Vaccinating the world is a test of our ability to co-operate

It is also a trial of our enlightened self-interest and will need G20 leadership to succeed

Martin Wolf

     © James Ferguson

Is it possible to tackle a global pandemic in a world marked by huge inequalities of wealth and power? The answer might tell us how the world will address the far more complex challenge of climate change. 

What we have learnt from Covid-19, so far, is that the world has shown more co-operation than many might have expected. 

Even so, given that we are all in this together, it has not been enough.

The effort to vaccinate the world is not the only test of our ability to co-operate. 

Another is assistance to badly-hit developing countries, given that between 88m and 115m people fell back into extreme poverty last year, according to the World Bank. 

Still, the vaccine programme is a test of our capacity for self-interested co-operation, because the world cannot return to normal if the pandemic is not controlled everywhere.

So far, the countries with the financial resources and technological capacity have won. 

According to the Financial Times’s vaccine tracker, more than 178m doses have been administered worldwide so far. Some 30 per cent of them have gone to the US, 23 per cent to China, 12 per cent to the EU and 9 per cent to the UK. 

India has administered only half as many doses as the UK. Many developing countries have administered none.

This outcome was inevitable, whatever one’s hopes for a more co-operative world. All governments are accountable to (and responsible for) their citizens first. 

Equally, companies engaged in the risky venture of creating vaccines will pay most attention to the demands of those with deepest purses. Such realities cannot be ignored. 

But can they be transcended?

Now that several vaccines have been developed and won regulatory approval in record time, the aim must be to vaccinate as much of the adult population as possible, as quickly as possible. 

Because of viral mutations, modified vaccines are already being developed, though it is not yet certain how many people will need to be revaccinated and how often.

Thus, the fight against Covid might turn out to be the beginning of a multiyear vaccination programme of unprecedented scale. Or it may be more of a one-off. 

If the latter, some of the new capacity may prove useful in other, future vaccination campaigns. 

In either case, the needed scaling up of global production capacity is complex, expensive and risky; as, too, is the scaling up of logistics and global vaccine deployment. 

Realistically, much of those risks and costs will have to be borne by governments, particularly those with the broadest financial shoulders.

Happily, the organisational structures for a global effort also exist. Thus, Gavi (the Global Vaccine Alliance), Cepi (the Coalition for Epidemic Preparedness Innovations) and the World Health Organization, together with other groups, have created the Act (Access to COVID-19 Tools) Accelerator, one of whose pillars is Covax, a co-operative effort to vaccinate the world.

What are the main obstacles to a global effort? 

From discussions with people involved, the answers seem to be chiefly the scale and complexity of the task, and shortages of money, time, organisational capacity and technical ability — particularly around the new mRNA-based vaccines. 

Note that not only have developing countries been pushed to the back of the queue, supplies are also constrained even for those at the front (the EU being perhaps the most prominent example.)

Despite all these difficulties, Covax currently hopes to deliver more than 2bn doses this year. Nobody can be sure that this will actually happen, given the complexity of the effort. 

Even if it does, it will still leave a huge challenge for 2022, if all the world’s adults are to be vaccinated. 

Regulatory processes have to be managed; new production capacity has to be built; supply chains must be created; and vaccine producers need indemnification against risk. Then, the vaccines actually need to be delivered. 

This is a more demanding task in developing countries, especially with the new mRNA vaccines which need to be stored in ultra-cold conditions.

There are many risks and uncertainties to this vast endeavour. All of them need to be managed. That will take time, effort and money. This is even before considering the best way to finance vaccine supplies to poor countries. 

Should scarce development aid be used or new funds provided? 

Given the cost of the pandemic to their economies, the answer should be the latter. But who will provide these extra funds?

How important an impediment to rapidly increasing the vaccine supply are the intellectual property rights of companies? 

The answer seems to be: not much. There are well known objections to the patent system as a means of motivating innovation: it creates temporary monopolies, which are costly and can be an obstacle to innovation rather than a spur. 

There are good arguments for alternative methods of motivating innovation. There are also arguments for compulsory licensing and control over the price at which licensing occurs, notably when governments have funded much of the innovation.

Yet, under current law (including trade law), intellectual property is not a binding constraint to creating, producing and deploying vaccines. After the crisis is over, it may make sense to reconsider these rules. 

Now is not the time.

It is hard to manage so global a challenge. But it cannot be impossible, especially as worldwide action is necessary. It is also an opportunity for Joe Biden. The new US president could reshape the world’s view of his country by galvanising G20 countries into making a decisive effort. 

Its leading members must provide the resources needed to accelerate the production of global vaccine supplies.

The effort only needs several tens of billions more dollars. The cost is dwarfed by the lost economic output from Covid-19, which I calculate at $6tn in 2020 and another $4.4tn in 2021, relative to the IMF’s pre-pandemic forecasts. 

