Ray Dalio-John Mauldin Discussion, Part 4

By John Mauldin

This week is the fourth in a series of five open letters responding to a series of essays by Ray Dalio, the founder of Bridgewater Associates. His original letters are Why and How Capitalism Needs to Be Reformed, Parts 1 and 2 and It’s Time to Look More Carefully at ‘Monetary Policy 3 (MP3)’ and ‘Modern Monetary Theory (MMT)’. My replies are here, here, and here. Today I continue my response.

I was quite pleasantly surprised to read a very generous and gentlemanly reply from Ray in Forbes last week, in which he clarified some of my understanding of what he wrote. I encourage you to read it after this letter for more context. I’ll continue responding to his original material but first a short piece responding to his letter in Forbes.

Dear Ray,

I want to thank you for your thoughtful and courteous reply to my first three essays. It was remarkably civil and I learned a great deal. Clearly you and I agree more than we disagree. Many of our differences are an emphasis on a different syllable in a word rather than the word itself. Much like tomato and to-mah-toe. I will continue my series in the spirit in which you replied, noting that my misunderstandings would have been cleared up in a few minutes in a normal conversation rather than a public internet back-and-forth. Part of the times we live in…

I will encourage my readers who are following this discourse to read your response, as there is much to be learned in your explanations of the nuances of MP3 and MMT. I somewhat conflated them in my first few readings of your letter, and your clarification helps immensely. I believe my fifth and hopefully last letter in this series next week will offer an alternative to this path we both agree would be perilous. These paragraphs from your response are at the crux of the matter:

Having studied these dilemmas in the past and thought a lot about the cause/effect relationships that determine how they work, it is my conclusion that central banks will have to turn to what I call Monetary Policy 3 (MP3) in the next downturn. MP3 follows Monetary Policy 1 (which is interest-rate-driven monetary policy), which continues until interest rate cuts can’t be big enough to do the trick. That’s when Monetary Policy 2 (which is central bank printing of money and buying financial assets) happens and continues until that doesn’t work anymore either. MP3 is fiscal and monetary policy working together with fiscal policy producing deficits that are monetized by the central bank. Modern Monetary Theory as it’s described is simply one version of many types of MP3. What I’m saying is that I believe that in the next downturn you will either see some form of MP3 from central banks or you will have terrible economic and social conditions.

To be clear, I’m not saying that such policies don’t have some undesirable consequences, and I don’t think that MMT is the best form of MP3. What I’m saying is that MP3 is the best of the bad alternatives and some form of it will likely happen, so one had better know how it works and how to deal with it. I welcome alternative descriptions of what will happen when both interest rate cuts and QE don’t work to stimulate the economy in the next significant downturn.

I quite agree that unless something is done there will be terrible economic and social conditions. As you say, we will have to choose between bad and perhaps even worse choices, none of which will be easy. The longer we wait, the more difficult and limited the choices will be.

I’m looking forward to hearing what form of MP3 will be best (or least bad). I quite agree that more QE will have its own attendant complications, creating the same problems as last time. The image of Christopher Walken demanding More Cowbell comes to mind. More QE may be far more annoying, if not destructive.

I look forward to continued conversation…


Comparative National Emergencies

(continuing from last week…)

While I am unsure wealth and income disparities, as obvious and politically charged as they are, rise to the level of a national emergency, I wholeheartedly agree that when 53-54% of America votes as if they are, politicians will agree it is a national emergency and do something, at a not insignificant cost. The resulting new debt could indeed spark a national emergency.

Let’s first look at this using historical data and Congressional Budget Office projections, which presume steady (though mild) growth and no recessions. Then we’ll tweak that data to see what happens if there is a recession at some point.

As noted above, the one seemingly bipartisan point of agreement is to never, ever discuss deficits in any serious manner. By “serious,” I mean actually suggesting specific solutions that would bring either higher taxes, lower spending, or both. Simply noting the debt exists, while important, isn’t serious discussion.

My associate Patrick Watson spent much of this week searching government websites to produce the charts and tables below. Let’s run through these to set up later discussions.

This first chart simply aggregates CBO spending and revenue figures. The CBO, of course, can’t predict a recession in the future and uses what it thinks are “best practice” projections. Note that tax revenue (the black line) is not enough to pay for mandatory spending, defense, and all of the net interest. Again, this is pretty much a best-case scenario. (Also notice how tax revenue dropped in the Great Recession. That will become important later.)

By the way, for this chart we treat Social Security and Medicare as if they were not separately funded. Payroll taxes are included in the revenue line and benefit payments are in the blue mandatory spending area. I think that is closer to reality, since taxpayers are liable for them regardless.

Under these projections, total federal debt will rise to $25 trillion sometime in 2021. If there is a new president, he or she will not have enough time to change that. Total debt by the end of the decade will rise to the mid-$30-trillion range. Note that these projections do not include off-budget spending (more on that later) which is significant.

The CBO also assumes the bond market can and will absorb almost $35 trillion worth of US government debt. When combined with state and local debt it will easily exceed $35 trillion. (State and local debt is already over $3 trillion. It will certainly rise in the next 10 years.)

