Going Nuclear

Doug Nolan

In a CBB from a decade or so ago, I noted that at the commencement of WWII President Roosevelt marshaled an agreement from the major warring parties to avoid the bombing of civilian targets. It was not long, however, before civilians living near military installations were considered unfortunate collateral damage. And so began the incremental abandonment of the principle of safeguarding innocent noncombatants.

By the end of the war, there were no limits – nothing too outrageous or deplorable: population centers, viewed strategically as even more valuable than military targets, were under unrelenting brutal bombardment. Hiroshima and Nagasaki suffered nuclear devastation.

“Money printing” and fiscal borrowing/spending viewed as unconscionable prior to 2008 are these days easily justified. The “nuclear option” is readily accepted as a mainstream policy response. A Wall Street economist appearing on Bloomberg even posited the current crisis is worse than World War II.

To challenge monetary and fiscal stimulus is almost tantamount to being unAmerican. After all, tens of millions of American citizens are hurting – millions of small businesses near the breaking point.

They are deserving of support in these circumstances. Yet I don’t want to lose focus on analyzing and chronicling ongoing catastrophic policy failure. COVID-19 greatly muddies the analytical waters.

Federal Reserve Credit jumped another $146bn last week to $6.598 TN, pushing the eight-week gain to a staggering $2.453 TN. M2 “money supply” rose $365bn, with an eight-week rise of $1.727 TN. Institutional Money Fund Assets (not included in M2) rose another $76bn, boosting the eight-week expansion to $921bn.

The Fed this week expanded its new “main street” lending facility, raising limits to include companies with up to 15,000 employees and $5.0 billion in revenues. Our central bank, as well, broadened terms for its state and local government financing vehicle to include counties as small as 500,000 (down from 2 million) and cities of 250,000 (reduced from 1 million).

From the WSJ (Nick Timiraos and Jon Hilsenrath): “The Federal Reserve is redefining central banking. By lending widely to businesses, states and cities in its effort to insulate the U.S. economy from the coronavirus pandemic, it is breaking century-old taboos about who gets money from the central bank in a crisis, on what terms, and what risks it will take about getting that money back.” The article quoted Chairman Powell: “None of us has the luxury of choosing our challenges; fate and history provide them for us. Our job is to meet the tests we are presented.”

There has traditionally been an unwritten agreement – an understanding borne from historical hardship – that central banks would never resort to flagrant monetary inflation. Risk to “innocent civilians” would be much too great.

“Open letters” challenged the Fed’s foray into QE, including one from 2010 signed by a group of leading economists: “We believe the Federal Reserve's large-scale asset purchase plan (so-called ‘quantitative easing’) should be reconsidered and discontinued.

We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.”

QE was to be a temporary crisis-management tool, employed to respond to the “worst financial crisis since the Great Depression.”

The initial Trillion from late-2008 was to be reversed, returning the Fed’s balance sheet back near the pre-crisis $1.0 Trillion level. Somehow, QE was employed in 2019, with stocks at record highs and unemployment at 60-year lows.

Last year’s monetary fiasco foreshadowed the 2020 nuclear option – a couple Trillion in a couple months.

At this point, it’s gone so far beyond anything thought possible with “helicopter money” or even MMT stimulus. Don’t hold your breath awaiting “open letters” of protest.

A Fed balance sheet briskly on its way to $10 TN seems just fine to most.

The Fed cut rates to zero (0-0.25%) in December 2008. The Fed then waited a full seven years for a single little “baby step” 25 bps increase. Nine years from the slashing to zero, rates were still only 1.25% (to 1.5%), before peaking at a paltry 2.25% (to 2.50%) with the Powell Fed’s final 25 bps increase in December 2018. Going into the 2008 crisis at less than $900 billion, the Fed’s balance sheet was still at $3.7 TN as of August 2019 (down from peak $4.5TN).

The Fed’s failure to retreat from aggressive monetary stimulus (aka “removing the punch bowl”) was a critical policy blunder that promoted destructive financial and economic excess. And in an unamusing Groundhogs Day dynamic, we are to believe that the current crisis will be resolved by only more egregious volumes of Fed liquidity and “loose money”. As master of the obvious, I will state categorically: “It’s not going to work.”

A question from Bloomberg’s Steve Matthews during Chairman Powell’s post-meeting press conference: “Do you worry that this recession is going to fall hardest on those workers who’ve struggled and just got job gains in the last year or two, and that it may take years from now before there are opportunities for them again?”

Powell: “…We were in a place, only two months ago, we were well into, beginning the second half of the 11th year is where we were. And every reason to think that it was ongoing. We were hearing from minority, low and moderate income in minority communities that this was the best labor market they’d seen in their lifetime. All the data supported that as well. And it is heartbreaking, frankly, to see that all threatened now. All the more need for our urgent response and, also, that of Congress, which has been urgent and large, and to do what we can to avoid longer run damage to the economy which is what I mentioned earlier. This is an exogenous event that, you know, it happened to us. It wasn't because there was something wrong with the economy. And I think it is important that we do everything we can to avoid that longer-run damage and try to get back to where we were because I do very much have that concern.”

My comment: I understand the Fed’s attention to “community outreach” and its PR focus on minorities and low-income workers. Yet not even Trillions of lip service will change the reality that the Fed’s securities market policy focus promotes inequality and divisiveness. At its roots, QE is a mechanism of wealth redistribution. Zero rates transfer wealth from savers to borrowers and speculators.

Moreover, there are myriad costs associated with central banks nullifying the business cycle.

The toll the unfolding crisis will inflict upon minority and low-income families will be horrendous. Federal Reserve policies of unrelenting monetary stimulus and market intervention ensure an especially problematic downturn.

The business cycle is absolutely essential to the functioning of capitalistic systems.

Policymaker intolerance for even mild market and economic corrections promotes cumulative excess and distortions that will culminate in extraordinarily deep and painful busts. I viewed chair Yellen’s employment focus as convenient justification and rationalization for delays to the start of policy “normalization.”

Boom and bust dynamics do no favors for minorities and the working class. Monetary and financial stability should have been the Fed’s top priority.

QE, low rates and market backstops reinforce instability and latent fragility.

The Associated Press’s Chris Rugaber: “You did talk about potential loss of skills over time. So, are you worried about structural changes in job markets that would keep unemployment high and, therefore, potentially beyond the ability of the Fed to do anything about, which was something that was debated, as you know, after the last recession?”

Powell: “So, in terms of the labor market, the risk of damage to people’s skills and their careers and their lives is a function of time to some extent. So, the longer one is unemployed, the harder it gets, I think, and we’ve probably all seen this in our lives, the harder it is to get back into the workforce and get back to where you were, if you ever do get back to where you were. So… longer and deeper downturns have had, have left more of a mark, generally, in that dimension with the labor force. And so, that’s why, as I mentioned, that’s why the urgency in doing what we can to prevent that longer-run damage.”

My comment: Central banks have for way too long encouraged the notion of deflation as the principal risk. I have argued Bubbles were instead the overarching systemic risk. Central bankers (along with Wall Street) have asserted that aggressive monetary stimulus has been necessary to counter deflationary risks.

But if Bubbles were indeed the prevailing risk, this added stimulus would undoubtedly promote only greater maladjustment, systemic risk and fragility. After already contributing to inequality and divisiveness, monetary policymaking now places trust in the institution of the Federal Reserve in jeopardy.

