risks from banks’ increased reliance on volatile short-term funding rather than customer deposits to fund loans and other investments. If money market interest rates spike in times of stress, institutions can be forced to dump assets in order to meet payments due to creditors. Tightening liquidity prompted the seven-day bond repurchase rate to hit a three-year high of 9.5% on Tuesday, versus an average of below 3% since the beginning of 2014.”

March 21 – Bloomberg: “This week’s squeeze in Chinese money markets is proving especially painful for the country’s shadow banks. While interbank borrowing rates have climbed across the board, the surge has been unusually steep for non-bank institutions, including securities companies and investment firms. They’re now paying what amounts to a record premium for short-term funds relative to large Chinese banks… ‘It’s more expensive and difficult for non-bank financial institutions to get funding in the market,’ said Becky Liu, …head of China macro strategy at Standard Chartered Plc. ‘Bigger lenders who have access to regulatory funding are not lending much of the money out.’”

March 23 – Wall Street Journal (Shen Hong): “A new specter is haunting China’s financial system: the negotiable certificate of deposit. An explosion in banks’ use of the bondlike loans, whose durations range from a month to a year, is testing Beijing’s resolve to cure the economy of its addiction to debt-fueled growth and investment booms. As authorities push up key short-term interest rates in their campaign to deflate asset bubbles swelled by borrowed money, the interest rates charged on these NCDs is rising so fast that it is starting to expose banks to the risk of investment losses and abrupt funding squeezes. This is causing worries about a potential repeat of the crippling cash crunch of 2013. ‘NCDs carry a lot of risk, and if not handled properly they could lead to a systemwide liquidity crisis,’ said Liu Dongliang, senior analyst at China Merchants Bank. Banks, mostly small or midsize ones, have been raising record sums via NCDs, selling 4.4 trillion yuan ($639bn) worth this year, 65% more than in the same period of 2016.”
The risk of financial accident in China has anything but dissipated. The People’s Bank of China this week injected large amounts of liquidity to stem a brewing funding crisis in the inter-bank lending market, only then to reverse course back to tightened policy later in the week. Over recent years, each effort to restrain excess in one area has been matched by heightened excess popping out in another. In general, financial conditions have remained too loose for too long – leading to recent Credit growth in the neighborhood of $3.5 TN annualized. Efforts to rely on targeted tightening measures have proved ineffective.

It appears there is now heightened pressure on Chinese monetary authorities to tighten system-wide financial conditions. The stress that befell the vulnerable corporate bond market over recent months is now pressuring small and medium sized banks with problematic exposure to short-term “money-market” borrowings. There were also further indications this week of “shadow banking” vulnerability.
I’ve never felt comfortable that Chinese authorities appreciate the types of risks that have been mounting beneath the surface of their massively expanding Credit system. Global markets seemed attentive a year ago, but have since been swept away by the notion of the all-powerful “China put” conjoining with the steadfast “Fed put.” These types of market perceptions create tremendous inherent fragility.

A multi-speed formula will shape Europe’s future   
The best option is a structure with an integrated core and a looser outer layer
by: Wolfgang Münchau

Back in the 1990s, I used to discuss the future of Europe with friends and colleagues. We had different aspirations. Some of us, me included, wanted a narrow, federal Europe with a central government and parliament; others preferred a wider, decentralised Europe; and then there was a third group in favour of what they called “variable geometry” — a multi-speed Europe in which overlapping groups of countries would integrate in different policy areas.

The debate is back on the official agenda, this time not out of choice but necessity. The EU is in trouble. Its monetary union crawls from one crisis to the next. Its immigration policies are a mess. One member voted to leave. Another, Poland, is isolating itself diplomatically. Beata Szydlo, the Polish prime minister, last week vetoed a resolution of the European Council in protest over the re-election of Donald Tusk, an erstwhile political rival. She is holding Europe to ransom over a battle that is really about domestic politics. In France and Italy, some leading opposition politicians are advocating a withdrawal from the euro.

A few days before last week’s summit, the leaders of France, Germany, Italy and Spain met to express a preference for a multi-speed Europe, on lines similar to the variable geometry some of my friends favoured two decades ago. They arrived at this conclusion through a process of elimination. A federal Europe of 27 member states is out of the question because that would require deep changes to the European treaties that would stand no chance of being approved by all. Doing nothing is not much of an option either. So there is no alternative to variable geometry. But what would it mean in practice?

