The battle for China’s backyard

The rivalry between America and China will hinge on South-East Asia

China’s advantages in the tussle are not as big as they seem

During their 45-year feud, America and the Soviet Union fought proxy battles all across the world. 

But the cold war was at its most intense in Europe, where the Soviets constantly worried about their satellites breaking away, and America always fretted that its allies were going soft. 

The contest between China and America, happily, is different from that. 

For one thing, the two sides armed forces are not glowering at one another across any front lines—although in Taiwan and North Korea each has an ally in a tense, decades-long stand-off with the other. 

Even so, in the rivalry between the two powers, there will be a main zone of contention: South-East Asia. And although the region has drawn up no clear battle-lines, that only makes the competition more complex.

People across South-East Asia already see America and China as two poles, pulling their countries in opposite directions. Those protesting against the recent military coup in Myanmar, for example, hold up angry placards that attack China for backing the generals and pleading ones that beg America to intervene. 

Governments feel under pressure to pick sides. In 2016 Rodrigo Duterte, the president of the Philippines, loudly announced his country’s “separation from America” and pledged allegiance to China instead. 

China’s claim that almost all the South China Sea lies within its territorial waters and America’s rejection of that assertion have sparked blazing rows in the main regional club, the Association of South-East Asian Nations (asean), which China has attempted to win over.

This tug-of-war will only become more fierce, for two reasons. First, South-East Asia is of enormous strategic importance to China. 

It is on China’s doorstep, astride the trade routes along which oil and other raw materials are transported to China and finished goods are shipped out. Whereas China is hemmed in to its east by Japan, South Korea and Taiwan, all firm American allies, South-East Asia is less hostile terrain, providing potential access to both the Indian and Pacific Oceans, for both commercial and military purposes. 

Only by becoming the pre-eminent power in South-East Asia can China relieve its sense of claustrophobia.

But South-East Asia is not just a way-station en route to other places. 

The second reason competition over it will intensify is that it is an ever more important part of the world in its own right. 

It is home to 700m people—more than the European Union, Latin America or the Middle East. 

Its economy, were it a single country, would be the fourth-biggest in the world after adjusting for the cost of living, behind only China itself, America and India. 

And it is growing fast. 

The economies of Indonesia and Malaysia have been expanding by 5-6% for a decade; those of the Philippines and Vietnam by 6-7%. 

Poorer countries in the region, such as Myanmar and Cambodia, are growing even faster. 

For investors hedging against China, South-East Asia has become the manufacturing hub of choice. 

Its consumers are now rich enough to comprise an alluring market. In commercial as well as geopolitical terms, South-East Asia is a prize.

Of the two competitors, China looks the more likely prize-winner. It is the region’s biggest trading partner, and pumps in more investment than America does. 

At least one South-East Asian country, Cambodia, is in effect already a Chinese client state. And none is willing to cross China by openly siding with America in the superpowers’ many rows.

However, as close as South-East Asia’s ties with China appear, they are also fraught. 

Chinese investment, although prodigious, has its drawbacks. Chinese firms are often accused of corruption or environmental depredation. 

Many prefer to employ imported Chinese workers rather than locals, reducing the benefits to the economy. Then there is the insecurity bred by China’s alarming habit of using curbs on trade and investment to punish countries that displease it.

China also dismays its neighbours by throwing its weight around militarily. Its seizure and fortification of shoals and reefs in the South China Sea, and its harassment of South-East Asian vessels trying to fish or drill for oil in nearby waters, is a source of tension with almost all the countries of the region, from Vietnam to Indonesia. 

China also maintains ties with insurgents fighting against the democratic government of Myanmar, and has in the past backed guerrillas all over the region.

This sort of belligerence makes China unpopular in much of South-East Asia—building, alas, on dismaying traditions of prejudice. 

Anti-Chinese riots often erupt in Vietnam. Indonesia, the world’s most populous Muslim country, has seen protests about everything from illegal Chinese immigration to China’s treatment of its Muslim minority. 

Even in tiny Laos, a communist dictatorship where public dissent is almost unheard of, whispered gripes about Chinese domination are commonplace. 

South-East Asian leaders may not dare criticise China openly, for fear of the economic consequences, but they are also wary of being too accommodating, for fear of their own citizens.

China’s bid for hegemony in South-East Asia is thus far from assured. South-East Asian governments have no wish to renounce trade with and investment from their prosperous neighbour. 

But they also want what America wants: peace and stability and a rules-based order in which China does not get its way by dint of sheer heft. 

Like all middling powers, the big countries of South-East Asia have an incentive to hedge their bets, and see what favours they can extract from the Goliaths of the day.

God’s playground

To help South-East Asia avoid slipping into China’s orbit, America should encourage it to keep its options open and build counterweights to Chinese influence. 

One mechanism is more regional integration. 

As it is, trade and investment among the countries of South-East Asia outweigh the business they do with China. 

Another mechanism is to strengthen ties with other Asian countries such as Japan and South Korea—one asean has rightly embraced. 

Above all, America should not fall into the trap of trying to force its members to pick sides. 

That is the one thing South-East Asia is determined to resist.

Lessons from a year of Covid

In a year of scientific breakthroughs — and political failures — what can we learn for the future?

Yuval Noah Harari

© Rafael Heygster/Helena Manhartsberger

How can we summarise the Covid year from a broad historical perspective? 

