The world economy

Joe Biden’s stimulus is a high-stakes bet for America and the world

It is part of a three-pronged economic experiment

When the pandemic struck it was natural to fear that the world economy would stay in the doldrums for years. 

America is defying such pessimism. 

Having outrun gloomy growth forecasts from last summer, it is adding fiscal rocket fuel to an already fiery economic-policy mix. 

President Joe Biden’s $1.9trn stimulus bill, which he was poised to sign into law after The Economist went to press, takes to nearly $3trn (14% of pre-crisis gdp) the amount of pandemic-related spending passed since December, and to about $6trn the total paid out since the start of the crisis. 

On current plans the Federal Reserve and Treasury will also pour some $2.5trn into the banking system this year, and interest rates will stay near zero. 

For a decade after the global financial crisis of 2007-09 America’s economic policymakers were too timid. Today they are letting rip.

The probable result is a bounce-back that was unthinkable in the spring of 2020. 

In January America’s retail sales were already 7.4% higher than a year earlier, as most Americans received $600 cheques from the government, part of the previous round of stimulus. 

Stuck at home and unable to spend as much as they normally would in restaurants, bars and cinemas, consumers have accumulated $1.6trn in excess savings during the past year. 

Mr Biden’s stimulus gives most Americans another $1,400 each. 

Unusually for a rich country, a big chunk of the cash pile is held by poor households that are likely to spend it once the economy fully reopens. 

If vaccines continue to reach arms and America avoids a nasty encounter with new variants, the unemployment rate should fall comfortably below 5% by the end of the year.

The good news is not confined to America. 

Manufacturing surveys are healthy even in the euro zone, which is behind on vaccinations and battling new variants, and is applying less stimulus. 

Mr Biden’s spending will further boost global demand for goods. 

America’s trade deficit is already more than 50% greater than before the pandemic, as the economy sucks in imports. 

But the rest of the world will not match Uncle Sam’s breakneck pace. 

On March 9th the oecd, a club of rich countries, forecast that America’s economy will, uniquely among big economies, be larger at the end of 2022 than it had been predicting before the pandemic. 

From April to September America is likely to outgrow even China, which is tightening monetary policy and has suffered a 9% fall in its stockmarket since mid-February.

Surging out of a crisis that had at its worst moment cut the number of people in work by 15% will be a triumph for America, and will stand in contrast to the puny recovery after the financial crisis. 

Mr Biden’s spending will provide welcome relief to those whose lives have been upended—today America is still missing 9.5m jobs. 

Thanks to extra cash for most parents, the country’s persistent and widespread child poverty will fall dramatically.

Yet, though today’s policymakers have a guaranteed place in economic history, they may not come to be seen as heroes. 

That is because America is running an unpredictable three-pronged economic experiment that features historic levels of fiscal stimulus, a more tolerant attitude at the Fed towards temporary overshoots in inflation, and huge pent-up savings which no one knows if consumers will hoard or spend. 

This experiment has no parallel since the second world war. 

The danger for America and the world is that the economy overheats.

It is a risk that investors have been weighing up. America’s ten-year bond yields, which move inversely against prices, have risen by about one percentage point since last summer, on expectations of higher inflation and higher interest rates. 

Because of America’s pivotal role in the global financial system, its outlook for monetary policy spills across borders. 

In recent weeks Australia’s central bank has had to increase its bond purchases to prevent yields from rising too much. 

The European Central Bank was deciding whether to make a similar intervention as we went to press. 

Emerging markets with big deficits, like Brazil, or with large dollar-denominated debts, like Argentina, have reason to fear the tightening in global financial conditions following a turn in American monetary policy.

The Fed is adamant that it will keep interest rates low and continue to buy assets until the economy is much healthier. 

Inflation will inevitably rise as a collapse in commodities prices early in the pandemic falls out of comparisons with a year earlier, but the Fed will ignore this. 

Under its new “average inflation targeting” regime, adopted last year, it is seeking to bring about inflation over its 2% target in order to make up for past shortfalls. 

That is particularly desirable because, for much of the past decade, the world economy’s problem has been too little inflation, not too much. 

Even if the economy eventually overheats, Jerome Powell, the Fed’s chairman, has argued that this, too, will be temporary. 

Longer-term inflation dynamics, he argues, “don’t change on a dime”.

