The Case for Deeply Negative Interest Rates

Only monetary policy addresses credit throughout the economy. Until inflation and real interest rates rise from the grave, only a policy of effective deep negative interest rates, backed up by measures to prevent cash hoarding by financial firms, can do the job.

Kenneth Rogoff

rogoff193_Sarah SilbigerGetty Images_jeromepowell

CAMBRIDGE – For those who viewed negative interest rates as a bridge too far for central banks, it might be time to think again. Right now, in the United States, the Federal Reserve – supported both implicitly and explicitly by the Treasury – is on track to backstop virtually every private, state, and city credit in the economy.

Many other governments have felt compelled to take similar steps. A once-in-a-century (we hope) crisis calls for massive government intervention, but does that have to mean dispensing with market-based allocation mechanisms?

Blanket debt guarantees are a great device if one believes that recent market stress was just a short-term liquidity crunch, soon to be alleviated by a strong sustained post-COVID-19 recovery. But what if the rapid recovery fails to materialize?

What if, as one suspects, it takes years for the US and global economy to claw back to 2019 levels?

If so, there is little hope that all businesses will remain viable, or that every state and local government will remain solvent.

A better bet is that nothing will be the same. Wealth will be destroyed on a catastrophic scale, and policymakers will need to find a way to ensure that, at least in some cases, creditors take part of the hit, a process that will play out over years of negotiation and litigation. For bankruptcy lawyers and lobbyists, it will be a bonanza, part of which will come from pressing taxpayers to honor bailout guarantees. Such a scenario would be an unholy mess.

Now, imagine that, rather than shoring up markets solely via guarantees, the Fed could push most short-term interest rates across the economy to near or below zero. Europe and Japan already have tiptoed into negative rate territory. Suppose central banks pushed back against today’s flight into government debt by going further, cutting short-term policy rates to, say, -3% or lower.

For starters, just like cuts in the good old days of positive interest rates, negative rates would lift many firms, states, and cities from default. If done correctly – and recent empirical evidence increasingly supports this – negative rates would operate similarly to normal monetary policy, boosting aggregate demand and raising employment. So, before carrying out debt-restructuring surgery on everything, wouldn’t it better to try a dose of normal monetary stimulus?

A number of important steps are required to make deep negative rates feasible and effective. The most important, which no central bank (including the ECB) has yet taken, is to preclude large-scale hoarding of cash by financial firms, pension funds, and insurance companies.

Various combinations of regulation, a time-varying fee for large-scale re-deposits of cash at the central bank, and phasing out large-denomination banknotes should do the trick.

It is not rocket science (or should I say virology?).

With large-scale cash hoarding taken off the table, the issue of pass-through of negative rates to bank depositors – the most sensible concern – would be eliminated. Even without preventing wholesale hoarding (which is risky and expensive), European banks have increasingly been able to pass on negative rates to large depositors.

And governments would not be giving up much by shielding small depositors entirely from negative interest rates. Again, given adequate time and planning, doing this is straightforward.

Negative interest rates have elicited a blizzard of objections. Most, however, are either fuzzy-headed or easily addressed, as I discuss in my 2016 book on the past, present, and future of currency, as well as in related writings. There, I also explain why one should not think of “alternative monetary instruments” such as quantitative easing and helicopter money as forms of fiscal policy.

While a fiscal response is necessary, monetary policy is also very much needed.

Only monetary policy addresses credit throughout the economy. Until inflation and real interest rates rise from the grave, only a policy of effective deep negative interest rates can do the job.

A policy of deeply negative rates in the advanced economies would also be a huge boon to emerging and developing economies, which are being slammed by falling commodity prices, fleeing capital, high debt, and weak exchange rates, not to mention the early stages of the pandemic.

Even with negative rates, many countries would still need a debt moratorium.

But a weaker dollar, stronger global growth, and a reduction in capital flight would help, especially when it comes to the larger emerging markets.
 Tragically, when the Federal Reserve conducted its 2019 review of policy instruments, discussion of how to implement deep negative rates was effectively taken off the table, forcing the Fed’s hand in the pandemic. Influential bank lobbyists hate negative rates, even though they need not undermine bank profits if done correctly.

The economics profession, mesmerized by interesting counterintuitive results that arise in economies where there really is a zero bound on interest rates, must share some of the blame.

Emergency implementation of deeply negative interest rates would not solve all of today’s problems.

But adopting such a policy would be a start.

If, as seems increasingly likely, equilibrium real interest rates are set to be lower than ever over the next few years, it is time for central banks and governments to give the idea a long, hard, and urgent look.

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.

The US is failing the test of the century

A new wave and second lockdown would be a bigger hit to wealth than a cautious return to work, but Donald Trump is refusing to listen

Edward Luce

US president Donald Trump at a daily briefing at the White House, Washington on Wednesday
Donald Trump intends to publish guidelines for the reopening of the US economy from May 1, less than two weeks away © Mandel Ngan/AFP/Getty

Like an asteroid, coronavirus is the textbook example of an exogenous shock. The threat came from beyond. Yet the pathogen offers a unique stress test of each country’s resilience. Some nation states are holding up well. In spite of its unmatched scientific resources, the US is not.

More worrying, it is showing little sign of lifting its performance. Six weeks after its first coronavirus death, America’s learning curve remains flatter than its infection rate. It should be the other way round.

The biggest worry is that the US still lacks a road map. The federal government has only a weak grasp on how many Americans are infected with Covid-19, a clear measure of the mortality rate, and therefore the extent of immunity in the country. Without more tests, the US is travelling blind. Just 1 per cent of the country, 3.2m people, have been tested so far.

In early March, Mike Pence, the vice-president, promised 4m tests within a week. The same day, President Donald Trump said anybody in the US who wanted a test could get one. That remains as untrue today as it was then.

The stubborn fact is that the US is not churning out enough kits. The average number of daily tests has been stuck at 140,000 for the past two weeks. That is far below the level that scientists say is required to gauge the pandemic’s reach.

Some say the US should be testing 10 times that number to understand the spread of the disease. Others want half-a-million a day. Either way, testing has hit a very low plateau, which is a metric of negligence. Without a grasp of the facts, the US will not find its way out.

The deepest puzzle is the gap between wishes and action. Mr Trump was not alone in waking up very late to the coronavirus threat. Others, including Britain’s Boris Johnson, were equally laggard. Each country now has higher death rates than they would have had they acted sooner.

Epidemiologists say that if the US shutdown had taken place two weeks earlier, 90 per cent of the deaths would have been prevented. More than 30,000 Americans have now died, according to the official tally. Had no social distancing occurred at all, the US would have lost many times that by now. There is no excuse for running the same experiment again.

Healthcare workers at the ProHEALTH Care coronavirus testing site on Wednesday in New Hyde Park, New York 
Only 3.2m Americans, just 1 per cent of the country, have been tested so far for Covid-19 © Bruce Bennett/Getty

Yet that is what Mr Trump is pushing to do. On Thursday he will publish guidelines for the reopening of the US economy from May 1 — less than two weeks away. The worst-hit states on each coast will probably stick to their timetables. US politics abhors a federal vacuum.

States are clubbing together to fill it. But they will be subjected to increasingly urgent pressure to follow Mr Trump’s dictates, which are driven by politics, rather than science. It was one thing to wake up late to the virus. It would be quite another to drift back into sleep too soon.

There is no point in fantasising which US presidents would have done better. The answer is almost any. You go to war with the president you have. But it is easy to project Mr Trump’s direction. There will be no federal plan to marshal the US’s resources for testing, therapeutics or the search for a vaccine.

The US will have to rely on its patchwork of labs, companies and philanthropists. They are unrivalled but highly fragmented. As the governor of New York, Andrew Cuomo, put it: states should not have to compete with each other during a war for tanks and guns. 

Nor will Mr Trump educate Americans about the reality ahead. In his view, the US is already past the peak. Failure to reopen the economy would cost more lives than keeping it closed, he says.

In fact, a new wave that triggered a second lockdown would be a far bigger hit to US wealth than a cautious return to work over a period of months. One paper estimates the difference at $5.2tn over 30 years. Economists and scientists mostly agree on this. Mr Trump is deaf to the consensus.