What Happens if There Is a Recession?

Ray, I think you would agree that at some point there will be another recession in the US. I think we would also agree it is somewhat of a mug’s game to predict the timing of a recession more than a few months in advance.

That being said, we should still ask what would happen to the deficits and debt if there were a recession. I asked Patrick to find the percentage change in tax revenues in the last recession (2008 and following) and the recovery thereafter. Using that historical data, the revenue line in the chart below assumes the same percentage revenue change following a hypothetical 2020 recession. (Note, recessions also raise spending due to increased unemployment insurance, welfare, and other economic backstops, but we ignore that in this chart.)

Possibly the next recession will not see revenues fall as much as the last one. Then again, it is also unrealistic not to expect an increase in expenses, so in my statistical dreamworld they will hopefully balance out. I’m sure we can look back in 2025 and see how close to the pin we actually were.

This first graph assumes a recession in 2020. Note that revenues fall below mandatory spending by the middle of the decade, then never get back above mandatory spending plus defense spending. Then by the end of the 2020s mandatory spending will again have risen to consume all tax revenue. And again, these deficits don’t include significant off-budget deficits.

This next graph assumes recession in 2022 instead of 2020. The pattern is basically the same, except that the $2-trillion deficits don’t begin until 2023. Again, this uses actual CBO projections and reduces revenues by the same percentage they fell in 2008–2009, and recovered thereafter.

On-Budget Versus Off-Budget Deficits

Finding a simple projection for off-budget deficits is extraordinarily difficult. When you begin to look at the actual numbers over the last 20 years, you can understand why. There can be a difference of as much as $950 billion from one year to the next. A lot of it has to do with accounting vagaries and statistical timing, which of course are hard to forecast years in advance.

That being said, there is a remarkable consistency about the average annual off-budget deficit. It has averaged around $269 billion a year since 2000. Since 2009 the average is $271 billion.

The following table looks at the actual growth of the US debt since 2000 and uses CBO projections for both on- and off-budget deficits through 2021. After 2021 we conservatively assume that the off-budget deficit will average $269 billion for the next eight years. We also assume, for the sake of mathematical interest, a recession in 2022. We did not project a tax increase at any point in the future, which would of course have an impact on future revenues and deficits. For those curious, a recession in 2020 would increase the total debt by more than $2 trillion in 2029.

Under these assumptions, annual deficits rise to over $2.5 trillion by 2024 assuming a 2022 recession. It will be hard for any administration to raise taxes after recession for at least a few years. And as we saw last week, even a 25% tax increase on the highest tenth of income earners in America would only produce about $250 billion. And that is not net and does not assume any behavioral change that reduces total taxable income of that top 10%.

Under our assumptions total federal debt will rise to over $44 trillion by 2029. The CBO forecast that does not include a recession has total debt rising to over $33 trillion. There is one line on page 16 of the report mentioned below which discloses that factoid. The rest of the report talks about government debt held by the public, as if debt held in the Social Security “lockbox” and other similar inter-government debt won’t be paid by the public as well.

Explaining off-budget deficits can be exhausting. Literally. But essentially, it is Congress appropriating funds from government agencies that are theoretically used for future expenses like pensions and healthcare, spending the money this year and replacing it with government bonds. Social Security obviously, but the US Post Office, all kinds of government pension funds, and all sorts of funds go into this budget legerdemain.

Forget Turning Japanese, We Are Turning Greek

The CBO produces a remarkably detailed report on the budget and economic outlook through 2029. It is very clear in its assumptions. Let’s look at its GDP projections for the next 10 years: slightly under 2% average growth with 2% inflation and modestly increasing interest rates. (Page 147 at the link above)

On page 126 you find that a 1/10 of 1% decrease in productivity could increase federal deficit spending by $307 billion over the next 10 years. Clearly productivity matters. Labor force growth has about half the effect of productivity growth. But both are significant.

The CBO projects US GDP will be in the $30-trillion range by 2029, again without a recession, which would no doubt shave a few trillion dollars off that number, but let’s go with it. Without a recession debt is projected to be about 105% (give or take) of GDP and with a recession it is closer to 150%. Shades of Italy or Greece.

Paul Krugman and many others would say I’m being unduly bearish and foolish to worry about deficits and national debt. “We” just want to wear our hair shirts and force austerity on everyone. The Italians are vocally resisting such austerity, as they saw what happened to Greece when the EU forced it to live within a budget. It could only be called a six-year+ depression. “Brutal” hardly describes it. Why would I wish such a turn of affairs on the US?

Maybe I’m just afraid of finding out the answer to “How much debt is too much debt?” We will know the answer only when the bond market rebels, and then it will be too late. Much too late.

Can the Fed intervene? Surely. But at what cost?

The problem is the data and research, by Lacy Hunt and others, shows a clear correlation between higher debt, lower GDP growth, and lower productivity. This will increase the deficit and debt in a vicious spiraling downward cycle.

It also increases the likelihood of QE4, 5, and ∞ into the future after the next recession, which will produce outcomes you (and I) are clearly unhappy with. With reasonable justification.

