The Reality of Financial Dominance 

Doug Nolan

The federal deficit for the first quarter of the new fiscal year was reported at $573 billion, up 61% y-o-y. Washington borrowed 45 cents of every dollar spent during the quarter. After the passage last month of the $900 billion stimulus legislation, estimates were placing this year’s deficit above $2.3 TN. 

The Biden administration Thursday released details of its Covid stimulus package with a price tag of $1.9 TN. Goldman Sachs has since increased its estimate of the eventual size of this stimulus to $1.1 TN from $750 billion. 

Goldman believes tough negotiations are in store to garner the necessary Republican votes in the Senate. Democrats could push some of this spending through the budget “reconciliation” process requiring only a simple majority, although this would come with delays and other issues. 

The President-elect also announced a second major package addressing taxes and infrastructure would be coming later in the year.

It appears likely that this year’s fiscal deficit will now even exceed last year’s unprecedented $3.1 TN. 

The country is hurting, and social tensions are boiling over. I understand the argument that a deeply divided country can’t commence a healing process until its citizens get their feet back on the ground with confidence the economy is moving forward. 

Yet I dismiss the argument that low interest rates create the opportunity to assume larger debt loads. It’s a tragedy we came into this pandemic with such indebtedness and financial instability. 

Our federal government is in the process of expanding debt by more than 30% of GDP in only two years. Hopefully not at double-digit annual rates, yet massive deficit spending is inevitable as far as the eye can see. 

Importantly, Washington is running massive deficits despite both record stock prices and corporate debt issuance – in the face of about the loosest financial conditions imaginable. 

How enormous will deficits balloon when this historic financial Bubble bursts? 

Are $5.0 TN annual deficits an unreasonable guesstimate? No worries, apparently. 

There’s always the “whatever it takes” Federal Reserve balance sheet. In the financial and economic crisis scenario, does the Fed boost Treasury, MBS, corporate bond and EFT purchases to, say, $500 billion monthly? 

Two headlines from Powell’s Thursday Princeton zoom call: “U.S. Federal Debt Not on Sustainable Path” and “High Public Debt Does Not Affect Monetary Policy.” Perhaps a more pertinent caption would read, “Monetary Policy Fomenting High Public Debt.” 

I might be persuaded to believe in the most extreme circumstances (i.e. war or during acute financial crisis) there may be justification for central banks temporarily pegging long-term market yields. 

Today is not such a scenario. The system is currently in a most desperate need of some market discipline. At this point, only the markets can keep Washington from completely bankrupting our government with unmanageable debt.

Markus Brunnermeier, director of the Bendheim Center for Finance at Princeton: 

“Let me move on to the next topic from price stability to financial stability, which is also a major concern for you and the Fed more generally. There is also this concept out there of financial dominance. So, if the financial sector - of course it’s very sound at this point but there might be over-leveraging going on on the corporate side – do you see that there is some threat from financial instability which might limit what monetary policy you can undertake at some point down the road? And do you think the macro-prudential tools the U.S. has are sufficient to avoid such a financial dominance circumstance?"

Fed Chair Jay Powell: 

“I would say we don’t feel any pressure from financial dominance… If financial dominance is the reluctance, or even the inability, of a central bank to tighten policy because of the leverage in the private sector – we don’t feel that. 

Our non-financial corporate sector did go into this downturn with relatively high leverage, but at these low interest rates the interest payment are actually not at terribly high level by historical standards – they're sort of at a normal level. 

We have not seen the big uptick in defaults that we thought we might see… It’s just not something we are feeling or have ever felt, really. When the time comes to raise interest rates we’ll certainly do that – and that time, by the way, is no time soon.” 

Noland comment: 

I can only hope this is an issue of semantics. 

The Fed hasn’t employed traditional tightening measures since their 1994 rate increases punctured a highly levered speculative Bubble (bond and derivatives markets). 

Fed funds ended 2002 at 1.25%, despite double-digit mortgage Credit growth. With household mortgage Credit having expanded 75% in five years in clear Bubble excess, Fed funds ended 2004 at 2.25%. 

After cutting rates to zero in late 2008, rates began 2018 at only 1.25%. Powell’s attempt to normalize policy rates ended rather abruptly at 2.25%, with a late-2018 bout of de-risking/deleveraging forcing the new Fed Chair to “pivot” right back to ultra-easy. 