Which means the US is likely to flunk the test that matters most — national purpose. No matter how sinuous their civic institutions, nations without leadership lose wars. The US was galvanised into unity after the Great Depression, Pearl Harbor and the launch of Sputnik.

Covid-19, by contrast, is spurring a hunt for scapegoats. The virus is only worsening America’s divide.

The American Catastrophe

Coronavirus Strikes a Nation Unprepared

The first coronavirus infection in the United States was confirmed in Seattle 100 days ago. A team of DER SPIEGEL reporters has documented what has happened since, following a dozen people as they struggle to come to terms with the health catastrophe.

By Anne Backhaus, Britta Kollenbroich, Katrin Kuntz, Guido Mingels, Ralf Neukirch, Dietmar Pieper, Yannick Ramsel, Christoph Scheuermann and Daniel C. Schmidt

A bus passenger in New York on April 3: A world power in freefall.
A bus passenger in New York on April 3: A world power in freefall. / SPENCER PLATT/ AFP

It all began with a cough on the very western edge of the United States, in the state of Washington. On Sunday, Jan. 19, a 35-year-old walked into an emergency clinic just north of Seattle.

He had just returned from visiting his family in the Chinese city of Wuhan, the epicenter of the outbreak. The patient is thought to be the very first case of the novel coronavirus in the Unites States. It marked the beginning of what has turned into an American disaster.

Almost 100 days have passed since that clinic visit. Over a million people have been infected by the coronavirus since then and close to 61,000 people have died, though the real number is likely much higher. Factories have shut down, airplanes have been parked on the ground and workers are digging hundreds of graves on an island off New York City.

What a calamity: a global power in freefall. Social restrictions have been imposed on 300 million people and, even though discussions have begun on loosening those restrictions, 39 states have announced that schools will remain closed until summer. More than 26 million people have lost their jobs and the unemployment rate for the entire country is trending toward 20 percent.

Those are the statistics. But what has really happened during these 100 days? In Indiana, Aimee Howard, the mother of 12 children, suddenly found herself out of work. In Georgia, nurse Dorothy Johnson's attendance at a funeral had deadly consequences. In Jefferson Parish near New Orleans, parish President Cynthia Lee Sheng set to work developing an emergency plan. In New York, a nurse named Christina, struggled to keep up with the huge number of patients. And in Colorado, a businessman named Bruce Penman insisted that the lockdown orders are akin to government overreach.

A team of DER SPIEGEL reporters followed - by telephone, WhatsApp and Skype – more than a dozen people through the pandemic over the course of several weeks.

Their stories show just how negligently the U.S. president acted as he sought to play down the pandemic and how dramatically the federal government has failed in the face of this health emergency.

At the same time, people who had little knowledge of viruses until now – public administrators, policewomen, company executives and more – rose to the occasion. It became the hour of the courageous and resolute – and also of the preachers of hate.

 Jan. 4: In Topeka, Aimee Howard builds her dream.

A new era in Aimee Howard's life has begun. For the last 14 months, the 42-year-old and her husband have been living in a trailer with nine of their children, but on this morning, they wake up in their new home for the first time.

"It felt surreal," she says. They will be saddled with monthly mortgage payments of $1,150 for the foreseeable future, but that doesn't look like it will be a problem: Both of the Howards have jobs. For now.

Topeka lies in the northeastern corner of the state of Indiana and the region is a hub of mobile home manufacturing. Ronnie Howard works as a welder in one of the factories, while Aimee is a self-employed driver for a kind of taxi service for the Amish, the religious group that has settled in the area and whose members don't drive themselves.
Every morning at 3:30 a.m., Howard gets up, climbs behind the wheel of her Ford E-350 and drives the Amish to a factory where they build cabinet doors.

Aimee Howard is a Christian, a cheerful woman who posts videos of her day-to-day life on Facebook along with Bible verses. She says she doesn't need much: a house, her family and church on Wednesdays. They have planned a summer vacation to Tennessee with two sisters, a friend and their families.
She can't know that in just two months, her life will be upturned by a virus.

Jan. 8: In Baltimore County, Melissa Hyatt begins her first year in office. Health officials issue a warning about the virus.

Melissa Hyatt still knows who she last shook hands with - back before COVID-19. An exciting year for her has just come to an end, a year in which she became the police chief of Baltimore County in the state of Maryland seven months earlier – the first woman ever to hold the position. She isn't yet thinking about COVID-19, even though the Centers for Disease Control issue an initial warning on this day. Hyatt has faith in President Donald Trump, who sees no cause for concern.

Feb. 25: Thousands celebrate Mardi Gras in New Orleans. Cynthia Lee Sheng develops an emergency plan.

Mardi Gras in New Orleans and in the surrounding communities comes to an end on this day, the highpoint of the party season. Cynthia Lee Sheng is the president of Jefferson Parish, a community near New Orleans of around 432,000 residents, a population bigger than that of the city itself. Hundreds of thousands of people have descended on the region to drink, dance and kiss. 
 Jefferson Parish President Cynthia Lee Sheng
Jefferson Parish President Cynthia Lee Sheng / Privat

Lee Sheng has only been in office for seven weeks and she doesn't yet know that "Area One," as her area of responsibility is called in bureaucratese, is currently in the process of turning into one of the largest infection hotspots in the entire country. Thus far, only 45 confirmed cases have been documented in the country, including more than a dozen cruise ship passengers.

"We never talked about cancelling Mardi Gras," Lee Sheng says. She is a friendly, energetic woman. A Republican. A few days earlier, Trump said that warmer weather would help get the virus under control, and Lee Sheng believes him.

Yet she is still doing the right thing. She has ordered the development of an emergency plan in the completely unlikely event that the virus should find its way to Jefferson Parish. What offices must remain open in the event of a catastrophe and which officials can work from home? How can people be kept informed? "I thought it might be useful for the summer, when hurricane seasons begins," she would later say.

Feb. 28: In Washington, the president plays down the threat. In Baltimore County, Melissa Hyatt establishes a taskforce.

The rally, Trump says, standing on the South Lawn of the White House before heading off to South Carolina, is going to be very exciting, with thousands of people. Regarding corona, he says: "As you know, with the flu, on average, we lose from 26,000 to 78,000 people a year."

At about the same time, Melissa Hyatt is busy establishing a taskforce at her police department in Baltimore dedicated exclusively to fighting the virus 24 hours a day, seven days a week. It is now up to people in local communities to prepare people for the outbreak. With the government in Washington doing nothing, governors, doctors, nurses, police and public health officials must pick up the considerable slack.

Hyatt is responsible for more than 1,800 employees, and she wants to set a good example, which means keeping her distance from others and refraining from shaking hands. "I would say that I started one or two weeks before it became the social norm," she says. She starts only communicating with her family by video chat or through a pane of glass.

Feb. 29: Dorothy Johnson buries her brother in Albany.

Around 200 people show up for Andrew's burial. Afterward, they all come together for a wake. None of them are concerned that doing so could be dangerous.

Andrew's sister Dorothy Johnson spoke to him on the phone just the day before he died, with his wife finding him dead in the living room a short time later. Nobody knows what caused his death.

Johnson has worked in the cancer ward of the local hospital for the last 28 years and she loves her job. In Dougherty County, where Albany is located, 70 percent of the population is black. Poverty is a widespread problem, Johnson explains over the phone.

She heard about corona for the first time just yesterday, on the day before the funeral, having seen Trump on the television. According to her recollection, he said that the virus is in China and there is no cause for concern - and that the Democrats are merely using the disease to make him look bad.

At the funeral for Andrew, his wife has such a high fever that she can hardly get out of the car. "We had to carry her into the house for the wake," Johnson says. That evening, one of the guests has to go to the hospital. The pastor, who held the eulogy, and the woman who prepared Andrew's body also get sick.

On the day of the funeral, the CDC reports the first coronavirus death in Seattle, but it is likely that the first deaths from the disease actually took place in California in early February. The case numbers are low, but that is likely due to the massive problems with testing. On March 6, Trump promises that anyone who wants to be tested for the illness can receive one.

