Sorry, but debt forgiveness is not going to happen

Cancelling the debt central banks have bought is not a fair way to address the economic challenges we face today, argues Rui Soares.

Guest writer

Parliamentary Affairs and Direct Democracy Minister Riccardo Fraccaro, who has called for the ECB to cancel the sovereign debt it has bought during the pandemic. © Getty Images

It is a law of finance that as government deficits balloon, calls for debt forgiveness grow. 

And, sure enough, this time is no different. 

In November, Riccardo Fraccaro, Italian cabinet under-secretary and close aide to Prime Minister Giuseppe Conte, floated the idea of the European Central Bank cancelling government bonds bought during the pandemic.

Putting our cynicism to one side for a moment, there are sound reasons for such calls. 

Chief among them is that debt cancellation would allow for a normalisation of monetary policy: one could end quantitative easing by in effect pretending it never happened, raising interest rates back closer to their historical norms with no fear of stirring a financial meltdown, and restoring the global economy to the world we knew prior to the great financial crisis. 

One might also argue that the growing inequality triggered by asset price inflation could be brought under control too.

Alas, this is all way too optimistic. And the reason is this:

Across advanced economies, debts have piled up. All of those countries listed above have, to varying degrees, significantly higher burdens now than they did in 2002. But, as the chart above shows, the nature of the current debt boom differs spectacularly from state to state.

Switzerland is a case in point: perceived (rightly) as a bastion of fiscal prudence, it is actually more leveraged than Italy — seen as a case study in profligacy — when you consider sources of debt beyond the state. Swiss mortgages, it turns out, are a formidable debt burden indeed.

And herein lies the problem. Most of the calls for debt forgiveness focus on forgiveness of sovereign debt. But, while that would enable a country such as Italy to handle higher interest rates, the same cannot be said about Switzerland -- Swiss homeowners would remain highly indebted and face real difficulties in a higher interest rate regime making it eventually unsustainable.

One might argue that, with central banks’ buying sprees including ever more corporate debt, mortgage-backed securities and other assets, at some point enough debt from all economic sectors will be held by them that we can then cancel debt across the board.

Sounds easy. But it isn't. How could you possibly justify cancelling the debt of highly leveraged company A and not of its competitor company B, which happens to only have bank loans but no bonds outstanding that the central bank can buy? 

Not to mention the adverse impact of debt cancellation on the competitive position of company C, who happens to be debt-free. 

This question is especially pertinent given the inability of smaller firms to tap bond markets — especially in Europe — which has meant that they have not benefited directly from quantitative easing, under which only bonds have been purchased.

You can apply much the same logic to the distributional effects of cancelling mortgages. 

Could citizens who have mortgages, many of whom tend to come from higher income brackets, be favoured over those who don't? 

One might argue that QE, by raising asset prices, favours the rich. 

But central banks such as the ECB have also argued that, by raising growth, the policy also helps the most vulnerable by lowering unemployment. 

Cancelling debt, on the other hand, would involve very explicit income distribution policy choices being made by non-elected public servants. 

Don't count on that happening any time soon. Central bankers' independence to set monetary policy as they see fit has already come under enough pressure since the financial crisis; officials will not want to risk further public anger.

There are plenty of reasons why we need to rid ourselves of the low-rate, high-debt world we’ve ended up in. 

From income inequality to low productivity growth, the economic problems befalling the world’s largest economies should be at the top of the political agenda. 

But solving them will require tools other than debt cancellation.

The following guest post about the practical and ethical arguments against debt cancellation is by Rui Soares, an investment analyst and member of the investment team at FAM Frankfurt Asset Management – a firm that specialises in high-yield bonds and options-based equity strategies. The views expressed here are his personal opinions and do not necessarily reflect the views of FAM.

What If You Never Get Better From Covid-19?

Some patients could be living with the aftereffects for years to come. Recent research into another persistent, mysterious disease might help us understand how to treat them.

By Moises Velasquez-Manoff

Kate Porter, 36, and her daughter Adria, 12, still have symptoms, including severely elevated heart rates, shortness of breath and debilitating fatigue. “It’s been a nightmare,” says Porter.Credit...Adam Ferguson for The New York Times

When Mount Sinai Hospital opened its Center for Post-Covid Care in May, it was New York’s — and the country’s — first such facility. 

The doctors there expected to treat patients who had been severely ill or hospitalized. 

By that point, three months into the pandemic, they knew that the coronavirus could cause harm to many parts of the body beyond just the airways where infections most commonly begin. And they knew that medical treatments meant to save patients’ lives could also take a toll. 

Recovery from having been put on a ventilator, in particular, could be a lengthy process. Mount Sinai sought to support patients recovering from severe Covid-19 by giving them access to a multidisciplinary medical team that included lung, heart and kidney doctors, rehabilitation specialists and psychiatrists for those whose mental health might have been affected by their ordeals.

Hundreds of patients, most of them women, showed up soon after the center’s doors opened. To the doctors’ surprise, however, many of them had experienced only mild cases of Covid-19. They hadn’t been hospitalized. 

They were relatively young and otherwise in good health, without the underlying conditions like obesity and diabetes that are known to make Covid-19 worse. And yet, months after their bodies had seemingly fought off the coronavirus, they still felt quite ill. 

“We’ve heard of illnesses, viral illnesses, that have a prolonged postviral phase,” Zijian Chen, the head of Mount Sinai’s recovery center, told me. “But these usually don’t last for the months and months that we see here. 

And because of that, we’re a little surprised that this is happening. It tells us how much we don’t know about this illness.” 

The center has now seen more than 1,600 patients.

These patients have labeled themselves “Covid long-haulers.” What they’re suffering from, they say, is “long Covid.” 

As a group, they report a strange hodgepodge of symptoms, including fatigue, pain, shortness of breath, light sensitivity, exercise intolerance, insomnia, hearts that race inexplicably, diarrhea and cramping, memory problems and a debilitating “brain fog” that can at times make it hard to put a cogent sentence together. 

In many cases, these symptoms continue unabated from the acute phase of the illness — as if, on some level, the infection never really went away. And for a subset of patients, new symptoms emerge later, as if a different illness has established itself in their bodies.

This was the experience of Lada Beara Lasic, a nephrologist who contracted the coronavirus in early April and later sought help at Mount Sinai’s post-Covid center. After an initial three-week illness and some shortness of breath, she thought she had mostly recovered. 

She even returned to work — for one day, before she fell ill again with aches the following day. She tried working from home in May but was troubled by fluctuating symptoms that gradually worsened until, in June, she decided to take a leave of absence from her job to focus on her recovery.

Lasic, who is 54 and has been working a few hours a day from home since September, worries about the long-term consequences of what she suspects is an immune system that can’t calm down. 

“We know that it’s not good for the body to have inflammation,” she told me. “It may cause scarring, and that means irreversible changes. The longer I have this disease and I’m inflamed, the worse it is for my health in the future.”

Despite the crippling symptoms, it’s often hard to figure out precisely what is wrong with patients like Lasic. Her blood work, for instance, has shown some signs of inflammation and elevated liver enzymes, but little else. 

“Many of these patients have had million-dollar work-ups, and nothing comes back abnormal,” says Dayna McCarthy, a rehabilitation specialist at Mount Sinai. Hearts, lungs, brains — all appear to be functioning normally. 

Among the only things that can be said with any certainty about these patients is that they recently received a diagnosis of Covid-19.

At Mount Sinai, most patients improve with time, McCarthy told me. But the improvements can be maddeningly slow. And they’re not universal. 

A small minority hasn’t improved in the many months since the first wave of the pandemic crashed into New York City, she says. Some patients, including a few doctors and nurses, can no longer work, because they are too fatigued or have trouble focusing. 

Others have lost their jobs but can’t get disability benefits because, subjective reports of misery aside, doctors can find nothing wrong with them. 

“Initially this was sold as a virus infection that only affects the elderly, and that is absolutely not the case,” McCarthy says. “I can’t think of anything worse than this type of symptomology that affects young people.”

Zijian Chen estimates that about 10 percent of Covid-19 patients end up developing symptoms that persist for months and months — a number that would equate to roughly 100,000 chronically sick people in New York State alone. 

Some surveys suggest the number is higher. A study from Ireland found that more than half of Covid patients, whether they’d been hospitalized or not, reported fatigue 10 weeks out; nearly a third hadn’t returned to work. 

