Germany’s bridges to Russia split open Europe

Outreach to Moscow risks ignoring the concerns of central and eastern EU countries

Tony Barber 

    © James Ferguson

No western country’s relationship with Russia is more burdened with history than Germany’s. In June will fall the 80th anniversary of the Nazi invasion of the Soviet Union, prelude to titanic battles and wartime atrocities that still affect Germany’s self-image and weigh heavily on official attitudes to Russia.

None of this serves as an excuse, however, for some ill-judged remarks that Frank-Walter Steinmeier, Germany’s president, made last week on German-Russian relations. 

In a newspaper interview, he defended the Nord Stream 2 pipeline project, intended to deliver Russian gas to Germany across the Baltic Sea, as one of the few bridges between Russia and Europe in an otherwise deteriorating diplomatic and security climate.

Steinmeier went on to say that “for us Germans, there is another dimension” — the more than 20m Soviet people killed in the second world war. “That doesn’t justify any wrongdoing in Russian policy today, but we must not lose sight of the bigger picture,” he said.

The trouble with Steinmeier’s defence of Nord Stream 2 as repayment of a moral debt to Russia is that the president made no mention of other countries laid waste between 1939 and 1945 at Nazi hands. 

Russia became the legal successor state to the Soviet Union in the UN Security Council after the end of communism in 1991. But Russians are not the sole successor nation in terms of moral debts, as Ukraine’s ambassador to Berlin was quick to point out.

Indeed, the list of European countries that could claim to be owed a German moral debt is distressingly long and extends far beyond the borders of the defunct USSR. 

Without question the former West Germany, and the reunified German state after 1990, have made amends for Nazi crimes with admirable perseverance and a high sense of responsibility. But Steinmeier’s remarks underline how Russia, for many German politicians and business executives, remains a special case.

Germany’s Nord Stream 2 partnership with Russia arouses apprehension in parts of central and eastern Europe where historical memories last for centuries. Poland was wiped off Europe’s map for 123 years because of three partitions between 1772 and 1795 organised chiefly by Prussia and Russia. 

The Nazi-Soviet pact of 1939 was the prelude to another two-pronged attack on Poland.

Nord Stream 2, a project so close to completion that it may be too late to stop, carries no threat of territorial annexations or military aggression. But to the countries that lie between Germany and Russia, it looks like another arrangement made over their heads and with a scandalous lack of attention paid by Berlin to their concerns.

The implications for the EU may be profound. The professed ambition of the 27-nation bloc is to act like a strategically mature power with a coherent, united foreign and security policy. 

However, for the Baltic states, Poland and others, the lesson of Nord Stream 2 is not to entrust their freedom to some nebulous concept of EU security when Germany single-mindedly pursues bilateral deals with Russia.

For central and eastern Europeans, the crucial protector of their independence is not the EU but the US. In this way, defence and security can be added to the rule of law, media pluralism and migration as one more area where disputes divide some of the EU’s western European member states from some in central and eastern Europe.

The striking feature of Germany’s engagement with Russia is its broad cross-party support. Chancellor Angela Merkel has kept EU sanctions on Russia for its annexation of Crimea in 2014 and armed intervention in south-eastern Ukraine, but she is supportive of Nord Stream 2. 

The approach of Armin Laschet, the new leader of Merkel’s Christian Democratic party, seems less nuanced. When Russian president Vladimir Putin was busy seizing Crimea, Laschet criticised what he called “anti-Putin populism” in Germany.

Heiko Maas, Germany’s Social Democratic foreign minister, defends Berlin’s dealings with Moscow on the grounds that western countries must take care not to push Russia into closer economic and military co-operation with China. 

As for the rightwing populist Alternative for Germany and the leftist Die Linke parties, they disagree with the CDU and SPD on most things, but not on reaching out to Russia.

Yet what is the Kremlin giving Germany in return? The Bundestag was the target of a cyber attack in 2015 that the German authorities blamed on Russia. 

Four years later, an exiled Chechen rebel leader was murdered in Berlin on what prosecutors say were the Russian government’s orders.

In short, the argument that a close economic and energy relationship with Russia brings dividends in European security appears shaky, at least in the Putin era. 

The question German politicians should ask themselves is not how big their country’s moral debt to Russia is, but whether Nord Stream 2 and other bridges to Russia are achieving any worthwhile results.

Biden and the Fed Leave 1970s Inflation Fears Behind

Administration and Fed officials argue that workers not getting enough stimulus help is a larger concern than potential spikes in consumer prices.

By Jim Tankersley and Jeanna Smialek

Federal Reserve Chair Jerome H. Powell has brushed off concerns about inflation, saying the bigger risk to the economy is doing too little rather than doing too much.Credit...Pool photo by Susan Walsh

WASHINGTON — Presidents who find themselves digging out of recessions have long heeded the warnings of inflation-obsessed economists, who fear that acting aggressively to stimulate a struggling economy will bring a return of the monstrous price increases that plagued the nation in the 1970s.

Now, as President Biden presses ahead with plans for a $1.9 trillion stimulus package, he and his top economic advisers are brushing those warnings aside, as is the Federal Reserve under Chair Jerome H. Powell.

After years of dire inflation predictions that failed to pan out, the people who run fiscal and monetary policy in Washington have decided the risk of “overheating” the economy is much lower than the risk of failing to heat it up enough.

Democrats in the House plan to spend this week finalizing Mr. Biden’s plan to pump nearly $2 trillion into the economy, including direct checks to Americans and more generous unemployment benefits, with the aim of holding a floor vote as early as next week. 

The Senate is expected to quickly take up the proposal as soon as it clears the House, in the hopes of sending a final bill to Mr. Biden’s desk early next month. Fed officials have signaled that they plan to keep holding rates near zero and buying government-backed debt at a brisk clip to stoke growth.

The Fed and the administration are staying the course despite a growing outcry from some economists across the political spectrum, including Lawrence Summers, a former Treasury secretary and top adviser in the Clinton and Obama administrations, who say Mr. Biden’s plans could stir up a whirlwind of rising prices.

No one better embodies the sudden break from decades of worry over inflation — in Washington and elite circles of economics — than Janet L. Yellen, the former Federal Reserve chair and current Treasury secretary. 

