Regime Change 

Doug Nolan


Ten-year Treasury yields closed out a tumultuous week at 1.41% bps, pulling back after Thursday’s spike to a one-year high 1.61%. 

Ten-year Treasury yields are now up 49 bps from the start of the year and almost 100 bps (1 percentage point) off August 2020 lows. 

More dramatic, five-year yields jumped 16 bps this week to 0.73%. 

Surging yields are a global phenomenon. 

Ten-year yields were up 12 bps in Canada (to 1.35%), 30 bps in Australia (1.90%), 28 bps in New Zealand (1.89%), five bps in Germany (-0.26%), and five bps in Japan (0.16%) - with Japanese JGB yields hitting a five-year-high.

“Periphery” bond markets were under intense pressure, in Europe and EM. 

Greek yields surged 22 bps to 1.11%, while Italian yields rose 14 bps to 0.76%. EM dollar bonds were bloodied. 

Yields were up 31 bps in Turkey (5.90%), 28 bps in the Philippines (5.90%), 25 bps in Peru (2.39%), 23 bps in Indonesia (2.57%), 16 bps in Qatar (2.14), 16 bps in Ukraine (6.95%), and 16 bps in Mexico (2.92%). Local currency bonds were walloped. Yields were up 125 bps in Lebanon, 31 bps in Brazil, 29 bps in Colombia, 27 bps in Romania, 19 bps in Poland, and 17 bps in Hungary.

Global bond markets have an inflation problem. The international central bank community has an inflation problem. Perhaps Treasuries and the Fed face the biggest challenge in managing around mounting inflationary risks.

The U.S., after all, is running unprecedented peacetime deficits, with a new $1.9 TN stimulus package scooting through Congress. This legislation will be followed by what is sure to be a major infrastructure program. There is literally colossal deficits and Treasury issuance as far as the eye can see.

February 23 – Bloomberg (Gerson Freitas Jr.): 

“Commodities rose to their highest in almost eight years amid booming investor appetite for everything from oil to corn. Hedge funds have piled into what’s become the biggest bullish wager on the asset class in at least a decade, a collective bet that government stimulus plus near-zero interest rates will fuel demand, generate inflation and further weaken the U.S. dollar as the economy rebounds from the pandemic. The Bloomberg Commodity Spot Index, which tracks price movements for 23 raw materials, rose 1.6% on Monday to its highest since March 2013. The gauge has already gained more than 60% since reaching a four-year low in March 2020.”

February 25 – Bloomberg (Vince Golle and Olivia Rockeman): 

“U.S. consumer prices are headed higher -– at least according to the people who set them. Corporate leaders are increasingly confident that they can charge more for their products without losing business. On recent earnings calls, plenty of executives said they boosted prices in response to the higher costs they’re having to pay. And many expect further increases, with economic growth speeding up and commodity prices showing no sign of coming off the boil. ‘There is a cost headwind and we continue thus far to be able to experience pretty positive ability to price,’ said Melinda Whittington, chief financial officer of La-Z-Boy…”

Inflationary pressures are mounting and broadening – food, energy, housing and beyond. There are worsening inflationary bottlenecks (i.e. semiconductors, global shipping, trucking, steel, myriad supply chains and so on). 

And we’re in uncharted territory with respect to massive fiscal deficits, with another year of a $3.0 TN plus shortfall in the offing. 

Meanwhile, the Fed is trapped with rates at zero and its $120 billion monthly QE operation.

I appreciated the Bloomberg headline (Mike Dolan): “Tantrum Without the Taper.” 

It’s a bond rout lacking even a hint of future QE tapering. 

Rather than sooth, the old dovish salve is starting to burn. 

Senator Pat Toomey (Senate Banking Committee hearing: 2/23/21): 

“As you know, the TIPS 10-year Breakeven on inflation is now over 2%, up from six-tenths of 1%. My point is that, at some point, we’ve got too much liquidity going into the system. The economy is recovering very, very well. Problems are isolated and should be addressed narrowly. 

And I hope that $120 billion a month of bond buying doesn’t become a permanent situation. One of the things that I’m concerned about - I wonder if you could comment on: the risk that we would have an increase in inflation, an increase in bond yields that would correspond to that, but without being back at full employment. What would that imply -- which I think is a very plausible scenario for later this year. What does that imply for the bond-buying program?”

Fed Chairman Powell: 

“Well, so what we said about the bond-buying program is that it will continue at least at the current pace until we make substantial further progress toward our goals. And we’ve also said that as we monitor that progress, we’ll communicate well in advance of any actual purchases. 

And so, that’s what it will take for us to begin to moderate the level of purchases. It's substantial further progress toward our goals, which we haven’t really been making for the last three months. But expectations are that that will pick up as the pandemic subsides.”

Powell and fellow Fed officials have gone out of their way to offer markets strong assurances they will stick with ultra-loose policies - economic recovery or mounting inflation risk notwithstanding. 

A few notable headlines: “Powell Says Inflation Goal is Still Years Away;” “Fed Officials Shrug Off Rise in Longer-Term Yields;” “Bostic Says Economy Can Run ‘Pretty Hot’ Without Inflation Spike;” “Fed’s Williams Says He Expects Inflation to Remain Subdued…;” “Fed’s Bullard Says Rise in Yields ‘Probably a Good Sign;’” ”Fed’s George Says It’s Too Soon to Pull Back on Monetary Support for Economy;” “Clarida: Robust Demand Won’t Generate Sustained Price Pressures;’ and “Brainard Says Fed Won’t React to Transitory Inflation Pressures.”

Traditionally, such cavalier attitudes toward inflation risks would provoke a stern bond market rebuke. 

But since QE’s introduction, bond market fixation shifted to prospects for additional QE. 

With consumer price inflation essentially a non-issue, market yields responded positively to any development that could possibly usher in additional central bank bond purchases (i.e. market Bubble Dynamics, heightened money market liquidity risk, economic vulnerability, global instability, pandemic risks, etc.). 

The Fed well-recognized the risk of rising market yields and an associated tightening of financial conditions ahead of waning QE support (“taper tantrums”). 

Powell and Fed officials this week adhered closely to their seasoned playbook. 

Major development of the week: Treasuries and global bond markets puked on the same old dovish gruel. 

Perhaps it’s a little premature to declare the long-awaited Reincarnation of the Bond Market Vigilantes. 

Yet I would caution against dismissing this week’s upheaval in the face of commentary that would have previously stoked market exuberance. The times, they are a changin. Regime Change.

Not many weeks ago markets relished in ultra-loose monetary policies forever. 

Not only would the Fed be sticking with zero rates and QE for years to come, our central bank would clearly resort to yield curve control in the unlikely event of rising Treasury yields. 