In another study, from the Faroe Islands, about half the patients with mild cases had at least one symptom 18 weeks later. A third, much larger study, from China, reported that three-quarters of those patients who were hospitalized with Covid-19 and then discharged still experienced at least one symptom six months later.

The range of outcomes underscores how much remains unknown about this syndrome; it also suggests that the number of people who now find themselves constantly ill is probably significant. Recognizing this, scientists have begun studying Covid patients with chronic symptoms at the National Institutes of Health and elsewhere. 

And centers catering to these patients are opening or are in the process of opening around the country, including at NYU Langone, Yale and the University of Iowa.

For many doctors, the strange symptomology of long Covid calls to mind another mysterious, poorly understood condition: myalgic encephalomyelitis, more familiarly known as chronic fatigue syndrome. 

ME/CFS, as it is often abbreviated, is defined by the presence of certain symptoms, including debilitating fatigue and unrefreshing sleep, that last for six months or longer. 

ME/CFS-like syndromes have been linked with infections for more than a century — including, most recently, those caused by the viruses responsible for the SARS and H1N1 pandemics in 2003 and 2009. 

Chiefly because of this association, several ME/CFS experts told me that they anticipate a wave of new patients — long-haulers who, because their symptoms are severe enough and last for six months or longer, will essentially be ME/CFS patients whether they receive the diagnosis or not.

Marjorie Roberts, 60, who has “never been so sick in my whole life.”Credit...Adam Ferguson for The New York Times

“I’m expecting to see an increase that could generate as many new cases over the next two to three years as exist already in the U.S.,” says Anthony Komaroff, a physician at Brigham and Women’s Hospital in Boston who has treated ME/CFS for decades. 

In other words, as many as 2.5 million additional people could become afflicted with a disorder that some have argued causes more illness and suffering than H.I.V. “It’s not death,” Komaroff told me. 

“But might it be a fate worse than death for some people? It’s possible.”

The underlying biology of ME/CFS is poorly understood. Certain doctors long dismissed it as a psychological phenomenon, in part because no one could figure out what caused it. 

For this and other reasons, research into the syndrome has, in the view of many, not been commensurate with the great costs it exacts — tens of billions of dollars yearly in medical bills and lost productivity, to say nothing of the many lives spent hidden away, sometimes bedbound, in darkened rooms.

These days, though, the medical community increasingly accepts the condition as real, and doctors have even made some headway in managing its symptoms. No one yet knows what the relationship between long Covid and ME/CFS — itself an imprecise diagnosis — will prove to be. 

But some experts think recent advances in the study of ME/CFS, inconsistent and inconclusive though our understanding of it remains, may provide insight into what ails long-haulers and how to treat them. 

In the process, that research might also shed light on an enduring medical conundrum: Why do certain infections, even as they resolve in most cases, become a protracted, debilitating ordeal for a small group of unlucky patients?

Even as doctors around the world have been flummoxed by long Covid and its mysteries, the patients themselves have found one another online. Soon after the pandemic started, the medical consensus, based on the World Health Organization’s analysis of China’s experience, held that mild Covid-19 cases should resolve in two weeks on average. 

So, as patients with supposedly mild cases continued to experience symptoms long after that two-week mark — and in some cases actually got worse as time dragged by — they knew something was amiss.

They named themselves early on. “Long-haulers” originated with an American woman who started a support group and christened it the “long-haul Covid fighters,” inspired by the trucker hat she was wearing when she was tested for Covid. 

“Long Covid” first emerged as a hashtag (#LongCovid), coined by an Italian in Lombardy, a hard-hit region of the country. Similar terms arose in Spanish (#CovidPersistente), German (#MitCoronaLeben) and other languages.

Many long-haulers report that medical professionals respond to them with disbelief or brush off their symptoms as merely psychological. Still, by September, the World Health Organization’s use of “long Covid” signaled that the term had crept into mainstream medical awareness. Doctors had formulated their own phrasing as well: “post-acute Covid-19 syndrome.”

When trying to treat what ails long-haulers, separating those with organ damage from the rest will be important, scientists told me. “There are some people whose heart and kidneys are not going to work as well for the rest of their lives,” Anthony Komaroff says. 

This doesn’t mean the damage cannot be treated. Doctors can prescribe aspirin and other drugs for the heart inflammation seen in some Covid patients, for example, or anticoagulants to help with blood clotting.

The more puzzling matter, though, is how to understand and treat the many patients who have little that’s measurably wrong with them, or whose Covid-related injuries can’t explain their malaise, but who nevertheless feel physically and mentally enervated.

In my conversations with them, long-haulers detailed bewildering post-Covid symptoms — new sensitivities to smells and tastes, brutal chest pains, migraines that felt like, in one woman’s words, “someone stuck an ice pick in my head.” But what often seemed most disturbing to patients were the deadening fatigue and cognitive issues that in some ways resembled dementia.

Lauren Nichols, who is 32 and fell ill in March, told me she had become so forgetful that she had to write notes to remind herself to eat. Once, in the shower, she sat on the floor weeping because she couldn’t recall how the doorknob worked. “It takes me hours to write email and text messages,” she says. 

Kristen Tjaden, who is 34, contracted the coronavirus in April. One time, months after the illness, she couldn’t remember which hand was the left one. She found she couldn’t do two things at once, like folding laundry and listening to music — the mental strain was too great. 

By November, things were gradually improving, but she just didn’t feel “like this is my own brain,” she told me then. The problem isn’t so much brain fog, she said, as “a brain hurricane.”

Scientists invariably mention the possibility that ongoing inflammation and perhaps autoimmune processes that result from having fought off the virus could drive the strange constellation of symptoms. 

Avindra Nath, clinical director of the National Institute of Neurological Disorders and Stroke, told me that when fighting a pathogen, the immune system sometimes conducts a very precise and surgical attack, working like a guided missile. But when that approach fails, it can begin “blanket bombing,” as he puts it. 

Once the infection is gone, tamping down the resulting firestorm can prove challenging. “You have persistent immune activation,” he says. And that lingering inflammation could drive many symptoms.

Lauren Nichols, 32, who developed shingles after Covid-19.Credit...Adam Ferguson for The New York Times

This notion that infection can unbalance the immune system has often been invoked to explain the onset of autoimmune diseases — conditions in which the immune system attacks the very body it’s meant to protect. 

Multiple sclerosis, for example, has long been associated with infection by the herpesvirus Epstein-Barr. 

Rheumatic fever, a potentially deadly autoimmune inflammation of the heart and brain, is caused by a strain of the same streptococcus bacterium that we know from “strep” throat. 

A form of autoimmune arthritis can erupt in human knees and other joints after infection by the bacterium that causes Lyme disease, Borrelia burgdorferi.

In recent years, scientists have come to realize that the symptoms of certain autoimmune diseases can even mimic psychiatric disorders. 

In anti-NMDA receptor encephalitis, for example, the immune system attacks glutamate receptors on neurons in the brain, sometimes provoking behavior that resembles what’s seen in schizophrenia. 

It, too, can be triggered by viral infection. (It’s treatable.) There’s also a pediatric condition that is similar to obsessive-compulsive disorder called pediatric acute-onset neuropsychiatric syndrome, or PANS, that many think can be set off by infection.

Certainly there is abundant evidence that the coronavirus can goad the immune system into overreaction during the acute phase of infection. Some children (and adults) develop a multisystem inflammatory syndrome. 

Scattered reports suggest that the virus might trigger Guillain-Barré syndrome, a frightening autoimmune condition in which patients develop full or partial paralysis (though most eventually recover). 

Some scientists have suggested that an exaggerated immune response to the coronavirus, rather than the damage directly inflicted by it, is responsible for many Covid deaths. This sort of self-destruction is often described as a “cytokine storm.”

Ignacio Sanz, an immunologist at Emory University, and his colleagues recently described more granular evidence of this self-attack in Covid-19. Compared with a healthy control group, they discovered, severe Covid-19 patients display high levels of antibodies directed at their own tissues — antibodies usually seen in lupus and rheumatoid arthritis, two autoimmune diseases. 

This does not necessarily mean that these patients have an autoimmune condition, Sanz stresses. Those same antibodies are found in healthy people. But not only are the levels of these antibodies relatively high in severe Covid-19; the cells that produce them also appear to be even more primed for aggression than they are in autoimmune disease. 