Ms. Yellen spent the bulk of her career fighting in a war against inflation that economists have been waging for more than a half century. 

But at a time when the American economy remains 10 million jobs short of its pre-pandemic levels, and millions of people face hunger and eviction, she appears to be ready to move on.

President Biden and Janet Yellen, the Treasury secretary, are pursuing a $1.9 trillion stimulus package to help struggling households and businesses make it through the pandemic downturn.Credit...Pete Marovich for The New York Times

“I have spent many years studying inflation and worrying about inflation,” Ms. Yellen told CNN earlier this month. “But we face a huge economic challenge here and tremendous suffering in the country. We have got to address that. That’s the biggest risk.”

In the guarded language of a Fed chair, Mr. Powell used a speech last week to push back on the idea that the economy was at risk of overheating. 

He said that prices could show a brief pop in the coming months, as they rebound from very low readings last year, and he said the economy could see a “burst” of spending and temporarily higher inflation when it fully reopened. 

But he said he expected such increases to be short-lived — not the sustained spiral that many economists worry about.

“That’s really not going to mean very much,” Mr. Powell said, noting that inflation has trended lower for decades. “Inflation dynamics will evolve, but it’s hard to make the case why they would evolve very suddenly, in this current situation.”

A small but influential group of economists is questioning that view — in particular, calling for Mr. Biden to scale back his economic aid plans, which include sending direct payments to most American households, increasing the size and duration of benefits for the long-term unemployed and spending big to accelerate Covid vaccine deployment across the country.

They argue that the size of the package outstrips the size of the hole the coronavirus has left in the economy. With so many dollars chasing a limited supply of goods and services, the argument goes, purchasing power could erode or the Fed might need to abruptly lift interest rates, which could send the economy back into a downturn.

“It’s hard to look at all those factors and not conclude there’s going to be inflationary pressure,” said Michael R. Strain, an economist at the conservative American Enterprise Institute who supported relief efforts earlier in the recession but was among the first economists to warn Mr. Biden’s plans could set off price spikes. “My worry is that by pushing the economy so hard, that will lead to some overheating.”

Mr. Summers, who is an economist at Harvard, warned in a Washington Post column that “judged relative to either the macroeconomic output gap or declines in family incomes, the proposed Covid-19 relief package appears very large.” 

There is a chance, he added, that Mr. Biden’s efforts “will set off inflationary pressures of a kind we have not seen in a generation.”

Such warnings were a familiar refrain from conservative economists who opposed going big on stimulus during and after the 2009 recession, when Mr. Biden was vice president and Mr. Summers was a top economic aide. 

They did not materialize: Inflation ran below the Fed’s 2 percent target rate for a decade after the crisis, and Mr. Obama’s $800 billion package has since been judged by many economists to have been too small. That shortfall contributed to sluggish growth and a painfully long recovery for lower- and middle-income Americans.

A shuttered building in Culver City, Calif., last month.Credit...Jenna Schoenefeld for The New York Times

“The onus should be on anybody who says the economy is about to overheat,” said Austan Goolsbee, a former head of Mr. Obama’s Council of Economic Advisers. 

“There have been many prominent voices saying that — that there was about to be inflation — for more than 10 years.”

And the fact that the Fed is brushing off overheating concerns is emboldening some Democrats.

“Earlier today, Fed Chair Powell gave an important speech about the state of our economy and what we need to do to get back on track,” Bharat Ramamurti, deputy director of the National Economic Council, said on Twitter Wednesday. “His remarks help back the case President Biden has been making for the American Rescue Plan.”

Many economists have déjà vu when it comes to overheating warnings. Nathan Sheets, a former Treasury official, was global head of international economics at Citigroup in the early 2010s. He recalls hearing worried murmurs about runaway inflation during meetings from London to New York.

“People were really, really sweating,” he said, noting that he, too, fretted that prices might take off. “It just didn’t happen. The world has changed in meaningful ways and the risks of overheating and high inflation are much less pronounced.”

Inflation warnings are a remnant of the late 1960s and 1970s, when American prices were driven relentlessly higher by wage increases, an oil embargo and geopolitical developments.

The result was uncomfortable — restaurants updated their menu prices with stickers; The New York Times reported in 1980 that Manhattan’s “69 Cents Shops” had decided to rebrand to the “88 Cents Shops” — and the cure was downright painful. After years of rapid inflation, Fed Chair Paul A. Volcker began to lift borrowing costs to staggering levels to cool off the economy. 

He received car keys from auto dealers who couldn’t make sales and planks of wood from home builders facing a dearth of demand. “Dear Mr. Volcker,” one wrote on a block with a knot. “I am beginning to feel as useless as this knothole.”

But for more than a quarter century, price gains have been surprisingly low — not too high.

In developed economies, including those of Japan, the euro area and the United States, monetary policymakers have actually been trying to encourage higher inflation in recent years. 

Inflation hasn’t sustainably reached the Fed’s 2 percent target since before the 2008 global financial crisis, looking at a Commerce Department index that strips out volatile fuel and food. Price pressures haven’t substantially exceeded 2 percent since the early 1990s.

Economists have struggled to understand the phenomenon, but they largely think inflation is being held down by a cocktail of aging demographics, changing consumer expectations and limited pricing power in a globalized world where consumers can search online to compare prices.

Market-based inflation expectation measures are hovering right around 2 percent, and consumer inflation outlooks have dipped slightly over the past decade, though one gauge ticked up in a recent reading. If buyers don’t expect higher prices, companies may find themselves unable to raise them, so whatever people anticipate can drive reality.

It’s also hard to see where a big and sustained spike in prices would come from, analysts said.

Airfares, apparel prices and hotel prices all took a hit in 2020 during the depths of the pandemic, and they’re likely to jump sharply as the economy reopens and consumers with money in their pockets take vacations and refurbish their wardrobes, said Alan Detmeister, a former inflation expert at the Fed who now works at the bank UBS.

Yet the price of goods that experienced a jump as workers shifted to home offices — from the category that includes laptop computers to the one that tracks cars — could fall back, weighing down overall gains. Categories that matter a lot to the overall index, like rent and health insurance, are both subdued and slow-moving.

In any case, a temporary bounce-back in prices is not the same as an inflationary process in which price gains continue month after month.

