America’s dangerous reliance on the Fed

Easy money and fiscal gridlock in Washington lead to populism

Edward Luce 

   © Matt Kenyon

For bitcoin speculators, last year was a bonanza. 

The cryptocurrency started January 2020 at $7,194 and on Sunday surged above $34,000 — a more than 360 per cent annual return. 

Courtesy of the US Federal Reserve, asset buyers in general have had a stellar pandemic. 

Whether it was US Treasuries or junk bonds, equity portfolios or high-end property, the free money gusher has lifted all asset prices. 

Nor is the Fed inclined to stop the party. This year could offer a similar kind of boom to last.

Even if they do not trigger high inflation, the Fed’s extraordinary interventions will come with steep price tags. 

No doubt these would be far lower than the Fed not having acted at all — particularly in the short term. 

Had it foregone the more than $3tn expansion to its balance sheet since last March, the US economy would have gone into freefall. Corporate bankruptcies would have piled up and there could have been a 2008-style financial meltdown.

The response to critics is the same today as it was after the 2008 crisis: that the Fed is doing whatever it takes to prevent a depression. But the risk is that each new chapter tightens a doom loop in which the US sovereign must eventually reckon with the ever-widening class of risk it is underwriting. 

America’s national debt is already past 100 per cent of gross domestic product for the first time since the second world war. It nearly doubled after 2008 and is rising sharply again. As Japan has shown, high indebtedness need not trigger a crisis. 

Its national debt is well over 200 per cent cent of GDP. But as the issuer of the world’s reserve currency, the US must guard its role carefully.

The most visible threat, however, is to US political stability. The Fed’s quantitative easing boosts wealth inequality by increasing the net worth of those who own financial assets, chiefly of stocks and bonds. 

The top 10 per cent of Americans own 84 per cent of the country’s shares. The top 1 per cent own about half. The bottom half of Americans — the ones who have chiefly been on the frontline during the pandemic — say they own almost no stocks at all.

The further up the scale you go, the greater the gains. The S&P 500 showed a return of around 16.2 per cent in 2020. Its global luxury index yielded a remarkable 34 per cent. 

To be sure, many of the equity market’s gains have gone to big tech companies, such as Amazon and Netflix, which have benefited from the partial closure of the physical economy. 

But their gains have heavily outweighed losses in the worst hit sectors, such as cruise liners and oil drillers. All that money must find some place to go. 

At the start of last year, five-year Treasury bonds yielded 1.67 per cent. 

By the end, it had fallen to 0.37 per cent.

As my colleagues have reported, the Fed’s inescapable bias towards asset owners has combined with the financial sector’s preference for size to produce a very skewed recovery. 

This has benefited big companies, even junk-rated ones, at the expense of small businesses, including financially-sound ones. And it has boosted wealthy individuals over median households. 

After 2008, the economic recovery coexisted with a so-called “main street recession”. 

Today we call it a K-shaped recovery. The majority of people are suffering amid a Great Gatsby-style boom at the top.

Whatever we label it, the political reaction is unlikely to be positive. The coincidence is unfortunate for Democratic presidents. Just as Barack Obama inherited the Great Recession, Joe Biden is walking into the Great Pandemic. 

In Mr Obama’s case the backlash to his two-speed economy triggered a Tea Party populism that eventually brought his presidency to a halt. Not much of fiscal note happened after his initial $787bn stimulus in February 2009. 

That meant the Fed had to go on doing the work of keeping the economy afloat. In 2013, the Fed chair, Ben Bernanke, announced plans to reduce the scale of its bond-buying programme known as quantitative easing. 

He was quickly forced to reverse after the market went into a “taper tantrum”.

Mr Biden could find himself in a similar two-speed economy. Last month Congress passed a $900bn stimulus, which will tide over most unemployed Americans until March and send $600 cheques to individuals earning less than $75,000 a year. 

But his chances of passing a far larger “build back better” relief package after he takes office look slim. By contrast, Jay Powell, the Fed chair, has said the central bank’s support could be indefinite. 

The Fed will continue to buy $120bn of debt a month for the foreseeable future.

Here are the potential seeds of America’s next populist crisis. The Fed is pledging to do what it takes, while America’s elected officials seem unlikely to agree on fiscal policy. 

The right emphasis, as Mr Powell keeps reminding Congress, would be the other way round. Monetary policy is a blunt tool. 

Spending by contrast can be targeted at those who need it and help lift America’s growth potential.

Alas, the chances are that the Fed will remain “the only game in town”. This would be both a missed opportunity and pose a severe danger. 