March 9: Christina, a nurse in New York, goes on vacation. The first confirmed coronavirus case is recorded in Jefferson Parish.

The impact is still far away and it is Christina's last day of work before her vacation. The young New Yorker, who asked that only her first name be printed, works in the intensive care unit of a hospital in Queens. She is familiar with the images from China and Italy, but the situation in her own clinic remains relaxed. One patient has tested positive for SARS-CoV-2 and has been isolated in a quarantine room that can only be entered through an airlock. Four additional cases are under observation.

The next day, she boards a plane for Costa Rica, excited about a few days on the beach.

In Jefferson Parish near New Orleans, Parish President Cynthia Lee Sheng is called into her office that same day for a phone call from John Edwards, the governor of Louisiana. "We have the first case," he told her over the phone. "It's in your parish."

Lee Sheng now knows that the wave of infections is just getting started. Mardi Gras came to an end 13 days before, but in Miami, college students are still celebrating Spring Break on the packed beaches while restaurants in Texas remain open. Lee Sheng decides to cancel the St. Patrick's Day parade that was planned for March 15. The parade took place for the first time in 1971 and has become an institution. Many are angry about the decision to cancel it.

March 10: Dorothy Johnson falls ill in Albany. In Baltimore, Randall Harward works to create the perfect mask.

Ten days after burying her brother, Dorothy Johnson reports to the emergency room at Phoebe Putney Memorial Hospital in Albany. "I was having trouble breathing and a high fever," she says. It felt, she says, like she was dying.

After three days, she is sent home and told to self-isolate and learns that she is suffering from COVID-19. Six of her siblings, all of whom attended the funeral, are also sick. Her 51-year-old daughter, meanwhile, is in intensive care with pneumonia in both lungs. She is in a hospital located two hours away because the one in Albany is full.

The virus continues to spread unhindered in Albany for the next 10 days. Hundreds of runners take part in a marathon and a city festival is celebrated. Around 60 million people live in rural regions of America, and they tend to be older and have more chronic health problems than those who live in the cities.

Dougherty County, with its approximately 90,000 people and more than 1,000 coronavirus cases, rapidly climbs to the top of the nationwide statistics for the disease.

Randall Harward quickly comes to the realization that nobody is safe from the virus as he watches the evening news in his Baltimore home, some 788 miles from where Dorothy Johnson is struggling with COVID-19. Harward is a product developer for the sportswear company Under Armour. A doctor from Italy is on the television and the reporter asks him what advice he has for the U.S. His answer, according to Harward's recollection, is essentially: Everything you have done up until now isn't enough. You have to start preparing.

Product developer Randall Harward
Product developer Randall Harward / Daniel Schmidt/ DER SPIEGEL

The comments hit a nerve with Harward. In challenging situations, he often turns to Hollywood films to get his co-workers moving, he says. "I show my team scenes from 'Apollo 13,' where there was an explosion on board and the crew had little more than a day before they would run out of oxygen," he says. "They had to solve the problem with what was available to them."

Soon, a competition for protective gear will erupt between the various states. And the product developer Randall Harward will be right in the middle of it.

March 13: The number of victims is climbing. In Baltimore, a worker has an idea.

There are now more than 2,000 infections and 50 deaths and Donald Trump declares a national emergency. Many hospitals are suffering from a shortage of face masks and demand for gloves is skyrocketing. There is a lack of protective equipment, ventilators and protective visors. States are doing all they can to find help.

On the previous day, Under Armour received a query from the University of Maryland Medical System, asking if the company could help with the production of masks. Randall Harward quickly comes up with a prototype, but it is rejected by the medical professionals.

But then, a member of Harward's team proposes a design using a lighter material. The mask she comes up with is essentially a single piece of fabric, with the strap being attachable through slits in the fabric cut by a machine. A simply folding technique creates a second layer in front of the nose and mouth. It is quickly approved by medical professionals and Harward's company begins churning out hundreds of thousands of masks.

A few days later, in a teleconference with governors, Trump says: "Respirators, ventilators, all of the equipment - try getting it yourselves."

March 14: The first coronavirus case in New Haven is confirmed.

It's a cold day when Steven Winter turns on his computer in New Haven, Connecticut. Winter is a member of the city council with the Democratic Party, and the first coronavirus case has just been confirmed in his city.

The mayor had already closed down the schools and announced that bars and restaurants can only continue operations at half capacity. The problem, though, is that the people of New Haven feel that the measures are excessive. It is Winter's job to convince them otherwise.

He begins writing the first of many emails, directing readers to the city's website and to its emergency newsletter. He writes about the planned testing regimen and that the number of cases will likely rise once more tests are performed. His underlying message: Take this virus seriously.

March 15: In San Francisco, Aimee Knight is growing concerned for her employees. In Maryland, Melissa Hyatt pushes through a lockdown.

Aimee Knight receives a text message from an alarmed business partner: "Oh nooo." Attached is a link to the announcement that San Francisco will be issuing a strict "shelter in place" order, requiring residents to remain at home and most shops and businesses to close.

Knight is the founder of a medical company in the Bay Area, called Reveal Diagnostics, with 10 employees and four locations between San Francisco and San José. All are outfitted with computer tomography scanners and the company specializes in dentistry diagnostics.

"Suddenly, we had just 10 patients a day instead of 50," Knight would say later. Initially, she spends most of her time on the telephone, trying to reach her insurers, her adviser for personnel issues and her financial adviser. "Do I have to lay off my employees? If yes, what will happen to them? For how long can the company survive?"

At the same time, she is trying to keep her five-year-old son Loxton occupied, since his daycare center closed its doors a few days earlier. And, as irony would have it, she is suffering from a terrible toothache and an appointment to treat it was cancelled because of the pandemic.

Revellers on Bourbon Street in New Orleans on March 15: One of the largest sources of infection
Revellers on Bourbon Street in New Orleans on March 15: One of the largest sources of infection / William Widmer/ The NewYorkTimes/ Redux/ laif

The strict lockdown begins in seven counties in California, but it is quickly followed by similar measures across the country. One day later, the state of Maryland closes down bars, restaurants and movie theaters, while the governor of Ohio says: "We are at war." South Dakota, by contrast, allows restaurants to stay open and in Texas, students in many parts of the state continue going to school.

March 18: New York becomes a hotspot. Christina breaks off her vacation.

New York Governor Andrew Cuomo reports 2,382 cases, an increase of around 75 percent over the day before.

Christina, the nurse from Queens, has been following the news from the beach in Costa Rica. With the numbers continuing to skyrocket, she decides to fly home early so she can help out in her hospital.

When she walks into the clinic, she hardly recognizes it. Three wards have been dedicated exclusively to COVID-19 patients and dozens of them have had to be intubated. They have all been sedated, a measure taken to facilitate artificial respiration.

March 23: In San Francisco, Aimee Knight lays off six employees. In Connecticut, Steven Winter freaks out.

New hotspots of infection are emerging in New Jersey, Seattle, Chicago, Detroit and Denver. In Louisiana too, the number of new infections increases exponentially, leading the governor to impose strict restrictions. The next day, a staff member bursts into Jefferson Parish President Cynthia Lee Sheng's office holding a sheet of data. "I didn't want to believe it, but we had a higher death rate than New York," Lee Sheng says.

Meanwhile, in San Francisco, the entrepreneur Aimee Knight has to lay off six of her 10 employees. "We hardly had any customers left, I had no choice," she says. "Hire and fire" may be one of the basic tenets of the American working world, but there's generally a widespread culture of self-help and solidarity at small companies. Knight decides to keep paying for her former employees' health insurance. They may lose their jobs, but at least they won't be uninsured, which is what usually happens to people who are laid off in the U.S.

In New Haven, Connecticut, the town councilman Steven Winter picks up his phone. A black activist from the neighborhood has been pestering him, insisting that African Americans are hardly affected by COVID-19. Winter considers such statements to be extremely dangerous. "That's bullshit," he shouts into the receiver. In fact, there's a good chance the virus is even more dangerous for black Americans due to the widespread prevalence of pre-existing health problems. His neighbor says: "Fuck you, Steven." And hangs up.