The Reserve Bank of Australia Friday moved to “control” their yield spike with a $2.4 billion purchase program – with notably little effect. 

How enormous would Fed Treasury purchases need to be at this point to place a ceiling on yields – especially with additional Trillions of supply in the pipeline? 

Furthermore, would such huge additional liquidity injections prove counter-productive in a backdrop of heightened inflation concerns?

Powell: 

“Inflation dynamics do change over time, but they don’t change on a dime. And so, we don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics.”

Hope is not a strategy. 

We’re in a period of unmatched synchronized global monetary inflation. 

Short-term rates are near – or even below – zero internationally. 

Global “money” and Credit growth is unprecedented. 

Governments around the globe are locked in massive deficit spending. 

It is difficult to imagine global financial conditions being any looser. 

In an environment of such extremes, it is imperative that central banks remain especially vigilant. 

But they aren’t because they can’t. 

Global central bankers are beholden to precarious market Bubbles. 

Policy tightening measures would incite a de-risking/deleveraging episode that would surely be quite challenging controlling. 

After expanding its balance sheet by $3.4 TN over the past year – and stoking an epic mania and other Bubble excess in the process – how much additional QE would now be necessary to counter another major deleveraging episode? 

Markets have just begun the process of coming to grips with a harsh reality: There are myriad historic speculative and Credit Bubbles, and central bankers are definitely not in control of the process. 

They have retained a semblance of control only through monstrous monetary inflation. 

And yet this week demonstrated it’s no longer so easy to manipulate market behavior with the usual pedestrian dovish comments. 

Markets now scoff at the notion of the Fed anchoring inflation expectations at a particular level. 

Moreover, even after Trillions of liquidity injections, central bankers are clearly not in command of marketplace liquidity. 

It is as if Fed credibility is evaporating right along with bond prices.

After beginning Thursday trading at 1.37%, 10-year Treasury yields were up to 1.45% in early afternoon trading. 

Then the results of a particularly poor (“disaster”) seven-year auction hit. 

February 25 – Bloomberg (Elizabeth Stanton and Edward Bolingbroke): 

“Treasury’s $62b 7-year auction was awarded at 1.195% vs 1.151% when-issued yield…, the highest auction stop for the tenor since February… 39.8% primary dealer award was highest since September 2014 as indirect award slumped to 38.1%... Record low 2.04 bid-to-cover compares with 2.35 average for previous six auctions.”

In what must have sent chills from Wall Street to Washington – and swiftly radiating to London, Tokyo, Beijing and EM financial hubs around the world – the Treasury market briefly dislocated as yields spiked to 1.61%. 

Less than a month after a spectacular “meme stock” equity dislocation and near market accident, the behemoth Treasury market was revealed as anything but immune to “flash crash” dynamics and financial accident risk. 

January’s equities upheaval left scars throughout the leveraged speculating community. 

In particular, losses were suffered in long/short and various “quant” strategies. 

This left many funds impaired by drawdowns (and prospective outflows) and the overall hedge fund industry with scaled down pain/risk tolerance. 

And while this doesn’t ensure a market drop, it does create vulnerability to commonplace market pullbacks escalating into a downside momentum dynamic. 

This week’s Treasury rout was a significant blow to many levered strategies, creating acute vulnerability to self-reinforcing “risk off” de-risking/deleveraging dynamics. 

February 26 – Bloomberg (Justina Lee): 

“One of the ugliest things about this week’s selloff is that there are so few places to hide, and that’s bad news for a breed of quant which seeks to spread out risk across assets. So-called risk-parity strategies posted their worst day in four months on Thursday…, while the $1.2 billion RPAR Risk Parity ETF plunged the most since the depths of the Covid rout in March. 

The investing style made famous by Ray Dalio allocates money across assets based on their volatility, so can struggle when things go haywire together. Thursday saw the S&P 500 slump 2.5% as benchmark U.S. Treasuries tumbled, the latest in a series of co-movements that have taken the 60-day correlation between their futures to the highest since 2016.”

The leveraged “risk parity” strategies this week were an obvious area under pressure to de-lever with stocks, Treasuries, corporate Credit and the precious metals suffering simultaneous price declines. 

But there are scores of strategies and products that have for years benefited from the reliability of Treasuries as a hedge against risk market weakness. 

Why de-risk or purchase derivative “insurance” when one can simply use levered Treasuries holdings to hedge market risks?

But with inflation risk an issue and Federal Reserve yield control impractical, the game has changed. 

With Treasuries no longer a reliable hedge, a key source of Treasury demand has waned – which was especially notable during this week’s bout of market instability. 

Indeed, the week likely saw significant de-risking/deleveraging in the Treasury market – helping explain poor demand for the seven-year auction, market liquidity challenges along with Thursday’s flash of “flash crash” vulnerability. 

Asset Bubbles create their own liquidity abundance. 

Rising prices foster leveraged speculation, leveraging that bolsters marketplace liquidity while begetting self-reinforcing asset inflation, speculative leveraging and liquidity abundance. 

And when the Fed’s balance sheet expands $3.4 TN in a year and M2 inflates $4.0 TN (institutional money funds an additional $570bn!), markets will understandably envisage liquidity abundance as a virtually permanent condition. 

This week provided a major wakeup call: despite the Trillions upon Trillions of “cash” on the sidelines – and the Fed’s $120 billion monthly “money” injections – markets are at heightened risk for a liquidity accident. 

The world is plagued by highly levered market Bubbles. 

Fueled by zero rates and the global QE bonanza, global bond prices became divorced from reality. 

Now bond prices are sinking, an innately problematic development for levered markets. 

It would appear a period of major de-risking/deleveraging has commenced, implying challenging market liquidity issues ahead.

I’ll add it is in no way obvious how interest-rate hedging can be expected to function effectively in the current environment. 

Globally, tens of Trillions of bonds have been issued at artificially high prices (low yields). 

If a meaningful segment of the marketplace now moves to hedge interest-rate risk, who has the wherewithal to take the other side of the trade? 

It will be necessary for those selling rate protection to short Treasuries or other debt securities to hedge their exposures. 

This would seem to ensure market liquidity issues and could portend more serious market dislocations than Thursday’s fleeting yield spike. 

It was a notably rough week for mortgage-backed securities, Eurodollars and other instruments in the belly of the interest-rate hedging beast. I do not envy those responsible for managing portfolios of interest-rate derivatives. 

Representative Warren Davidson (House Financial Services Committee hearing: 2/24/21): 

“Chairman Powell, thank you for your time, and I want to commend the Federal Reserve for the work that was done at the end of March to provide the liquidity and stability to our economy, to deal with the massive surge in demand for U.S. dollars, and we’re just so grateful that the U.S. dollar has become the world’s reserve currency and in time of crisis not just Americans, but people all around the world, want our dollar. 