In his view, this dynamic hints at an immune system pushed into overdrive. Sanz suspects that in people who already have a propensity to develop autoimmune disorders, the virus may tip their immune systems into overt autoimmune disease.

The fact that most long-Covid patients are women may be an important clue in support of this hunch. In general, women are more likely than men to develop autoimmune disease. 

Akiko Iwasaki, an immunologist at Yale, has found that female Covid patients tend to mount a stronger response to the virus from T cells, which help defend against microbial invaders, than their male counterparts. 

Testosterone is a slight immune suppressant, which may explain this disparity between women and men — and perhaps why men are more likely to die from Covid-19. (The female members of many species outlive the males, possibly because they have superior immune systems.) 

But one disadvantage of a more forceful immune response may be a greater propensity to attack the self. “Women survive this,” Iwasaki says, “but maybe there’s a cost.”

Iwasaki and her colleague Aaron Ring have, like Sanz, also identified what seems to be immune misfiring in Covid-19. But instead of looking for antibodies already associated with autoimmune disease, they used a new technique to search for any antibody, including previously unidentified ones, that might bind with some 3,000 proteins — out of tens of thousands — produced in humans. 

Their findings, reported in a December preprint, which has not yet been peer-reviewed, suggest a widespread autoimmune attack. Compared with subjects from the healthy control group, severe Covid-19 patients had elevated levels of antibodies directed at dozens of tissues, including the brain, the lining of blood vessels and components of the immune system itself.

Why some infections might cause the immune system to attack the body in certain individuals but not others is a longstanding medical mystery. 

It may be that proteins on the invading microbe resemble tissue in the human body, and that in pursuing the invader, some people’s immune systems accidentally attack similar molecules in their own organs. This idea is called molecular mimicry.

But Ring told me that the sheer number and variety of self-directed antibodies he and Iwasaki discovered suggest some other process gone awry. Some antibodies they observed were directed at virus-fighting components of the immune system itself, and Iwasaki posits a “vicious cycle” that begins with the immune system attacking itself, undercutting its own antiviral response. 

The body tries to compensate by ramping up other defenses, but these aren’t well suited to fighting viruses and cause extensive cellular damage. 

As injured cells burst and release debris, the immune system, already in a frenzy, turns against the debris as well, inflicting even more harm.

Some of those self-directed antibodies declined in number over the course of Ring and Iwasaki’s study, indicating that they may subside naturally once the virus is defeated. 

But if the antibodies stick around in some individuals, they could drive an ongoing attack at various sites in the body, which might account for the symptoms of long Covid. 

If that proves to be the case, Ring says, potential treatments already exist, including rituximab, a powerful drug that selectively depletes antibody-producing B-cells.

How exactly might an autoimmune disease cause the fatigue, cognitive failings and other symptoms seen in those with long Covid? 

Patients with other autoimmune diseases, like rheumatoid arthritis and inflammatory bowel disease, often report debilitating fatigue and brain fog. They may even consider this fatigue to be worse than the pain or discomfort emanating from what’s usually considered the site of attack — the gut and the joints, respectively. 

The chronic inflammation central to these diseases causes the fatigue, doctors think. 

It’s an illustration of just how tightly connected the immune system is with our sense of well-being.

Long Covid and ME/CFS share features beyond symptoms. Both are linked with infection. And the immune system is a focus of research into both conditions. Yet the idea that long Covid and ME/CFS are overlapping disorders is not universally accepted. 

Although many long-haulers may now technically meet the criteria for ME/CFS, Maureen Hanson, a molecular biologist who studies ME/CFS at Cornell University, warns against assuming they are related. 

“We don’t know how long people will actually remain ill,” she says. 

And of course, there are thought to be millions of people around the world with ME/CFS, but “none of them got it because of SARS-CoV-2,” she adds. “We don’t know if this new virus will cause the same disease.”

Jeffrey Siegelman, 40, an Atlanta emergency medicine physician, was out of work for five months and only recently returned to partial shifts.Credit...Adam Ferguson for The New York Times

For patients, the “chronic fatigue” label carries the stigma of not always having been taken seriously by the medical establishment. But perhaps worst of all, the equation of the two conditions implies a scary permanence. 

“Chronic fatigue syndrome is a syndrome that does not get better,” Dayna McCarthy says. “From a psychological perspective, that’s just devastating.” She counsels her patients not to read too much about ME/CFS on social media.

Even so, the similarities are numerous enough that Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases, has raised them repeatedly, telling Medscape in July that “it’s extraordinary how many people have a postviral syndrome that’s very strikingly similar to myalgic encephalomyelitis/chronic fatigue syndrome. They just don’t get back to normal energy or normal feeling of good health.”

Scientists have for years considered three nonmutually exclusive explanations for how a viral infection might trigger ME/CFS: It changes the brain somehow, prompting ongoing fatigue and malaise; it becomes chronic, making the person ill indefinitely; or it triggers an autoimmune or inflammatory disease that continues to torment people long after the offending microbe is gone. 

These explanations feature in scientists’ thinking on long Covid as well.

Yet for decades, physicians trying to treat ME/CFS have been bedeviled by one obstacle above all others: They have no way of objectively diagnosing the condition. 

Cardiologists see clogged arteries and consider heart disease. Infectious-disease doctors detect viruses and bacteria and think infection. 

But there is no equivalent, empirically measurable dysfunction that indicates ME/CFS. It “isn’t a diagnosis — it’s a label,” Anne Louise Oaklander, a neurologist at Massachusetts General Hospital, told me. “We don’t really understand what the underlying biology is.”

In order to apply that ME/CFS label, a physician must first rule out other possibilities. Then a patient must satisfy three criteria, which are subjectively reported: incapacitating fatigue lasting more than six months; worsening symptoms after physical or mental exertion; and unrefreshing sleep. 

A fourth requirement is that patients suffer from at least one of the following: difficulties with thinking and memory; or orthostatic intolerance, a debilitating dysfunction of the autonomic nervous system characterized by rapid changes in heart rate and blood pressure when standing.

Even if scientists aren’t sure about the root cause of ME/CFS, however, numerous studies in recent years have documented biological differences in these patients. 

There’s orthostatic intolerance, for one — which, as one scientist pointed out to me, can’t be “psychological.” 

And Nancy Klimas, a physician and scientist at Nova Southeastern University, and others have observed that one set of cells in particular, called natural killer cells, behave quite strangely in ME/CFS patients. Normally these cells sidle up to and destroy cells infected by viral invaders. 

But in ME/CFS patients, Klimas has found them to be listless and inert. She doesn’t think that they’re defective; she hypothesizes that they’ve been worked to exhaustion.

Klimas’s research on postexertional malaise — which has involved collecting blood work on volunteers before, during and after mild exertion — has also revealed numerous differences compared with healthy people. Some inflammation after exercise is normal. 

But that immune activation is quickly brought under control, and an anti-inflammatory signal eventually prevails. In ME/CFS patients, that inflammatory spike continues unabated. The patients seem to respond to exercise as if they were fighting the flu. “You can imagine what that feels like, like getting hit by a truck,” Klimas says.

ME/CFS (and long-Covid) patients can suffer from dysautonomia, an affliction of the autonomic nervous system that can cause racing hearts, gut problems, dilated pupils, sweating and rapid changes in blood pressure when at rest. It may be one reason they don’t feel rested after sleeping. 

The sympathetic nervous system — that part of your body that swings into action when, for example, you’re chased by a bear — seems to have been permanently switched on in some patients. “Flight-or-fight all the time is not healthy,” Klimas says.

Perhaps spurred by the sense that a storm of chronic illness is gathering, the National Institute of Allergy and Infectious Diseases hosted a video meeting in December devoted solely to long Covid, with the goal of sharing what was known about the condition and also identifying what remained unknown. 

Physicians and scientists from the United States and elsewhere spoke, as did some patients. 

And Peter Rowe, director of the Children’s Center Chronic Fatigue Clinic at Johns Hopkins University, urged his fellow physicians to familiarize themselves with ME/CFS. 

Even if the root cause isn’t well understood, doctors have learned a lot about how to manage some symptoms in recent years, he said, particularly orthostatic intolerance, which is common in both young ME/CFS patients and the few long-Covid patients he has seen so far.

Rowe told me he is concerned that the health care workers who will be involved in the long-haulers’ rehabilitations won’t know what ME/CFS specialists have learned. He frets that physicians aren’t aware, for example, that too much physical exertion can drastically worsen symptoms. 