The opportunity is for the US government to borrow long term funds at near zero rates and invest it in productive capacity. 

The danger of not doing that can be expressed in a simple equation: QE — F = P. 

Quantitative easing minus fiscal action equals populism.

How Biden Can Restore Multilateralism Unilaterally

After four years of the Trump administration undermining global governance arrangements, President-elect Joe Biden will certainly have his work cut out for him. Nonetheless, there are several actions the new administration can take immediately to reaffirm America's commitment to multilateral institutions and the rule of law.

Joseph E. Stiglitz

NEW YORK – There is so much to celebrate with the new year. 

The arrival of safe, effective COVID-19 vaccines means that there is light at the end of the pandemic tunnel (though the next few months will be horrific). 

Equally important, America’s mendacious, incompetent, mean-spirited president will be replaced by his polar opposite: a man of decency, honesty, and professionalism.

But we should harbor no illusions about what President-elect Joe Biden will face in office. There will be deep scars left from the Trump presidency, and from a pandemic that the outgoing administration did so little to fight. 

The economic trauma will not heal overnight, and without comprehensive assistance at this critical time of need – including support for cash-strapped state and local governments – the pain will be prolonged.

America’s long-term allies, of course, will welcome the return of a world where the United States stands up for democracy and human rights, and cooperates internationally to address global problems like pandemics and climate change. 

But, again, it would be foolish to pretend that the world has not changed fundamentally. The US, after all, has shown itself to be an untrustworthy ally.

True, the US Constitution and those of its 50 states survived and protected American democracy from the worst of Trump’s malign impulses. 

But the fact that 74 million Americans voted for another four years of his grotesque misrule leaves a chill. 

What might the next election bring? 

Why should others trust a country that might repudiate everything it stands for just four years from now?

The world needs more than Trump’s narrow transactional approach; so does the US. 

The only way forward is through true multilateralism, in which American exceptionalism is genuinely subordinated to common interests and values, international institutions, and a form of rule of law from which the US is not exempt. 

This would represent a major shift for the US, from a position of longstanding hegemony to one built on partnerships.

Such an approach would not be unprecedented. After World War II, the US found that ceding some influence to international organizations like the World Bank and the International Monetary Fund was actually in its own interests. The problem is that America didn’t go far enough. 

While John Maynard Keynes wisely called for the creation of a global currency – an idea later manifested in the IMF’s Special Drawing Rights (SDRs) – the US demanded veto power at the IMF, and didn’t vest the Fund with as much power as it should have.

In any case, much of what Biden will be able to do in office depends on the outcomes of run-off elections for Georgia’s two US Senate seats on January 5. But even without a willing partner in the Senate, the president has enormous sway over international affairs. There is plenty that Biden will be able to do on his own, starting immediately.

One obvious priority will be the post-pandemic recovery, which will not be strong anywhere until it’s strong everywhere. 

We cannot count on China to play as pronounced a role in driving global demand this time around as it did in the aftermath of the 2008 financial crisis. 

Moreover, developing and emerging economies lack the resources for the massive stimulus programs that the US and Europe have provided to their economies. 

What is needed, as IMF Managing Director Kristalina Georgieva has pointed out, is a massive issuance of SDRs. Some $500 billion of this global “money” could be issued overnight if only the US Secretary of the Treasury would approve.

Whereas the Trump administration has been blocking an SDR issuance, Biden could give it the green light, while also endorsing existing congressional proposals to expand the size of the issuance substantially. The US could then join the other wealthy countries that have already agreed to donate or lend their allocation to countries in need.

The Biden administration can also help lead the push for sovereign-debt restructuring. Several developing countries and emerging markets are already facing debt crises, and many more may soon follow. If there was ever a time when the US had an interest in global debt restructuring, it is now.

For the past four years, the Trump administration has denied basic science and flouted the rule of law. Restoring Enlightenment norms is thus another top priority. International rule of law, no less than science, is as important to the US’s own prosperity as it is to the functioning of the global economy.

On trade, the World Trade Organization offers a foundation upon which to rebuild. As of now, the WTO order is shaped too much by power politics and neoliberal ideology; but that can change. 

There is a growing consensus in support of Ngozi Okonjo-Iweala’s candidacy to serve as the next director-general of the WTO. A distinguished former Nigerian finance minister and former vice-president of the World Bank, Okonjo-Iweala’s appointment has been held up only by the Trump administration.

No trade system can function without a method of adjudicating disputes. By refusing to approve any new judges to the WTO’s dispute-settlement mechanism to succeed those whose terms have retired, the Trump administration has left the institution inquorate and paralyzed. 

