Starting over again

The covid-19 pandemic is forcing a rethink in macroeconomics

It is not yet clear where it will lead

In the form it is known today, macroeconomics began in 1936 with the publication of John Maynard Keynes’s “The General Theory of Employment, Interest and Money”. Its subsequent history can be divided into three eras.

The era of policy which was guided by Keynes’s ideas began in the 1940s. By the 1970s it had encountered problems that it could not solve and so, in the 1980s, the monetarist era, most commonly associated with the work of Milton Friedman, began.

In the 1990s and 2000s economists combined insights from both approaches. But now, in the wreckage left behind by the coronavirus pandemic, a new era is beginning. What does it hold?

The central idea of Keynes’s economics is the management of the business cycle—how to fight recessions and ensure that as many people who want work can get it. By extension, this key idea became the ultimate goal of economic policy. Unlike other forms of economic theory in the early 20th century, Keynesianism envisaged a large role for the state in achieving that end.

The experience of the Great Depression had convinced proto-Keynesians that the economy was not a naturally correcting organism. Governments were supposed to run large deficits (ie, spending more than they took in taxes) during downturns to prop up the economy, with the expectation that they would pay down the accumulated debt during the good times.

The Keynesian paradigm collapsed in the 1970s. The persistently high inflation and high unemployment of that decade (“stagflation”) baffled mainstream economists, who thought that the two variables almost always moved in opposite directions. This in turn convinced policymakers that it was no longer possible to “spend your way out of a recession”, as James Callaghan, then Britain’s prime minister, conceded in 1976.

A central insight of Friedman’s critique of Keynesianism was that if policymakers tried to stimulate without tackling underlying structural deficiencies then they would raise inflation without bringing unemployment down. And high inflation could then persist, just because it was what people came to expect.

Policymakers looked for something new. The monetarist ideas of the 1980s inspired Paul Volcker, then chairman of the Federal Reserve, to crush inflation by constraining the money supply, even though doing so also produced a recession that sent unemployment soaring. The fact that Volcker had known that this would probably happen revealed that something else had changed.

Many monetarists argued that policymakers before them had focused too much on equality of incomes and wealth to the detriment of economic efficiency. They needed instead to focus on the basics—such as low and stable inflation—which would, over the long run, create the conditions in which living standards would rise.

It sounds like a whisper

In the 1990s and 2000s a synthesis of Keynesianism and Friedmanism emerged. It eventually recommended a policy regime loosely known as “flexible inflation targeting”. The central objective of the policy was to achieve low and stable inflation—though there was some room, during downturns, to put employment first even if inflation was uncomfortably high.

The primary tool of economic management was the raising and lowering of short-term interest rates, which, it had turned out, were more reliable determinants of consumption and investment than the money supply.

Central banks’ independence from governments ensured that they would not fall into the inflationary traps of which Friedman warned. Fiscal policy, as a way to manage the business cycle, was sidelined, in part because it was seen to be too subject to political influence. The job of fiscal policy was to keep public debts low, and to redistribute income to the degree and in the way that politicians saw fit.

Now it seems that this dominant economic paradigm has reached its limit. It first began to wobble after the global financial crisis of 2007-09, as policymakers were confronted by two big problems.

The first was that the level of demand in the economy—broadly, the aggregate desire to spend relative to the aggregate desire to save—seemed to have been permanently reduced by the crisis.

To fight the downturn central banks slashed interest rates and launched quantitative easing (QE, or printing money to buy bonds). But even with extraordinary monetary policy, the recovery from the crisis was slow and long. GDP growth was weak. Eventually, labour markets boomed, but inflation remained muted (see chart 1).

The late 2010s were simultaneously the new 1970s and the anti-1970s: inflation and unemployment were once again not behaving as expected, though this time they were both surprisingly low.

This threw into question the received wisdom about how to manage the economy. Central bankers faced a situation where the interest rate needed to generate enough demand was below zero.

That was a point they could not easily reach, since if banks tried to charge negative interest rates, their customers might simply withdraw their cash and stuff it under the mattress. qe was an alternative policy instrument, but its efficacy was debated.

Such disputes prompted a rethink.

According to a working paper published in July by Michael Woodford and Yinxi Xie of Columbia University the “events of the period since the financial crisis of 2008 have required a significant reappraisal of the previous conventional wisdom, according to which interest-rate policy alone...should suffice to maintain macroeconomic stability.”

The second post-financial-crisis problem related to distribution. While concerns about the costs of globalisation and automation helped boost populist politics, economists asked in whose interests capitalism had lately been working.

An apparent surge in American inequality after 1980 became central to much economic research. Some worried that big firms had become too powerful; others, that a globalised society was too sharp-edged or that social mobility was declining.

Some argued that structurally weak economic growth and the maldistribution of the spoils of economic activity were related. The rich have a higher tendency to save rather than spend, so if their share of income rises then overall saving goes up. Meanwhile in the press central banks faced accusations that low interest rates and qe were driving up inequality by boosting the prices of housing and equities.

Yet it was also becoming clear just how much economic stimulus could benefit the poor, if it caused unemployment to drop sufficiently for wages for low-income folk to rise. Just before the pandemic a growing share of GDP across the rich world was accruing to workers in the form of wages and salaries. The benefits were greatest for low-paid workers.