As for raising taxes to make up the difference, total income taxes in 2018 were less than $1.7 trillion. If you literally doubled taxes on the top 10%, you would only get an extra trillion dollars and still not come close to balancing the budget. Not to mention the recession such a tax increase would cause.

After a recession? It wouldn’t even close half the deficit gap with a 100% increase. And that’s before any increased spending. Some of the ideas run into the trillions of dollars over the next 10 years. Maybe that’s just a rounding error given the actual deficits, but these things do matter.

Where Will the Money Come From?

The cash government spends in excess of its tax revenue has to come from somewhere. If somehow it comes from the bond market (read US investors, as non-US investors in government bonds are increasingly scarce), that reduces the amount available for more productive endeavors, and thus reduces growth. If it comes from QE it increases distortions and misallocations in the market and, as you pointed out, increases wealth disparity. I am not exactly certain what MP3 would mean, but I look forward to learning.


Or we could completely (and somewhat radically) restructure the entire tax code along with getting expenditures under control (and maybe even reduced in some areas) and over three or four years come to a balanced budget. Let’s speculate about what that might look like…

(To be continued next week…)

Boston, New York, Puerto Rico, New York, Maine, and Montana

As you read this, Shane and I are in Boston for Steve Cucchiaro and his beautiful bride Jama’s wedding Saturday night. The next day I meet with my business partners in Mauldin Economics (Olivier Garret and Ed D’Agostino). Monday morning I fly to New York where I am with CMG partner Steve Blumenthal, visit with Art Cashin, attend more meetings, have a CNBC shoot Tuesday afternoon for the Closing Bell, have dinner with accredited investor clients and prospects on Tuesday, and more meetings Wednesday before flying back to Puerto Rico on Thursday, July 4.

Early August sees me in New York for a few days before the annual economic fishing event, Camp Kotok. Then maybe another day in New York before I meet Shane in Montana and spend a few days with my close friend Darrell Cain on Flathead Lake.

Shane and I celebrated her birthday and our wedding anniversary yesterday. It was quite glorious. We are really enjoying living in Puerto Rico, much more than I expected. I don’t think I can get Shane to move with dynamite. And if she’s not moving, I’m certainly not.

On a final thought, my editor Patrick Watson and I spent hours this week going back and forth over these deficit and spending numbers, along with my other thoughts you will read next week. As we talked, I asked him what he thought about my outlines. “John, you are being way too optimistic!” If $44 trillion is optimistic…

And with that I will hit the send button. You have a great week and I hope you get to be with some friends and family. All the best!

Your worried about deficits and debt analyst,

John Mauldin
Chairman, Mauldin Economics

Britain is now stranded in Brexit limbo

Barring a referendum, doing nothing looks increasingly like the default option

Philip Stephens

Enough. Britain must make up its mind about Brexit. Whether it’s crashing out, a resurrected deal or another referendum to settle the issue, the nation cannot remain trapped in a dismal nether world stranded between leave and remain. Halloween, October 31, is the deadline.

Really? It is true enough that Britain has made itself a laughing stock on the international stage. Clear also that the uncertainty is sapping the strength of the economy. But the closer you look, the harder it is to map the route that releases it from the present limbo. The nation is divided and parliament paralysed. Inertia suddenly looks the most powerful force.

Boris Johnson says otherwise. The frontrunner in the crowded contest for the succession to Theresa May has a plan. His pal Bertie Wooster agrees it is a wizard wheeze. Prime minister Johnson will head to Brussels with a list of demands. The self-styled heir to Winston Churchill will remind those foreign chaps that Britain won the war. The white flag will be raised over the Berlaymont. Mr Johnson will return to London clutching a very large cake.

I do Mr Johnson a slight disservice. The strategy is a tad more sophisticated than could be found in the pages of PG Wodehouse. Canvassing the votes of Tory MPs, he has assured visitors to his Westminster office he will first visit Paris and Dublin. He will charm French president Emmanuel Macron and Irish prime minister Leo Varadkar into submission. Brussels will then have no option but to rewrite the Irish backstop chapter of the withdrawal deal.

This is fantasy on the scale of Mr Johnson’s claim some time ago that Michel Barnier and his Brexit team would allow Britain to have our cake and eat it. We should not be surprised. During his spell as foreign secretary, officials reported that Mr Johnson’s response to inconvenient facts was to cover his ears with his hands and hum the national anthem.

The latest promise that by threatening no deal he will secure just such a have-cake-and-eat-it settlement is a transparent charade. The EU27 are not about to change their minds on the substance of the withdrawal agreement. In truth, Mr Johnson’s great wheeze amounts to nothing more than a pledge that Britain will crash out in October.

In the real world, the past three years have seen national polarisation serve as the midwife of political paralysis. No one should lament Mrs May’s fall. Her approach to negotiations, at once stubborn and inept, elevated an attempt to avoid a Tory split over any objective measure of the national interest. Remainers were scorned. She might just have got away with it. But then she squandered her majority in a badly misjudged general election.

While Britain voted by a slim margin to leave the EU, the only two things upon which parliament has yet agreed are that Mrs May’s deal is unacceptable and that Britain must not leave without a settlement. Labour leader Jeremy Corbyn takes a share of the blame for playing an entirely cynical game. But it was Mrs May who declared Brexit the property of the Tories.