Flawed doctrine and a string of recurring missteps have ensured the worst of possible outcomes: a deep and prolonged downturn within a backdrop of heightened social and political instability.

Politico’s Victoria Guida: “…More broadly, you mentioned earlier this year that the federal debt was on an unsustainable path. And I was just wondering, for Republicans that are starting to get worried about how much fiscal spending they’re having to do in this crisis, you know, whether that should be a concern for them?

Powell: “In terms of fiscal concern…, for many years, I've been, before the Fed, I have long time been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective at the federal level. We have not been on such a path for some time which just means that the debt is growing faster than the economy. This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer run productive capacity of the economy as possible. The time will come, again, and reasonably soon, I think, where we can think about a long-term way to get our fiscal house in order. And we absolutely need to do that. But this is not the time to be, in my personal view, this is not the time to let that concern, which is a very serious concern, but to let that get in the way of us winning this battle…”

My comment: We’re in the endgame. There will be no turning back on either massive monetary or fiscal stimulus.

Not surprisingly, Congress is already contemplating an additional Trillion dollars of spending.

The floodgates have been flung wide-open, and at this point it will prove troublesome to ration stimulus.

Meanwhile, deeply maladjusted market and economic structure will dictate unrelenting stimulus measures.

I would add that last year’s reckless Trillion dollar federal deficit was the upshot of years of experimental monetary policy. There was but one mechanism with the power to inhibit Washington profligacy: market discipline (i.e. higher Treasury yields).

But market discipline was one of the great sacrifices to the Gods of QE and New Age monetary management. Stating that the Fed has been complicit in Washington running massive deficits (even throughout a market and economic boom period) is not strong enough.

Bloomberg’s Michael McKee: “And I know you said that this isn’t the time to worry about moral hazard, but do you worry, with the size of stimulus that you and the Congress are putting into the economy, there could be financial stability problems if this goes along?”

Powell: “In terms of the markets…, our concern is that they be working. We’re not focused on the level of asset prices in particular, it’s just markets are trying to price in something that is so uncertain as to be unknowable which is the path of this virus globally and its effect on the economy. And that’s very, very hard to do. That’s why you see volatility the way it’s been, market reacting to things with a lot of volatility. But… what we’re trying to assure really, is that the market is working. The market is assessing risks, lenders are lending, borrowers are borrowing, asset prices are moving in response to events. That is really important for everybody, including… the most vulnerable among us because, if markets stop working and credit stops flowing, then you see, that’s when you see… very sharp negative, even more negative economic outcomes. So, I think our measures have supported market function pretty well. We’re going to stay very careful, carefully monitoring that. But I think it’s been good to see markets working again, particularly the flow of credit in the economy has been a positive thing as businesses have been able to build up their liquidity buffers.”

My comment: It is the nature of contemporary Bubble markets that they are only “working” when they’re inflating. We witnessed again in March how quickly selling turns disorderly – how abruptly markets turn illiquid and dislocate. There were, after all, only nine trading sessions between February 19th all-time market highs and the Fed’s March 3rd emergency rate cut.

The Fed has for years nurtured the perception that the Federal Reserve was ready to backstop the markets in the event of incipient instability. The Fed “put” became deeply embedded in the pricing of various asset markets – certainly including stocks, corporate Credit, Treasuries, structured finance and derivatives. But this financial structure turns unsupportable the moment markets begin questioning the capacity of central banks to sustain inflated prices.

We observed the Fed being “trapped” dynamic in action: Market Bubbles had inflated to unparalleled extremes. When collapse began in earnest, unprecedented liquidity injections and interventions were required to reverse the panic. But this liquidity was then available to fuel disorderly markets on the upside, setting the stage for only more instability going forward.

Fed officials are surely delighted their measures are proving instrumental in what will be record debt sales (Treasuries and corporates). But do today’s market yields make any sense heading into a major economic downturn with unprecedented debt and deficits? The Fed can claim it doesn’t focus on the level of asset prices, but the reality is the Fed is trapped in policies meant to sustain highly elevated asset markets.

Listening to Bloomberg Television Wednesday ahead of the Fed’s policy statement, I sat in disbelief at what I was hearing: one of our nation’s leading economists speaking utter nonsense.

There is a long list of individuals that should have some explaining to do when this all blows up.

Bloomberg’s Tom Keene: “In the field of economics, there are people that are always excellent at mathematics and then there’s the truly excellent. I spoke with Randall Kroszner of Chicago and the Booth School earlier today – he’s one of those people. And another one is Narayana Kocherlakota, of course, the President of the Minneapolis Fed and now at the University of Rochester. He has been extremely aggressive about a Fed that needs a different and better dynamic… You have said that this Fed must be more aggressive. What is the next step for Chairman Powell?”

Kocherlakota: “I think that the Fed should really contemplate going negative with interest rates. I think that would send a powerful message about their willingness to be supportive of their price stability and employment mandates. Obviously, there’s a limited amount of room that you can go negative, because eventually banks and others will substitute into cash. But I think there is some room to go negative – 25, 50 bps below zero – and that makes all your other tools more effective – the forward guidance we’re going to see at some point down the road, asset purchases and yield curve control – all that becomes more effective if you can go further below zero.”

Bloomberg’s Scarlet Fu: “We’ve seen Europe, we’ve seen Japan go further below zero and it really hasn’t done what they wanted. In Japan’s case, the country then moved to yield curve control. We know the Federal Reserve has telegraphed yield curve control as an option, what’s the risk from the Fed just moving to targeting yields now and skipping over going to negative interest rates?”

Kocherlakota: “The risk, Scarlet, is you’re not doing enough. I think the Fed statement is exactly right. The ongoing public health crisis will weigh heavily on economic activity in the near-term – and poses considerable risk to the outlook over the medium-term… You want to throw every tool you got available at that. I’m not saying I’m opposed to yield curve control – I’m absolutely not. But I think going negative with interest rates is going to make that tool even more powerful – more effective than simply rolling it out on its own.”

Keene: “One of the great themes here… and this goes to the late Marvin Goodfriend of Carnegie Mellon, is the amount of negative interest rates. Ken Rogoff at Harvard also addressed it in his glorious book, ‘The Curse of Cash’. OK, so we tweak it a quarter point, a little bit here, a little bit here. Really, do we need to experiment with a boldness that forces the banking system into new actions?”

Kocherlakota: “One of the roles of economists like myself that are in academia, you mentioned Ken and Marvin who lead the way on this, is to really try to push us into a much better place. I really believe that fifty years from now people are going to look back – economists are going to look back – as the existence of cash much like we look back at the gold standard. We look back at the gold standard as a period which really hamstrung monetary policy and created huge amounts of unemployment as a result during the Great Depression. People are going to look back at the existence of cash and the zero lower bound – the inability to go much below zero with interest rates – in the same way, hamstringing the ability of central banks to provide sufficient support to the economy – and thereby creating excessive unemployment and robbing people of their jobs.”

Fu: “…You were out front in suggesting that the Federal Reserve cut interest rates before they actually did between meetings, I just wonder with this idea of negative interest rates are you in communication with anyone on the FOMC? Is there any slice of the members of the FOMC open to the idea of negative interest rates in any meaningful proportion?”