It is indeed a source of our strength as a country to have a strong dollar that has become the world’s reserve currency. It does great things for our capital markets and frankly helps enable the deficit spending that we continue to do, because we certainly haven’t saved for bad times. 

We’re able to navigate them because we still can borrow. I wonder, sir, do you have a definition of sound money?”

Fed Chairman Powell: 

“We target inflation that averages two percent over time. That is what we consider to be…”

Davidson: 

“Well, that's the policy, but I mean, when you think of sound money, what would you say constitutes sound money?”

Powell: 

“Where the public has confidence in the currency, which they do, which the world does. That’s really what it comes down to - that people believe that the United States currency is perfectly reliable and stable in value.”

Davidson: 

“Okay, so as a store of value. It clearly isn’t stable in value. It is not. What is a store value? The U.S. dollar really, is it diluted as a store value when M2 goes up by more than 25% in one year? Does the printing of more U.S. dollars somehow diminish the value of the dollars that others hold?”

Powell: 

“You know there was a time when monetary aggregates were important determinants of inflation and that has not been the case for a long time. So you’ll see if you look back, the correlation between movements in different aggregates - you mentioned M2 - and inflation is just very, very low, and you see that now where inflation is at 1.4% for this year…”

Davidson: 

“Yeah, you keep using that, you keep using it to talk about inflation. And I don’t think that’s the only proxy for whether the dollar is a store value and an efficient means of exchange. 

It is clearly still the world’s reserve currency, but we’re putting it under a pretty big stress test by diluting the value of the dollar. 

And I think one of the indicators of that is when the U.S. government issues debt for all this spending that we’ve done as a country, it isn’t really funded, is it? There’s not a true market demand for this much debt. 

It’s not being lent. When there’s borrowing there’s actually a lender. 

How much has the Federal Reserve had to purchase to bridge the gap between market demand for Treasuries and the actual need to finance the spending?”

Powell: 

“That’s not at all what’s happening. 

We don’t have to purchase any of this. We purchased it because it is providing accommodative financial conditions and supporting the economy in keeping with our mandate. 

There’s plenty of demand for U.S. Treasury paper around the world.”

Davidson: 

“So, all of it would sell – you’re competing, so are you bidding up the price then? Is it your contention that you’re inflating asset prices by increasing this purchase?”

Powell: 

“No. I think that we could sell all of our debt. 

The reason we do it - by the way, we issue debt - we issue United States obligations in the form of reserves when we buy Treasuries, so we’re not actually changing the amount of obligations outstanding on the part of the Treasury -- what we’re doing is we’re substituting an overnight reserve for a Treasury bill. 

It has no effect on the overall outstanding obligations to the United States when we do that.”

Davidson: 

“Right. So, the growth of the Federal Reserve’s balance sheet - you don’t think that has anything to do with the disconnect between Wall Street and Main Street? 

Let’s just take as an example the confidence people have expressed in bitcoin and other cryptocurrencies and you know well-respected proven investors like Ray Dalio - who said ‘cash is trash’ – isn’t it because the U.S. dollar is being destroyed by fiscal and monetary policy?”

Powell: 

“It's hard to say that it’s being destroyed. Another way to look at the dollar, you mentioned the dollar, you can ask domestically what can it purchase and that’s a question of inflation. 

You can also look at it in terms of a basket of other currencies and…”

Davidson: 

“I understand, but if you look at it, if you look at it, sir… the key to this is the Fed has done a horrible job at predicting asset Bubbles. 

They have. And if the pensions are going up because the market prices are going up, people with marketable securities have their basket of wealth going up and wages aren’t. 

Teachers, for example, they have a great pension but their current consumption isn’t going up. So, CPI lags what’s going on in the investment. 

I think it’s a big concern and I would just implore you and the other members of the Fed to pay attention to monetary inflation, not just price inflation.”

Noland comment: 

It is a disturbing flaw in Powell’s (and conventional) thinking to equate sound money to relatively contained consumer price inflation. 

After all, asset inflation and Bubbles are this era’s greatest threats to monetary stability and sound money more generally. 

Unfettered “money” and Credit is the root cause. 

Massive monetary inflation and fiscal deficits are categorically incompatible with sound money. 

And unsound money is incompatible with social and political stability. 

Inequality, speculative Bubbles and manias, resource misallocation, wealth redistribution and destruction, and deep economic structural impairment are all consequences of years of unsound money. 

And it’s back to this fundamental flaw I’ve been railing against for too long: it is impossible to resolve Monetary Disorder and the fallout from unsound money through additional monetary inflation. 

It’s destined for catastrophic failure, and it was another week when inklings of a failing system were observable to those with discerning eyes.

It may be archaic and relegated to the dustbin of history. 

But one cannot overstate the peril associated with entrenched unsound money. 

An insidious corruption of price mechanisms over time jeopardizes the very foundation of Capitalism. 

And as Capitalism decays Democracy flounders. 

Society frays, while insecurity, animosity, anxiety, and the forces of distrust are left to fill the void. 

And as we continue to witness, the consequences of unsound money incite only more perilous inflationism. 

Joe Biden’s huge bet: the economic consequences of ‘acting big’

For four decades, governments have feared inflation and 1970s-style stagnation. The new administration is hoping they were wrong

Chris Giles



Joe Biden’s strategy for the US economy is the most radical departure from prevailing policies since Ronald Reagan’s free market reforms 40 years ago. 

With plans for public borrowing and spending on a scale not seen since the second world war, the administration is undertaking a huge fiscal experiment. The whole world is watching.

If Biden’s coronavirus recovery plans are vindicated, they will demonstrate it is possible to “build back better” from the pandemic and that advanced economies have been overly obsessed with inflation for the past 30 years. It will put government back at the heart of day-to-day economic management.

If the plan comes off, it will show that unnecessary timidity in recent decades has let millions suffer unnecessary unemployment, starved many areas of opportunities for improved living standards and widened inequalities.

But if the strategy fails, ending in overheating, high inflation, financial instability and the economics of the 1970s, the US experiment of 2021 will go down as one of the biggest own goals of economic policymaking since François Mitterrand’s failed reflation in France in 1981.

Biden’s $1.9tn borrowing and spending plans have not been dreamt up on university campuses but are the result of a delicate political balance in a divided Congress. 

Any new stimulus figure much lower than the planned 9 per cent of gross domestic product risks losing more votes from Democrats than it would gain from Republicans. 