Nonetheless, while Trump has done everything he can to undermine international institutions and the rule of law, he also has unwittingly opened the door for improving US trade policy.

For example, the Trump administration’s renegotiation of the North American Free Trade Agreement with Mexico and Canada largely did away with the investment provisions that had become among the most noxious aspects of international economic relations. 

And now, Trump’s Trade Representative, Robert Lighthizer, is using the time he has left in office to call for “anti-dumping” sanctions against countries that give their companies an advantage by ignoring global environmental standards. 

Considering that I included a similar proposal in my 2006 book, Making Globalization Work, there now seem to be ample grounds for a new bipartisan consensus on trade.

Most of the actions I have described do not require congressional action and can be carried out in Biden’s first days in office. Pursuing them would go a long way toward reaffirming America’s commitment to multilateralism and putting the disaster of the past four years behind us. 

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is Chief Economist at the Roosevelt Institute and a former senior vice president and chief economist of the World Bank. His most recent book is People, Power, and Profits: Progressive Capitalism for an Age of Discontent.

Overconfidence Meets Impatience To Set Up The Crash Of 2021


Commentary on America’s overvalued stock market can be found pretty much everywhere these days. 

These arguments are compelling, and are becoming more so as stocks keep rising.

The latest clue that we’re in yet another bubble is margin debt, which is money that investors borrow against their existing stocks to buy even more. 

A spike in its use means two things: First, investors have had some success in the recent past and are now convinced of their own genius. Second, they’re growing impatient and (being infallible) are comfortable using leverage to make a fast killing.

Overconfidence and impatience are a bad combination in most situations.  But they’re frequently deadly in equities. Put another way, when margin debt peaks, so, frequently, does the market.

Where is it now? Way up here:

Another sign of the same dangerous attitude is excessive use of leveraged ETFs. 

As with margin debt, the soaring popularity of these volatile “trading vehicles” reveals an investment community swinging for the fences.

Who exactly are these cocky, impatient people betting the farm on their own awesome judgment? 

Mostly, they’re retail investors, which explains a lot.

The government has responded to the covid pandemic by sending people free money while using interest rates and other fiscal/monetary tools to elevate financial asset prices. 

So the young traders who deposited their covid checks in free stock trading apps like Robinhood have only ever experienced a raging bull market in hot stocks, and can’t yet envision anything else.

The result? 

Huge spikes in stocks that professionals view as overvalued and therefore good short sale candidates. Amateur traders are swamping “the shorts,” pushing stocks like Tesla (where shorts lost $40 billion in 2020) to levels that pretty much guarantee an epic plunge the minute new stimulus money is withheld or even delayed.

The first half of this year, meanwhile, is an ideal candidate for a stimulus delay.

The just-completed bill was both paltry (below $1 trillion — chump change in today’s hyperinflationary world) and hard to cobble together. 

The next one will be even harder since legislators will want to give the latest stimulus time to work. 

This means the government will require some kind of crisis before acting again. 

Stocks, now the most fragile of a long list of fragile sectors, are likely to provide that crisis. 

Cue the crash of 2021.

A New Theory About the Monolith: We’re the Aliens

By Jody Rosen

    Photo illustration by Mike McQuade

The desert of southeastern Utah is a wilderness of flat-topped mesas, jutting buttes and plunging canyons. 

It is a fantastical landscape, the kind of scenery that pulls your thoughts toward things not quite of this earth. 

Indigenous people from the region have told stories of deities who formed the mountains by sweeping rocks through a hole in the heavens, and of warrior gods who stomped the topography into existence with their mighty footfalls. 

Other local legends hold that the desert is haunted by screaming ghosts or stalked by a phantom wolf. 

The area is known for U.F.O. sightings, and its arid terrain, dotted with crimson sandstone outcroppings, has often been likened to Mars. 

Since 2001, a group advocating the human settlement of Mars has maintained a research center outside a small town called Hanksville, where crews live for weekslong stretches to simulate habitation on the red planet. 

The desert is, literally, home to would-be Martians.

Recently, an alien presence of another kind brought this place into the news. 

On Nov. 18, a Utah Department of Public Safety helicopter crew, flying over public land in San Juan County with a team of biologists to conduct an aerial count of bighorn sheep, spotted an object that, clearly, was not a sheep. 

The crew landed and went to investigate on foot. 

What followed is documented in brief cellphone videos. 

One clip shows workers in green jumpsuits descending a rock formation while a voice chuckles off-camera: “OK, the intrepid explorers go down to investigate the alien life form.” 