Mr Johnson is far from alone among the Tory leadership contenders in advocating a complete rupture. The success of Nigel Farage’s Brexit party in the elections for the European Parliament has many rushing towards the wilder shores of English nationalism. But the Tory party still has a few sane pragmatists and in John Bercow the House of Commons has a Speaker determined to ensure that its voice is not silenced. That makes it hard to see how the Brexit fundamentalists secure a majority.

Another possibility, of course, is that Mr Macron’s patience will snap and the EU27 will rally in October around a French policy of refusing to extend the deadline. After the delusions and duplicity that have marked the British negotiating strategy you can see why Mr Macron’s frustrations might be shared. But an approach that would amount to Britain’s expulsion? I am doubtful.

Three years after the referendum vote it is still hard to grasp that even a decision as consequential as Brexit could tip the nation into such unbridled chaos. Divided at home and diminished abroad, Britain now confronts a lost decade. David Cameron, Mrs May’s predecessor and the author of the mess, is putting the final touches to his memoirs. What on earth will he say?

The EU has other preoccupations. The Strasbourg elections preview a change in the EU’s top jobs, including the presidents of the European Commission, European Parliament and the European Council, as well as head of the European Central Bank. It will be November before things are back to normal.

So the Brexit deadline most likely will be extended again. And then what? Well, a sizeable slice of the UK population will remain noisily unhappy. They will accuse all and sundry of subverting democracy. But the noisier they become and the further we travel from 2016 the more eccentric Brexit will seem to a wider audience. How long before Mr Farage is barricading the Channel tunnel while the nation talks about education and health, tax and crime?

Barring a referendum, doing nothing looks more and more like the default option. Better to leave the fight unsettled and talk about something else than to reopen constantly the old wounds. Perhaps limbo is not such a terrible place when the alternative is Brexit hell.

Check Out The Epic Battle In The Gold Market

It is generally, if grudgingly, accepted that the “paper gold” markets – that is, the people trading futures contracts and options – are able to dictate the metal’s price and have used this power to suppress and delay gold’s inevitable trip to the moon.

It’s also generally believed (at least by gold bugs) that demand for physical gold will someday overwhelm these paper games, sending the metal to its intrinsic value somewhere north of $10,000/oz.

The timing of this shift in market dynamics is impossible to predict, of course, but when it comes its early stage will look a lot like what’s happening right now.

This month’s sudden jump from $1,200 to $1,400 was at least in part driven by trend following speculators adding to their long bets. Since those speculators are almost always wrong at big turning points, the result is a very bearish signal for the next few months.
The following chart shows yet another week of increases in speculator net longs and commercial net shorts, with speculator long positions now a historically extreme five times their shorts.

Gold COT physical gold

The next chart shows the same data graphically, illustrating how unusual this setup is compared to the previous couple. Anyone who’s been watching futures drive the price action over the past decade has to be a little worried right now.

Gold COT chart physical gold

And yet … the fundamentals are screaming “buy gold!”, making it at least possible that global demand for physical precious metals is finally strong enough to steamroll the futures markets, setting off the long-awaited generational bull run.

Among those fundamentals are a new round of central bank easing
Is the Federal Reserve about to cave to Trump’s demand to cut interest rates?
(LA Times) – President Trump has been hectoring the Federal Reserve to lower interest rates, and financial markets are screaming for a cut. This even though rates are historically low and the economy is sailing along, albeit with some recent gray clouds. 
What’s a central bank to do? 
Fed policymakers stood pat on rates after their two-day meeting last Wednesday. But it looks as if they already may have backed themselves into a corner. 
In recent weeks the Fed and its chairman, Jerome Powell, have signaled they’re prepared to lower rates if the outlook worsens. Just three months ago, they were favoring a rate hike or no action.

… continued strong buying by Russia and China…
Russia Bought Another 200K Ounces Of Gold Right Before The Rally
(Kitco) – Russia continues to add gold to its reserves, buying another 200,000 ounces or 6 tonnes of gold in May, according to the country’s central bank. 
The latest purchase was made right before the latest gold rally shook the markets and the yellow metal surged to six-year highs and breaching the $1,400 an ounce level last week. 
Moscow has been actively buying up gold this year, adding more than 77 tonnes since the beginning of 2019, with around 40% of that bought in February. 
In April, Russia purchased 550,000 ounces, preceded by 600,000 ounces in March, one million ounces in February, and 200,000 ounces in January. 
During the last decade, Russia’s gold reserves have gone from 2% of total reserves to 19% as of the end of 2018 Q4, according to the World Gold Council’s data.