Even if prices do temporarily bounce, the Fed has pledged to be patient in the way it thinks about inflation. In years past — including under Ms. Yellen’s watch — it lifted interest rates before price gains had really picked up to head off potential overheating. The central bank’s new framework, adopted last year, calls for policymakers to aim for a period of above-2 percent inflation so that it hits its goal on average over time.

And besides stabilizing prices, Congress also tasks the Fed with trying to achieve maximum employment. 

Charles Evans, the president of the Federal Reserve Bank of Chicago, said earlier this month that $1.9 trillion in government spending would have the potential to help the Fed hit its inflation and job market goals faster.

“I’m hard-pressed to see the size of this leading to overheating,” he said.

Jim Tankersley covers economic and tax policy. Over more than a decade covering politics and economics in Washington, he has written extensively about the stagnation of the American middle class and the decline of economic opportunity. @jimtankersley

Jeanna Smialek writes about the Federal Reserve and the economy. She previously covered economics at Bloomberg News, where she also wrote feature stories for Businessweek magazine. @jeannasmialek


Lessons in betting against bubbles from the Big Short

Knowing for sure that something is askew may not be enough to make you money

He now runs a chain of hotels in his native Ghana. 

But in the 1990s Tony Yeboah played football at a high level, his two seasons at Leeds United sandwiched between longer spells in the Bundesliga. 

In England he is fondly remembered for a wonder-goal against Wimbledon fc. 

Watch it on YouTube. 

Trapping a high ball expertly on his chest, he juggles between defenders before smashing the ball off the crossbar into the net.

Great goals stay in the mind long after the game-to-game grind of a championship win fades from memory. 

So it is with investing. 

Success often comes down to the compounding of incremental gains over time. 

The trades that capture the imagination, though, are the bold ones with big payoffs. 

Among the biggest and boldest was “The Big Short”, a bet against subprime mortgages before the 2008 crash, and also the title of a book by Michael Lewis (and, later, a film).

That episode feels relevant again. 

The recent spectacular run-up in stock prices and the attendant mania in pockets of the financial markets have the word “bubble” on many investors’ lips. 

A new paper* by Aaron Brown of New York University and Richard Dewey of Royal Bridge Capital, a hedge fund, re-examines the Big Short and sounds a note of caution. 

It argues that the bet against subprime mortgages was far riskier than is often appreciated. 

The paper has a subtler message, too: the way in which a trading idea is expressed is as important as the insight that underpins it.

People who lived through it can scarcely forget the subprime crisis. Still, here’s a recap. 

In the mid-2000s, house prices were rising rapidly in many rich countries. 

In America, much of the growth in mortgage lending was to “subprime” borrowers with low credit scores. 

These mortgages were pooled and turned into securities. 

The riskiest tranches of these pooled mortgages took the first losses, providing a buffer for the aaa-rated tranches. 

Such was the demand for aaa bonds that standards slipped. 

Just about anyone could get a subprime mortgage.

America’s housing boom had all the hallmarks of a bubble: cheap money, a build-up of debt and a belief that there was no risk. 

If you were so minded, how could you bet against it? 

A handful of clever people worked out that subprime bonds were likely to suffer a higher rate of default than was suggested by their price or credit rating. 

So they bet against the riskiest tranches of the worst pools. 

They entered into agreements with banks, called credit-default swaps (cds), which insured specific mortgage bonds against default. In 2007 and 2008, default rates soared. 

The cds insurance was triggered. 

The payoff was as spectacular as a Tony Yeboah goal.

Why didn’t more people bet this way? 

Mr Brown and Mr Dewey spoke to investors who considered the short subprime trade, but passed on it. 

One turn-off was the Big Short’s steeply negative “cost of carry”: the premium on cds insurance was high. 

Moreover, mortgage cds were illiquid instruments, making it tricky to get out of the trade. 

A high cost of carry is a big bar when the payday might be years away—if it comes at all. 

The banks that were the counterparties to the cds could be dragged under. 

Maybe the government would make good all mortgage-holders when the bust came. 

History did not play out this way. 

But investors could not be sure at the time.

Traders found other ways to bet against the bubble. 

One was to sidestep the negative-carry problem by buying risky tranches of subprime securities, with double-digit yields, and at the same time taking out insurance on “safe” aaa tranches using cds with a fairly low premium. 

The bet here was that a housing bust would blow up both risky and safe tranches; but while waiting for the apocalypse you could benefit from positive carry. 

Perhaps the safest way to profit from a bubble is the pick-up-the-pieces trade, in this case buying mortgage bonds at fire-sale prices after the bust.

A subtext of the Brown-Dewey paper is that conviction can be your enemy. 

Knowing for sure that something is very askew may not be enough to make you money. 

Still, the precariousness of the Big Short is a big part of its legend. 

Yes, things might have played out differently. 

And if Tony Yeboah’s shot were an inch higher, then it would not have been a goal. 

But it was not a fluke. 

He had scored an equally spectacular goal against Liverpool a month earlier. 

That one went in off the crossbar, too.

Can Navalny Take Down Putin?

Unlike the protests that roiled Russia in 2011-12 in response to Vladimir Putin’s third presidency, today’s protest movement has a charismatic and sympathetic leader. But Putin has spent the last decade consolidating a police state, and he is prepared to use every available tool to retain power.

Nina L. Khrushcheva

MOSCOW – There are arguably two moments in the last century when a wrecking ball was taken to Russia’s political regime. 

In 1917, the Bolshevik Revolution toppled the country’s teetering monarchy. 

And, in 1991, an abortive coup by Marxist-Leninist hardliners against the reformist Mikhail Gorbachev accelerated the tottering Soviet Union’s collapse. 

Does the wave of protests that have swept Russia in recent weeks herald another regime change?

Not likely. 

To be sure, unlike the protests that roiled Russia in 2011-12 in response to Vladimir Putin’s third inauguration as president, today’s protest movement has a charismatic and sympathetic leader. 

Not only has Alexei Navalny been a relentless anti-corruption advocate for years; when he was arrested last month, he had just returned from Germany – where he had spent months recovering, after being poisoned with the Kremlin’s favorite nerve agent, Novichok – to continue confronting Putin’s regime.

But, unlike the twilight of the czars and the Soviets, Putin’s regime is neither teetering nor tottering. 

