Please Don’t Completely Destroy...

Doug Nolan


I’ve been dreading this. In the midst of all the policy responses to the collapse of the mortgage finance Bubble, I recall writing something to the effect: “I understand we can’t allow the system to collapse, but please don’t inflate another Bubble.”

It was obvious early on that policymakers had every intention to reflate Bubbles.

There was a failure to grasp the most critical lessons from that terrible boom and bust episode: Aggressive monetary stimulus foments market distortions, while promoting risk-taking, leveraged speculation and latent risk intermediation dysfunction.

Years of deranged finance ensured unprecedented economic imbalances and deep structural impairment. There was no predicting a global pandemic. Yet today’s acute financial and economic fragility – and the risk of financial collapse - are directly traceable to years of negligent monetary management.

I have to adjust my message for this post-Bubble backdrop: I understand we can’t allow the system to collapse, but Please Don’t Completely Destroy the Soundness of Central Bank Credit and Government Debt.

Does anyone realize what’s at stake?

I don’t see another Bubble on the horizon.

Each reflationary Bubble must be greater in scope than the last. Mortgage finance was used for post-“tech” Bubble reflation. Policymakers unleashed the “global government finance Bubble” during post-mortgage finance Bubble reflation. Massive international inflation of central bank Credit and sovereign debt went to the heart of global finance – the very foundation of “money” and Credit.

There is no greater Bubble waiting in the wings to reflate the collapsing one. We are instead left with desperate measures to expand central bank “money” and government borrowings that will surely appear absolutely reckless in hindsight.

Let’s touch upon prospects for Bubble reflation. There was an abundance of positive spin coming out of the previous bust period. “If only the Fed hadn’t incompetently failed to bail out Lehman, crisis could have – should have - been avoided.”

Reckless home lending caused the crisis, and regulators will never tolerate a replay. Prudent “macro-prudential” policies and an abundantly capitalized banking sector ensure stability.

From the crisis experience, central bankers learned to move early and aggressively to nip market instability in the bud.

The previous crisis was labeled “the 100-year flood.” Onward and upward, with enlightened central banking both leading the way and ensuring a smooth ride.

With assurances of central bank liquidity and market backstops, an unprecedented Bubble inflated throughout global leveraged speculation. Popular “carry trades,” foreign-exchange “swaps” and myriad derivatives (incorporating leverage) and such morphed during this cycle into a colossal self-reinforcing Credit Bubble.

The resulting liquidity became a prominent fuel source for asset and economic Bubbles, reminiscent of the late-twenties.

Can’t a massive expansion of central bank Credit (securities purchases, lending facilities, swap lines, etc.) now reflate the Bubble?

I seriously doubt it.

Risks associated with various strategies have been revealed. Leverage in its many forms has been, once again, shown to be a serious problem. Rather than the proverbial “100-year flood,” for the second time in less than 12 years the world is facing the worst financial crisis since the Great Depression.

Burn me once, shame on you. Fool me twice…

It’s not hyperbole today to use “depression” to describe the unfolding deep global economic downturn. Coronavirus uncertainty makes it impossible to forecast the length and severity of the economic collapse.

In the best case, the rapidly expanding outbreak in Europe and the U.S. subsides over the coming weeks. Even so, economies around the world will take huge hits. And prospects for the coronavirus to reemerge next winter (and emerge more powerfully during the southern hemisphere’s approaching winter season) will keep risk-taking well-contained for many months to come.

Coming out of the previous crisis, the global economy had the benefit of a powerful “locomotive” of accelerating expansions in China and the emerging markets more generally.

Importantly, post-Bubble reflationary measures came as these fledgling Bubbles were attaining powerful momentum. Beijing pushed through an unprecedented $600 billion stimulus package, while aggressive monetary policy stoked EM booms generally. Keep in mind that total Chinese banking system assets inflated from about $7 TN to $40 TN since the crisis.

Looking ahead, the global economy is without “locomotives.” It evolved into one massive global financial Bubble financing a precarious synchronized global economic expansion. And I believe speculative finance became a prevailing source of Global Bubble Finance.

Here’s where I could be wrong. I seriously doubt this Bubble is revivable. The unwind will likely unfold over weeks and months. Extraordinary central bank measures will spur rallies and hopes for recovery. At times, it will appear that liquidity is returning. Yet the Bubble will not be reflated.

Confidence has been shattered. Faith that central banks have everything well under control has been broken. Myriad fallacies have been exposed. Central banks can’t guarantee liquid markets, especially in a Bubble-induced highly levered speculative environment. The entire derivatives universe has been operating on the specious assumption of liquid and continuous markets.

History is unambiguous: markets experience bouts of illiquidity, dislocation and panicked crashes. The fantasy that contemporary central bank monetary management abrogates illiquidity and market discontinuity risks is being debunked. The mania in finance has, finally, run its course.