We should distinguish between different varieties. The first would consist of deeper integration based on the enhanced co-operation clauses in European law. These allow a group of at least nine member states to press ahead with legislation with each other. This excludes areas of common interest, such as the single market or the customs union.

While enhanced co-operation sounds like a good idea, a word of caution is in order. It has been around since the 1990s and was given more prominence in the Lisbon treaty. One of the authors of this particular clause told me that he wrote it to provide a legal foundation for the eurozone to develop into a closer political union. But the clause has only been used three times — for divorce law, the European patent and on property rights for international couples. Not exactly an ambitious list.

It is worth studying the failures of the procedure. A group of member states wanted to use enhanced co-operation to agree on a financial transaction tax. They became bogged down by disagreements, before the realisation dawned that, if only nine countries signed up to such a tax, they might put themselves at a competitive disadvantage compared with those member states that refused to take part.

The second version of variable geometry is more radical and, in the final analysis, the only one that respects the political constraints and the need to solve the EU’s problems. European integration belongs to the category of things that are simultaneously inevitable and impossible.

More integration is needed if Europe is to manage an economically divergent monetary union; to strengthen defence-co-operation at a time when Donald Trump, the US president, is casting doubt on the future of Nato; and to remain credible when confronted by assertive neighbours, notably Russia and Turkey. At the same time it is impossible because the kind of treaty change needed to construct such an edifice is unrealistic.

The way out of this trap is to accept a process of disintegration followed by reintegration. The EU as constituted is monolithic. It is stuck with a legal framework for everybody that suits nobody. The best option would be a structure with a reasonably integrated core, surrounded by a less integrated outer layer. All member states would be part of a customs union and the single market but not necessarily the single currency or the interior and foreign and security policy apparatus. Freedom of movement could be defined as a right obligatory for members of the inner group but voluntary for the others.

Countries in the outer sphere would have the right, but not the obligation, to join core policy areas. The outer layer would thus not be monolithic either. Such a structure would even allow the UK to rejoin after it leaves the bloc. But it would be rejoining not the EU as we know it but a more flexible successor organisation, with a different legal basis.

Europe’s dilemmas are solvable if one opens up the institutional fabric. Otherwise, there is no alternative but to muddle through in the hope that nothing happens. And we know where that ends.

France as a Northern and Southern European Power

By Antonia Colibasanu

The country holds a unique position on the Continent.

France is the only country in Europe that is both a northern and southern power. The Continent’s northern and southern regions have developed in relative isolation. Two geographic features help pull the Continent in separate directions. The first is the North European Plain – an expansive stretch of land extending from the Russian steppe in the east to the French Pyrenees in the west. Northern Europe, with the densest navigable waterways in the world, is the Continent’s wealthiest region. The second feature is the Mediterranean Sea. Southern Europe is mountainous and lacks a robust coastal plain. Therefore, while rich by global standards, it is poorer than Northern Europe.

France is unique because it is part of both of these European regions. The Rhône, which begins at the Mediterranean and serves as a trade corridor to Northern Europe, is the only river that unites the south with the north. The Garonne River, with its head of navigation in Toulouse, is only about 90 miles from the Mediterranean and flows west into the Atlantic. This makes France the only country that can project power in any part of Europe. However, France’s status as both a northern and southern European country has posed internal problems due to a disconnect between France’s north and south.

This picture taken on June 4, 2013, shows the Wilson bridge on the Rhône River in the center of Lyon. PHILIPPE MERLE/AFP/Getty Images

This disconnect can be seen in the issues facing southern France today. The south of France is a key region that highlights the challenges the next government in Paris will face after upcoming elections in just over a month. Its experience and problems embody the country’s key concerns.

Currently, the media and the public in southern France are more focused on local issues, and the election is of secondary importance. It is no longer a topic of conversation in French cafes, taking a back seat to more immediate concerns for the average French voter. Apathy over the election is widespread: About 40 percent of French voters have not decided whom they will support. But the most important themes in the current campaign are French identity, security and unemployment. These are all key issues in Provence, where populism is on the rise.