More and more Americans are fed up with the lockdowns, including Donald Trump. "Our country wasn't built to be shut down," Trump says at a White House press briefing.

March 24: In Indiana, Aimee Howard loses her job. In Washington, Congress debates a $2 trillion bailout package.

When Aimee Howard's life comes to a halt, she's waiting in a parking lot in her Ford E-350. It's early in the afternoon and, as usual, she's there to take home a bunch of factory workers. But the head of the company also walks out, approaches the driver-side window and tells her that he doesn't need his employees anymore at the moment.

For the first time in her life, Howard is out of work.

Aimee Howard and her husband
Aimee Howard and her husband / Privat

The week before, 3.3 million Americans filed for unemployment benefits. Howard now belongs to a rapidly growing army of people who have lost their jobs due to the coronavirus. At the same time, Congress is debating a bill, the CARES Act, that in addition to aid for companies, would make $560 billion available to private individuals.

A few days later, Aimee Howard is struggling to fill out an online application for Indiana state unemployment benefits. She doesn't know how to answer many of the questions, such as if she is willingly registering as unemployed. "Nobody fired me, but because I was self-employed, I was kind of unemployed," Howard says. Next question. Did she have a full-time job where she worked 45 hours a week? Howard worked maybe half that, so no.

At the end, the website informs Howard that her application has been rejected.

March 26: In Colorado, Bruce Penman defends freedom.

More than 81,000 infected, more than 1,000 dead. Sure, Penman says, from an epidemiological standpoint, the world needs to be put on hold for a year. But that's not how he wants to imagine his country. Not the U.S.

Penman is a 58-year-old businessman from the town of Monument, Colorado, and a Trump voter. Every morning, he turns on the TV and watches "Mornings with Maria" on Fox Business. He then scrolls through Twitter and reads articles on Fox News. But he also keeps an eye on the enemy, such as the New York Times. The company that he and his wife own provides janitorial services, including for the telecom giant AT&T, which is considered essential. Penman is therefore also considered systemically relevant.

In the past few weeks, Penman has had to hire new employees. But he still says: "The government should get out of the way of the free market. People should decide for themselves if they want to isolate."

Penman doesn't think the pandemic will be worse than a slightly more intense flu season. He says the media have been fueling fears of the virus, which, in turn, harms the economy. Penman isn't alone with his criticism. Soon rage against the lockdown measures will spill into the streets.

March 27: The U.S. overtakes China and Italy. In New York, Christina arranges a phone call for a dying man.

There are now more confirmed cases of coronavirus in the U.S. than in China, Italy and Spain, and almost half of those infected live in the state of New York. Hospitals are struggling to keep up with the number of new patients. There are 6,481 people who are so seriously ill with COVID-19 that they have to be admitted overnight. Of those, 1,583 are in intensive care. One of them is being looked after by Christina.

Things aren't looking good for the man. Christina has been taking care of him for three days, changing his diapers, washing him and changing his sheets. She stands at the edge of his bed, between computers, tubes and ventilators, and points her phone screen at her patient. Relatives and friends from Haiti want to say goodbye.

Christina doesn't really have time for such things, but she wants to at least give the relatives a chance to see him one last time. It's a bit of dignity in a situation that otherwise leaves sick people feeling lonely and dehumanized.

In Washington, Trump tweets to the automakers General Motors and Ford: "START MAKING VENTILATORS, NOW!!!!!!"

March 30: In Albany, Dorothy Johnson's daughter is fighting for her life.

The virus is rapidly spreading to rural areas of America. For weeks, hardly anyone has been paying much attention to more remote regions, but now, even Washington has recognized the danger. Deborah Birx, the government's top coronavirus coordinator, advises rural communities to prepare for the pandemic: "No state, no metro area will be spared."

Word doesn't reach Dorothy Johnson, the nurse, in Albany. She herself has been released from quarantine, but her daughter Tonya's condition is only worsening. She's in the hospital, breathing with the help of a machine.

April 3: In Michigan, Roslyn Bouier is fighting for water. Health officials have advised all people to wear masks.

Roslyn Bouier is behind the wheel of her car, bringing several gallons of water to a foodbank in northwestern Detroit.

A spirited, 60-year-old Creole woman with tightly curled hair, Bouier's job as a pastor has led her to monitoring six foodbanks for the needy these days. And when she talks about water, she tends to get loud. Since 2014, Detroit has shut off water to around 141,000 households for not paying their water bills. "How are you supposed to flatten the curve when people can't even wash themselves?" Bouier yells into her mobile phone.

She erupts into bitter laughter over the phone when she thinks of Michigan Governor Gretchen Whitmer. Just a couple of days earlier, Whitmer had tweeted that everyone should regularly wash their hands for at least 20 seconds at a time. "How can you wash your hands when your water has been turned off?" The city of Detroit has announced that water would be temporarily turned on again, but that doesn't go far enough for Bouier.

One of the poorest cities in the U.S., Detroit is also one of the top five hardest hit cities in this crisis. And just like elsewhere in the state of Michigan, the virus has hit African Americans the hardest. Calls for social distancing, Bouier says, are a bad joke for many black people in Detroit because of the small apartments they live in.

April 5: In San Francisco, Aimee Knight is hoping for $150,000. In New York, Christina is struggling to contain the madness.

Aimee Knight, who runs Reveal Diagnostics in San Francisco, has just laid off her last employee. She has done her best to make sure that her people don't have too hard a landing, but she must now shift her focus to preventing the company itself from collapsing - with the help of a bank loan made available through crisis aid.

Aimee Knight had to lay off all her employees.

Aimee Knight had to lay off all her employees. / Privat

The government has earmarked $350 billion for smaller companies in the first aid package.

Knight clicks through the online forms and files her application with the bank on the first day possible.

Based on the size of her company, she is eligible for $150,000, which would take care of her fixed costs for several months. She receives a call that her application is being processed.

"That was a good day," Knight says. "I had the feeling that it would work, that there was hope." She has been waiting ever since.

The first fund has since been emptied and she thinks that her papers might have been lost in the chaos - in part because the world's leading economy doesn't have any emergency infrastructure. It has no Plan B for a pandemic.

In New York, meanwhile, Christina's shift begins at 7 a.m. with yet another fatality, with a man having died in the night of COVID-19-related complications. Christina makes a phone call to get help with removing the man. "You'll have to take him away by yourselves," she is told.

There is a shortage of personnel throughout the clinic, with more and more staff members testing positive for the virus. The parents of some workers are also being treated in the hospital. The protective clothing that Christina puts on at the beginning of her shift has to last for the entire day. She is so busy that she only takes her mask off a single time during her entire 13-hour shift.

 A COVID-19 victim in Albany on April 7: "How are you supposed to flatten the curve when people can't even wash themselves?"
A COVID-19 victim in Albany on April 7: "How are you supposed to flatten the curve when people can't even wash themselves?" / Christopher Morris/ VII/ Redux

April 15: Thousands are protesting against the lockdown measures. In Indiana, Aimee Howard begins wondering where she can cut corners.

Aimee Howard read in a New York Times article that the current crisis is comparable to the Great Depression of 1929. She says she immediately thought of her children and began wondering: "Should I start rationing our food just to be on the safe side?"

The Howards are now living off of their savings. To make her April mortgage payment, Aimee used the money she receives for her six adopted children, and she has had to put off paying her gas and electricity bills. Howard says she would feel better if Obama was still president. "The government didn't tell us the truth for several weeks."

April 16: In Jefferson Parish, Cynthia Lee Sheng is starting to get worried. In Georgia, Dorothy Johnson bids farewell to her neighbor.

Jefferson Parish President Cynthia Lee Sheng is standing in front of the administration building where her office is located. Aside from hers and those of a few other staff members, the building is completely empty. For the first time in this crisis, the mayor has good news to report: It looks as though the peak has past - the point at which hospitals were at their fullest.

But there is bad news as well: A doctor tells her that the number of patients coming to the emergency room for reasons other than the coronavirus is beginning to rise, perhaps an indication that people are no longer taking stay-at-home restrictions seriously. And the number of fatalities remains too high, with 261 dead out of 5,306 confirmed infections, says Lee Sheng. "That's still one of the highest rates in the country."