Kocherlakota: “I’m certainly not in communication with the FOMC, except hopefully they’re watching right now. What I learned during my time as a policymaker is that – I was a hawk for a while and then I became a dove. But I could never be dovish enough. There’s always this force within you as an economist that’s pushing you toward being a hawk – to be concerned about inflation or concerns about putting too much accommodation out there – too much monetary policy out there. What I learned at my time at the Fed was never to be concerned about that. So right now, I think the Fed is concerned about going negative. They feel that somehow that’s going to cause risk to the banking system or somehow be too much in terms of monetary policy. My own view is, and I hope I’m wrong on this, but I think they’ll learn as we have a slow recovery from where we are that they’ll have to do more. I think negative will come up… Down the road I think it will come up because I think they’ll need it.”

“The Fed must be more aggressive”?

You gotta be kidding. And why such an ardent proponent of negative rates when there is little if any evidence from Europe or Japan that they are constructive?

The “existence of cash” and the “zero lower bound” are the problems – similar to the gold standard? All nonsense.

Our nation desperately needs some talented young, independent-minded economists to take the initiative to reform our deeply flawed economic doctrine.

This week’s CBB was too heavy on quotes and light on analysis.

But there was just a lot that needed to be documented.

The origin of covid-19

The pieces of the puzzle of covid-19’s origin are coming to light

How they fit together, though, remains mysterious

AURIC GOLDFINGER, villain of the novel which bears his name, quotes a vivid Chicago aphorism to James Bond: “Once is happenstance, twice is coincidence, the third time it’s enemy action.”

Until 2002 medical science knew of a handful of coronaviruses that infected human beings, none of which caused serious illness. Then, in 2002, a virus now called SARS-CoV surfaced in the Chinese province of Guangdong. The subsequent outbreak of severe acute respiratory syndrome (SARS) killed 774 people around the world before it was brought under control.

In 2012 another new illness, Middle Eastern respiratory syndrome (MERS), heralded the arrival of MERS-CoV, which while not spreading as far and as wide as SARS (bar an excursion to South Korea) has not yet been eliminated. It has killed 858 people to date, the most recent of them on February 4th.

The third time, it was SARS-CoV-2, now responsible for 225,000 covid-19 deaths. Both SARS-CoV and MERS-CoV are closely related to coronaviruses found in wild bats. In the case of SARS-CoV, the accepted story is that the virus spread from bats in a cave in Yunnan province into civets, which were sold at markets in Guangdong.

In the case of MERS-CoV, the virus spread from bats into camels. It now passes regularly from camels to humans, which makes it hard to eliminate, but only spreads between people in conditions of close proximity, which makes it manageable.

Third time unlucky

An origin among bats seems overwhelmingly likely for SARS-CoV-2, too. The route it took from bat to human, though, has yet to be identified. If, like MERS-CoV, the virus is still circulating in an animal reservoir, it could break out again in the future. If not, some other virus will surely try something similar.

Peter Ben Embarek, an expert on zoonoses (diseases passed from animals to people) at the World Health Organisation says that such spillovers are becoming more common as humans and their farmed animals push into new areas where they have closer contact with wildlife. Understanding the detail of how such spillovers occur should provide insights into stopping them.

In some minds, though, the possibility looms of enemy action on the part of something larger than a virus. Since the advent of genetic engineering in the 1970s, conspiracy theorists have pointed to pretty much every new infectious disease, from AIDs to Ebola to MERS to Lyme disease to SARS to Zika, as being a result of human tinkering or malevolence.
The politics of the covid-19 pandemic mean that this time such theories have an even greater appeal than normal. The pandemic started in China, where the government’s ingrained urge to cover problems up led it to delay measures that might have curtailed its spread. It has claimed its greatest toll in America, where the recorded number of covid-19 deaths already outstrips the number of names on the Vietnam War Memorial in Washington, DC.

These facts would have led to accusations ringing out across the Pacific come what may. What makes things worse is a suspicion in some quarters that SARS-CoV-2 might in some way be connected to Chinese virological research, and that saying so may reapportion any blame.

There is no evidence for the claim. Western experts say categorically that the sequence of the new virus’s genome—which Chinese scientists published early on, openly and accurately—reveals none of the telltales genetic engineering would leave in its wake. But it remains a fact that in Wuhan, where the outbreak was first spotted, there is a laboratory where scientists have in the past deliberately made coronaviruses more pathogenic.

Such research is carried out in laboratories around the world. Its proponents see it as a vital way of studying the question that covid-19 has brought so cruelly into the spotlight: how does a virus become the sort of thing that starts a pandemic? That some of this research has been done at the Wuhan Institute of Virology (WIV) seems all but certainly a coincidence. Without a compelling alternative account of the disease’s origin, however, there is room for doubt to remain.
The 4% difference

The origin of the virus behind the 2003 SARS outbreak—“classic SARS”, as some virologists now wryly call it—was established in large part by Shi Zhengli, a researcher at WIV sometimes referred to in Chinese media as “the bat lady”. Over a period of years she and her team visited remote locations all across the country in search of a close relative of SARS-CoV in bats or their guano. They found one in a cave full of horseshoe bats in Yunnan.

It is in the collection of viral genomes assembled during those studies that scientists have now found the bat virus closest to SARS-CoV-2. A strain called RaTG13 gathered in the same cave in Yunnan shares 96% of its genetic sequence with the new virus. RaTG13 is not that virus’s ancestor.

It is something more like its cousin. Edward Holmes, a virologist at the University of Sydney, estimates that the 4% difference between the two represents at least 20 years of evolutionary divergence from some common antecedent, and probably something more like 50.

Although bats could, in theory, have passed a virus descended from that antecedent directly to humans, experts find the idea unlikely. The bat viruses look different from SARS-CoV-2 in a specific way. In SARS-CoV-2 the spike protein on the viral particle’s surface has a receptor-binding domain (RBD) that is adept at sticking to a particular molecule on the surface of the human cells the virus infects. The RBD in bat coronaviruses is not the same.

One recent study suggests that SARS-CoV-2 is the product of natural genomic recombination. Different coronaviruses infecting the same host are more than happy to swap bits of genome. If a bat virus similar to RaTG13 got into an animal already infected with a coronavirus which boasted an RBD better suited to infecting humans, a basically batty virus with a more human-attuned RBD might well arise. That is what SARS-CoV-2 looks like.

Early on, it was widely imagined that the intermediate host was likely to be a species sold in Wuhan’s Huanan Seafood and Wildlife Market, a place where all sorts of creatures, from raccoon dogs to ferret badgers, and from near and far, are crammed together in unsanitary conditions. Many early human cases of covid-19 were associated with this market.

Jonathan Epstein, vice-president of science with EcoHealth Alliance, an NGO, says of 585 swabs of different surfaces around the market, about 33 were positive for SARS-CoV-2. They all came from the area known to sell wild animals. That is pretty much as strong as circumstantial evidence gets.

The first animal to come under serious suspicion was the pangolin. A coronavirus found in pangolins has an RBD essentially identical to that of SARS-CoV-2, suggesting that it might have been the virus with which the bat virus recombined on its way to becoming SARS-CoV-2.

Pangolins are used in traditional medicine, and though they are endangered, they can nonetheless be found on menus. There are apparently no records of them being traded at the Huanan market. But given that such trading is illegal, and that such records would now look rather incriminating, this is hardly proof that they were not.

The fact that pangolins are known to harbour viruses from which SARS-CoV-2 could have picked up its human-compatible RBD is certainly suggestive. But a range of other animals might harbour such viruses, too; it’s just that scientists have not yet looked all that thoroughly.

