Moral Hazard Pinnacle 

Doug Nolan


German 10-year bund yields dropped 10 bps this week to negative 0.62%, the low since March. French yields fell eight bps to negative 0.35%, only four bps from March panic lows. Italian and Greek yields ended the week at record lows 0.65% and 0.78%. Spanish yields closed Friday at a record low 0.12% and Portuguese yields at an all-time low 0.11%. European bond prices have an unmistakable correlation to European COVID infections.

European new daily COVID cases have spiked to 120,000, about triple the level from a month earlier. 

Infections in France have spiked to a daily record 30,000, with Paris and other cities now under restrictions. Cases have spiked in Spain, the Netherlands, Italy, Germany, Belgium, Greece, the UK and elsewhere. UK Prime Minister Boris Johnson has faced intense backlash for imposing regional “circuit breakers” with potential lockdowns. A Friday Bloomberg headline: “Europe is Losing Fight to Stay Open on Record Virus Surge.” From CNBC: “Europe’s ICU beds are nearing capacity in some areas, WHO says.”

Here in the U.S., the seven-day average for new daily cases is nearing 65,000, up 25% in just two weeks. 

In a troubling development, new infections are increasingly disbursed across the country with rural areas leading the rise. On Thursday, 39 states were reporting average new daily cases at least 5% above last week’s level. The Worldometer's 24-hour tally had Friday global infections at a record 412,000, with the U.S. surpassing 71,000.

From the NYT: “As the coronavirus caseload in the United States soars past eight million, epidemiologists warn that nearly half of the states are seeing surges unlike anything they experienced earlier in the pandemic… Uncontrolled outbreaks in the Midwest and Mountain West are driving the surge... Some of the states with the most extreme growth had relatively few cases until recently, and rural hospitals have been strained. Per capita, North Dakota and South Dakota are adding more new cases than any states have since the start of the pandemic. Wisconsin… has seven of the 10 metropolitan areas in the United States with the highest rates of recent cases. ‘What’s happening in the Upper Midwest is just a harbinger of things to come in the rest of the country,’ said Michael Osterholm, an infectious-diseases expert at the University of Minnesota.”

We’re all sick and tired of the pandemic. If the virus had awareness, it would surely be reveling in its success at wearing down opponents. Besides, we’re in the throes of an election ostensibly as historic as COVID-19. And, heck, with a manic marketplace - and stocks near all-time highs - how poor could prospects be? 

It all makes it so easy to forget about March. Governments have learned their lesson: There will be no more general lockdowns. And we are to believe central bankers have learned lessons as well.

The Fed’s Vice Chairman for Supervision – “The Federal Reserve’s point man on financial regulation” – raised some eyebrows Wednesday. At an event sponsored by the Institute of International Finance, Randal Quarles offered an admission: “It may be that there is a simple macro fact that the Treasury market, being so much larger than it was even a few years ago, much larger than it was a decade ago, and now really much larger than it was even a few years ago, that the sheer volume there may have outpaced the ability of the private-market infrastructure to kind of support stress of any sort there. …Will there be some indefinite need for the Fed to provide — not as a way of supporting the issuance of Treasuries, but as a way of supporting a functioning market in Treasuries — to participate as a purchaser for some period of time.”

Here are the numbers: 

The fiscal year ended in September with the federal deficit reaching $3.1 TN, or 15% of GDP. 

Outstanding Treasury Securities jumped $2.852 TN during the second quarter to $22.371 TN and were up $4.556 TN, or 25.6%, over the past year. 

After ending 2007 at about $6.0 TN, outstanding Treasury Securities increased $16.3 TN, or 270%. 

Treasuries ended June at 115% of GDP. This was up from 69% at the end of 2010 and 44% to conclude the nineties.

Mr. Quarles was simply stating what markets already knew. 

“You break it, you own it.” 

For too long, the Fed has accommodated unbridled Treasury issuance. And especially with the Powell Fed openly calling for additional massive fiscal stimulus, it’s difficult today to see the Treasury market ever operating adequately without resolute Fed support. 

Call it what it is: The ballooning Treasury market is “too big to fail” – right along with markets for equities and corporate debt. 

The ETF complex has become “too big to fail” – a fate money market funds and the “repo” market succumbed to years ago. 

First illuminated as “too big to fail” during the 1998 Russia/LTCM collapse, derivatives markets have become too big for even middling instability. 

March’s financial meltdown confirmed what I already knew. The Fed’s response to the “great financial crisis” has been an abject failure. An even somewhat reasonably sound system would not have required a $3 TN bailout – three times the size of 2008’s QE operation. 

The strategy of ensuring the banking system remains well capitalized – while letting market-based finance run wild – may have plausible theoretical underpinnings. Yet it wantonly disregards the core shortcomings of contemporary finance. The Fed’s post-2008 crisis assessment essentially came to a conclusion: had bank loan officers only lent responsibly, then risk intermediation, speculation and leverage would not have evolved into systemic issues. In reality, Bubbles in risk intermediation and leveraged speculation were the cart pulling the horse – the force spurring the increasingly reckless lending boom. 

I appreciate vice chair Quarles’ Wednesday speech, “What Happened? What Have We Learned From It? Lessons from COVID-19 Stress on the Financial System.” 

While his Treasury market comment garnered media interest, he provided insightful analysis outlining the systemic nature of March’s market dislocation. 

Moreover, it supports my thesis that the entire system (at home and abroad) has inflated into one colossal “too big to fail” quagmire. 

What the Fed today views as policies supporting financial stability are in truth measures sustaining historic Bubble excess. 

From Quarles: 

“Some of the most severe strains emerged in short-term funding markets and among institutions engaged in liquidity transformation… 

First, we saw a pullback from commercial paper, or CP, markets… At the same time, some prime and tax-exempt money market funds experienced large redemptions, forcing these funds to sell assets. 

In addition, we saw large outflows at corporate bond funds and exchange traded funds. 

Corporate bond funds promise daily liquidity, but the underlying assets often take a longer time to sell. 

This creates conditions that can lead to runs on these funds in times of stress. Indeed, each of these three developments - the pullback from CP and the elevated redemptions at prime money funds and at corporate bond funds-can be viewed as a kind of run by investors. A run occurs when investors concerned about potential losses clamber to withdraw funds or sell their positions before other investors do.”

“A fourth area of strain was in the Treasury market-one of the largest and deepest financial markets in the world. Treasury securities play a central role in short-term funding markets, such as the repo market… Significant amounts of Treasuries are held by institutions that use short-term funding, like broker-dealers and money market funds. 