Might they, however, turn on trillions of dollars? 

We have no reason to doubt the Fed’s near-terms plans, but neither it nor the markets can predict the eventual outcome of America’s experiment. 

The Fed might have to pour cold water on the economy, raising interest rates to get inflation down. 

That would be awkward, given how much it has recently emphasised its obligation to seek “broad based and inclusive” strength in the jobs market. 

Higher rates would puncture asset markets and might also precipitate conflict with an increasingly indebted government.

All the chips on red

Mr Biden’s stimulus is a big gamble. 

If it pays off, America will avoid the miserable low-inflation, low-rate trap in which Japan and Europe look stuck. Other central banks may copy the Fed’s new target. 

Massive fiscal stimulus may become the normal response to recessions. 

The risk, however, is that America is left with rising debts, an inflation problem and a central bank facing a test of its credibility.

This newspaper would have preferred a smaller stimulus. 

Alas, America’s troubled politics do not permit fine-tuned policymaking and Democrats wanted all they could get. 

Mr Biden’s gamble is better than inaction. 

But nobody should doubt the size of his bet.

Broken Debt

By John Mauldin 

Modern technology is amazing but our ancient forebears built some wondrous things, too. Long-ago historians organized them into “Seven Wonders of the Ancient World.” (Of course, their “world” was the Mediterranean and Middle East. Other wonders existed elsewhere.)

Last week I noted how some call compound interest the Eighth Wonder of the World. Is it really on par with the Colossus of Rhodes? Maybe.

But today the Colossus is gone. So are the Hanging Gardens of Babylon. In fact, six of the seven wonders are now dust, and the Great Pyramid is slowly joining them. Compound interest seems headed in the same direction. Great while it lasted, but nothing lasts forever.

The miracle of compounding happens only when two things occur:

  • First, interest rates are a positive number significantly greater than zero.

That has been less so in recent years, and low inflation expectations are a prime reason. Which brings us to the second thing:

  • Interest rates have to exceed inflation.

There is no positive benefit to compounding interest rates below the rate of inflation. My last letter explained how official government inflation measurements are low in part because our benchmarks distort some important costs like housing. Today I’ll show how the same applies in healthcare.

Then we’ll ask cui bono—who benefits—from persistently low interest rates. The answer is borrowers, which is problematic when the biggest borrowers (the Fed and the US government) of all both control rates and provide the data to justify it. Is it any wonder we have a debt problem? And a lot of the debt comes from healthcare, so it’s all a big circle. The outlook is bad and getting worse.

Of course the market, in the forms of TIPs and similar instruments, projects inflation higher than the government measures. They can’t both be right. We are going to look at broken debt and broken measurements, and then look at how Fed leaders painted themselves into a corner by shifting to a reactive stance this week.

For investors, this is about more than just policy. We could see both rising rates and rising inflation, with the Federal Reserve behind the curve. In fact, with this week’s announcements, I think the Fed is intentionally putting itself behind the curve. I can’t remember one instance where rising inflation and/or rising interest rates were good for the stock market in general.

But let’s start with the measurement dilemma.

Inflated Healthcare

Last week I shared this table, breaking down expense weightings in the two primary inflation benchmarks, Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). Let’s look again, but this time focused on healthcare instead of housing.

Source: Wikipedia

The first thing to notice is a huge difference between CPI and unadjusted PCE. 

This has to do partly with including employer insurance contributions. 

Healthcare is, in most cases, costlier than the consumer actually feels.

According to the Kaiser Family Foundation, in 2020 the average annual premium for employer-provided family healthcare coverage was $21,342. 

Of this, the average worker contribution was $5,588. (Note this is only for the insurance, not any deductibles or copays.) 

Of course, those vary by region, employer size, etc.

This next chart shows the actual total expenditure on healthcare for the last 50 years in the US.

Source: Health System Tracker

Healthcare costs have been rising more than 4% on average every year for the last decade.

Source: Health System Tracker

In CPI and PCE, a substantial part of healthcare spending isn’t captured as such, but is instead diffused in the prices of other goods and services. 

But let’s go back to those premiums. 

Kaiser says the average worker with family healthcare coverage (I know, not all workers have it) pays $5,588 a year in premiums ($465 monthly).

The median two-parent household with children, per Census Bureau data, has an income of $88,149. 