In Albany, the nurse Dorothy Johnson is once again sitting in her yard. Her daughter's funeral was 10 days ago, and her uncle has also since died of COVID-19. Then, her neighbor died, who had mowed his lawn religiously every day until the very end. In a few hours, Johnson says, she'll be heading back to the cemetery.

In several states, angry, flag-waving residents have begun protesting the stay-at-home orders, and Trump turns to Twitter to offer them his support: "LIBERATE MICHIGAN!", he writes, "LIBERATE MINNESOTA!" Finally: "LIBERATE VIRGINIA, and save your great 2nd Amendment. It is under siege!"

Demonstrators at a "Freedom Rally" against the Lockdown in San Diego on April 18: "We're keeping an eye on the situation."
Demonstrators at a "Freedom Rally" against the Lockdown in San Diego on April 18: "We're keeping an eye on the situation." / Sandy Huffaker/ Getty Images

April 22: In Indiana, Aimee Howard is happy to receive financial support. Hope returns to New York.

Aimee Howard still hasn't received any state assistance, but her husband has been granted unemployment support of $390 per week from the state of Indiana and another $600 from the government's CARES Act, almost as much as his previous weekly wages.

In Baltimore County, Maryland, Police Chief Melissa Hyatt says she understands that the lockdown scares some people. "We're keeping an eye on the situation," she says.

In New York, by contrast, the situation seems to be relaxing somewhat. More staff have been assigned to the ward where Christina, the nurse from Queens, works. Every time a patient is taken off a ventilator, the nurses ask the hospital technician to play a song over the sound system.

Christina now hears the Beatles song "Here Comes the Sun" four or five times a day.

And back in Seattle, the 35-year-old thought to be America's "Patient Zero" has since recovered.


The case for emerging-market stocks

The ideal diversifier is something that contrasts with what you own

You know by now, if you’ve been paying attention, that the coronavirus pandemic is, if not a turning point in history, then the midwife to profound change or, at the very least, an opportunity for a bit of a rethink. Everything has changed—except, perhaps, minds.

Those who expected China (or the European Union or shareholder capitalism) to blow up are now more convinced it will. Believers in globalisation’s retreat, or inflation’s comeback, have fewer doubts.

And if you were chary of emerging markets you might be more so now. In March, when there was a mad scramble for cash, the cash everyone wanted was dollars.

When the dollar gets bid up, it hurts emerging markets. If inflation returns, meanwhile, it will surely show up first in the developing world.

Yet if these vices seem more apparent, so does the virtue of diversification. The ideal diversifier is not just something other than what you own, but something that contrasts with it. The typical portfolio is rich in dollar assets—in Treasuries and the leading American shares. It needs a counterweight, an anti-dollar trade. A benchmark basket of emerging-market stocks is a good one.

It helps that such stocks are cheap. Valuations based on company earnings are often misleading at the start of recessions. Recent earnings figures flatter the appraisal; forward-looking estimates of profits take time to reflect grim reality. A way around this is to use a measure that takes in company profits over the cycle: the cape (cyclically adjusted price-earnings ratio) popularised by Robert Shiller of Yale University.

A snapshot taken at recent market lows by James Montier of gmo, an asset-management firm, shows a healthy margin of safety. Emerging-market shares look very cheap relative to both their history and to America’s s&p 500 index of shares.

Rich-world investors must also consider exchange-rate risk. Forecasting currencies is a mug’s game. Even so, a shrewd investor should at least check she is not buying a currency that is obviously riding high, and thus at greater risk of a dramatic fall. A broad analysis by Charles Robertson of Renaissance Capital, an investment bank, finds that after recent declines, emerging-market currencies are as cheap in real terms as they have been since the mid-2000s.

Should inflation pick up faster in the developing world than in the rich one, the reckoning would change. Currencies would then need to fall further in nominal terms to keep the exchange rate steady in real terms, so that exports stay competitive. Emerging-market economies tend to be more inflation-prone than richer ones. Because of that, central banks have generally been vigilant.

A weaker currency has been typically met with higher interest rates to counter imported inflation—even if that hurts an already weak economy. But a lot of central banks in the developing world have relaxed monetary policy recently—understandable, given the severity of the economic shock.

For some countries, though, the dangers of inflation are not great. These more closely resemble rich-world economies, where a weak currency leads to a temporary burst of inflation. The wealthier parts of Asia are like this.

But in other places inflation sticks around if not stomped upon. That tends to be because wages are indexed to prices; industry is somewhat cartelised; or trust in the currency is low, encouraging the local use of the dollar.

Parts of Latin America come to mind. So does Turkey. Indeed the options a country has when its currency falls define its status, says Eric Lonergan of m&g, a fund-management group. If it must raise interest rates to counter inflation, it is an emerging market; if it has the room to cut rates without fear, it is developed.

Definitions matter, of course. Part of the appeal of indices of emerging-market stocks is that they are dominated by Asian economies that are fairly rich and well-run. They count as emerging markets, because the buying and selling of financial assets is not quite frictionless.

Taiwan and South Korea together make up a quarter of the msci index. China accounts for a further third. All may prove quite resilient as the world emerges from lockdown. At the very least, the way they perform is likely to be different from rich-world economies.

That feature alone should be appealing to a certain kind of investor. If the world is indeed changed radically by this health crisis, it may be in ways that are hard to imagine today.

And if you are unsure of the future, it makes all the more sense to spread your bets.

As Trump Pushes to Reopen, Government Sees Virus Toll Nearly Doubling

An internal Trump administration model projects a near-doubling of daily coronavirus deaths by June 1 as the nation begins to reopen, as well as a rapid rise in daily infections.

By Sheryl Gay Stolberg and Eileen Sullivan

Bodies were taken to a Muslim cemetery last week in Marlboro Township, N.J.Credit...Todd Heisler/The New York Times

WASHINGTON — As President Trump presses states to reopen their economies, his administration is privately projecting a steady rise in coronavirus infections and deaths over the next several weeks, reaching about 3,000 daily deaths on June 1 — nearly double the current level.

The projections, based on data collected by various agencies, including the Centers for Disease Control and Prevention, and laid out in an internal document obtained Monday by The New York Times, forecast about 200,000 new cases each day by the end of May, up from about 30,000 cases now. There are currently about 1,750 deaths per day, the data shows.

They are not the only ones forecasting more carnage. Another model, closely watched by the White House, raised its fatality projections on Monday to more than 134,000 American deaths from Covid-19, the disease caused by the coronavirus, by early August.

The Institute for Health Metrics and Evaluation at the University of Washington more than doubled its previous projection of about 60,000 total deaths, an increase that it said partly reflects “changes in mobility and social distancing policies.”

The numbers underscore a sobering reality: While the United States has been hunkered down for the past seven weeks, the prognosis has not markedly improved. As states reopen — many without meeting White House guidelines that call for a steady decline in coronavirus cases or in the number of people testing positive over a 14-day period — the cost of the shift is likely to be tallied in funerals.

“There remains a large number of counties whose burden continues to grow,” the C.D.C. warned, alongside a map that offered a detailed view of the growth of the pandemic.

The projections amplify the primary fear of public health experts: that a reopening of the economy will put the nation right back where it was in mid-March, when cases were rising so rapidly in some parts of the country that patients were dying on gurneys in hospital hallways amid overloaded health systems.

Under the White House’s reopening plan, called “Opening Up America Again,” states considering relaxing stay-at-home policies are supposed to show a “downward trajectory” either in the number of new infections or positive tests as a percent of total tests over 14 days, and a “robust testing program” for at-risk health care workers.

But some of the states moving the quickest are not honoring all of those guidelines.

In fact, the Trump administration has steered clear of enacting a national policy to prevent its own projections from coming to pass. On a conference call with the nation’s governors on Monday, Vice President Mike Pence cheered on state-level coronavirus testing, and he again promised this week to ship out more tests to all 50 states.

But a recording of the call, obtained by The Times, made clear that the White House was taking its cues from state governments. Mr. Pence’s upbeat assessment also included some public relations advice for the governors.