And he worries about the historical tendency to see the condition as psychological in nature. That thinking led to an overemphasis on treatments like cognitive behavioral therapy or graded exercise therapy, he says, which have largely been abandoned as cure-alls for ME/CFS in the United States, but not without first doing great harm to patients. 

“It’s going to be extremely important not to make the mistakes that were made in the early ’90s,” he said at the meeting. As he put it to me: “I’m concerned that people haven’t learned the lessons of the past 25 years.”

Scientists have known for many decades that infections can trigger long-lasting, often debilitating conditions — ones that feature fatigue and cognitive dysfunction similar to what doctors are observing today in Covid-19 survivors. 

In other words, long Covid may simply be the latest example of a postinfectious phenomenon that has mystified physicians for more than a century.

Margot Gage Witvliet, 38, a professor in epidemiology at Lamar University in Texas, has been sick for nine months.Credit...Adam Ferguson for The New York Times

The “Russian flu” pandemic that occurred between 1889 and 1892 left in its wake a now-familiar-sounding collection of symptoms, including pain, numbness and fatiguelike complaints described as “prostration” and “inertia,” Mark Honigsbaum writes in his 2013 book “A History of the Great Influenza Pandemics.” 

He quotes Josephine Butler, the British women’s rights crusader, who declared in 1892, three months after contracting the virus: “I am so weak that if I read or write for half an hour I become so tired and faint that I have to lie down.” 

Survivors of history’s worst influenza pandemic, the so-called Spanish flu of 1918-19, also reported lingering symptoms, including “loss of muscular energy,” “apathy” and “melancholia” that sometimes lasted for years.

Much smaller outbreaks of similar disorders occurred with remarkable regularity throughout the 20th century, with the notable difference that no one really knew what gave rise to them. 

In 1934, nearly 200 doctors and nurses in Los Angeles came down with what doctors labeled “atypical poliomyelitis” — “atypical” because, unlike true polio, it struck adults rather than children and caused neither death nor paralysis. Yet some patients regarded the long-lasting symptoms, which included pain, sleeplessness and difficulties with concentration and memory, as worse than the original illness.

In 1956, after an outbreak in London, British doctors coined the term “benign myalgic encephalomyelitis” to describe the condition, which, in medical speak, roughly means “muscle pain with brain and spinal cord inflammation.” 

Most of these patients recovered, but not all. In London, 7 percent remained hospitalized three months later. After an outbreak in Iceland, doctors found that only 31 percent had recovered six years later.

Doctors proposed that a milder relative of the poliovirus must be at fault. But perhaps because no such virus could be identified, a rival explanation gained currency. In 1970, two British doctors reviewed records from 15 outbreaks and dismissed the idea of an infectious cause. 

Instead, they concluded that “either mass hysteria on the part of the patients or altered medical perception of the community” could explain the phenomenon. To support the “hysteria” claim, they cited the fact that most patients were women. 

The resulting shift in how doctors thought about the disease would, some have since argued, inflict tremendous harm on patients suffering from a very real, if ill-defined, disease.

In 1985, after another apparent outbreak in Incline Village, Nev., near Lake Tahoe, the media piled on, derisively calling the condition the “yuppie flu” — or as Newsweek described it in 1990, “a fashionable form of hypochondria.” 

About this same time, scientists who were studying the condition settled on “chronic fatigue syndrome” to describe it. The term still rankles many who see it as greatly understating the severity of their condition. As the author Laura Hillenbrand, who has the illness, once told The Times, it “is condescending and so grossly misleading. Fatigue is what we experience, but it is what a match is to an atomic bomb.”

After pursuing what seemed like promising leads, the quest to identify a single infectious cause of these persistent illnesses — the proverbial chronic fatigue virus — ultimately turned up little, and in 1992, a group of scientists, including Anthony Komaroff, advanced a more complicated if less satisfying explanation. 

“We think that this is probably a heterogeneous illness that can be triggered by multiple different genetic and environmental factors,” they wrote, “including stress, toxins and exogenous infectious agents.” 

In other words, the disease emerged from an interaction between each patient’s unique makeup and any number of stressors in the environment — including, possibly, an infection.

In the 2000s, researchers in rural Australia tried to confirm through direct observation the proposed link with infection. Previously, scientists studying the syndrome were always playing catch-up, trying to figure out what had happened to patients who showed up at their offices already ill. 

But in the township of Dubbo, scientists collaborated with local doctors to follow 253 patients who contracted infections more serious than the common cold — those viruses weren’t linked with ME/CFS — in order to see who might develop fatigue and other symptoms over the following year.

The scientists found that Dubbo residents could develop chronic fatigue after several illnesses, among them Q fever, which is caused by bacteria carried by livestock; Ross River fever, spread by mosquitoes; and Epstein-Barr infection, transmitted via human saliva. 

About 11 percent of the patients who contracted one of these infections still had symptoms six months later, at which time they met the criteria for chronic fatigue syndrome. Nine percent had persistent symptoms a year later. 

No social or psychological factors foretold who developed long-term fatigue and other symptoms. But one factor was broadly predictive: how sick patients became during the initial phase of their illness. 

The sicker they got, the more likely they were, after the infection itself had cleared up, to develop fatigue, pain and problems with memory and concentration.

From the Russian Influenza to Covid-19, these have been the abiding questions: Where in the body is the dysfunction that drives these chronic symptoms? And what distinguishes those who develop these long-term syndromes from those who don’t? 

A study conducted several years ago by Alice Russell and Carmine Pariante at King’s College London suggests that the answer may lie in the different ways individual immune systems respond to the same challenge.

Russell and Pariante decided to follow 55 subjects being treated for hepatitis C, a chronic viral infection of the liver. 

They wanted to see if any of them developed persistent problems not from the hepatitis virus itself but from the therapy meant to cure it. 

At the time, treatment included injections of interferon-alpha, a protein also made by our own bodies, which activates the body’s antiviral defenses. By giving patients interferon, doctors essentially rev up their immune systems in much the same way an actual viral infection does. 

For years, scientists have known that interferon treatment can also lead to fatigue and depression in some patients. The therapy for these patients thus provided a way to simulate infection and then study its long-term consequences without using an actual infectious agent.

Six months after the treatment concluded, one-third of the patients reported persistent fatigue. 

At that point, nothing appeared to be different about their immune function. 

But by analyzing inflammatory markers in blood taken before and during the interferon therapy, the scientists found two rough predictors: the more activated their immune system was before treatment, and the more inflamed they became during treatment, the greater the likelihood of suffering from fatigue months later.

Kristen Tjaden is still having cognitive and memory issues. It’s like ‘‘a brain hurricane,’’ she says.Credit...Adam Ferguson for The New York Times

“It may be that in one person, the immune system is more reactive,” Pariante says, “so it doesn’t go back easily to normal after the challenge. And this is the person more likely to develop long-term fatigue.”

This relationship may be present in Covid-19 as well. Pariante points to a study from Vita-Salute San Raffaele University in Milan showing that levels of inflammatory markers during a coronavirus infection roughly predicted the development of anxiety and depression after. (Depression is not the same as fatigue, of course, but scientists have for years hypothesized that aberrant inflammation is responsible for some cases of depression, just as they consider it a possible cause of ME/CFS.)

It still remains unclear, though, what biological dysfunction underlies those persistent symptoms after interferon treatment (or an actual infection) has run its course. 

This is the mystery at the heart of those ME/CFS cases associated with infection, and maybe long Covid too: How does an infection change your body so that you continue to feel terrible, and maybe even worse, long after the infection has gone? 

And why can’t scientists pin down whatever that change is?

Pariante and others suspect that something may shift in the brain itself, where it’s harder to detect anomalous immune activity. 

Two very small studies have documented brain inflammation in ME/CFS, one using positron emission tomography and another employing a technique called magnetic resonance spectroscopy. As always, in purely observational studies like these, it’s unclear if what’s different about these patients — the brain inflammation — actually causes the condition, results from it or is unrelated to it.

But scientists know that certain cells in the brain, called microglial cells, can assume different personas: They can function like agreeable handymen, removing detritus and ensuring that your synapses are clean and working properly. 

Or they can act like vandals, interfering with the brain. In animal studies, the shift is visible under a microscope, says Jarred Younger, director of the Neuroinflammation, Pain and Fatigue Laboratory at the University of Alabama at Birmingham, and the senior author on one of those brain-inflammation studies. 

