Five Viral Lessons

By John Mauldin


We live in truly historic times. “There are decades when nothing happens, and weeks when decades happen,” says a quote usually attributed to Vladimir Lenin. It certainly fits now.

For thousands of years, people who lived through what we call “history” didn’t realize it. We are the exceptions. We’re seeing history and we know it.

The Vietnam War was certainly historic, but the coronavirus killed more Americans in the last two months than died in that long conflict. The Great Depression was historic but by some indicators we are well on the way to matching it. The Manhattan Project and the Apollo missions were historic, but right now even more massive, world-changing technology and biotechnology are being hastily developed under pressure.

What will future generations say of 2020? What clever term will they devise for this period? And what dramatic events will they recall that we, in our time, still haven’t seen? These are unknowable questions for now. We can only speculate.

I’m thinking of history because last week I ran across a powerful essay by Morgan Housel, whom I knew when he wrote for The Motley Fool. He is now a partner at The Collaborative Fund and still writing.

His article looks at five lessons from history that, on the surface, have nothing to do with coronavirus, Trump, China, the Fed, or any of our other usual topics. But at the same time, it has everything to do with them.

Today, I’ll share a little of that essay with you, using Morgan’s five points to review the big events unfolding around us. As you’ll see, they aren’t so surprising once you step back and take a long view.

And speaking of the long view, next week it’s finally here: the 2020 Virtual Strategic Investment Conference, which instead of happening live in Scottsdale will be live on the same screen you are looking at right now or even on your TV.

We’ll start Monday morning with the famed Dave Rosenberg, followed by Samuel Rines and Lacy Hunt—a kind of economists’ trifecta. Then after a lunch break we’ll hear from Matt Ridley, Bruce Bartlett, and Bruce Mehlman. Then we’ll go into the political panel featuring Bartlett and Mehlman plus David Bahnsen and Ben Hunt, moderated by Rob Arnott.

After a quick break we’ll hear from top Wall Street trader Renè Aninao, then Ben Hunt will come back for his own presentation that promises to be, ahem, colorful. And that’s just Monday. We have four more days of equally impressive analysis and debate. Here’s just a few names:

The whole team from Gavekal, Louis and Charles Gave, and Anatole Kaletsky. One of their other associates will be doing the emerging market presentation. George Friedman, Felix Zulauf, and Ian Bremmer. What a powerful European panel and geopolitical focus.

Woody Brock and Jim Bianco will join Lacy and Sam for the ultimate monetary panel moderated by Renè Aninao (you’re going to become very familiar with that name over the next decade).

Then we turn to China. Michael Pettis, for 15 years a professor at Beijing University, is joined by the enormously influential Jonathan Ward.

Of course we look at technology. Peter Diamandis, Karen Harris, the director of the Macro Trend Group at Bain, technology superstar Cathie Wood interviewed by Barry Ritholtz. We are finalizing what is going to be a powerful energy panel on Tuesday the 19th. On that same day we will hear from Felix Zulauf, David McWilliams, and Niall Ferguson, as well as the ever-popular Mark Yusko.

The final day has Leon Cooperman, top mortgage analyst Barry Habib, Doug Kass, Jeff Saut, and Peter Diamandis (with a very powerful presentation on the wonderful future in front of us).

One nice feature: Since no one has to travel, we’re able to extend the experience a bit. The program occurs on May 11, 13, 15, 19, and 21. I think those open days in between will let us absorb the information better and make the whole experience more enjoyable and useful.

Your pass also includes audio recordings you can download for later listening (when you get to start commuting again, for instance), video you can watch at your leisure and written transcripts of every session.

So you’re getting weeks and maybe months of enlightenment. Join us. You know you want to. My week has been packed with dozens of calls with speakers and panels. I am simply blown away. Already there’s so much to absorb. Be there.

Five Lessons

Now, let’s move on with history. Morgan Housel lists five important lessons, all of which fit like a glove with our present reality. I’ll list them one at a time and then draw some connections.

Lesson #1: People suffering from sudden, unexpected hardship are likely to adopt views they previously thought unthinkable.

That sparked a memory. Back in June 2016 I wrote a letter called Thinking the Unthinkable, drawn from my presentation at that year’s SIC. I talked about the then-unthinkable idea the US would have to monetize its debt and eventually see a worldwide debt jubilee, what I would later call The Great Reset.

For me, simply entertaining those thoughts was a giant step. Yet here we are, just four years later, seeing some of them on the horizon. But it doesn’t end there.

In 2020, we’re all thinking unthinkable things. I never expected to endorse the kind of massive fiscal stimulus Congress has unleashed. A bunch of Republican senators and representatives never expected to vote for such bills.

And I bet some Democrats never thought they would approve some of the business bailout provisions. Yet they did. Similarly, I doubt Jerome Powell would have ever said having the Fed buy junk bonds was feasible or advisable. Or any non-bank corporate bonds at all, for that matter.

But they aren’t really suffering the kind of “hardship” Morgan means. Unfortunately, many people are. A lot of middle-class workers never thought they would get suddenly furloughed and then have to stand in food bank lines because their unemployment benefits are stuck in bureaucracy. Now it’s happening all over.

April’s headline unemployment rate (U3) came in this morning at 14.7% (and would have been nearly 5 percentage points higher if workers were classified differently during the survey data collection, the BLS noted).

The broader U6 unemployment number, which includes people working involuntarily part-time, or not looking for a job because they expect to go back soon, jumped to 22.8%.

That’s probably closer to a “real” unemployment number. However, the survey ended in the middle of April. We have seen 10 million more unemployment claims filed since then. The May numbers will be much uglier, with U6 likely over 25%. These are Depression-era numbers. We have never seen a spike like this.