… and surging silver imports by India…
U.S. Silver Exports To India Explode Past Six Months
(SRS Rocco) – While silver investment demand in the West continues to remain weak, Indians are purchasing the white shiny metal hand over fist. In just the past six months, U.S. silver exports to India have exploded to record highs. Yes, there is no better way of putting it if we compare how little silver India imported from the United States during the previous six month period. 
Furthermore, according to the Metals Focus Consultancy, they forecast even stronger Indian silver demand in 2019 due to rural Indians spending their “Cash Handouts” from the government to assist local economies ahead of the President’s election. How interesting. When Americans receive a government check in the mail, they use it to buy more throw-away crap they don’t need. However, many Indians use it to purchase silver as an investment. 
Regardless, the chart below shows just how much silver the U.S. has exported to India over the past six months; 
India silver physical gold

Add in unsettled geopolitics, including trade war with China, possible shooting war with Iran, and the very real prospect of a far-left government taking power in the US next year, and you get a world of massive deficits, rising taxes, zero-to-negative interest rates and volatile oil markets. This is horrible for most people, but great for gold.

Another way of viewing the above is as a generational shift from the old practice of governments, banks and hedge funds manipulating precious metals for their own benefit, and towards buyers seeking safe haven assets that they won’t sell for years or decades. The latter’s appetite is growing while supply is not. The inevitable result will be a rising price.
Markets, unfortunately, never give straight answers to questions like “is this the long-awaited regime change or just another head fake?” So betting big on either scenario is speculation rather than investing. The best strategy remains dollar cost averaging into precious metals and out of bonds and other financial assets while watching the world unravel from the safest possible distance.

Remember the ‘10,000 Hours’ Rule for Success? Forget About It

By Jim Holt

Credit Cari Vander Yacht

Why Generalists Triumph in a Specialized World
By David Epstein

Are you a generalist or a specialist? Do you strive for breadth or depth in your career, in your life?

After all, you can’t have both. Your time on earth is finite, as are your energy and attention. If you concentrate on doing one thing, you might have a chance of doing it really well. If you seek to do many things, you’ll taste a wider variety of human goods, but you may end up a well-rounded mediocrity — a dilettante.

Folk wisdom holds the trade-off between breadth and depth to be a cruel one: “jack-of-all-trades, master of none,” and so forth. And a lot of thinking in current pop-psychology agrees.

To attain genuine excellence in any area — sports, music, science, whatever — you have to specialize, and specialize early: That’s the message. If you don’t, others will have a head start on you in the 10,000 hours of “deliberate practice” supposedly necessary for breakout achievement.

But this message is perversely wrong — so David Epstein seeks to persuade us in “Range.”

Becoming a champion, a virtuoso or a Nobel laureate does not require early and narrow specialization. Quite the contrary in many cases. Breadth is the ally of depth, not its enemy. In the most rewarding domains of life, generalists are better positioned than specialists to excel.

If true, this is good news. It means that excellence and well-roundedness naturally go together; that each of us — in principle, at least — can realize the “comprehensiveness and multiplicity,” the “wholeness in manifoldness” that Nietzsche celebrated as the essence of human greatness. (Nietzsche, by the way, was himself quite the generalist, achieving distinction as a philosopher, a classicist and a composer before he came to a sticky end.)

So what is the evidence for this happy thesis? Epstein serves up a feast of it, displaying his own impressively wide range of interests: art, classical music, jazz, science, technology and sports. (A former senior writer for Sports Illustrated, he is previously the author of “The Sports Gene.”) Although the book unfolds according to a formula that has become familiar — story, study, lesson; rinse and repeat — the storytelling is so dramatic, the wielding of data so deft and the lessons so strikingly framed that it’s never less than a pleasure to read. Indeed, so smooth and persuasive is Epstein’s marshaling of evidence that I almost failed to notice an ambiguity lurking at the heart of his case.

It’s there at the very opening of the book, where Epstein contrasts Tiger Woods with Roger Federer. Woods’s rise to greatness exemplifies early and fiercely single-minded specialization: golf, golf, golf, from the age of 2. Federer’s typifies the opposite: a casual interest in a succession of sports — skiing, basketball, soccer — with an eventual focus on tennis that left him starting well behind his teenage peers.

Why did the hyperspecialized “Tiger path” lead to stardom in the one case, and the meandering “Roger path” in the other? Epstein points to the nature of the two sports. Golf (he claims) is a more specific skill than tennis: It is less dynamic, with a narrower set of patterns, and hence more rewarding of repetitive practice. Specialists flourish in such “kind” learning environments, where patterns recur and feedback is quick and accurate. By contrast, generalists flourish in “wicked” learning environments, where patterns are harder to discern and feedback is delayed and/or inaccurate.

Golf, chess, classical-music performance, firefighting and anesthesiology are (in this sense) kind learning environments; tennis and jazz are less kind; emergency-room medicine, technological innovation and geopolitical forecasting are downright wicked — as is much of the rest of modern life. And it’s getting wickeder: So Epstein’s many examples from corporate culture, higher education and the space program seem to suggest. Increasingly the advantage is going to generalists who have broad integrative skills. One star innovator even descries the inflection point, telling Epstein that “specialists specifically peaked about 1985.”