Putin has spent the last decade consolidating a police state, and he is prepared to use every available tool to retain power. 

The leader who invaded Ukraine and illegally annexed Crimea in 2014 to bolster his foundering approval rating, and who secured a constitutional amendment last year so that he could remain president for life, is not about to be forced from power by a movement of weekend protesters.

Yet there is something particularly excessive, even irrational, about Putin’s suppression of Navalny, his associates, and his supporters. 

Already, law-enforcement officers have detained thousands (including journalists), often using brutal tactics. The government has also blocked social-media platforms, because they are supposedly fueling unrest.1

Meanwhile, the Kremlin-controlled television networks endlessly broadcast fawning stories about Putin, and every effort is being made to discredit the protest movement. 

By effectively shutting down central Moscow, including public transport leading to it, the government has severely inconvenienced many citizens – and made it seem like Navalny’s fault. 

The government wants “peaceful city-dwellers” to be able to do their weekend shopping, the narrative goes, but the “law-breaking” protesters, much like “terrorists,” insist on disrupting “normal” life.

By the Kremlin’s logic, when foreign leaders, journalists, and diplomats speak out in support of the opposition, they are merely proving that Navalny is the factotum of a global plot to destabilize Russia. 

To drive this point home, Russia’s Ministry of Foreign Affairs recently expelled three European diplomats for attending Navalny rallies – while Josep Borrell, the European Union’s high representative for foreign affairs and security policy, was visiting Moscow, no less.

The Kremlin is treating Navalny himself accordingly – like an enemy of the state. Navalny’s farcical court hearings since his return from Germany recall Stalin’s show trials in the 1930s, with one key difference: Navalny is not capitulating to the dictator by confessing his “crimes.” 

During the proceedings, Navalny rebuked the state’s lawlessness and denounced his sentence – almost three years in a penal colony – as illegitimate.

Moreover, Navalny recently released a viral video accusing Putin of using fraudulently secured funds to build a billion-dollar palace on the Black Sea. 

While Russians expect their leaders to be corrupt, Navalny consistently puts into perspective the scale of the riches that corruption generates. (He did the same with his 2017 investigation into then-Prime Minister Dmitri Medvedev.)

Navalny’s attacks thus directly undermine Putin. In this sense, Navalny is not like one of Stalin’s Trotskyist targets; he is Trotsky himself. And he needs to be purged.

Putin’s fears are compounded by the possibility that a slow-motion palace coup may be unfolding. Since the annexation of Crimea, Western sanctions have been choking Russia’s economy, fueling resentment among the country’s political elites, who long for access to their Swiss bank accounts and Italian villas. 

They may now seek to oust Putin, much in the same way Nikita Khrushchev was ousted in 1964. And a humiliated Putin would presumably be much easier to overthrow than a popular one.

The emergence of mystics and proselytizers with promises of clarity offers further evidence that Russia’s ossified regime is beginning to destroy itself. 

Grigori Rasputin, a self-proclaimed holy man, helped to drive the rotting imperial monarchy into the ground. In the 1980s, when the Soviet empire was beyond reform, TV psychiatrists were all the rage.

Today, political shamans of all stripes – from communist to nationalist – are rising to prominence. 

They predict Putin’s imminent death, warn of a Western or Chinese takeover, and speculate that Navalny is a project of Russia’s security services that got out of hand. Some have even interpreted Navalny’s name – which translates as “push away” – as a sign that he is the one who will drive out Putinism.

Nonetheless, as the Kremlin’s response to the protests has shown, Putin and the state are one and the same. 

That makes toppling him a particularly difficult proposition – at least for now.

Nina L. Khrushcheva, Professor of International Affairs at The New School, is the co-author (with Jeffrey Tayler), most recently, of In Putin’s Footsteps: Searching for the Soul of an Empire Across Russia’s Eleven Time Zones.

Bitcoin’s rise reflects America’s decline

Cryptocurrencies have a place in a new world order where the dollar has less of a starring role

Rana Foroohar

    © Matt Kenyon

A little over 100 years ago, there was a bubble asset that rose and fell wildly over the course of a decade. 

People who held it would have lost 100 per cent of their money five different times. 

They would have, at various points, made huge fortunes, or seen the value of their asset destroyed by hyperinflation.

The asset I’m referring to is gold priced in Weimar marks. If this reminds you of bitcoin, you are not alone. 

In his newsletter Tree Rings, analyst Luke Gromen looked at the startling similarities in the volatility of gold in Weimar Germany and bitcoin today. 

His conclusion? 

Bitcoin isn’t so much a bubble as “the last functioning fire alarm” warning us of some very big geopolitical changes ahead.

I agree. Central bankers have over the past 10 years (or the last few decades, depending on where you put the marker) quashed price discovery in markets with low interest rates and quantitative easing. Whether you see this as a welcome smoothing of the business cycle or a dysfunctional enabling of debt-ridden businesses, the upshot is that it’s now very difficult to get a sense of the health of individual companies or certainly the real economy as a whole from asset prices.

The rise in popularity of highly volatile cryptocurrencies such as bitcoin could simply be seen as a speculative sign of this US Federal Reserve-enabled froth. But it might better be interpreted as an early signal of a new world order in which the US and the dollar will play a less important role.

The past four years of Donald Trump’s presidency and his toxic politics have taken a toll on the world’s trust in America. That has also diminished trust in some quarters about the dollar’s stability as the global reserve currency. This feeling reached an apex during the January 6 attack on the US Capitol building. 

As financial policy analyst Karen Petrou put it in a recent note to clients: “There are many casualties of this quasi-coup, but the US dollar may well be among them. It’s no more immortal than any other category-killer brand.”

Trump certainly devalued Brand USA. But he is also a symptom of longer-term economic problems in the US — problems which have in recent years been papered over by low rates and monetary policy, which kept asset prices high but also encouraged debt and leverage.

Bitcoin’s rise reflects the belief in some parts of the investor community that the US will eventually come in some ways to resemble Weimar Germany, as post-2008 financial crisis monetary policy designed to stabilise markets gives way to post-Covid monetisation of rising US debt loads. 

There are, after all, only three ways out of debt — growth, austerity, or money printing. If the US government sells so much debt that the dollar starts to lose its value, then bitcoin could conceivably be a safe haven.