With repeated infectious hits, microglia can become “spiky.” “They look angry,” he says, “like they’re ready to fight.”

Younger thinks that in ME/CFS, these cells may permanently change into that “angry” version of themselves. He is currently studying the possibility and, should that work pan out, he has a few drug candidates that might calm microglia. 

These include low-dose naltrexone, a drug that blocks opioid receptors and is sometimes used to treat autoimmune disease — and also been found to be effective, anecdotally, in ME/CFS — as well as minocycline, an old antibiotic that scientists know can exert an anti-inflammatory effect in the brain.

Another explanation for misfiring immune systems — one that some researchers put forward to explain long Covid — is that infection triggers an autoimmune disease, and that scientists have simply been unable to pinpoint where that self-attack is directed. 

Carmen Scheibenbogen, head of the chronic fatigue center at the Charité university hospital in Berlin, thinks she may have identified the target tissue. 

Some ME/CFS patients have an autoimmune disease in which antibodies interfere with certain receptors in the endocrine system, she thinks — precisely the kind of molecular self-laceration that might hamper the autonomic nervous system, producing the rapid pulse and other odd symptoms often seen in ME/CFS patients. Importantly, she and others have had some very preliminary success treating the problem as an autoimmune disease. 

If some portion of long Covid cases turn out to have the same or similar condition, her research may have much broader bearing.

Unfortunately, though, no single treatment is likely to cure all cases of ME/CFS. Scheibenbogen, Younger and other ME/CFS experts I spoke with were in agreement: The entity we call ME/CFS probably has multiple causes. “It’s very unlikely this is a single disease,” Younger says. “It’s a few things.”

Maybe the simplest explanation for why some long-haulers aren’t recovering is that, even if they test negative, they may in fact still harbor a Covid infection somewhere in their body. 

Amy Proal, a microbiologist with the PolyBio Research Foundation, which focuses on chronic inflammatory diseases, thinks that if people feel sick after an infection, that may be because they in fact are still fighting a hidden infection. “An incredibly logical explanation is that the driving factor is still there,” she says.

The idea of a persistent Covid infection remains unproved, although several studies hint at the possibility. 

But if this turns out to be the case for some patients, it will be important to separate them from those who might have an autoimmune or inflammatory condition, Proal points out, because treating one could aggravate the other. 

Using immune suppressants to treat an autoimmune condition, for example, could very well make a lingering infection worse.

The notion that long-term infection is responsible for chronic illness has an extensive history in ME/CFS research, where herpesviruses, which establish a lifelong presence in our bodies, have been put forward as the possible culprit. 

Nancy Klimas of Nova Southeastern University has gradually moved away from the suggestion that herpesviruses directly cause ME/CFS, though. Her view is that they play a secondary role. 

She suspects that, in some cases, ME/CFS consists of a two-phase illness: an initial hit of some sort — infection or trauma, say — and then, because that stressor lowers immunological vigilance, a second phase in which herpesviruses already present in the body may spring back to life and lead to misery. 

And then for reasons no one understands, the immune system can’t get that second viral rebellion back under control. 

“The issue isn’t the virus,” Klimas says. 

“The issue is immune surveillance.” The problem isn’t necessarily their presence in our bodies, in other words, but rather that, after some destabilizing event, the immune system may lose the ability to manage viruses it easily handled before.

Lada Beara Lasic, a nephrologist, worries about the long-term consequences of what she suspects is an immune system that can’t calm down. “We know that it’s not good for the body to have inflammation. It causes scarring and that means irreversible changes.”Credit...Adam Ferguson for The New York Times

Anecdotally, at least, some long-haulers are experiencing the type of viral reactivation Klimas describes. In late October, seven months after contracting the coronavirus, Lauren Nichols developed shingles — a reactivation of the virus that causes chickenpox. 

The episode, which featured burning, “out of this world” nerve pain, sent her to the emergency room. A lesion developed on the cornea of her left eye, threatening her vision. Antiviral medication helped bring the shingles under control. 

Nichols, an administrator of a long-Covid support group, told me that reactivation of Epstein-Barr, cytomegalovirus and other herpesviruses occurs in a small but significant percentage of long-haulers on the site.

A similar argument over what drives chronic symptoms — persistent infection versus lingering inflammation from a past infection — appears prominently in the study of Lyme disease. 

Some people infected with Borrelia burgdorferi, the tick-borne bacterium that causes Lyme, fail to recover even after antibiotic treatment. Patients may refer to this illness as “chronic Lyme disease,” but doctors prefer to call it “post-treatment Lyme disease syndrome,” because they’re not sure an infection is still really there. As in ME/CFS research, the debate over the root cause of this post-Lyme illness has for years polarized the field.

There are other similarities as well. The Lyme problem is underrecognized but immense. Every year, an estimated 329,000 people are infected by B. burgdorferi. 

About 10 percent of those treated with antibiotics develop lasting symptoms, including fatigue, pain and occasionally nervous-system conditions like dysautonomia — heart rate, blood pressure and other basic bodily functions in disarray. It appears to strike women more than men, it has long been dismissed as psychological and the long-term illness is often judged worse than the acute infection.

Like ME/CFS, post-Lyme syndrome has no biological marker that allows for concrete diagnosis. The three nonmutually exclusive ideas about what causes long-term symptoms roughly correspond with those for ME/CFS: a persistent infection (or perhaps merely debris from the Lyme spirochetes); an autoimmune or inflammatory dysfunction triggered by the infection that continues after the bacteria are gone; or changes in the nervous system that mirror Jarred Younger’s “angry microglia” idea, but that are described by Lyme researchers as “central nervous system sensitization.” Perhaps the infection changes how the brain works in such a way that once-easily bearable stimuli — pain, light, sound — become unbearable.

The parallels between ME/CFS and Lyme reinforce the notion that many different infections — including the Lyme spirochete — can trigger debilitating long-term syndromes. 

It’s a lesson that we as a society have perhaps forgotten, Allen Steere, a Lyme expert and rheumatologist at Harvard Medical School, told me. “Now we have millions infected, and it becomes apparent to people that this type of problem can follow.”

It’s a maddening prospect, but long Covid may not be a single syndrome at all. It could, as seems to be the case with ME/CFS, be an array of problems connected in various ways with an initial trigger — in Covid’s case, the invasion of the human body by a virus thought to be originally native to bats. 

ME/CFS doctors and researchers have faced this sort of frustrating complexity for years. It’s an unavoidable challenge in managing a condition, be it ME/CFS or long Covid, whose diagnosis is based almost entirely on the subjective reporting of symptoms. 

There are, after all, many ways to produce symptoms like fatigue, brain fog and even dysautonomia. As Peter Rowe puts it, treating ME/CFS is like peeling an artichoke. “You’re trying to remove treatable layers of problems and see what the essence is,” he told me.

In the case of ME/CFS, scientists have identified a few more leaves of the proverbial artichoke — a grab bag of treatable, somewhat obscure conditions that seem to be associated with it. 

One is mast cell activation syndrome, which can produce fatigue, pain and problems with thinking and memory; infection can sometimes initiate it. 

Another is small-fiber neuropathy, a condition in which the body’s nerves begin to misfire and can die off, causing pain, fatigue and disruption to basic bodily functions like breathing. Infections can sometimes trigger it, and given the current description of long-Covid symptoms, Anne Louise Oaklander, a pioneer in understanding this neuropathy, suspects it will be found to occur among long-haulers as well. 

“Small-fiber neuropathy is usually treatable,” Oaklander told me, “and in some cases curable.”

Long-haulers who contracted the novel coronavirus early in the pandemic are just about to round the one-year mark. Only with time will scientists be able to determine if long Covid and ME/CFS are the same or overlapping syndromes, or whether they’re distinct and unrelated. 

For some ME/CFS specialists, however, long Covid already seems like a variant of the condition they’ve spent their careers treating. Carmen Scheibenbogen told me that in her experience, 1 to 2 percent of all patients infected with coronavirus meet the criteria for ME/CFS six months later. 

In New York, Susan Levine, an infectious-disease doctor who specializes in ME/CFS, finds that long-Covid patients respond to some of the same treatments that help ME/CFS patients, including low doses of naltrexone, which is anti-inflammatory.

But she does point out that long-Covid patients differ in subtle ways. Among ME/CFS patients, new complications can emerge slowly. Long-Covid patients see new symptoms develop relatively quickly. 