“This is what he can get done when he has razor-thin majorities to deal with,” says Professor Kenneth Rogoff of Harvard University



The new administration is making the case that the stimulus plan is an extension of the “high-pressure economy” Janet Yellen advocated in 2016, when she chaired the Federal Reserve, which was a response to the insipid recovery after the financial crisis. 

The administration believes that this is the best way to ensure a full recovery from the Covid-19 crisis with few lasting scars. Now with Yellen as Treasury secretary, “act big” is the new slogan and the US economic policymaking establishment is on board. 

Jay Powell, the current Fed chairman, stressed last week the need for “patiently accommodative” monetary policy, signalling that the US central bank was in no mood to take away the punchbowl by raising interest rates before the party got going.

Growth expectations 

The plans have left economic forecasters in a quandary. 

The IMF and OECD have recommended looser fiscal policy to aid the recovery, but not so far on the scale planned by the US. The non-partisan Congressional Budget Office forecasts, which included only the final Trump stimulus in its latest forecasts, already expected the US economy to grow sufficiently fast this year to regain the pre-pandemic level of output by summer. 

It also expected the US economy to recover all of the lost ground from the Covid-19 pandemic by 2025 with no permanent scars. 

If former president Donald Trump’s stimulus plans were sufficient to make up the lost ground, the question is what an additional stimulus of 9 per cent of national income will achieve.  

The new administration of Joe Biden, centre, is making the case that the stimulus plan is an extension of the ‘high-pressure economy’ Janet Yellen, right, advocated in 2016 © Saul Loeb/Getty Images


The CBO has not yet given its view, but academics and private sector economists are increasingly taking a stance. Consensus Economics reports positively that independent forecasters have raised their expectations of US economic growth for 2021 and 2022 with barely any additional inflation.

Ellen Zentner, chief US economist of Morgan Stanley, argues that the high-pressure economy will raise US output by the end of next year almost 3 per cent above the level that she had pencilled in before the coronavirus crisis. She assumes the Fed would not seek to rein in the rapid growth rates. 

The contrast with the 2008-09 financial crisis is striking. In the decade after that crisis, the US economy, along with almost all other advanced economies, did not manage to return to the pre-crisis path of output.

In the halls of academia, the vast scale of the US experiment is much more controversial and has created shifts in allegiances within the economics profession that few could have predicted even a month ago.

There is little surprise that Paul Krugman, the economics Nobel laureate, would support the Biden plan, arguing that there was only weak evidence for the theory that low unemployment rates raise wages and then inflation. This view, he said, was “mostly wrong”, leading to policy being overly “constrained by the fear of a ’70s repeat”.



But his support for the Biden plan is matched almost as fully by Rogoff, who became famous during the global financial crisis for warning of the dangers of high levels of public debt. He says “we are in a different world today”, with much lower interest rates and a highly partisan politics. 

“I’m very sympathetic to what Biden’s doing,” Rogoff adds, even though there was a long-term cost to additional public debt and a risk of higher inflation. “Yes, there is some risk we have economic instability down the road, but we have political instability now.”

Sceptical voices

Among those looking enviously across the Atlantic are Europeans who worry that the eurozone will once again fall short of the US in terms of policy action and results. Erik Nielsen, chief economist of UniCredit, says that with the EU fiscal support around half the size of that in the US, Europe is now “frozen with fear”, which is likely to lead to “another three to five years of European growth underperformance relative to the US”.

Lined up on the other side of the argument are several economists who have been hitherto the most vocal supporters of public borrowing and spending. 

Larry Summers, a former Treasury secretary who was one of Barack Obama's leading economic advisers in the aftermath of the financial crisis, has spent much of the past decade warning about “secular stagnation”, the view that advanced economies were stuck in a semi-permanent rut and needed more stimulus. 

But now that stimulus is on the cards, he has warned it has gone too far and is likely to trigger “inflationary pressures of a kind we have not seen in a generation”, which would also limit the “space for profoundly important public investments”.

Fed chair Jay Powell has stressed the need for ‘patiently accommodative’ monetary policy © Eric Baradat/Getty Images


Olivier Blanchard, former IMF chief economist who ignited the global fiscal stimulus debate in 2019 with his presidential address to the American Economics Association, accepts that he is known to be supportive of higher public debt. Nevertheless, he warns that Biden’s “$1.9tn programme could overheat the economy so badly as to be counterproductive”.

Some economists fear these sceptical voices will dissuade Europe from adopting the fiscal stimulus they think it needs to recover fully from the pandemic. Adam Posen, head of the Peterson Institute for International Economics, worries that fiscal conservatives in Europe will seize on any rise in inflation or signs of waste in the programme. “Delivery of good results doesn’t generate the same groundswell as a conservative warning,” he says. “I’d hate for [the Biden plan] to get a bad reputation abroad.”

Supporters of the plan, especially those looking at it from an international perspective, have worked hard to justify the scale of the fiscal stimulus. 

Core to the argument for “going big” is the evidence of the past decade that countries have much more room for economic growth and lower unemployment before there is any inflationary pressure. In the US, the unemployment rate fell to 3.5 per cent in early 2020 before the pandemic, its lowest in 50 years, without any sign of inflation rising.

The European Central Bank has struggled to raise inflation close to its 2 per cent target, leading many to think there has been insufficient fiscal stimulus. This suggests economists and policymakers have persistently underestimated the output gap, the economic concept that estimates the degree to which economies are functioning below a level that would keep inflation stable.

Robin Brooks, chief economist at the Institute of International Finance, which represents the world’s largest financial institutions, has run a campaign on what he calls “nonsense output gaps”, especially in southern Europe, estimated by the IMF and others. 

He says there was always more scope for expansionary fiscal policies without inflation and that the low output gap estimates have prevented growth and prosperity, further undermining countries’ public finances.



“Output gaps are a key input into whether and how much overheating we might get,” he says. While he believes the US debate on overheating is appropriate, Europe can afford much more stimulus without inflation. 

If it continues along existing lines and does not follow the US, he says: “Europe will get a repeat of sluggish recovery after the financial crisis.”

Alongside the potential for larger output gaps, another defence of big stimulus is that government spending, particularly on investment projects, can itself raise the speed limits of economies before they generate inflation.

If the Biden plan can demonstrate it has generated more capacity for higher and greener future growth rates, that would be the holy grail of government intervention, says Mariana Mazzucato, professor of economics at University College London. Do it right, she says, and there are huge benefits available.


Then president Barack Obama with vice-president Joe Biden in 2011. Some economists worried than about 'secular stagnation', but now they fear high inflationary pressures © Pete Souza/Getty Images



“You’re not just flooding the system with liquidity, but reaching the real economy and creating a stronger industrial base,” she says. “That’s the kind of thing we want to see — expanding capacity and preventing inflation.”