“It’s important that as we see progress being made, and declining hospitalizations and emergency room admissions and positive rates going down, that all of these governors are also aware as they’re increasing testing, the number of cases that are going to be reported are going up,” the vice president said on the call. “But it’s all going to be a matter of making sure that the public sees the whole picture. But it’s all progress.”

While the Trump White House is emphasizing testing, experts say a whole range of additional policies are needed to contain the fast-moving virus: isolation of those infected, contact tracing to locate people who interacted with a coronavirus-positive person and quarantines for those people.

In New York, where the number of overall cases is declining, a cautious-sounding Gov. Andrew M. Cuomo said Monday that the state would monitor four “core factors” to determine if a region is ready to reopen: the number of new infections; the capacity of the health care system; the testing capacity; and the capacity for “contact tracing” to identify people exposed to those who test positive.

“While we continue to reduce the spread of the Covid-19 virus, we can begin to focus on reopening, but we have to be careful and use the information we’ve learned so we don’t erase the strides we’ve already made,” Mr. Cuomo said. “Reopening is not going to happen statewide all at once.”

Nationally, 27 states had loosened social distancing restrictions in some way as of Monday, and others had announced changes that will take effect in the coming weeks, according to an analysis by the Kaiser Family Foundation. But only 20 of those states meet the caseload or testing criteria set out by the Trump administration.

The remaining seven — Indiana, Iowa, Kansas, Minnesota, Mississippi, Nebraska and Wyoming — are still showing a rise in daily infections and positive tests, but have moved toward reopening anyway.

“It is true that there are parts of the country that are doing better and can begin to look at ways to ease the requirements, but there are large swaths of the country that are not, and the growth that is projected is based mostly on these other parts of the country,” Jennifer Kates, the foundation’s director of global health and H.I.V. policy and an author of the analysis, said in an interview.

The administration’s forecast, she said, “says we are far from out of the woods on this, and it’s quite concerning.”

Before reopening, Ms. Kates said, governors must consider other factors beyond caseload and testing: “Do we have enough I.C.U. beds? How is our hospital capacity? How is our contact tracing?” Based on its own metrics, which urge states to increase the number of tests conducted and the share of their populations tested each week, her analysis concluded that just nine of the 27 states could consider relaxing social distancing requirements.

If anything, the administration’s projections are too optimistic, forecasting experts said Monday. In the projections, the number of actual deaths for one of the last days in April turned out to be slightly lower than what the model showed. But for much of April and parts of May, actual deaths were some 10 times higher than the model predicted.

“The model is overly optimistic and not particularly useful in guiding decisions about the disease’s trajectory,” said Dr. Donald Burke, a professor of epidemiology at the University of Pittsburgh Graduate School of Public Health.

Dr. George Rutherford, a professor of epidemiology at the University of California, San Francisco, noted that the government’s model has already come in below reported deaths from Covid-19, and that death toll is not counting deaths not officially recorded. “Remember,” he said, “these are reported deaths; the true number is likely higher.”

In the absence of a national policy to slow the virus, state officials have been left to answer a wrenching question: How many deaths are acceptable?

The White House distanced itself from the projections, saying the document, dated May 2, was not produced by or presented to the president’s coronavirus task force, which does its own modeling. “The data is not reflective of any of the modeling done by the task force or data that the task force has analyzed,” Judd Deere, Mr. Trump’s deputy press secretary, told reporters on Monday.

On Sunday, the president offered his own projections, saying that deaths in the United States could reach 100,000, twice as many as he had forecast only two weeks ago. But that figure falls short of what his own administration is now predicting to be the total death toll by the end of May — much less in the months that follow. It follows a pattern for Mr. Trump, who has frequently understated the effect of the disease.

“We’re going to lose anywhere from 75, 80 to 100,000 people,” he said in a virtual town hall on Fox News. “That’s a horrible thing. We shouldn’t lose one person over this.”

Public health experts and epidemiologists say they were not surprised by the administration’s numbers. Many do not expect the virus to slow down until 60 to 70 percent of the population is infected, creating what experts call “herd immunity.”

Dr. Michael T. Osterholm, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota, published an analysis last week describing three possible pandemic wave scenarios through the end of 2021: a series of repetitive smaller waves that gradually diminish over time; a sharp rise in cases in the fall and one or more subsequent smaller waves; and a “slow burn” of continuing transmission, without a clear wave pattern.

“I’m not saying we don’t have to deal with our economy and lost jobs in society,” Dr. Osterholm said in an interview on Monday. “We can’t spend 18 to 24 months in lockdown, but at the same time, this virus is going to keep transmitting, and we have to not let our hospitals get overrun.”

Yet many states are still operating under stay-at-home orders. Public health officials said their goal was to “bend the curve” — to slow and ultimately reverse the rising trajectory of infections — by shutting down schools and businesses. But after nearly two months of a near total shutdown, the curve does not appear to have bent as far as they had hoped.

“While mitigation didn’t fail, I think it’s fair to say that it didn’t work as well as we expected,” Scott Gottlieb, Mr. Trump’s former commissioner of food and drugs, said Sunday on the CBS program “Face the Nation.” “We expected that we would start seeing more significant declines in new cases and deaths around the nation at this point. And we’re just not seeing that."

Jonathan Martin contributed reporting from Washington, and Benedict Carey from New York.

Central banks prop up fund industry with $100bn injection

Fitch says scale of support points to the systemic importance of $55tn asset management market

Siobhan Riding in London

Jay Powell’s US Fed made a $51bn liquidity injection to help money market funds meet redemption requests © Getty Images

Central banks have injected close to $100bn to prop up investment funds hit by the coronavirus-induced market turmoil, raising fresh questions about the systemic risks posed by the asset management industry.

Monetary authorities including the US Federal Reserve and the Reserve Bank of India stepped in to relieve stress on their fund markets after the escalating health crisis triggered heavy fund outflows and sharp falls in asset prices. Central banks have provided support totalling $93.8bn to funds since the emergency began, according to rating agency Fitch.

The figure will provide fresh ammunition to policymakers concerned that the fund industry could be the locus of the next financial crisis. In April, the IMF warned that further outflows from vulnerable bond funds risked running down managers’ cash buffers, triggering renewed turbulence and clogging up credit markets.

It could also revive a debate about whether funds such as money market funds should be subject to bank-like supervision.

The most aggressive central bank contribution came from the Fed’s backstop aimed at helping US money market funds meet redemption requests. The programme has delivered a $51bn liquidity injection to the country’s $3.8tn money market fund sector.

In addition, the US central bank in March appointed BlackRock to manage two Fed-backed special-purpose vehicles to buy primary and secondary market corporate bonds. One of the vehicles has bought investment-grade exchange traded funds, marking the first time the Fed has included ETFs in this type of purchasing programme.

Mutual fund support facilities provided by monetary authorities in Thailand, India and Colombia respectively total $31.2bn, $6.6bn and $5bn, Fitch said.

The interventions were aimed at preventing contagion stemming from investor runs on several large funds. In late April, the Indian arm of US fund manager Franklin Templeton suspended six local bond funds managing more than $3bn after jittery investors pulled their cash.

Alastair Sewell, head of fund and asset manager ratings for Emea and Apac at Fitch, said the scale of central bank support was evidence of “regulators’ sensitivity to the potential systemic risks that funds pose through spillover effects to financial markets”.

Investment management has grown significantly since the last crisis, now controlling assets of about $55tn, compared with $24tn in 2008, according to the Investment Company Institute, the US trade body. Fitch estimates the industry’s asset pool is now equal to 64 per cent of global GDP, versus 38 per cent in 2008.

Despite this, fund managers maintain they are not “systemically important” in the same way as banks, arguing their agency business model means that losses befall investors in individual funds, not asset managers themselves.

They also point to risk management tools at their disposal that help mitigate the possibility of a liquidity mismatch arising in funds.But Mr Sewell said central bank support indicated liquidity management tools “may be inadequate for a severe stress scenario”.

In Europe, where the local fund industry has not benefited from direct central bank support, more than 80 funds managing assets of more than $40bn were forced to suspend in March after failing to meet redemption requests.