“It all happens in a compressed way,” Levine told me. 

“The only silver lining is that I feel we can get these people earlier, soon after the Covid infection, as opposed to the ME/CFS patients, who languished for years.”

The other possible silver lining, one expressed repeatedly by scientists and patients alike, is the prospect that the explosion of long-Covid cases will spur research, and that that research could yield treatments that may help the long-suffering ME/CFS community. 

“The disease has been ignored for decades and misjudged as a psychiatric disease,” Scheibenbogen says. “We hope now that we get the awareness and money for research — and pharmaceutical drugs.”

For the first time, scientists can follow thousands of patients infected by the same virus at roughly the same time. Funded by the C.D.C., Nancy Klimas has begun a study on long-haulers in which she hopes to prevent ME/CFS from taking root altogether. 

“We often talk about the three-year mark as people shifting into long-term illness,” she told me. She plans to intervene with drugs before that milestone and hopefully prevent whatever it is that becomes self-perpetuating in ME/CFS.

Long-haulers may have one comparative advantage, at least: Whereas their ME/CFS counterparts in the past may have felt isolated and bereft of information, long-haulers live in a connected world. 

They’ve already been remarkably adept at organizing and making themselves heard, writing opinion pieces in major medical journals and media outlets, even conducting their own research.

If nothing else, the online organizing has been hugely important for some patients’ mental health. Lauren Nichols told me that, early on, she contemplated suicide because few — neither doctors nor friends — believed her when she detailed her symptoms. (Those with ME/CFS have an elevated risk of suicide.) 

She connected with others who were going through similar experiences only after reading an April Op-Ed in The New York Times. The author, Fiona Lowenstein, had started a support group on her queer feminist website, Body Politic. Nichols rushed to join and quickly became an administrator. 

“My mental state changed — I said, ‘Oh, my God, I’m not crazy,’” she told me. “The Body Politic support group prevented me from killing myself. And I really mean that.”

Now, as we face the worst but hopefully final wave of the pandemic, many people — long-haulers, those with ME/CFS, scientists and doctors — worry about the long-term consequences of tens of millions of people infected with a virus that, it seems, can inflict lasting damage on the body. 

The palpable fear is that years from now, after the dead have been buried and victory over the coronavirus declared, some long-haulers will continue to suffer; and that their ongoing ordeal will be reckoned among the pandemic’s more awful, lasting legacies.

Moises Velasquez-Manoff is a contributing writer for the magazine. He last wrote about the immune system’s reaction to Covid-19.

No long-term silver lining for markets

History shows its limited value as a shelter in catastrophic financial collapse

Brendan Greeley

       © Bloomberg

In August 1963 a group of East German farmers pulled some 17th-century silver taler coins out of a potato field in the village of Glave. 

By the next harvest, historians had found several hundred more and come up with a fun thesis: the great Albrecht von Wallenstein, a Bohemian general in the Thirty Years’ War, had buried a cache of taler in a jar on his way out of town in the late 1620s. 

A trader today would say that the general had been long physical silver.

Over the weekend, someone on the Reddit forum /WallStreetBets began encouraging people to buy physical silver. 

The forum was not unanimous in its support for the trade. 

Some found it a distraction from other bets, just another day of silver obsessives pushing their favourite trade. 

But on Monday, the spot price for silver rose as much 12 per cent in London before retreating to end up 7 per cent. 

The price fell a further 4 per cent in trading on Tuesday.

Some traders might have been buying to squeeze those betting against the metal, forcing prices higher. 

But some on r/WallStreetBets were making the very long-term case: if you are holding real silver, then no matter what happens, you are still holding real money. 

Let’s call this the von Wallenstein trade: in a time of uncertainty, you put away a literal jar of silver.

The von Wallenstein silver long assumes that in a catastrophic financial collapse, it’s possible to find shelter at all. And it looks back to a time that never existed: a time of true strong metal money, with none of that inflated, unreliable credit money.

“This is it. This is our Financial Revolution,” wrote Marco de Yolo on r/WallStreetBets. 

“We will not need the dollar and we will leave them holding the bag.” 

The dollar collapse is coming, goes the argument, and anyone with bank deposits or investments in dollars is a sucker, holding a metaphorical bag full of nothing.

In the late 19th century, American farmers wanted to back the country’s money with silver because there was so much of it. 

They wanted monetary policy to be looser. 

But that’s not Marco de Yolo’s brand of populism. 

He wants a return to silver money precisely because there is so little of it. 

Silver, he wrote, is the “people’s currency”.

Textbooks teach a history of money that progressed neatly from one thing to another: barter to metal to credit. 

Accept this history and you may find yourself nostalgic for something that never existed: a time of metal, for example, when money was sound and reliable. 

Or a time before metal, when barter was restrained by social and moral obligations. But money has almost always been messy, mixed, and unfair.

Those coins the farmers found in a jar, for example: the taler system in northern Europe never rested exclusively on financial markets of pure, reliable silver. 

In the 16th century, investors in the trading town of Leipzig pulled silver taler from the Ore Mountains in Saxony and Bohemia, then pushed them out into global markets. 

But Uwe Schirmer, a financial historian at the University of Jena in Germany, has pointed out that the regular arrival of silver coins on market days also temporarily inflated credit markets, easing trade in cloth and other commodities. 

The silver generated more credit transactions and helped close them. But it never replaced them.

The Leipzig markets, like almost all markets, were great for merchants and princes connected to the silver trade. 

Money has almost always been a mixed system of a few commodities and a lot of credit, all of it unevenly distributed. 

Even in a silver system, physical silver was never the people’s currency. 

In 19th century America, farmers didn’t want silver coins. 

They wanted higher prices for their wheat. 

Silver was just a way to get it.

Wealthy and powerful people have a way of making markets unfair. 

When the US Federal Reserve pushes up financial asset prices in a crisis, this is of course better for people who hold financial assets. 

But there has never been an asset that destroys the plutocrats. 

If the dollar system collapses, there will be no new silver princes, just a long, brutal slog back to re-establishing markets for credit, and then more of the ancient fight to make them fairer. 

So traders might buy silver if they want to speculate this week. 

But they should remember when they do that the von Wallenstein trade didn't even work for Albrecht von Wallenstein. 

He was assassinated in Bohemia before he could return to Glave and close out his bet. 

Catastrophic, uncertain times are just that: no one knows what’s going to happen. 

To fantasise about collapse because you’re the only one holding anything real is to imagine shelter where there is none.

The destructive force and failure of QE

 By Alasdair Macleod

This article concludes that quantitative easing as a means of stimulating economies and financing government deficits will fail. 

The underlying assumption is that the transmission of additional money to non-banks in order to inflate financial assets, and to banks to cover government finances, will become too great in 2021 for it to succeed without undermining fiat currencies and financial markets. 

Admittedly, this opinion stands in stark contrast to the common Keynesian view, that once covid is over economies will start to grow again.

To help readers to understand why QE will fail, this article describes how its objectives have changed from stimulating the economy by raising asset prices, to financing rapidly increasing government budget deficits. 

It walks the reader through the inflationary differences between QE subscribed to by banks and by non-bank financial institutions, such as pension funds and insurance companies.

Having exhausted the reduction of interest rates as the principle means of economic stimulation, central banks, and especially the Fed, have embarked on pure monetary inflation. 

Before the end of 2019, that became the driving force behind the Fed’s monetary policy. Since March 2020 the objective behind QE altered again to financing the US government’s budget deficit.

In this current fiscal year, just to fund budget deficits and in the absence of net foreign demand for US Treasuries, QE is likely to escalate to a monthly average of $450bn. 

Almost impossible with a stable exchange rate, but with the dollar being sold down on foreign exchanges and for commodities, the everything dollar bubble will almost certainly collapse.


Now that the US has elected a new president who will appoint a new administration, we must forget recent political events and focus on future economic and monetary policies. 

It is a statement of the obvious that President-elect Biden and his new Treasury Secretary will be naturally more Keynesian than Trump and Mnuchin, and it is likely that the economic focus will be more on stimulating consumption than on supply side economics. Policies are likely to be closer to modern monetary theory, which is highly inflationary — certainly much more so than under Trump’s presidency.

An important change is therefore bound to occur in monetary policy, and for the purpose of this debate we can forget any idea that the Fed, of for that matter any central bank, is an independent government agent prepared to restrict monetary growth responsibly. Beyond routine public expressions of independence, the Fed will fall in line with the Federal Government’s fiscal policies: it is up to the Fed to find a way to comply without losing face. 