The key issue throughout this cycle has been speculative leverage as opposed to over-indebted corporations. The Fed obviously “feels pressure” – as its $3.1 TN response to March’s market dislocation demonstrates. 

It was not the economy forcing what seemed at the time daily boosts to the scope of the Fed’s emergency balance sheet operations. It was, instead, the clear and present danger of an unraveling of unprecedented speculative leveraging behind previously unimaginable Fed liquidity injections. 

It can be called “financial dominance” or the layperson’s “trapped,” but markets operate today with high confidence that the Fed has no alternative but to maintain ultra-easy conditions – zero rates, massive ongoing balance sheet growth, and whatever it takes market liquidity backstopping. “Financial Dominance” is the Bubble’s lifeblood. 


“The public debt level, of course, has reached record highs. If you look at the CBO forecast, it’s going up tremendously over the next few years… How will this impact monetary policy… It might be constraining through fiscal dominance of monetary policy down the road. 

And how important do you see the independence of the central bank, of the Fed, that at that time – when it has to step on the brakes a little bit – that it can actually raise interest rates? Do you think it’s very important – not only for the Fed but for other central banks around the globe as well? How would you stress the importance of independence…?"


“The U.S. is not on a sustainable path at the federal government level in the simple sense that the debt is growing substantially faster than the economy. That means by definition it is unsustainable. 

That’s not to say that the level of debt is unsustainable. It’s not unsustainable and it is far from unsustainable. I think we’re a long, long way from fiscal dominance in the United States, if we ever get to that place. 

It is certainly not a factor we consider in any way at this time. So high debt in no way impacts monetary policy now. We are squarely focused serving the public through to achieve maximum employment and stable prices. 

My strong view is that central bank independence is an institutional arrangement that has served the public well… I frankly feel that is well understood among elected representatives – on both sides of the aisle people do understand that having an independent central bank really does help, particularly in times of crisis, but also through the business cycle where you can really be focused on serving all the American people and ignore political considerations completely.”

Noland Comment: 

The system is today one unexpected spike in market yields away from mayhem. Why are current deficits not alarming, when past deficits a fraction of today’s size were recognized as dangerous and unsustainable? 

What gives Powell the confidence that “we’re a long, long way from fiscal dominance”? One reason: because of contemporary, experimental monetary policy – more specifically the introduction of prolonged periods of zero rates and central bank asset purchases. 

I have much less confidence in debt sustainability than Powell, as I seriously question the sustainability of central bank inflationist doctrine. I don’t believe the Fed can continue to inflate “money” and manipulate the markets without ensuring at some point one catastrophic market reaction/adjustment. Excess, distortions and imbalances will mount until something snaps. 


“Hopefully the crisis will be behind us soon, with the new vaccines coming out. At some point we’ll have to start thinking about exit. I know that some of your colleagues – and even you - said it’s too early to even think about exit. 

But perhaps at some point we have to start to think about exit. I was wondering are there any lessons from taper tantrums – certain things we should avoid because taper tantrum was very detrimental to other economies outside the U.S. What are the lessons from the past experience…?”


“Now is not the time to be talking about exit. I think that is another lesson of the global financial crisis is be careful not to exit too early. By the way, try not to talk about exit all the time if you’re not sending that signal because markets are listening. 

The economy is far from our goals, and as I’ve mentioned a couple times, we’re strongly committed to our framework and to using our monetary policy tools until the job is well and truly done. The taper tantrum highlights the real sensitivity that markets can have about the path of asset purchases. 

We know we need to be very careful in communicating about asset purchases… We will, of course, be very, very transparent as we get close. I would just say this on the current situation, when it does become appropriate for the committee to discuss specific dates - when we have clear evidence that we’re making progress toward our goals – and that we’re on track to make substantial further progress towards our goals – when that happens and we can see that clearly we’ll let the world know. 

We will communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual tapering of asset purchases. So, that’s how we’re thinking about that.”

Noland Comment: 

“Be careful not to exit too early” is a “lesson of the global crisis”? You can’t be serious? 

The Fed doubled its balance sheet to $4.5 TN between 2011 and 2014 in a non-crisis environment. 