Leverage has to come down – and I believe it will stay down for years to come. A month ago risk could be disregarded – had to be disregarded. Market, financial, economic, social and geopolitical risks matter tremendously now, and they will matter going forward. In the best-case scenario, the coronavirus peaks over the coming weeks. I don’t want to ponder the worst-case.

A Friday-evening Zerohedge headline says it all: “Stocks Suffer Worst Week Since Lehman Despite Biggest Fed Bailout Ever.” In last week’s CBB, I wrote that we “saw more than a glimpse of what the beginning of financial collapse looks like”. This week’s sequel was how global financial collapse gains momentum – especially Wednesday.

I watched the ’87 stock market crash on a Quotron machine. I’ve witnessed scores of bursting Bubbles and collapses – including bonds in ’94, Mexico ’95, SE Asia ‘97, Russia/LTCM in ’98, “tech” in 2000, 9/11, the spectacular 2008 collapse and 2012’s near melt-down. None of those previous crises were as alarming as current market dynamics.

The dollar index surged 4.1% this week, in a perilous market dislocation. The Mexican peso sank 10.2%, and the Russian ruble fell 9.2%. The South African rand dropped 7.6%, the Czech koruna 7.5%, the Indonesian rupiah 7.4%, the Hungarian forint 7.0% and the Brazilian real 4.5%. Massive “carry trade” losses (i.e. borrow in dollars to lever in higher-yielding EM bonds) were compounded by collapsing EM bond prices (surging yields). Even with Friday’s bond rally (yield decline), yields this week surged 96 bps in Peru, 82 bps in South Africa, 70 bps in Turkey, 44 bps in Indonesia, and 39 bps in Thailand.

Ominously, the rout was even more pronounced in dollar-denominated EM bonds.

This market rallied sharply Friday after the announcement of enhanced central bank swap facilities. Mexican yields sank 44 bps Friday but were still up 72 bps for the week. Brazilian yields surged 68 bps this week, even after Friday’s 34 bps decline.

For the week, dollar-denominated yields were up 152 bps in Ukraine, 131 bps in Qatar, 97 bps in Chile, 92 bps in Philippines, 92 bps in Turkey, and 74 bps in Indonesia. This type of dislocation in highly levered markets signals global markets are “seizing up.”

Market dislocation went much beyond the emerging markets. Crude oil’s 29% collapse was behind the Norwegian krone’s stunning 13.9% decline. The Australian dollar fell 6.7%, the Swedish krona 6.6%, the New Zealand dollar 5.9%, the British pound 5.3%, the Canadian dollar 3.9%, the euro 3.8%, the Swiss franc 3.6%, and the Japanese yen 3.0%. Mayhem.

Pointing to acute systemic risk, “developed” nation bond markets also dislocated. After beginning the week at 1.85%, Italian yields spiked to 2.99% in panicked Wednesday trading. Greek yield began the week at 2.10% (up from 0.96% on Feb. 21) and traded as high as 4.09% Wednesday.

Portuguese yields were at 0.86% in early-Monday trading before spiking to 1.61% by mid-week. Spanish yields surged from 0.66% to 1.38%. Even German 10-year bund yields rose from Monday’s negative 0.59% to Wednesday’s negative 0.24%.

Wednesday’s meltdown spurred the ECB into emergency action, announcing a new $800 billion QE plan. ECB buying was surely behind the big end-of-week rallies in euro zone periphery bonds.

March 15 – Financial Times (Martin Arnold): “Christine Lagarde has apologised to other members of the European Central Bank’s governing council for her botched communication about its new monetary policy strategy which triggered a bond market sell-off last week.
Speaking to the ECB’s top decision-making body in a call on Friday, the central bank’s president said she was sorry for comments that led to the biggest single-day fall in Italian government bonds in a decade… In Thursday’s press conference Ms Lagarde said it was not the ECB’s role to ‘close the spread’ in sovereign debt markets…”

Lagarde’s “gaff” was ridiculed by market pundits, with comparisons to communication blunders early in Powell’s chairmanship. Yet it should have never become the ECB’s role to narrow borrowing spreads, or for the Fed and global central bankers to kowtow and backstop the securities markets. Years of central bank cultivation of risk-taking and leveraged speculation are coming home to roost in the a very bad way.

Evidence of acute financial instability made it to U.S. shores this week. “Short-Term Bond Market Roiled by Panic Selling.” “Government Bonds Buckle as Investors Dump Haven Assets for Cash.” “How a Little Known Trade Upended the U.S. Treasury Market.” It was the nightmare scenario for highly levered contemporary finance: Illiquidity and rising safe haven yields, rapidly widening Credit spreads, surging CDS prices, de-risking/deleveraging, general market illiquidity and dislocation. The definitive recipe for devastating outcomes. Even more alarming, systemic dislocation unfolded not long after the Fed announced a new $700bn QE program.