And, the structure of the Treasury market has evolved substantially in recent years, with the growth of high-speed and algorithmic trading, and a growing share of liquidity provided by new entrants alongside established broker-dealers… Treasury market conditions deteriorated rapidly in the second week of March… Foreign official and private investors, certain hedge funds, and other levered investors were among the big sellers.”

“First, in March, many businesses-unable to satisfy their large cash demand through CP or corporate bond issuance… drew down on their existing credit lines with banks in order to raise cash. As a result, commercial and industrial (C&I) loans in the banking system increased by nearly $480 billion in March-by far the largest monthly increase ever.”

“While the continued ability of banks to lend to creditworthy borrowers has been good news, a lot of credit in the United States is provided by nonbank financial institutions and markets. Indeed, almost two-thirds of business and household debt in the United States is held by nonbanks…”

“In light of these unusual and exigent circumstances, the Federal Reserve took a series of emergency actions to support liquidity in markets and the flow of credit to households, businesses, and communities… Interestingly, in many cases our facilities had their effect less by actually providing liquidity or credit, than by providing a backstop. 

The ‘announcement effect’ of the Fed's willingness to step in returned confidence to market participants and function to markets, without the facilities themselves seeing large amounts of use.”

“Looking back at these events since the COVID event, what have we learned about the U.S. financial system? One lesson is that several short-term funding markets proved fragile and needed support -- the commercial paper market and prime and tax-exempt money market funds, as key examples. The runs on prime money funds and commercial paper were particularly disappointing, since in many ways they resembled runs that we saw in these markets during the GFC.”

“A second lesson we learned last spring is that the Treasury market is not immune to the problems of short-term and dollar funding markets… In addition, we have to ask: What can be done to improve Treasury market functioning over the longer term so that this market can withstand a large shock to demand or supply? I will simply raise that question, but not attempt to answer it here.”

“Almost all of these measures were targeted towards financial markets, nonbank financial institutions, and the real economy. Moreover, the unprecedented and in many ways unimaginable nature of the shock posed by the COVID event made it appropriate to take these steps when we did, to backstop the functioning of markets essential to the financial system. 

Their creation was an unmistakable signal to market participants of the capability and willingness of the Fed to restore market functioning, and the fact that this functioning was restored so quickly, with relatively little borrowing, shows this message was received, and believed. The system worked.”

“Vulnerabilities associated with short-term funding have always been at the heart of financial crises and central banks' efforts to promote financial stability. Such vulnerabilities led to Walter Bagehot's 19th century dictum that central banks need to stand ready to lend freely against good collateral during periods of financial strain.”

Noland: Let there be no doubt, Walter Bagehot would be absolutely aghast at the current state of central banking. From the New York Fed’s website (excerpted from a 2013 speech by Thomas C. Baxter): 

“Bagehot’s central theme was about liquidity, and how the central bank must inject it during times of financial panic… Bagehot urges the central bank to lend freely into a panic, and to do so ‘at a very high rate of interest.’ 

He explains that the reason to charge a penalty rate is to use price as a self-limiting mechanism. In Bagehot’s words, a penalty rate mitigates moral hazard and ‘will prevent the greatest number of applications by persons who do not require [a loan from the central bank].’ 

Bagehot also urged another core principle for central bank liquidity. He believed that central bank lending should be secured by good collateral.”

The “penalty rate” issue is key to mitigating moral hazard. 

Yet markets knew funding rates would be slashed to zero, while the Fed would bypass “lending” and simply inject massive liquidity directly into faltering markets. And from the March experience, markets now fully comprehend that “whatever it takes” includes Trillions of free “money.” Instead of lending against good collateral, the Fed will now aggressively purchase Treasuries, MBS, corporate bonds and corporate ETFs – backstopping market liquidity and prices. 

And from the Fed’s September 2019 policy pivot, markets appreciate any incipient risk of funding crisis would see the Fed administer aggressive monetary stimulus. Bagehot would have never imagined – let alone condoned - such a policy course. Fed policy has reached the Pinnacle for Promoting Moral Hazard. 

One of Quarles’ “lessons” is so fundamental that it’s deserving of further discussion:

 “Several short-term funding markets proved fragile and needed support.” 

“Vulnerabilities associated with short-term funding have always been at the heart of financial crises and central banks' efforts to promote financial stability.” 

My retort: 

Markets in perceived “money” and money-like instruments are invariably at the heart of financial panics. 

That’s where risk intermediation tends to be the most impactful. Indeed, markets operating under a prevailing perception of liquidity and safety (store of nominal value) are inherently susceptible to an abrupt change of perceptions and resulting “run.”

 “This secure ‘repo’ money market instrument backed by Treasury collateral is absolutely safe and liquid.’ “Holy crap, my ‘repo’ with Lehman Brothers is in major jeopardy and I gotta get out of it (and others similar)!”

Pondering the momentous ramifications of the Bernanke doctrine, over a decade ago I warned of an unfolding “global government finance Bubble.” I introduced the concept “moneyness of risk assets.” 

On the one hand, this Bubble has gone to the very foundation of “money” with the egregious expansion of central bank credit and sovereign debt. 

Moreover, central bank stimulus, market backstops, and massive fiscal spending have worked to confer “money-like” attributes upon an ever-broadening array of risk assets. In particular, Wall Street alchemy (risk intermediation) has come to include the transformation of risky stocks and corporate debt into perceived safe and liquid ETF shares. 

Moreover, Fed measures continue to promote the ever-enlarging derivatives universe that operates on the specious premise of liquid and continuous markets.

It's as if policymakers go out of their way not to learn lessons. 

Mr. Quarles outlines key factors in a crisis that nearly spun out of control. He pinpoints areas of fragility, yet his speech is bereft of prescriptions or solutions. This financial system is what it is. “The system worked,” he said. Three Trillion worked to further inflate history’s greatest Bubble. 

September Chinese Credit was out this week. Aggregate Financing, China’s metric for system Credit growth, expanded $517 billion (3,480 renminbi) during the month to a record $41.6 TN. This was about 10% ahead of forecasts, and the strongest growth since March’s $770 billion. 

August and September combined for a snappy $1.05 TN two-month expansion. The $4.402 TN y-t-d growth was 44% and 64% ahead of comparable 2019 and 2018. At 13.5%, year-over-year growth in Aggregate Financing was the strongest since 2017 – a notable feat in the face of economic stagnation.

Total Bank Loans rose $281 billion in September, up from August’s $189 billion and about 10% ahead of forecasts. Year-to-date growth of $2.409 TN (13% annualized) is running 19.3% ahead of comparable 2019 growth. 

Consumer Loans jumped $143 billion in September. Year-to-date growth of $909 billion is 7.7% ahead of comparable 2019. Consumer Loans were up 14.7% y-o-y, 33% over two years, 57% over three, and 135% over five years. 