Side note: it is quite clear that the BLS revised its methodology to better reflect the on-the-ground reality of the Covid-19 economy. This is going to draw some criticism, as they are guessing on those numbers. But they are entirely correct in making the attempt.

These things change attitudes and they do it fast. In his essay, Morgan talks about the elections of 1928 and then 1932. Americans elected Herbert Hoover with one of the biggest landslides ever, then voted him out with a landslide the other way.
Then the real changes started: gold standard gone, massive public works spending, Social Security, and more. The years 1933–1935 saw some of the most consequential economic changes in history, all because the Great Depression’s hardships made people think the unthinkable.

Roosevelt made some good decisions but also some bad ones, sparking another recession. It was a mind-bogglingly bad situation and it can happen again. I think it will.

I fully expect the economy to recover, if over a few years. However, we need to recognize that government decisions and monetary policy can make a bad situation even worse.

Lesson #2: Reversion to the mean occurs because people persuasive enough to make something grow don’t have the kind of personalities that allow them to stop before pushing too far.

Business school doctrine says entrepreneurial business founders rarely make good CEOs after the company attains success. They are two different skill sets. In fact, they aren’t just different; in many ways, they are incompatible. As Morgan puts it, “The same personality traits that push people to the top also increase the odds of pushing them over the edge.”

You can probably think of some example names. I certainly can. But more important, I think we all, collectively, may be in this trap. Maybe the habits and attitudes that built the world economy to what it is (or was a few months ago) are unable to keep it there.

“Resiliency” is suddenly a buzz word. We are seeing how ultra-optimized global supply chains are actually quite fragile when unexpected events occur. We pushed too far in trying to save the last penny. Now we’ll have to not just rebuild, but rebuild differently, and it’s the opposite of everything known to generations of engineers and consultants.

Same for investors. The person who takes big risks for big rewards often has a hard time turning cautious. They stick around too long and eventually the risk-taking catches up with them. I think we’re seeing some of that, too, and it probably won’t end well.

Lesson #3: Unsustainable things can last longer than you anticipate.

This one is near and dear to my heart. One of my talents is putting the pieces together to see what’s coming. How fast it’s coming is a different question. Usually not as fast as I think.

For instance, I’ve been saying for years that our massive government debt is unsustainable. Ditto for gargantuan private debt. Yet both are here, and in fact growing considerably as this crisis pushes politicians to spend and also pushes the Fed to buy.

For that matter, who thought the Fed could sustain near-zero interest rates for over a decade, and now possibly another decade to go? I’m pretty sure even Ben Bernanke didn’t think it would happen that way.

I keep highlighting the woefully underfunded public employee pensions. Many state and local government plans, weighed down with ridiculously generous benefits for a few high-level bureaucrats while most public servants get crumbs, are doomed by any rational calculation. They were already hurting before this crisis and now will be worse.

As Herb Stein said, “If something can’t go on forever, it will stop.” The question is, of course, when? The euro was a bad idea from the beginning yet they have kicked that can down the road for 20 years now. We may finally be reaching a point where they either have to mutualize the debt or split up into multiple currency zones. Not this year or next, but it is coming. So is a final reckoning for state and local pension plans. Sigh…

Lesson #4: Progress happens too slowly for people to notice; setbacks happen too fast for people to ignore.

Morgan illustrates this lesson with the Wright Brothers airplane quest. Obviously, motorized flight was a hugely consequential, world-changing invention. But strangely, no one paid attention for years after their first flight in 1903. The first major press account wasn’t until 1908. And even then, no one saw the significance. The Washington Post wrote in 1909, “There will never be such a thing as commercial aerial freighters.” Oops.

The kind of personalities who make great discoveries are not the best at promoting. They have to be discovered by someone who can. And even stranger, the greatest inventions are often more about luck than genius. Hence the famous Isaac Asimov quote, “The most exciting phrase to hear in science, the one that heralds new discoveries, is not ‘Eureka!’ (I found it!) but ‘That’s funny...’”

Conversely, setbacks happen quickly. We are certainly seeing it now with the coronavirus. We spent a decade thinking the slow-growing economy would eventually take off. Now we would love to have that kind of “progress” back, and it happened in just a couple of months.

Lesson #5: Wounds heal, scars last.

I talk a lot about “muddling through.” We have all kinds of problems but we get through them somehow. We adapt to new circumstances and find new answers. I suspect Morgan would agree, but he also makes a distinction between wounds and scars.

The people who muddle through a calamity are, by definition, the ones who survived it. So I can correctly say the US will muddle through the coronavirus, but some 70,000 Americans won’t muddle through because they are dead. That number could rise considerably higher.

Surviving family members will carry emotional scars the rest of their lives. It’s not a small number, either, when you add the families, friends, co-workers, and (God bless them) the healthcare workers heroically fighting this battle for us, and seeing so much suffering and death.

And that doesn’t even account for the scars yet to be earned as we go through recession and a long, slow recovery. People are going to lose their homes as well as their jobs. Children are going to see parents break up. Once-promising careers will be ruined.

We Baby Boomers didn’t see the Great Depression but we heard about it from our parents. We know the scars it left on them and, indirectly, on us. This generation will be scarred too. Not in the same way but scarred nonetheless. The future economy will reflect it.

Changes Coming

But let me finish on an optimistic note. There are millions of entrepreneurs around the world. It’s not in their DNA to simply quit.

Governments cannot lead us out of this crisis. They can make sure the conditions are favorable, but it is those entrepreneurs who will figure out how to create businesses and jobs in the new world.