The south of France is one of the most populous regions in the country, with a population of more than 5 million. While its economy has been growing, so have the unemployment rate and the popularity of the National Front, a nationalist party. Positive growth figures have not translated into better economic conditions for French citizens.

The structure of this region’s economy partly explains this disconnect in Provence. While tourism in Côte d’Azur accounts for 7 percent of France’s GDP and 11 percent of the region’s GDP, according to France’s National Institute of Statistics and Economic Studies (INSEE), the education sector is the predominant source of income for the rest of the region. Education and tourism sectors together employ about 80 percent of the region’s workforce. Other industries that employ workers here – pharma, gas and water distribution, and electrical and electronic components – are important, but more than 90 percent of the enterprises affiliated with these sectors are small and only employ up to 10 people. These sectors have suffered less than others since the 2008 financial crisis.

The region does not have large automobile and textile industries, which were hit hard by the crisis, forcing companies to lay off personnel and implement restructuring programs. Real estate and construction were the only sectors in southern France that slowed down as a result of the crisis. But these sectors only account for 12 percent of the region’s GDP and have rebounded according to the latest data from 2016. All in all, the economy has shown positive signs, registering a growth rate of 2 percent last year, according to INSEE.

However, southern France has one of the highest unemployment rates in the country – between 11 and 13 percent. The Provence-Alpes-Côte d’Azur region has the fastest-growing population in the country, increasing by 73 percent since the 1960s compared to France’s national average of 35 percent. Immigration has increased even though other regions in southwestern France have become more appealing for immigrants in the last 10 years. The region also has one of the highest poverty rates in the country, with more than 15 percent of the population living below the poverty line, according to French statistics from 2013. During tourism’s off-season, economic stagnation is more visible: Local restaurants close early, shops adapt to the slow provincial pace of life and the only lively areas are near universities and business centers.

Geography offers another explanation for the contradiction between the region’s economic development numbers and social realities. Much of the region’s economic activity is concentrated along the 400-mile coastline, which encompasses just 10 percent of the region’s territory and is home to more than three quarters of the population. Last year’s terrorist attack in Nice hurt the tourism industry, and a slowdown in global trade and investment had a negative impact on Marseille and its shipbuilding industry. “For Sale” signs scattered around neighborhoods in Nice also indicate the negative effects of real estate’s slowdown.

Half of Provence is mountainous and most of the population is urban, relatively decoupled from the realities of tourist-heavy Côte d’Azur and the major port of Marseille. Universities, the center of gravity for these urban communities, are dependent on international students – many of whom came to France through European Union exchange programs before 2010. But because European demographics no longer supply a steady flow of students to these universities, they have begun marketing to Middle Eastern countries and, less successfully, Asia. All of this ties into the region’s new challenges, particularly regarding immigration.

The region has been the traditional point of entry into the country for North Africans. This has helped the economy, since companies can take advantage of lower-cost labor, but it also has contributed to a growth in nationalism. While immigration from North Africa is not new for the region, security concerns have grown over the last several years, especially since the Nice terrorist attack. Job creation in this region is limited, and youth unemployment is high. As elsewhere in Western Europe, migrants often get jobs faster than locals because they are willing to accept lower salaries.

These local realities create regional problems that pull campaign discourse toward issues like identity, security and unemployment. The region, fearful of the negative effects of immigration, has long been wary of European Union integration, especially its impact on the economy. Small shops in Provence complain just as much as small businesses in rural Britain about the problems that have arisen from policies made in Brussels. Small business owners argue that they will never get access to the EU market, as rules governing the market have killed their chance to be competitive.

For these reasons, the region’s attitude toward EU integration should be no surprise. In 1992, Provence voted against the Maastricht Treaty. In 2005, more than 55 percent of people in Provence voted against an EU draft constitution. The region has historically voted for the French right, and support for the National Front has grown over the last two elections. In 2015 local elections, the party received 20-25 percent of votes. As the economy weakened, nationalism and populism became more prominent in Provence, as they did throughout France and Europe. However, apathy and disengagement from politics also have grown.

France’s position as both a southern and northern European country will continue to present challenges, even though it is also an advantage for the country’s position in Europe. Provence’s development will depend on how both economic and security challenges evolve. France needs to take a broader view and balance between looking to its east (and preparing for any threat that may come from the North European Plain) and looking to the Mediterranean – which presents its own security challenges.