March 15 – Wall Street Journal (Nick Timiraos): “The Federal Reserve slashed its benchmark interest rate to near zero Sunday and said it would buy $700 billion in Treasury and mortgage-backed securities in an urgent response to the new coronavirus pandemic. The Fed’s rate-setting committee, which delivered an unprecedented second emergency rate cut in as many weeks, said it would hold rates at the new, low level ‘until it is confident that the economy has weathered recent events and is on track’ to achieve its goals of stable prices and strong employment. ‘We have responded very strongly not just with interest rates but also with liquidity measures today,’ Fed Chairman Jerome Powell said during a press conference Sunday evening…”

As the week unfolded, it was full-fledged financial crisis. It was difficult to keep track of the various emergency measures.

March 17 – Bloomberg (Christopher Condon, Craig Torres, and Matthew Boesler): “The Federal Reserve unleashed two emergency lending programs on Tuesday to help keep credit flowing to the U.S. economy amid strain in financial markets… The central bank is using emergency authorities to establish a Commercial Paper Funding Facility with the approval of the Treasury secretary… The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund. Later in the day it announced a Primary Dealer Credit Facility, also with backing from Treasury. The moves follow mounting pressure to act after the Fed’s Sunday evening emergency interest-rate cut to nearly zero and other measures failed to stem market stress as investors reacted to the risk that the virus will tip the U.S. and global economy into a recession.”

March 18 – Reuters (Howard Schneider and Megan Davies): “The U.S. Federal Reserve rolled out its third emergency credit program in two days to battle the fallout from the virus crisis, this one aimed at keeping the $3.8 trillion money market mutual fund industry functioning if investors make rapid withdrawals. The Money Market Mutual Fund Liquidity Facility unveiled on Wednesday will make up to 1-year loans to financial institutions that pledge as collateral high quality assets like U.S. Treasury bonds that they have purchased from money market mutual funds. The Fed is in effect encouraging banks to buy assets from those mutual funds, insulating the funds from having to sell assets at a discount if they come under pressure from households or firms wanting to withdraw money.”

Despite it all, U.S. markets convulsed uncontrollably. U.S. equities were bludgeoned (S&P500 down 15.0% and Nasdaq falling 12.6%). Yet the more alarming developments were within the Credit market. Dislocation was deep and broad-based – Treasuries, investment-grade corporates, high-yield, municipal debt, MBS, commercial paper, CDOs and derivatives.

A popular investment-grade corporate ETF (LQD) collapsed 13% in three sessions (Tuesday through Thursday). Perceived safe and liquid (“money-like”) instruments were crushed in a panic (see “Market Instability Watch” below). ETF problems turned acute, as “investors” ran for the exits.

March 19 – Financial Times (Robin Wigglesworth): “When financial markets were rattled across the board last week, some investors and analysts thought they knew where to point the finger. ‘The risk parity kraken has finally been unleashed,’ one tweeted. Risk parity is a strategy pioneered by Bridgewater’s Ray Dalio. His pioneering fund, All Weather, has been hit hard in the recent turmoil, sliding 12% this year. That is quite a fall, for a strategy designed to function well in almost any market environment, by seeking to find a perfect balance of different asset classes such as stocks and bonds. Some analysts say such funds are not just succumbing to the wider turmoil but exacerbating it — especially the freakish sight of both supposedly defensive government bonds and risky equities selling off at the same time. ‘These moves suggest a rapid unwind of leveraged strategies like risk parity,’ said Alberto Gallo, a fund manager at Algebris Investments.”

With Treasuries these days providing minimal upside, losses escalated for myriad levered strategies. The global leveraged speculating community is hemorrhaging. The derivatives complex is in chaos. Goldman Sachs Credit default swap (5-yr CDS) prices surged 66 to 223 bps, the high since the 2012 European crisis. Bank of America CDS jumped 63 to 199 bps; Citigroup 60 to 214 bps; Wells Fargo 59 to 192 bps; Morgan Stanley 57 to 211 bps; and JPMorgan 53 bps to 176 bps. Ominously, the big U.S. financial institutions were at the top of the global bank CDS leaderboard this week.

If financial collapse can be avoided, an altered financial world awaits. The old scheme doesn’t work any longer. The era of cheap money financing massive stock buybacks has ended.

Leveraged speculation creating self-reinforcing liquidity abundance and asset inflation – over.

Buy and hold and disregard risk has been discredited. Blindly plowing savings to perceived safe and liquid ETFs is a thing of the past. In the new financial landscape, can derivatives be trusted? How about the private equity Bubble? The age of endless cheap finance for virtually any borrower or equity issuer (irrespective of cash flow or earnings) has reached its conclusion.

Meanwhile, “helicopter money” has arrived. Seemingly outrageous on Monday, Senator Schumer’s proposal for a $750 billion stimulus package was small potatoes compared to spending plans contemplated by week’s end. Federal Reserve Assets surged $356 billion the past week to a record $4.668 TN. Fed Assets were up $907 billion over the past 28 weeks, as it becomes clear a $10 TN balance sheet will unfold more quickly than I have anticipated.