This same phenomenon has happened after every major crisis and war since before the Industrial Revolution. There is no reason to think it will be any different this time.

What will be different and utterly fascinating will be the new business models and services these entrepreneurs create. They will blend the old knowledge with new technology, giving us something completely different.

Yes, we’ll have to go through Neil Howe’s Fourth Turning and the geopolitical chaos George Friedman predicts, not to mention my own Great Reset, (all of which will be talked about at the conference), but it will happen at the same time the greatest entrepreneurial and technological boom in the history of humanity is brewing.

There will be so much opportunity if you are prepared to take advantage of it. The world is not ending. It is just changing and it’s going to get better.

I’ll end there. You can read Morgan’s full essay here. Over My Shoulder members can see an annotated version here.

Around the World from My Home

Up until this week, I will admit to not being a fan of video conferencing.

I have done a lot of TV interviews. I’m used to going to studios, putting on makeup, and connecting by satellite. And while I wouldn’t put on makeup if you came to the house or if we met at a restaurant, I somehow feel that I should have makeup on when I’m in front of a camera.

But this week didn’t allow that.

I literally had almost a dozen video conference calls, some with as many as nine different participants, literally from all over the world. None of whom were wearing makeup.

Many were old friends and it was fun to meet and talk and exchange ideas. I soon became comfortable and realized that watching their expressions, something you can’t do over a telephone, really improved the level of communication.

I will actually be doing more of these one-on-one in the future.

All of those meetings, and perhaps a dozen phone calls, were in preparation for the Virtual Strategic Investment Conference starting this Monday.

We have more panels this year than ever. Great panels, where the conversation quality is paramount, require planning. Panelists need to meet each other in advance, hash out what to say, discard some ideas and focus on others. Great moderators are critical.

We have always done this conference preplanning by phone, but videoconferencing really improves the communication. I’m not on most of the panels, but I needed to hear them to make sure the entire conference has the right “flow.”

I also want all the panelists and speakers to understand what comes before and after their parts. This helps the experience for everyone.

You can’t imagine how much work it is to pull something like this off. I want to thank my team for their long hours and work. I can hardly wait for the conference to start Monday.

I will be coming to you live from the corner of my bedroom, where we have set up my “studio.” It has the best lighting and background.

I can already tell, just from the preconference meetings, that this particular SIC will influence my writing/thinking/personal investing for years to come.

I think you will find the same. If you haven’t already, join us at the SIC. I know, we keep asking that. But honestly? I think as many people as possible should be watching. This will be life-changing for many people. I know it will be one of the highlights of my year if not the last decade.

By the way, whether you’re attending SIC or not, follow me on Twitter (@JohnFMauldin) for some behind-the-scenes highlights.

And with that, I will hit the send button and wish you a great week!

Your amazed at the quality of the speakers and thinking I have heard this week analyst,

John Mauldin
Co-Founder, Mauldin Economics

The risk of a US double-dip depression is real

Reopening states to boost the economy despite the scientific evidence will do more damage than good

Edward Luce

Several states, such as Georgia, above, are moving to lift lockdown restrictions 
Several states, such as Georgia, above, are moving to lift lockdown restrictions © ERIK S LESSER/EPA-EFE/Shutterstock

If you think one lockdown is painful enough, imagine a second. It is too soon to gauge the lasting impact of putting the US economy into a deep freeze for weeks. But it will be very hard for consumers and businesses to shake off a lingering sense of risk aversion.

The shock of a second wave of sheltering-in-place would be orders of magnitude worse. Twice bitten, multiply shy. Given the choice, no self-preserving leader would take risks with the spectre of another outbreak later this year.

Yet the temptation to go for a V-shaped recovery before the November election looks too great for Donald Trump. Publicly discussing prospects of a second outbreak is now banned among US government scientists.

On Wednesday, Mr Trump effectively gagged Robert Redfield, head of the Centers for Disease Control, after he warned of a second — and worse — round of coronavirus infections this coming winter.

What Mr Redfield had meant to say was that every American should get their regular flu injections, the White House explained. Several states, including Florida, South Carolina and Tennessee are already relaxing stay-at-home orders.

Tattoo parlours, cinema complexes and bowling alleys are apparently now safe to visit in Georgia. In reality, such venues are ideal for super-spreaders.

In the trade-off between growth and health, reopening the economy too soon achieves neither.

Scientists warn such measures will sharply increase the chances of a second wave of coronavirus.

That, in turn, would trigger another instant depression. Economists point out that the US is not even in a recession, which is defined as two consecutive quarters of negative growth.

Yet JPMorgan forecasts that the US economy will shrink by 40 per cent in the second quarter.

American unemployment is likely to hit 20 per cent when the April number comes out next week. In reality, the US economy is already in depression.

Nothing on this scale — and at this speed — has been seen since the Great Depression in the early 1930s. It took the second world war to dig the US out of that. It will take a vaccine, or a miracle prophylactic, to stop America’s first depression in almost a century.

The country to watch is China.

Its rules are being set as much by citizens as government. China’s restaurants are sparse.

Few people are flying. And many people only leave home for essential tasks. The Chinese, in other words, are sticking to a semi-formal lockdown. To judge by US poll numbers, most Americans are in a similar mood.

Mr Trump may believe he can press a button to switch the US economy back on. In practice, he cannot force consumers to swallow their fears. The more the president talks about the coronavirus — an average of roughly 90 minutes a day — the less Americans trust what he is telling them. China’s task is arguably easier than America’s.

Its economy is far less dependent on consumer spending than the US’s. In theory, China could have all its manufacturing operations back to capacity by June. In practice, however, their order books are unlikely to be filled.