“We are hearing loud and clear that this long recovery is now benefiting low- and moderate-income communities to a greater extent than has been felt for decades,” said Jerome Powell, the Fed’s chair, in July 2019. The growing belief in the redistributive power of a booming economy added to the importance of finding new tools to replace interest rates to manage the business cycle.

Tables starting to turn

Then coronavirus hit. Supply chains and production have been disrupted, which all else being equal should have caused prices to surge as raw materials and finished goods were harder to come by.

But the bigger impact of the pandemic has been on the demand side, causing expectations for future inflation and interest rates to fall even further. The desire to invest has plunged, while people across the rich world are now saving much of their income.

The pandemic has also exposed and accentuated inequities in the economic system. Those in white-collar jobs can work from home, but “essential” workers—the delivery drivers, the rubbish cleaners—must continue to work, and are therefore at greater risk of contracting covid-19, all the while for poor pay. Those in industries such as hospitality (disproportionately young, female and with black or brown skin) have borne the brunt of job losses.

Even before covid-19, policymakers were starting to focus once again on the greater effect of the bust and boom of the business cycle on the poor. But since the economy has been hit with a crisis that hurts the poorest hardest, a new sense of urgency has emerged.

That is behind the shift in macroeconomics. Devising new ways of getting back to full employment is once again the top priority for economists.

But how to go about it? Some argue that covid-19 has proved wrong fears that policymakers cannot fight downturns. So far this year rich countries have announced fiscal stimulus worth some $4.2trn, enough to take their deficits to nearly 17% of GDP, while central-bank balance-sheets have grown by 10% of GDP.

This enormous stimulus has calmed markets, stopped businesses from collapsing and protected household incomes. Recent policy action “provides a textbook rebuke of the idea that policymakers can run out of ammunition,” argues Erik Nielsen of Unicredit, a bank.

Yet while nobody doubts that policymakers have found plenty of levers, there remains disagreement over which should continue to be pulled, who should do the pulling, and what the effects will be. Economists and policymakers can be divided into three schools of thought, from least to most radical: one which calls merely for greater courage; one which looks to fiscal policy; and one which says the solution is negative interest rates.

Take the first school. Its proponents say that so long as central banks are able to print money to buy assets they will be able to boost economic growth and inflation. Some economists argue that central banks must do this to the extent necessary to restore growth and hit their inflation targets. If they fail it is not because they are out of ammunition but because they are not trying hard enough.

Not long ago central bankers followed this creed, insisting that they still had the tools to do their job. In 2013 Japan, which has more experience than any other country with low-growth, ultra-low-inflation conditions, appointed a “whatever-it-takes” central banker, Kuroda Haruhiko, to lead the Bank of Japan (BOJ).

He succeeded in stoking a jobs boom, but boosted inflation by less than was promised. Right before the pandemic Ben Bernanke, a former chairman of the Fed, argued in a speech to the American Economic Association that the potential for asset purchases meant that monetary policy alone would probably be sufficient to fight a recession.

But in recent years most central bankers have gravitated towards exhorting governments to use their budgets to boost growth. Christine Lagarde opened her tenure as president of the European Central Bank with a call for fiscal stimulus.

Mr Powell recently warned Congress against prematurely withdrawing its fiscal response to the pandemic. In May Philip Lowe, the governor of the Reserve Bank of Australia (RBA), told the Australian parliament that “fiscal policy will have to play a more significant role in managing the economic cycle than it has in the past”. 

Standing in the welfare lines

That puts most central bankers in the second school of thought, which relies on fiscal policy.

Adherents doubt that central-bank asset purchases can deliver unlimited stimulus, or see such purchases as dangerous or unfair—perhaps, for example, because buying corporate debt keeps companies alive that should be allowed to fail.

Better for the government to boost spending or cut taxes, with budget deficits soaking up the glut of savings created by the private sector. It may mean running large deficits for a prolonged period, something that Larry Summers of Harvard University has suggested.

This view does not eliminate the role of central banks, but it does relegate them. They become enablers of fiscal stimulus whose main job is to keep even longer-term public borrowing cheap as budget deficits soar. They can do so either by buying bonds up directly, or by pegging longer-term interest rates near zero, as the BOJ and the RBA currently do.

As a result of covid-19 “the fine line between monetary policy and government-debt management has become blurred”, according to a report by the Bank for International Settlements (BIS), a club of central banks.

Not everyone is happy about this. In June Paul Tucker, formerly deputy governor of the Bank of England, said that, in response to the bank’s vast purchases of government bonds, the question was whether the bank “has now reverted to being the operational arm of the Treasury”. But those influenced by the Keynesian school, such as Adair Turner, a former British financial regulator, want the monetary financing of fiscal stimulus to become a stated policy—an idea known as “helicopter money”.

Huge fiscal-stimulus programmes mean that public-debt-to-gdp ratios are rising (see chart 2).

Yet these no longer reliably alarm economists. That is because today’s low interest rates enable governments to service much higher public debts (see chart 3).

If interest rates remain lower than nominal economic growth—ie, before adjusting for inflation—then an economy can grow its way out of debt without ever needing to run a budget surplus, a point emphasised by Olivier Blanchard of the Peterson Institute for International Economics, a think-tank.