A second video focuses in on the “life form”: a triangular pillar, nearly 10 feet tall, sheathed in metal and held together with rivets.

The site had evidently been chosen with care. 

The pillar was dramatically situated at the base of a slot canyon, encircled by sheer walls in a geometric arrangement. 

It looked like the setting for some ancient ritual, or at least the set of a “Star Trek” episode. 

Framed against the vast desert sky and towering red rocks, the sleek pillar was an intruder from another world, like a sculpture that had fallen off a truck on its way to Art Basel. 

Was it a work of landscape art? 

A parody of landscape art? 

It was well constructed and had been skillfully installed in a neatly cut cavity. 

The unseen narrator of the D.P.S. videos laughs incredulously: “Who does this kind of stuff?” 

There’s a hint of unease that mirrors the viewer’s, a suspicion that we are being set up. 

Even if the pillar isn’t dangerous, it may be a booby trap: a joke, cosmic or otherwise, at our expense.

Add a foreboding soundtrack, and this could be the opening scene of a sci-fi movie, the eerie discovery that sets the plot in motion. 

That’s more or less what happened: When the D.P.S. announced its discovery on the 20th, the pillar became a sensation. 

Believers in U.F.O.s insisted that it “fell out of the sky” and aired conspiracy theories about government cover-ups. 

The government, for its part, winked at the idea of aliens. 

The D.P.S. referred to the pillar as “the monolith,” an apparent reference to the extraterrestrial structures in Stanley Kubrick’s “2001: A Space Odyssey” — which appear after an astronaut is sucked into a vortex of light that sends him shooting through space-time. 

The Utah Bureau of Land Management tweeted reminders that using public land this way was “illegal, no matter what planet you are from,” and that the road to the site was “not suitable for most earth-based vehicles.”

Internet sleuths pinpointed the site anyway — a remote patch near the Bears Ears National Monument — and tourists arrived to take Instagram photos. 

Four days later came another announcement: Some locals had taken it upon themselves to remove the monolith. 

A photographer, Ross Bernards, claimed to have witnessed the removal — accomplished under cover of darkness, he said, by a team of four men — and a friend posted blurry Instagram photos that appeared to confirm his story.

The mystery of who created the monolith may never be solved. 

If we accept that it was a guerrilla art intervention, it was clearly successful, seizing public attention in ways a commissioned work never could. 

Weeks after the structure vanished, monolith fever has not abated, with copycats springing up across the U.S. and around the globe, from Romania to Morocco to Paraguay. 

Their spread so captivated social media that many wondered whether the world was falling for a viral marketing campaign.

But the appeal of the monolith touches deeper depths than the usual dopamine hits of the viral internet. 

In an age of GPS mapping and Google Earth, we may feel that the planet has been demystified, down to the centimeter — that there is no more unsurveilled terrain. 

The appearance of a monolith in a hinterland is a satisfying reminder that the world remains very large. 

It is still possible for an artist, or a prankster, or an artist-prankster, to slip undetected into the backcountry and leave something weird and alluring behind. 

Online detectives studying Google Earth figure the pillar was installed around 2016, which would mean that it’s possible for a weird, alluring thing to remain hidden for years, a secret shared only with passing bighorn sheep.

The idea of terra incognita exerts a powerful pull at this moment. 

The pandemic has radically disordered our sense of space and place; whether these months of social distancing were spent hiding inside or seeking uncrowded spots in the open air, they have altered our ideas about where we fit in the world and what strange events may be unfolding far from us. 

In any year, the discovery of a mysterious monument in the desert would capture the imagination. But the fascination that has greeted the monolith these past few weeks feels significant, the sign of a jolt to the collective unconscious. 

The monolith is a literal blank screen, on whose shimmering surface we can etch our terrors, longings, fantasies, crackpot theories, gallows humor and other dreams and nightmares incubated in the anxious purgatory of 2020.

It is too early to know if the homemade monoliths rising in streets and parks around the world are totems of a passing craze or lasting landmarks in the making. 

But it is surely not a stretch to read symbolic significance in their proliferation at the end of the most dreadful year in living memory: a collective desire to mark a transition, to post figurative headstones commemorating the demise of 2020. 

Or perhaps the better metaphor comes from the Kubrick movie. 

The year has turned us earthlings into aliens, wanderers on an unfamiliar planet. 

Who among us doesn’t want to leave this place behind and go hurtling through space-time, into a new year, and back to another world?

Jody Rosen is a contributing writer for the magazine and the author of “Two Wheels Good: The Bicycle on Planet Earth and Elsewhere,” to be published next year. He last wrote about the racial anxiety lurking behind reaction videos