That would mean they spend 6.3% of their income on health insurance premiums—a little more than PCE shows and very close to the CPI medical care weighting. 

But we’re not done.

First, recognize this is median income. 

That means half the family households have income below $88,149, and thus may spend a higher percentage of it on health insurance—potentially a lot more.

More important, workers face deductibles and copays which can be quite significant. Out-of-pocket maximums vary widely, but in 89% of plans are at least $2,000 for single coverage, per KFF. 

So workers with even a mildly sick person in the family can spend a lot more than 6.3%.

The healthcare weightings in both CPI and PCE are probably low, but worse, they don’t necessarily measure the right prices. 

PCE simply assumes Medicare reimbursement rates, which are basically government-dictated price controls. 

Many hospitals and other healthcare providers lose money on Medicare patients and make it up from the higher payments they get from private insurers. (That’s one reason, incidentally, “Medicare for All” ideas might not work. 

Converting the whole industry to Medicare-level payment would put many providers out of business. 

That, or Medicare reimbursement prices would have to rise, significantly increasing the program’s costs.)

But the broader point is that the Fed relies on PCE to measure inflation, and we know PCE significantly understates housing and healthcare costs as experienced by typical families. 

This is one reason Fed officials see little inflation and expect little more in the future, and thus keep interest rates low. 

They encourage and subsidize excessive debt… and the biggest debtor is taking full advantage of it.

Thus when they say they want inflation to average 2%, they’re using a false measure, the equivalent of an 18-inch yardstick (or for my international readers, a 50-cm meter stick.)

Debt Trap

One of my favorite sites is also one of the most terrifying: US National Debt Clock. It has real-time, running tickers showing government debt and literally scores of other related statistics. 

Here’s a screen snap from earlier this week.

Source: US National Debt Clock

The page updates constantly so you’ll see different numbers if you go there now—but they won’t be any better. 

Note that the actual federal budget deficit is $4.5 trillion. 

That is because the off-budget deficit is well over $1 trillion right now. 

But at the end of the year, when the Treasury publishes actual debt numbers, it will show something like a $4.5 trillion actual increase in total debt. 

The market is not fooled by that “official” $3.2 trillion number. 

And since the $1.9 trillion stimulus has just passed, I would expect it to rise over the next few weeks.

Last September in Great Reset Update, I estimated a $50 trillion federal debt by 2030. 

I walked through the steps to explain, as shown in this table:

Note the 2025 row. I expected a $38.7 trillion debt by then, using what I believed (and still do) are quite realistic assumptions. 

Also note, I used the 20-year average for the off-budget deficit. 

That line item can vary significantly, and is clearly doing so this year.

This week I noticed the US Debt Clock has a 2025 projection page, which simply presumes everything continues at today’s rates for four more years. 

It puts the debt at $49.7 trillion in March 2025.

Source: US National Debt Clock

In other words, they project in 2025 roughly the same debt level I thought, as of a few months ago, we would not reach until 2030. 

And people called me a pessimist. 

But I still look pessimistic compared to the CBO and OMB. 

Here is how 2025 will look under their assumptions.

Source: US National Debt Clock

These laughably Pollyanna 2025 numbers are almost here right now

Does anyone see any reason the debt won’t grow considerably in the next four years? 

I sure don’t. 

And I see a bunch of reasons to think the debt growth will accelerate.

We know, for instance, President Biden and congressional Democrats just passed $1.9 trillion in additional pandemic spending, on top of the regular budget and off-budget spending. 

That number doesn’t include the cost of some provisions, like a major expansion in Affordable Care Act subsidies

It is presently authorized only for two years but will likely become permanent, as government programs often do. (Milton Friedman famously used to say that nothing was so permanent as a temporary government program.)

We also know an infrastructure package is probably coming, some of which may be necessary and I actually advocate, but it will further add to the debt. 

If your roof has a hole in it, you have to fix it unless you want to destroy the whole house. 

But that costs money. And we should certainly expect more social spending of various kinds. 

Will we get a bright, shiny, and very expensive Green New Deal? 

None of that fits into the projections yet, and will only make them worse.

The US Debt Clock projection shows a 191% debt-to-GDP ratio in 2025, up from 129% now. 

Is that possible and sustainable? 


Japan’s ratio is even higher. 

But Japan also has very low GDP growth because it is, as Lacy Hunt explains, Caught in a Debt Trap

The US has been following a few years behind. 