The inexhaustible inflationists and eager MMT adherents see their opening. “Please Don’t Completely Destroy…” will haunt me – and the world. In a crisis, no one was willing to stand up to Bernanke. Today, “Helicopter Ben” looks fainthearted compared to what today’s central bankers are about to attempt. The experiment has gone terribly wrong, just as foolhardy bouts of inflationism have throughout history.

If they actually believe the massive inflation of central bank and government Credit will reflate markets and economies, they will be grievously disappointed. Government debt and central bank balance sheets have commenced what will be a frightening buildup. The inflationary consequences are today unclear. What is clear is it will be anything but confidence inspiring.

The desperate inflation of perceive money-like Credit will not encourage the leverage speculating community to re-leverage. It will not entice burned investors back into perceived money-like ETFs. It will not stabilize currency markets. However, it does risk a bond market debacle.

History’s greatest Bubble is nearing the end of the line. It’s all left to central bank credit and sovereign debt – the massive inflation of Credit at the very foundation of global finance. This experimental strategy is so fraught with peril that it is difficult to believe that risk will be disregarded – that things can somehow stabilize and return to normal. Confidence in central banks’ capacity to control global markets has been irreversibly damaged – and a long overdue market reassessment of the value of financial instruments has commenced.

Truth is stranger than fiction. The world’s weakened superpower cracks down, initiating a trade war with the aspiring superpower. Relations sour. Then, shortly after a watered-down compromise agreement is signed, a virus outbreak erupts in the aspiring country that leads to a global pandemic and major crisis in the superpower country.

The aspiring nation’s dictatorial government, seeking a scapegoat to pacify its shaken populace, blames the superpower for the virus and its collapsing Bubble. The superpower government, in an election year, points blame at the aspiring nation government. Two strongmen leaders face off. The American Virus vs. the Chinese Virus, with consequences that are chilling to contemplate.

Two strongmen leaders face off – in the oil market. Why all the strongmen?

No coincidence. A decade (or two) of booms and busts and resulting heightened global insecurity has led to this critical juncture.

Strongman heads of state, uncontrollable monetary inflation, and epic bursting Bubbles make for a perilous geopolitical backdrop.

Covid-19 has let the genie out of the bottle.

The world economy

How to prevent a covid-19 slump, and protect the recovery

Governments need to be able to dial financial support up and down for people and firms



In just two months the world economy has been turned upside down. Stockmarkets have collapsed by a third and in many countries factories, airports, offices, schools and shops have been closed to try to contain the virus.

Workers are worried about their jobs and investors fear companies will default on their debts.

All this points to one of the sharpest economic contractions in modern times.

China’s gdp probably shrank by 10-20% in January and February compared with a year earlier. For as long as the virus rages, similar drops are likely in America and Europe, which could trigger a further downward lurch in Asia. Massive government intervention is required to ensure that this shock does not spiral into a depression. But scale alone is not good enough—new financial tools need to be deployed, and fast.

Western authorities have already promised huge sums. A crude estimate for America, Germany, Britain, France and Italy, including spending pledges, tax cuts, central-bank cash injections and loan guarantees, amounts to $7.4trn, or 23% of their GDP. Yet central banks are responsible for over four-fifths of that and many governments are doing too little.

A huge array of policies is on offer, from holidays on mortgage-payments to bail-outs of Paris cafés. Meanwhile, orthodox stimulus tools may not work well. Interest rates in the rich world are near zero, depriving central banks of their main lever. Governments typically try to stimulate demand in a downturn but people trapped at home cannot spend freely.

History is not much of a guide. The global pandemic of 1918 took place when the economy was wrecked by war. China has endured a lockdown but its social model is different from the West’s.


What to do? An economic plan needs to target two groups: households and companies. And it needs to be fast, efficient and flexible so that if the virus retreats only to resurge, workers and firms can be confident that governments will dial assistance down and up again as needed. Start with households, where large government spending is needed.

One aim is to protect vulnerable people, by subsidising sick pay and ensuring those without insurance have health care. But spending is also needed to discourage lay-offs at firms running far below capacity, by subsidising workers’ wages—an area where Germany has led the way.



Governments also need to jerry-rig digital systems so they are able to distribute cash to households directly, as Hong Kong hopes to. The aim should be to have the capability to ramp further support up and down quickly.

Many places, including America, rely on sluggish postal services and tax agencies to distribute cash. If funds can be sent instantly through mobile phones or online bank accounts, people will feel more confident and avoid hoarding cash and slowing the recovery when the virus recedes.

All this spending will cost governments dear, but the fiscal stimulus of about 1% of gdp so far across Europe is clearly too low. America’s plan to spend 5% is closer to the mark given the risk of a double-digit gdp drop. As fiscal deficits balloon, governments will have to issue piles of bonds.