As the world moves into its first global contraction since the second world war, that is unlikely to change. Whatever tepid growth China achieves will largely come from government stimulus.
 The ideal would be for the US and China to work together to contain the virus. Given their mutual hostility, that is almost impossible to imagine. Even if the US reopened without triggering another epidemic, much of the rest of the world will remain on lockdown.

Parts of it, including Sub-Saharan Africa and Latin America, are facing their worst economic crises in decades. It would be fanciful to suppose business travel and tourism will return to pre-pandemic levels.

Some countries will impose 14-day quarantines on all incomers, which would effectively kill about 90 per cent of trips. Others will be too risky to visit. It is possible the world could create a vaccine in record time. History, meanwhile, is likely to be on Mr Redfield’s side.

Most epidemics have several waves. The second bout of the Spanish flu in winter 1918 was far worse than the first one the previous spring. For the time being, the best the US can hope for is a modest U-shaped recovery with gentle starts and stops. Given the alternative — the spectre of another instant depression — aiming for a V-shaped resurrection is reckless.


Why the euro is more durable than it looks

The commitments of a shared currency are not so easily shaken off

IN THE WEEKS following the bankruptcy of Lehman Brothers in 2008, there was naturally concern about the security of deposits. Many judged cash was safer kept in hand than parked with a wobbly bank. Demand for banknotes surged.

Discerning German hoarders were said to be stuffing their mattresses with euros with serial numbers prefixed by an “X”, indicating they were printed in Germany. Numbers starting with a “Y” (Greece) or an “S” (Italy) were shunned.

This made little sense. A euro banknote is a euro banknote, wherever it is printed. But in troubled times people look to strong states for security. “Europe” doesn’t cut it. Tellingly, in the present crisis, sovereign prerogatives—to close borders; to backstop businesses; to spend freely—have been asserted, regardless of the European Union’s rules.

This has left Europe looking weak. Whenever that happens, a bout of anxiety about the euro can’t be far off.

A widely held view is that a common currency cannot survive without a common budget. But the burden-sharing that would strengthen the euro always seems too big a step. Low-debt countries, notably Germany, do not fully trust high-debt ones, such as Italy, to play fair.

Eurosceptics believe the lack of a fiscal centre will tear the currency zone apart. This downplays the pull of a monetary union. It has been sufficient in Europe to ensure that enough fiscal union follows—hesitantly, grudgingly, murkily—in its train. The euro is a lot more durable than it sometimes looks.

History says that political union is the essential glue of any currency union. This invariably entails a centralised system of taxation and public spending. It offers a way to deal with economic disruptions that have an uneven effect across the currency zone. A shared fiscal policy automatically directs support to where the economic hurt is greatest. The coronavirus is one such “asymmetric shock”.

It hit Italy and Spain first, and hardest, within Europe. A country with its own money could in principle absorb such shocks through a weaker currency or with a monetary policy tailored to its needs. This is not possible in a currency union.

The picture becomes fuzzier in today’s setting. A bond is a government liability; but so is money.

In a world of near-zero interest rates, cash and bonds are indistinct. As central banks print money to buy ever more bonds the lines between fiscal and monetary policy become increasingly blurred. This is true even in the euro zone, which has tried hard to keep the lines clear.

Quantitative easing by the European Central Bank (ECB) is, in effect, mutualisation: a shared liability (cash) has been swapped for the sovereign bonds of individual euro-zone countries. The ECB is a collective endeavour. An explicit fiscal union of some kind would of course be helpful.

But some implicit burden-sharing already takes place.

None of this makes the euro zone a powerhouse. Its bourses are laden with the stocks of seemingly doomed industries, such as carmaking and banking. But the euro itself is not obviously doomed. Indeed it is not too fanciful to imagine a future in which it survives even if the EU loses its sway.

The commitments of a shared currency are not easily shaken off. The complexity of the financial super-structure built upon the euro makes break-up a terrifying prospect. And the ECB, the institution at the heart of the euro, has muscle.

It can swiftly bring to bear powerful tools in a crisis. The EU, by contrast, is a rule-setter. The exigencies of the present crisis led to the suspension of many of its strictures: on the free movement of labour; on state aid to industry, and spending limits. But people have not stopped using the euro. Its reach is a lot harder to reverse.

The sight of politicians squabbling over who should bear the budgetary cost of coronavirus is not a great advertisement for Europe. But for once the euro zone is ahead of the game.

Who bears the fiscal burden incurred by the recession is a question that all economies must answer eventually. Some combination of taxpayers, consumers and bondholders will have to foot the bill in the end.

In most places, this reckoning will take place within a country’s borders. In the euro zone, by contrast, the burden-sharing would ideally be across borders. Some countries will lose; others will win.

That is what makes the argument so bitter.

For all the bickering, the euro zone has become good at lasting another day.

It never quite does enough to resolve all its contradictions.

But they have never quite proved fatal.

Seeing red

Germany’s highest court takes issue with the European Central Bank

Its decision imperils the EU’s entire legal order

THE MAGNIFICENT scarlet robes that adorn the judges of Germany’s constitutional court trace their origins to a spot of judicial attention-seeking. Soon after the court was established in 1951, its judges decided they needed to distinguish themselves from their peers on the Federal Court of Justice, and recruited a theatrical costumier to update their look. Yet, as the judges showed on May 5th, their rulings can be even more eye-catching than their attire.