This was after formally communicating an “exit strategy” in 2011. 

Between 2008 and 2014, Fed holdings surged from $860 billion to $4.5 TN. At that point reducing assets to $3.72 TN doesn’t qualify as either “early” or an “exit,” especially when the Fed quickly reversed course in 2019.

At this point, I doubt an “exit” will ever be possible. 

Count me skeptical of the nice scenario of the “very transparent” Fed clearly communicating an approaching taper to a calm and rational marketplace. We’re so beyond that. The Federal Reserve’s life is about to turn much more complicated and challenging. 

Inflation risk is the highest it’s been in years. 

The 10-year Treasury “breakeven” inflation rate added a couple more basis points this week to 2.09%, the high since October 2018. 

Commodity prices continue to rally, with the Bloomberg Commodities Index closing Friday near one-year highs. Services and manufacturing surveys indicate heightened price pressures. 

Yet my main point is different. 

The world is awash in liquidity. 

Moreover, the dollar has weakened, and the central bank overseeing the world’s reserve currency is trapped in reckless monetary inflation. This backdrop has granted countries around the world the flexibility to recklessly inflate their money and Credit. I would argue global “money” and Credit are unhinged like never before. And it’s no longer hypothetical. 

Global central bank “money” is solidly on a trajectory that ensures Acute Global Monetary Disorder. 

Does this ensure accelerating general price inflation? 

Not necessarily. There remains the possibility for the bursting Bubble scenario with collapsing asset prices, de-leveraging, illiquidity and resulting deflationary pressures. 

But after what was experienced in 2020, we must assume global central banks would respond in concert with multi-Trillions of additional monetary inflation. 

We’ve reached the point where a particularly problematic circumstance would appear a relatively high probability scenario: central banks being forced by synchronized global de-risking/deleveraging to move early and aggressively to flood the system with liquidity. 

Central banks, for the first time, would be flooding a system with liquidity despite increasingly entrenched inflationary pressures and biases. General price inflation could really catch fire. 

January 13 – Bloomberg (Steve Matthews and Vivien Lou Chen): 

“Federal Reserve officials are beginning to split over when they may need to start pulling back on their massive monetary stimulus, drawing nervous glances from investors who remember how markets were roiled during the 2013 taper tantrum. 

In the past week, four of the Fed’s 18 policy makers have publicly raised the prospect they may discuss reducing bond buying -- currently running at $120 billion a month -- by year’s end. 

In contrast, several others have called the debate premature and Fed Vice Chairman Richard Clarida, the most senior central banker to weigh in, has said he doesn’t expect any changes before 2022.”

Powell may have tried to throw cold water on taper talk, but this issue is anything but resolved. Inflationary pressures are mounting, while egregious market speculative excess could not possibly be more conspicuous. M2 “money” supply was up $3.842 TN, or 25%, over the past year. 

With the Democrats in charge, already massive deficit spending will be supersized. 

It’s terrible to see our members of Congress living in fear. Any responsible central banker would look at today’s monetary environment and be panicked.

Another fascinating week in global finance. Interesting to see the People’s Bank of China and the Reserve Bank of India both moving to drain some excess liquidity. 

EM equities Bubbles indicated some vulnerability, with major equities indices sinking 3.8% in Brazil and 2.1% in South Korea. 

EM bond prices reversed lower. 

EM currencies were generally lower for the week, with notable weakness in European EM currencies. European equities faced selling pressure, with most major indices down around 2%. Italian 10-year yields jumped eight bps on renewed political instability (see Europe Bubble Watch), as Italian banks were hit 3%. 

The S&P500 dropped 1.5%, giving back most of its y-t-d gain. With its 2.3% decline, the Nasdaq100 is now down for 2021. 

While speculation runs rampant at the fringe, the major indices are indicating vulnerability. Investment-grade and high yield CDS prices rose this week. The VIX jumped almost three points to 24.34, a notably elevated level considering equities are near record highs and there’s no major impending event raising the fear level. 

January 15 – Reuters (April Joyner): 

“Trading volume in U.S. equity options hit a new record on Friday… More than 49.5 million contracts traded during the session, Trade Alert said. Friday marked the expiration of monthly options contracts… 

This year, some 416 million U.S equity options contracts have already traded over 10 sessions. That’s equal to the total options volumes over the first four months of 2004…”

Markets are appearing more fragile to me. 