Central banks should step in to buy those bonds in order to keep yields low and markets orderly. Inflation is a second-order concern and there is little danger of it taking off. To prevent a euro-zone crisis, the European Central Bank plans to buy €750bn of assets. But it and European governments should also give a clear guarantee of sovereign support for Italy and other peripheral economies.

The second priority is to get cash to millions of companies, whose failure would damage the economy’s potential. They face a cash drought even as bills fall due. Bond markets are closed to many of them. Mass defaults would fuel unemployment and bad debts at banks, and make it harder for commercial activity to rebound.

Most governments have intervened, but in flawed ways. France says nationalisation is an option—which firms will resist. America is propping up the commercial-paper market, but this funds only a fraction of all corporate debt and is used by big firms—not small ones, which employ most people. Germany and Britain have offered loan-guarantee schemes but it is unclear who will process millions of loan applications.

The best approach is to use the banking system—almost all firms have accounts, and banks know how to issue loans. Governments should offer banks cheap funding to lend to their clients while guaranteeing that it will bear most of the losses. Borrowers could be offered bonuses for repaying loans early.

There are huge drawbacks to all of this. Public and corporate debt will soar. Handouts will be given to rich people and loans extended to firms that are badly run. But even with this fearful list of side-effects, the advantages are overwhelming. Cash will be distributed fast.

Vulnerable people will be able to get by. Households will be confident enough to spend when conditions improve. And firms will keep their workforces and plants intact, ready to get back to action when this dark episode has passed.

Corporate margins are going to be squeezed

Even before the outbreak of coronavirus, pressures were beginning to mount

Rana Foroohar

Globalisation Retraction
© Matt Kenyon


If there is a simple lesson to be drawn from last week’s market rout, it is that there is fragility in complexity. The coronavirus outbreak has, like the 2011 Japanese tsunami and Thai floods that disrupted auto and electronics businesses, or the 1999 earthquake in Taiwan that brought the semiconductor industry to a halt, shown us the vulnerabilities of our highly interconnected economy and global supply chains.

This time around, the trigger is an outbreak spreading outwards from China, still the factory of the world as well as its second-largest economy. It comes at a time when US politics are in flux, and we are in the midst of what Ray Dalio, founder of the Bridgewater hedge fund, recently called a “paradigm shift” for both markets and economies. This is a new era in which few of the old rules will apply.

Goldman Sachs last week warned investors to expect zero profit growth from US companies this year, mainly because of the growing impact of the virus. But I wonder how much profit growth big corporations will be able to expect even after the infections play out and the results of the November US presidential elections come in.

In this new and unsettled era, the main forces that have propelled profit margins over the past 40 years or so — globalisation, increasing corporate concentration, a lower tax burden for corporations versus workers, and a larger share of wealth going to companies versus workers — are all facing headwinds.

The healthy margins of today’s highly optimised, extremely complex multinational corporations have largely depended on their ability to manufacture in China, sell in the US and Europe, and stash wealth wherever it makes most sense — particularly in favourable tax destinations like Hong Kong, Dublin or the Cayman Islands.

As Gavekal founding partner Charles Gave put in a client note last week, these companies have become as optimised, fast paced and high performing as English rugby player Manu Tuilagi.

“Yet, as England fans know, the problem with Tuilagi is that injuries mean he is seldom available to put on the white shirt. The more optimised a system is, the more fragile it potentially becomes.”

I’ve wondered for years when the fragility inherent in complex global multinationals would force them to shift their business models, and I think we’ve reached that moment. I believe coronavirus will speed the decoupling of the US and Chinese economic ecosystems, increasing regionalisation and localisation of production. That may result in “supply chains that are less efficient but more resilient”, says Mike Pyle, BlackRock’s chief global investment strategist. He also believes the trend towards decoupling and deglobalisation will speed up in the wake of the virus.

A pullback from no holds barred globalisation may come with some upsides (see Raghuram Rajan’s book The Third Pillar for more on that). However, it will cost companies more in the short to midterm. There is only so much production slack that countries like Vietnam can quickly pick up from China.

If decoupling continues, multinationals will have to make costly choices around labour, productivity and transport in order to manage a shift away from China. That’s something that many investors are counting on, given that the two most likely winners of the 2020 US presidential elections, Donald Trump or Bernie Sanders (now seen as the Democratic favourite by many) both believe that greater economic nationalism is a good thing.

Mr Sanders and many other Democrats would also like to curb corporate concentration, which has helped boost margins but reduced government tax revenues, labour’s share of revenue and competition. Many on both sides of the US aisle (not to mention in Europe) would be happy to curb the power of Big Tech, which is responsible for the single largest chunk of the S&P 500 for varying political reasons, from national security and competition concerns to privacy and tax justice.