Well, that’s one line of argument in favor of being a generalist. But does it really apply to Roger Federer? True, Federer played a variety of sports; but once he figured out that tennis was his thing, he became pretty monomaniacal about it. He sampled widely (like a generalist), then focused narrowly (like a specialist). A more extreme case of this pattern is Vincent van Gogh, who pinballed from one potential career to another — pastor, teacher, bookseller — before, just a few years prior to his death at the age of 37, finally discovering his true passion in art. As Epstein tells it, van Gogh was optimizing “match quality”: the degree of fit between who he was and what he did. That meant trial and error — attaining self-knowledge by living, knowing when to quit — and a consequent delayed start. (Presumably Mozart, who had a similarly abbreviated life, was just lucky that his father optimized his match quality early on by putting him in front of a harpsichord when he was just 3.)

So Epstein gives us two distinct reasons for thinking the generalist might have an edge over the specialist: (1) Generalists are better at navigating “wicked” learning environments. (2) Generalists end up with better “match quality.” What he doesn’t seem to notice is that these two reasons imply contradictory prescriptions on how to live. If life is “wicked,” you should start off broad and stay that way. If life is about “match quality,” then you should start off broad and then go narrow when you find what hits your sweet spot. What are we to do?

Happily, “Range” offers such a wealth of thought-provoking material that you’ll probably be able to work that out for yourself. Suppose science is your calling. Then, the evidence suggests, you should strive for broadness throughout your career. Students who take an interdisciplinary array of science courses are better at thinking analogically; researchers with offbeat knowledge combinations score more “hit” papers; Nobel laureates in science are more likely than their less-recognized peers — 22 times as likely! — to have artistic pursuits outside their field.

Or suppose you aspire to be an inventor. Here specialists and generalists each have their advantages. But the really enviable type is the “polymath,” who possesses deep expertise in one or more core areas but also knows the “adjacent stuff” in dozens of other technological domains. While polymath inventors are less deep than the specialists, they tend to be even broader than the generalists. Schematically, polymaths resemble a T (broad + deep) or even a π (broad + double-deep). They’re like the “Hamilton” creator Lin-Manuel Miranda, who says, “I have a lot of apps open in my brain now.”

Which leads to a caveat. Miranda is a very talented fellow; so are most of the other “high fliers” who crop up in “Range.” What worries me is that this emphasis — what social scientists call “restriction of range” — might skew Epstein’s moral just a bit.

Let’s say, as a crude approximation, that Success = talent + practice + luck. Those who are richly endowed with talent may find it easy to excel in multiple domains, to be Renaissance men and women, to be decathletes of life. (The example of Leonardo da Vinci comes to mind.) The rest of us, however, must lean heavily on the practice part of the equation. If success is what we’re aiming at, then perhaps we should seek out the “kindest” learning environment open to us and give it our all. If, on the other hand, we want to live well by sampling a smorgasbord of human goods — learning a bit of quantum mechanics, running a marathon, playing viola in an amateur string quartet, fighting for local justice — then we might be doomed to fall short of transcendent achievement.

But we can still be snobbish about it. Just declare: “I am a polymath. You are a generalist. He is a dilettante.”

North Korean Missiles and the US Red Line

For perhaps the first time in decades, Pyongyang feels like it’s operating from a position of strength.

By Phillip Orchard


The tacit deal between the U.S. and North Korea is still holding: In exchange for scaled back joint U.S.-South Korea military exercises, North Korea has held off on intercontinental ballistic missile testing. U.S. President Donald Trump affirmed as much during his state visit to Tokyo this weekend, brushing off Japanese Prime Minister Shinzo Abe’s concerns about North Korea’s tests of new short-range missiles, which it launched into the sea of Japan earlier this month – Pyongyang’s first ballistic missile tests in more than a year and a half. So long as the North refrains from resuming ICBM testing, the U.S. can be content to let the impasse drag out indefinitely, even if in public Washington continues to demand full denuclearization.



But the test of the North’s newest missiles, which appear curiously similar to Russian Iskanders, along with other recent developments, illustrates the reality that Pyongyang can’t as easily stand pat. It needs sanctions relief and economic aid. It’s keen to drive a wedge between the U.S. and its allies and further reduce U.S. military options. And now, with a growing capability to deposit a nuclear weapon just about anywhere in the region, it can move more aggressively to try to meet its needs – even without crossing Washington’s red line of testing missiles that can hit the U.S. mainland.
South Korea in the Crosshairs
North Korea’s primary reason for going nuclear was regime security. Pyongyang watched as Moammar Gadhafi and Saddam Hussein abandoned their nuclear programs and met inglorious deaths. It noted that when China, India and Pakistan went nuclear, the West briefly raised hell before quickly shifting to engagement.

But there are other benefits to its nuclear program. For example, there’s newfound prestige abroad and, perhaps more important for the regime of Kim Jong Un, at home. It also allows Pyongyang to act more aggressively in the region without worrying about an overreach that would trigger major blowback. The risks of going to war with a nuclear state are simply too high to respond to a provocation with enough conventional force to deter future provocations, typically forcing other regional powers to hold or at least limit their fire out of fear of escalation. This paradigm has kept a lid on India and Pakistan’s conflict over Kashmir since the late 1990s.