However, in the early days of the new Biden administration this should not be too difficult because last March the Fed had already reduced the funds rate to the zero bound and announced unlimited quantitative easing, initially set at $120bn every month, as well as a range of other expansionary measures.

More QE is likely to be central to future monetary policies. But other than a bald assumption that QE is a sure-fire way to rescue an economy in difficulty, the consequences are poorly understood. In today’s context and other than the Japanese experiment with it which started long before, it was originally intended to be limited to the rescue of national economies following the Lehman banking crisis. But the precedent having been created it should be no surprise that it has become a permanent fixture for the Fed and other major central banks.

Doubtless, through linguistic prestigitation the term quantitative easing was meant to detract from public accusations of inflationary financing. If so, it succeeded. Public awareness of what is involved is apathetic in nature, and its monetary effects remain insufficiently understood. And the political class, not usually endowed with economic and monetary knowhow, sees little or no danger of the consequences of monetary inflation, having placed the matter entirely in their central banker’s hands.

The original objective is encapsulated in a few words in a Bank of England paper published in its 2014 Q1 Quarterly Bulletin, Money creation in the modern economy:

“QE is intended to boost the amount of money in the economy directly by purchasing assets, mainly from non-bank financial companies…. raising the prices of those assets and stimulating spending in the economy.”[i]

The statement in this quote that stands out is about raising the prices of (financial) assets, being an admission of deliberately pursuing a John Law policy of printing money to rig market prices. Apologists for monetary policies might say that central banks have been manipulating asset prices for some considerable time, which is true. But a train of thought accelerating on the rails of a policy’s objectives towards the buffers at the end of the line always ends in disaster. All further considerations of the consequences are blanked out. The consequential impoverishment of everyone other than the state and its licenced banking intermediaries through monetary debasement does not deserve a mention.

The other processes of monetary creation described in the Quarterly Bulletin paper are certainly informative, and worth studying for those fuzzy on the subject. But while the article in the Quarterly Bulletin goes on to explain the intended outcome of QE at that time, things have clearly moved on and an update is due. In examining monetary flows from QE in detail, this article goes further than the Bank’s paper and does so from an independent standpoint.

Understanding the role of bank reserves

Under QE, monetary stimulation is channelled through commercial banks, ending up crediting their reserve accounts at the central bank. Understanding how these reserve accounts operate is important for a full understanding of QE’s mechanics, and can be boiled down to the following bullet points:

• Only licenced commercial banks are permitted to have an account with the central bank. Any interaction between a central bank with a non-bank is conducted through a commercial bank’s reserve account.

• The balance on a reserve account is recorded as an asset on the commercial bank’s balance sheet and is therefore one of several line items under its asset column.

• Just as in any banking relationship, there are active and passive roles. In this case, only the central bank can activate changes in total reserves. A bank cannot initiate a sale or purchase of reserve funds to or from the central bank.

• If a central bank lends money to a commercial bank, it is credited to its reserve account. This is not widely appreciated, but it undermines statistical analysis.

A bank can exchange its reserves with another bank with a reserve account at the central bank.

• Being an asset on a commercial bank’s balance sheet, reserves held on its account with a central bank are an active source of finance for its liabilities.

From the foregoing, it will be clear that reserves are just one of a commercial bank’s means of funding its liabilities. Broadly, those liabilities are comprised of chequing and deposit accounts due to customers, bonds and bills issued by the bank, wholesale market funding, and shareholders’ funds. An increase in reserves permits a commercial bank to increase its liabilities by expanding bank credit. But the degree to which this is possible is governed by the gearing relationship between total assets and shareholders’ funds, which is a separate matter.

Stimulating the financial sector

The Bank of England’s paper posits that once interest rates reach the lower bound, the central bank cannot stimulate the economy any further by cutting interest paid on commercial banks’ reserves. It is at that point that asset purchases are considered as the means of getting more money into the economy, and as the authors put it, it requires a shift of policy from interest rate management to directly expanding the quantity of money. 

The original intention was to access non-bank financial institutions such as pension and insurance funds, buying government debt from them and encouraging them to reinvest the cash gained in higher yielding assets: in other words, to adopt greater investment risk, reflected in higher yields on non-government debt and from prospective returns in equities.

QE has certainly worked in this respect by feeding cash through these institutions into financial markets, driving prices ever higher. QE aimed at large investment funds is the link between accelerating rates of monetary inflation and the equity market bubble, a point missed by those who believe that financial markets must be grounded on assessments of fundamentals and risk. 

But the central bank view is that rising prices for financial assets floats all boats, and the wealth effect stimulates both confidence and economic activity. But it is a mistake to think that all QE ends up in pension and insurance funds. Increasingly, it has become a means of financing government deficits with commercial banks acting as principals in QE transactions, rather than just puffing up financial assets. 

And the delineation between banks and non-banks is important, because the monetary and market consequences are different.

How QE for non-banks works

The Bank of England’s paper makes a distinction of QE transactions taken up by non-bank financial institutions for good reasons. It has little to do directly with funding of a government deficit, which it was assumed at the time the paper was published would be through normal channels. 

Furthermore, the inflationary effects of QE targeted at non-banks, such as pension funds and insurance companies, is entirely different from that when a commercial bank subscribes for government debt.

In order for a central bank to deliver monetary stimulus to non-banks it must do so through a commercial bank, because only commercial banks have accounts with the central bank. The chain of payments is for the central bank to credit the reserve account of the fund’s bank, against which the bank credits the fund’s account with a matching entry. 

In the case of the Fed, the financial asset being bought, usually Treasury or agency bonds, is delivered out of the fund’s name and reregistered to the Fed’s account. The schematic diagram below, taken from the Bank of England’s article, summarises the transaction.

Having disposed of its holding of government debt, the pension fund has newly issued money to invest credited to its account at the commercial bank. It invests it either by buying into new issues of regulated investments, including fixed interest and equities, or by buying existing stocks and bonds in the markets. 

The newly created money then moves from the pension fund into new hands with different consequences for prices. An investment into a new issue gets distributed through the non-financial sector and pursues a Cantillon course, driving up prices of goods and services in the wake of its absorption into the wider economy. An investment into existing stocks and bonds will mostly remain in circulation in the financial sector, being reinvested by the sellers in other securities.

If the pension fund invests in an exchange traded fund (ETF) it leads to an expansion of the ETF, which can either feed into purchases by the ETF of financial or non-financial investments in accordance with the ETF’s remit. By transmitting newly created money through pension and insurance funds into purchases of commodity ETFs, commodity prices are thereby increased by investment flows whose origin is QE.

This explains how central banks through QE increase financial asset prices by monetary inflation, and how it also affects commodity prices. In the case of the Fed, the mechanism requires government or agency debt to be available for purchase from insurance and pension funds. But there is a mismatch to overcome: both pension and insurance funds have long-term liabilities against which they wish to hold long-term risk-free investments. 

Consequently, the government debt they are normally prepared to sell to the central bank tends to be naturally restricted to shorter-dated maturities, which they own principally for liquidity purposes. Therefore, if they are to sell short-term maturity debt, they end up subscribing for new issues with similar maturities in the absence of their actuary’s recommended changes in overall investment strategy. 

The introduction of longer-term financing is a different issue, by which deliberate central bank intervention in the shape of the yield curve is used by a central bank to access non-bank ownership of longer-term bonds. 

This form of “operation twist” is discussed later in this article. For now, we must examine a second monetary objective, to be regarded as separate from the original intention behind QE: the financing of the government’s deficit.

Financing the government’s deficit

A pension fund which subscribes for new issues of government debt, only to sell it on to the central bank through its commercial bank is engaged in a different operation to that described above. Where a purchase of government debt is matched to its sale, the monetary effect is the same as that of a bank when it acts as a principal to a QE transaction

While rules and procedures vary between central banks, the effects are always the same. A commercial bank applying for a new issue of government bonds does so off its own balance sheet. QE then allows the bank to sell the bonds to the central bank for a turn. 

The proceeds of QE are credited to the commercial bank’s reserves at the central bank. Other than the profit on the transaction, the purchase and sale effectively net each other out and there is no material change in the money in general circulation as a result of the transaction.