This week’s ruling took aim at the Public Sector Purchase Programme (PSPP), a quantitative-easing scheme established by the European Central Bank in 2015. Over the years a gaggle of conservative German academics, lawyers and hangers-on have regularly visited Karlsruhe, where the court sits, to challenge the legality of the ECB’s monetary tools. The court has issued various warnings and red lines in response.

But this week it went further, ruling that the bank had not properly applied a “proportionality” test to the PSPP that would have accounted for its economic side-effects, and that German politicians should have challenged it.

Worse, the judges said that the European Court of Justice (ECJ), the EU’s top court, which had opined on the case at Karlsruhe’s request, had not checked the ECB’s homework properly.

It will take months for the ruling’s full consequences to unfold. But in the short term little will change. The PSPP looks safe. Karlsruhe rejected the plaintiffs’ claims that it violates the EU ban on monetary financing of governments. Instead, it gave the ECB three months to justify its bond-buying.

The bank’s battalion of lawyers can probably pass this test—though the ECB may refuse to be ordered around by a mere national court. The German government may then have to get involved. Ultimately the Bundesbank, which like all euro-zone central banks buys its own government’s debt on behalf of the ECB, could have to sell holdings worth around €550bn ($593bn). But even then the PSPP would probably find a way to muddle on.

More troubling is the cloud the court has cast over all ECB actions. Next in line is its €750bn Pandemic Equity Purchase Programme (PEPP), which aims to inject liquidity and to lower bond spreads in countries like Italy walloped by covid-19.

To maximise the bank’s firepower, Christine Lagarde, its president, reserved for the PEPP the right to relax some of the usual rules on which bonds it may buy.

But Karlsruhe relied on such rules in its explanation of why PSPP did not amount to monetary financing. This offers an obvious line of attack to the plaintiffs, who seem certain to launch a case against the PEPP.

And investors may start to doubt whether the ECB will implement the scheme as decisively as it otherwise might.

“At some point the ECB is going to lose credibility with markets,” says Sebastian Grund, a Fulbright scholar at Harvard and former ECB economist.

The larger battle

Ultimately the ECB is just collateral damage in a long-running tussle between the German and EU courts. Karlsruhe has jabbed at the ECJ for years, in rulings covering EU treaties, extraditions and much besides. The court does recognise the ECJ as the final arbiter of EU law. But the judges also reserved the right to declare that the ECJ acted outside its legal competence by failing properly to assess the proportionality of the PSPP (it dismissed the ECJ’s verdict as “not comprehensible”).

Familiar to veteran Karlsruhe-watchers, this argument rests on the contention that because the EU is not a federal state, national courts may step in if they judge the ECJ to be acting outside the competences governments have granted it. But who should take precedence?

This challenge to the EU’s supreme legal authority has not gone unnoticed elsewhere. The deputy justice minister of Poland, which has been locked in rule-of-law wrangles with the EU for years, said (tendentiously) that the Karlsruhe ruling was of “tremendous importance” to his own country’s disputes.

Others speculated that a southern European court might one day rule against the ECB for failing to give due weight to employment or growth effects in its decision-making. Fearing a leaching of the EU’s legal authority, the European Commission may in time feel obliged to open an infringement case against Germany.

Some optimists spot opportunity in crisis. For years the ECB has in vain urged the euro zone’s governments to balance its monetary firepower by doing more on the fiscal front. By highlighting the perils of forcing the ECB to shoulder the entire burden, the ruling may jolt politicians—Germans, above all—into action.

The EU’s negotiations over a post-covid recovery fund offer a timely chance to conduct that debate. Yet governments have taken every opportunity to duck it in the past.

A related view is that Karlsruhe helps the EU by drawing attention to its creaking legal edifice. The judges have long sought to remove the air of stealth from rows over legal authority in the EU, says Robert Klotz, a Freiburg-based lawyer and research associate.

But it is a risky path to tread.

“This is about the European legal order,” says Olli Rehn, who sits on the ECB’s governing council as head of Finland’s central bank. “Not national courts, but the European Court of Justice has exclusive jurisdiction over the ECB. This is an existential question for the EU.”

Learning from the Dead

What Autopsies Can Reveal about COVID-19

Pathologists are eager to quickly conduct autopsies on as many COVID-19 victims as possible. They aim to determine who is at greatest risk from the virus and what damage it causes inside the body. Initial results are already available.
By Jörg Blech

There are very few people out there who are as occupied with COVID-19 as Hans Bösmüller in the southern German city of Tübingen - both professionally and in private life. He was one of the first people in the country to contract the disease.

Püschel believes that the schools should be re-opened and people should be allowed to go back to work. "I am an older man myself and personally, I reject measures that prevent me from in-person socializing. I would like to play with my grandchildren."

The Coronavirus Oil Shock Is Just Getting Started

The pandemic is causing crisis for energy-producing governments around the world—and could change the global economy forever.

By Nicholas Mulder, Adam Tooze

A trader at the Dubai Stock Exchange in the United Arab Emirates.
A trader walks beneath a stock display board at the Dubai Stock Exchange in the United Arab Emirates on March 8. GIUSEPPE CACACE/AFP via Getty Images

The idea of a negative price for any commodity is outlandish, implying the seller is prepared to pay a buyer. But for oil, the largest commodity market in the world, the basic fuel of modernity, to be trading at negative prices is nothing short of mind-boggling. In the early afternoon EDT of April 20, the May contract for West Texas crude touched negative $40.32. It was a succinct demonstration of how severe the impact of the COVID-19 crisis has been.

What triggered the inversion of prices on April 20 was the overflow of unsellable oil in the tank farms of Cushing, Oklahoma, where U.S. oil futures are settled. But the collapse in oil prices has sent shockwaves rippling around the world.