A historic mania faces a troubling reality. 

The pandemic continues to spiral out of control, with risk that these virus variants worsen an already horrible situation. 

The U.S. economy has notably weakened (i.e. employment, retail sales, small business confidence and consumer confidence). 

And while the bullish consensus sees only a few months until vaccines reignite recovery, there are major issues with the vaccine rollout as well as deepening scars as the U.S. pandemic downturn approaches its one-year anniversary. 

Mainly, I sense Bubble vulnerability. 

Things evolved into an out-of-control liquidity-fueled mania, within a backdrop acute economic, social and political instability. 

We’ve lost sight of the combustibility of this mix. 

When markets inevitably succumb, the dark social mood is poised to exacerbate the downturn. 

Chile populists challenge elite as voters seek new direction

Maverick candidates gain support ahead of polls as leaders fail to address grievances

Benedict Mander in Buenos Aires

Chile’s opposition deputy Pamela Jiles celebrates after voting on a bill that allows for early withdrawal of private pension funds in Santiago © AFP via Getty Images

When Pamela Jiles pranced around Chile’s lower house of Congress sporting a pink cape and waving matching feathers after the approval of a law allowing pensioners to withdraw their funds early, she was not the only one celebrating.

The legislation pushed by the former television personality, who has since become one of Chile’s most popular politicians, was backed enthusiastically by a public suffering from the economic impact of the coronavirus crisis. 

But it was still seen by many as a populist stunt that would do little to resolve the country’s underlying problems.

With Chile’s traditional ruling class failing to provide solutions to the demands of protesters after a wave of mass demonstrations that started in 2019 and continued last year, a new brand of politician has emerged. 

Rather than coming from the country’s deeply unpopular traditional elite, their roots lie mainly in municipal politics, grassroots movements and the media.

However, the same questions hang over the heads of this new generation: can they prevent the explosion of more social unrest caused by Chile’s high levels of inequality, rising prices, meagre pensions and poor public services.

The leading candidates in opinion polls ahead of Chile’s November presidential elections are mayors who have set themselves apart from the established political class. 

On the right is Joaquín Lavín, the social media savvy mayor of a well-heeled district in Santiago. 

On the left is Daniel Jadue, the communist mayor of a downtrodden area of the Chilean capital who won support by setting up a “popular pharmacy” selling medicines cheaply.

“Both are very much neo-populists. Neither has a programme or a team. They are all by themselves,” said Marta Lagos, a Chilean pollster and sociologist. 

They were only offering short-term fixes, she argued: “They have only touched the surface with immediate populist solutions, but there are no proposals for the future.” 

Mr Lavín is an old hand at headline-grabbing stunts. First elected as mayor in 1992, he once hired a plane to spray chemicals to generate rain — unsuccessfully — during a drought. 

He has also brought a truckload of snow down from the Andes to Santiago’s main square for children to play in and created a makeshift beach with imported sand by the capital’s river.

A regular on television chat shows, Mr Lavín has become adept at harnessing social media. “If you have a problem with the overhanging branches of a tree, you can tweet him and within an hour he will have told someone to deal with it. 

I don’t know if he has a team of little elves helping him out, but it’s quite amazing,” said Robert Funk, a political analyst in Santiago.

Mr Jadue is seen as a problem solver and has focused on complaints over expensive medicines and inadequate public services. Through his state-run pharmacy, he managed to break a private sector monopoly and provide cheaper drugs, an initiative since copied by other mayors around the country.

Most mainstream political analysts believe Mr Lavín has the edge over his rivals, although some see him as no more than a traditional politician.

Mr Lavín was first elected as mayor of the Santiago district Las Condes in 1992, a position he returned to in 2016 after serving as a minister in the first government of current president Sebastián Piñera and standing twice as a presidential candidate.

While Mr Lavín may be able to rally the Chilean right behind him, Mr Jadue will struggle to win the backing of centre-left voters, say analysts. The leftist Concertacion coalition that governed Chile for most of the past 30 years — with the exception of Mr Piñera’s two terms — has all but collapsed, having failed to address high levels of inequality.

“How can the country’s most successful coalition in the last 100 years self-destruct to a degree where not only can they not win an election, but they do not even have a candidate? 