Many people believe that the terrible toll coronavirus has taken demonstrates humanity’s helplessness in the face of nature’s might. 

In fact, 2020 has shown that humanity is far from helpless. Epidemics are no longer uncontrollable forces of nature. Science has turned them into a manageable challenge.

Why, then, has there been so much death and suffering? Because of bad political decisions.

In previous eras, when humans faced a plague such as the Black Death, they had no idea what caused it or how it could be stopped.

When the 1918 influenza struck, the best scientists in the world couldn’t identify the deadly virus, many of the countermeasures adopted were useless, and attempts to develop an effective vaccine proved futile.

It was very different with Covid-19. The first alarm bells about a potential new epidemic began sounding at the end of December 2019. By January 10 2020, scientists had not only isolated the responsible virus, but also sequenced its genome and published the information online. 

Within a few more months it became clear which measures could slow and stop the chains of infection. Within less than a year several effective vaccines were in mass production. In the war between humans and pathogens, never have humans been so powerful.

Moving life online

Alongside the unprecedented achievements of biotechnology, the Covid year has also underlined the power of information technology. 

In previous eras humanity could seldom stop epidemics because humans couldn’t monitor the chains of infection in real time, and because the economic cost of extended lockdowns was prohibitive. 

In 1918 you could quarantine people who came down with the dreaded flu, but you couldn’t trace the movements of pre-symptomatic or asymptomatic carriers. 

And if you ordered the entire population of a country to stay at home for several weeks, it would have resulted in economic ruin, social breakdown and mass starvation.

In contrast, in 2020 digital surveillance made it far easier to monitor and pinpoint the disease vectors, meaning that quarantine could be both more selective and more effective. Even more importantly, automation and the internet made extended lockdowns viable, at least in developed countries. 

While in some parts of the developing world the human experience was still reminiscent of past plagues, in much of the developed world the digital revolution changed everything.

Consider agriculture. 

For thousands of years food production relied on human labour, and about 90 per cent of people worked in farming. Today in developed countries this is no longer the case. 

In the US, only about 1.5 per cent of people work on farms, but that’s enough not just to feed everyone at home but also to make the US a leading food exporter. 

Almost all the farm work is done by machines, which are immune to disease. 

Lockdowns therefore have only a small impact on farming.

Imagine a wheat field at the height of the Black Death. 

If you tell the farmhands to stay home at harvest time, you get starvation. 

If you tell the farmhands to come and harvest, they might infect one another. What to do?

Now imagine the same wheat field in 2020. A single GPS-guided combine can harvest the entire field with far greater efficiency — and with zero chance of infection. 

While in 1349 an average farmhand reaped about 5 bushels per day, in 2014 a combine set a record by harvesting 30,000 bushels in a day. Consequently Covid-19 had no significant impact on global production of staple crops such as wheat, maize and rice.

To feed people it is not enough to harvest grain. You also need to transport it, sometimes over thousands of kilometres. 

For most of history, trade was one of the main villains in the story of pandemics. 

Deadly pathogens moved around the world on merchant ships and long-distance caravans. For example, the Black Death hitchhiked from east Asia to the Middle East along the Silk Road, and it was Genoese merchant ships that then carried it to Europe. 

Trade posed such a deadly threat because every wagon needed a wagoner, dozens of sailors were required to operate even small seagoing vessels, and crowded ships and inns were hotbeds of disease.

In 2020, global trade could go on functioning more or less smoothly because it involved very few humans. 

A largely automated present-day container ship can carry more tons than the merchant fleet of an entire early modern kingdom. 

In 1582, the English merchant fleet had a total carrying capacity of 68,000 tons and required about 16,000 sailors. The container ship OOCL Hong Kong, christened in 2017, can carry some 200,000 tons while requiring a crew of only 22.

True, cruise ships with hundreds of tourists and aeroplanes full of passengers played a major role in the spread of Covid-19. But tourism and travel are not essential for trade. 

The tourists can stay at home and the business people can Zoom, while automated ghost ships and almost human-less trains keep the global economy moving. Whereas international tourism plummeted in 2020, the volume of global maritime trade declined by only 4 per cent.

Automation and digitalisation have had an even more profound impact on services. In 1918, it was unthinkable that offices, schools, courts or churches could continue functioning in lockdown. 

If students and teachers hunker down in their homes, how can you hold classes? 

Today we know the answer. The switch online has many drawbacks, not least the immense mental toll. It has also created previously unimaginable problems, such as lawyers appearing in court as cats. But the fact that it could be done at all is astounding.

In 1918, humanity inhabited only the physical world, and when the deadly flu virus swept through this world, humanity had no place to run. 

Today many of us inhabit two worlds — the physical and the virtual. When the coronavirus circulated through the physical world, many people shifted much of their lives to the virtual world, where the virus couldn’t follow.

Mounted police in Hanover, Germany, disperse a group playing in a park © Rafael Heygster/Helena Manhartsberger

Of course, humans are still physical beings, and not everything can be digitalised. 

The Covid year has highlighted the crucial role that many low-paid professions play in maintaining human civilisation: nurses, sanitation workers, truck drivers, cashiers, delivery people. It is often said that every civilisation is just three meals away from barbarism. 

In 2020, the delivery people were the thin red line holding civilisation together. They became our all-important lifelines to the physical world.