We are still on that same course.

Source: MacroMarketsDaily

I am asked all the time how long this can go on. Is there an end in sight? 

The simple and honest answer is that we don’t know. 

The US dollar is the world’s reserve currency. 

Japan is a secondary reserve currency, as is the euro. 

Japan and many European countries, (and strangely, Singapore) are all running debt-to-GDP ratios higher than the US is today. 

This can go on longer than we might think. 

But as we will see, there is a little grumbling among the troops.

The Federal Reserve Trap

This week was a regular Federal Open Market Committee policy meeting. 

At the press conference, Jerome Powell was quite adamant the Federal Reserve won’t raise rates until they see a 3.5% unemployment rate and inflation averaging 2%. 

He was also emphatic that he wanted to see these numbers not just forecasted but as actualized, real results. 

He also made clear they would tolerate the economy “running hot” and inflation above 2% for a period of time. 

They think such inflation would be transitory and not cause to raise rates.

Let’s turn to some notes that my good friend Sam Rines published, after commenting on essentially the same thing at noted above:

That is not a bad thing, but it does have side effects. 

Inflation expectations should continue to creep higher.

There is a bit of a warning embedded in the Fed's message though. 

This growth surge is temporary, the sugar high is not going to last, and the Fed is not going to react to it.

There was no wavering. 

Not even a flinch. 

Any speculation that the Fed would waver from its commitment to not alter its policy until both full employment and inflation above 2% had been realized is dead. 

During the press conference, Powell made a few things exceedingly clear. 

(1) The Fed wants to see realized outcomes not forecasted wishes before raising rates. 

(2) The Fed does not see these outcomes occurring anytime soon. 

(3) The growth surge of 2021 will quickly wane. 

And that is how the Fed choose “winning to lose”.

Powell confirmed that they will continue to buy $80 billion worth of government bonds and $40 billion in mortgage bonds monthly. 

In the actual release they use the words “at least.” 

This gives them room to increase the bond buying. 

I think we will see that policy sooner rather than later. 

Back to Sam…

When asked about tapering QE, Powell said “substantial further progress” toward the dual mandate was needed. 

Critically, there was the promise of giving plenty of forewarning. 

That combination means QE is not going anywhere, anytime soon.

Let me quote some more from Sam as he says it more succinctly than I can:

There are side effects to the Fed’s decision. 

Inflation expectations should remain elevated, particularly the closer years. 

After all, there will be a pick-up in inflation this summer be it ever so brief and due predominantly to “base effects”. 

The Fed is not going to kill the cycle, and inflation expectations should rise. 

There is a difference, though, between the Fed not killing a cycle and inflation actually materializing. 

Inflation expectations are probably ahead of themselves a little. 

But the Fed’s new policy framework acts as a bit of a floor.

Another side effect is the pointing to the longer-term and realized outcomes. 

The Fed is not going to be precautionary. 

The Fed will be reactionary. 

It will be fairly obvious when the Fed begins to think about altering policy. 

By choosing to win the credibility battle, the Fed has lost some of the effects of easy policy by letting longer-term yields move higher.

The Fed’s dot dilemma was resolved. 

There is no dilemma now. 

There is no debate. 

There is no uncertainty left about Fed policy. 

The Fed has chosen its credibility. 

By “winning to lose”, the Fed is saying that forecasts are great but real outcomes are better. 

There will be no pre-emptive tightening of policy. 

The Fed is going to look through the sugar high coming to the US economy this summer—monetary policy will not change because of it.

There is almost no sense in watching the data to get a sense of Fed policy for the foreseeable future. 

Inflation surge this summer? “It is transitory.” 

Unemployment rate falls to 4.5% by the end of 2021? 

“Participation needs to be higher.” 

The Fed is not going anywhere. 

The Fed has the cred, and it is using it.

Far be it from me to disagree with young Sam, who is smarter than I am, but I am not so sure about that Fed credibility. Actual 10-year bond rates are rising. 

This is the bond market telling the Federal Reserve it isn’t comfortable with letting the economy run hot and inflation rise Peter Boockvar sent me this chart this morning:

Source: Peter Boockvar

Fed officials have laid down the gauntlet: They will let inflation rise because it is transitory. No policy change is coming. I think they intend to jawbone the markets, using words to substitute for actions.