Ending this haemorrhage of livelihoods and lives is the priority. That can only happen if all adult humans are vaccinated. 

The G20 must now ensure the means.

Inflation and Broken Windows

By John Mauldin

I’m often asked if I foresee inflation or deflation. This week we had an “Ask Me Anything” session for Alpha Society members and it came up several times. 

Both are possible in their own ways, and frankly I feel a little funny telling people I think we will see both. I would just like to have a growing economy and dependable money that holds its value.

But for these letters, I have to distinguish between what I want and what I expect

The kind of stability I prefer isn’t on the menu right now. 

So today we will wrap up my 2021 forecast series with a look at this important debate.

By the way, my Over My Shoulder macro research service members already saw full versions of some of the reports I’ll quote below. 

If you aren’t one of them, now is a great time to join. Where else can you find an essay from a music lawyer comparing Robinhood to Napster? 

It was totally on point. 

Technology quickly transformed that industry. 

If you are in the market you need to understand those changes. Someone will become the financial equivalent of Spotify.

That’s the kind of unique analysis my co-editor Patrick Watson and I find for Over My Shoulder members. 

We try to help them understand the critical points of our society and economics. 

Our goal is to give them economic and financial news without the noise... and I think we’re succeeding.

Now on with today’s topic. We will begin with the obvious.

Gripping Hand Update

As I have been repeating all month (see here, here, and here), anything I say about the economy or markets is subject to the coronavirus “Gripping Hand” It greatly constrains the available options. 

Other possibilities open up if we manage to get and keep the virus under control.

Bluntly, conclusion first: You cannot predict inflation or deflation until you understand the extent of the virus this summer. You get to radically different outcomes, which I will discuss at the end.

The good news is that US vaccinations are accelerating. States and the federal government are working out bugs in the process. Supply constraints are easing a bit. It is still going much too slowly, but was always going to be an ordeal. 

The single-dose Johnson & Johnson vaccine should be approved soon and will help. 

With luck, everyone who wants to be vaccinated should have the chance by this summer.

Let’s look at a few charts. 

First of all, hospitalizations are way down. 

That is very good news.

Source: Justin Stebbing

Ditto for ICU patients:

Source: Justin Stebbing

The testing positivity rate and number of new cases are dropping, too. 

Well over 27 million people in the US have had at least one vaccine dose, with about 1.3 million more doses administered each day.

Source: Our World in Data

Here is another chart comparing the responses of various countries.

 We must remember that we have to vaccinate the world to keep a new strain/variant from popping out and starting this process all over again.

Source: Our World in Data

The next question is whether that will be enough. 

The winter surge is reversing, but the B117 and other more infectious variants could send case numbers and hospitalizations higher again, and possibly a lot higher. 

And even with recent improvement, the numbers are still worse than they were at last summer’s peak.

Back with a Vengeance

Thinking positively, imagine the US and other major economies vaccinate enough people in the next few months to let semi-normal life resume We’ll still be cautious, but the generalized fear subsides enough to let us circulate again. Restaurants, hotels, airlines, and other hard-hit industries start to get back on their feet. Then what?

Scenarios like that usually point to inflation. 

Pent-up demand will make people spend some of the extra savings they accumulated (often via fiscal aid programs) in the last year. 


Yes, but I don’t expect it. 

I think this experience is scarring many people in the same way the Great Depression scarred our parents, giving their generation a permanently thrifty attitude. We’ll see.

But inflation can come from other directions, too. 

My friend Louis Gave recently described the larger forces at play.

I think inflation will come back with a vengeance. One of the key deflationary forces in the past three decades was China. I wrote a book about that in 2005; I was a deflationist then, as my belief was that every company in the world would focus on what they can do best and outsource everything else to China at lower costs. But now, we’re in a new world, a world that I outlined in my last book, Clash of Empires, where supply chains are broken up along the lines of separate empires. 

Let me give you a simple example: Over the past two years, the US has done everything it could to kill Huawei. It’s done so by cutting off the semiconductor supply chain to Huawei. 

The consequence is that every Chinese company today is worried about being the next Huawei, not just in the tech space, but in every industry. Until recently, price and quality were the most important considerations in any corporate supply chain.

Now we have moved to a world where safety of delivery matters most, even if the cost is higher. This is a dramatic paradigm shift… It adds up to a huge hit to productivity. 

Productivity is under attack from everywhere, from regulation, from ESG investors, and now it’s also under attack from security considerations. 

This would only not be inflationary if on the other side central banks were acting with restraint. 

But of course we know that central banks are printing money like never before.

(Over My Shoulder members can read the full Louis Gave interview here, with my summary and highlights.)