The internet holds on

As humanity automates, digitalises and shifts activities online, it exposes us to new dangers. One of the most remarkable things about the Covid year is that the internet didn’t break. 

If we suddenly increase the amount of traffic passing on a physical bridge, we can expect traffic jams, and perhaps even the collapse of the bridge. In 2020, schools, offices and churches shifted online almost overnight, but the internet held up.

We hardly stop to think about this, but we should. After 2020 we know that life can go on even when an entire country is in physical lockdown. 

Now try to imagine what happens if our digital infrastructure crashes.

Information technology has made us more resilient in the face of organic viruses, but it has also made us far more vulnerable to malware and cyber warfare. 

People often ask: “What’s the next Covid?” 

An attack on our digital infrastructure is a leading candidate. 

It took several months for coronavirus to spread through the world and infect millions of people. Our digital infrastructure might collapse in a single day. 

And whereas schools and offices could speedily shift online, how much time do you think it will take you to shift back from email to snail-mail?

What counts?

The Covid year has exposed an even more important limitation of our scientific and technological power. Science cannot replace politics. 

When we come to decide on policy, we have to take into account many interests and values, and since there is no scientific way to determine which interests and values are more important, there is no scientific way to decide what we should do.

For example, when deciding whether to impose a lockdown, it is not sufficient to ask: “How many people will fall sick with Covid-19 if we don’t impose the lockdown?”. 

We should also ask: “How many people will experience depression if we do impose a lockdown? 

How many people will suffer from bad nutrition? 

How many will miss school or lose their job? 

How many will be battered or murdered by their spouses?”

Even if all our data is accurate and reliable, we should always ask: “What do we count? 

Who decides what to count? 

How do we evaluate the numbers against each other?” 

This is a political rather than scientific task.

It is politicians who should balance the medical, economic and social considerations and come up with a comprehensive policy.

Similarly, engineers are creating new digital platforms that help us function in lockdown, and new surveillance tools that help us break the chains of infection. 

But digitalisation and surveillance jeopardise our privacy and open the way for the emergence of unprecedented totalitarian regimes. 

In 2020, mass surveillance has become both more legitimate and more common. Fighting the epidemic is important, but is it worth destroying our freedom in the process? 

It is the job of politicians rather than engineers to find the right balance between useful surveillance and dystopian nightmares.

Three basic rules can go a long way in protecting us from digital dictatorships, even in a time of plague. 

First, whenever you collect data on people — especially on what is happening inside their own bodies — this data should be used to help these people rather than to manipulate, control or harm them. My personal physician knows many extremely private things about me. 

I am OK with it, because I trust my physician to use this data for my benefit. My physician shouldn’t sell this data to any corporation or political party. It should be the same with any kind of “pandemic surveillance authority” we might establish.

Researchers at Munich’s Bundeswehr Institute of Microbiology, a military research facility that diagnosed the first German Covid-19 case © Rafael Heygster/Helena Manhartsberger

Second, surveillance must always go both ways. 

If surveillance goes only from top to bottom, this is the high road to dictatorship. 

So whenever you increase surveillance of individuals, you should simultaneously increase surveillance of the government and big corporations too. 

For example, in the present crisis governments are distributing enormous amounts of money. 

The process of allocating funds should be made more transparent. 

As a citizen, I want to easily see who gets what, and who decided where the money goes. 

I want to make sure that the money goes to businesses that really need it rather than to a big corporation whose owners are friends with a minister. 

If the government says it is too complicated to establish such a monitoring system in the midst of a pandemic, don’t believe it. If it is not too complicated to start monitoring what you do — it is not too complicated to start monitoring what the government does.

Third, never allow too much data to be concentrated in any one place. Not during the epidemic, and not when it is over. 

A data monopoly is a recipe for dictatorship. 

So if we collect biometric data on people to stop the pandemic, this should be done by an independent health authority rather than by the police. 

And the resulting data should be kept separate from other data silos of government ministries and big corporations. Sure, it will create redundancies and inefficiencies. 

But inefficiency is a feature, not a bug. 

You want to prevent the rise of digital dictatorship? 

Keep things at least a bit inefficient.

Over to the politicians

The unprecedented scientific and technological successes of 2020 didn’t solve the Covid-19 crisis. They turned the epidemic from a natural calamity into a political dilemma. 

When the Black Death killed millions, nobody expected much from the kings and emperors. About a third of all English people died during the first wave of the Black Death, but this did not cause King Edward III of England to lose his throne. 

It was clearly beyond the power of rulers to stop the epidemic, so nobody blamed them for failure.

But today humankind has the scientific tools to stop Covid-19. Several countries, from Vietnam to Australia, proved that even without a vaccine, the available tools can halt the epidemic. 

These tools, however, have a high economic and social price. We can beat the virus — but we aren’t sure we are willing to pay the cost of victory. That’s why the scientific achievements have placed an enormous responsibility on the shoulders of politicians.

Unfortunately, too many politicians have failed to live up to this responsibility. For example, the populist presidents of the US and Brazil played down the danger, refused to heed experts and peddled conspiracy theories instead. 

They didn’t come up with a sound federal plan of action and sabotaged attempts by state and municipal authorities to halt the epidemic. 

The negligence and irresponsibility of the Trump and Bolsonaro administrations have resulted in hundreds of thousands of preventable deaths.

In the UK, the government seems initially to have been more preoccupied with Brexit than with Covid-19. For all its isolationist policies, the Johnson administration failed to isolate Britain from the one thing that really mattered: the virus. 