North Korea could put this dynamic in play with the South. Reunification of the Korean Peninsula is a geopolitical imperative for both Seoul and Pyongyang. Neither can reunify by force without significant outside help. Under President Moon Jae-in, South Korea, in an effort to stave off another U.S. war on the peninsula, align the strategic interests of the two Koreas, and lay the groundwork for a long-term reconciliation, has pursued a robust engagement agenda with the North. Pyongyang, which needs economic assistance and is keen to see the U.S. gone from the peninsula, would prefer that these happen through reconciliation rather than provocation. But, constrained primarily by the inflexibility of the U.S. position on sanctions and by other factors like his declining popularity at home, Moon’s outreach has largely stalled. And U.S.-South Korea exercises, though scaled back and redesigned to avoid simulating an invasion of the North, have continued.

Thus, one goal of North Korea’s latest missile and artillery tests is to persuade Seoul that, if forced by Washington to pick a side, Pyongyang is its best long-term bet. The particular missile tested reinforces this message in two ways. One, it is the North’s first solid-fuel short-range ballistic missile with a range covering all of South Korea, including major U.S. military bases in the southern parts of the country and key ports where U.S. forces would arrive to support an invasion. (Unlike their relatively unstable liquid fuel counterparts, solid fuel engines don’t need to be fueled up right before use, allowing for quicker launches, greater mobility, camouflaging and pre-positioning options.) Two, the Iskander can fly on a flat trajectory at an altitude of 25-30 miles (40-50 kilometers). This would potentially allow it to exploit a coverage gap in the U.S. missile defense architecture currently deployed on the peninsula; that altitudeis just outside of the range of Patriot missile interceptors and just below the engagement floor of THAAD and Aegis systems. For good measure, it’s also believed to have greater maneuverability at low altitudes than most ballistic missiles, further complicating missile defense plans.

In other words, Pyongyang is trying to make the case to Seoul that preserving U.S. security guarantees is no longer worth the cost of derailing reconciliation with the North. The new missile alone won’t do the trick; South Korea can’t abandon the leverage of U.S. backing just yet, and it still needs U.S. counterstrike guarantees to remain in place. But, at a time when the White House is repeatedly threatening to pull up stakes if Seoul doesn’t pay the full cost of the U.S. presence on the peninsula (plus, per Donald Trump’s insistence, as much as a 50 percent premium), it deepens the wedge between Washington and Seoul and tilts Seoul’s long-term calculus in Pyongyang’s favor.

South Korea is certainly preparing for the day when it needs to stand on its own. Recent moves by the South, such as the launch of new military exercises aimed at accelerating the return of wartime operational control over its own forces from the U.S., should be viewed in this light.
Getting Washington’s Attention
The new missile tests were also aimed at nudging Washington away from its Hanoi summit position of refusing any sanctions relief until the North fully denuclearizes. Sanctions have never been able to bring the Kim regime to its knees. But Kim is increasingly staking his legacy on his ability to deliver economic prosperity – repeatedly pledging in public that while a nuclear program brought isolation and poverty, nuclear statehood will bring the opposite. Now, he needs to show some results. The international sanctions regime could unravel even if the U.S. declines to relent; Russia or China could block renewal of U.N. sanctions. But with these and other countries wary of getting slapped with secondary sanctions by the U.S., Pyongyang is eager to get Washington to back off as well.

In this context, that the North’s new missile appears at minimum inspired by Russian missile designs is noteworthy. There’s currently no evidence that Moscow helped the North build its new missile. North Korea has proved adept at swiping and cloning other military technologies in the past, and since Russia has exported Iskanders to other countries and used them in Syria, it’s not hard to imagine the North accessing the technology in other ways. (South Korea and Ukraine also have missile programs inspired by the Iskander.)



But it’s also not far-fetched to hypothesize that there’s indeed a fresh set of Russian fingerprints on North Korea’s new missiles. The tests occurred less than three weeks after Kim’s high-profile visit with Russian President Vladimir Putin in Vladivostok in late April. Russia shares the North’s interest in seeing the U.S. alliance structure in Northeast Asia unravel. And for decades, Moscow has sought to retain influence in Pyongyang primarily as leverage against Washington on other more pressing issues in Central and Eastern Europe. Whether or not Moscow actually transferred missile technology to Pyongyang, the tests serve as a reminder that it could if the U.S. doesn’t play ball elsewhere – perhaps even helping Pyongyang overcome critical hurdles in its ICBM program.

This suits Pyongyang’s interests. At present, the North has yet to demonstrate that it has mastered ICBM re-entry capability – the trickiest part of long-range missile development. Its Hwasong-15 ICBMs can fly far enough to hit the U.S. mainland, but there’s no evidence they can hit their target with any degree of certainty. To keep the U.S. from stalling indefinitely on sanctions relief, Pyongyang wants to persuade Washington of its ability (with a bit of outside help) of making this last leap in missile technology. It’s attempting to make the case that the suspension of its ICBM program was a good faith move meriting reciprocal concessions and that, most important, it was a choice – one that Pyongyang could choose to reverse.