Although a small section of the €17.7tn European fund market, it nevertheless casts doubt on whether asset management regulations “fully address the liquidity risk that may materialise in a severe stress scenario”, Mr Sewell said.

Tanguy van de Werve, director-general of the European Fund and Asset Management Association, said the Fed’s intervention was not evidence of asset management’s systemic importance, arguing the fund liquidity facility’s main objective was to reboot trading in commercial paper, in which money market funds invest.

But Mr Sewell said had the Fed not acted, the pressures on US prime money market funds would have intensified, with weak market liquidity compromising managers’ efforts to meet redemption requests in an orderly fashion.

Paul Schott Stevens, chief executive of the Washington-based ICI, said the “powerful psychological effect” of the Fed’s action was greater than its financial impact.

He said the amount of liquidity it had supplied to funds was less than half the balance of a similar facility at the same point in 2008.

Narcos are suffering from the Covid-19 lockdown too

Organised crime dealt big blow by disrupted supply chains and blocked sales channels

Alejandro Hope

Soldiers patrol the surroundings of the government palace in Culiacan, Sinaloa state, Mexico, on October 18, 2019. - Mexico's president faced a firestorm of criticism Friday as his security forces confirmed they arrested kingpin Joaquin "El Chapo" Guzman's son, then released him when his cartel responded with an all-out gun battle. (Photo by ALFREDO ESTRELLA / AFP) (Photo by ALFREDO ESTRELLA/AFP via Getty Images)
Mexiacn soldiers patrol in Culiacan, Sinaloa state, during the attempted arrest of a drug lord. In Mexico, fuel theft and human trafficking are also significant sources of income for criminal gangs © Alfredo Estrella/AFP/Getty

The pandemic has locked down the global economy and, like everyone else, criminal gangs are suffering from disrupted supply chains. For governments, this presents a rare opportunity to take back control of areas run by organised crime.

In Mexico, fentanyl and methamphetamine production has reportedly crumpled as imports of chemical precursors from China have plummeted. The wholesale price of meth in Mexico has more than doubled since January.

As about 90 per cent of all meth consumed in the US is sourced in Mexico, meth prices are probably doing the same in the US too. Meanwhile, Colombian narcos are struggling to ship cocaine to Europe due to the shutdown of transatlantic air travel.

There are already signs of a supply shock: anecdotally, the London retail price per gramme is up 10 per cent since late March. Even when drugs do reach consumer markets, traditional distribution channels such as bars and clubs are shut.

In Chicago, drug arrests, a proxy of retail market activity, has fallen 42 per cent over the past month. Covid-19 will not bankrupt Latin America’s drug gangs, among the biggest players in the global trade. After all, their annual export income is thought to as high as $20bn.

Still, it is the biggest financial crunch they have ever faced.Diversification is one solution. In Colombia and Venezuela, drug traffickers are already big players in illegal mining. In Mexico, fuel theft and human trafficking are likewise significant sources of income.

In Brazil, prison gangs such as the Primeiro Comando da Capital have long run a diverse portfolio of criminal undertakings, such as prostitution.However, these business lines have problems too. Tightly closed borders and restricted travel makes human trafficking harder.

Mexican fuel theft, worth $3bn a year, is not a great moneymaker when gasoline demand has collapsed. As for extortion, who can gangs shake down when most businesses are closed? Kidnapping, usually a fail-safe income source, is next to impossible when most potential victims are quarantined at home.

Even humdrum street crime is suffering. In some Argentine provinces, robberies have dropped as much as 90 per cent. Muggings in Mexico City are meanwhile expected to fall 10 per cent in April due to movement restrictions; a full-scale lockdown would cut them by 65 per cent, forecasts the crime-mapping company Tierra that I work for.

Muscling into pharmaceutical drugs and medical supplies, as some European and Asian gangs seem to be doing, is an attractive alternative. But setting up the needed logistics amid high competition for such goods is difficult and takes time.

Such conditions makes this the perfect moment for security forces to try to take out regional drug trafficking networks. Indeed, Washington’s recent decision to increase US counterdrug operations in the Caribbean and eastern Pacific builds on Pentagon plans that, fortuitously, were already in place.

But such efforts are unlikely to be effective if local governments do not raise their game. That is not happening currently, as security forces are overwhelmed by the pandemic. In Mexico, funds earmarked for police vetting and training are being used to buy personal protection equipment. Brazil has seen mass prison breakouts.

In Peru, more than 120 police officers have caught the virus. Where the state falls short, organised crime is stepping in. Mexico’s Gulf Cartel is distributing food in one border town. In El Salvador, the MS-13 gang is even enforcing lockdown measures; remarkably, one of the world’s most violent countries has seen days without any murders.

With borders closed, most people at home and gangs’ business models in tatters, there has never been a better time for governments in Latin America and elsewhere to beat back organised crime. For the most part, though, they are not even trying. That is more than a missed opportunity: it is a tragedy.

The writer is a security analyst and former Mexican intelligence officer

South Korea After COVID-19

By: Phillip Orchard

For a brief moment in mid-February, the South Korean city of Daegu looked like it was heading the way of Wuhan, the Chinese megacity at the epicenter of the COVID-19 pandemic. In two weeks, the number of detected cases in Daegu jumped from a handful to more than 6,000. (More than 1,200 of those cases were members of a single megachurch that had been sending missionaries to Wuhan.)

This figure may seem quaint today, but at the time it made South Korea the only other country on China’s road to “viralgeddon.” Since mid-February, though, South Korea has become proof that the virus can be brought to heel without a cure, a vaccine or endless draconian quarantine measures. By April 6, new daily cases had dropped below 50, and they have stayed there. Just 230 South Koreans have died.

Remarkably, the government was able to crush the curve without completely shutting down life inside the country. Office buildings, shopping malls and restaurants often remained open. Churches started resuming services by Easter.

And, on Wednesday, close to 30 million people, nearly two-thirds of the country’s eligible voters, felt confident enough in the government’s containment measures to show up at the polls and give President Moon Jae-in’s Democratic Party a landslide victory in parliamentary elections.

This means that, for his remaining two years in office, Moon can push his ambitious agenda with the backing of a near-supermajority in the National Assembly and a hearty public mandate. And, absent a COVID-19 revival, he’ll be governing a country that would seem to be uniquely well-positioned to leverage its epidemiological success into geopolitical influence.

However, South Korea will remain subject to the underlying forces that have historically limited its options, particularly as its all-important alliance with the United States comes under further strain.

How South Korea Dominated the COVID-19 Outbreak

The odds were stacked against South Korea in its fight against the coronavirus. An average of 16,000 visitors from China arrived each day in 2019, with more than 50 direct flights arriving from Wuhan in both December and January.

More than 81 percent of South Koreans live in urban areas, and the country has one of the highest public transportation usage rates in the world. Nearly half the South Korean population is older than 45, the age group that accounts for more than 90 percent of COVID-19 fatalities worldwide.

But this vulnerability to pandemics is in large part why the country responded to the coronavirus so successfully. Like others in East Asia that have managed the outbreak relatively well — Hong Kong, Singapore and gold medalist Taiwan — South Korea honed its skills the hard way during past outbreaks.

The country saw just three cases during the 2003 SARS outbreak, which left the government overconfident and underprepared for the 2015 arrival of MERS, COVID-19’s less infectious but deadlier cousin. That virus infected 182 South Koreans and killed 38 — the highest levels outside Saudi Arabia — and contributed to the defeat of former President Park Geun-hye’s conservative Liberty Korea Party in parliamentary elections the following year.

COVID-19 Deaths: World Leaders and Select Asian Countries

As a result, this time around, Seoul acted quickly and aggressively. As soon as the Daegu cluster was detected, the government isolated the city, forced politically powerful churches (which have proved to be “super-spreader" incubators across the world) to shut down, closed schools and restricted international flights. In general, though, South Korea’s social distancing measures have been relatively relaxed and short-lived compared to other hot spots in China, Europe and the United States.