What’s a President to Do?

Barry Eichengreen

SEOUL – Donald Trump took office promising a raft of sweeping economic-policy changes for the United States. He has quickly discovered, like previous US presidents, that America’s political system is designed to prevent rapid, large-scale change, by interposing formidable institutional obstacles, from the Congress and career civil servants to state governments and the courts.
Start with reform of personal income tax. This should be a slam-dunk, because the president and congressional Republican leaders are on the same page. Trump’s goal of removing the government’s groping hand from Americans’ pockets, by cutting the top marginal tax rate on ordinary income from 39.5% to 33%, is entirely consistent with mainstream Republican ideology, according to which high tax rates penalize success and stifle innovation.
But, to be politically viable, significant tax cuts for the wealthy would have to be accompanied by at least token tax cuts for the middle class. And broad-based tax cuts would blow a hole in the budget and excite congressional deficit hawks, of whom there are still a few.
One can imagine closing loopholes to render rate cuts revenue neutral. But one person’s loophole is another’s entitlement. Even if there are economic arguments for eliminating, say, the deductibility of mortgage interest payments, imagine the howls of protest from homeowners, including many Trump voters, who borrowed to purchase their houses. Imagine the reaction of Trump’s friends in real estate.
Cuts on the spending side would assuage the deficit hawks. And big cuts to the Environmental Protection Agency, the US Agency for International Development, and National Public Radio are high on the Republican hit list. But the vast majority of federal spending is on entitlements, the military, and other proverbial “third rail” items that elected officials touch at their peril. Simply put, broad-based spending cuts to match broad-based income-tax reductions are not politically feasible.
Eliminating federal subsidies for health-insurance coverage under the Affordable Care Act (“Obamacare”) would save the government a little over $100 billion a year, about 3% of federal spending. But those subsidies are largely paid for by their own dedicated taxes. Moreover, Trump and congressional Republicans are learning that replacing Obamacare is easier said than done. Health-care reform, as Hillary Clinton could have told them, is fearsomely complex.

It is increasingly clear that the name will change (“Trumpcare,” anyone?), and it can be expected that the Republican plan will cover fewer people; but much of the substance will remain the same.
Because corporate taxes are less significant in terms of overall federal revenue, rate cutting doesn’t pose a comparable threat to the budget balance. But here there is no agreement between Congress and the Trump administration on the form such cuts should take.
House Speaker Paul Ryan and others favor moving to a border adjustment tax that would tax corporate cash flows regardless of where the goods sold by US companies are produced, while exempting exports. Others, such as Treasury Secretary Steven Mnuchin, are evidently skeptical. And an important part of Trump’s business constituency – import-dependent retailers like Target and Walmart – are actively hostile. Agreement on a plan won’t come easily.
Trump’s other flagship proposal is a $1 trillion infrastructure program. But this initiative will run headlong into deficit concerns, and it is fundamentally at odds with Republican skepticism about big government, and specifically about the public sector’s capacity to carry out investment plans efficiently. Trump will want to be able to point to a few signature projects. He will want his border wall with Mexico. But any new federal infrastructure spending is likely to be more symbolic than real.
So what will an impatient president, frustrated and hemmed in on all sides, do? First, Trump will focus on the one set of economic policies a president can pursue without close congressional cooperation, namely those affecting trade. He can invoke the Trade Expansion Act of 1962, restricting imports on the grounds that they threaten US “material interests.” He can invoke the International Emergency Economic Powers Act of 1977 on the grounds that the loss of jobs to Mexico and China constitutes an economic emergency. He can even invoke the Trading with the Enemy Act of 1917 on the grounds that the US has Special Forces active in the Middle East.
Second, Trump will respond, as populists do, by attempting to distract attention from his failure to deliver the economic goods. This means directing his ire and that of his supporters toward others – whether internal enemies like the press, the intelligence community, and Barack Obama, or external adversaries like the Islamic State and China. It wouldn’t be the first time a politician used a domestic political crusade or a foreign policy adventure to divert attention from his economic failures.
We have already seen Trump’s tendency to lash out at perceived enemies, foreign and domestic. And we know that this confrontational style is the modus operandi of senior White House advisers like Stephen Bannon and Stephen Miller. We can hope that cooler heads prevail. But, given the constraints on implementing Trump’s economic agenda, it’s hard to be optimistic.