Germany’s currency debasement didn’t end well. This underscores another aspect of the bitcoin boom. We have moved from a unipolar world in which the US was the pre-eminent political and economic power, to a post-neoliberal world where there is no longer a consensus in favour of free trade and unfettered capitalism. 

We will probably have two or even three poles — the US, Europe and China. China has signalled its desire to become less dependent on the US financial system, buying fewer US Treasuries and rolling out its own digital currency.

In this world, it is easy to imagine that the dollar would continue to be the main reserve currency, with the renminbi and the euro gradually becoming more important stores of value. But one can also imagine that cryptocurrencies that can easily cross borders would have some advantages over fiat money issued by governments. 

While the migration of people and goods may become more constrained, digital trade and information flows are still growing.

Crypto advocates including technology leaders such as Tesla’s Elon Musk, Facebook’s Mark Zuckerberg and Twitter’s Jack Dorsey believe that digital currencies are better suited to this more multipolar world. 

They are largely unregulated and thus less subject to political forces. In the same way that large technology platforms recently demonstrated their power by removing Trump from social media, bitcoin could conceivably float above any currency nationalism that might result from the new world order.

Will cryptocurrency become the new gold — a hedge against a changing world? Will the Big Tech consensus prove more powerful than either the Washington consensus or the Beijing consensus? Perhaps. 

But it’s also possible that sovereign states will move to regulate this existential threat. 

In the US, Treasury Secretary Janet Yellen has already raised the issue of future cryptocurrency regulation.

None of this makes me want to buy bitcoin. But I also don’t see it as a normal bubble. It was unclear at the beginning of the 20th century which of the hundreds of automakers would win the race to replace the horse and buggy. 

Now, who knows whether bitcoin, ethereum, or diem, or some yet-to-be-invented digital currency will win out long term. 

For now, the bitcoin boom may best be viewed as a canary in the coal mine.

The holiday only just began

Tourism will rebound after the pandemic

It could even improve, if properly managed

It is an unfortunate fact that the ease of throwing things into a wheelie-bag and travelling far and wide helped spread covid-19 around the world. 

The effects on leisure travel and destinations that rely on tourism will be felt for years to come. 

But just as the way we travel may improve as a result, so the chance for countries to rethink tourism industries could turn a bruised and battered industry into a better one.

The pursuit of pleasure using cultural pursuits as cover goes back to the days of the grand tourists, who trawled Europe’s artistic heritage as well as indulging in more hedonistic activities. As souvenirs they returned with paintings, sculptures and sometimes syphilis. Travel was hard and expensive. 

The earl of Salisbury spent the equivalent of nearly £500,000 today on his grand tour in the 18th century, according to mbna, a credit-card firm. 

Even 50 years ago foreign travel was a luxury pursuit. 

In 1970 a return flight from New York to London cost around $500 (equivalent to $3,500 today).

Lower fares and the rise of the internet have made holidays cheaper and easier to arrange. Airlines, hotel chains, car-hire firms and other businesses have moved online. Dedicated internet travel agents like Expedia and have emerged. 

Online peer-to-peer review sites offer a mostly honest assessment of hotels, restaurants and tourist sites. Airbnb and its competitors have created a new class of accommodation. 

The frictional costs of travel have fallen sharply.

Such is the stunning growth of tourism that the 72% decline in trips in the first ten months of 2020 on a year earlier merely took international travel back to where it was in 1990. 

Leisure travel accounts for the biggest slice but the rest contributes too. 

Business travellers stay in hotels, eat at restaurants and hire cars. 

Some visits to relatives or friends may be barely distinguishable from a holiday.

Not only are there more trips, but the world is a bigger oyster. In 1950 the top 15 destinations—with America, France, Italy and Spain the most visited—claimed 97% of tourist arrivals. 

By 2015 that share had dropped to just over half. Europe, with it historic cities, countryside and beaches, still rules, taking just over half of all international travellers. 

That is twice the share of the Asia-Pacific region, the next most popular area. Europe rakes in the most receipts, around 37% of the global total, worth some $619bn in 2019. 

France and Spain are the most popular countries for a visit. 

The top spots may not have changed, but their arrivals have. 

Chinese visits overseas have grown from just 9m trips in 1999 to 150m in 2018.

Travellers’ preference for richer countries has created large industries. Spain relied on domestic and foreign visitors for 11.8% of gdp in 2019, France 7.4% and Mexico 8.7%. 

Poorer countries lean even more on tourist dollars. America is the biggest country for travel spending, some $1.8trn in 2019, but overseas visitors have put tourism at the heart of many economies. 

In Aruba it accounts for nearly three-quarters of gdp; in most other small Caribbean islands it is also the main economic activity. Other poorer countries are less reliant overall but have vast tourist industries. 

Thailand welcomed around 10m foreign tourists in 2001. By 2019 it had grown fourfold (with a quarter of the total coming from China), bringing in 1.9trn baht ($60bn) and contributing some 18% of gdp.

The emptying of tourist trails and resorts resembling ghost towns is causing massive upheaval. unctad estimated that losses could amount to 2.8% of world output if international arrivals dropped by 66% in 2020. 

The oecd now reckons that the drop was more like 80%. 

And the expectation is that international arrivals will probably not recover to pre-covid levels until 2023.

Tourism is a resilient industry. 

But it faces a downturn like no other. 

Firms reliant on visitors may not be best placed to survive. 

According to the wtcc, around 80% of tourist businesses worldwide, from hotels to restaurants to tour guides, are small businesses. 

Large hotel chains may have the balance-sheets to weather the storm or the management skills to reconfigure their business to cater more to domestic travellers. 

Small businesses probably lack the cash to invest in equipment for contactless payments or better cleaning and hygiene to reassure returning tourists.

The uncertain path to recovery raises questions over what will remain. The unwto reckons that countries with a big share of domestic tourism—America, China and India have the largest home markets—will recover more quickly. 

Travel restrictions have kept China’s high-rollers at home, giving its fanciest hotels their best year ever. 

But even domestic tourism is far from a saviour. 

Britain and Spain, for example, reckon on a decrease in domestic tourism of 45-50% in 2020.

These problems have prompted various responses to keep businesses alive. Some countries such as France, which launched an $18bn bail-out in May, have aimed cash directly at tourist businesses. 