The arguments in favour of the Biden stimulus plan are not disputed by most of those who have expressed concerns, but they say its size at up to 14 per cent of gross domestic product, including the stimulus signed into law by Trump in December, is simply unwarranted and might undermine the argument for using fiscal policy to help economies recover from the pandemic.

Jason Furman, former chair of Obama’s council of economic advisers, says the new administration is entirely justified in seeking to test the level of the output gap and the potential level of GDP that did not generate inflation. 

“The idea you test potential by year after year throwing logs on the fire is incredibly compelling, but that’s not the same as spending over 10 per cent of GDP in one year,” he says.


Protesters in 1970s New York rally against high food prices. If Joe Biden's economic experiment fails it could lead to the overheating, high inflation and financial instability of that decade © H. Armstrong Roberts/ClassicStock/Getty Images


Few would worry about inflation rising to 3 per cent or even temporarily a bit higher, he adds, but the Fed would have to react if there was a sustained bout of inflation.

One danger cited by many economists is that if inflation becomes ingrained in an economy it can be difficult and painful to eradicate, with central banks having to raise interest rates and cause a recession and unemployment to bring it back down. 

If Krugman is right that the link between unemployment and inflation has become weaker, there is a fear that any action by the central bank to lower inflation will require a lot more unemployment than in the 1980s and 1990s to bring it down.

Poorly targeted

While some inflation is certainly seen as a benefit of the reform, helping to grease the wheels of a modern economy, there is also a debate whether inflation was, in any case, about to rise. 

Manoj Pradhan, founder of Talking Heads Macroeconomics, is concerned that the short-term inflationary dynamics of the Biden plan will combine with longer-term upward pressures on prices that will come from an ageing population consuming more and producing less.

“Even before [Biden announced his plan], the US looked like an inflationary place anyway,” Pradhan says. And what happens in the US tends to get exported, he adds. 

“Fiscal policy has led the stimulus and if inflation becomes acceptable in the US, it gives a green light to the rest of the world.”

Economics professor Mariana Mazzucato says that, done right, Biden's plan is 'not just flooding the system with liquidity, but reaching the real economy and creating a stronger industrial base' © Gian Ehrenzeller/EPA


Economists of all persuasions also worry that the Biden plan, with its heavy emphasis on sending cheques to families, is poorly targeted and not nearly as focused on improving the potential for future growth as they would like. 

Randall Kroszner, former Federal Reserve governor and now deputy dean of the University of Chicago’s business school, says the heavy fiscal stimulus in response to the pandemic is appropriate, but the debt created does have a cost.

“It does have to be paid back by future generations so it is very important to make sure there is a return to that spending,” he says.

If that was not difficult enough, others warn that Europe cannot simply ape what America is doing, partly because it does not have the same access to finance and partly because there is more scepticism that it is possible simply to “build back better” just by borrowing and spending.

Robert Chote, the recently departed head of the UK Office for Budget Responsibility, says the outlook for fiscal policy outside the US is likely to focus less on the stimulus debate and more “on the severity of any long-term scarring of the economy — which is hard to estimate with any confidence”.

He adds that the public finances are more complicated than thinking about stimulus. Governments, for example, would soon need to consider raising taxes, especially if they “feel the need to spend a permanently bigger share of national income on health and social care after the pandemic than before it, to build more resilience into the system”. 

These structural public finance questions will not go away easily once economies have recovered.

For now, however, all eyes are on the huge stimulus numbers coming from the US. Its new government is planning to borrow and spend and Yellen has called on the rest of the G7 to follow suit. As Rogoff says, the experiment is likely to be global. 

“If it goes wrong for the US, it goes wrong for everybody.”

They told you so

The European Union must face up to the real Russia

Appeasement isn’t working


When robert conquest, a historian, was working on a new edition of “The Great Terror”, his seminal text on Stalin’s crimes, he was told to come up with a new title. 

The book had described the horrors of the Soviet Union at a time when apologism for it was still rife. By the time of the new version, freshly opened archives had vindicated Conquest’s account. 

His friend Kingsley Amis, a novelist, suggested a pithy new title: “I told you so, you fucking fools”.

Head east in Europe today and it is easy to find similar sentiments about Russia. The Baltic states and Poland warned Josep Borrell, the eu’s foreign-policy chief, against visiting Moscow in the wake of its imprisonment of Alexei Navalny, Russia’s leading opposition politician. 

They were right. Mr Borrell was humiliated. In a press conference Sergey Lavrov, the Russian foreign minister, dismissed the eu as an “unreliable partner”, while Mr Borrell stood alongside. 

European hypocrisy was mocked as he brought up the treatment of Catalan politicians by Spanish authorities, knowing that Mr Borrell is a staunch opponent of independence for the region. 

Mr Borrell did not even insist on visiting Mr Navalny in jail. While he was there, news leaked that the Russian government had expelled diplomats from Germany, Poland and Sweden for attending pro-Navalny rallies. Diplomats from eastern Europe may be politer than Amis, but the message is the same.

Dealing with Russia is the most pressing foreign-policy problem facing the eu. It is also where the bloc is least coherent. While national capitals may not always agree on how best to handle China or how close to remain to America, on Russia they are hopelessly split. 

Russia can be a potential or even necessary ally, a business opportunity or an existential threat, depending on whether you are in Paris, Berlin or Warsaw. The notion of an eu foreign policy is flimsy at the best of times, but especially on this topic. 

“Everybody knows that the big boys freelance on anything that matters,” says Radek Sikorski, a Polish mep and former foreign minister. And Russia is among the things that matter most.

Doveish attitudes are based on pragmatism, pessimism and cynicism. France puts its accommodating strategy down to culture and geography: Russia is too large to push around and too near to ignore. It emphasises patience and engagement—a tactic its critics label “doing nothing”. 

When it comes to Russia, Emmanuel Macron, the French president, talks in terms of decades, and doubts whether tough action would do much good. Whereas such remarks may be wise from a policy wonk, they are less comforting coming from the mouth of the eu’s only hard power.

In Germany economics trumps geopolitics. Nord Stream 2, a pipeline running from Russia to Germany, undercuts the eu’s wider strategy of trying to rely less on Russia for energy but retains the support of the German government. 

(The fact that Gerhard Schröder, a former German chancellor, is the chairman of the scheme does not help.) Angela Merkel surprised critics by shepherding through—and sticking with—sanctions on Russia over its actions in Ukraine. 

Yet she is soon to leave office. Armin Laschet, the new leader of her Christian Democratic Union, is more doveish. Even direct attacks, such as Russian hackers breaking into the Bundestag’s computers in 2015, failed to budge opinion. 

Unfortunately for the eu’s band of eastern hawks, France and Germany are not alone. 