The pandemic is clearly accelerating some preexisting trends. Globalization was already starting to slow and possibly reverse for technological reasons. 

President Trump’s trade war gave more impetus to “Buy American” and “Buy Local” policies, and Biden seems intent on continuing them. 

And now COVID-19 gives national governments everywhere reason to be as self-sufficient as possible. Businesses feel the same pressure.

But what really matters is how the Federal Reserve responds if price inflation pushes interest rates higher. 

Louis believes the Fed will enact some kind of “yield curve control” to keep long-term Treasury yields near 2%. This will tank the dollar, raising inflation but sending “real” interest rates even more negative than they are now, thereby helping finance fast-growing government debt.

This scenario would be good for gold and terrible for bonds. But it’s not the only scenario, so let’s turn next to my favorite bond bull.

Broken Window Fallacy

Lacy Hunt of Hoisington Investment Management has been steadfastly bullish on Treasury bonds for 39 years. 

He saw what Paul Volcker was doing and became a monster bond bull. He has been exactly right. 

His argument is really just simple math. To summarize:

  • Growing public and private debt suppresses economic growth as the additional debt has a smaller and smaller effect.
  • The low growth reduces velocity of money, without which sustained general inflation is impossible (though there can be inflation in some segments).
  • Inflation being the major determinant of Treasury yields, those yields will move lower.

In his latest report, Lacy takes on the idea that fiscal stimulus plus recovery from the pandemic will spark inflation. 

He notes that any GDP growth from here won’t reflect the pandemic’s vast wealth destruction. He compares it to the famous Frederic Bastiat/Henry Hazlitt story of the broken bakery window. 

Fixing the damage boosts GDP, but you don’t see the other costs incurred or opportunities missed. 

Just as we can’t grow the economy by breaking each other’s windows, we can’t expect pandemics or other disasters to be beneficial.

He also points out (and Louis Gave does, too) that most fiscal stimulus has a small and maybe negative multiplier effect. Governments aren’t “investing” in new productive capacity or building anything new. 

They are simply transferring money between taxpayers, bondholders, and benefit recipients. This may be necessary in the short term, but it also misallocates resources and reduces future growth.

Lacy saves his real fire for our overuse of debt. 

This isn’t new but the pandemic has accelerated it.

When debt capital, like any other factor of production, is overused its marginal revenue product declines. 

This serves as a persistent drag on economic activity that restrains growth despite the best efforts of monetary and fiscal policy. 

The decline in the marginal revenue productivity of debt, due to the pandemic, must now operate with even weaker demographics around the world. 

The pandemic resulted in considerably lower marriage and birth rates which will have negative long-term consequences for domestic and global growth. 

Based upon the universally applicable production function, the capability of achieving historical rates of economic growth will be even more difficult in the years ahead.

Source: Hoisington Investment Management

(Over My Shoulder members can read Lacy Hunt’s full report here, with my summary and highlights.)

The Federal Reserve is trying to stimulate an economy that already had too much debt with yet more debt. 

No surprise, it’s not working, though it is boosting stock/asset/housing prices. Most of their stimulus simply stays on the sidelines. 

This is very clear in the velocity of money, which was already trending lower but fell sharply in 2020.

Source: Hoisington Investment Management

At the most basic level, this is just plumbing. 

Water flows downhill. 

Inflation is hard to imagine unless that velocity line turns higher. 

But water can still splash for short periods. 

Velocity rose sharply in the post-WW2 years when, not coincidentally, the Fed was engaged in the kind of yield curve control Louis Gave expects.

My friend David Rosenberg agrees. 

He did a very interesting podcast with Grant Williams and Stephanie Pomboy. Quoting from the transcript:

David Rosenberg: So look, I would just say that you can almost dust off your slide package from 12 years ago. The same people calling for inflation now were calling for inflation back then. 

They’re the ones that have to answer as to why it is that inflation in the final analysis even with a stock market that quintupled, and even with a bull market and commodities, and even with 3-1/2% unemployment, we never did get the big inflation. 

So they’d have to come and explain why all of a sudden we’re going to get inflation in the coming cycle that we couldn’t get in the previous, not just one, not just two, but the previous three cycles.

Stephanie Pomboy: What worries me about it is that I totally agree with you on those forces of deflation or disinflationary forces that are clearly evidenced over that whole period …. But that doesn’t preclude people from getting all hot and bothered and getting chinned up on an inflation scare. 

They see the dollar going down, they see import prices going up and they assume, okay, well, that’s going to lead to CPI inflation, never mind that as you point out it didn’t for the last decade or even longer, but what is the possibility?

David Rosenberg: [At] the end of the day though, we have the most unpatriotic development you could ever think of, which is that Americans have paid down their credit card balances at a 14% annual rate over the past six months. 