My home country of Israel has also suffered from political mismanagement. As is the case with Taiwan, New Zealand and Cyprus, Israel is in effect an “island country”, with closed borders and only one main entry gate — Ben Gurion Airport. 

However, at the height of the pandemic the Netanyahu government has allowed travellers to pass through the airport without quarantine or even proper screening and has neglected to enforce its own lockdown policies.

Researchers at the Covid-19 drive-in test station at the Saarbrücken exhibition centre © Rafael Heygster/Helena Manhartsberger

Both Israel and the UK have subsequently been in the forefront of rolling out the vaccines, but their early misjudgments cost them dearly. 

In Britain, the pandemic has claimed the lives of 120,000 people, placing it sixth in the world in average mortality rates. 

Meanwhile, Israel has the seventh highest average confirmed case rate, and to counter the disaster it resorted to a “vaccines for data” deal with the American corporation Pfizer. 

Pfizer agreed to provide Israel with enough vaccines for the entire population, in exchange for huge amounts of valuable data, raising concerns about privacy and data monopoly, and demonstrating that citizens’ data is now one of the most valuable state assets.

While some countries performed much better, humanity as a whole has so far failed to contain the pandemic, or to devise a global plan to defeat the virus. 

The early months of 2020 were like watching an accident in slow motion. 

Modern communication made it possible for people all over the world to see in real time the images first from Wuhan, then from Italy, then from more and more countries — but no global leadership emerged to stop the catastrophe from engulfing the world. 

The tools have been there, but all too often the political wisdom has been missing.

Foreigners to the rescue

One reason for the gap between scientific success and political failure is that scientists co-operated globally, whereas politicians tended to feud. 

Working under much stress and uncertainty, scientists throughout the world freely shared information and relied on the findings and insights of one another. 

Many important research projects were conducted by international teams. 

For example, one key study that demonstrated the efficacy of lockdown measures was conducted jointly by researchers from nine institutions — one in the UK, three in China, and five in the US.

In contrast, politicians have failed to form an international alliance against the virus and to agree on a global plan. 

The world’s two leading superpowers, the US and China, have accused each other of withholding vital information, of disseminating disinformation and conspiracy theories, and even of deliberately spreading the virus. 

Numerous other countries have apparently falsified or withheld data about the progress of the pandemic.

One of about 400 vaccination centres set up in Frankfurt’s Festhalle, which is usually a concert venue © Rafael Heygster

The lack of global co-operation manifests itself not just in these information wars, but even more so in conflicts over scarce medical equipment. 

While there have been many instances of collaboration and generosity, no serious attempt was made to pool all the available resources, streamline global production and ensure equitable distribution of supplies. 

In particular, “vaccine nationalism” creates a new kind of global inequality between countries that are able to vaccinate their population and countries that aren’t.

It is sad to see that many fail to understand a simple fact about this pandemic: as long as the virus continues to spread anywhere, no country can feel truly safe. 

Suppose Israel or the UK succeeds in eradicating the virus within its own borders, but the virus continues to spread among hundreds of millions of people in India, Brazil or South Africa. A new mutation in some remote Brazilian town might make the vaccine ineffective, and result in a new wave of infection.

In the present emergency, appeals to mere altruism will probably not override national interests. 

However, in the present emergency, global co-operation isn’t altruism. 

It is essential for ensuring the national interest.

Anti-virus for the world

Arguments about what happened in 2020 will reverberate for many years. But people of all political camps should agree on at least three main lessons.

First, we need to safeguard our digital infrastructure. It has been our salvation during this pandemic, but it could soon be the source of an even worse disaster.

Second, each country should invest more in its public health system. This seems self-evident, but politicians and voters sometimes succeed in ignoring the most obvious lesson.

Third, we should establish a powerful global system to monitor and prevent pandemics. In the age-old war between humans and pathogens, the frontline passes through the body of each and every human being. 

If this line is breached anywhere on the planet, it puts all of us in danger. Even the richest people in the most developed countries have a personal interest to protect the poorest people in the least developed countries. 

If a new virus jumps from a bat to a human in a poor village in some remote jungle, within a few days that virus can take a walk down Wall Street.

Bioscientia’s laboratories, where coronavirus tests are diagnosed, evaluated and archived © Rafael Heygster

The skeleton of such a global anti-plague system already exists in the shape of the World Health Organization and several other institutions. 

But the budgets supporting this system are meagre, and it has almost no political teeth. 

We need to give this system some political clout and a lot more money, so that it won’t be entirely dependent on the whims of self-serving politicians. 

As noted earlier, I don’t believe that unelected experts should be tasked with making crucial policy decisions. 

That should remain the preserve of politicians. 

But some kind of independent global health authority would be the ideal platform for compiling medical data, monitoring potential hazards, raising alarms and directing research and development.

Many people fear that Covid-19 marks the beginning of a wave of new pandemics. But if the above lessons are implemented, the shock of Covid-19 might actually result in pandemics becoming less common. 

Humankind cannot prevent the appearance of new pathogens. 

This is a natural evolutionary process that has been going on for billions of years, and will continue in the future too. But today humankind does have the knowledge and tools necessary to prevent a new pathogen from spreading and becoming a pandemic.