Another way of making the argument is to say that central banks can continue to finance governments so long as inflation remains low, because it is ultimately the prospect of inflation that forces policymakers to raise rates to levels which make debt costly.

To some, the idea of turning the fiscal tap to full blast, and co-opting the central bank to that end, resembles “modern monetary theory” (MMT). This is a heterodox economics which calls for countries that can print their own currency (such as America and Britain) to ignore debt-to-GDP ratios, rely on the central bank to backstop public debt, and continue to run deficit spending unless and until unemployment and inflation return to normal.

And there is indeed a resemblance between this school of thought and MMT. When interest rates are zero, there is no distinction between issuing debt, which would otherwise incur interest costs, and printing money, which text books assume does not incur interest costs. At a zero interest rate it “doesn’t matter whether you finance by money or finance by debt,” said Mr Blanchard in a recent webinar.

But the comparison ends there. While those who advocate mmt want the central bank to peg interest rates at zero permanently, other mainstream economists advocate expansionary fiscal policy precisely because they want interest rates to rise. This, in turn, allows monetary policy to regain traction.

The third school of thought, which focuses on negative interest rates, is the most radical. It worries about how interest rates will remain below rates of economic growth, as Mr Blanchard stipulated.

Its proponents view fiscal stimulus, whether financed by debt or by central-bank money creation, with some suspicion, as both leave bills for the future.

A side-effect of qe is that it leaves the central bank unable to raise interest rates without paying interest on the enormous quantity of electronic money that banks have parked with it. The more money it prints to buy government bonds, the more cash will be deposited with it.

If short-term rates rise, so will the central bank’s “interest on reserves” bill.

In other words, a central bank creating money to finance stimulus is, in economic terms, doing something surprisingly similar to a government issuing floating-rate debt. And central banks are, ultimately, part of the government.

So there are no free lunches. “The higher the outstanding qe as a share of total government debt, the more the government is exposed to fluctuations in short-term interest rates,” explained Gertjan Vlieghe of the Bank of England in a recent speech.

A further concern is that in the coming decades governments will face still more pressure on their budgets from the pension and health-care spending associated with an ageing population, investments to fight climate change, and any further catastrophes in the mould of covid-19.

The best way to stimulate economies on an ongoing basis is not, therefore, to create endless bills to be paid when rates rise again. It is to take interest rates negative.

Waiting for a promotion

Some interest rates are already marginally negative. The Swiss National Bank’s policy rate is -0.75%, while some rates in the euro zone, Japan and Sweden are also in the red. But the likes of Kenneth Rogoff of Harvard University and Willem Buiter, the former chief economist of Citigroup, a bank, envision interest rates of -3% or lower—a much more radical proposition.

To stimulate spending and borrowing these rates would have to spread throughout the economy: to financial markets, to the interest charges on bank loans, and also to deposits in banks, which would need to shrink over time.

This would discourage saving—in a depressed economy, after all, too much saving is the fundamental problem—though it is easy to imagine negative interest rates stirring a populist backlash.

Many people would also want to take their money out of banks and stuff it under the mattress.

Making these proposals effective, therefore, would require sweeping reform. Various ideas for how to do this exist, but the brute-force method is to abolish at least high-denomination banknotes, making holding large quantities of physical cash expensive and impractical. Mr Rogoff suggests that eventually cash might exist only as “weighty coins”.

Negative rates also pose problems for banks and the financial system. In a paper in 2018 Markus Brunnermeier and Yann Koby of Princeton University argue that there is a “reversal interest rate” beneath which interest-rate cuts actually deter bank lending—harming the economy rather than boosting it.

Below a certain interest rate, which experience suggests must be negative, banks might be unwilling to pass on interest-rate cuts to their depositors, for fear of prompting peeved customers to move their deposits to a rival bank.

Deeply negative interest rates could squash banks’ profits, even in a cashless economy.

Take what’s theirs

Several factors might yet make the economy more hospitable to negative rates, however.

Cash is in decline—another trend the pandemic has accelerated. Banks are becoming less important to finance, with ever more intermediation happening in capital markets.

Capital markets, notes Mr Buiter, are unaffected by the “reversal rate” argument. Central bankers, meanwhile, are toying with the idea of creating their own digital currencies which could act like deposit accounts for the public, allowing the central bank to pay or charge interest on deposits directly, rather than via the banking system.

Joe Biden’s campaign for the White House includes similar ideas, which would allow the Fed to directly serve those who do not have a private bank account.

Policymakers now have to weigh up the risks to choose from in the post-covid world: widespread central-bank intervention in asset markets, ongoing increases in public debt or a shake-up of the financial system.

Yet increasing numbers of economists fear that even these radical changes are not enough.

They argue that deeper problems exist which can only be solved by structural reform.

A new paper by Atif Mian of Princeton University, Ludwig Straub of Harvard University and Amir Sufi of the University of Chicago expands on the idea that inequality saps demand from the economy. Just as inequality creates a need for stimulus, they argue, stimulus eventually creates more inequality.

This is because it leaves economies more indebted, either because low interest rates encourage households or firms to borrow, or because the government has run deficits. Both public and private indebtedness transfer income to rich investors who own the debt, thereby depressing demand and interest rates still further.