It’s never happened before. And so it’s very difficult to get inflation when there’s no credit creation, which is what the money velocity numbers are telling you, or where there’s no significant wage growth. 

Where’s the wage growth going to come from? It’s very interesting that the same people that tell you about inflation are so bulled up on the economic outlook, they believe that full employment is still somewhere at or below 4%.

And of course the Fed’s forecast is that the next few years we’re going to get back to that magical level below 4%. But let’s just say that we have a situation where one in eight Americans is either unemployed or underemployed. 

There’s still tremendous idle capacity in the labor market. We have a capacity realization rate in industry that’s around 74%. We’re nowhere near the conditions, in terms of the capacity pressures in the economy, that’s going to lead to a sustained increase in inflation. 

It doesn’t mean that you don’t get some temporary periods of pass through in the goods-producing side from commodities in the weaker dollar, but that’s not lasting inflation.

So which will we get? 

I suspect both. First off, this summer we will have very low comparisons for inflation if you only look back for 12 months. 

If we get even a modest recovery in the COVID numbers, we clearly could see some short-term “inflation” in annual data from those weak comparisons. It won’t last. If you look back 24 months (which we never do) you would see inflation still under 2%. 

And for the record, annualized PCE inflation, the Fed’s favorite measure, is only 1.3% annually today. We have a long way to go to get to 3%.

The debt burden will cap growth enough to keep the inflation mild. It won’t be another 1970s period of sustained inflation. 

But it might be enough to send gold to record highs. 

A lot depends on how much inflation the Fed chooses to tolerate. 

Their recent signals indicate it may be a lot more than we’ve seen in this century. 

I don’t think they get worked up until inflation is well north of 3% for six months to a year. They have made it clear they want inflation to “average” 2% for a period of time. 

That means they have to overshoot that target to get that average.


To get inflation, we have to assume that we have controlled the gripping hand of the coronavirus. Look at what’s happening in Portugal, where B117 recently began taking off.

Source: Our World in Data

This looks almost exactly like the Irish problem I mentioned two weeks ago. 

Notice that barely a month ago, Portugal was seeing a steep drop in cases per million, much like the US is today. Then boom!

We really need to avoid such a spike here, first of all to save lives, but also economically. 

People would stay home and businesses close voluntarily even if governors don’t order it, further devastating our already-weakened economy.

Former FDA commissioner Scott Gottlieb, looking at CDC data, thinks 50% of US coronavirus cases will be the B117 variant by the end of February. 

If this is the case (and we will know in a few weeks), then it means another very serious spike in cases.

This would leave governors no good choices. Lockdowns which are increasingly shown to be ineffective? 

No lockdowns and let it run? 

Nothing but bad options. 

Fortunately, we are getting better medicines to deal with the disease. 

The Cleveland Clinic has begun sending nurses to administer IV drugs in patients’ homes, avoiding hospitalization. We will see more such innovation and it will help.

Nevertheless, in a variant-driven spike event, the modestly recovering economy will probably fall back into recession. Recessions are by definition deflationary events.

Obviously we all hope to avoid that, and I think it is quite possible. 

A few more weeks of solid vaccine progress, warmer weather, continued distancing and other precautions, plus a little luck, might do the trick. 

But there is no time to waste. 

I urge everyone: Get vaccinated as soon as it is available to you, and keep avoiding crowds and all the other standard measures. 

That is the best way you can help the economy, and particularly the small businesses that have been hit so hard. We can get through this but it will require everyone’s cooperation.

Other risks remain, too. Scientists think the current vaccines will still work against the known variants, but that is not yet certain. 

The South African and Brazilian variants are already in the US (I have actually been to Manaus where the Brazilian variant came from). Other variants could appear, too.

It’s also still unclear how long immunity lasts, whether from vaccines or from prior infection. 

And more than a few people simply don’t want the vaccine, for whatever reason. 

Reaching “herd immunity” is not a sure thing even when vaccinations crank up.

Then there is the rest of the world. Truly solving this problem requires global herd immunity, which means billions of vaccinations. 

That part of the battle has barely begun and could take several years.

So the gripping hand, aside from superior strength, has independently moving fingers. 

We need them all to relax before we can relax. 

And oddly, that happy outcome might trigger the kind of inflation we’d rather not see. 

But I don’t expect it this year. 

And the bigger we build our debt in the US and Europe, the less likely inflation becomes.

If we overcome the virus, the dollar likely continues lower, although the eurozone is already trying to figure out how to manipulate the euro lower. 

If we get that spike here? 

And it shows up in the rest of Europe like it did in Portugal? 

The dollar bears could get their face ripped off. 

I think gold does well in any event. 

Sadly, every prediction and outcome is still in the Gripping Hand. Stay tuned…

Robinhood, GameStop, et al.