We’re doubtful that Pyongyang will push forward with ICBM testing again anytime soon, with or without Moscow’s help. There just wouldn’t be that much to gain by provoking the U.S. in such a manner, and potentially a lot to lose. At minimum, doing so would make it easier for the U.S. to sustain a broad sanctions front. But for perhaps the first time in decades, the North feels like it’s operating from a position of strength and has every interest in seeing just what nuclear statehood entitles it. Don’t expect Kim to stay quiet.

A Guidebook for Financial Crisis Managers

After World War II, Winston Churchill confidently asserted that history would treat him kindly because “I propose to write that history.” Now, a decade after the global financial crisis, three of the key players in that episode have co-authored a book that is interesting not so much for its treatment of the past as for its proposals for the future.

Howard Davies


EDINBURGH – Journalists, the adage goes, write “the first rough draft of history.” It’s a grand claim, but perhaps the best of them achieve something close to that. In the case of the Great Financial Crisis of 2008, Andrew Ross Sorkin of The New York Times did so in his book Too Big to Fail, which remains a useful description of how it felt on Wall Street when the markets began to collapse. Sorkin had good access to the key people involved.

The second draft of history is often written by the key people themselves. After World War II, Winston Churchill confidently asserted that history would treat him kindly because “I propose to write that history.” When the financial crisis erupted, the same thought may have crossed the minds of Hank Paulson, Ben Bernanke, and Tim Geithner, who were US Treasury Secretary, Chairman of the Federal Reserve Bank, and President of the New York Fed, respectively. All three published lengthy memoirs explaining why they did, and didn’t, do what they did and didn’t do – inevitably, with a degree of self-justification in each case.

Now, a decade later, the three of them have co-authored what might be described as version 2.1 of that episode’s history. At the cost of far fewer trees, Firefighting: The Financial Crisis and Its Lessons briefly summarizes the conclusions they now draw.

William Wordsworth described the origin of poetry as “emotion recollected in tranquility.” That might overstate the case for this book a little, but they have made a stab at pulling away from the day-to-day narratives of their earlier work to offer calmer judgments, now that the dust has settled and we can see the longer-term impact of the decisions they made in haste.

The style is a little curious at times. It is full of observations like: “Ben did this…. Tim thought that… Hank took a different view,” and so on, as if the Three Musketeers had been interviewed by an oral historian. There is also some routine praise for the two presidents they worked with, George W. Bush and Barack Obama, and a reprise of their frustration with people who did not see the world their way, and obstructed their solutions, like Sheila Bair of the Federal Deposit Insurance Corporation (FDIC) and various pesky members of congress.

The main interest lies not so much in the narrative chapters, which cover the same ground as their earlier books, as in their policy recommendations for the future. It is noteworthy that they have been able to reach consensus on quite a radical program. Three proposals in particular should cause policymakers in the United States and elsewhere to think hard.

First, Bernanke, Geithner, and Paulson point out that imposing higher capital requirements on banks caused much credit creation to migrate to the non-bank sector, where US authorities still lack authority to intervene, whether preventively, by requiring higher capital reserves, or by providing financial support to stabilize markets if necessary. They argue for an FDIC-style insurance model for the broader financial system. Quite how that would work is left unclear, but the idea is worth further thought.

Second, they note that the US system of financial regulation has barely been reformed, despite the many weaknesses revealed by the crisis. In their view, “the balkanized financial regulatory system could use reform, to reduce turf battles among redundant agencies with overlapping responsibilities.” They tried to promote change, but only one small agency, the ineffective Office of Thrift Supervision, has been abolished. Even after the Dodd-Frank overhaul, they lament, “there is no single regulator responsible for safeguarding the system as a whole.” That is a damning commentary on the Financial Stability Oversight Council, which was supposed to fulfill that function.

They are a little coy about the identity of those “redundant agencies,” but the Commodity Futures Trading Commission must be on their list. No other country has separate regulators for cash equities on the one hand, and derivatives on the other. Only defensive congressional fiefdoms prevent rational reform in that area.

The third proposal is targeted principally at the Trump administration, though Congress is again also implicated. Bernanke, Geithner, and Paulson believe that current US fiscal policy is deeply misguided. The deficit is too high, at a time when the economy is growing healthily. That is bad economics today, and, more important, the authorities could, as a result, find it difficult to relax fiscal policy to combat a future recession. As they put it, “the use of fiscal adrenaline could be limited just when it is needed most.” There is an urgent need to “restock the emergency arsenal,” particularly when there is relatively little scope to relax monetary policy. The Fed began a process of normalizing monetary policy, but has not completed the job, and President Donald Trump is doing what he can to prevent them from doing so, by heckling from the sidelines.

The Three Musketeers remain positive about some elements of the post-crisis program. Bank capital has been greatly strengthened, and the transparency of the derivatives markets materially enhanced. Those changes make the financial system safer. But their agenda for further reform is substantial, and fundamental. And, next time, we may not be as fortunate in the quality and resourcefulness of our crisis managers – or in the wisdom of their political masters.

Howard Davies, the first chairman of the United Kingdom’s Financial Services Authority (1997-2003), is Chairman of the Royal Bank of Scotland. He was Director of the London School of Economics (2003-11) and served as Deputy Governor of the Bank of England and Director-General of the Confederation of British Industry.