Spain and Italy, the eu’s other big countries, are similarly meek when it comes to Russia.

Each approach shares an assumption that there is not much the eu can do about Russia. But the eu forgets its power. It is a bloc of 450m people with a gdp that is nine times larger than that of its Russian neighbour; Russia’s economy is slightly larger than Spain’s and smaller than Italy’s. 

Collectively, eu countries spend almost three times as much as Russia on defence. Just France and Germany together spend roughly two-thirds more. Yet when dealing with Russia, the eu behaves like a supplicant. 

What Russia lacks in relative means, it makes up for in motivation: from the Sahel to Belarus, Russia is an enthusiastic troll, causing no end of trouble for the bloc. 

European governments have the tools to take a firmer line with Russia, whether sanctions on those close to Mr Putin, or scrapping Nord Stream 2. What they lack is the will to use them. In one multilingual intervention, Assita Kanko, a Belgian mep, asked of Mr Borrell: “Dónde están los cojones de la ue?”

When doves cry

The ill-fated Moscow trip caps off a period in which Russia’s gangsterism has become impossible to ignore. Until recently, it was possible to argue that it was open to a constructive relationship with Europe. 

Now it is not. Sanctions require the unanimous support of all governments, which is tricky, even with new eu legislation that makes it easier to punish human-rights abusers. But such measures are more likely thanks to Russia’s recent actions. “Russia is usually its own worst enemy,” says one official from an eastern country.

This clarity leaves Europe’s doves in a bind. Their vision of a better relationship with Russia, working together on matters like climate, is appealing. In this world, Russia could be a well-behaved g8 member. 

Unfortunately, that Russia does not exist. Instead, European powers face a government that tries to murder its opponents, stokes proxy wars and hacks its neighbours. It is a country that deliberately chooses confrontation rather than partnership, and the eu—both its national capitals and its institutions—must recognise this.

The real Russia is much closer to the way it is described by the eu’s eastern countries than to the benign image conjured up by western ones. No one can force Mr Macron to give up his hope that Russia will eventually be a partner. 

Likewise, no one can force German politicians to take a short-term economic hit for geopolitical gain. But they cannot say they were not told.

RIGHT AT HOME

When Can I Be a House Guest Again?

Vaccines are rolling out, but we still have a long way to go. We asked experts to give us a clue about when we can just go to a friend’s house and hang out.

By Ronda Kaysen



A few days ago, I stopped by my best friend’s house to meet up for a brisk winter walk, and I caught a glimpse of the new royal blue sofa in her living room. 

Admiring her purchase, I no longer wanted to walk in 20-degree weather. I wanted to curl up on that sofa for the rest of the afternoon and drink coffee with her.

I wanted to be a house guest again.

Yes, I miss going out to restaurants and concerts, and traveling, but above all I miss going to a friend’s house and hanging out. I miss browsing through someone else’s cluttered bookshelf, or admiring their décor. 

Of all the layers of life that have been stripped away by this pandemic, the loss of casual intimacy — time with a friend that’s not masked and outdoors and crowded with worry — takes a toll.

As the months wear on, I wonder if we’ll ever feel unguarded again.

Now that vaccines are rolling out, the prospect of a post-pandemic life has started to become one worth imagining. 

When will we readily have house guests again without worrying about contributing to the spread of this disease? What might those visits look like?

Perhaps we will quickly return to our old habits. Or maybe a new normal will take shape, one influenced by the troubling new variants to the virus that threaten to undermine vaccination efforts.

I spoke with historians and health experts to learn when we might be able to safely spend a weekend with friends again, and what that get-together will look like.

When Can I Mark My Calendar Again?

You may be able to start marking your calendar in pencil by early summer, as the weather warms and more people get vaccinated. By the end of the year, those dates could be marked in pen.

“By the time we get into late spring, summer, I fully expect, with a large proportion of adults vaccinated, things will be dramatically better,” said Dr. Ashish K. Jha, the dean of the Brown University School of Public Health.

Friends, no longer relegated to the deck, might actually come inside and stay a while, maybe for the weekend. “Could I imagine having my brother and sister-in-law and my nephews staying at our house in April? Probably not,” Dr. Jha said. “Summer seems much more reasonable.”

Dr. Ingrid Katz, an associate professor at Harvard Medical School and an infectious-disease specialist at Brigham and Women’s Hospital in Boston, sees the summer as more of a test case for the fall. 

She anticipates that gatherings will still happen mostly outside, but masks might come down more readily. “We’re not done by a long shot, and if everything goes well, and I mean everything,” she said, then we may see normalcy resume by the end of 2021.

We are still in the midst of an uncontrolled pandemic, with new, worrisome variants threatening to stall progress. “Vaccinations are just not happening fast enough, and I mean that not just in the U.S., but globally,” Dr. Katz said. 

“As long as we have this level of Covid in the background, and we have such low rates of immunization, it gives the virus the opportunity to continue to mutate,” and potentially evade the vaccine.

What Will Post-Pandemic Dinner Parties Look Like?

After the 1918 influenza pandemic, Americans went shopping, traveled, and attended sporting events, movies and concerts. Christopher Nichols, an associate professor of history at Oregon State University who studies that period of American history, anticipates that Americans could go big after this pandemic, too. 

After all, millions of people traveled to gather with friends and family over the holidays, despite dire warnings from public health officials.

“This is a human longing,” said Dr. Nichols, an editor of “Rethinking American Grand Strategy,” which is set to be released in April. “People will want to have dinner parties, have guests in their homes for leisure time, to show off a new piece of furniture, to have a Super Bowl party.”

Initially, our gatherings may be about “going small,” he said — a dinner party for four, a weekend trip with your best friend. “I suspect we’ll be taking baby steps” back to a normal social life.

John M. Barry, an adjunct professor at Tulane University and the author of “Great Influenza: The Story of the Deadliest Pandemic in History,” is skeptical that this pandemic will have a lasting effect on our behaviors if cases continue to fall and the worst is behind us by the end of the year. In that scenario, our living room cocktail parties of 2022 won’t look much different than the ones of 2019. “People have short memories,” he said. “Habits die hard.’”

But if a new variant disrupts progress and the isolation extends for another year or longer, then some more lasting cultural changes may take hold, he said.

Which Pandemic Habits Might Stick?

Conversations about testing and vaccinations might become part of our everyday life. 

Host a party, and you may ask guests to tell you if they’ve been vaccinated or recently tested, particularly if at-home tests have become available.

“Imagine some friend says, ‘Hey I have a house on the Cape and we’re having four families over.’ In the past my first question would be: Can we do this? Do we like these people?” Dr. Jha said. “Now my question will be: ‘Is everybody vaccinated?’”