The secular trends of recent decades, of higher inequality, higher debt-to-gdp ratios and lower interest rates, thus reinforce one another. The authors argue that escaping the trap “requires consideration of less standard macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.”

One of these “structural sources of high inequality” might be a lack of competitiveness. Big businesses with captive markets need not invest as much as they would if they faced more competition.

A new working paper by Anna Stansbury, also of Harvard University, and Mr Summers, rejects that view and instead blames workers’ declining bargaining power in the labour market.

According to the authors, this can explain all manner of American economic trends: the decline (until the mid-2010s) in workers’ share of income, reduced unemployment and inflation, and high corporate profitability. Business owners may be more likely to save than workers, they suggest, so as corporate income rises, aggregate savings increase.

Ms Stansbury and Mr Summers favour policies such as strengthening labour unions or promoting “corporate-governance arrangements that increase worker power”. They argue that such policies “would need to be carefully considered in light of the possible risks of increasing unemployment.”

Ideas for increasing the power of workers as individuals may be more promising. One is to strengthen the safety-net, which would increase workers’ bargaining power and ability to walk away from unattractive working arrangements.

In a recent book Martin Sandbu, a columnist at the Financial Times, suggests replacing tax-free earnings allowances with small universal basic incomes. Another idea is to strengthen the enforcement of existing employment law, currently weak in many rich countries. Tighter regulation of mergers and acquisitions, to prevent new monopolies forming, would also help.

All these new ideas will now compete for space in a political environment in which change suddenly seems much more possible.

Who could have imagined, just six months ago, that tens of millions of workers across Europe would have their wages paid for by government-funded furlough schemes, or that seven in ten American job-losers in the recession would earn more from unemployment-insurance payments than they had done on the job?

Owing to mass bail-outs, “the role of the state in the economy will probably loom considerably larger,” says the bis.

Talking about a revolution

Many economists want precisely this state intervention, but it presents clear risks. Governments which already carry heavy debts could decide that worrying about deficits is for wimps and that central-bank independence does not matter.

That could at last unleash high inflation and provide a painful reminder of the benefits of the old regime.

Financial-sector reforms could backfire. Greater redistribution might snap the economy out of a funk in the manner that Mr Sufi, Ms Stansbury and their respective colleagues describe—but heavy taxes could equally discourage employment, enterprise and innovation.

The rethink of economics is an opportunity. There now exists a growing consensus that tight labour markets could give workers more bargaining power without the need for a big expansion of redistribution. A level-headed reassessment of public debt could lead to the green public investment necessary to fight climate change.

And governments could unleash a new era of finance, involving more innovation, cheaper financial intermediation and, perhaps, a monetary policy that is not constrained by the presence of physical cash.

What is clear is that the old economic paradigm is looking tired. One way or another, change is coming.

Covid has exposed society’s dysfunctions

If we wish to avoid a political breakdown we should not seek to suppress markets, but we must surely temper their gales


James Ferguson illustration  of Martin Wolf column ‘Covid has exposed society’s dysfunctions’
© James Ferguson/Financial Times

We are living in an era of multiple crises: Covid-19; a crisis of economic disappointment; a crisis of democratic legitimacy; a crisis of the global commons; a crisis of international relations; and a crisis of global governance.

We do not know how to deal with all of these. This is partly because it is hard to develop the needed ideas for reform. Yet it is far more because politics cannot deliver the necessary changes.

The Financial Times series on the new social contract brought out several dysfunctions: over-leveraging of corporations; the disappointments of western millennials; corporate tax evasion; and the low pay of many of the people on whom we have particularly depended in the Covid-19 crisis.

In my own piece, I referred in addition to some of the longer-term dysfunctions, including the hollowing out of the middle class and the decline in trust in democracy, notably in the US and UK.

Line chart showing % of survey respondents dissatisfied with democracy in UK and US

In 1944, two influential books were published by émigrés from Vienna. One, The Road to Serfdom, by Friedrich Hayek, argued against the incoming tide of socialism. The other, The Great Transformation, by Karl Polanyi, insisted that this tide was the inescapable result of the 19th-century free market.

These books both contain truths. But, if we are to understand what is happening today, Polanyi seems much the better guide. If we wish to avoid a political breakdown, we should not seek to suppress markets, but we must surely temper their gales.

In the UK, that challenge was recognised at the time by two great thinkers: John Maynard Keynes, who focused on macroeconomic stabilisation, and William Beveridge, who developed the plan for a welfare state. Much of our debate now is again on how to support economic security. Answers will again have to integrate macroeconomics with microeconomics. These are the two central economic elements in the renewal of the idea of citizenship.

Line chart showing persons in employment on a 'zero-hours' contract in thousands

Yet this sense of responsibility, as Keynes understood, also has to be global. The international conference at Bretton Woods in 1944, in which he played a huge part, created the IMF, to help manage the global economy, and the World Bank, to promote economic development.

Nowadays, he would surely advocate an equally strong global environmental institution. The need for a global community in a war-torn world informed the launching of the UN by Franklin Roosevelt. It also led to the creation of the European Coal and Steel Community in 1951.