The government has focused on finding ways to respond with a scalpel rather than a sledgehammer. Seoul's biggest success has been with mass testing, which it was able to quickly implement at scale because it had incentivized domestic biotech firms to start test development and production in January. When the Daegu outbreak began, hospitals already had diagnostic tests on hand, allowing them to confirm new cases and then test everyone new patients had come in contact with, irrespective of whether they were showing symptoms.

South Korea stood up more than 600 testing facilities within weeks, with enough tests to handle more than 20,000 people per day, and its universal health insurance scheme removed barriers for potential carriers to get tested early and often. This also allowed the country to conduct aggressive contact tracing, using smartphone apps and CCTV to effectively “tag” sick people, look back at where they might have spread the virus to others and warn the public to steer clear of areas where the virus may be lurking.

For the international community, the country’s success should provide a measure of optimism, even if it's too late for many countries to implement similar procedures — and even if such intrusive contact tracing tools will meet stiff political resistance in Western countries (their citizenry's blithe attitudes about handing data over to tech giants notwithstanding).

For South Korea — and for Moon’s administration in particular— the success ostensibly opens a window of opportunity to gain diplomatic favor, boost its core industries at the expense of competitors in countries like Japan, which is faring worse with the pandemic, and burnish its reputation as a well-governed, technologically advanced democracy capable of punching above its weight in the face of intractable global challenges.

Already, for example, it’s becoming a vital exporter of tests and equipment needed to combat the pandemic. And its success — like Taiwan’s — undercuts Chinese state media’s newfound narrative that, in a crisis, the Communist Party's tightly centralized model of governance is superior to that of liberal democracies.

The Limits of Success

But while South Korea is in a relatively good situation, the emphasis falls heavily on “relatively.” The coronavirus may have largely spared South Korean lives and lifestyles, but it took a bat to the South Korean economy anyway; the national gross domestic product is expected to contract this year by more than 1.5 percent.

The reality is that official lockdown measures aren’t the only thing suffocating economic activity across the globe. Fear of getting sick is itself a powerful motivator keeping people away from restaurants and stores — something that will bedevil efforts to “restart” economies by relaxing social distancing measures.

But the main problem for South Korea is the same that awaits exporting behemoths such as China, Japan and Germany as they return closer to full production capacity: the loss of foreign demand. Getting factories up and humming means little if there are no customers. Compared to its neighbors, the South’s strong fiscal position and high domestic consumption put it in pretty good shape to ride out the crisis without suffering structural damage to the economy.

Nonetheless, exports accounted for around 44 percent of South Korean GDP in 2019, and its domestic industry is grappling with widespread supply chain disruptions. Many South Koreans will be hurting until Europe and the United States recover, which might take years.

COVID-19: Outliers that are limiting the spread

The popularity Moon gained for Seoul’s handling of the coronavirus pandemic may quickly evaporate once the economic toll truly begins to hit — particularly if Seoul is forced to lean more heavily on the large, family-owned conglomerates, known as chaebol, that dominate the South Korean economy and that he had pledged to reform during his run for office.

The looming recession will also force the Moon administration to redirect funding meant to make progress on thorny geopolitical issues, such as enticing North Korea out of its shell with lucrative financial enticements. And if China’s own recovery continues apace (though this is by no means a guarantee), then South Korea’s economic dependence on Chinese consumers will increase — something that Beijing has tried to weaponize in the past.

Seoul will also find it harder to fund research and development projects aimed at reducing dependence on Japanese imports of key tech sector supplies. Seoul’s relations with Pyongyang, Beijing and Tokyo were already highly politically contentious at home before the economic slump; Moon will likely find his stores of political capital very limited.

There’s also the lingering risk that the pandemic — whether the disease itself or the economic fallout — leads to major political destabilization in either China or North Korea. Somewhat paradoxically, neither would be particularly good news for Seoul. The more the Communist Party of China comes under political pressure at home, for example, the more likely it is to try to stir up nationalist forces to survive, including by becoming more aggressive abroad. South Korea isn’t typically the foremost target of nationalist ire in China, but it’s not wholly immune and, historically, it hasn’t fared well when caught in the crossfire between its more powerful neighbors.

Regarding North Korea, nobody knows how the COVID-19 crisis will shape Pyongyang’s behavior, in large part because nobody knows just how badly the virus has hit the country. Officially, the North has zero cases, which would be great if there weren’t also several reports from defectors and intelligence agencies that the outbreak there is actually widespread. North Korea’s weak health care system and isolation make it an epidemiological nightmare.

Meanwhile, the country is still conducting regular tests of an increasingly sophisticated arsenal of short-range weapons systems — the type intended to drive a wedge between South Korea and the United States and agitate for sanctions relief from the West. Denuclearization negotiations with the United States are still dead. And since last year, several hints have suggested that something is amiss in Pyongyang’s chambers of power.

A major power struggle or surge of public unrest would, at minimum, make it harder for Kim Jong Un’s regime to pursue the sort of risky diplomatic concessions needed to bring about a meaningful reconciliation with the South. Worse, such events could compel Pyongyang to try to rally domestic support by, say, shelling another South Korean island. Most alarming to Seoul, North Korean unrest would further strain the government’s already dodgy command-and-control problems over the military.

With Friends Like These

South Korea’s regional challenges would be more manageable if it was acting in tandem with its indispensable partner, the United States. But since 2017, Washington and Seoul have been increasingly at odds over a variety of issues, managing North Korea’s nuclear program chief among them.

More recently, the two sides have also been embroiled in contentious burden-sharing negotiations. The administration of U.S. President Donald Trump is demanding a fourfold increase in Seoul’s contributions to the costs of hosting U.S. troops; Seoul is reportedly offering a 13 percent increase.

Thousands of South Korean support staff at U.S. bases in the South were furloughed earlier this month as a result, and Seoul's mounting fiscal and political constraints will make it harder for it to budge anytime soon. The cost-sharing issue isn’t particularly important on its own; there’s little reason to think it will hinder the two militaries’ operational readiness.

But it reflects deeper issues in the alliance that, if left unresolved, have real potential to impact the regional geopolitical landscape.

Military alliances are never frictionless, particularly when one side’s forces are stationed on the other’s soil. In just about any alliance, the weaker partner typically frets about one of two things: either abandonment (as seen in the U.S.-Philippines and U.S.-Australian alliances) or entanglement in a fight not in its interest.

For an ally to fear both simultaneously is fairly rare, because in such cases the weaker ally is likely to feel extorted and look for a way out before the partnership turns into a politically unsustainable vassalage.

At present, South Korea fears both. It worries the United States will ignore its concerns and start a war with North Korea and/or China that would quite likely leave Seoul in ruins. It’s also worried that, as North Korea develops longer-range missiles and the capacity to put U.S. overseas bases at risk (if not the U.S. mainland itself), and as China’s anti-access and area denial buffer expands, the United States could reasonably conclude that South Korea isn’t worth shedding American blood over.

Implicit in the cost-sharing negotiations — and explicit in some of the Trump administration’s rhetoric — moreover, is that the United States is indeed willing to leave South Korea.

The U.S. positions aren’t without merit. Washington’s “fire and fury" approach to pressuring North Korea in 2017 didn’t force Pyongyang to capitulate, nor has its more recent maximum pressure campaign. But there’s an argument to be made that Pyongyang must be squeezed to the breaking point and realistically fear the threat of U.S. military action before it will make any movement toward denuclearization.

The United States, which is vulnerable to becoming militarily overstretched, also has a growing interest in discouraging allies (particularly prosperous ones with growing military budgets) from free-riding on U.S. security guarantees.

But to whatever extent Washington’s reasons are really valid, they only underscore the reality that U.S. and South Korean interests are diverging.

A U.S.-South Korean divorce is not imminent. The alliance is still broadly popular with the public and military planners on both sides. The United States benefits enormously from a forward position on China and North Korea’s doorstep. And it can (and probably will) back off its maximalist cost-sharing demands easily enough.

Moreover, South Korea doesn’t exactly have a plan B. But as the strategic moorings of an alliance weaken, its continued existence starts to hinge increasingly on inertia and assumption.

This makes it more vulnerable to a shock from which it might not recover — a well-timed move by an adversary to shatter the partnership, for example, or a pandemic that leaves domestic political landscapes or the regional power balance deeper in flux.