The subdued mood in Singapore’s financial industry

Donald Trump, slowing trade and competition from Hong Kong all worry the city-state

SINGAPORE owes its existence, and its prosperity, to its place at the heart of intra-Asian trade. In more than 50 years of independence, the city-state has striven mightily to attract investment from all over the world. Such has been its success, indeed, that others hope to imitate its open, low-tax model. In Britain, for example, there has been talk of the country turning into a “European Singapore” once withdrawal from the EU is complete. (It would be a nice start if London’s Tube operated with anything like the same efficiency as Singapore’s subway network.)

The current mood in Singapore, however, is far less buoyant than you might imagine.

Singapore has survived and thrived by steering a middle course between America and China. It has been alarmed both by the isolationist rhetoric of President Donald Trump and by recent, highly unusual, public spats with China.

Global trade growth has slowed in recent years. Despite signs of a pickup, this has had a big effect in a city that has the world’s second-busiest port and that (according to Barclays, a bank) is the country most exposed to the global value chains created by multinational companies.

Annual GDP growth in 2016 was just 1.8%, the slowest rate since 2009. Even in this famously open economy, the government has been allowing in fewer foreign workers in the face of pressure from the voters.

The city still has enormous potential as a regional financial centre. Thanks to its political stability and strong legal and regulatory systems, Singapore looks like a natural haven—an Asian Switzerland. In particular, Indian offshore wealth is being attracted to the city, which hopes to be a hub for the budding market in masala bonds (rupee-denominated debt issued outside India).

Singapore has a rare AAA credit rating. The IMF last year described its banks as “well capitalised”, with adequate provisions for bad loans, despite worries about their exposure to oil-and-gas firms. Singapore is now the third-biggest trading centre for foreign exchange in the world (having overtaken Tokyo in 2013). It also has a growing derivatives market with daily over-the-counter volume of $400bn, as of October 2015. Finance comprises 13% of the country’s GDP, considerably more than the 8% share it contributes to Britain’s.

But Singapore faces a strong challenge as a regional finance hub from Hong Kong, which benefits from far stronger links to the Chinese economy. Hong Kong has the upper hand over Singapore in terms of investment banking, particularly in corporate-finance businesses such as mergers and acquisitions. Hong Kong’s capital markets are much deeper; the local economy in Singapore is simply not large enough to generate the same volume of business. Many of South-East Asia’s businesses are family-owned and rely on banks (or reinvested profits) rather than the markets for finance. Singapore’s daily stockmarket turnover in 2016 was around S$1.1bn ($797m), down by 19% on 2013 and less than a tenth of the Hong Kong stock exchange’s daily volume.
Indeed, the magnetic pull of China may only increase if America under Mr Trump retreats from its Asian role. Multinationals may feel that they simply have to locate more resources in Hong Kong than Singapore for the sake of proximity to the regional superpower.

Singapore’s long-term prospects may depend on how two trends resolve themselves. Asians are becoming wealthier and are looking for other ways to invest their money aside from bank deposits and property. As Asian economies become more important to the world economy, so banks, insurance companies and fund managers will look to increase their operations in the region. As the thief Willie Sutton said when asked why he robbed banks: “That’s where the money is.”

At the same time, however, technology means that investors can manage their money with the click of a mouse or the swipe of an app. And they can do so at very low cost. Vanguard, an index-tracking fund manager, attracted more global mutual-fund inflows last year than its ten largest rivals combined. Index-tracking managers don’t need to have a regional base in a gleaming office tower in Singapore or Hong Kong.

This city is trying to ride this trend by becoming known as a hub for “fintech”, whereby new, technology-driven groups take aim at established, high-cost finance firms. But this is a tricky tightrope to walk. Fintech may cannibalise existing financial businesses without generating many additional jobs. The next 50 years may present Singapore with even greater challenges than its first half-century.

What Our Cells Teach Us About a ‘Natural’ Death

Haider Javed Warraich

Effigies in Scotland from the 17th century, when death was simpler. Credit Corbis, via Getty Images                    

Every Thursday morning on the heart transplant service, our medical team would get a front-row seat to witness an epic battle raging under a microscope. Tiny pieces of heart tissue taken from patients with newly transplanted hearts would be broadcast onto a gigantic screen, showing static images of pink heart cells being attacked by varying amounts of blue immune cells. The more blue cells there were, the more voraciously they were chomping away the pink cells, the more evidence that the patient’s inherently xenophobic immune system was rejecting the foreign, transplanted heart.
There was so much beauty to be found in the infinitesimal push and pull between life and death those slides depicted that I would fantasize about having them framed and put up in my house.