If Covid-19 nevertheless continues to spread in 2021 and kill millions, or if an even more deadly pandemic hits humankind in 2030, this will be neither an uncontrollable natural calamity nor a punishment from God. It will be a human failure and — more precisely — a political failure.

Yuval Noah Harari is author of ‘Sapiens’, ‘Homo Deus’, ‘21 Lessons for the 21st Century’ and ‘Sapiens: A Graphic History’. 

Treasury Yields Jump Again on Covid-19 Stimulus, Jobs

Inflation expectations are increasing along with yields, but move puts pressure on growth stocks

By Paul J. Davies

U.S. Treasury yields jumped Monday following the Senate’s approval of the $1.9 trillion Covid-19 relief bill over the weekend, which moves President Biden’s spending package closer to being signed into law.

The huge stimulus, which faces a final vote in the House as early as Tuesday, is expected to boost the U.S. economy just as vaccinations allow more businesses to reopen, driving a burst of activity and a likely pickup in inflation.

The 10-year yield briefly rose as high as 1.610% on Monday morning, surpassing the 1.609% hit when Treasurys sold off sharply on Feb. 25, according to Tradeweb. 

It later dropped back to 1.594%, which was up versus Friday’s close of 1.550%. Bond yields rise when prices fall.

The rise in yields is also putting pressure on growth stocks, such as technology companies, whose valuations are linked to prevailing discount rates for long-term cash flows.

Senate Majority Leader Chuck Schumer gives a thumbs-up after lawmakers approved the latest Covid-19 aid bill on Saturday. / PHOTO: TASOS KATOPODIS/GETTY IMAGES

The tech-heavy Nasdaq Composite fell 310.99 points, or 2.4%, to 12609.16, falling into correction territory.

The Federal Reserve has been sanguine in its response to rising yields because it sees them as a sign of the brightening outlook for the economy. 

It also targets an average inflation rate over time, which means the central bank would allow inflation to run above its 2% target for a spell before tightening monetary policy.

Investors are having trouble adjusting to this new policy framework. 

There is confusion about where yields will settle and some skepticism that the Fed will stick to its low-rates and bond-buying program.

“The market still hasn’t completely absorbed the idea of the average inflation targeting regime,” said Sebastien Galy, senior macro strategist at Nordea Asset Management. 

He also pointed to the strong jobs report on Friday and a test for the market with a big auction of new 10-year Treasurys coming up on Wednesday. 

He expects 10-year yields to move toward 1.8%.

A rise in real yields—or the yields on inflation-protected Treasurys, known as TIPS—is potentially more important in judging how and when the Fed might change its policy.

These haven’t risen as much as normal yields and the gap between the two has grown, which indicates higher inflation expectations.

On Monday, 10-year inflation expectations hit 2.24%, the highest since the summer of 2014.

Shorter-term inflation expectations have risen even faster, with the five-year measure exceeding 2.55% Monday.

This suggests expectations that a rise in inflation will be followed by the Fed taking action and bringing inflation back toward the target over the longer term.

However, if real yields start to rise faster, especially at shorter maturities, that would suggest market skepticism over Fed policy, according to Neil Shearing, group chief economist at Capital Economics.

That “might indicate that the markets do not believe the Fed’s commitment to keeping its policy rate at near-zero until it has achieved a ‘broad and inclusive’ recovery,” Mr. Shearing said.

The difference between real yields on five-year and 10-year TIPS, which measures the steepness of the curve, has been rising steadily since last April and reached almost 1.1 percentage points on Friday. 

That is the steepest the curve has been since April 2014. However, it slipped back to 1.04 percentage points on Monday. 

If the gap shrinks further due to rising five-year real yields, that would suggest investors expect faster rate increases from the Fed.

Yields have also been pushed higher by a series of technical factors including worries about constraints on bank balance sheets and the unwinding of leveraged bets linked to the relative yields of different Treasurys.

In the past week, there has also been a big pickup in outright bets by hedge funds that yields will keep rising and hefty sales of Treasurys by leveraged funds that trade based on market volatility, according to data from Citigroup’s quantitative analysts. 


By Matthew Piepenburg

I’ve often joked that fretting over delusional price moves in individual stock names in a market Twilight Zone is akin to fretting over the desert choices on the Titanic’s dinner menu.

In short, the real issue is the obvious iceberg ahead, not chocolate vs. vanilla eclairs, Amazon vs. Tesla or even Bitcoin vs. gold.

Today, the big questions, and the big variables as well as icebergs, all hinge upon the “macros”—you know, boring things like historically unpresented (as well as unpayable) debt levels, openly absurd risk-asset bubbles and the artificial measures central bankers and politicos will and must employ to postpone the inevitable.

What to Watch

Toward this end, central banks and fiscal deficits are the big forces/variable to watch, as are rising or falling bond yields and inflation rates.

Whatever one’s view of the COVID pandemic and the relief policies which followed, there are 10 million less folks employed in the U.S. today than last year, despite massive fiscal support.

This means we can expect even more aid, and hence more debt ahead, especially with a Biden-supported Congress.

More aid, whether greater or larger than the last administration’s, also means more money supply creation as well as more money supply inflation to “pay” for the aid.

In just one year, we saw a massive increase in the broad money supply (printed money, currency already in circulation, checking & saving accounts etc.), and we can expect more this year.

It’s thus rational to anticipate a base case of large aid packages ahead and hence a Fed continuing to purchase the bonds issued to pay for that aid, currently at a rate of $80B per month, which means we can expect at least another $1T in deficits.