There is simply no room in this letter to deal with the whole trading debacle that is happening around Reddit, Robinhood, and so on. But I have some comments on Twitter, where it seems to be more appropriate and where you can follow me @JohnFMauldin. As noted above, we’ve also discussed it in Over My Shoulder and I highly recommend you subscribe.

And somebody get Dave Portnoy, obviously on vacation, some sunscreen. 

And maybe we just give the poor hedge fund managers $600.

Time to hit the send button. 

I am told I will get my first dose of vaccine next week. 

One of the few advantages of being older. 

Have a great week and stay safe.

Your desperately hoping we win the race against this virus analyst,



John Mauldin
Co-Founder, Mauldin Economics

Kristalina Georgieva: ‘We are in a resilient place but cannot take stability for granted’

The IMF chief calls for global co-operation to support health systems and limit the damage of economic scarring

Martin Wolf 

© Leonie Woods

The year 2020 will be remembered as the worst recession since the Depression. 

Green shoots of growth in the summer were crushed by a second wave of the coronavirus pandemic that did not discriminate between rich and poor, leaving low-income countries hardest hit economically. 

With the promise of a vaccine and broad political consensus to rebuild the global economy and stem the damaging aftershocks, 2021 is projected to be the year of recovery. At the centre of this effort is the IMF, one of the most important financial policymakers among the international institutions. 

As the fund’s managing director, Kristalina Georgieva has kept a hand on the pulse of the world economy throughout the Covid crisis, signalling problems early so that they can be addressed, especially for vulnerable countries and emerging markets.

Her message is optimistic but cautionary — “Vaccines are wonderful, but they’re not a magic wand,” she warns. 

Recovery is coming but it will be partial and uneven. To succeed, it must be supported by decisive and unified action by all quarters “acting together”. 

Such co-operation could deliver a growth rate in the world economy of 5.2 per cent, a significant climb from the minus 4.4 per cent expected by the IMF for last year. 

In an interview with Martin Wolf, the FT’s chief economics commentator, the Bulgarian economist says that a durable exit from the Covid health crisis depends on two things. 

First, not withdrawing policy support prematurely but injecting stimulus where it is needed. 

And second, ensuring that vaccines are available everywhere, as fast as possible. 

“Having vaccines is not the same as having applied them universally,” she points out.

Fresh stimulus could herald a “transformative” year for the climate economy, and new opportunities for investment in much-needed job creation, particularly in the digital skills sector. 

But tightening policy around non-banking financial intermediaries will be paramount, as will acting quickly to restructure debt and minimise bankruptcies. The ease of borrowing now for both companies and governments means we’ll need “incentives for good behaviour” in the recovery.

On the plus side, the IMF has $1tn extra firepower since the 2008 financial crisis, of which it has deployed $102bn so far in the pandemic. 

But Ms Georgieva’s particular worry, she says, is lobbying: “Don’t touch my bank. Yes, it’s weak, don't touch it.”

Martin Wolf: We’ve had the most extraordinary rollercoaster ride in 2020, an incredible year. I sense a return of optimism. People are beginning to think that maybe we’ll get this under control from a pandemic point of view in 2021 and then the economy will come back. How do you see this? 

Kristalina Georgieva: We project minus 4.4 per cent [growth in 2020], somewhere around this number. 

We got some good news in the third quarter after a devastating first half of the year. But then we were hit by a second wave in many places, and the green shoots of recovery were snowed over. 

What we are stepping into 2021 with is weaker recovery momentum, but with the promise of vaccines to anchor us to what we have been projecting for 2021 — a year of uneven recovery. And yet, recovery nonetheless.

We projected 5.2 per cent growth for 2021, based on the assumption that a durable exit from the health crisis will indeed happen next year. With vaccines, this seems to be the more likely scenario.

But let me make a very important point. Vaccines are wonderful, but they’re not a magic wand. 

They will take time to be applied around the world, and this is why our main messages for 2021 are twofold. 

First, do not withdraw policy support prematurely; having vaccines is not the same as having applied them universally. 

And two, act decisively for vaccines to be quickly available everywhere, to everyone, because this is what would bring a durable exit.

If we apply vaccines universally as fast as possible, we could give a boost to global output of $9tn between now and 2025; $9tn, clearly a number not to sniff over. 

To sum it up, partial uneven recovery is indeed coming. We can boost it by co-operating and acting together. 

MW: Is it your sense that there will be political changes towards global co-operation, particularly over vaccines, and maintaining policy support, especially in developed countries?

KG: Let me give credit where credit is due. Last year, we did see remarkable co-operation among central banks and finance authorities. I don’t think we have recognised them enough for what they have done to act in a synchronised manner to put the floor under the world economy. 