Others are trying to reassure tourists that their countries are safe by developing protocols and guidelines for tourism workers. Luís Araújo, president of the Portuguese National Tourism Authority, says his organisation has arranged training for 60,000 workers at restaurants, hotels and travel agents to create a safer travel experience. 

Finland and Greece are among countries with new training programmes aimed at improving the digital presence of tourist businesses.

Some parts of the tourist economy will do better than others. Travel firms have noted a rising preference for self-catering and private accommodation over hotels. Coastal and rural locations, far from crowds, will recover faster than cities. 

Cyril Ranque of Expedia notes that his customers are more inclined to drive to domestic locations but then to stay longer than before. But these trends, he believes, are “all temporary”.

Waiting for the rebound

The travel bug seems certain to outlast the virus. Its first manifestation may be “revenge tourism” as people get away after a year of lockdowns and quarantines. But some things will change for good. 

A preoccupation in previous centuries, health and hygiene will re-emerge as central to holiday planning. Guidebooks from Baedeker, a German publisher, were never reticent about warning travellers of the filth they faced in foreign climes even in the early 20th century, bemoaning the “evil sanitary reputation of Naples”. 

Destinations will continue to boast of their scenery, cuisine and beaches but safety and hygiene will become as important, says Ian Yeoman, a tourism academic at Victoria University of Wellington, New Zealand. 

This may benefit longer-established destinations, tilting visitors away from poorer countries.

Those countries will not be deliberately trying to avoid tourists, even so. Some remote places have used the hiatus to build a better online presence, says Mr Ranque. He points to other innovations to make travel less of a bother. 

Flexibility, to cope with last-minute changes of plans, will endure. 

Late or even last-minute bookings are more common. 

Josh Belkin of reports that, because people are taking more staycations and travelling by car rather than plane, they are booking hotels later, on average 13 days before a trip rather than the 20 before covid-19.

Many travel companies and airlines have introduced more flexible rebooking policies. Faced by a wave of cancellations as covid-19 took hold, Expedia introduced “one-click cancellation” to deal with all elements from flights and hotels to car hire. 

Firms that use its platform can deploy new tools to add special offers to listings to encourage last-minute bookers and manage refunds. 

Gathering real-time data on searches, and sharing them with businesses that relied on information from previous years to set prices, could also lead to a better match between supply and demand and encourage more dynamic pricing. 

In future, personalised customer data should allow travel firms to recommend holidays in a more focused way.

Covid-19 presents a “once-in-a-lifetime opportunity to move towards more sustainable and resilient models of tourism development”, says the oecd. 

“Tourism was seen as unambiguously good 20 years it’s a double-edged sword,” says Paul Flatters of the Trajectory Partnership. 

Concerns about the impact of tourism on the environment predate the pandemic. But tourism also broadens awareness of different cultures and environmental issues and helps pay for wildlife conservation, as well as providing employment and economic development.

Many destinations failed to strike a balance between tourist numbers and local sensibilities. Venetians have long protested against vast cruise ships, prompting some firms to drop the city from their itineraries. 

Venice also plans to impose a levy on all visitors from 2022. Anti-tourist slogans daubed on walls have greeted visitors to Barcelona, which has clamped down on illegal holiday letting (as have Berlin and other places in which holiday lets have replaced rental properties, forcing up prices for residents). 

Amsterdam is considering a ban on non-residents buying cannabis in its notorious coffee shops, to encourage a better class of tourist. Machu Picchu, where trails were overrun, imposed a pre-covid limit of 5,000 visitors a day. That will be cut to 675 to ensure social distancing.

Covid-19 offers the chance not only to reset tourism to reduce the numbers who spend the least but also to spread them out. Barcelona has run a campaign to encourage people to venture away from the old city. Thailand has a scheme to promote 55 less visited parts of the country. 

Concentrating on attracting fewer tourists ready to spend more is one way to promote a healthier business. And sustainability may become a more important guide to choices as awareness of climate change and the less welcome effects of tourism grow. 

Getting the right balance between economic, environmental and social benefits and costs has seen a new emphasis on sustainability. 

Mexico thinks covid-19 will help with its “Mexico Reborn Sustainable” campaign, which aims in part to create new routes that spread tourist dollars more widely and promote destinations that tap into fast-growing nature tourism.

A dynamic tourism economy depends on the availability of a variety of services, from accommodation and good services to attractions, activities and events. Whether a critical mass of services will remain everywhere is less clear. 

Less choice and competition, if businesses go bust, may mean higher prices. 

The rapid growth of tourist economies in recent years suggests they can be rebuilt swiftly. 

But for all those governments that redesign their tourism strategies to keep down crowds and protect the environment, others may compete by racing to the bottom, using deep discounts to fill hotels and planes. 

Tourist numbers will recover and continue to grow either way. 

Greater efforts to manage them carefully should make for a better experience for everyone.

US removes stumbling block to global deal on digital tax

Biden administration drops insistence on ‘safe harbour’ for companies, opening door to agreement

James Politi and Aime Williams in Washington, Chris Giles in London, Sam Fleming in Brussels and Miles Johnson in Rome 

US Treasury secretary Janet Yellen told G20 finance ministers that the US ‘is no longer advocating for safe harbour implementation’ © Reuters

US Treasury secretary Janet Yellen has told G20 finance ministers that Washington will drop a contentious part of its proposal for reform of global digital taxation rules that had been the main stumbling block to an agreement.

The move could unlock long-stalled multilateral negotiations at the OECD, which struggled to make progress after the Trump administration first insisted on the “safe harbour” measure in late 2019.

The provision would have allowed technology companies to abide by any agreement on a voluntary basis.

On Friday, Yellen said at a meeting of G20 finance ministers that the US “is no longer advocating for safe harbour implementation”, a US Treasury official told the Financial Times.

The US “will engage robustly to address both pillars of the OECD project, the tax challenges of digitisation and a robust global minimum tax”, the official said.

Italian finance minister Daniele Franco, who co-chaired the meeting, said in a press conference afterwards that the G20 aimed to reach a solution by “mid-2021”.

“There is a need to reform the current system; this has become an urgent task as we are faced with the challenges of the globalisation and digitalisation of the economy,” he said.