Again, today, there are new ideas worth serious consideration. I would stress the need to make economies less debt-dependent, partly by redistributing income. Other ideas focus on combining high employment with greater personal security. Others focus on tax reform, including calls for wealth taxes.

Others concentrate on the need for reform of corporate governance. Others again stress the need to promote competition. At the global level, the onset of Covid-19 has reminded us of the need for co-operation, as, even more, does the challenge of climate change.

Again, there are ideas for dealing with both. But they demand an alliance of politics with expertise, both domestically and globally, just as happened in the 1940s and 1950s.

Line chart showing % share of total net personal wealth held by top groups in the wealth distribution in the US

In the interwar years, a period of distress and division comparable to today, politics threw up the kinds of leaders and relationships among countries that made doing anything ambitious impossible. The League of Nations failed.

The world recovered only after passing through the furnace of war. Even then, it took the onset of the cold war for the US to launch the Marshall Plan and so start the European recovery.

Ideas are never enough. There has to be consensus, especially in democracies, on what is needed. Jimmy Carter, not Ronald Reagan, appointed Paul Volcker, the slayer of inflation, and Labour’s James Callaghan, not Margaret Thatcher, declared in 1976 that “The cosy world we were told would go on for ever, where full employment would be guaran­teed by a stroke of the chancellor’s pen, cutting taxes, deficit spending, that cosy world is gone.”

External enemies have often secured domestic unity and cemented alliances. But, even if this could work now, it would make our global threats worse than they already are.

Bar chart showing cumulative deaths per million of population attributed to Covid-19 in various countries

At present, alas, the most potent force in world politics is a resurgent nationalist authoritarianism, as in the interwar period. With the exception of the Chinese regime, the common feature of these autocrats is the performance of personal power. The leaders have little interest in the complexity of purposeful policy.

Instead, they offer their supporters the red meat of gladiatorial combat. The Brexit debate was a good example. Meanwhile, a dominant thrust of the left’s politics is based not on policy but on identity, asserted against the conservative and nativist ideologies of the right.

With such politics, the chances of a consensus on creating a better world on multiple dimensions appears minimal.

Line chart showing global annual CO2 emissions in billions of tonnes and global annual per capita CO2 emissions in tonnes

Yet, it is not by any means hopeless. The politics of some democracies still seem sane and effective. The EU seems to be pulling together, at last. The sheer incompetence of the nativist populists has at least become clear.

Maybe, many members of the old working class will start to see US president Donald Trump as the fraud he is.

Maybe, a coalition of radical, yet sensible, reformers will re-emerge, to re-engineer domestic policies and global politics. Perhaps, the Covid-19 crisis itself will catalyse this.

But it will take both will and the talent to create new coalitions of ideas and interests. In the end, change is always about politics. Policy proposes. Politics disposes.

Capital Wars, by Michael Howell

The fractious interdependence of China and the US

John Plender

Michael Howell asks whether a digital renminbi might become the 21st-century’s pre-eminent safe asset
Michael Howell asks whether a digital renminbi might become the 21st-century’s pre-eminent safe asset © Xu Jinbai/EPA/Shutterstock

The chief focus of strategic rivalry between the US and China in the economic sphere has so far been the trade war waged by Donald Trump against the challenger superpower snapping at America’s heels. There has been little comparable friction in financial markets.

Indeed, as more Chinese stocks are incorporated into global indices, US investors have been pouring capital into China via their investment in index-tracking funds.

Yet that is unlikely to last, according to Michael Howell, a former research director of investment bank Salomon Brothers who now runs his own boutique.

In Capital Wars he points out that the swap lines extended by the US Federal Reserve to other central banks after the 2008 financial crisis — an exercise repeated since coronavirus struck — have been extended to friendly nations, while China has been pointedly excluded. So the Fed’s role as a global lender of last resort has been both partial and politicised.

At a fundamental level, the nature of the relationship between these two powers is unbalanced. Despite its declining share of global output, the US is the main provider of the dominant reserve currency to world markets. Its economy is marked by low productivity growth along with highly developed financial markets.

China has enjoyed high productivity growth as it catches up, but has under-developed financial markets. Persistent trade surpluses have contributed to a huge accumulation of foreign exchange reserves: the majority is in dollar assets. It’s a fractious interdependence.

China’s economic rise has coincided with a long period of liberalisation in international financial markets. A central theme of the book is the ballooning of global liquidity — gross flows of credit, savings and international capital that facilitate debt, investment and cross-border capital flows.

In 2019 this footloose pool of funds was estimated at $130tn, two-thirds larger than world gross domestic product. China’s contribution was close to $36tn.
 This financial system is light years away from the postwar model, where banks borrowed from retail depositors and lent to individuals and companies. Today, wholesale markets predominate; the main providers of funds are financial institutions and large companies such as Apple or Toyota.

Users range from companies and banks to hedge funds and governments.

The chief source of funds is not deposits but repurchase agreements or repos, a form of borrowing that has to be backed by collateral in the form of “safe” assets such as government bonds. One of the chief sources of instability in the modern financial system has been a shortage of such safe assets.

Before the 2008 financial crisis, investment bankers tried to solve that problem by inventing new safe assets such as collateralised mortgage obligations.

They proved — at the risk of understatement — not to be safe at all. Soon after the crisis, government austerity programmes restricted the supply of government IOUs, thereby increasing market volatility and financial fragility.