People in the West tend to think about oil shocks from the perspective of the consumer. They notice when prices go up. The price spikes in 1973 and 1979 triggered by boycotts by oil producers are etched in their collective consciousness, as price controls left Americans lining up for gas and European governments imposed weekend driving bans. This was more than an economic shock. The balance of power in the world economy seemed to be shifting from the developed to the developing world.

The same thing happened more gradually in the early 2000s when oil prices surged and remained at elevated levels until 2014. Once again, consumers were squeezed—and not only in the West. The poorest developing countries were particularly hard-hit. The flip side of this was the enormous wealth accumulated by oil producers. Emerging-market fossil fuel companies such as Brazil’s Petrobras and Malaysia’s Petronas were lionized in global financial markets. Backed by the power of Gazprom, Lukoil, and Rosneft, Vladimir Putin’s Russia reemerged as a geopolitical force.

For the vast majority of countries in the world, the decline in oil prices is a boon.

If a surge in fossil fuel prices rearranges the world economy, the effect also operates in reverse. For the vast majority of countries in the world, the decline in oil prices is a boon. Among emerging markets, Indonesia, Philippines, India, Argentina, Turkey, and South Africa all benefit, as imported fuel is a big part of their import bill. Cheaper energy will cushion the pain of the COVID-19 recession. But at the same time, and by the same token, plunging oil prices deliver a concentrated and devastating shock to the producers. By comparison with the diffuse benefit enjoyed by consumers, the producers suffer immediate immiseration.

Though they are less well remembered in the West, such counter-shocks have happened before. The first came in 1985 when Saudi Arabia began a price war to reconquer market share it had sacrificed to fellow OPEC members. The second came in 1997 when the Asian financial crisis led to a collapse in demand. The third began in June 2014 as surging production from U.S. shale fields fundamentally altered the balance between demand and supply. That slide was halted temporarily in September 2016 by an agreement between OPEC and Russia to limit production.

We are now facing a fourth counter-shock. Faced with the unprecedented collapse in demand due to COVID-19, talks between Russia and Saudi Arabia broke down in early March. Russia refused to limit production, and Saudi Arabia doubled down by dumping oil on global markets at steep discounts.

Despite the effort to patch together an agreement on production restriction in recent weeks, the overhang of supply is massive. A fleet of up to 20 supertankers loaded with Saudi oil is bearing down on American oil ports. Even if the negative prices for oil in May were the result of technical factors in the futures market, the prices for June are also historic lows.

In inflation-adjusted terms, oil prices are similar to those last seen in the 1950s, when the Persian Gulf states were little more than clients of the oil majors, the United States and the British Empire. All of this raises the question of what the impact will be on today’s global producers.

Against the backdrop of the Petronas Twin Towers, a drone sprays disinfectant in Kuala Lumpur, Malaysia, as a preventive measure against the spread of the coronavirus March 31. Petronas has accounted for 15 percent of Malaysia’s total revenue over the past five years.
Against the backdrop of the Petronas Twin Towers, a drone sprays disinfectant in Kuala Lumpur, Malaysia, as a preventive measure against the spread of the coronavirus March 31. Petronas has accounted for 15 percent of Malaysia’s total revenue over the past five years. MOHD RASFAN/AFP via Getty Images

We tend to think of oil states as rich oligarchies serviced by armies of foreign workers, and the image applies to the Gulf states. Lower prices will certainly require them to tighten their belts.

In February, even before the coronavirus hit, the International Monetary Fund was warning Saudi Arabia and the United Arab Emirates that by 2034 they would be net debtors to the rest of the world.

That prediction was based on a 2020 price of $55 per barrel. At a price of $30, that timeline will shorten. And even in the Gulf there are weak links. Bahrain avoids financial crisis only through the financial patronage of Saudi Arabia.

Oman is in even worse shape. Its government debt is so heavily discounted that it may soon slip into the distressed debt category. At that point it will most likely be forced to turn either to Riyadh or to the IMF for help.

The sudden shift in the terms of trade undercuts export revenues, budget stability, and growth prospects.

The economic profile of the Gulf states is not, however, typical of most oil-producing states. Most have a much lower ratio of oil reserves to population. Many large oil exporters have large and rapidly growing populations that are hungry for consumption, social spending, subsidies, and investment.

Whereas such countries as Saudi Arabia and Kuwait routinely earn more in revenue than they can sensibly invest at home, even at the height of OPEC’s power in the 1970s, the shah’s regime in Iran not only consumed all its oil revenue but used its oil assets as collateral for borrowing.

It is therefore not surprising that counter-shocks to oil prices often trigger political upheaval. The sudden shift in the terms of trade undercuts export revenues, budget stability, and growth prospects. Fiscal crises caused by falling prices limit governments’ room for domestic maneuver and force painful political choices.

The dilemma of defaulting on debt owed to foreign creditors and imposing austerity on populations has been the cause of grave political crises, some with serious geopolitical consequences.

In the late 1980s, falling oil revenues undercut Mikhail Gorbachev’s efforts to reform Soviet communism, accelerating the end of the Soviet Union. Both Hugo Chávez in Venezuela and Vladimir Putin in Russia were able to rise because their predecessors failed to stabilize domestic politics in the wake of the price plunge of the late 1990s.

Since 2014 the fall in oil prices has once again applied huge pressure to the regime of Chávez’s successor, Nicolás Maduro, in Caracas. While U.S. economic sanctions against Russia and Venezuela have been prominent in the news, aggressive competition from U.S. shale producers has been as important in shaping their economic fortunes.

So who is vulnerable now?