In high school, I played the part of Freddy Eynsford-Hill in My Fair Lady, walking the street in front of Eliza Doolittle’s house, seeking to persuade her of his love. 

Her response?

Speak and the world is full of singing,
And I'm winging Higher than the birds.
Touch and my heart begins to crumble,
The heaven's tumble, Darling, and I'm...

Words! Words! Words!
I'm so sick of words!
I get words all day through;
First from him, now from you! Is that all you blighters can do?

Don't talk of stars Burning above; If you're in love,
Show me! Tell me no dreams
Filled with desire. If you're on fire,
Show me! 

This is a massive poker game. 

The market knows the Fed has a strong hand, but doubts the Fed’s willingness to play it. 

The Federal Reserve hopes markets will fold. 

Maybe, if the stock market falls 20% (a real possibility if inflation reaches 3.5% and the 10-year yield exceeds 2% this summer). 

We don’t know yet how much effect the stimulus will have. 

Will recipients save most of it like they did last time? 

Will they put it in stocks? 

Will consumer spending and supply chain problems push prices higher?

The Fed is betting the market will tolerate higher inflation. 

They really are going to try to hold off on raising rates until they get 2% average inflation (which they have not been able to do for a very long time) and 3.5% unemployment, which has only happened twice in the last 60 years.

Source: St. Louis Fed

One of those times was during the Vietnam War, when the draft had a major effect on unemployment. The last was in February 2020. This is a lofty unemployment goal when anything under 4.5% will be remarkable over the coming decade, given the pressures of technology and the changes arising from the pandemic, not to mention losing hundreds of thousands of small businesses. Promising to hold interest rates at the zero-bound waiting for Godot a record unemployment rate is simply irrational.

Let me close by agreeing with my friend Doug Kass:

* Monetary policy is on a collision course—a course that will likely exacerbate wealth and income inequality

* The Fed is off the rails and how—as I have written—this is not visible to most, amazes me

* Despite the consensus bullish response to Powell's comments—both “stonks” and “bonks” could take a hit

* With value stocks extended and growth stocks vulnerable to a higher cost of capital, I remain negative on the market outlook

The next few months could be highly volatile, as the stimulus money hits, and annualized inflation rises due to low annual comparisons. 

Will the bond market vigilantes continue to press the Federal Reserve? 

Especially when they know the measurement of inflation using PCE is bogus? 

If it says 2.5 or 3%, it really means closer to 4%. 

Everyone knows this.

For the time being, we need an inflation bias in our portfolios. 


I’m still in the deflationary camp, unless government spending and QE get completely out of control. 

Stay tuned…

Once Upon a Time a Tenor…

Yes, I really did sing the tenor role in My Fair Lady

I also sang the tenor solos in high school for Handel’s Messiah

I was a tenor with the Fort Worth Opera chorus my senior year. 

I really could hit the high C. 

Because they wanted young faces at the front of the crowd scenes, I stood 10 feet away from Beverly Sills singing her signature performance of the mad scene in Lucia di Lammermoor.

I sang with quartets, choirs, all-male chorales, and more. 

I thoroughly enjoyed singing. 

But in my 40s, I had surgery to remove an 80% blockage to my nasal airway. 

When the bandages were removed a few days later, I breathed through my nose for the first time in my life. 

I had no idea.

Then a few days later, I tried to sing. 

Everything was off. 

I literally could not sing on key, let alone hit the high notes. 

Over time, I became the deep baritone I am today. 

With practice I might once again be able to carry a tune. 

I still have the appreciation, just not the ability to participate.

Oh well, I have no complaints. For a country boy from small-town West Texas, my life has been and is amazing. 

What a long, strange trip it’s been.

A little schedule note: Two weeks ago, I promised a letter on what isn’t broken, namely the incredible new technologies that are not just on the horizon, but here now. 

I’m delaying that as my forthcoming second vaccine has a very small potential to “interrupt” my writing schedule with side effects. 

The technology topic fits better that week since I can write it in advance. 

You have a great week. 

I might spend the weekend listening to a little a cappella music and reminiscing. 

Good times.

Your only singing by himself now analyst,

John Mauldin
Co-Founder, Mauldin Economics

Humanity is a cuckoo in the planetary nest

It has fallen to our generation to take responsibility for the planet and here is how to do it

Martin Wolf

     © James Ferguson

Today, human beings and the livestock we rear for food make up 96 per cent of the mass of all the mammals on the planet. 