This may now be easing thanks to governments spewing out safe assets to finance the fiscal policy response to the pandemic. Yet that seems unlikely to change the book’s assertion that financial flows and the risk-taking behaviour of investors increasingly drive the real economy and asset prices, not vice versa. And the geopolitical tensions remain.

Howell asks whether a digital renminbi might become the 21st-century’s pre-eminent safe asset.

That requires a leap of the imagination. But certainly plausible is his immediate conclusion that regionalism will replace globalisation as capital rivalry limits cross-border trade, technology transfer and the free flow of risk capital.

There is much that is enjoyably controversial here. As a description of the workings of the modern global financial system and the interrelationship of finance and the real economy, it has no current rival.

Not for beginners, but essential reading for market practitioners.

John Plender is an FT columnist


Chris Vermeulen
Chief Market Strategist

We get a lot of questions from individuals every week. Our research posts contain a lot of varied examples of Technical Analysis, Economic Data Points, Advanced Price Theory, and other more obscure analysis techniques. Yet, sometimes our readers want to know more – how do we read the tea leaves to try to adopt a consensus approach to trading, investing, and hedging the global markets at times like these?

The easiest answer is that we are a team of technical researchers and analysts. Every day we are watching our proprietary modeling systems, various market symbols, and technical/price setups that occur throughout the globe. Because we specialize in US stocks, ETFs, and Futures, our concern is how the US market will react to these impulses. 

Having said that, we explore ideas about how capital will flow from one asset class to another over time as various rotations in the global market take place.

Every week, we communicate different points of view and do so across different time frames which provides you with a full view of long and short term expectations and potential moves for stocks and commodities.

Sometimes this can be confusing to follow if you don’t understand the time horizon we are discussing. One article may be about a major double top in the stock market with long term bearish implications, and the next article about more upside potential in stocks as the stock market tries to fill the February price gap window. One is bearish, the other is bullish, both provide a ton of insight for a different type of trader and time horizon looking forward.

The team is able to explore and identify any potential trade setup/trigger we believe is important for our future success. Our team can identify short, intermediate, or longer-term setups in any symbol or market segment. We then discuss the potential for each setup/trigger and attempt to validate the setup/trigger using our proprietary technology. We focus on confirmed trade setups originating from a variety of proprietary technology solutions that are aligned with our researcher’s general analysis.

This keeps our team honed in on what is really happening in the markets as we attempt to identify the “Best Asset Now” related to potential risk and profit. The one thing that many people don’t understand is how much we discuss “RISK”. The first thing any of our researchers accomplish before they suggest a trade setup is a “Risk Analysis” related to the price structure and future expectations. 

Our researchers may think a certain symbol or asset class is the greatest trade of the year, but risk factors associated with general market conditions, recent support/resistance levels, or volatility may disqualify that trade simply because we won’t allow anything to take excessive risks for our members. Our view is “there will always be another trade setting up in the next two or three days”.

Before you continue, we suggest taking a moment to read some of our other “bigger picture” research posts on silver, gold, and the US markets. Be sure to opt-in to our free market trend signals before closing this page so you don’t miss our next special report!


We are sharing some of our most recent research with all of you to help you understand how we view different market perspectives and opportunities as triggers set up in the US stock market. We view some of these longer-term triggers as “bigger waves” that are setting up out in the ocean. 

When they hit the shore, they have the potential of disrupting things quite extensively and causing quite a bit of damage. But until they hit the shoreline, they are just big waves that are pending in the future.

Our shorter-term systems help us navigate the smaller price rotations and are often what we fall back onto to confirm trade triggers. If the bigger wave suggest greater risk is a factor, then we’ll adjust the targets and stops for our shorter-term triggers to help eliminate risk and turn the short-term trades into a “scalping-type” of trade. Quick in and out for 5% to 7% (or more) and then wait for the next setup.

In a broader sense, we are simply navigating the seas and tides while attempting to identify the best opportunities for our members. We write about all types of technical and price pattern triggers – even economic data. 

Internally, we focus on technical patterns and setups that are generated by our proprietary trading/modeling systems. So, when you read any of our public research posts, remember that internally we may be viewing things quite differently as the technical and modeling systems are only deployed for subscribers or members.


This first example highlights what we believe is a very clear longer-term setup relating to the general market weakness across a broad segment of the US stock market. Back in February 2020, a similar type of pattern set up just before the February 24 collapse. 

Now, we have a bigger and broader divergence between the number of stocks above their 200 Day Moving Average levels while Bonds (TLT) is climbing higher. This, generally, warns that the markets are stalling and may settle into a downside price trend.

Could the downside price trend be aggressive and volatile? You bet it could. But right now we know this “big wave” is pending and we also know that risks seem rather high for a downside price correction given this technical pattern setup.


This second chart highlights the Jobless Claims levels over the past 6+ months of 2020. 

The one thing we want to highlight is the moderate increase in the latest Jobless Claims level and how that may represent a “second wave” of COVID-19 cases prompting additional closures/shut-downs within the US economy in some states. 

The last thing this recovery effort needs right now is another wave of newly unemployed workers and this data could become a very real problem when you consider the spending, housing, mortgage, credit card, and other factors that are associated with “a loss of income” for any active consumer. 