It helped us, the IMF, to do our job for low-income countries. We tripled concessional financing and that was a saviour to many economies in incredibly difficult moments.

This being said, there are two areas of co-operation for 2021. One is on vaccines. The case for co-operation on vaccines is clear, but vaccines don't inject themselves. They require health systems. And let’s remember, in many developing countries, health systems are excruciatingly weak, so the world needs to support low-income countries decisively.

We have to build a health system globally that makes people more resilient to shocks to come, because — let me be frank — this is not going to be the one and only health emergency. We know that with the climate emergency, resilient people will be absolutely essential. 

And two, this crisis is not going to magically waive all the scarring that it has caused. 

There will be scarring. Debt levels are high, corporate debt levels are high, official borrowing is high, and once policy support is withdrawn, not everybody will make it to the other side of this crisis. 

Having global co-operation to make sure that we are resilient and we have as limited scarring as possible is going to be absolutely essential. 

MW: In the end though, isn't it inevitable that there will be some global scarring, with many countries poorer than we expected or hoped they would be, back when we made forecasts in 2019? 

The IMF itself produced a very interesting forecast in October which showed that its expectations for 2025 are now significantly worse, not colossally/catastrophically, but significantly worse for all regions of the world, than they were a year earlier.

KG: Yes, of course. Look, we asked producers not to produce, consumers not to consume. We shrank the economy in 2020. In 2021, the recovery will not bring us up to the pre-2019 level. 

Let me remind us we weren’t in great shape in 2019. We had low productivity, low growth. My first speech as managing director was about synchronised slowdown. And we had rising inequality and a looming climate crisis. None of this has gone away.

We project a total of $28tn loss of output by 2025. In other words, we are going to be somewhat poorer than we would have been without this crisis. And this is exactly why it is paramount to decisively act and act together. Policymakers do have tools.

Number one, they can inject stimulus in the economy to put it on a different trajectory in terms of productivity and job creation. We now know that the digital future has arrived. But it hasn’t arrived for everybody. 

Policymakers can do a lot to expand access to the knowledge economy to more people and firms, and in all countries. This is a precious investment in digital transformation and skills that we ought to make.

Kristalina Georgieva, IMF chief, urges leaders to take co-ordinated steps to deliver investment in the environment, infrastructure and digital technology © Nicholas Kamm/AFP/Getty

And two, we can use 2021 to be the transformative year towards the new climate economy. 

And climate investment can be job-rich and, boy, do we need these jobs. Just in tourism, the projections are that 120m jobs may be wiped out because of the pandemic.

If policymakers were to be determined to invest in a green recovery, that means investing in building installations, investing in electric mobility, investing in reforestation and mangroves restoration. 

MW: Let’s talk about the financial aspects of this. There is a general expectation that there is going to be a lot of bad debt in the private sector as a result of this tremendous shock. 

Companies have borrowed. Many governments have supported their borrowing, rightly. But they are going to come out with a huge debt overhang.

And then we are inevitably concerned about the state of the financial intermediaries. 

When we went in, people thought that the banks were in very good shape. But if there’s a lot of bad debt among their borrowers, it’s bound to affect their balance sheets. 

How worried should we be that we’re going to have aftershocks in the form of debt overhangs, defaults, suppressed investment?

KG: We calculate that shortfalls vis-à-vis mandatory capital requirements would be in the order of $220bn. On the scale of the global financial system, this is manageable. So we are in a resilient place but we cannot take financial stability for granted. 

I want to frame three issues that policymakers need to wrestle with. 

One, low [interest rates] for longer. This is why we can carry so much debt without breaking our back. However, low for longer creates problems of its own, because it exacerbates risk-taking. 

Firms and governments are more at ease to borrow than they otherwise should be. And that is a risk we have recently flagged. We published the paper “‘Low for Long’ and Risk-Taking”. 

Obviously we need strong macroprudential [policies], but we also need incentives for good behaviour. 

Two, because of low interest rates, banks are less profitable. When they’re less profitable, we see less appetite to lend. This is why we have to inject a growth momentum because otherwise we would see a problem in the service they’re supposed to provide. 

And three is something that you said quite correctly. You brought it up: non-banking financial intermediaries. They were the unfinished business after the global financial crisis. 

Actually, I remember I had a fireside chat with Randy Quarles [vice-chair of the US Federal Reserve] in January. And this is what we talked about; that non-banking financial intermediaries are not sufficiently regulated, and the policies applied to them are not strong enough.

In March, we saw for the naked eye, evidence that they are not in the best of shape. Central banks stepped up, they did what needed to be done. Short of that, we would have been in trouble. And now the Financial Stability Board is coming up with their comprehensive review of the March market turmoil.