Beggar thy neighbour tax politics (to which the US capitulated in 2017 with Mr Trump’s tax cuts and rule changes) have bolstered corporate margins for decades. But that looks to be shifting, too, with some European countries taxing tech giants, the OECD putting pressure on member states to work together on new digital tax rules, and states including California considering things like a digital dividend tax. In a world where populists are gaining influence, I find it hard to imagine corporate taxes or the labour share of income going in any direction but up.

Meanwhile, the spectre of slower growth or even recession by November, makes a Sanders presidency more likely. Even if Mr Trump were reelected or the US Federal Reserve approved more quantitative easing, I doubt that US corporate profit margins will return to levels anywhere near where they have been in the past several years.

Mr Trump is, predictably, urging investors to buy equities. But the right response to that advice depends on whether you think we’re going back to business as normal for the longer haul. I don’t. We may well see the market begin to come back. It would respond positively to additional monetary stimulus from the world’s central bankers or a slowing of the spread of coronavirus, or both. But I doubt that shape of the share price graph will be a perfect V. The other big V — the virus — has exposed too much vulnerability.

If Coronavirus-Stricken China Can’t Export Medicine, the World Is in Trouble

China is the source of a large percentage of basic drug ingredients

By Nathaniel Taplin and Charley Grant  


If Chinese factory shutdowns persist into late spring, drug manufacturers could begin encountering serious problems for a range of products. / Photo: Rich Pedroncelli/Associated Press .


Much of the contents of your medicine cabinet can be traced back to Chinese ingredients processed into pills in India. Thanks to the coronavirus, much of Chinese industry remains shut down. The potential ramifications of that for pharmaceuticals are now becoming clear.

India, which supplies around 40% of U.S. generic drugs, announced this week that it was restricting exports of 26 drug ingredients and medicines that use them, including several common antibiotics and the active ingredient in Tylenol.

The news follows an announcement from the Food and Drug Administration warning that the coronavirus epidemic had already resulted in a shortage of a drug that it didn’t name. The FDA said that other alternatives for the unnamed drug are available.



All of this highlights a worrying new development for U.S. consumers and businesses bracing for a potential coronavirus pandemic. The health of the U.S. workforce now depends partly on how quickly stalled Chinese pharmaceutical factories can get up and running again.

The complexity of global drug supply chains, with even major manufacturers acknowledging that they can’t always trace the ultimate origin of all the raw materials they use, makes it difficult to say exactly how large the vulnerability really is.

But the balance of evidence suggests that if Chinese factory shutdowns persist into late spring, drug manufacturers could begin encountering serious problems for a range of products.

For some specific drugs, the problem is already here. Prices of ingredients needed to make some common drugs such as statins, used to control cholesterol levels, have risen 40% or more for some drugmakers, according to Bernstein Research.

The Financial Times reported last month that Indian drugmakers were struggling to source a basic raw material needed for paracetamol. That active ingredient in Tylenol, known to Americans as acetaminophen, was among the drugs restricted for export this week.

Antibiotics are a particularly worrying area of vulnerability. China is by far the largest exporter of basic antibiotic chemicals, with shipments worth $3.4 billion in 2018, according to United Nations data.

India was the largest importer, buying $1.4 billion. Nearly 80% of that came from China. India then ships much of this abroad as packaged antibiotic drugs for retail: $1.5 billion worth in 2018, putting it roughly on par with other major exporters including Italy, Switzerland and Belgium.

The good news is that large global pharmaceutical makers tend to hold substantial inventory.

So if disruptions in China ease over the next two months, serious shortages may well be averted. Industry experts interviewed by Bernstein Research in late February said inventories were mostly sufficient for several months. Many of the experts said substantial shortages were unlikely before the late second or early third quarter.

Even the threat of a shortage during a global health scare casts globalization in a poor light, and perhaps with good reason in this case.

The Next President Will Be Over 70

By: George Friedman


Perhaps the most important thing that has emerged in the presidential election campaign over the past few weeks is that the next president of the United States will be in his 70s.

Several of the remaining candidates would finish their first term in their 80s. The first five U.S. presidents ranged in age from 57 to 61 when they took office. Until 2016, no president was ever elected in his 70s – Donald Trump had turned 70 in mid-June of that year. But in the 2020 election, every viable candidate is in his 70s.

In the Bible, it is said that we are granted by God lives that are “threescore years and ten.” It did not mean that we couldn’t live longer or die younger. It meant that, on the whole, the time after the age of 70 was a gift in which we should prepare for our death. None of the candidates seems to be bearing their mortality at the top of their mind. Nor, more important, is the public regarding age as a liability. The fact that all current candidates are over that age has meaning.

I say this not only because I have passed 70 but because of something that I had thought was unique to me. I do not feel as I had expected to feel at this age. I continue to lift weights, having benched 250 pounds in the recent past, and I know that if I had 90 days without travel I could push close to my old max of 315 pounds. (I say this only because I really have been looking for an opportunity to brag.) There are a variety of medicines on my bathroom counter that abolish some minor curses of old age, but I still have the ability to do the things I did all my life: write, travel, manage a business, offend people.