The RBD in SARS-CoV-2 is useful not only for attacking the cells of human beings and, presumably, pangolins. It provides access to similar cells in other species, too. In recent weeks SARS-CoV-2 has been shown to have found its way from humans into domestic cats, farmed mink and a tiger.

There is some evidence that it can actually pass between cats, which makes it conceivable that they were the intermediate—though there is as yet no evidence of a cat infecting a human.

The market’s appeal as a site for the human infections behind the Wuhan outbreak remains strong; a market in Guangdong is blamed for the spread of SARS. Without a known intermediate, though, the evidence against it remains circumstantial.

Though many early human cases were associated with the market, plenty were not. They may have been linked to people with ties to the market in ways not yet known. But one cannot be sure.
Where to begin?

The viral genomes found in early patients are so similar as to suggest strongly that the virus jumped from its intermediate host to people only once. Estimates based on the rate at which genomes diverge give the earliest time for this transfer as early October 2019.

If that is right there were almost certainly infections which were not serious, or which did not reach hospitals, or which were not recognised as odd, before the first official cases were seen in Wuhan at the beginning of December. Those early cases may have taken place elsewhere.

Ian Lipkin, the boss of the Centre for Infection and Immunity at Columbia University, in New York, is working with Chinese researchers to test blood samples taken late last year from patients with pneumonia all around China, to see if there is any evidence for the virus having spread to Wuhan from somewhere else.

If there is, then it may have entered Huanan market not in a cage, but on two legs. The market is popular with visitors as well as locals, and is close to Hankou railway station, a hub in China’s high-speed rail network.

Further research may make when, where and how the virus got into people clearer. There is scope for a lot more virus hunting in a wider range of possible intermediate species. If it were possible to conduct detailed interviews with those who came down with the earliest cases of covid-19, that genetic sampling could be better aimed, says Dr Embarek, and with a bit of luck one might get to the source. But the time needed to do this, he adds, “might be quick, or it might be extremely long”.

If it turns out to have originated elsewhere, the new virus’s identification during the early stages of the Wuhan epidemic may turn out to be thanks to the city’s concentration of virological know-how—know-how that is now surely being thrown into sequencing more viruses from more sources. But until a satisfactory account of a natural spillover is achieved, that same concentration of know-how, at WIV and another local research centre, the Wuhan Centre for Disease Control and Prevention, will continue to attract suspicion.

In 2017 WIV opened the first biosecurity-level 4 (BSL-4) laboratory in China—the sort of high-containment facility in which work is done on the most dangerous pathogens. A large part of Dr Shi’s post-SARS research there has been aimed at understanding the potential which viruses still circulating among bats have to spill over into the human population.

In one experiment she and Ge Xingyi, also of the WIV, in collaboration with American and Italian scientists, explored the disease-like potential of a bat coronavirus, SHC014-CoV, by recombining its genome with that of a mouse-infecting coronavirus. The WIV newsletter of November 2015 reported that the resulting virus could “replicate efficiently in primary human airway cells and achieve in vitro titres equivalent to epidemic strains of SARS-CoV”.

In early April this newsletter and all others were removed from the institute’s website.

This work, results from which were also published in Nature Medicine, demonstrated that SARS-CoV’s jump from bats to humans had not been a fluke; other bat coronaviruses were capable of something similar. Useful to know. But giving pathogens and potential pathogens extra powers in order to understand what they may be capable of is a controversial undertaking.

These “gain of function” experiments, their proponents insist, have important uses such as understanding drug resistance and the tricks viruses employ to evade the immune system. They also carry obvious risks: the techniques on which they depend could be abused; their products could leak.

The creation of an enhanced strain of bird flu in 2011 in an attempt to understand the peculiar virulence of the flu strain responsible for the pandemic of 1918-19 caused widespread alarm. America stopped funding gain-of-function work for several years.

Filippa Lentzos, who studies biomedicine and security at King’s College, London, says the possibility of SARS-CoV-2 having an origin connected with legitimate research is being discussed widely in the world of biosecurity. The possibilities speculated about include a leak of material from a laboratory and also the accidental infection of a human being in the course of work either in a lab or in the field.

Leaks from laboratories, including BSL-4 labs, are not unheard of. The world’s last known case of smallpox was caused by a leak from a British laboratory in 1978. An outbreak of foot and mouth disease in 2007 had a similar origin.

In America there have been accidental releases and mishandlings involving Ebola, and, from a lower-containment-level laboratory, a deadly strain of bird flu. In China laboratory workers seem to have been infected with SARS and transmitted it to contacts outside on at least two occasions.

Here’s one I made earlier

Things doubtless leak out of labs working at lower biosafety levels, too. But how much they do so is unknown, in part because people worry about them less. And as in other parts of this story the unknown is a Petri dish in which speculation can grow. This may be part of the reason for interest in a lab at the Wuhan Centre for Disease Control and Prevention.

A preprint published on ResearchGate, a website, by two Chinese scientists and subsequently removed suggested that work done there may have been cause for concern. This lab is reported to have housed animals—including, for one study, hundreds of bats from Hubei and Zhejiang provinces—and to have specialised in pathogen collection.

Richard Pilch, who works on chemical and biological weapons non-proliferation at the Middlebury Institute of International Studies, in California, says that there is one feature of the new virus which might conceivably have arisen during “passaging experiments” in which pathogens are passed between hosts so as to study the evolution of their ability to spread. This is the “polybasic cleavage site”, which might enhance infectivity.

SARS-CoV-2 has such a site on its spike protein. Its closest relatives among bat coronaviruses do not. But though such a cleavage site could have arisen through passaging there is no evidence that, in this case, it did. It could also have evolved in the normal way as the virus passed from host to host.

Dr Holmes, meanwhile, has said that there is “no evidence that SARS-CoV-2...originated in a laboratory in Wuhan, China.” Though others have speculated about coincidences and possibilities, no one has been able, as yet, to undermine that statement.

Many scientists think that with so many biologists actively hunting for bat viruses, and gain-of-function work becoming more common, the world is at increasing risk of a laboratory-derived pandemic at some point. “One of my biggest hopes out of this pandemic is that we address this issue—it really worries me,” says Dr Pilch. Today there are around 70 BSL-4 sites in 30 countries. More such facilities are planned.

Again, though, it is necessary to consider the unknown. Every year there are tens of thousands of fatal cases of respiratory disease around the world of which the cause is mysterious. Some of them may be the result of unrecognised zoonoses. The question of whether they really are, and how those threats may stack up, needs attention.

That attention needs laboratories. It also needs a degree of open co-operation that America is now degrading with accusations and reductions in funding, and that China has taken steps to suppress at source.

That suppression has done nothing to help the country; indeed, by supporting speculation, it may yet harm it.

Not quite all there

The 90% economy that lockdowns will leave behind

It will not just be smaller, it will feel strange

IN THE 1970s Masahiro Mori, a professor at the Tokyo Institute of Technology, observed that there was something disturbing about robots which looked almost, but not quite, like people. Representations in this “uncanny valley” are close enough to lifelike for their shortfalls and divergences from the familiar to be particularly disconcerting.

Today’s Chinese economy is exploring a similarly unnerving new terrain. And the rest of the world is following in its uncertain steps.