Moreover, 70 per cent of all the birds now alive are poultry — mostly the chickens we eat. 

Extinction rates are also thought to be 100 to 1,000 times higher than their background rate over the past tens of millions of years. 

All this is a small part of our overall impact on the planet’s biosphere, the sum of all its ecosystems.

Humanity has become a cuckoo in the planetary nest. 

Our dramatic success in increasing our wealth and numbers has created a new age, sometimes called the “Anthropocene”. 

This label may be an exaggeration. But that our activities are reshaping life on earth is no exaggeration. The question then is this: if we wish to reverse these threats, what must we do and give up?

The remarkable facts noted above come from the foreword by David Attenborough to a definitive study of the economics of biodiversity, by Sir Partha Dasgupta of Cambridge university. 

It is no longer possible, Dasgupta argues, to exclude nature from our economic analysis. 

As his review states soberly: “At their core, the problems we face today are no different from those our ancestors faced: how to find a balance between what we take from the biosphere and what we leave behind for our descendants. 

But while our distant ancestors were incapable of affecting the earth system as a whole, we are not only able to do that, we are doing it.”

In a fascinating recent lecture on “Techno-optimism, behaviour change and planetary boundaries”, the British economist Lord Adair Turner tackles head on the question of how best to manage the challenges. 

He notes two alternative approaches. 

One, which I would call “Onward and Upward”, rests on faith that human ingenuity will find a way to solve problems created by human ingenuity. 

The other, which I call “Repent, For the End is Nigh” rests on the conviction that we must abandon all our greedy ways if we are to survive.

Helpfully, Turner transforms these contradictory attitudes into empirical questions: what will work, and over what time horizon? 

In answering them, he distinguishes physical from biological systems. 

The former are the ones that provide us with work, heat and cooling. 

The big challenge here is our dependence on fossilised sunlight, in the form of fossil fuels and their emissions of greenhouse gases. 

The latter supply us with the food we eat, as well as some textiles. 

The sun, water, minerals and the atmosphere are, needless to say, essential to life. 

But the transformation of these inputs into life itself involves biochemistry — the production of complex molecules by life itself.

Making Mission Possible: Delivering a Net-Zero Economy, published by the Energy Transitions Commission in September 2020, lays out, Turner notes, a plausible passage to net zero emissions by 2050. 

At its core is a shift towards reliance on incident sunlight and wind, in the form of solar- and wind-generated electricity. 

This will be combined with batteries, hydrogen and other forms of storage, as well as a role for bioenergy and carbon capture in the medium run. 

Thanks to the collapse in cost of renewable energy, this transition is now both feasible and cheap. 

A few sectors, such as iron and steel, will be expensive to transform. But they are not large enough to change the big picture.

In brief, the physics of the energy transition is simple. 

The difficulty is shortage of time. 

We need to make large progress towards lower emissions over the next decade. 

But we cannot renew our entire infrastructure in so brief a period. 

So, in the short run, many will need to constrain their consumption. But, over the long run, the techno-optimists will be proved right on the energy transition.

Unfortunately, they are not (yet) right about the food transition. 

The problem is not the energy we need for food, which is just 6 per cent of total human non-food energy use. 

The problem is that photosynthesis and the conversion of plants into meat by animals are energy inefficient. 

So, biochemistry explains why humanity has had to take over so much of the planet. 

It takes huge areas of the solar receptors called plants to produce enough food and agriculture also emits large amounts of greenhouse gases.

Turner suggests a mixture of three solutions to this huge problem. 

The first is big improvements in agricultural practice. 

We are, for example, ruining land and replacing it with new land taken from other uses. 

Genetic engineering will surely play a part here. 

The second is changes in diet, especially away from meat and dairy. 

The third is radical changes in technology, ultimately turning the production of food into just another industrial process.

We are, in sum, at a historic juncture. 

It has fallen to our generation to take responsibility for the planet as a whole. 

There is no question that much of the response must be well-directed technological change, since no conceivable political process, least of all a democratic one, will meet these challenges by reversing two centuries of increased energy use. 

Humanity will not go back to its premodern existence, where life was nasty, brutish and short for almost all. 