Corporate Loans rose $140 billion, up from August’s $86 billion and the strongest expansion since April. 

At $1.569 TN, year-to-date growth in Corporate Loans is running 29% ahead of comparable 2019 and 49% ahead of comparable 2018. 

Government Bonds increased $150 billion during September, down from August $205 billion but up significantly from the year ago $56 billion. Year-to-date growth of $1.0 TN was 69% ahead of comparable 2019. Government Bonds expanded 20% over the past year to $6.6 TN. 

China M2 “money” supply surged $405 billion during September, the strongest expansion since June. 

This put year-to-date growth at $2.639 TN, or 18% annualized, to a record $32.156 TN. 

M2 inflated $3.148 TN over the past year (10.9%). 


Covid: we’re in the same storm but not the same boat

Those with capital are doing well through the pandemic, while those without are suffering

Gillian Tett 

     © Shonagh Rae

Last week I was chatting with a London-based childhood friend, Tony (now an author and entrepreneur), who said he was worried about how Covid-19 was creating “the three Bs” among his acquaintances. Some had become desperately “bored” after being mostly trapped for six long months in their domestic surroundings. Others were facing “burnout” because they had been toiling insanely hard on open-all-hours digital platforms — sometimes combined with childcare.

Then there were people grappling with a more serious B: “breakdown”, sparked by the type of depression and anxiety that can be unleashed by job losses, financial pain, isolation, relationship stress — or a fear that the pandemic has no obvious end.

“There is a fourth B too,” I pointed out more optimistically: for some, Covid-19 lockdown has also produced “blessings”. They have used this peculiar period to build closer relations with their families, enjoy time in beautiful locations or relish the freedom of doing their jobs without a long commute or the curse of permanent jet lag. Tony agreed that he happened to be in that fourth camp. So, to some degree, am I.

The bitter — ghastly — cruelty of Covid-19 is that it has not just exposed existing inequalities but that it is exacerbating them too, increasing fortune for some and misfortune for others. There are many ways to frame why people are having such different experiences. But I suspect that one concept that deserves a lot more debate revolves around the issue of capital and who possesses it.

This is a topic that burst into public view with a vengeance in 2013 when French economist Thomas Piketty published the best-selling Capital in the Twenty-First Century. The book turned him into an academic star and has now been made into a film. (Spoiler: I am interviewed in the latter, along with my FT colleague Rana Foroohar.)

Piketty defines capital as “the sum total of non-human assets that can be owned and exchanged on some market” and argues that “when the rate of return on capital exceeds the rate of growth of output and income . . . capitalism automatically generates arbitrary and unsustainable inequalities”.

In many ways, this is precisely what has happened in recent months: anybody who holds assets such as equities has seen the value of these increase, because of central banks’ super-loose monetary policies. People without assets, by contrast, have probably seen their net wealth shrivel because the recession has crushed wages and jobs.

However, as an earlier French thinker, Pierre Bourdieu, argued in the 1970s, “capital” does not need to be viewed just through the lens of economics. Bourdieu, for example, was fascinated by the peculiarity of cultural capital — such as tastes, skills and qualifications (from an expensive education, say), all symbols of social power that elevate the holder over time.

Then there is “political capital”, or the fact that some people accumulate links with channels of power, and “social capital”, for those who collect networks of useful contacts and/or a strong base of friends and family. There’s “career capital” too.

The cruelty of Covid-19 is that it has not just exposed existing inequalities but that it is exacerbating them too

In practical terms, these different forms of capital tend to augment each other over time. And just as Covid-19 is probably increasing the power of economic capital, it is also rewarding those who have other types as well. 

People with strong social capital, say, tend to be more resilient in lockdown, since they like the people they are confined with or have such close friendships and family relationships that these ties can be maintained (and even strengthened) virtually. 

People without this social capital may have struggled.

Similarly, some of those with career capital might have found this augmented in lockdown since their companies needed them more than before. People who are just entering the workforce, without career or intellectual capital, are in a radically different position. So too with emotional capital: data from the UK’s Mental Health Foundation shows that anyone who started Covid-19 with pre-existing problems has fared dramatically worse, in mental health terms, than everyone else.

In a hard-hitting report that details the deep variation in mood among different parts of the British population in recent months, the Mental Health Foundation quotes the saying: “We are all in the same storm, but we are not all in the same boat.” 

The report says: “[There is] a divergence in people’s experience depending on their social and/or economic context in society . . . Differences in the mental health impact will persist and likely increase.” Or to put it another way, the key point about capital is that it can provide resilience in an economic, emotional, social and career sense. If you possess it, you started Covid-19 in a dramatically better place than those who do not.

There is no easy way to fix this tragic inequity; Piketty’s book (and the new film) make that clear. But it should worry us all. From a narrow economic perspective, rising inequity around our physical situations and mental health during Covid-19 is likely to drag down productivity, as economists such as Nicholas Bloom of Stanford have pointed out. 

From a political perspective, it is a recipe for corrosive bitterness. And from a moral perspective, it is simply wrong. So anybody who is lucky enough to have capital today — of whatever sort — should count their blessings, remember those who do not and then ask themselves this: how can I share mine, at least a little?

The sleeping giant wakes up

Thirty years after reunification, Germany is shouldering more responsibility

But it has is a lot more to do

Margaret thatcher feared and openly opposed the reunification of East and West Germany. François Mitterrand was said to have shared her worries, though he accepted it was inevitable. Giulio Andreotti repeated a popular quip: that he loved Germany so much, he “preferred it when there were two of them”. 

Yet despite the reservations of the British, French and Italian leaders in 1990, a new country came into being 30 years ago on October 3rd. 

With 80m people, it was immediately the most populous country and mightiest economy in a Europe that until then had had four roughly equal principals. Ever since, statesmen and scholars have grappled with the problem of how to deal with the reluctant hegemon at the heart of Europe. 

How should Germany lead without dominating? Indeed, after the enormities of Nazism, can it be trusted to lead at all?

Thirty years on, German reunification has been a resounding success. East Germans were freed from the dull yoke of communism. With just three chancellors in three decades, the new, liberated Germany has been steady and pragmatic. 

It has championed the expansion of the European Union to the east and the creation of the euro. It has powered solid if unspectacular growth across a continent—at least until covid-19. 

Europe survived the economic crisis of 2007-08, the euro panic of 2010-12 and the migration surge of 2015-16. Germany has thrown its weight around less than sceptics feared, though indebted southern Europeans are still sore about crisis-era austerity.

Under its next chancellors, Germany needs more ambition. The need is most acute when it comes to security. Military spending is rising in Germany, but remains far below the 2% of gdp that nato members are supposed to contribute. 