Whatever the drawbacks of these new lowlands, they are assuredly preferable to the abyss of lockdown. Measures taken to reverse the trajectory of the pandemic around the world have brought with them remarkable economic losses.

Not all sectors of the economy have done terribly. New subscriptions to Netflix increased at twice their usual rate in the first quarter of 2020, with most of that growth coming in March. In America, the sudden stop of revenue from Uber’s ride-sharing service in March and April has been partially cushioned by the 25% increase of sales from its food-delivery unit, according to 7Park Data, a data provider.

Yet the general pattern is grim. Data from Womply, a firm which processes transactions on behalf of 450,000 small businesses across America, show that businesses in all sectors have lost substantial revenue. Restaurants, bars and recreational businesses have been badly hit: revenues have declined some two-thirds since March 15th. Travel and tourism may suffer the worst losses. In the EU, where tourism accounts for some 4% of GDP, the number of people travelling by plane fell from 5m to 50,000; on April 19th less than 5% of hotel rooms in Italy and Spain were occupied.

According to calculations made on behalf of The Economist by Now-Casting Economics, a research firm that provides high-frequency economic forecasts to institutional investors, the world economy shrank by 1.3% year-on-year in the first quarter of 2020, driven by a 6.8% year-on-year decline in China’s GDP.

The Federal Reserve Bank of New York draws on measures such as jobless claims to produce a weekly index of American economic output. It suggests that the country’s GDP is currently running about 12% lower than it was a year ago (see chart 1).

These figures fit with attempts by Goldman Sachs, a bank, to estimate the relationship between the severity of lockdowns and their effect on output. It finds, roughly, that an Italian-style lockdown is associated with a GDP decline of 25%.

Measures to control the virus while either keeping the economy running reasonably smoothly, as in South Korea, or reopening it, as in China, are associated with a GDP reduction in the region of 10%.

That chimes with data which suggest that if Americans chose to avoid person-to-person proximity of the length of an arm or less, occupations worth approximately 10% of national output would become unviable.

The “90% economy” thus created will be, by definition, smaller than that which came before.

But its strangeness will be more than a matter of size. There will undoubtedly be relief, fellow feeling, and newly felt or expressed esteem for those who have worked to keep people safe. But there will also be residual fear, pervasive uncertainty, a lack of innovative fervour and deepened inequalities.

The fraction of life that is missing will colour people’s experience and behaviour in ways that will not be offset by the happy fact that most of what matters is still available and ticking over. In a world where the office is open but the pub is not, qualitative differences in the way life feels will be at least as significant as the drop in output.

The plight of the pub demonstrates that the 90% economy will not be something that can be fixed by fiat. Allowing pubs—and other places of social pleasure—to open counts for little if people do not want to visit them. Many people will have to leave the home in order to work, but they may well feel less comfortable doing so to have a good time.

A poll by YouGov on behalf of The Economist finds that over a third of Americans think it will be “several months” before it will be safe to reopen businesses as normal—which suggests that if businesses do reopen some, at least, may stay away.

Ain’t nothing but tired

Some indication that the spending effects of a lockdown will persist even after it is over comes from Sweden. Research by Niels Johannesen of Copenhagen University and colleagues finds that aggregate-spending patterns in Sweden and Denmark over the past months look similarly reduced, even though Denmark has had a pretty strict lockdown while official Swedish provisions have been exceptionally relaxed.

This suggests that personal choice, rather than government policy, is the biggest factor behind the drop. And personal choices may be harder to reverse.

Discretionary spending by Chinese consumers—the sort that goes on things economists do not see as essentials—is 40% off its level a year ago. Haidilao, a hotpot chain, is seeing a bit more than three parties per table per day—an improvement, but still lower than the 4.8 registered last year, according to a report by Goldman Sachs published in mid-April.

Breweries are selling 40% less beer. STR, a data-analytics firm, finds that just one-third of hotel beds in China were occupied during the week ending April 19th. Flights remain far from full (see chart 2).

This less social world is not necessarily bad news for every company. UBS, a bank, reports that a growing number of people in China say that the virus has increased their desire to buy a car—presumably in order to avoid the risk of infection on public transport. The number of passengers on Chinese underground trains is still about a third below last year’s level; surface traffic congestion is as bad now as it was then.

Wanting a car, though, will not mean being able to afford one. Drops in discretionary spending are not entirely driven by a residual desire for isolation. They also reflect the fact that some people have a lot less money in the post-lockdown world. Not all those who have lost jobs will quickly find new ones, not least because there is little demand for labour-intensive services such as leisure and hospitality.

Even those in jobs will not feel secure, the Chinese experience suggests. Since late March the share of people worried about salary cuts has risen slightly, to 44%, making it their biggest concern for 2020, according to Morgan Stanley, a bank. Many are now recouping the loss of income that they suffered during the most acute phase of the crisis, or paying down debt. All this points to high saving rates in the future, reinforcing low consumption.

A 90% economy is, on one level, an astonishing achievement. Had the pandemic struck even two decades ago, only a tiny minority of people would have been able to work or satisfy their needs. Watching a performance of Beethoven on a computer, or eating a meal from a favourite restaurant at home, is not the same as the real thing—but it is not bad.

The lifting of the most stringent lockdowns will also provide respite, both emotionally and physically, since the mere experience of being told what you can and cannot do is unpleasant. Yet in three main ways a 90% economy is a big step down from what came before the pandemic. It will be more fragile; it will be less innovative; and it will be more unfair.

Take fragility first. The return to a semblance of normality could be fleeting. Areas which had apparently controlled the spread of the virus, including Singapore and northern Japan, have imposed or reimposed tough restrictions in response to a rise in the growth rate of new infections.

If countries which retain relatively tough social-distancing rules do better at staving off a viral comeback, other countries may feel a need to follow them (see Chaguan). With rules in flux, it will feel hard to plan weeks ahead, let alone months.

Can’t start a fire

The behaviour of the economy will be far less predictable. No one really knows for how long firms facing zero revenues, or households who are working reduced hours or not at all, will be able to survive financially. Businesses can keep going temporarily, either by burning cash or by tapping grants and credit lines set up by government—but these are unlimited neither in size nor duration.

What is more, a merely illiquid firm can quickly become a truly insolvent one as its earnings stagnate while its debt commitments expand. A rise in corporate and personal bankruptcies, long after the apparently acute phase of the pandemic, seems likely, though governments are trying to forestall them. In the past fortnight bankruptcies in China started to rise relative to last year. On April 28th HSBC, one of the world’s largest banks, reported worse-than-expected results, in part because of higher credit losses.

Furthermore, the pandemic has upended norms and conventions about how economic agents behave. In Britain the share of commercial tenants who paid their rent on time fell from 90% to 60% in the first quarter of this year. A growing number of American renters are no longer paying their landlords.

Other creditors are being put off, too. In America, close to 40% of business-to-business payments from firms in the spectator-sports and film industries were late in March, double the rate a year ago. Enforcing contracts has become more difficult with many courts closed and social interactions at a standstill. This is perhaps the most insidious means by which weak sectors of the economy will infect otherwise moderately healthy ones.

In an environment of uncertain property rights and unknowable income streams, potential investment projects are not just risky—they are impossible to price. A recent paper by Scott Baker of Northwestern University and colleagues suggests that economic uncertainty is at an all-time high.