Why Deficits Matter

Deficits, of course, matter. They are like credit ice cubes which turn into debt icebergs.

We can also assume, quite confidently, that the money printing needed to purchase those otherwise unloved sovereign bonds will continue.


The answer is as simple as it is tragic: If the Fed didn’t buy those Treasuries, their yields would rise, which means rates (i.e. the cost of debt) would rise too.

But here’s the rub: Our cornered Fed and Treasury Dept. can’t afford rising rates. Not even one tiny bit of them.

Thus, to keep rates and yields artificially low, desperate Yield Curve Control (YCC) is inevitable.

The Fed has NO CHOICE but to continue its pattern (think Q4 of 2018 & 2019) of rushing to the rescue by printing more money (QE) whenever markets tank in order to purchase demand-less bonds and thus artificially repress yields and rates (YCC).

Alas: More “Uh-Oh” moments are inevitable, as is more QE and YCC, at least until even that rigged game implodes…

Revisiting Inflation

So, what can we rationally expect going forward? What key indicator, as well as key asset, are the logical choices?

History, as usual, gives us some credible maps to follow.

As always, this involves a deeper dive into seemingly “boring” topics like inflation, Treasury yields and desperate bankers.

Toward that end, we need to revisit—you guessed it—inflation…

Fortunately, the 20th century gives us two inflationary case studies—the 1940’s and 1970’s—to make the future clearer, with no need for tarot cards.

1940’s Inflation

The 1940’s, very much like today, saw inflation in the backdrop of massive fiscal deficits (coming out of the Second World War).

In the 1940’s, as today, government debt to GDP had climbed above the critical 100% marker.

Of course, that’s a lot of debt, too much debt. And if rates (or Treasury yields) ever climbed too high, Uncle Sam would default.

To cover those deficits, the Fed then, like today, opted to buy lots and lots of U.S. Treasuries to keep yields and rates artificially low.

Thus, Uncle Fed of the 1940’s deliberately kept yields (and hence rates) no higher than 2.5% across the entire duration of the yield curve, short-term to long-term Treasuries.

This was a classic case (as well as mix) of massive debt, high inflation and low rates compliments of YCC.

1970’s Inflation

The 1970’s inflation offered an entirely different inflationary flavor and “solution.”

Unlike the 1940’s, the nation’s debt to GDP ratio (at the government, corporate and household level) in the 1970’s was much smaller.

Thus, when inflation reared its ugly (and Post-Nixon) head, Volker’s Fed was able (unlike today) to allow yields and rates to skyrocket in order to stem the inflation.

2020’s Inflation

Needless to say, we are entering into an inflationary period far more like the 1940’s than the 1970’s. In short, we will never see a Volker rate hike anytime soon.

Today, if Treasury yields and/or interest rates went to even 4% or 5%, the debt cost would be fatal. Our nation and markets of Titanic debt would hit a rising-rate iceberg. Party over.

That’s why more Yield Curve Control is as inevitable as a fibbing politician.

But as for inflation in the 2020’s, it’s not here yet—or at least not as reported by the comically downplayed CPI data.

Thus, you might be asking why I’d compare the 2020’s to the inflationary 1940’s?

After all: Where’s the inflation?

Well, inflation is coming, and here’s why.

Inflation & the Velocity of Money?

Many deflationary proponents say there won’t be inflation without an increase in the velocity (i.e. circulation) of money within the real economy.

But inflation is more complex than just rising money velocity.

History, in fact, confirms that inflation doesn’t require the velocity of money to increase, it just requires it to keep from falling. 

During the inflationary period of the 1970’s, for example, the velocity of money was significantly lower than the non-inflationary decade of the 1950’s.

Inflation & Money Supply

Instead, the safest and surest measure of inflation has always been its correlation to an increase in the broad money supply.

In short: When broad money supply increases, that, by definition, IS inflation.

Inflation & Rising Commodity Prices

But for our current era to see rising CPI inflation, we’d have to see two forces in motion, namely 1) non-falling money velocity alongside broad money supply increases and 2) a scarcity (and hence price increase) in commodities.

And guess what? These forces are slowly converging today.

Notwithstanding the over-supplied energy sector, we are witnessing this commodity scarcity (and hence price rise) in the broader commodities market—from copper and lumber to beef and corn.

This cyclical shift toward commodity price inflation is a neon-flashing sign of consumer price inflation felt in the wallet and measured by the CPI scale, however broken that entirely fictitious indicator may otherwise be.

Prior to commodity scarcity, the broader money supply, as well as printed dollars, went straight into grossly inflated stocks, bonds and real estate, each of which are in classic bubble territory today.

But as we near the later months of 2021, such commodity scarcity (and hence commodity driven inflation in the CPI) will become more apparent, increasing in the coming years as even the openly fraudulent CPI inflation scale has no choice but to move noticeably upwards.

Inflation and Precious Metal Direction

Of course, the knee-jerk response of most precious metal owners is that inflation is always a tailwind for gold.

This is largely true, but the inflation-to-gold issue, like all things, is not always that black and white. Many inflationary forces are at play, and we’ve written and spoken of them at length.

Gold, for example, had been rising throughout 2019 and 2020 in openly deflationary conditions, so the gold discussion is not simply one of inflation alone, but inflation when measured against yields/rates.