Even within Chancellor Angela Merkel’s Christian Democrats this is a touchy issue; it is even more so for her coalition partners, the Social Democrats, and for the Greens, who may help form the ruling coalition after next year’s election. More important, Germany has been too cautious in its policy towards Russia and China, tending to put commercial interests ahead of geopolitical ones. 

The construction of Nord Stream 2, a gas pipeline connecting Russia and Germany, is a case in point. It undermines the interests of Ukraine, Poland and the Baltic states, but until now Mrs Merkel has refused to cancel it, despite the outrageous behaviour of President Vladimir Putin. Nor has she listened much to those in her own party who warn that it is too risky to allow Huawei, a Chinese firm, to supply Germany with 5G telecoms equipment.

Still, there are signs of a shift. This week it emerged that Mrs Merkel had gone to visit the Russian opposition leader Alexei Navalny in hospital in Berlin, where he was recovering from being poisoned (by himself, Mr Putin claims). Huawei is to face steeper bureaucratic hurdles in Germany than previously envisaged, and Mrs Merkel is showing doubts, albeit faint, about Nord Stream 2. 

She increasingly accepts Emmanuel Macron’s argument that America is becoming an uncertain ally, and that Europe will have to do more to help itself no matter who wins November’s presidential election. This does not yet add up to a more assertive Germany leading a more assertive Europe, but it is a shift in the right direction.

Likewise, Germany needs to do more on the economic front. The pandemic has accomplished what the euro crisis did not, forcing the eu’s richer countries to show more solidarity with the poorer. 

The agreement over the summer to set up a €750bn ($880bn) recovery fund to be financed by common debt has been a crucial shift that Germany until recently would not have allowed. More than half of the fund will be given as grants rather than adding yet more debt to the highly indebted. 

The fund may yet be delayed; but it is a sign that Germany is at long last shouldering its responsibilities. More of this will be needed in the next 30 years if Europe’s currency union, and perhaps even the eu itself, are to survive. 

But the Bundesrepublik is growing up. 

What If Trump Won't Go?

Europe Preparing for the Worst in Washington

Concern is growing in the European Union that Donald Trump might refuse to recognize the election results if he loses. Preparations are underway for the worst-case scenario.

By Markus Becker, Christiane Hoffmann und Peter Müller

German Foreign Minister Heiko Maas with European counterparts Foto: Janine Schmitz / / imago images

A horror scenario is making the rounds these days in both Berlin and Brussels: Should the outcome of the U.S. presidential election on Nov. 3 be close, incumbent Donald Trump could declare himself the winner when polls close, even if he is behind in the vote count. He could prematurely and unlawfully claim the presidency.

One could imagine a scenario in which Brazilian President Jair Bolsonaro rushes to congratulate the "re-elected" U.S. president on election night, followed by Saudi crown prince Mohammed bin Salman, North Korean dictator Kim Jong Un and maybe even Russian President Vladimir Putin. Soon, though, the first congratulations from Europe might find their way to the White House, from Hungarian Prime Minister Viktor Orbán, for example, or his Polish counterpart Mateusz Morawiecki.

Should a constitutional crisis in fact develop in the United States following the election, there are widespread concerns in Europe that the EU could once again be deeply divided.

Presidential elections in the U.S. are always tense times for foreign policy experts in European capitals. Foreign Ministry staffers run through various scenarios for what the election result might mean for their country and for the European Union as a whole. The platforms of the two candidates are examined for commonalities and potential pitfalls, for areas of convergence and places where discussion might be fruitful. It is all quite routine.

Usually. This time, it's different.

It is about more than just the normal shift in U.S. foreign policy that happens when somebody new moves into the White House. It’s also about more than the risk that four more years of Trump could fatally damage the trans-Atlantic relationship.

The upcoming U.S. election is unique because in addition to the two possible outcomes, a third has also crept into the discussion: What happens if Donald Trump simply refuses to leave the White House even if he loses the election? Should that happen, the stability of democracy in the United States would be put to the test. It could even call into question the future of democracy as a form of government.

Behind-the-Scenes Planning

How can Europe prepare itself for such a scenario? Officials in Berlin and Brussels are wary of speculating publicly. They don't, after all, want to give Trump even more ammunition should he emerge victorious on Nov. 3.

But in background discussions, politicians and diplomats have made it clear that they see such a third scenario as a very real possibility.

Some politicians have even been open about their concerns. "I am aware of the danger that, should the results of the election be close, Trump could declare victory prematurely and the U.S. could find itself in a constitutional crisis," says Peter Beyer, a parliamentarian with Chancellor Angela Merkel's Christian Democrats (CDU) and the German government's trans-Atlantic coordinator. Everybody must consider such a scenario, he says: "Years ago, such a thing was inconceivable."

In Brussels, a senior EU diplomat recently sent a confidential report -- which DER SPIEGEL has seen -- from Washington, in which he warned that such a scenario cannot be discounted. The report notes that the U.S. is at risk of stumbling into such a crisis, which could last for several months and have significant negative consequences for the rest of the world.

Trump campaign event in Florida Foto: Jonathan Ernst / REUTERS

A senior official in Germany's Foreign Ministry is a bit more circumspect in his formulation: "It cannot be excluded that, if the results are close, the situation might be uncertain immediately afterwards, as was the case in 2000, for example." 

That year, a lack of clarity about who had won the election led to a recount. The Supreme Court then stopped this process in Florida, handing the election to George W. Bush.

Still, as one European commissioner pointed out in a background interview, more than two months separate the election in the U.S. and the inauguration of the winner on Jan. 20 - enough time, the commissioner hopes, for the U.S. to clarify the results. 

Reinhard Bütikofer, a Green Party lawmaker in the European Parliament, adds: "If we're smart here in the EU, we'll keep our mouths shut and hope that U.S. democracy is strong enough to solve the problem."

But not everybody wants to sit back and wait. "We in Germany and Europe have to prepare," warns Beyer, the trans-Atlantic coordinator. In Berlin, he says, too many people are content to simply hope for the best. "But we can't afford the luxury of biding our time."

Split in the EU?

Some diplomats are concerned that if a constitutional crisis does develop in the U.S., the EU wouldn't even be able to agree on a common position. "If the result of the U.S. election isn't completely clear, European admirers of Donald Trump could rush to his side and drive the EU apart," warns Franziska Brantner, the German Green Party's leading parliamentarian on European affairs. "That is a real danger."

Brantner warns that, as the current holder of the rotating presidency of the Council of the EU, Germany carries the responsibility for "preventing the EU from drifting apart after the U.S. election." She adds: "My impression is that Berlin isn't doing enough to address this scenario, particularly when it comes to other EU capitals."