When I was young, the elders in my family struck me as being ancient, weak and failing. When I look back on them, they were ancient. I have to this point explained the difference between how they lived and how I live by the fact that they had had terrible lives. That might have had a great deal to do with it, but there was more. The shape of human life is changing. Alternatively, the shape of my self-awareness and wishful thinking has replicated the same illusions that my ancestors had.

There is, however, a hard statistical reality. Prior to this election, there was no guarantee that the next president would be over the age of 70. Among the founding generation, George Washington took office at 57, John Adams at 61, Thomas Jefferson at 57, James Madison at 57 and James Monroe at 58. Today, and I hesitate to list these names next to those of our founders, Trump is 73, Joe Biden 77, Bernie Sanders 78 and Elizabeth Warren 70. There is a 20-year age spread between the founders – and most of their successors – when they took office, and the remnants of the current presidential campaign.

The reality is that to some extent we not only live longer but also remain functional longer – at least some of us do. I wonder at Sanders, who had a heart attack and was back on the road a few weeks later. When I was young a heart attack meant the person would have extended convalescence and never be himself again. Sanders remained himself, perhaps more so. It may all be due to modern medicine, or perhaps to the wretched vegetation called spinach that my wife forces me to eat, but the “why” is perhaps less important than what it means.

We are all children of the Enlightenment, even those who loathe it. The Enlightenment believed in progress and therefore also in youth. The world is constantly evolving, and the young will take things novel and alien to the old for granted. They will also create the future. The old, having spoken their lines and added to our knowledge, must now shuffle off this mortal coil and free the young to carry forth the project of perfecting humanity.

The ancients of Greece, China and the rest venerated the old, because having lived through their lives, they had acquired a wisdom that the young could not have. They did not envision man as constantly progressing toward some perfection. They saw the human condition as permanent and therefore the old as the repository of experience and wisdom.

America was to a large extent the product of the Enlightenment, praising equality, democracy and progress. It has always been fascinated by youth. All of us remember our youth fondly, although in fact it might have been unpleasant. We remember it fondly because we were young and had our lives ahead of us, though many of us regret some of the choices we made back then.

That is our personal relationship to our past. But in the United States, the young are venerated because they inherently understand the world better than the old can understand it and, standing on the shoulders of the old, can continue the project of protection. The term "millennial" is uttered with the same awe as "baby boomer" once was.

But in the argument between antiquity and modernity, the virtues of youth are mythologized while the value of experience is dismissed because experience ties you to an obsolete past.

TikTok is now here and only the old and irrelevant use Facebook, and only the hopelessly irrelevant view a smartphone as a dreadful nuisance. Technology is hallowed by the Enlightenment, and old age provides the perspective that much of it is harmful, if not useless, while the young build higher and higher edifices on the ragged foundation of MS-DOS.

In the primaries, some expected that the young would lead a revolution by surging to the polls to support Bernie Sanders. But the young, on the whole, have far better things to do with their precious evenings. Therefore, the same mix of young and old went to the polls, and what emerged from it was a group of 70-year-olds, none of whom seem to grasp their obvious obsolescence. They are all who they were.

John F. Kennedy, young, with a beautiful wife and young children, seemed to represent America in the 1960s. He was what we should be. Yet his presidency, mythologized now, was filled with hubris and error. Ronald Reagan, old, with a fragmented family many of us have, was denigrated as out of touch with reality. Yet when we look back, we see a startlingly successful presidency. Youth does not carry with it insight, and old age does not necessarily mean exhaustion.

I think something is happening to the life cycle, and I try to make certain that it is not wishful thinking on my part. Being a confirmed hypochondriac according to my wife, I am perhaps protected from illusions. But we cannot evade the fact that in the primaries the old crushed the young, and that it is likely that a 77-year-old or 79-year-old will face a 74-year-old to be our next president.

I think this is important, but I must think about why it has happened and why it really is important. So first thoughts emerge.

Trump’s Great Purge

US President Donald Trump has unleashed another round of personnel changes in the intelligence community, replacing career national-security officials with unqualified toadies. With the White House's war on intelligence agencies taking its toll, those who remain are likely to be intimidated into submission.

Kent Harrington

harrington22_Sean GallupGetty Images_richardgrenell


ATLANTA – After nearly four years of inveighing against the US intelligence officials and analysts who revealed Russia’s meddling in the 2016 US presidential election, Donald Trump is finally acting fully on his paranoia by carrying out a purge.

The recent defenestration of top US national-security officials may come as a shock to Americans, but it is no surprise to the Russians. For months, the joke making the rounds in Moscow goes that if Trump would only fire his spy chiefs, he could get his intelligence directly from the source: Russian President Vladimir Putin.