If they had a decent one, Jadue would not be anywhere near where he is today,” said Mr Funk, who argued that the communist mayor would not be able to win wide support.

There is still time for a true outsider to emerge ahead of the November polls. For many of the protesters who stormed downtown Santiago last year, even Mr Jadue does not qualify. 

He was not welcome when last year he tried to join a demonstration in Plaza Italia, the emblematic epicentre of the protests, as some saw him as seeking to exploit the situation for personal political gain.

However, the populist tide seems likely to prevail. Asked who they thought would win the next elections in the latest Cadem poll, 17 per cent of Chileans surveyed said Mr Lavín, 9 per cent thought Mr Jadue, and 5 per cent favoured Ms Jiles. 

In fourth place with 3 per cent was another rightwing mayor and former presidential candidate, Evelyn Matthei, who wants to run against Mr Lavín because she considers him to be a populist.

It remains to be seen what the implications would be for the country’s much-vaunted market-friendly economic model. The country has enjoyed three decades of continuous growth since the return of democracy in 1990.

“Chileans want to be Sweden or Finland, not the USSR. They want a welfare state,” said Patricio Navia, a political scientist at New York University. But with voters wanting better pensions and public services but struggling to decide how to fund them, he said, “Chileans are in for a rude awakening.”

Are We the Cows of the Future?

The pastures of digital dictatorship — crowded conditions, mass surveillance, virtual reality — are already here.

By Esther Leslie

Bryan Olson

There was a moment, in the early days of the pandemic, when reports surfaced here and there of improvements in air and water quality across the world, as production and traffic abruptly diminished. 

Images circulated of herds of mountain goats and wild boar exploring deserted city streets and schools of dolphins exuberant in the Bosporus. 

Some were hoaxes, but all spoke momentarily to the idea that the disruption that had come from some sort of imbalance in human-animal relations, and could result in a rerighting in favor of nature.

In these hopes, nature was made to play a familiar role: as a haven to guarantee human well-being. 

Utopian thinking is full of this fantasy. 

The Hyperboreans of Greek legend, for example, led a perfect existence beyond the north winds in a permanent spring, and the denizens of Thomas More’s “Utopia” “cultivate their gardens with great care so that they have both vines, fruits, herbs, and flowers in them.” 

Later, William Morris drew nature — made almost palpable on the walls on well-furnished parlors — into his utopian counterimagining of the factories of industrial society. Today’s utopians, dreaming of shopping malls turned into wetlands, are similar in spirit.

In this view, nature guarantees cyclicality, reproduction and predictability, unlike history, with its contingency, its sudden twists and turns. 

But this is an illusion. 

Nature, of course, is very much subject to history; what seemed more or less eternal is now undergoing extinction, unstoppable melting. 

Nature is not settled and permanent, but always in flux. It is not something separate from humans, reliably ready to soothe our woes and restore our spirits. 

It is rather entangled in the web and substance of humanity, its helter-skelter activity, its ceaseless pursuits.

Human intervention in plant and animal life, for example, is legion. 

Take cattle. 

Cows’ bodies have historically served as test subjects — laboratories of future bio-intervention and all sorts of reproductive technologies. 

Today cows crowd together in megafarms, overseen by digital systems, including facial- and hide-recognition systems. 

These new factories are air-conditioned sheds where digital machinery monitors and logs the herd’s every move, emission and production. 

Every mouthful of milk can be traced to its source.

And it goes beyond monitoring. In 2019 on the RusMoloko research farm near Moscow, virtual reality headsets were strapped onto cattle. 

The cows were led, through the digital animation that played before their eyes, to imagine they were wandering in bright summer fields, not bleak wintry ones. 

The innovation, which was apparently successful, is designed to ward off stress: The calmer the cow, the higher the milk yield.

A cow sporting VR goggles is comedic as much as it is tragic. There’s horror, too, in that it may foretell our own alienated futures. 

After all, how different is our experience? 

We submit to emotion trackers. 

We log into biofeedback machines. 

We sign up for tracking and tracing. 

We let advertisers’ eyes watch us constantly and mappers store our coordinates.

Could we, like cows, be played by the machinery, our emotions swayed under ever-sunny skies, without us even knowing that we are inside the matrix? 