Under Putin, Russia overhauled its economic policy after the 2014 price collapse. Its budget was pared by a sustained austerity drive. When it launched the current oil price war in March by refusing to cooperate with OPEC in supply reductions, Moscow probably did not anticipate the collapse that would ensue.

But Russia started with an exchange reserve of just shy of $570 billion, and due to its budgetary consolidation, it only began running up deficits once oil prices fell below $42.

Other emerging-market oil producers, by contrast, have to deal with large debt loads. Petrobras in Brazil has $78.9 billion of net debt as of the end of 2019 and one of the highest debt burdens of all oil firms. Its bonds trade at junk levels. But there have so far been few signs of panic.

In Malaysia, Petronas has accounted for more than 15 percent of the government’s total revenue over the last five years. It was put on a negative outlook by Fitch. But like its government, it maintains a solid A- bond rating. These are resilient businesses with deep pockets in diversified economies.

An Ecuadorean waves a national flag in Quito on Oct. 12, 2019, during the 10th day of protests over a fuel price hike ordered by the government to secure an IMF loan. The government’s plans to abolish fuel subsidies had to be halted because of the enormous popular protests.
An Ecuadorean waves a national flag in Quito on Oct. 12, 2019, during the 10th day of protests over a fuel price hike ordered by the government to secure an IMF loan. The government’s plans to abolish fuel subsidies had to be halted because of the enormous popular protests. MARTIN BERNETTI/AFP via Getty Images

After Venezuela, Ecuador is the Latin American oil producer facing the most urgent problems.

In February 2019, it obtained a $10.2 billion loan package from a group of multilateral lenders led by the IMF. But to unlock this funding it had to push through painful reforms. By last October, the government’s plans to abolish fuel subsidies had to be halted because of enormous popular protests. Ecuador was already in this unstable condition when the oil price shock hit.

This weekend, the government announced it had agreed with investors to delay $800 million in interest payments on its $65 billion foreign debt. This means that Ecuador is the second Latin American country after Argentina to enter technical default this year.

Populous middle-income countries that depend critically on oil are uniquely vulnerable. Iran is a special case because of the punitive sanctions regime imposed by the United States. But its neighbor Iraq, with a population of 38 million and a government budget that is 90 percent dependent on oil, will struggle to keep civil servants paid.

Not paying the state administration is a recipe for instability at a time when the country is the theater of a shadow war between Washington and Tehran.

Populous middle-income countries that depend critically on oil are uniquely vulnerable.

In North Africa, Algeria—with a population of 44 million and an official unemployment rate of 15 percent—depends on oil and gas imports for 85 percent of its foreign exchange revenue. In the late 1980s, the oil shock triggered by Saudi Arabia wreaked havoc in Algeria, destabilizing its state-dominated economy.

As harsh austerity measures were implemented, the Islamic Salvation Front grew as the main organization opposition to the National Liberation Front regime. When the Algerian military denied the Islamists their electoral victory in 1991 it unleashed a civil war that raged until 2002 and cost an estimated 150,000 lives.

The oil and gas boom of the early 2000s provided the financial foundation for the subsequent pacification of Algerian society under National Liberation Front President Abdelaziz Bouteflika. Algeria’s giant military, the basic pillar of the regime, was the chief beneficiaries of this largesse, along with its Russian arms suppliers.

The country’s foreign currency reserves peaked at $200 billion in 2012. Spending this windfall on assistance programs and subsidies allowed Bouteflika’s government to survive the initial wave of protests during the Arab Spring. But with oil prices trending down, this was not a sustainable long-run course.

By 2018 the government’s oil stabilization fund, which once held reserves worth more than one-third of GDP, had been depleted. Given Algeria’s yawning trade deficit, the IMF expects reserves to fall below $13 billion in 2021.

A strict COVID-19 lockdown is containing popular protest for now, but given that the fragile government in Algiers is now bracing for budget cuts of 30 percent, do not expect that calm to last.

One thing that Algeria has going for it is that it has virtually no foreign debt. Even if borrowing in the current moment is unattractive, the tough domestic choices it will need to make will not be compounded by an external squeeze. The same cannot be said for the two major producers of sub-Saharan Africa: Angola and Nigeria.

The Kaombo Norte, a floating production storage and offloading vessel operated by a multinational oil company, sits off the coast of Angola on Nov. 8, 2018. The arrival of the platform ship, which belongs to French oil giant Total, was a timely lifeline for the Angolan government.
The Kaombo Norte, a floating production storage and offloading vessel operated by a multinational oil company, sits off the coast of Angola on Nov. 8, 2018. The arrival of the platform ship, which belongs to French oil giant Total, was a timely lifeline for the Angolan government. RODGER BOSCH/AFP via Getty Images

Angola’s President João Lourenço came into office in 2017, succeeding the country’s longtime ruler José Eduardo dos Santos, who had been in power for 38 years. Lourenço has struggled to contain Angola’s debt burden, which has surged from about 30 percent of GDP in 2012 to 111 percent of GDP in 2019. Before last month’s price collapse, Angola was already spending between one fifth and one third of its export revenues on debt service.

That burden is now bound to increase significantly. Ten-year Angolan bonds were this week trading at 44 cents on the dollar. Having been downgraded to a lowly CCC+, it is now widely considered to be at imminent risk of default.

Because servicing its debts requires a share of public spending six times larger than that which Angola spends on the health of its citizens, the case for doing so in the face of the COVID-19 crisis is unarguable.

Last month Nigeria overtook South Africa as the largest African economy. As a large and diversified economy, it is not a petrostate in the sense that Iraq and Algeria are. But most of Nigeria’s economic activity is informal, untaxed, and unconnected to the world economy.