There is a domino-process that is likely to take place if these workers are unable to find new jobs quickly.


Now, as we close out this first part of our Technical Patterns, Trading Perceptions, Future Expectations, and More research post, we want to ask you if you would do anything differently than we currently do to attempt to effectively trade and manage risk levels throughout these incredible times and price swings in the global markets? 

Remember, we actually called these incredible price moves back in July/August 2019 (and earlier) with our Super-cycle research and other longer-term cycle analysis:

Over the past 12 months, we’ve effectively called many of the biggest market moves and trends – in some cases many months in advance. Our predictions related to precious metals have been highlighted on many other podcasts and segments. 

 We consider it an honor to be included in other’s interpretations and presentations – yet we also know the accuracy of our research is what really counts.

This brings us back to the start of this post – our efforts in generating these free research posts is to help you understand what we are thinking along different time horizons to help you develop your own consensus outcome. 

We hope you are gaining real value from our efforts because we are not going to stop now – this is when you need us the most. 2020 through 2024 are going to include some of the biggest price swings we’ve seen in decades.

A Return to ‘Normal’: How Long Will the Pandemic Last?

American consumers are crowding back into stores, restaurants and other places of business as states ease pandemic-related restrictions that strangled the economy for months. But a full return to normal isn’t likely to happen until November 2021, according to Ezekiel (Zeke) Emanuel, vice provost for global initiatives and chair of the Department of Medical Ethics and Health Policy at the University of Pennsylvania and Wharton professor of health care management.

“That’s your date,” Emanuel said. “I’m generally a very optimistic guy, and I’m being realistic here.”

Emanuel believes that’s how long it will take for an effective vaccine to be distributed widely enough to stop the spread of COVID-19, the disease caused by the novel coronavirus that in the U.S. has infected more than 3.2 million people and caused over 134,000 deaths.

Until then, he said, corporate employees should continue to work from home as much as possible, because enclosed spaces and prolonged exposure to other people increase the likelihood of transmission.

In the case of frontline workers and others who cannot work remotely, including employees at retail stores, a detailed protocol should be implemented to protect both workers and customers – such as mandatory masks, plexiglass dividers, and regular sanitizing of hands and surfaces.

Emanuel shared his advice with retail executives and founders who joined an exclusive video conference in late June hosted by Wharton’s Jay H. Baker Retailing Center. During the hour-long call, he answered questions on a wide range of topics related to the pandemic, from how often cash registers and other store surfaces should be cleaned to the safety of air travel to whether schools should reopen.

Emanuel, an oncologist and bioethicist, served as a special advisor for health policy to the director of the Office of Management and Budget in the Obama White House and is a key architect of the Affordable Care Act. He’s also a prolific author and a regular columnist for The New York Times.

Emanuel said that while the deaths caused by COVID-19 already have been devastating, he expects the toll in the U.S. to reach 250,000 by the end of 2020. He also believes that non-pharmacological interventions – the measures that help prevent transmission of the virus – are working.

They include social distancing; wearing masks; avoiding crowds and enclosed spaces; and staying away from people who are coughing, sneezing, singing or yelling.

Those “deep exhalations” can propel droplets containing the virus into the air – in fact, Emanuel noted, sneezes travel at 200 MPH and can spread throughout a room.

Emanuel, who has advocated for a safe reopening of the economy, said strict adherence to non-pharmacological interventions work better than haphazard compliance with them, and it has been challenging to get everyone to comply.

In fact, states like Arizona, Florida and Texas have seen infections skyrocket since they relaxed lockdown measures.

“I think it’s almost inevitable we’re going to have a second wave that pops up in October or November [of this year], when we’re all going inside. That worries me a lot,” he said.

“Adhering to strict measures doesn’t seem possible in the U.S.”

What Should Stores Do?

Emanuel has been advising a number of national companies and organizations on how to reopen safely, and he said stores have much to consider. Can they put some of their merchandise outside to limit the number of shoppers inside? Can they open windows or doors to help air circulation?

Use of face masks will be important, he said, but he questioned the effectiveness of conducting temperature checks at the door. People have different baseline temperatures, while some who have COVID-19 do not exhibit high temperatures and are often asymptomatic in the early days of infection, he noted.

Instead, employees should be asked symptom screening questions each day, such as whether they are experiencing shortness of breath.

Testing for COVID-19 more than once a week for asymptomatic employees is wasteful and can create a false sense of security, he said. Instead, an emphasis on good, routine personal hygiene – especially washing hands — and store cleaning is reassuring for both employees and customers.

More research is needed to determine whether clothing, shipping boxes, or store surfaces could transmit the virus, but he said these are likely not the main modes of transmission.

When should a store close its doors? The answer depends on a lot of factors, including the concentration of local cases, evidence of transmission from worker to worker, the design of the work site, etc. “It’s a little too abstract to say,” Emanuel said.

Racing for a Vaccine

While Emanuel acknowledged the “super-fast, super-human effort” underway to develop a vaccine, he cautioned that the process is complicated and takes time. “That’s biology; you can’t speed it up with an algorithm.”