Will the rejected, unemployed and redundant be deluded into thinking that the world is beautiful, a land of milk and honey, as they interact minimally in stripped-back care homes? 

We may soon graze in the new pastures of digital dictatorship, frolicking while bound.

The notion of nature as something external, benevolent and consolatory might be part of the problem. 

Theodor Adorno, the great German philosopher and cultural critic of the mid-20th century, observes in “Aesthetic Theory” how nature that has evaded human cultivation — Alpine moraines or moonscapes — resembles the unnatural forms of industrial waste mountains and is just as terrifying.

For Adorno, idyllic nature, pristine, pretty, has more to do with oppressive sexual morality than with what nature is or can be. 

Against the insistence that nature should not be ravished by technology, he argues that perhaps technology could enable nature to get what “it wants” on this sad earth. And we are included in that “it.”

Nature, in truth, is not just something external on which we work, but also within us. 

We too are nature. 

“My tears well up,” wrote the German Romantic poet Johann Wolfgang von Goethe. 

“Earth, I am returning to you.” 

Adorno took our overawed sensations when confronted with the magnitude of untamed nature as a signal of an awareness of our natural essence. 

The sublime — whether encountered in the world or in art — provokes in us tears, shudders and overwhelming feeling. 

Our ego is reminded of its affinities with the natural realm. 

In our collapses into blubbering wrecks, eyes wide and wet, we become simultaneously most human and most natural.

For someone associated with the abstruseness of avant-garde music and critical theory, Adorno was surprisingly sentimental when it came to animals — for which he felt a powerful affinity. 

It is with them that he finds something worthy of the name Utopia. 

He imagines a properly human existence of doing nothing, like a beast, resting, cloud gazing, mindlessly and placidly chewing cud.

To dream, as so many Utopians do, of boundless production of goods, of busy activity in the ideal society reflects, Adorno claimed, an ingrained mentality of production as an end in itself. 

To detach from our historical form adapted solely to production, to work against work itself, to do nothing in a true society in which we embrace nature and ourselves as natural might deliver us to freedom.

Rejecting the notion of nature as something that would protect us, give us solace, reveals us to be inextricably within and of nature. 

From there, we might begin to save ourselves — along with everything else.

Esther Leslie is a professor of political aesthetics at Birkbeck College, University of London, and the author, most recently, of “Liquid Crystals: The Science and Art of a Liquid Form.”

Biden Administration Could Unsettle Banks in More Than One Way

Percolating policy ideas like postal banking and digital wallets via the Fed give a hint of how Washington could reshape the banking business

By Telis Demos

An idea under discussion is to create banking accounts for individuals with the help of the Federal Reserve./ PHOTO: BRENDAN MCDERMID/REUTERS

Historically, investors in banks would be worried about stepped-up financial regulation from a new Democratic administration. 

This time around, however, a bigger long-term worry might be government efforts that could disrupt banking itself.

There are a handful of measures either working their way through agencies or being discussed in Democratic policy circles aimed at broadening access to financial services, which could force traditional banks to compete more—either with the government, technology upstarts, or both in combination.

Postal banking is one intriguing example. 

The notion of offering basic banking services via the post office had the support of several Democratic contenders, and some advocates have had roles in President-elect Joe Biden’s transition. 

Major new legal powers granting the U.S. Postal Service license to make loans or hold deposits may be politically complex. 

But things like installing ATMs, facilitating bill payments or expanding electronic money transfer services at post offices may be more feasible.

Some banking industry groups have opposed postal banking, arguing consumers could be left vulnerable. 

But moves to broaden banking access might generate support among other constituencies, perhaps from rural representatives, or in Silicon Valley: Digital players could see post offices as de facto branches, helping people that don’t use traditional banks move cash into and out of their virtual wallets.

There are other ideas that could further enable a new kind of banking ecosystem to evolve. 

One that has been making its way into potential legislation is to create accounts for individuals with the help of the Federal Reserve. 

Some propose this in conjunction with postal banking. 

Additionally, the Fed is in the early stages of developing its own real-time payments system. 

Depending on how it is fleshed out, that could compete with some existing forms of bank payments.

There also are ongoing developments at the level of who is allowed to offer banking services. 

Some of this work, done by agencies during the Trump administration, may move further ahead in the coming years under new leadership. 