As a result, oil is responsible for the lion’s share of the government budget and 90 percent of foreign exchange earnings. The oil price downturn of 2014 already inflicted serious pain. Faced with the price collapse of 2020, Finance Minister Zainab Ahmed has declared that Nigeria is now in “crisis.”

In March, the rating agency Standard & Poor’s lowered Nigeria’s sovereign debt rating to B-.

This will raise the cost of borrowing and slow economic growth in a country in which more than 86 million people, 47 percent of the population, live in extreme poverty—the largest number in the world.

Furthermore, with 65 percent of government revenues devoted to servicing existing debt, the government may have to resort to printing money to pay civil servants, further spurring an already high inflation rate caused by food supply shortages.

Swings in oil prices mark epochs in the development of the world economy. The price surge of the 1970s and the nationalization of the Middle East oil industry announced the definitive end of the imperial era.

The 1980s saw the creation of a market-based global energy economy. The early 2000s seemed to open the door on a new age of state capitalism, in which China was the main driver of demand and titans like Saudi Aramco and Rosneft managed supply.

But the price collapse of 2014 created problems for this model of petrostate capitalism. China’s demand growth is no longer as rapid as it once was. America’s shale producers have upset the efforts of OPEC and Russia to manage the market. As the failure of efforts to stabilize oil prices in the face of the COVID-19 crisis has demonstrated, there is currently nothing one could call an order in the oil market.

The diplomacy of supply agreements is fragile. The geopolitics are haphazard. It is unclear whether the U.S. administration prefers a low or a high price for oil. The financial foundations of the shale boom are precarious. The physical infrastructure to store oil is inadequate. And all the while the futures markets react with merciless speed.

For states such as Iraq, Algeria, and Angola, the threat is nothing short of existential.

If this lack of order in itself marks an important historical caesura, it raises the question of what comes next. The giants such as Saudi Arabia and Russia will exploit their muscle to survive the crisis.

But the same cannot so easily be said for the weaker producers. For states such as Iraq, Algeria, and Angola, the threat is nothing short of existential. What is the long-term horizon for them?

Many of the commodity producers hit hardest by the oil price shock will be in line for financial assistance from the IMF and the World Bank. The priority right now is immediate assistance. But in the background of the spring meetings lurked the question of whether China would cooperate with other international creditors.

Since 2004, Beijing has made $152 billion in resource-backed loans to African, Asian, and Latin American economies.

The Chinese state now owns large parts of both Venezuela’s and Angola’s external debt. Is China systematically reshaping the commodity supply chains of the world by using its financial and political influence?

If so, one might expect the COVID-19 crisis to be a moment in which it would put its foot down. But Beijing has so far shown little interest in exploiting the crisis for debt-book diplomacy. It has signaled its willingness to cooperate with the other members of the G-20 in supporting a debt moratorium.

This is helpful in that it facilitates the negotiation of debt relief. Western creditors will worry less that whatever concessions they make will help to repay debts owed to China.


A motorist rides April 2 along a deserted street in New Delhi, which is regularly listed as one of the world’s most polluted cities but has seen periods of clean air as a result of the coronavirus lockdown.
A motorist rides April 2 along a deserted street in New Delhi, which is regularly listed as one of the world’s most polluted cities but has seen periods of clean air as a result of the coronavirus lockdown.JEWEL SAMAD/AFP via Getty Images

While debt relief can provide breathing room, this does not answer other fundamental questions. In a century that will be marked by climate change, how useful is it to restore profits and prosperity based on fossil fuel extraction? With the possibility that the coronavirus might lower global carbon emissions by 5 percent this year, is this not the moment for a reenvisioning of the world economy toward a horizon of energy transition and decarbonization?

The COVID-19 crisis drives home that high-cost producers are on a dangerously unsustainable path that can’t be resolved by states propping up their uncompetitive oil sectors.

Before the crisis struck, many political and economic analysts were already concerned about vulnerable fossil fuel producers. The question was not how they would respond to negative oil prices but how they would be affected by the renewable energy transition and carbon taxes. How would the most vulnerable oil producers fare in a world beyond carbon, a world in which energy prices were depressed and yet oil consumption was slashed?

That constellation is unlikely to occur under normal circumstances, as low prices will generally stimulate fresh demand. But demand repression is what a concerted decarbonization drive would produce. It is also exactly what we are seeing today. The shock of the coronavirus is offering a glimpse of the future and it is harsh.

The COVID-19 crisis drives home that high-cost producers are on a dangerously unsustainable path that can’t be resolved by states propping up their uncompetitive oil sectors. Even more important is the need to diversify the economies of the truly vulnerable producers in the Middle East, North Africa, sub-Saharan Africa, and Latin America.

If that is not made a priority both by national governments and international agencies, deep decarbonization will become a formula for social crises affecting hundreds of millions of people.

If their states are not already fragile, they are doomed to become so.

It would be a failure of vision to separate the current crisis from the one on the horizon. A series of makeshift interventions may assist vulnerable oil-producing countries in rapid recovery, but what they need is a concerted strategy to wean themselves off their dependence on fossil fuel exports.

Otherwise, the oil counter-shock of 2020 will be no more than the first step on a path toward terminal crisis.

Nicholas Mulder is a political and economic historian and a postdoctoral associate at Cornell University. He is finishing a book about the interwar origins of economic sanctions. Twitter: @njtmulder

Adam Tooze is a history professor and director of the European Institute at Columbia University. His latest book is Crashed: How a Decade of Financial Crises Changed the World, and he is currently working on a history of the climate crisis. Twitter: @adam_tooze