Among those ousted by Trump in the past month were the acting director of national intelligence, Admiral Joseph Maguire, and his deputy. But the removal of senior officials isn’t the most important part of the story.

What matters most is that Trump wants to send a message to the intelligence community’s rank and file, which has consistently given the lie to his groundless claims about issues ranging from the North Korean nuclear program to climate change. Trump wants to intimidate US intelligence professionals into submission, and he might just succeed.

There is no question that Trump’s latest round of firings qualify as a “purge.” His interim choice to replace Maguire, Richard Grenell, who had been the US ambassador to Germany, is a notorious Trump sycophant with no intelligence experience. Grenell will happily play to the Oval Office’s audience of one.

He has already ordered his own minions to start investigating alleged conspiracies among the intelligence officials who uncovered Russia’s election interference, and to pore over personnel files in search of those who may not be sufficiently loyal to Trump.

With the 2020 presidential election approaching, it isn’t hard to see Trump’s motive. In December, intelligence officials avoided the public portion of their annual threat briefing to Congress, following hearings a year earlier in which they provoked Trump’s wrath by contradicting him on almost every major national-security issue.

The message from that episode was clear: Trump wants an executive suite staffed by servile appointees who will muzzle the intelligence agencies throughout the 2020 presidential campaign season. If Grenell does his job and completes the purge, Trump’s new DNI nominee should be able to sail through the Senate confirmation process with an innocent smile.

That nominee will be Republican US Representative John Ratcliffe, another consummate Trump toady. Ratcliffe’s attacks on Special Counsel Robert Mueller during the congressional hearings into the Russia investigation led Trump to pick him for the DNI job last summer.

But revelations that Ratcliffe had inflated his resumé to make up for his lack of intelligence experience torpedoed his nomination, with even Senate Republicans admitting that loyalty to Trump is not a sufficient qualification for the job. Now the Senate will be faced with choosing between Ratcliffe and Grenell.

Ratcliffe’s history of shameless pandering suggests that, like Grenell, he will politicize intelligence whenever Trump demands. The intelligence community’s job is to deliver facts and nonpartisan analysis to the president, top policymakers, and military commanders, regardless of their stated policy preferences. But Trump has made many efforts to suppress or discredit intelligence he doesn’t like, and he is now likely to do so with abandon.

Both Republicans and Democrats have already raised alarms about the White House’s meddling in critical intelligence activities. In January, Adam Schiff, the Democratic chairman of the House Intelligence Committee, warned that the Trump administration was pressuring intelligence agencies to withhold information on Ukraine from congressional oversight.

And in the Senate, an intelligence briefing to explain the imminent threat that supposedly justified the targeted killing of Iranian Quds Force commander Qassem Suleimani in January was met with bipartisan criticism over what looked like White House misrepresentations.

To be sure, presidents have every right to give intelligence agencies new directives and to remove officials for failures or missteps.

After the disastrous Bay of Pigs invasion in 1961, President John F. Kennedy installed an intelligence-community outsider, John McCone, at the helm of the CIA. And after the Iran-Contra scandal implicated CIA Director William J. Casey, President Ronald Reagan tapped William H. Webster, a former FBI director, to replace him.

Nonetheless, until Trump, no president has so blatantly put his own political fortunes ahead of the country’s security by discrediting the very agencies charged with its defense.

Indeed, not even a president as ethically challenged as Richard Nixon has come close to Trump’s war on intelligence. Under pressure from the Watergate scandal, Nixon, in February 1973, appointed James R. Schlesinger to replace Richard Helms as CIA director, because the latter had refused to go along with the coverup.

Upon arrival, Schlesinger downsized the agency, forcing out hundreds of experienced officers and unsettling the rank and file. But he never questioned the agency’s loyalty or discredited its work. Moreover, unlike Grenell and Ratcliffe, Schlesinger, who later served as secretary of defense, at least had national-security credentials.

Trump’s ceaseless attacks and installation of political apparatchiks at the top of the intelligence community has undoubtedly taken its toll on morale. US spies and intelligence analysts are trained to do their jobs with integrity and to take risks in the field.

They are there to provide independent, nonpartisan information and analysis in the service of the country’s security. By ignoring their findings, denigrating their work, and hunting for signs of disloyalty, Trump’s actions have jeopardized that mission.

So far, the intelligence community’s leaders have said little about the damage that Trump has wrought. The most charitable explanation of their silence is that they are protecting the mission by keeping their heads down.

That may be true. But at some point, silence becomes indistinguishable from complicity, particularly when those who are most responsible for the success of the mission are targeted by purges and bogus investigations. When those who should be receiving accolades are getting the boot, something has gone very wrong.


Kent Harrington, a former senior CIA analyst, served as National Intelligence Officer for East Asia, Chief of Station in Asia, and the CIA’s Director of Public Affairs.