Another official close to the international tax talks said the US “wants a deal on both pillars [of the proposals] by July . . . the coming few weeks will be critical but the dynamic has never been that positive”.

Yellen’s break with the Trump administration stance on digital tax came a day after she also dropped Washington’s objections to new financial support for low-income countries through an allocation of special drawing rights (SDRs), the IMF’s reserve currency.

“An allocation of new special drawing rights at the IMF could enhance liquidity for low-income countries to facilitate their much-needed health and economic recovery efforts,” Yellen said in a letter to G20 finance ministers and central bank governors on Thursday. 

“We look forward to discussing potential modalities for deploying SDRs [with other G20 nations].”

The last time the IMF allocated a fresh batch of SDRs was in 2009 during the global financial crisis.

Support for the financial assistance is widespread among G20 countries, so Washington’s step could pave the way for as much as $500bn in support to be pumped into the global economy. 

However the detail has yet to be settled; the US wants advanced economies’ SDR allocations be passed on to low-income countries with greater need for financial assistance.

Kristalina Georgieva, the IMF managing director, said on Friday she was “very encouraged by the growing support” for a new SDR allocation “to boost reserves of all members in a transparent and accountable manner” and offer “an additional mechanism to enable our wealthier members to support low-income countries through on-lending part of their SDRs”. 

“We stand ready to present to our membership a robust assessment of long-term reserve needs and implementation modalities,” Georgieva said. 

The gloomy prospects for a multilateral deal on digital tax during the Trump administration led a number of countries, mainly in Europe, to introduce or consider their own levies on large technology companies, in a bid to prevent them from paying little or no tax on their sales.

Washington objected to those tax measures as unilateral and discriminatory against Silicon Valley, turning the dispute into one of the biggest sources of transatlantic economic and trade tensions.

However, despite the renewed hopes for a deal, there is still a lot to do before a new global regime can be introduced. 

Not only will an agreement have to be finalised, but in the case of the US it will have to be approved by Congress, where taxation policy changes can be highly contentious.

The Number That Blows Up The World, “Everything Bubble” Edition


We’re deluged with numbers these days, many of them huge, ominous departures from historical norms. 

But one matters more than the others. 

To understand why, let’s start with some history.

In the 1960s the US entered the expensive and divisive Vietnam War, while simultaneously creating major entitlement programs including (also very expensive) Medicare. 

In the 1970s, commodity prices, led by oil, started to rise due in part to the billions of new dollars sloshing around in the world, and in part to Middle East turmoil.

The above combined to produce rising inflation and a falling dollar, wreaking havoc in the foreign exchange markets and raising doubts about the viability of the dollar as the world’s reserve currency. 

It was a huge mess.

But the US recognized the gravity of the situation and, led by Federal Reserve chairman Paul Volker, responded aggressively by jacking up interest rates to double-digit levels. 

The Fed Funds rate hit nearly 16% in late 1979.

This spike in interest rates, not surprisingly, sent the economy into recession in 1981 and shaved about 25% from the S&P 500.

But the harsh medicine saved the patient. 

Higher interest rates attracted global investment capital to the US and squeezed inflation out of the system. 

After falling by 29% versus the world’s other major currencies in the 1970s, the dollar went back to being the world’s rock-solid reserve asset in the 1980s. 

And the economy recovered and began a long run of mostly good times that culminated in today’s epic bull market.

An empty toolbox …

The lesson? 

There is a fix for rising inflation and financial instability: higher interest rates. 

But unfortunately, we no longer have that tool. 

In the 1970s, monetary chaos notwithstanding, the US was actually in pretty good financial shape. 

The debts of governments, corporations, and individuals were all very low by today’s standards, which means higher interest rates could claim fewer over-leveraged victims while enriching savers with rising interest income.

Today the opposite is true. 

Debt is at record levels in every sector of every major country. 

“Zombie” companies and governments that can only survive with new credit are everywhere. 

Raising interest rates to 1980 levels would bankrupt pretty much everyone and bring down the curtain on today’s credit-driven world.

Luckily, inflation is nice and low, so we don’t have to resort to 1970s-style monetary policy, right? 

Well…that’s the thing. 

A growing number of credible people are starting to predict higher inflation, as industrial commodities join stocks, bonds, and real estate on upward sloping price curves. 

Here’s JP Morgan, as reported by Zero Hedge:

Having dabbled in the fields of viral epidemiology and presidential polling, JPM quant Marko Kolanovic is set to conquer yet another “cross-asset”: commodities.

Two days after Dylan Grice published an article “The Stage is Set for a Bull Market in Oil”, with various commodities around the world soaring, and the price of oil up a stunning 64% since November, today Marko Kolanovic made a bold prediction – that the world has entered a new commodity supercycle:

“It is generally agreed that over the past 100 years, there were 4 Commodity supercycles and that the last one started in 1996 . 

We believe that the last supercycle peaked in 2008 (after 12 years of expansion), bottomed in 2020 (after a 12-year contraction) and that we likely entered an upswing phase of a new commodity supercycle.”

Meanwhile, mining stock analyst Jay Taylor, who compiles an “inflation/deflation” indicator, is showing an upside breakout:

Which brings us to “The Number” promised in the title of this post. 

That would be the yield on the 10-year Treasury bond, which has taken the place of the Fed Funds rate as the indicator from which all things financial take their cue. 

It’s been rising lately, and if it moves from a 1 handle to 2 or higher, that will set lots of things in motion, including the aforementioned mass-bankruptcy. 

So let’s say a yield of 3% is the number that blows up the world.

Seen this way, the current environment is similar to 1977, a time of rising but not yet runaway inflation, in which the mood is just beginning to shift from complacency to concern. 

Not yet alarm, and certainly not yet panic. 

But those things will come unless inflation and its attendant instability are quickly reined in.

This time we’ll just have to do it – somehow – without raising interest rates or cutting government spending. 

It will be interesting to see how that goes – and how people react when whatever else we try doesn’t work.

When Do People Take Huge Risks?

As a species, we’re cautious … except when the stakes are life-altering.

Derek D. Rucker

Person skydives from prop plane / Lisa Röper

Let’s flip a coin. Heads, you lose $10. What amount do you need to win from a tail-flip in order to take the gamble?