That may go some way to explaining the results of a weekly survey from Moody’s Analytics, a research firm, which finds that businesses’ investment intentions are substantially lower even than during the financial crisis of 2007-09. An index which measures American nonresidential construction activity 9-12 months ahead has also hit new lows.

The collapse in investment points to the second trait of the 90% economy: that it will be less innovative. The development of liberal capitalism over the past three centuries went hand in hand with a growth in the number of people exchanging ideas in public or quasi-public spaces. Access to the coffeehouse, the salon or the street protest was always a partial process, favouring some people over others. But a vibrant public sphere fosters creativity.

Innovation is not impossible in a world with less social contact. There is more than one company founded in a garage now worth $1trn. During lockdowns, companies have had to innovate quickly—just look at how many firms have turned their hand to making ventilators, if with mixed success. A handful of firms claim that working from home is so productive that their offices will stay closed for good.

Yet these productivity bonuses look likely to be heavily outweighed by drawbacks. Studies suggest the benefits of working from home only materialise if employees can frequently check in at an office in order to solve problems. Planning new projects is especially difficult.

Anyone who has tried to bounce ideas around on Zoom or Skype knows that spontaneity is hard. People are often using bad equipment with poor connections. Nick Bloom of Stanford University, one of the few economists to have studied working from home closely, reckons that there will be a sharp decline in patent applications in 2021.

Cities have proven particularly fertile ground for innovations which drive long-run growth. If Geoffrey West, a physicist who studies complex systems, is right to suggest that doubling a city’s population leads to all concerned becoming on aggregate 15% richer, then the emptying-out of urban areas is bad news.

MoveBuddha, a relocation website, says that searches for places in New York City’s suburbs are up almost 250% compared with this time last year. A paper from New York University suggests that richer, and thus presumably more educated, New Yorkers—people from whom a disproportionate share of ideas may flow—are particularly likely to have left during the epidemic.

Something happening somewhere

Wherever or however people end up working, the experience of living in a pandemic is not conducive to creative thought. How many people entered lockdown with a determination to immerse themselves in Proust or George Eliot, only to find themselves slumped in front of “Tiger King”?

When mental capacity is taken up by worries about whether or not to touch that door handle or whether or not to believe the results of the latest study on the virus, focusing is difficult. Women are more likely to take care of home-schooling and entertainment of bored children (see article), meaning their careers suffer more than men’s.

Already, research by Tatyana Deryugina, Olga Shurchkov and Jenna Stearns, three economists, finds that the productivity of female economists, as measured by production of research papers, has fallen relative to male ones since the pandemic began.

The growing gender divide in productivity points to the final big problem with the 90% economy: that it is unfair. Liberally regulated economies operating at full capacity tend to have unemployment rates of 4-5%, in part because there will always be people temporarily unemployed as they move from one job to another.

The new normal will have higher joblessness. This is not just because GDP will be lower; the decline in output will be particularly concentrated in labour-intensive industries such as leisure and hospitality, reducing employment disproportionately. America’s current unemployment rate, real-time data suggest, is between 15-20%.

The lost jobs tended to pay badly, and were more likely to be performed by the young, women and immigrants. Research by Abi Adams-Prassl of Oxford University and colleagues finds that an American who normally earns less than $20,000 a year is twice as likely to have lost their job due to the pandemic as one earning $80,000-plus. Many of those unlucky people do not have the skills, nor the technology, that would enable them to work from home or to retrain for other jobs.

The longer the 90% economy endures, the more such inequalities will deepen. People who already enjoy strong professional networks—largely, those of middle age and higher—may actually quite enjoy the experience of working from home. Notwithstanding the problems of bad internet and irritating children, it may be quite pleasant to chair fewer meetings or performance reviews.

Junior folk, even if they make it into an office, will miss out on the expertise and guidance of their seniors. Others with poor professional networks, such as the young or recently arrived immigrants, may find it difficult or impossible to strengthen them, hindering upward mobility, points out Tyler Cowen of George Mason University.

The world economy that went into retreat in March as covid-19 threatened lives was one that looked sound and strong. And the biomedical community is currently working overtime to produce a vaccine that will allow the world to be restored to its full capacity.

But estimates suggest that this will take at least another 12 months—and, as with the prospects of the global economy, that figure is highly uncertain. If the adage that it takes two months to form a habit holds, the economy that re-emerges will be fundamentally different.

When the government calls, companies must answer

The aim is to emerge with a sterling reputation, staff trust and solid financial base

Robert Armstrong

web_Presidential demands on companies  © Ingram Pinn/Financial Times

In a time of crisis, what does business owe the public good?

And what can the government require companies to do? If the crisis is deep enough, the answer to the latter question is: almost anything.

In his 1942 State of the Union address, US president Franklin D Roosevelt proclaimed “overwhelming superiority of armament” a requirement for victory in the second world war.

He ordered the construction of an astonishing 60,000 planes, 45,000 tanks, 20,000 anti-aircraft guns and 6m tonnes of shipping capacity that year.

To reach those goals, the Office of Production Management banned the manufacture of passenger cars, diverting all of Detroit’s manufacturing capacity to the war effort.

In the coronavirus pandemic, the US government’s demands have been lighter — but less predictable. Last month, President Donald Trump signed a memo ordering General Motors to “accept, perform, and prioritise federal contracts for ventilators”.

The memo said GM had been “wasting time”, and Mr Trump tweeted that it was “always a mess with” chief executive Mary Barra.

A similar memo instructed the secretary of homeland security to “use any and all authority” to secure N95 face masks from the manufacturer 3M.

It came after Mr Trump said 3M would have “a hell of a price to pay” if it did not prioritise US customers.

Both companies quickly came to agreements with the administration. A GM factory will soon start turning out ventilators, and 3M has agreed to send some 166m masks to the US from its plants abroad. It may not always be so easy, however.

We are at a moment of cautious optimism about the virus’s trajectory. But the worst-case scenario, in which repeated outbreaks cripple the US economy for another six months or more, may yet play out.

In that case, the federal government will ask much more of a lot more companies.

The greatest risk then would come not from Mr Trump’s tweets and temper but the lack of institutional structures. FDR put in place systems that filtered the executive will through agencies, boards and Congress. Business executives were not just consulted; they led the efforts.

The first chair of the Office of Production Management was former GM president William Knudsen.

The rapid rise of coronavirus has made it difficult to construct that kind of structure. This may change in time, but so far Mr Trump has kept power closely held. His supply-chain task force is run by a Navy admiral, not a business leader, and it gives the presidential son-in-law, Jared Kushner, a key role.

Complicating companies’ relationship with the government is the fact that the biggest challenge this time is not going to be manufacturing equipment but supporting the economy through the shutdown. When the government tells you to make guns to kill Nazis, and offers to pay, you do it.

When it tells you to administer, for a fee, the coronavirus bailout programme for small business, as US banks have been asked to do, it is almost as easy to say yes.

If the next ask — implicit or explicit — is about whether companies can lay off staff or set pay, responding will be harder.
 There is no guarantee that what the government asks will be reasonable.

But two principles will help see companies through.

First: don’t wait.

The best way for an industry to avoid landing on the wrong side of an unpredictable government’s agenda — or of public opinion — is to act first. We have seen some of this already.

The biggest US banks announced as a group that they would suspend buyback programmes to preserve capital for lending.

This was not a costless decision. With banks’ share prices low, buybacks can deliver big gains to shareholders, and many bank leaders were confident they had plenty of capital. But the decision was wise.