A Major Gold Indicator

Thus, there is a far more accurate forecaster of gold price, one not ordinary making the headlines or reading lists of retail investors.

Drumroll please…….

The Inverse Relationship Between Negative Real Yields and Gold

It may sound complex, or even boring, but a key variable for gold forecasting is negative real yields—that is, the 10-Year Treasury yield minus the official CPI inflation rate.

More simply stated: Gold has a very close inverse relationship with negative real yields: Gold’s price rises as real (i.e. inflation-adjusted) yields fall deeper and faster into negative territory.

In the 1970’s, for example, we saw this interplay of sinking negative real yields and rising gold prices; the big gold spikes during that decade occurred when negative real yields sank as low as -4%.  

More recently, from mid-2018 to mid-2020, gold was once again rising dramatically because real yields were collapsing from +1% to negative 1%.

This rapid rate of change toward negative real yields was a clear tailwind for gold.

By late 2020, however, the nominal yields on the 10Y Treasury began to rise faster than official (and still anemic) CPI inflation rate.

As a result, the real yields weren’t as dramatically negative as in the past. Not surprisingly, gold’s dramatic price rise came to a halt.

As for now, gold’s lackluster price action is no surprise, as real yields continue to churn rather than trend further downwards.

Consequently, gold prices are biding their time, yawning in the short term, but stretching their legs for a sprint upward.

Very soon (as discussed below), real yields will again break below -1%, and thus gold and silver will revisit their price climb to much, much higher valuations in the coming 5+ years.

Why do I think negative real yields will sink further and gold will rise higher?

Back to the Future—or At Least the 1940’s

Well…History, as well as embarrassingly fat debt levels and openly desperate central bankers, is one reason.

For example, we all can be fairly certain of this fact: U.S. Government debt to GDP will increase over the coming years, for all the reasons discussed above.

And toward this end, the inflationary case study of the 1940’s is helpful.

As commodity-driven CPI inflation increases, alongside the obvious and text-book money supply definition of inflation, the central banks, politicos and nervous markets will get scared. Real scared.

Just like the 1940’s.

Central banks will thus have NO CHOICE but to artificially control/repress bond yields and rates at the same time that CPI inflation pushes inexorably northward.

This means inflation rates will rise higher than artificially repressed/controlled bond yields—at least for as long as the Fed can print enough money to control rates and yields.

And by pure high-school math (Treasury yields-CPI), this also means real  (inflation-adjusted) yields will go deeper into the negative—a confirmed tailwind for gold.

History Lessons

Why else am I so confident inflation will rise?

Just like in the 1940’s, the money-printing Fed of the 2020’s will “solve” their otherwise unsustainable debt nightmare by devaluing the currency to partially inflate their way out of debt.

In the 1940’s, cash lost 1/3 of its purchasing power and debt only went “down” because inflation and devalued dollars pushed it down with debased greenbacks.

In short, debt was not really paid back, it was inflated away.

Get ready for more of this type of inflation in the 2020’s.

Ironically, another source of my confidence in declining rates comes from the Fed itself…

A key proxy for declining yields and rates comes from the Fed’s own, “forward-guided” projections on declining 10-year TIPS:

Putting It All Together

The golden case for gold boils down to this: Gold rises when inflation adjusted Treasury yields sink into negative territory with increasing speed.

This happens whenever the inflation rate is greater than Treasury yields, and can certainly occur when rising inflation collides with increased yield suppression.

I think the near-term conditions are ripe for this type of iceberg-like collision.

As for inflation, the Fed is deliberately targeting more of the same; furthermore, commodity price inflation from “Bitcorn” to beef suggests the CPI inflation rate will be rising well into 2021 and beyond.

In short: Inflation will rise, and prolonged inflation lies ahead.

As for 10-Year Treasury yields, they are headed south for the simple reason that the Fed can’t and won’t allow them to go north, and for now at least, why fight the Fed?

With U.S. debt to GDP passing the 100% waterline, such a debt iceberg simply can’t stomach rising yields.

In short: YCC will equally ensure further yield suppression.

When you place rising inflation against artificially suppressed (i.e. falling) yields, by definition you get negative real (inflation-adjusted) yields.

And again: Gold loves negative real yields.

Looking forward five years out and more, this trend of negative real yields will likely increase, and to see gold double in price from its recent highs in the 2020’s would be far less of a surprise than the multiples we’ve already seen in far more hysterical price moves in names like Tesla or BTC.

In sum: Golden days are ahead for gold as real yields sink, Titanic-like, below the waterline.

But What About the Case for Spiking Yields?

Many, of course, can make an equally valid case for rising rather than sinking yields when (not if) the extreme and fantasy-like Fed money printing so critical to YCC simply gets too crazy and blows apart.

In such a scenario, un-supported bond prices would tank, sending Treasury yields and rates to the moon rather than below the waterline.

The good news for gold, however, is that such a scenario doesn’t change the end result for precious metals or the aforementioned case for negative real yields.

That is, if YCC fails or collapses under its own weight, and thus yields skyrocket rather than sink, the foregoing scenario just expands rather than unwinds.

Stated otherwise, if the Fed were to ever lose control of YCC and thus yields spiked, interest rates and inflation would also spike, up to and including a setting for hyper-inflation.

But so long as inflation rises higher than rising yields, which it would in such a super-inflationary scenario, we still get the same result: negative real yields.