Initially, people may be reluctant to go to a crowded house party on a cold winter night, or perhaps they’ll wear a mask when they travel by airplane or public transit. (Others may never go maskless on the subway again.) 

Perhaps we’ll remember to wash our hands whenever we arrive at a friend’s house, as we do when visiting a friend with a new baby. Mr. Nichols suspects that people, particularly younger generations, may scrap the hand shake.

Can Vaccinated Friends Bubble Together?

Our decisions will depend on our personal tolerance for risk. 

The vaccines made available thus far provide a high level of protection against infection, but the risk is not zero.

“The individual perception of risk is really important in this. Some people are super eager to get back, and others may be a bit more leery,” Dr. Katz said. “That could impact how things play out, even when things may be legitimately more safe.”

So what happens if two adults are vaccinated? Can they get together without masks? 

Can they rent a house for the weekend? 

The answer to those questions, according to Dr. Jha and Dr. Katz, is a tentative yes, assuming everyone is at a low risk for severe illness and the community spread is low.

“We’re social creatures and I’ve seen the toll this has taken on people’s mental health,” Dr. Katz said. “To be giving each other a hug again is going to be so nice.”

Amid Slow Vaccine Deliveries, Desperate E.U. Nations Hunt for More

Countries eager to augment the troubled E.U. buying program are eyeing offers from each other, from Russia and China, and from private brokers, some of whom are fraudsters.

By Matina Stevis-Gridneff

A patient receiving a coronavirus vaccine in Gdansk, Poland, last month. The country gave up a chunk of its expected Moderna vaccine quota, reasoning that it would not come soon enough to make much difference.Credit...Bartosz Banka/Agencja Gazeta, via Reuters


BRUSSELS — In vaccine-hungry, cash-rich Europe, the hunt for more doses has nations trading with each other, weighing purchases from Russia and China, and fielding offers from middlemen ranging from real to outright frauds.

Amid building anger over a sluggish European Union coronavirus vaccine rollout that has left them far behind several other wealthy countries, many E.U. states are looking beyond the bloc’s joint purchasing strategy, which now seems woefully underwhelming.

An immense black — or at least gray — market has arisen, with pitches from around the world at often exorbitant prices. Sellers have approached E.U. governments claiming to offer 460 million doses of vaccines, according to the early results of an investigation by the bloc’s anti-fraud agency that were shared with The New York Times.

While they still plan to get vaccines from the bloc, some nations are also trying to negotiate directly with drug makers and eyeing the murky open market where they are still unsure of the sellers and the products. Some have also agreed to swap vaccines with each other, deals some of them now have reason to regret.

The European Union last year was slow to make massive advance purchases from drug companies, acting weeks after the United States, Britain and a handful of other countries. This year, the bloc was blindsided by slower-than-expected vaccine production, and individual countries have fumbled the rollout.

A doctor adminstering the AstraZeneca vaccine in Sheffield, England, this month.Credit...Oli Scarff/Agence France-Presse — Getty Images


About 5 percent of the E.U.’s nearly 450 million people have received at least one dose of a vaccine, versus almost 14 percent in the United States, 27 percent in Britain and 53 percent in Israel, as of earlier this week, according to Our World in Data database and governments.

The stumbles by the world’s richest bloc of nations have turned vaccine politics toxic. Particularly galling to many Europeans is the sight of a former E.U. member, Britain, forging ahead with its vaccination and reopening plans, while E.U. societies remain under lockdown amid a new surge of dangerous variants, their economies sinking deeper into recession.

In the final months of 2020, several countries opted to forgo parts of their population-based shares of E.U.-purchased vaccines. Much of that trade involved less affluent countries, with less infrastructure and hard-to-reach populations, selling their shares of vaccines from Pfizer-BioNTech and Moderna that require ultracold storage, and instead making the cheaper AstraZeneca vaccine, which is easier to handle, the centerpiece of their vaccination campaigns.

But then AstraZeneca, whose vaccine was developed with the University of Oxford, slashed its expected E.U. deliveries because of production problems. And despite experts’ assurances, many Europeans expressed doubts about it after some leaders questioned its efficacy in older age groups, which were not well represented in clinical trials. (Pfizer also suffered a supply slowdown.)

A decision by any country to let go of doses is potential political dynamite, and the recriminations have begun. Poland gave up a chunk of its expensive Moderna quota expected late this year, reasoning that it would not come soon enough to make much difference, considering they were anticipating ample deliveries of AstraZeneca and potentially the Johnson & Johnson vaccine by that point.

“I would never give up on buying what is safe and efficient,” said Andrzej Halicki, a Polish member of the European Parliament. “As a former minister I can tell you that in my view this is criminal action, this is a breach of obligations.”

A German official said the country had secured 50 million Moderna vaccine doses, a significantly larger number than it would get under its population-based allocation of the E.U. supply. E.U. officials confirmed that Germany had obtained at least some of their extra doses from other member states.

Germany also secured a controversial side-deal with Pfizer-BioNTech, for an extra 30 million doses to be delivered later in 2021, sparking anger in parts of the E.U. as the move was seen as the richest E.U. nation leading the bloc to a collective strategy and then hedging by also going at it alone.

The bloc’s fear is that such side-deals could undermine its collective purchasing power and override delivery schedules to all 27 countries.

The European Commission has made it clear that E.U. countries should not be cutting separate deals with the same pharmaceutical companies that it has negotiated contracts with for the whole bloc.

Erich Frey, 92, arrived with his daughter to his vaccination appointment in Haar, a suburb south of Munich. Credit...Lena Mucha for The New York Times


The Netherlands has secured, from one or more other E.U. countries, 600,000 doses of the shot that Pfizer developed with the German company BioNTech, according to a government official who would not say which nation or nations had given them up.

France has not made public any deals it has made, but Prime Minister Jean Castex said, “If vaccine doses happen to be available, the instruction is clear: France will buy immediately.”

Hungary has unilaterally approved and bought Russian and Chinese vaccines, and others, such as Croatia and the Czech Republic, are weighing similar moves. E.U. officials say they are getting calls from several other member states eager to see the bloc approve the Russian shot, Sputnik V.

In a troubling turn, senior government officials and even heads of government have received dozens of unsolicited offers for vaccines. Few of the sellers appear to be legitimate operators, said Ville Itala, director-general of the European Anti-Fraud office, known as OLAF.

“They are offering vaccines, quite huge amounts, so far it’s 460 million doses, which is around 3 billion euros,” he said in an interview this week. “So it’s not a small business, it’s a huge business, and this is growing all the time.”

Mr. Itala said he was taking the unusual step of going public with the information, little over a week into his agency’s investigation, because the potential risks to Europeans are huge.