There are already some countries where the problem of corporate debt is severe. And in some low-income countries and emerging markets with weak fundamentals, government debt level is very high. In some cases, unsustainable.

So what is our advice? 

Front it. Act decisively on debt restructuring. Act decisively on anticipating there will be bankruptcies. Minimise those bankruptcies. 

And when they happen, have the resolution mechanism in place. 

What I particularly worry about is lobbying. Don’t touch my bank. 

Yes, it’s weak, don’t touch it. There has to be forward leaning in, fronting these issues before they become a sour point. As support starts to fade, we will see these problems coming up. 

Remember Warren Buffett, when the tide goes down, we see who has . . . 

MW: Been swimming naked. 

KG: Been swimming naked, exactly.

MW: Since you’ve been talking about emerging markets, should we be expecting a significant wave of sovereign defaults? 

We have some already. There are restructurings, notably Argentina.

KG: We had two restructurings, Ecuador and Argentina. And we have Zambia. There are two very important factors to keep in mind. 

One, many emerging markets have taken to heart lessons from prior crises. 

They built strong buffers, they built reputable, well-respected, independent central banks, supervisors and regulators. 

In this crisis, they were very fast to go back to borrowing at low interest rates. Some of them have taken some unconventional monetary policy measures, and so far we see that market reaction is positive.

Finally the G20, China included, have agreed to act together. They have given the fund a mandate, and the mandate is to come up with programmes for countries with unsustainable debt so we can bring it down to sustainable levels. 

MW: After the dust has settled, do you think we are going to want to change the relative position of banks and non-bank financial institutions? 

Or will we actually want them more or less to continue doing what they’re doing in different but related ways?

And if we do, does this mean we are going to have to create a completely new global system of financial regulation which covers banks and non-bank institutions essentially in similar ways?

KG: Banks and non-banking financial intermediaries play an important role. They not only complement each other, but they expand options by having this diversity of roles. So we have not had any discussions around one absorbing the other or changing mandates. 

I want to praise my colleagues at the fund, Tobias Adrian [the IMF’s head of monetary and capital markets] and his team, for flagging early this issue of non-banking financial intermediaries being the unfinished business.

Bringing policy tightness around non-banking financial intermediaries is absolutely paramount. That is where we think we need to zero in on.

Do we need a global system? [What] I actually see, and I may be a minority in that regard, is that since the global financial crisis, there has been a build-up in three areas. 

One is countries have built up strong buffers, central banks built up reserves. Now we have some $11-12tn in reserves. 

Second, we built institutional capacity for global co-ordination and decision-making, and the FSB plays a very important role in that. And third, the IMF got a step up in our financial capacity. We now have $1tn to deploy, and the combination of those three is what makes us so resilient.

If you look at the story of this crisis so far, yes, we have deployed $102bn. What is more interesting is 82 countries have benefited from our support. This has never happened before. 

But we still have up to $1tn. If you take the pre-existing commitments, we still have $730bn capacity. 

What this tells you is that this triage has made the world economy more resilient. 

And I think we need to continue to build on it. 

This is the edited transcript of an interview between Kristalina Georgieva and Martin Wolf

Reddit’s Silver Rush Is Another Symptom of Market Madness

Attempts to push up the metal’s price seem guided by mistaken ideas about the depth of this market and the monetary value of precious metals

By Jon Sindreu

   Previous attempts to corner the silver market have failed./PHOTO: CHRIS RATCLIFFE/BLOOMBERG NEWS

In 1896, former U.S. lawmaker and silver lover William Jennings Bryan attacked those that would “crucify mankind upon a cross of gold.” 

Reddit investors now risk building their own cross of silver.

On Monday, the price of silver futures jumped about 11% to around $30 an ounce—its biggest one-day move since 2009—after becoming the latest target of the individual investors who spent last week foiling Wall Street’s short bets. 

By coordinating security purchases online, these amateur day traders have triggered surges in unloved stocks such as GameStop, GME 67.87% BlackBerry and American Airlines.

“Silver Bullion Market is one of the most manipulated on earth,” user RocketBoomGo wrote Saturday on Reddit, encouraging individual investors to push the silver price up to $1,000. 

“Any short squeeze in silver paper shorts would be EPIC. 

We know [that a] billion banks are manipulating gold and silver to cover real inflation.”

The Reddit crowd may have—so far—been successful in upending the market for little-traded stocks. 

In the far more liquid silver market, though, they may have worse luck.

Previous attempts to corner the silver market have failed. 

Back in 1979, three of the sons of Texan oil billionaire H.L. Hunt managed to push silver prices up eightfold, only for them to crash following a change in rules on leveraged purchases of commodities—notably on March 27, 1980, known as “Silver Thursday.” 

That happened despite the Hunt brothers owning more than a third of the world’s nongovernmental supply of silver, which speaks to the difficulty of manipulating this market. 