He also pointed to research that shows the immune system reaction to the virus is short-lived, with antibodies lasting only two to three months versus three to 12 months for other viruses, indicating that it might be difficult to develop a long-lasting vaccine.

“I think it’s almost inevitable we’re going to have a second wave that pops up in October or November [of this year], when we’re all going inside. That worries me a lot.” –Zeke Emanuel

Still, there is some hope that the fatality rate is notching down because doctors are learning more about effective treatments as they work through the pandemic — not because the virus is losing its potency.

“There’s so much uncertainty here,” he said. “My suspicion is the death rate is going down not because it’s getting weaker, but we’re getting better and managing it.”

Emanuel answered several other COVID-19 questions, and a short list of his responses are below:

Schools: They should reopen but with an emphasis on social distancing and a detailed plan of action. Schools may need to go to six days a week to reduce class density, for example.

Gyms: Exercise at home or outside – at least until there is a widely distributed vaccine or herd immunity is reached. Gyms are enclosed spaces where people are exhaling deeply.

Public Transportation: Avoid it. Emanuel is an avid bike rider and said he even rides his bike in the snow.

Air travel: Avoid it. While airplanes have good air filtration systems, they cannot protect against sneezes or other exhalations from fellow passengers two rows away from you or in the aisle. Emanuel said this is a tough one for him because he loves to travel for work and pleasure. He has canceled four international trips and a domestic trip planned for this year, including one to work with the World Health Organization.

Visiting the elderly at home: That’s an individual choice. Family members should evaluate their circumstances and risk factors before making that decision.

Football: Emanuel favors a shortened season without fans in the stadiums and where players “live in a bubble” to contain any spread. He wrote a recent opinion piece in the Washington Post on the topic.

Best website: Emanuel relies on Trust for America’s Health — a nonpartisan policy, research and advocacy organization — for comprehensive information on the pandemic.

Banks Are Fine, but the Economy Isn’t

The biggest banks proved their ability to generate revenue through tough times, but they said little that would indicate the economy is poised for a sharp recovery

By Telis Demos

Citigroup and JPMorgan Chase reported second-quarter profits on Tuesday. / Photo: Andrew Harrer/Bloomberg News .

Two of the three big banks that reported results on Tuesday still earned a lot of money in the second quarter. That is less reassuring than investors might hope.

Underlying the banks’ relative resilience in the second quarter were some arguably temporary benefits that don’t really address the long-term economic risks. Reserve builds in anticipation of future credit losses remain a major swing factor for earnings at Citigroup, C -3.93%▲ JPMorgan Chase, JPM 0.57%▲ which turned profits, and Wells Fargo, WFC -4.57%▲ which didn’t. But bankers stressed that their provisioning remains highly subjective and they lack much visibility into the true health of consumers, the biggest source of credit risk.

The reports did resolve some near-term questions for investors. Dividends for now appear to be well safe at JPMorgan and Citigroup. Thanks to a tidal wave of investment-banking and trading fees, these banks are still actually adding to their core equity capital levels. 

Wells Fargo is a bit of a special case due to asset-growth limitations imposed on it by the Federal Reserve, and has already said it would be cutting its dividend.

But the quarter provided little that should give investors marginal comfort on the more complex questions that will loom going forward. That includes whether the additional loan-loss reserves set aside in the second quarter represent the peak, and what banks’ earning power will look like in a stagnant economy at zero interest rates.

Bankers emphasized that while they are seeing hopeful signs, such as a stabilization of spending through June, massive government stimulus and unemployment benefits have made it difficult to gain a true picture of consumers’ future health. Citigroup Chief Financial Officer Mark Mason told reporters that there are “a number of factors that make it hard to determine with any level of precision how [consumer activity] will unfold.” JPMorgan’s Jennifer Piepszak said: 

“The visibility on the economic damage is not very good.”

Even the hopeful indicator of how many people in forbearance, or recently leaving forbearance, remain current on their loans isn’t terribly reassuring. Both Citigroup and JPMorgan suggested that around 50% of card borrowers in forbearance are still making payments. 

JPMorgan also noted that 80% of people who rolled off forbearance programs were making payments. That still leaves a large group of people for whom government stimulus apparently hasn’t been enough.

In addition, banks by necessity are forecasting possible future losses from base-case scenarios, or have weighted outcomes with probabilities that are ultimately unknowable. Citigroup estimated a 15% probability that the economic recovery is “materially slower” than its main forecast, which would imply an unemployment rate about 4 to 5 percentage points higher than the base forecast through 2021. Investors who see big upside in banks at current valuations will need to make their own judgments about how likely such scenarios are.

As for the surge in trading and capital markets, it is hard to see those gains being repeated in future quarters. JPMorgan said it expected a slowdown that began in June to continue. Forecasting market performance is even more challenging than usual—and it is usually pretty tough.

Meanwhile, there are signs that risks are spreading beyond consumers. Second-quarter reserve builds for wholesale and commercial lending went up far more than they did for consumer loans across the three banks. Plus, companies are borrowing less. Commercial and industrial lending at JPMorgan was down 7% from the first quarter, despite the jump in Paycheck Protection Program loans.

While the broader stock market appears to be focusing on rosy scenarios, banks certainly aren’t. Investors looking for evidence of a strong and rapid economic rebound will need to look elsewhere.