But, given where we are now, in terms of our impact on the biosphere, we will also have to change our behaviour, at least over the short to medium run.

Whether it will be possible to agree and implement so radical a course correction is, to put it mildly, open to question. 

So far, we have shown next to no ability to resolve this huge challenge to collective action. 

But the need is obvious. 

We must not go on behaving as we have been. 

Many of us will need to change our behaviour and the richest among us will have to change most.

Who Needs a Digital Dollar?

Recently, the idea of a digital greenback elicited support from US Treasury Secretary Janet Yellen and Federal Reserve Chair Jay Powell. Ultimately, the advantages of a digital dollar will need to be weighed against the potentially high costs and significant risks to the financial system that come with it.

Barry Eichengreen

BERKELEY – The idea of a digital dollar has been in the air for some time now. 

Recently, it descended from the ether to the lips of US Treasury Secretary Janet Yellen and Federal Reserve Chair Jay Powell. 

At an event in February, Yellen flagged the idea as “absolutely worth looking at,” adding that the Federal Reserve Bank of Boston, in conjunction with academics at MIT, was already doing so. 

In Congressional testimony the following day, Powell called a digital dollar “a high priority project for us.”

Some see this as another front in the technological cold war between the United States and China. 

The People’s Bank of China (PBOC) will almost certainly be the first major central bank to roll out a digital currency, in 2022 at the latest. 

If the US doesn’t move quickly, it will fall behind. 

America’s financial system will remain stuck in the twentieth century, damaging US competitiveness. 

The dollar’s position as the dominant international currency will be eroded by the ease of using China’s digital unit in cross-border transactions, and the US will squander a singular source of monetary and financial leverage.

In fact, such concerns are either overblown or flat-out wrong. 

The PBOC’s main motivation for issuing a digital renminbi is to create a government-controlled alternative to two very large and loosely regulated digital payment platforms, Alipay and WeChat Pay.

The ubiquity of Alipay and WeChat Pay raises the specter of the Chinese authorities losing control of payment flows through the economy. 

And because they use information on payments to inform their lending activities, their pervasiveness points to the possibility of the authorities losing control of financial flows and credit allocation more generally. 

Thus, the PBOC’s determination to issue a digital currency is part and parcel of the Chinese government’s decision last November to quash the initial public offering of Ant Group, Alipay’s corporate parent.

The American government has no analogous worries. 

In the US, scores of different platforms, such as PayPal, Stripe, and Square carry out digital payments, which are ultimately settled by banks, and hence through Fedwire, the Federal Reserve’s in-house system for clearing interbank transactions. 

Visa, Mastercard, Discover, and American Express process the lion’s share of card-based payments, but their actual cards are issued by banks, which are regulated, limiting risks to the payments and financial system. 

Here, too, settlement occurs through Fedwire.

Similarly, it is important to bear in mind how far the renminbi lags behind the greenback as an international currency. 

Currently, China’s currency accounts for a mere 2% of global cross-border payments, a negligible share compared to the dollar’s 38%.

To be sure, the convenience of a digital renminbi would hasten its uptake in cross-border transactions. 

But that digital currency might also have a hidden backdoor, enabling Chinese authorities to track transactions and identify those undertaking them, discouraging use by third parties. 

Given this, it’s hard to see China’s digital currency as a game changer internationally.

So, the decision to create a digital dollar would have to be justified on other grounds. 

The soundest justification is financial inclusion. 

Americans without credit cards and bank accounts, who rely entirely on cash, are denied not just financial services but other services as well. 

Rideshare companies ask you to link your app to your credit or debit card; no card, no pick-up. 

And no bank account, no card.

In this context, recall the difficulty the US Treasury had in getting pandemic relief checks to the unbanked. 

If everyone had a Federal Reserve-issued electronic wallet into which digital dollars could be deposited, this problem would be solved.

Digital dollars could also address the exorbitant cost of cross-border money transfers. 

But foreign governments might be reluctant to permit their nationals to install the Fed’s digital wallet, because that would leave them and their central banks unable to enforce their capital controls, which they value as macroprudential tools.

Alternatively, the Fed’s digital wallet could be made interoperable with foreign digital wallets. 

But interoperability would require close cooperation between central banks on the details of technology and security. 

While there are efforts in this direction, making it work would be a daunting task, to say the least.