Given retail traders’ financial resources, the chances of them inflating a bubble that hurts Wall Street more than themselves seem even slimmer than with GameStop shares.

To be sure, as with the videogame retailer, there are some reasonable arguments as to why silver might have been undervalued. 

Precious metals tend to be inversely correlated to the yields of inflation-protected Treasurys, which are hovering around all-time lows. 

Also, silver and platinum used to trade roughly in lockstep with gold, but have consistently underperformed the yellow metal for about a decade. 

A catch up could be in order, especially if the post-pandemic recovery boosts industrial demand for silver and platinum.

More likely, though, many retail traders have fallen prey to the siren song of precious metals as “real money.”

So-called gold bugs are convinced that “real inflation” is much higher than reported consumer-price increases. 

They believe that an age of paper-money printing by central banks will eventually force a return to something like the Gold Standard that reigned before World War I, when prices were allegedly set by the market-determined flow of specie.

Silver bugs, who could be construed as having the Argentine version of this pathology, are fewer in number but even more passionate. 

They hark back to an even earlier era when both precious metals served as commodity money, and to the “bimetallist” debates of the late 19th century that were led by politicians of the U.S. populist movement such as Mr. Bryan.

But most of these ideas are based on misconceptions about how the Gold Standard and commodity money actually worked. 

Claims of runaway inflation in the present also aren’t backed up by evidence.

Reddit investors may still have room to upend some hedge fund trades. 

But they would do well to stay away from the shiniest targets.

Markets Are Convinced: The Fed Won’t Come for the Punch Bowl

The Treasury selloff is about inflation expectations, not higher ‘real’ yields. Investors may need to adjust their old playbooks.

By Jon Sindreu

Global investors have seized on the idea that the Federal Reserve will keep interest rates low as inflation rises. But they still need to fully figure out what this means for their portfolios.

On Thursday, the S&P 500 set another record. Markets have been emboldened by upbeat earnings, Covid-19 vaccinations and the Biden administration’s $1.9 trillion fiscal-stimulus plan. 

But there is a puzzle: Optimism has also pushed up yields on 10-year U.S. government bonds to 1.1%, from 0.9% at the end of 2020, and investors often fear that this makes equities less attractive. 

Technology giants are seen as particularly vulnerable to rising rates, yet they are leading the charge once again.

An explanation is that inflation-protected Treasurys, or TIPS, haven’t sold off. 

This means the bond-market gyrations are all about inflation expectations rising well above pre-outbreak levels. 

In other words, the market is now convinced that, even if the Fed eventually raises rates, it will do so by less than inflation, keeping “real” financial conditions very loose.

For now, U.S. inflation remains low due to the pandemic, but is predicted to bounce back strongly. In the past, traders would have expected the Fed to pre-emptively try to cool the economy—in the immortal words of former Chairman William McChesney Martin in 1955, ordering “the punch bowl removed just when the party was really warming up.” 

Last year, though, officials committed to allowing inflation to run at a higher level for a while before taking action.

Various investment strategies have historically outperformed in periods of “reflation” or higher inflation. 

Buying gold is the most famous inflationary hedge, but has actually only been effective against sudden jumps in consumer prices—not the upward drift that many see as likely now. 

Stocks are better than bonds when costs rise, but still suffer as companies cannot always raise prices to maintain margins. 

Retailers, miners and energy firms tend to do better, whereas technology stocks struggle, as do utilities and other so-called bond proxies.

If the market is wrong and the Fed can’t resist raising real rates as soon as inflation accelerates, traditional portfolio plays may work. 

But, as behemoth money manager BlackRock has pointed out, if the punch bowl really is glued to the table, some strategies need to change.

The modern investment playbook was developed for an era in which central-bank rate rises and higher inflation went hand in hand. Investors need to start disentangling the impact of the two, which isn’t easy.

Based on market data since 2004, tech and telecom shares have shown they can outperform the market in periods when Treasury yields and inflation are rising, as long as “real” yields remain subdued—as long as, of course, they have convincing growth stories. 

Conversely, cyclical sectors that are typically favored during economic recoveries could disappoint somewhat. Banks, which are usually believed to benefit from higher rates, may also struggle more than previously thought if inflation-adjusted yields stay low.

More generally, ultralow “real” rates, which are often seen as an ill omen for economic growth, could instead provide some extra fuel to stocks—despite already-expensive valuations and clear signs of market froth. Low real rates help emerging markets, too, by potentially limiting appreciation in the U.S. dollar.

While a return to 1970s-style inflation is unlikely, prices are almost certain to rise faster than normal this year, because they were artificially depressed by the pandemic. If the market is reading the Fed correctly, though, that needn’t stop the party.