And as we like to say, all roads, and indicators, point toward gold. 

Toward this end, the importance of negative real yields as an indicator of gold price is worthy of real consideration.

Winners and Losers in the Digital Transformation of Work

Advances in artificial intelligence and machine learning have again raised fears of large-scale job losses. And while labor-market adaptation is likely to stave off permanent high unemployment, it cannot be counted on to prevent a sharp rise in inequality.

Michael Spence

MILAN – Perhaps no single aspect of the digital revolution has received more attention than the effect of automaton on jobs, work, employment, and incomes. There is at least one very good reason for that – but it is probably not the one most people would cite.

Using machines to augment productivity is nothing new. Insofar as any tool is a machine, humans have been doing it for most of our short history on this planet. But, since the first Industrial Revolution – when steam power and mechanization produced a huge, sustained increased in productivity – this process has gone into overdrive.

Not everyone welcomed this transition. Many worried that reduced demand for human labor would lead to permanently high unemployment. But that didn’t happen. Instead, rising productivity and incomes bolstered demand, and thus economic activity. 

Over time, labor markets adapted in terms of skills, and eventually working hours declined, as the income-leisure balance shifted.

And yet, as augmentation of human labor gives way to automation – with machines performing a growing number of tasks autonomously in the information, control, and transactions segments of the economy – fears of large-scale job losses are again proliferating. 

After all, white- and blue-collar jobs involving mostly routine – that is, easily codified – tasks have been disappearing at an accelerating rate, especially since 2000. Because many of these jobs occupied the middle of the income distribution, this process has fueled job and income polarization.

As in the nineteenth century, however, labor markets are adapting. At first, displaced workers may seek new employment in jobs requiring their pre-existing skills. But, facing limited opportunities, they soon begin pursuing jobs with lower (or easily attainable) skill requirements, including part-time jobs in the internet-enabled gig economy, even if it means accepting a lower income.

Over time, a growing number of workers begin investing in acquiring skills that are in demand in non-routine, higher-paying job categories. This is generally a more time-consuming process, though it has been accelerated in some countries, including the United States, by initiatives involving government, businesses, and educational institutions.

But, even with institutional support mechanisms, access to skills development is usually far from equitable. Only those with sufficient time and financial resources can make the needed investment, and in a highly unequal society, many workers are excluded from this group. 

Against this background, we should probably be worried less about large-scale permanent unemployment and more about an uptick in inequality and its social and political ramifications.

To be sure, technological adaptation may reduce the magnitude of the skills-acquisition problem. After all, markets reward innovations that make digital equipment and systems easier to use.

For example, the graphical user interface, which enables us to interact with electronic devices via visual indicator representations, is now so pervasive that we take it for granted. As such intuitive approaches are applied to increasingly complex technological processes, the need for re-training – and, thus, the digital revolution’s distributional impact – will be diminished.

Progress on artificial intelligence will also have an impact. Until about ten years ago, automation relied on the codification of tasks: machines are programmed with a set of instructions that reproduce the logic of human decision-making. But what about tasks that cannot be distilled into a series of logical, predefined steps? 

From understanding natural language to recognizing objects visually, a surprisingly large number of activities – even ostensibly simple ones – fit into this category. This has kept many jobs “safe” from automation, but not for much longer, owing to advances in machine learning.

Machine learning is essentially very sophisticated pattern recognition. Using large pools of data and massive computing power, machines learn to do things we cannot code. 

They do this using examples rather than rules-based logic. Advances in machine learning have opened vast new areas of automation: robotics, autonomous vehicles, and scanning technical medical literature for key articles. 

In many areas – such as pattern recognition in genetics and biomedical science – machines not only become capable of replacing human workers; in certain respects, their capabilities dwarf those of any human. 

This is better news than it may seem. Yes, far more tasks and subtasks will be reallocated to machines. But the purpose and end point of the digital revolution must be to turn automation of work into digital augmentation. 

And when machines perform tasks humans cannot, augmentation is precisely what we are getting.

While it is impossible to say for sure at this early stage, there is reason to believe that the transition costs of this new round of work-related disruptions will be experienced more broadly across the income spectrum than the first. 

At the low end of the income spectrum globally, advances in artificial intelligence and robotics will disrupt and eventually displace labor-intensive manufacturing – and the development models that depend on it. 

At the high end, machine learning-based capabilities will have a major impact on scientific research and technological development, as well as high-end professional services.

The fact remains, however, that we are dealing with highly complex transitions, not equilibria: and we cannot expect natural adaptation by workers and labor markets to produce equitable results, especially with huge differences in household resources as a starting point. 

That is why policymakers (in partnership with business, labor, and schools) must focus on measures to reduce income and wealth inequality, including ensuring broad access to high-quality social services like education and skills training. 

In the absence of this kind of intervention, there is a significant risk that the digital transformation of work will leave many people behind, with adverse long-run consequences for social cohesion. 

Michael Spence, a Nobel laureate in economics, is Professor of Economics Emeritus and a former dean of the Graduate School of Business at Stanford University. He is Senior Fellow at the Hoover Institution, serves on the Academic Committee at Luohan Academy, and co-chairs the Advisory Board of the Asia Global Institute. He was chairman of the independent Commission on Growth and Development, an international body that from 2006-10 analyzed opportunities for global economic growth, and is the author of The Next Convergence: The Future of Economic Growth in a Multispeed World.