If you’re like most people, the answer is somewhere around $20. This little experiment, popularized by economist Daniel Kahneman, demonstrates a phenomenon called loss aversion. The idea that losses loom larger than gains, documented in years of psychological and economic research, is thought to be an important component of human decision-making.

But Derek Rucker, a professor of marketing at the Kellogg School of Management, and his colleague David Gal, a professor of marketing at the University of Illinois at Chicago, found this notion difficult to square with what they observed all around them: football coaches calling for risky plays in high-stakes games, students waving off the familiarity of their hometown for a college far away, or people leaving secure jobs to start new businesses. If we’re so loss averse, why do we take such big swings in our lives?

Their theory: courage. The ability to take purposeful action in the face of fear is widely prized across cultures; one study found that courage was among just six values shared by nearly every philosophical and religious tradition.

Because much of the research on risk and loss aversion focuses on low-stakes financial gambles, Rucker and Gal suspected different patterns might emerge if they studied important life decisions, where courage is most likely to emerge.

Indeed, across several experiments, that’s precisely what Rucker and Gal found. When facing a risky choice with meaningful consequences for their lives, people have the opportunity to display courage. And because people prize being courageous, in contrast to prior research findings, they may be more likely to opt for the high-risk, high-reward path.

“This suggests that, in contrast to some of the findings in controlled laboratory gambles, people might have a radically different response to risk in some situations,” Rucker says. “When people see an opportunity to be courageous, and want to see themselves as courageous, that may actually lead to a preference for the riskier option.”

The Courage to Take Risks

To see how courage influenced peoples’ willingness to take risks in different types of decisions, in one study, Rucker and Gal recruited 508 online participants. Half the participants—the courage group—wrote about a time they or someone they knew had exhibited great courage. The control group wrote about a time they or someone they knew did something ordinary.

Next, participants read scenarios in which they had to make either an important or a trivial choice. The half who were presented with an important choice were asked to imagine facing a chronic illness. They could either continue in their current quality of life, or try a treatment that might either significantly improve or significantly worsen their situation. The other half of the participants, who read a scenario describing a trivial choice, were asked to choose whether to accept a gamble in which they had a fifty–fifty chance of winning or losing $15.

Among participants who read about the medical decision, those who had written about courage were significantly more like to choose the risky treatment than those in the control group: 57 percent of the courage-group participants opted for the treatment, as opposed to 37 percent of the control-group participants. Thinking about courage, in other words, had made them likelier to take a significant risk.

But when facing a low-stakes financial gamble, the difference between how many participants in the courage group and the control group chose the risky option was relatively small. In other words, the desire to be courageous did not significantly influence people’s willingness to take risks when facing a trivial choice—only a significant one.

Is Courage Just a Greater Appetite for Risk? Not Exactly.

The researchers next wanted to test that it was courage—and not simply high stakes—that led participants to take significant risks.

For their second experiment, they decided to up the stakes in the financial gamble so that it induced the same amount of fear as the other gamble, but lacked a critical aspect of courage: a sense of purpose. As Gal explains, “Courage is not just taking risk. It is confronting fear in a task that is linked to a higher-order goal or that has meaning to the individual.”

They recruited 402 new online participants. Half of the participants read a scenario about a career gamble: they could accept a risky assignment that would either significantly help or hinder their advancement, or continue in their current duties.

The rest read about a significant monetary gamble: a 50 percent chance to win or lose the hefty sum of $5,000. While both scenarios elicited fear, a pretest confirmed that the career gamble was widely thought to be more purposeful, courageous, and worthy of respect. Next, all participants rated from one to seven how much they valued being courageous in life.

The researchers found that, for participants in the career-decision group, valuing courage more highly was associated with a stronger preference for the risky option.

Valuing courage was also somewhat associated with a preference for the risky financial gamble, but much less strongly. Rucker and Gal think this may be because the desire to be courageous and an overall willingness to take risks are interrelated traits—or perhaps because some participants found the financial gamble to be an important life decision, with stakes as high as the career choice.

Either way, the results showed that courage increases peoples’ risk appetite more strongly when the decision has long-term significance for their lives.

Courage Requires Agency

In thinking about courage, Rucker and Gal had a realization: for a decision to be truly courageous, it must be within your control. After all, taking a risk you didn’t choose doesn’t feel like courage. It just feels, well, risky.

So the researchers decided to study this key dimension of courage—agency—because it would allow them to understand more clearly whether participants were making risky choices out of a desire to act courageously rather than simply out of a desire to take on risk.

As before, some participants read a scenario about an important choice (this time, a risky call in an important sports game), while others read a scenario about a fear-inducing but nonetheless less important choice (another monetary gamble).

But this time, there was a twist. Within each group, some participants were told they would get to make the choice, while the rest were told someone else would decide. Then participants stated their preferences and rated on a six-point scale how much they would respect a decision-maker facing an identical situation who took the risky option.

For the high-importance decision, participants who had agency chose the risky option 65 percent of the time—precisely what the researchers expected to happen when the desire to be courageous kicks in. But among participants who did not have agency—that is, they were asked what they would want someone else to choose for them—that old human impulse toward caution dominated. Just 42 percent of these participants opted for the risky call.

For participants who contemplated the lower-importance monetary gamble, on the other hand, having agency had no significant effect on preferences for the risky option.

In general, people reported higher levels of respect for a decision-maker who took the risky option in the sports situation than the monetary gamble. In fact, their level of respect for the risky decision-maker predicted how likely they were to prefer the risky decision—except when they lacked agency.

“If you take away my ability to choose,” Rucker explains, “I can no longer credit myself as being courageous.” Gal elaborates, “when someone else is making the decision, I can’t show courage—so go ahead and give me the safe option.”

The Gifts and Perils of Courage

To these researchers, this work highlights an important and understudied aspect of decision-making: values like courage can override other psychological impulses, especially when the real-world stakes are high.

It also suggests that we need to evaluate how our desire for courage might push us toward decisions that aren’t wise in the end. “You could imagine where you might get into trouble,” Rucker says. “There’s a danger of saying ‘I want to feel courageous’ when you’re going down a path that is not a good decision.”

“Sometimes you do need to be bold and courageous. But other times you might want to ask yourself, ‘Wait, is being bold the right decision here, or do I need to take a step back and think through an appropriate, measured action?’”