Yet the more I studied those cells, the more I realized that they might have the answers to one of the most difficult subjects of our time.
Throughout our history, particularly recently, the human race has looked far and wide to answer a complex question — what is a good death? With so many life-sustaining technologies now able to keep us alive almost indefinitely, many believe that a “natural” death is a good one.

With technology now invading almost every aspect of our lives, the desire for a natural death experience mirrors trends noted in how we wish to experience birth, travel and food these days.
When we picture a natural death, we conjure a man or woman lying in bed at home surrounded by loved ones. Taking one’s last breath in one’s own bed, a sight ubiquitous in literature, was the modus operandi for death in ancient times. In the book “Western Attitudes Toward Death,” Philippe Ariès wrote that the deathbed scene was “organized by the dying person himself, who presided over it and knew its protocol” and that it was a public ceremony at which “it was essential that parents, friends and neighbors be present.” While such resplendent representations of death continue to be pervasive in both modern literature and pop culture, they are mostly fiction at best.
This vision of a natural death, however, is limited since it represents how we used to die before the development of modern resuscitative technologies and is merely a reflection of the social and scientific context of the time that death took place in. The desire for “natural” in almost every aspect of modern life represents a revolt against technology — when people say they want a natural death, they are alluding to the end’s being as technology-free as possible. Physicians too use this vocabulary, and frequently when they want to intimate to a family that more medical treatment may be futile, they encourage families to “let nature take its course.”
Perhaps we need to observe something even more elemental to understand what death is like when it is stripped bare of social context. Perhaps the answer to what can be considered a truly natural death can be found in the very cells that form the building blocks of all living things, humans included.
Though we have known for more than a century how cells are created, it is only recently that we have discovered how they die. Cells die via three main mechanisms. The ugliest and least elegant form of cell death is necrosis, in which because of either a lack of food or some other toxic injury, cells burst open, releasing their contents into the serums. Necrosis, which occurs in a transplanted heart undergoing rejection, causes a very powerful activation of the body’s immune system. Necrosis, then, is the cellular version of a “bad death.”
The second form of cell death is autophagy, in which the cell turns on itself, changing its defective or redundant components into nutrients, which can be used by other cells. This form of cell death occurs when food supply is limited but not entirely cut off, such as in heart failure.
The most sophisticated form of cell death, however, is unlike the other two types. Apoptosis, a Greek word used to describe falling leaves, is a programmed form of cell death. When a cell becomes old or disrepair sets in, it is nudged, usually by signaling molecules, to undergo a form of controlled self-demolition. Unlike in necrosis, the cell doesn’t burst, doesn’t tax the immune system, but quietly dissolves. Apoptosis is the reason our bone marrow doesn’t weigh two tons or our intestines don’t grow indefinitely.
In many ways, therefore, life and death at a cellular level are much more socially conscious than how we interface with these phenomena at a human level. For cells, what is good for the organism is best for the cell. Even though cells are designed entirely to survive, an appropriate death is central to the survival of the organism, which itself has to die in a similar fashion for the sake of the society and ecosystem it inhabits.

We have striven endlessly to answer some of our most crucial questions, yet somehow we haven’t tried to find them in the basic machinery of our biology. Apoptosis represents a pure vision of death as it occurs in nature, and that vision is something we might aspire to in our own deaths: A cell never dies in isolation, but in clear view of its peers; it rarely dies of its own volition; a greater force that is in touch with the larger organism understands when a cell is more likely to harm itself and those around it by carrying on. Apoptosis represents the ultimate paradox — for the organism to survive, the cells must die, and they must die well. “There are many disorders in which there is too little apoptotic death,” Dr. Horvitz said, “and in those cases it is activating apoptosis that could increase longevity.”
And finally, a cell also understands better than we humans do the consequences of outlasting one’s welcome. For though humanity aspires to achieve immortality, our cells teach us that a life without death is the most unnatural fate of all.