There are, however, competing interests within the EU. The majority of the bloc's 27 member states is hoping for a victory for Democrat Joe Biden, who they hope will steer the U.S. back to its traditional multilateral approach as a reliable alliance partner. But countries like Hungary, Poland and the Czech Republic prefer a Trump victory.

Thomas Kleine-Brockhoff, deputy head of the German Marshall Fund and leader of the think tank's representation in Berlin, sees three European camps. "That of the French, who want strategic autonomy, that of the Eastern Europeans, who engage in strategic embrace, and that of the Germans, whose commitment to strategic patience sometimes leads to strategic inertia."

France is convinced that, because of structural changes in the world, the relationship between Europe and the U.S. is changing so fundamentally that the election result will not have a decisive influence. Leaders in Poland are hoping for Trump's re-election, but they could also live with Biden, who hasn't been shy about reiterating his critical approach to Russia.

"The approaching U.S. election isn’t as important for any other European government as it is for the German government," says Kleine-Brockhoff. "Germany believes that the world order is at stake in this election."

Push to Send Election Observers

It seems likely that the EU heavyweights will initially remain silent, should the results in the U.S. be unclear. But that would become more difficult if Trump were to ignore a clear Biden victory. Would the EU then dare to declare Trump's presence in the White House illegitimate, as it did most recently following Alexander Lukashenko's claim to power in Belarus? 

"If it is blatant, the EU would have to quickly take a position," says Elmar Brok, a former long-time European Parliament member with the CDU. "It couldn't act differently than it does in other instances."

Hungarian Prime Minister Viktor Orbán in Brussels Foto: Thierry Monasse / Polaris / laif

It is seen as a virtual certainty that the European Parliament would pass a sharply worded resolution should Trump attempt to illegally cling to power. But that's not enough for Martin Schirdewan, floor leader for the Left Party parliamentary group. If the EU wants to be a leading defender of democracy, that ambition has to apply to the U.S. just as it does to places like Belarus, he says.

As such, Schirdewan is calling for the EU to send election observers to the U.S., just as the bloc most recently did for the vote in Nigeria. "The EU must push the U.S. government and also state governments to allow neutral EU election observers," Schirdewan wrote in a letter sent to European Commission President Ursula von der Leyen and European Parliament President David Sassoli.

"There are many indications that Trump will try to manipulate the election results or won't recognize a loss," the Left Party politician continues. "If the EU is serious about its appeals for democracy and multilateralism, then the only choice it has is to send election observers." Such a thing, though, would only be possible if they were invited by the U.S., which is extremely unlikely.

"Far Too Fixated" on U.S. Election

The U.S. election has also begun to affect political planning in the EU. One example is the trans-Atlantic dialogue on China, which the EU foreign policy chief, Josep Borrell, proposed in June following a video conference with EU foreign ministers and U.S. Secretary of State Mike Pompeo. Although both Borrell and Pompeo would like to launch the talks, the project has gone nowhere.

With the election looming, it doesn't seem like there will be anything more than a telephone call between the two on the issue. Many EU member states, including Germany, are opposed to launching a project with the Trump administration so close to Election Day, particularly given the danger that it could provide Trump with last-minute ammunition to declare himself a multilateralist who is valued as a partner across the globe.

The EU is also holding back on trade policy to avoid making any move that could help Trump. On Tuesday, for example, the World Trade Organization (WTO) granted the EU permission to introduce punitive tariffs on almost $4 billion worth of U.S. goods per year. The ruling came after Washington imposed such tariffs on EU imports in response to Brussels subsidies for Airbus. Now, the EU is allowed to respond in kind due to U.S. government assistance provided to Boeing.

But some EU member states, particularly Germany, are urging patience. They are concerned that Trump could take advantage of such punitive tariffs in the final days of the campaign. Diplomats say they want to avoid giving Trump such a gift at all costs.

The European Commission, which is responsible for foreign trade issues, is also reserved. In all likelihood, say Commission sources, Europe will refrain from levying sanctions ahead of the U.S. election, particularly given that such a move could be interpreted as political meddling. The hope is that a solution can be negotiated after the election instead of immediately confronting a possible Biden administration with a trade conflict.

At the same time, there are those who warn against expecting too much from the November vote. "We are far too fixated on the U.S. election," says Sigmar Gabriel, head of the trans-Atlantic think tank Atlantik-Brücke and former German foreign minister. "It's as if Europe's fate depended on this election."

Europe's problems, Gabriel says, have nothing to do with the U.S. "We'll continue to have those problems no matter who is sitting in the White House." 

Former National Security Adviser H.R. McMaster

“There Is a Strange Tendency in the U.S. to Hold Trump Responsible for All Evil”

H. R. McMaster served as Donald Trump's national security adviser until the president fired him. In an interview, he discusses Putin's unscrupulous behavior, the future of NATO, trench warfare in the White House and why he believes Germany should scrap its gas pipeline project with Russia.

Interview Conducted By René Pfister

Retired General McMaster: "It expresses a remarkable level of self-loathing." Foto: Ray Kachatorian

Herbert Raymond McMaster is able to look back on a long career in the United States Army. When the Iron Curtain fell in Europe, he was stationed in Bavaria as an officer in an Armored Cavalry Regiment that patrolled the border between West and East Germany. In February 1991, he commanded a battle during the Gulf War in Kuwait in which 28 Iraqi tanks were destroyed within minutes.

In February 2017, Donald Trump appointed the three-star general as his national security adviser. Once in the White House, McMaster quickly locked horns with the president. He urged the U.S. government to stand by its European partners and advised the president not to withdraw from the Paris climate agreement, which made him a target for Trump’s chief adviser Steve Bannon, who wanted the president to pursue a populist course.

The right-wing website Breitbart, where Bannon had worked for years, launched a smear campaign against McMaster. When McMaster later publicly contradicted Trump and declared it was "undeniable” that the Kremlin had interfered in the 2016 presidential election, it didn’t take long before the president fired him. Today, McMaster, 58, is a researcher at Stanford University in California. His new book, "Battlegrounds: The Fight to Defend the Free World,” was published by HarperCollins in September.

DER SPIEGEL: General McMaster, you witnessed the fall of the Iron Curtain firsthand in November 1989 -- as a captain in the 2nd Armored Cavalry Regiment stationed on the West German border to East Germany. It was one of the greatest American foreign policy triumphs of the 20th century. Now, however, China is rising to become a new world power and Russia is obviously trying to manipulate the American presidential elections again. How could it come to this?