Shares can always be bought back after the crisis has passed, and acting early aligned the banks with regulators and the public good. We will need to see similar and bolder actions, if the crisis worsens.

The American industrial response to coronavirus will almost certainly be better if companies lead and the president follows.

But this can only happen if companies follow a second principle: look to the horizon. In normal times, there is a healthy tension between short-term and long-term results. In a crisis, only the long term matters.

The goal must be to contribute what you can, and emerge from the crisis with a sterling public reputation, employee trust and a strong financial foundation. All this will pave the way for a better relationship with government, too.

In 1944, Sewell Avery, chairman of the department store Montgomery Ward and an ardent free marketeer, lost patience with the government rules for negotiating with the store’s unions.

“To hell with government!” he shouted.

He was physically carried out of his office by national guardsmen. Mr Avery eventually got his company back.

But today’s chief executives might want to consider how a similar failure to see the big picture would play out in the age of social media.

Bucking the trend

The dollar’s dominance masks China’s rise in finance

The pandemic is a fillip for China’s currency and fintech firms

In hong kong’s deserted airport, two cash machines face each other. One is run by HSBC, a British bank that is one of the territory’s main conduits for accessing American dollars. The other, operated by the Bank of China, dispenses Hong Kong dollars and Chinese yuan.

Flashing in the eerie, pandemic-induced silence, they are a metaphor for China’s discreet quest for financial influence.

The dollar is still the king of currencies. It underpins four-fifths of global supply chains and around two-thirds of securities issuance and foreign-exchange reserves.

Though China is the world’s second-largest economy, its financial clout lags far behind that of America. But it wants to catch up, and the pandemic could speed its progress.

At first blush, last month’s global rush for dollars might suggest otherwise. The outbreak of covid-19 presaged widespread lockdowns and an intense liquidity crunch.

Spooked, investors sold whatever they held. Dollars became highly sought after. Australia’s currency hit its lowest level against the greenback since 2002. The Indian rupee fell to a record low.

Even the Japanese yen and Swiss franc, usually havens, tumbled.

Funding markets also hinted at a serious dollar shortage. The three-month “cross-currency basis” swap rate, which tracks the premium traders pay to temporarily exchange euros for dollars, reached its highest point since 2011.

The cost of borrowing greenbacks in the interbank market soared. Alarmingly, the value of American Treasury bills started falling, suggesting investors were selling their safest assets to free up cash.

The problem was that covid-19 boosted dollar demand while choking off supply. Trade stalled, leading firms to draw down credit lines. Investors dumped emerging-market assets, causing a record $100bn in portfolio outflows.

Redemption requests prevented money-market funds from filling the gap. All this made dollars more expensive. Emerging markets, hurt by crashing commodity prices and bulging debt repayment costs, were the hardest hit.

In order to ease the pressure, the Fed set up swap lines for rich-world central banks and those in some emerging markets, which now cover 14 countries. On March 31st it also created a “repurchase” facility, allowing other central banks to temporarily swap their holdings of American Treasuries for dollars, rather than be forced to sell them into an illiquid market. The measures seem to have worked: the euro-dollar basis touched a 12-year low on April 6th.

This “magnanimity” will only heighten dollar dependence, says Eswar Prasad of Cornell University, as central banks amass yet more American bonds as a buffer for the next crunch.

But to some that very prospect is a reason to diversify. The Fed’s “repo” facility does not help nations with few reserve assets. America’s rivals fear being denied access. Others may reckon that reliance on a keystone currency could amplify future shocks. And the fortunes of many economies are now more tightly bound to their best trading buddy—China—than to America.

China cannot yet satisfy them. The yuan makes up just 2% of payments and global reserves.

But three factors mean that Beijing could emerge from the current crisis with a stronger hand: the increasing allure of China’s government bonds; its role as a creditor; and its technological clout.

Take bonds first. China is winning kudos as a trusted debtor, which props up the yuan. Even as other markets froze, its government-bond market was undisturbed. The gap between prices at which investors want to buy and sell—the “bid-ask” spread—has stayed low, as has volatility.

According to an index compiled by JPMorgan Chase, returns on emerging-market bonds fell by 15.5% in the first quarter, but Chinese debt returned 1.3% (see chart).

The bond market also recorded 60bn yuan ($8.5bn) in net foreign inflows. “The Chinese market has proven that it is somewhat independent from other global markets,” says Edmund Goh of Aberdeen Standard Investments, an asset manager.

That makes China’s $13trn bond market, the world’s second-largest, a haven among emerging peers. And it is a more lucrative option than rich-world bonds: China’s five-year treasuries yield 2.24%; American ones, 0.35%.

As interest rates stay low in the West, that gap will endure. It should help that China’s bonds are being gradually included in two popular indices. Passive—and sticky—money should stream in.

Another factor in China’s rise is its status as a big creditor. As the world recovers from coronavirus, this could yield strategic benefits—and dilemmas. Its apparent willingness to back a G20 deal to suspend bilateral loan repayments by poor countries for the rest of this year—much of which would have gone to China—will help inspire more faith in its credit and, by extension, the yuan. In the private sector, though, it may be more hard-headed.

Since 2008 Chinese banks have become some of the world’s largest lessors of planes and ships.

As a halt to trade and travel threatens to push lessees into default, lenders seem to be “playing hardball”, says Richard Skipper of dla Piper, a law firm. A lack of forgiveness now could alienate future borrowers.

A final factor, and perhaps China’s trump card, is technology.

Tencent and Ant Financial, which run “digital wallets” with over 1bn users each, are investing in peers across Asia. OneConnect, an offshoot of Ping An, China’s largest insurer, provides cloud-based services that power financial institutions in 16 countries.

All should get a boost as covid-19 forces money and staff to migrate online. Some are already talking to bankers about buying upstarts that investors no longer want to bankroll, says Frank Troise of SoHo Capital, an investment firm. China’s growing influence over the profitable plumbing of Asian finance will in time be hard to ignore.

China will need an open capital account and a trusted legal system for the yuan to become a reserve currency. If its resilient bond market and whizzy tech attract big inflows, officials in Beijing could become more confident about relaxing cross-border controls.

For the growing number of countries and companies with reason to ditch the dollar, that would make China a more viable alternative.

Is The Government About To LBO The Private Sector?

by John Rubino

So it’s early 2021 and we’ve bought back most of the extant Treasuries, a big chunk of investment-grade corporates and agency bonds, even a significant part of the junk market. And the damn economy is still flat on its back.

Guess ten trillion dollars isn’t what it used to be!

But giving up isn’t an option unless you like the idea of falling into a deflationary abyss, so we need to keep going.

And it’s not like currency is hard to create, haha.