Ultimately, such advantages should be weighed against the costs and risks of digitizing the dollar. 

If people shift their savings from banks to digital wallets, banks’ ability to lend will be hamstrung. 

Some banks will close, and small businesses that rely on banks for credit will have to look elsewhere.

Moreover, a Fed-run network of retail payments would be a rich target for hackers and digital terrorists. 

Security and financial stability are of the essence, and it is not obvious that they can be guaranteed. 

All this is to say that while the case for a digital dollar may be worthy of examination by Yellen and Powell, it is hardly a slam-dunk.

Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era.  

Sputnik vaccine developers hit out at EU commissioner over ‘bias’

Thierry Breton said the bloc had ‘absolutely no need’ for Russian-made jab

Henry Foy in Moscow, Michael Peel in Brussels and Victor Mallet in Paris

Russia has sought to promote exports of Sputnik V to EU countries over the past two months © Bloomberg

Moscow has accused Brussels of “bias” against its Covid-19 vaccine, after the EU’s internal market commissioner Thierry Breton said the bloc had “absolutely no need” to use the jab.

“Commissioner [Thierry Breton] is clearly biased against the Sputnik V vaccine just because it is Russian,” Sputnik V’s developers said in a post on Twitter. “We hope that facts will help [him] to have less hubris and be less biased.

“Biases lead to failures. And Breton’s failures are clear to many people in EU,” they added.

The barbed exchanges came as President Vladimir Putin announced that he would himself be receiving the jab on Tuesday. The Kremlin has since December insisted that Putin intended to be vaccinated, but has given no reasons for the delay.

Hitting back at criticism of Sputnik V, Putin said: “Despite the deliberate discrediting of our vaccine, various misinformation, sometimes outright fables, more and more countries around the world are showing interest in our vaccine.”

Sputnik V’s developers said increasing numbers of EU member states had begun discussions over acquiring or manufacturing the jab, which is yet to be approved by the European Medicines Agency.

A close aide of Breton accused Sputnik’s makers of “pressuring EU officials” and claimed the vaccine would not be available in large quantities until at least next year.

In a subtweet of the Sputnik vaccine’s Twitter post Terence Zakka, Breton’s communication adviser wrote: “Sputnik V pressuring EU officials. The EU already has a full portfolio of safe vaccines and production is ramping up. If EMA approves the Sputnik V vaccines, doses will not be available at large scale before 2022 at the earliest. It’s a fact — not a bias.”

Relations between Moscow and Brussels have sunk to historic lows following the jailing of Russian opposition activist Alexei Navalny last month and the humiliation of the EU’s foreign policy chief Josep Borrell on a visit to Moscow shortly after, during which three diplomats from EU states were ordered to leave the country.

The use of Sputnik V has become a controversial issue in the EU, after Hungary and Slovakia issued emergency approval for the jab, bypassing the EMA. A number of EU states are exploring other vaccine supply options because of a first-quarter squeeze, in part because of a big delivery shortfall for the Oxford/AstraZeneca jab.

Breton told TF1 television on Sunday evening that the EU needed to give “priority to vaccines made on European soil” and said the Russians were having production problems for Sputnik V, which the EU could help with in the second quarter if required. 

Alexander Grushko, Russia’s deputy foreign minister, told the country’s parliament on Monday that Sputnik V “has faced a campaign of misinformation, discrimination, and demonstrative disregard by European institutions”.

“Attempts to prevent the use of Sputnik V on the territory of the European Union continue, political statements are being made that cannot be interpreted otherwise than purely politicised,” added Grushko, who is responsible for relations with European countries.

Moscow has sought to promote exports of Sputnik V to EU countries over the past two months, alongside striking supply deals with dozens of governments around the world.

Sputnik V’s developers said Breton’s comments would pressure member states to approve the Russian jab individually and not wait for approval from the EMA. “[Breton] believes all is great with EU vaccinations and Sputnik V is not needed. Are Europeans happy with Breton’s vaccination approach?” the tweet said.

Breton said the acute shortages of vaccine doses in the EU would soon be over. “We won’t lack for vaccines, they will be there very soon,” he said. “Today we clearly have in our grasp the capacity to deliver 300m-350m doses between now and the end of June . . . We have the possibility of reaching immunity at the level of the continent.” 

The priority, he added, was to “produce these vaccines en masse and administer them en masse”.