McMaster: We won the Cold War, but victory gave us over-optimism and complacency In the United States and Europe, we thought that with the collapse of the Soviet Union, free and democratic societies would finally prevail. We believed that the era of great power competition was over and that the peoples of the world would from now on tackle the great global problems together. The victory in the Gulf War in 1991 also reassured us that the U.S. and NATO militaries, because of our strength and technical superiority, were unbeatable. All of these assumptions proved false and resulted in a bitter disappointment.

DER SPIEGEL: To what extent?

McMaster: The Sept. 11, 2001, attacks proved that a box knife is enough to hijack an airplane and murder 3,000 people. In addition, global power competition is coming back: China is threatening its neighbors in the South China Sea and trying to suppress the freedom movement in Hong Kong. And Russia dreams of being a great power again, which was shown, among other things, in the annexation of Crimea and the invasion of eastern Ukraine. The Europeans reacted too slowly to this, and the U.S. also made the mistake of withdrawing troops from Europe as Putin became more aggressive.

DER SPIEGEL: Who is the greatest threat to the free world at the moment? Russia, China -- or Donald Trump?

McMaster: It is certainly the revisionist authoritarian regimes of Russia and China. But maybe even a bigger threat may be the loss of confidence in democratic institutions and processes. This problem existed before Trump. He reflects more than amplifies divisions in our society. Our loss of confidence is due in part to unchecked globalization that left many American workers without jobs.  Many felt abandoned by the political establishment.  Then came the financial crisis that made a bad situation worse. The financial crisis also encouraged China to take advantage of the perceived weakness of our free market economic system and act even more aggressively on the world stage.

DER SPIEGEL: Many of the U.S.’ partners view the man in the White House and not China and Russia as the main threat. According to a poll published just a few months ago, Germans trust Vladimir Putin and Chinese ruler Xi Xinping significantly more than they do Trump. How do you explain this rather sobering finding?

McMaster: I think it expresses a remarkable level of self-loathing and moral equivalency that is the bane of the West these days. We all live in democratic countries. We enjoy the rule of law, a free press and a market economy that rewards initiative -- and at the same time, we fail to recognize how much autocratic countries stifle human freedom.

DER SPIEGEL: You had no illusions about the president’s character when you took up your post in the White House. Why did you choose to serve this man anyway?

McMaster: I saw it as my duty to serve any elected president. Since joining the military, my role model has been General George Marshall. He was the architect of the American victory in World War II and then planned the reconstruction of Europe. Marshall never took part in an election in his life. I did the same thing. I am not a supporter of a party; I do not want to be drawn into political trench warfare. 

But in Iraq and Afghanistan, as a soldier, I had to implement strategies that made little sense to me. They were based on some fantasy in Washington, but not the reality of the war on the ground. So, I wanted to take the opportunity to correct the strategic deficits that we have already talked about. 

I wanted the president to be able to base his decisions on the best possible analysis and expertise. But of course, I also had an inkling that it would be challenging to serve in the toxic partisan environment.

DER SPIEGEL: Did you know that your term in your position was coming to an end when the right-wing website Breitbart started a campaign against you and the hashtag #fireMcMaster began circulating online?

McMaster: It was meant to make my job impossible. Behind this are people who weren't interested in serving the president, but had their own agenda. I chose to ignore it and focus on my job.

DER SPIEGEL: You’re talking about Steve Bannon, who was then Trump’s chief strategist, right?

McMaster: It was a number of people who saw the effectiveness of our process as an impediment to their narrow agenda.

DER SPIEGEL: Bannon and others wanted the president to follow an isolationist course. You successor was John Bolton, the fiercest hawk in the Republican foreign policy camp.

McMaster: There may be an element of poetic justice in that contradiction.

DER SPIEGEL: In your book, you primarily describe Russia as a threat to the free world. What is dangerous about Putin?

McMaster: Putin doesn't feel bound by our moral standards. For example, there is irrefutable evidence that the Russians shot down a passenger plane over Ukraine in 2014. Putin tried to kill former Russian intelligence officer Sergei Skripal with a nerve agent, endangering the lives of thousands of British citizens. Most recently, he tried to poison the regime critic Alexei Navalny. Putin denies all of this. He believes the West is weak and he can get away with murder, sometimes literally.

DER SPIEGEL: Many Germans remember another Putin who gave a speech in fluent German in the German federal parliament at the end of September 2001 -- a few days after the attack on the World Trade Center -- and who campaigned for peaceful coexistence between the U.S., Russia and Europe. Was it a mistake to turn down Putin's outstretched hand?

McMaster: In the 1990s, the U.S. and the Europeans paid billions to Russia to help the country transform itself into a market economy. That failed because a criminal patronage network spread across Russia, which first brought down Boris Yeltsin and then promoted Putin's rise. In a speech in 2000, Putin himself declared that he wanted to restore his country to its old national greatness. We should not make the mistake of holding ourselves responsible for the most egregious acts of our enemies. This is what I call strategic narcissism in my book.

"I think the likelihood of (us leaving NATO) is very slim. We are not a monarchy. In such a decision, Congress would also have a say."

DER SPIEGEL: Many Russians say that after the end of the Cold War, the West paid too little attention to the country's strategic sensitivities. George W. Bush wanted Georgia to join NATO in 2008. Barack Obama called Russia a "regional power.”

McMaster: (laughs bitterly) Ok, all right. We offended Putin, and that is why he is now allowed to run a campaign to undermine our democracies? I suppose it also explains why Putin is allowed to oppress his own people and bend the Russian constitution so he can remain czar until 2036? That really makes no sense to me. As for the enlargement of NATO and the EU, should we really have said "no” to nations that have regained their freedom: "We are very sorry, but you are not allowed to join the EU because Russia does not want you to”?

DER SPIEGEL: No. But the U.S. didn't care about Cuba's sovereignty either when it supported the attempted coup in the Bay of Pigs in 1961 and imposed a sea blockade on the island during the Cuban missile crisis in 1962.

McMaster: The sovereignty of a country that doesn't give a damn about human rights? I'm sorry, but I just don’t by that moral equivalency.

DER SPIEGEL: There is a consensus across party lines in Washington that the German government should stop the Nord Stream 2 gas pipeline project with Russia. Do you agree?

McMaster: Of course. Why do our German allies want to give Putin, of all people, influence over their economy and energy supply? Nord Stream 2 is based on a corrupt deal made by a former German chancellor who sits on the board of directors of a Russian state-owned company. The U.S. helped build a postwar order that has given Europe, and especially Germany, enormous advantages. It is sad for me to see that our German friends have not done more to counter the Russian czar who is aggressively undermining our democracies and our alliance.