Looks like we’ll have to revisit the trial balloons we launched last year:

Yellen says the Fed doesn’t need to buy equities now, but Congress should reconsider allowing it
(CNBC April 6, 2020) – Former Federal Reserve Chair Janet Yellen thinks the central bank is not in a position where it needs to buy equities but thinks lawmakers should give it more leeway for the future. 
“It would be a substantial change to give the Federal Reserve the ability to buy stock,” Yellen told CNBC’s Sara Eisen on “Squawk on the Street.” “I frankly don’t think it’s necessary at this point. I think intervention to support the credit markets is more important, but longer term it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own.” 
Normally, the Fed is only allowed to own government debt and agency debt with government backing, Yellen said. The central bank has also received special powers during the coronavirus outbreak to buy other assets such as corporate debt through exchange-traded funds.  
The Fed has also cut rates to zero and launched an unlimited quantitative easing program to help stabilize markets. Still, the Fed would need additional authority to buy exchange-traded funds holding stocks. 
Other central banks — including the Bank of Japan — have been purchasing some of their countries’ stocks to mitigate the recent carnage sparked by the coronavirus outbreak. 
“The Fed … is far more restricted than most other central banks,” Yellen said. “Even with respect to owning corporate debt, the Fed is not allowed to directly own corporate debt and most other central banks are.” 
U.S. weighs taking equity stakes in energy companies, Mnuchin says 
(Reuters, April 24, 2020) – The U.S. government is considering taking equity stakes in U.S. energy companies as it seeks to help the nation’s oil and gas sector amid the coronavirus outbreak, Treasury Secretary Steven Mnuchin said on Friday. 

President Donald Trump, speaking at a White House event with Mnuchin, said he wants to help industry and suggested the federal government could buy fuel for the country in advance as well as purchase airline tickets in advance. 
“We’re looking at a whole bunch of alternatives,” Mnuchin said. 
“You can assume that’s one of the alternatives, but there’s many of them,” Mnuchin said, referring to possible equity stakes.

Now back to the present, where we can discuss this next stage of monetary experimentation as a future possibility rather than a fait accompli.

Governments buying equities is a sort of Twilight Zone version of the greater fool theory, in which you buy something that is admittedly overpriced in the expectation that someone even more exuberant will come along to pay even more for it.

This is a vote of no confidence in both the asset in question and the intelligence of the broader public. But it’s frequently profitable in markets dominated by speculators (and idiots) rather than investors.

In today’s case, a rational investor might look at the value of US equities and conclude that they’re overpriced, given the utter chaos of a hyper-leveraged, virus-ridden world. But then he might notice the Fed, which has both an unlimited monetary printing press and (soon) a mandate to buy equities, not in order to turn a profit by buying low and selling high but to artificially inflate prices, causing gullible consumers to borrow more money and buy more stuff.

Viewed through that lens, stocks become a screaming buy because the ultimate greater fool is now prowling the market with unimaginable amounts of money.

This is exactly what the government is trying to accomplish in the short run. But it’s also a death knell for capitalist wealth creation since the leveraged buyout (LBO) of the private sector by the government will cripple the capital markets’ price signaling mechanism and bring innovation to a screeching halt.

This second point is lost on the desperate folks at the Fed and Treasury.

Which means the ultimate fiery end of this system will come as a complete surprise to them, though maybe not to the people on the other side of the LBO trade.

Obesity dangers make Covid-19 a rebuke to unequal societies

Excess body fat seems to matter more than heart or lung disease, or smoking, when it comes to catching the virus

Camilla Cavendish

Artwork for FTWeekend Comment - issue dated 02.05.20
© Jonathan McHugh 2020

Covid-19 is perhaps the reckoning for ignoring two things that might once have seemed unrelated.

Leaders were urged to prepare for a viral pandemic, and to tackle widening gaps between the health of rich and poor.

Covid-19 is the reckoning. We are repeatedly told that age is the main risk factor with this virus. But so, it seems, is being poor.

“Why are you surprised?” asks my friend Jo, an intensive care nurse in the National Health Service. “It’s nothing new.”

The patients Jo sees are disproportionately overweight or obese.

Many have type-2 diabetes, kidney problems or hypertension.

People with those conditions, she points out, were always more prone to end up in ICU.

They have weakened immune systems which often relate to chronic stress from low-income jobs, poor diet and physical inactivity. We urgently need to understand the connections between these conditions and Covid-19.

In France, the US and UK, figures suggest that patients who are overweight are at significantly greater risk. In New York City, a study of 4,000 Covid-19 patients found that obesity is the second strongest predictor, after their age, of whether someone over 60 will need critical care.

Surprisingly for a virus that hits the lungs, the researchers say that excess body fat seems to matter more than heart or lung disease, or smoking — perhaps because obesity triggers chronic inflammation, leaving sufferers more susceptible.

A second New York study says that being overweight is the main driver of whether younger people will be hospitalised with Covid-19. Patients under 60, the researchers found, are twice as likely to need intensive care if they have a body mass index over 30, and 3.6 times more likely to need it with a BMI over 35. Once in ICU, we must remember, survival odds are tragically only 50:50.Looking back to the swine flu outbreak, it is clear this should have been anticipated.

In 2009, 51 per cent of Californians who died from the H1N1 Influenza A were obese: this was 2.2 times more than the prevalence of obesity in the state population.

Obesity is well known to be a risk factor for chronic health conditions, including strokes, heart attacks and hypertension. One group of scientists last week called on healthcare systems to start systematically measuring the “metabolic parameters” of patients: body mass index, waist circumference, glucose and insulin levels, in order to calculate their risk of complications from the disease.

It is incredible this isn’t already happening. This is not just about body weight. People of normal weights can have impaired metabolic health.

A recent commentary in the journal Nature stated that “patients with type-2 diabetes and metabolic syndrome might have up to 10 times greater risk of death when they contract Covid-19”.

Both of these conditions disproportionately afflict people of south Asian and Afro-Caribbean descent, who are being hit hard.

We need to know whether metabolic syndrome might in some way explain the shocking death toll of Filipino nurses in the UK and the US. They tend to give their all to the job; some may have been working without adequate protection.

But are they also physically more vulnerable?To find out, we need better data and an open debate. Last week, three-quarters of Covid-19 patients in 268 NHS ICUs were overweight or obese, according to the Intensive Care National Audit and Research Centre.

Almost half were younger than 60. These figures do not include some of the oldest people, who are dying in care homes.

Nevertheless, they suggest that locking down everyone over 70 may not be the best way to stratify risk. I am not arguing that slim, fit people are safe.

Our immune systems tend to weaken as we age, and our metabolisms slow down (which in turn can lead to weight gain). Experts are also looking at whether “viral load”, — repeated exposure — may explain why some young, healthy professionals treating the sick are struck down by this virus.

But if this growing body of evidence is anywhere near the mark, it suggests that the UK and US will fare especially badly in the crisis.

France’s chief epidemiologist has already taken a swipe at the US, warning that Americans are likely to suffer the most from Covid-19 because obesity is “a major risk factor”.

The US is the fattest nation in the OECD, and the UK is the fattest in Europe after Portugal.

Both countries also have abhorrent health inequalities. In some parts of England, there is now a 12-year gap in healthy life expectancy between rich and poor.

Deficient housing, pollution, insecure work, poor diets: all of these drive chronic disease, which strikes at younger and younger ages. We have loaded the dice against the poor and this is being cruelly exposed by the pandemic. It is notable that Japan has recorded relatively low mortality rates, despite being the world’s oldest society.

There are many possible explanations.

But Japan has low obesity and its government has an ambitious, successful public health programme. How might we arm our populations against this virus, and for the future?

We must turbocharge public health programmes that can reverse chronic conditions such as type-2 diabetes.

We should realise that lockdowns which prevent people from exercising will store up trouble.

And not bracket people simply by age.

There is much more to learn about Covid-19.

But it seems clear that poverty, obesity and its related diseases make some people old before their time.

The writer is a senior fellow at Harvard University and an adviser to the UK Department of Health and Social Care