A lot of the thinking behind the Office of the Comptroller of the Currency’s process for so-called fintech charters began under President Obama and may continue. 

The Federal Deposit Insurance Corp. has adopted new rules around industrial loan companies that might open a path for more nonbanks to offer certain banking services, though much may hinge on how individual applications are treated. 

There also are potential Consumer Financial Protection Bureau “open banking” rules that might allow easier access to bank-account data from upstarts.

The State of Play in North Korea

Progress is possible, but expect a lot of tests from Pyongyang early in Biden’s tenure.

By: Phillip Orchard

In a White House meeting just weeks before Donald Trump’s inauguration, then-President Barack Obama warned the president-elect that the North Korean nuclear threat would be the thorniest national security challenge he would inherit. 

Kim Jong Un then welcomed Trump to office with nearly two dozen ballistic missile tests in 2017 alone, showing off increasingly sophisticated capabilities with each, including solid-fuel engines and a pair of intercontinental ballistic missiles. 

So Trump moved with gusto to abandon the more cautious and conventional but generally futile approaches of his predecessors. His administration tried “maximum pressure,” pairing crippling U.N. sanctions with an all-out effort to communicate that it was serious about going to war to end the North's nuclear threat. 

It tried diplomacy by personal rapport, breaking precedent with a trio of historic summits between Trump and Kim. Then it tried basically ignoring the North for a couple of years.

But while Trump made a lot of history, the situation with North Korea is essentially the same as it was four years ago. 

The North’s nuclear and missile programs are still humming, and Pyongyang is under intense pressure to leverage these for economic and strategic gain. If anything, North Korea is at once stronger and more desperate – a dangerous combination.

No Small Thing

The Trump administration's biggest success with North Korea was a tacit agreement involving a freeze on the North's tests of intercontinental ballistic missiles (ICBMs) and nuclear weapons in exchange for reduced joint U.S.-South Korean drills, which, from Pyongyang's point of view, are indistinguishable from preparations for an invasion. 

This was no small thing. It disrupted a dangerous spiral of escalation. It stopped the North's attempts to master reentry technology, the most difficult part of ICBM development. 

And it created space for the two sides to begin a slow, painstaking process of establishing trust, implementing confidence-building measures and taking small steps toward a fundamentally new security relationship both could live with.

But the process never gained traction, and Trump’s attempt at forging a grand bargain with Kim ultimately fell short. Put simply, the U.S. didn't have enough leverage to force North Korea to capitulate and make sweeping concessions it couldn't tolerate. 

And Pyongyang didn't have enough leverage to scare the U.S. so much that it would back off its demands for complete, verifiable and irreversible denuclearization.

So long as the U.S wasn't willing to go to war with a notoriously unpredictable nuclear-armed state, “maximum pressure” was reduced to things Pyongyang had a long history of shrugging off. 

Isolation, sanctions and flattery just weren't going to get the Kim regime to abandon a nuclear program it sees as strategically invaluable, indispensable to the regime's hold on power, and something that has, for perhaps the first time in generations, allowed it to negotiate from a position of strength. 

Even so, the U.S. had little reason to worry about the North actually using its weapons so long as Pyongyang didn't believe a U.S. attack was imminent. This meant the U.S. could effectively ignore the North after the third Trump-Kim summit in Hanoi fell apart, moving the goalposts on what it defined as success and shifting focus to bigger strategic concerns in the region.

Still, North Korea stuck to the deal for a number of reasons. For one, it thought Trump had significant political interest in signing a grand bargain, making him more likely to deal than his potential successor. 

For another, pausing tests of long-range missiles (while launching short-range ones) benefited Pyongyang because it further stressed an already-strained U.S. alliance structure in Northeast Asia – as did the continued pause in U.S.-South Korean drills. Moreover, the deal didn’t require Pyongyang to truly give up anything of substance. 

If and when it felt compelled to return to its familiar pattern of ratcheting up tension whenever it wanted international attention, there was very little stopping it from resuming long-range missile tests.

Square One, Again

The Biden administration would probably be content to keep the status quo in place and focus on the many, many more pressing priorities on its plate. But it’s doubtful that North Korea will be similarly patient. 2020 was a really bad year for Pyongyang. 