In this, the monetary effect is fundamentally different from the end seller being a non-bank, such as a pension fund, selling an existing asset in its portfolio to the central bank. The sale of a previously existing bond to the central bank does not benefit government finances. But the pass-through of new government bonds via a commercial bank acting off its own book to the central bank does.

The inflationary effect from bank-funded QE comes from government spending of the raised funds and depends how that money is spent. It is also worth repeating that if a non-bank similarly subscribes for government debt and then sells it into the central bank’s QE programme via its commercial bank, following completion of the transaction there is no monetary expansion, other than the profit on the transaction. 

In any case where government bonds are bought only to be sold to the central bank the transaction does not involve monetary stimulus at the initial level. All one can say is there is no crowding out of private sector bond demand from increased government bond issuance, as there would be if QE was not involved. The monetary inflation comes from government spending of the funds raised.

In the current economic environment, where government deficits are growing rapidly, QE is increasingly deployed as a means of financing government spending instead of it being directed to stimulate financial asset prices. The original intention as described in the Bank of England’s 2014 article has not been the paramount objective since September 2019, so far as the Fed is concerned.

In the case of the US Government’s issues of treasury bills and bonds, until September 2019 there were ready buyers from foreign sources recycling dollars gained through America’s trade deficit, and from large hedge funds in a carry trade through the fx swap market; the latter being in effect the borrowing of euros and yen to invest in higher-yielding US Government debt. The significance of September 2019 was that was when the US banking system ran out of balance sheet space to finance fx swaps, and the repo rate exploded higher, fully 8% above the Fed’s funds rate which stood at 2%.

The unwinding of fx swaps was followed by a diminishing foreign appetite for US Treasuries and bills, made more acute by the Fed’s reduction of the funds rate to the zero bound in March 2020. To an extent, this fall in foreign demand was masked by continuing demand from captive insurance companies in centres such as the Caymans, reinvesting their dollar denominated premiums to match their US dollar liabilities.

But with the Fed funds rate at the zero bound, the process of squeezing risk premiums lower through QE is finite. The attraction to pension funds and insurance companies of a role in QE diminishes. 

Furthermore, the economic malaise from the impact of covid lockdowns has increased investment risks. As well as moving the emphasis of QE from inflating financial assets to funding a rapidly growing budget deficit, it appears that the momentum behind the inflation of investible financial assets is in danger of slowing down. 

New measures are called for, and the two possibilities are an “operation twist” to unlock access to non-bank medium and long-dated Treasury debt, and a venture into negative rates.

In a new operation twist, the Fed would reinvest maturing treasury and agency debt in medium and longer maturity bonds, keeping its fund rate at zero but reducing bond yields along the curve. 

When the Fed used this tactic in 2011, it was part of an economic stimulation package, and against a background of foreign demand for new US government debt. 

A new operation twist would be different, in that its primary objective would be to fund government spending in the absence of foreign demand for treasury debt.

The plan would be to replace, at least to a degree, the stimulus of QE to non-bank investors with a new stimulus in falling yields for ten-to-thirty-year maturities. If the 10-year Treasury bond yield could be returned to less than 0.75% from its current 1.1% that could prolong the wealth effect in financial assets without tapping the non-banks, while using QE to fund government deficit spending.

In other words, the stimulus for markets returns to lowering interest rates along the yield curve, but without breaking the zero bound. The banks operating off their own books can deal in billions for gains measured in basis points for a while, but already this thesis is running into the headwinds of benign assumptions.

The first assumption is that falling interest rates for the US dollar can continue into negative territory in order to enable QE funding to continue, the important part for the banks being their ability to use negative funding costs on their reserves for a yield pick up on subscriptions for government debt, which subsequently gets sold to the central bank. 

Precedents exist in euros and yen and are being debated for sterling. But with the dollar as the world’s reserve currency, negative rates would drive all commodities into nominal backwardations with spectacular unintended consequences. Furthermore, if passed on by commercial banks to their customers, it would be a tax on foreign deposits, accelerating the recent fall in the dollar on the foreign exchanges.

The second assumption concerns the deflection of bank business in favour of government funding from funding the private sector’s credit requirements. 

While banks in the current economic climate are not inclined to increase private sector lending anyway, an increase in the Fed’s QE can only encourage and accelerate a shift away from private sector financing through bank credit in favour of profiting from the QE roundabout. 

Remember, bank balance sheet capacity is strictly limited, irrespective of their reserve balances.

Furthermore, it must be assumed that there will be no feedback loops from a falling dollar or from prices rising in the non-financial economy, as a consequence of the government’s deficit spending — an assumption that appears unwarranted.

The increasingly inevitable failure of QE

It would appear that in 2021 the rate of QE will increase significantly compared with the rates for the central banks which deployed it last year. 

In the case of the Fed, it could soon find itself funding unprecedented amounts, just to cover the government’s budget deficit in the current fiscal year. 

The budget deficit in the second half of the last fiscal year (March-September 2020) was an astonishing $2.774 trillion out of a total $3.3 trillion for the whole year.[ii] 

If, as seems likely, US government deficits for fiscal 2021 run at a similar pace to that of the second half of last fiscal year, it implies the full year deficit to be financed will be close to £5.5 trillion, requiring an average funding rate through QE of about £460bn every month.

In the wake of the presidential election, Keynesian thinking has got little further than hoping that as soon as covid lockdowns end, economic activity will rapidly return to normal. 

All it requires is just one more stimulus package, currently in negotiation. 

Then, the Keynesians say, the Fed can begin to normalise its balance sheet and allow interest rates to gradually rise. Proof of this view was expressed recently by the regional Fed chiefs of Dallas, Atlanta, Chicago and Richmond suggesting in unison that the Fed might start to wind down QE later this year, with rises in interest rates to follow.[iii]

It probably has an element of politicking, staking out the ground ahead of Biden’s first budget stimulus. But as non-banks look to their investment risks at a time of stalling bank credit, deflationary forces in credit markets are set to undermine the effectiveness of QE in managing to keep financial asset prices supported.

There is also a growing threat that pension funds and insurance companies, which need to keep core balances of government bonds, are in danger of running these balances too low and will be reluctant to sell any more to the central bank for cash, certainly in the quantities likely to be needed to support financial markets. 

The stimulus to markets from the reinvestment of this cash will then slow down to a point where markets begin to slide. Furthermore, the Fed is likely to find itself having to absorb selling by foreign holders of US Treasury bonds and bills as well, undermining attempts to keep short-term rates close to the zero bound.

The trend is already forming. 

Figure 1 below shows how the yield on the US Treasury 10-year bond is now rising, despite all the new money from QE being pushed into financial markets, which has suppressed bond yields until now.

Keynesians are presumably hoping that far from being a worry, higher bond yields are anticipating their vaunted economic recovery, and the Fed’s prospective tapering later this year. But that estimation is in the face of indisputable facts. 

Businesses in non-financial sectors are going bust on an unprecedented scale and any analysis of systemic risk shows that a major bank failure is on the cards, driven by a confluence of excessive bank balance sheet gearing and escalating bad debts. 

Bank share prices around the world, notably of some major G-SIB banks in the Eurozone, China and the UK, are trading at substantial discounts to book value. So, why is the UST 10-year yield rising?

The answer is disturbingly singular: markets see the value of the dollar being lower in the future. 

Holders of dollars therefore require a higher level of time preference to compensate them for their expectations of the purchasing power of the dollar. 

This is confirmed by rising prices across the board for commodities, and the funk money going into bitcoin. The fact that gold rose 26% last year is an additional indicator that this is so.

Therefore, the prospect of flooding bond markets with more government debt at an unprecedented scale has dollar bond yields rising they will continue to do so. 

The whole scheme, whereby the Fed prints dollars through its non-bank financial agents to continue to inflate financial asset prices, is set to fail. 

And as the John Law experience in France three centuries ago proved, the best way to benefit from today’s Keynesian replay on a global scale is to short the central bank’s money for sound money. 

In late-1719, Richard Cantillon shorted Law’s livre against English pounds and Dutch guilders in the foreign exchanges in London and Amsterdam in preference to shorting shares in Law’s Mississippi bubble. 

Today he would short dollars for gold, the only sound money available today.

[i] See the Overview on pp 14.

[ii] See figure 2 in

[iii] Quoted from today’s The Daily Telegraph — an article by Ambrose Evans-Pritchard: “Biden’s spending blitz fires starting gun on a fresh Fed taper tantrum”.