DER SPIEGEL: Trump’s challenger Joe Biden is promising to regain the trust of the country’s partners if he wins the election.  Is that even possible? With Richard Grenell, the Germans experienced a U.S. ambassador, who helped ensure that almost 12,000 American soldiers are withdrawn from Germany.

McMaster: The troop withdrawal is a mistake, there is no question about that. On the other hand, we have seen these fluctuations in U.S.-German relations several times. The Germans oscillate back and forth between the rejection of an American troop presence and the paranoia that we Americans are leaving them in the lurch. That was already the case during the Cold War. But know who will bring us back together? Vladimir Putin. I think he can be relied on because in the end everyone will understand how determined he is to divide us.

DER SPIEGEL: It appears that Trump came close in the summer of 2018 to declaring the U.S.’ withdrawal from NATO. Should the NATO partners be preparing for the possibility of Trump taking that step during a second term in office?

McMaster: NATO is more important than ever. There are new dangers that require common defense: cyberattacks on our communication channels or the digital processing of our financial transactions. Putin helped make the mass murder in Syria possible and thus created a refugee crisis that led to political upheaval in Germany. NATO is more important than ever to confront these and other emerging threats to our security and way of life.

DER SPIEGEL: But Trump is encouraging the Russian president to test NATO’s dependability.

McMaster: That's why it's important for Germany to show how much it stands for the alliance and stands strongly against Putin’s campaign of subversion. For example, by increasing its defense spending.

"I clearly condemned the president's words. They are wrong and a danger to our democracy."

DER SPIEGEL: Your successor, John Bolton, announced a few weeks ago that it was conceivable that Trump would leave NATO in a second term.

McMaster: I think the likelihood of that is very slim. We are not a monarchy. In such a decision, Congress would also have a say.

DER SPIEGEL: At the beginning of Trump's term in office, experienced military officials and business people joined the government to protect the president from his worst reflexes. Is that even possible?

McMaster: Above all, I think it's the wrong understanding of job. The only man elected in the White House is the president. If someone is deliberately undermining the president's agenda, he is working against the American constitution and ignoring the sovereign will of the American people.

DER SPIEGEL: Are you not to blame if you refuse to warn against a president who clearly has no respect for the democratic rules and who does not even want to guarantee a peaceful transfer of power in the event that he loses?

McMaster: I clearly condemned the president's words. They are wrong and a danger to our democracy.

DER SPIEGEL: John Bolton has made it absolutely clear that he thinks Trump is incompetent. It appears that you feel the same way. Why don't you say it?

McMaster: There is a strange tendency in the U.S. to hold Trump responsible for all evil. He certainly contributed to the division in American society, but he is more a symptom than the cause. If Republicans and Democrats are constantly at each other’s throats, we will not be able to solve our country's most pressing problems or strengthen our response to adversaries.

DER SPIEGEL: Will you break your habit on Nov. 3 and vote for the first time in your life?

McMaster: I will vote, but I will not engage in partisan politics.

DER SPIEGEL: General McMaster, we thank you for this interview.

The LEAST Important Election Of Our Lifetimes

A consensus seems to have formed on both left and right that the upcoming presidential election involves some literally existential questions, making it THE MOST IMPORTANT ELECTION OF OUR LIFETIMES.

In fact, the opposite is true. This election is the least important of the past 30 years and very possibly the least important ever. Because, to put it bluntly, we’re kind of screwed either way.

Let’s consider some of those supposedly existential threats:

A Politicized Supreme Court

As this is written, Senate hearings on the nomination of Trump’s third Supreme Court Justice are in progress. Democrat questioners seem to be mainly concerned that a conservative Court would eliminate Obamacare and Roe v Wade, consigning women and the poor to circa 1915 levels of degradation and neglect.

Leaving aside the question of whether Obamacare and Roe were Constitutional in the first place, let’s consider what would happen if they’re overturned.

Would the elimination of Roe v Wade mean that abortion becomes illegal from coast to coast? Not at all. States containing 70 or so percent of the US population would immediately legalize abortion within their borders while making provisions to ferry in pregnant women from neighboring non-choice states. The result: The issue moves back into the legislative realm where actual voters get to have a say and the procedure remains available for the vast majority of American women. Not ideal for folks on either side of the issue, but par for the course in a Democracy where citizens seldom get all that they want. And certainly not an existential threat.

With Obamacare, the issue is not the whole program, but just its “mandate” provision through which the government orders every American to buy health insurance and penalizes us if we don’t. Striking it down as beyond the scope of Federal power does not mean that Obamacare – or any other healthcare entitlement – goes away. It would continue as before but without the government ordering people to participate. A little bit harder to administer perhaps, but probably not the end of the program and, again, certainly not the end of the world.

In any event, 49% of Democrats want to replace Obamacare with a single-payer system like Medicare For All, and the demise of Obamacare might speed up that process, thus improving the world from a liberal perspective.

Meanwhile, conservatives fear that the Democrats, should they retake control of the White House and Senate, will “pack the Supreme Court” by decreeing that it should have, say, 15 judges instead of the current 9 and then adding 6 liberals, to turn the court into a permanently liberal branch of Congress.

So how big a threat is a politicized Supreme Court? Obviously not too big, since Justices have been “legislating from the bench” for decades (Roe dates from 1973) and activists on both right and left continue to complain that the other side is winning. Sounds like business as usual whoever is the next president.

World War III

This is just filler because the military/industrial complex is obviously in charge either way.  Under Trump, we’re liable to be fighting China or Iran by this time next year while under Biden, WWIII will probably feature Russia. The details differ but our kids are cannon fodder in both scenarios.

Rampant corruption

Let’s just agree that Trump, Biden, Harris, and Pence are each in their own way corrupt and/or unethical. But since two of them will end up running the country come November, from a corruption standpoint does it really matter which two?

The environment

This seems like a legitimate potential difference — until you notice a couple of things. First, Trump has talked about rolling back regulations to “save” coal and boost fracking, but he’s actually accomplished very little. Coal is still dead and fracking is moribund.

Second, solar power is eating the electricity business. Here’s a chart showing how solar installations are soaring even as Trump tries to save coal. As the cost of solar keeps falling, it will eventually dominate the energy economy, and there’s nothing Trump can do to stop it.

Solar power installations least important election

And don’t forget cultured meat and vertical farms, which will, over the next couple of decades, do to factory agriculture what solar is doing to coal and natural gas.

Meanwhile, the Dems’ Green New Deal (which Biden in any event has disavowed) would, even in its most ambitious form, accomplish very little for the environment beyond what solar and other clean technologies will inevitably do via the free market.

The conclusion: Trump isn’t nearly the environmental threat he’s made out to be, and Biden isn’t that much of a savior. Technology and new business models are the big story here, and they don’t care who’s in charge.