Ursula von der Leyen, president of the European Commission, said last week, “I think in a crisis like this you’ll always have people who seek to benefit or profit from the problems of others and we see a growing number of frauds and fraud attempts.”

But with offers piling in, officials say they are prepared to examine each one carefully before rejecting it.

“Wherever a few thousand, or a few hundred thousand, vaccines seem to be ready to fall off a truck, a Hungarian scout must be standing by to catch them,” Prime Minister Viktor Orban of Hungary said earlier this month.

A county official in Matranovak, Hungary, delivering a container of vaccines produced by China’s Sinopharm on Wednesday. The country has unilaterally approved and bought Russian and Chinese vaccines.Credit...Pool photo by Peter Komka


In neighboring Czech Republic, Prime Minister Andrej Babis said he had gotten offers from brokers in Dubai and elsewhere, while such pitches also reached the inboxes of top government officials in Germany, Greece and Finland, to name just a few.

Most of the middlemen claim to be selling the AstraZeneca shot, Mr. Itala said. The company said it only does deals with governments or multilateral organizations, such as through the Covax vaccine-sharing initiative. But that does not rule out the possibility of countries quietly reselling them to third parties.

“AstraZeneca has not authorized any shipments of the vaccine outside of the existing contract with the European Union,” a company spokesman said. “There should be no private sector supply for sale or distribution of the vaccine in Europe.”

While many of the offers are clearly fraudulent, others may be legitimate, officials say, even if the prices quoted are astronomical.

In Italy, many of the pitches have gone to regional officials who have extensive power over health care systems. The Italian police and other authorities are actively vetting the pitches.

“If these doses are legally purchased and there was a fully regular process, we could also consider purchasing it,” said Cesare Buquicchio, a spokesman for the country’s health minister. “Because of the delays in the deliveries we could rethink this, nothing is unchangeable, we could rediscuss this at a European level.”

In the northern region of Emilia-Romagna, Raffaele Donini, the top health official, said he had received several emails offering millions of vaccines, including one from J&G General Service D.O.O., a company based in Croatia that offered AstraZeneca doses at a price not much higher than the E.U. negotiated.

The company’s director, Juri Gasparotti, said a “major pharmaceutical company” outside the E.U., which he declined to name, was directly in contact with AstraZeneca and would provide the batch.

Mr. Gasparotti said that vaccine producers were “hypocrites” to claim they only sell to state entities.



Medical workers preparing Pfizer-BioNTech vaccines at a retirement home in Saluzzo, Italy, this month.Credit...Marco Bertorello/Agence France-Presse — Getty 


Other vaccines offered to Emilia-Romagna by Mondial Pharma, a company based in the Swiss town, Lugano, cost more than those offered by Mr. Gasparotti.

Pierfrancesco Lucignano, a marketing official for Mondial Pharma, said the company had offered the region three million doses of the AstraZeneca vaccine he said was produced by the Serum Institute of India, the official Indian manufacturing partner for AstraZeneca, for about 26 euros per dose, almost $32.

“There are other countries outside Europe that are buying them,” he said, adding that he is negotiating with South American and African countries.

The northern Italian region of Veneto has also gotten offers of millions of doses, from intermediaries it has done business with in the past. “We are not talking about tricksters that come here and pretend they have a garage full of vaccines,” the region’s president, Luca Zaia, said during a news conference earlier this month.

Mr. Donini, the official in Emilia-Romagna, said his region put the negotiations on hold and suggested the Italian state take full advantage of the region’s connection with brokers.

“We activated a setup that would allow us to go 100 kilometers per hour,” he said, “and we are forced to go 20 kilometers per hour because we don’t have gas, while we know there are people who could fill us up.”


Emma Bubola contributed reporting from Rome, Constant Méheut from Paris, Monika Pronczuk from Brussels, Thomas Erdbrink from Amsterdam, and Melissa Eddy from Berlin. 

Well This Looks Disturbingly Familiar

BY JOHN RUBINO 


Last March, the financial markets were rocked by a disease that public health officials defined as a pandemic. Stocks and gold both tanked, and the locked-down economy went into free-fall.

Here’s the Nasdaq …


… and gold:


This flash-crash was brutal but ultimately short-lived, as the world’s governments immediately stepped in with tens of trillions of dollars of new liquidity. 

By April financial asset prices were headed back up, and for owners of stocks, bonds, real estate, and precious metals, the good times were rolling again.

Now fast forward almost exactly one year. 

The financial markets are being rocked by rising inflation and surging interest rates, which in some ways present an even trickier challenge than covid-19. 

Here’s this month for the Nasdaq…


… and gold:


If history is repeating, a few more days of this and the federal government will feel obligated to intervene. 

But how exactly does it fix an interest rate spike caused by rising inflation? 

Especially when the problem is global:

Bond markets left smarting from worst rout in years as reflation goes global

From the United States to Germany and Australia, government borrowing costs on Friday were set to end February with their biggest monthly rises in years as expectations for a post-pandemic ignition of inflation gained a life of their own.

Australia’s 10-year bond yield and Britain’s 30-year yields were set for their biggest monthly jump since the 2009 global financial crisis. 

Long-dated New Zealand yields were flirting with their biggest monthly surge since 1994.

For the United States and some European markets, the bond selloff was on the scale of late 2016, when Donald Trump’s election as U.S. President last triggered so-called reflation bets.

U.S. 10-year bond yields, up more than 35 bps this month and near one-year highs above 1.45%, are set for their biggest monthly jump since November 2016.

Britain’s 10-year bond yield, up 45 bps in February, was also set for its biggest monthly jump since 2016. Thirty-year yields headed for their biggest monthly leap since 2009 after rising 48 bps.

In the euro area, where German Bund yields were set for their biggest monthly jump in three years, the European Central Bank has said it is monitoring the rise in rates closely.



Reponding to inflation with a new infusion of helicopter money is pouring gasoline on a fire. 

But that’s exactly what the US and many other countries are doing. See House set to pass Biden’s $1.9T pandemic relief package.

The dilemma facing Washington – really the whole world – is that the past four decades of wildly excessive borrowing had left huge sections of the global financial system vulnerable to higher borrowing costs – before the pandemic lockdown. Now huge sections of the global economy are functionally bankrupt.

So either they’re bailed out immediately or they fail.

But bond buyers are responding to the prospect of another year of insane borrowing and currency creation by running for the exits. And – again – a big part of the global economy is too fragile to handle the resulting higher interest rates.

So here we are: “Capital D” Depression if governments rein in their spending and borrowing, and a spike in interest rates followed by a Depression if governments continue on their present course.

This day was always coming, but the lockdowns moved it from “inevitable” to “imminent.” Buy gold (after it bottoms).