Trade with China fell by an estimated 75 percent after the COVID-19 pandemic forced the North to close its borders. 

The loss of raw material imports reportedly led to an alarming drop in factory activity, spikes in food prices and wild swings in the value of North Korea's currency, according to South Korean intelligence. In October, Kim stunned Korea watchers with a tearful apology for failing to deliver on his economic promises.

To be clear, the North has an extraordinary ability to withstand international isolation and domestic privation. Nothing that happened this year – not even the weird stretch when Kim kept disappearing from the public eye for weeks at a time – gives any reason to think the regime is on the brink of collapse. 

Thus, the continued sanctions should not be viewed as an existential threat to the regime's survival. If it felt that its best play was to continue abiding by the tacit deal brokered in 2018, it likely could. But it's hard to come up with reasons it would think continued compliance is its best play.

So in all likelihood, North Korea will greet Biden's arrival in the White House in a similar manner it did Trump – as well as Obama, whose first four months in office saw the North test its longest-range missile to date, withdraw from the Six-Party Talks and conduct its second nuclear test.

Around the time Biden is inaugurated on Jan. 20, Kim is expected to preside over a rare major Party Congress. Don't be surprised if it produces a fairly explicit message about Pyongyang's plans and expectations from the United States. 

And if Pyongyang does not feel the Biden administration is paying sufficient attention and/or is ready to budge on sanctions relief, expect there to be an escalating series of provocations intended to nudge Washington back to the negotiating table. 

After all, the North already unveiled a massive new missile at a military parade last fall. Whenever Pyongyang shows off a new rocket, tests tend to follow shortly thereafter. 

If and when they do, the U.S. and North Korea will be back at square one, again.

No Shame

Naturally, this raises the question of whether meaningful progress on curbing the North Korean threat is even possible for the Biden administration – or any administration, for that matter. 

There are any number of reasons to be pessimistic.

Consider the following factors working against U.S. negotiators: The North has a long history of breaking hard-negotiated agreements on its nuclear program. Its economic interests have never been prioritized over regime survival or national defense. 

Indeed, it's almost wholly dependent economically on another outside power that wants it to denuclearize (China) – and yet is incapable of doing much about it. A rapid "opening up" to the outside world is seen as an intolerable threat to regime control, making integration-related inducements futile. 

The nuclear program legitimizes the regime with the masses, which the regime has conditioned to see themselves as permanently under siege by foreign enemies. It's immensely popular with elite hardliners, military brass and the national security apparatus – most of whom live lives of luxury and whose steadfast support Kim needs to rule. 

And, above all, the nuclear program has passed the point of being aspirational, and the window for eliminating it with military action has realistically closed. 

The North has hundreds of nukes and an ever-expanding arsenal of delivery mechanisms. No one can take them from it at an acceptable cost.

So there's no shame in failing to get the North to denuclearize. But this doesn't mean a lesser agreement that reduces the North's nuclear threat – that is, something meant to limit the shape and size of the North's arsenal – is impossible. 

Nor does it mean that Pyongyang isn't capable or willing to negotiate in earnest. The North demonstrated as much beginning in 2018, when it opened a slow and halting but substantive reconciliation process with the South. 

This, in turn, opened the window for the Kim-Trump bromance. The North may have grossly miscalculated just how much it could get from the Trump administration at the meeting in Hanoi, but post-summit purges of the North's negotiating team suggested that Pyongyang wasn't acting entirely in bad faith.

Its missile and nuclear programs are big enough now that aspects could be negotiated away without making it feel too exposed and vulnerable. It doesn't need ICBMs if it feels a fundamentally new security relationship – one that somehow makes it feel the threat of invasion by the U.S. or one of its allies is reduced to manageable levels for good – can be established. 

And while it may not give its economic interests priority over national defense and regime security, its economic interests are still important enough to function as crucial sweeteners in any deal. The devil is absolutely in the details here, and it will require an achingly slow, sustained process to get them right.

But there's enough pieces of a potential deal in play to make it worthwhile to keep talking, and Pyongyang won't abide silence from the Biden administration anyway. It just won't happen with a framework centered on complete denuclearization. 

North Korea is a nuclear state and has the ability to demand to be treated as such. 

If negotiations move forward in any meaningful way, that'll be the new basis of understanding.