Irresponsible borrowing

Each side accuses the other various kinds of financial impropriety. But the truth is that both are operating on an unspoken agreement to spend, borrow, and print whatever it takes to stave off a collapse brought about by past mismanagement.

The following chart shows the increase in US government debt over the past three administrations. Note that in the absence of labels you can’t tell by the amounts borrowed whether Democrats or Republicans were in charge in any given year.

US government debt least important election

The conclusion? 

If Trump wins he’ll continue to run trillion-dollar deficits. 

If Biden wins, he’ll borrow that much or more. 

Neither will scale back the military budget or soaring entitlements. 

And both will encourage, via zero and possibly negative interest rates, the private sector to continue its own borrowing binge. On fiscal policy, these guys are virtually indistinguishable.

Fascist dictator!

It’s amazing how many Democrats literally expect Trump to ignore the coming election and just declare himself dictator.

Please listen, liberals: Trump is trolling you. He’s a narcissistic stand-up comedian who finds himself with a vast audience of emotional children, and he’s doing what any self-respecting comic would do: He’s freaking you out. So pretend you’re at a stage-side Comedy Store table and just roll with it. When his set is over, he’ll drop his mike and amble off to his next gig.

Meanwhile, it’s equally amazing that conservatives look at Court stacking, the Green New Deal and other liberal power grabs as a prelude to an updated version of Orwell’s 1984. This is Joe Biden we’re talking about. He’s been a feckless political hack for longer than most voters have been alive and has never once displayed the ambition required to set up a dictatorship.

As President, he will take corporate donations and follow the orders implicit in those legal bribes. The result will be Clinton/Obama business as usual, not revolution.

Granted, Biden will likely die or lose what’s left of his mind before his first term ends. And yes, Kamala Harris is an instinctive authoritarian. But she has the same moral flexibility as the Bidens, Obamas and Clintons, which just implies a slightly nastier version of the status quo. Again, plenty of run-of-the-mill corruption and brutality, no coup in sight.

So the very real personality defects of this crop of candidates are an annoyance rather than a danger. And as such, they’re easily managed. Just don’t watch Fox or MSNBC and the coming political mess will wash over you like the smell from a passing garbage truck, unpleasant but ephemeral.

What DOES Matter?

The coming financial crisis of course. The pandemic turbocharged a process of hyper-financialization that was already underway, and now whoever is in charge next will have no choice but to keep bailing out everything in sight with tens of trillions of newly created dollars.

This will shift the pressure from bankrupt states and insolvent companies to the currency. Prices will start to rise as the dollar falls. And the fears of today’s voters will seem in retrospect like quaint fantasies from a simpler and embarrassingly naïve time.

And that’s when dictatorship becomes a real possibility. Not Because Trump or Biden are implementing long-held plans but because they are panicked by events spinning out of their control and have literally no idea what to do. This is a legitimately scary prospect. But the coming election will have nothing to do with it one way or the other. Buy gold now.

The Limits of American Recovery

While most of the Global North has reached a state of cautious optimism after confronting COVID-19 head on, the United States continues to stand out for its persistently high rates of death and infection. This public-health failure, and the political dysfunction underpinning it, will remain a drag on economic performance.

J. Bradford DeLong

BERKELEY – The United States is home to 4% of the world’s population but 21% of confirmed COVID-19 deaths; it accounts for 25% of the Global North’s population but 50% of its excess mortalities (deaths from all causes above the usual rate) registered during the pandemic.

Moreover, America’s current cumulative cases per million are almost four times higher than in the European Union (though the latter itself appears to be experiencing a second wave). While the US continues to lose around 1,000 people to COVID-19 each day, the EU’s daily death toll is closer to 300, and Asian countries in the Global North are losing almost nobody. And no, this is not a continental North American problem: Canada loses only around ten people per day to the virus.

After so many months of failure to confront the pandemic, America’s world-leading fatality and infection rates are no longer a surprise. The question is what the current trajectory of the pandemic means for the US economic recovery.

The first thing to bear in mind is that a recovery from the initial pandemic-induced depression earlier in the year is already around 60% complete. After falling from 80.5% in February to 69.7% in April, the employment rate for prime-age workers (25-54 years old) climbed back to 75.3% in August. As of the time of this writing in late September, it has probably increased to around 76.5%. But, for comparison, that is around where prime-age employment was at the nadir of the 2008-09 Great Recession.

A second point to note is that the recovery experienced so far may represent all that the US will get for now. Just because the economy has recovered by 60% doesn’t mean that it will get all the way back to 100%. After all, the current recovery is unfolding in the shadow of the recovery from the 2008 financial crisis and Great Recession, which was also a period of zero-lower-bound interest rates.

It is worth remembering that this previous recovery did not feature a recovery in production, which remained as far below its pre-crisis trend as it had been when the unemployment rate was at its peak. As employment recovered slowly after the Great Recession, productivity continued to lag ever-further behind. But, because there was a persistent lag in output, too, this lack of productivity growth allowed for employment eventually to recover.

One lesson of recent history, then, is that modern market economies after a crisis seem to require not just the standard contributions of entrepreneurial capitalism but also an additional boost from another spending channel to drive production back up to its previous trend. But when interest rates are already near zero, such stimulus cannot come from further monetary easing – as indeed it did not after the Great Recession. Worse, it is becoming increasingly unlikely that stimulus in the future will come from expansionary fiscal policy – the obvious alternative to interest-rate cuts – owing to debt concerns and political gridlock.

Yet another cause for fear is the prevalence of the virus itself. The average of 1,000 COVID-19 daily deaths being recorded each week implies that there are 10,000 symptomatic cases emerging every day. That is enough to worry anyone who ventures out of her house. With such a persistently high risk of contracting the virus, US consumers will continue to be much more cautious than their counterparts in Japan, Canada, or Germany when it comes to returning to semi-normal economic activities like dining out or air travel.

As such, even if America could stage a rapid recovery and restore employment to its previous levels, the justifiable fears of US consumers would pose a significant hurdle to sustained growth, as would the glaring absence of business investment in today’s economic climate.

That leaves only the government to serve as an engine of recovery. But the US government is currently led by President Donald Trump, a leader who has consistently failed every test posed by the pandemic. Making matters worse, his closest advisers apparently regard high unemployment and waves of small-business bankruptcies as salutary developments that will strengthen American’s work ethic in the long run.

As for the Democratic presidential contender, Joe Biden, it remains to be seen whether he will accept the federal government’s role as employer of last resort. In the meantime, while the rest of the Global North is well on its way to recovery, America will remain mired in political acrimony, economic malaise, and potentially an even deeper existential crisis after Election Day on November 3.

J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.