Tiny Housing Bubbles

By John Mauldin 


Recently I searched the Thoughts from the Frontline archives to see how often I used the word “bubble.” 

It was more than I thought, and I wasn’t quoting Don Ho. 

The bubbles I talked about were anything but tiny. Most of them subsequently popped, too.

For most people, buying a home is the biggest single purchase they ever make. 

It continues to represent the largest part of their net worth It is also the most leverage most people ever take on. 

The risk of loss is very high if you have little equity in the home and need to sell it.

Housing has other effects on the economy, too. 

Booming home values contribute to a “wealth effect” that increases consumer confidence, making people spend more freely. 

Some homeowners tap their equity to finance other purchases. 

Some of it finds its way into the stock market. 

The industries that feed on all this—construction, building materials, mortgages, title companies, real estate agents, etc.—are huge employers.

All of which says the housing sector is far more important than many realize. 

They notice only when it falls apart. 

Today home prices are being compared to the pre-2008 period, which was clearly a bubble that ended painfully for many. 

Are we setting up for the same again?

I don’t think so. 

Yes, the housing market is a bit overheated, but for reasons that make far more sense than the rationalizations of stock market bulls. 

Some buyers are certainly overpaying and may regret it. 

Nonetheless, I don’t foresee another 2008-style housing crash in the near future, nor anything like the subprime crisis. 

There are altogether different fundamentals working here.

Manic Behavior

Let’s start with the obvious: The single-family home market is crazy hot right now. Many Americans want to relocate, for various reasons, and they outnumber the quantity of homes for sale. 

No surprise, the market responds with higher prices—sometimes far higher than seems justifiable.

On the other hand, basic economics says the “fair” price is the intersection of the amount the marginal buyer is willing to pay, and the amount the seller is willing to accept. 

Whatever the rest of us think isn’t part of that equation. 

It is somewhat murkier in housing because every product is one of a kind, based on its location, size, condition, and so on. 

Houses aren’t like shares of a company’s stock, all of which have identical characteristics and thus identical value.

But in the current atmosphere, some houses are selling in a kind of frenzy that resembles a crazy day in the stock market. Here’s one example, via Business Insider.

A California home received 122 offers in a single weekend amid a skyrocketing US real estate market.

The 1,400-square-foot home—located in Citrus Heights, California, a suburb of Sacramento—was listed at $399,900. It spans 1,400 square feet and has three bedrooms, two bathrooms, and a swimming pool, according to a report from KTXL, the local Fox affiliate.

The house received 122 offers in two days, including one above $500,000, and has since been sold for an undisclosed amount—KTXL reports the selling price was "in the mid-$400,000 range."


If you’ve ever sold your home and waited weeks (I’ve had to wait months before) to get even one offer, the thought of 122 offers in two days is hard to process. 

I would probably be kicking myself for not asking even more. 

But this is happening all over the US.

The pandemic and its associated fear triggered a frenzy, at first with wealthy city-dwellers wanting to get away from the same crowds that attracted them to urban life. 

Then, as companies let more of their staff work from home, people realized they could now live far from the office, in whatever location suited their desires. 

So, we have a kind of giant card-shuffling underway as millions reorganize their lives.

This will end, but for now it’s a flurry of activity. 

Some people are making mistakes in their haste. 

They buy houses requiring unanticipated repairs, or they move someplace that seemed nice then find it lacks what they wanted. 

That is unfortunately what happens when you get in a hurry. 

It’s unpleasant and maybe expensive for those affected, but the systemic effects probably aren’t great. 

Damage to the person who overpaid is offset by extra spending from the seller who got a windfall.

The bigger problem occurs when this activity sets up a price correction big enough to trigger a “negative wealth effect” that reduces consumer spending. Is that likely? 

Dave Rosenberg thinks so. 

These charts are from his March 31 morning letter.


Source: Haver Analytics & Rosenberg Research

Dave notes that all ratios are mean-reverting, and extremes like these tend not to continue. 

He went on:

If the home price to CPI, to rent and to wage ratios ever did mean revert, which Bob Farrell’s Rule #1 says they will, we would be talking about a 20% decline in average home prices nationwide. 

Maybe the catalyst will come from bond yields to mortgage rates, as was the case the last time around. 

Remember—the home price erosion was happening as oil prices made their move above $100 per barrel and were on the way to a $150 per barrel peak. 

You tell me which of the two price movements exerted a more dramatic and lasting impact on the economy, inflation, and the markets.

The US household sector is exposed to residential real estate to the tune of $32 trillion. 

Tracing through the negative wealth effect on spending would shave $400 billion, or close to 3%, from consumption right there (and cut by half the stimulus right now being directed to the personal sector—the thing is, any mean-reversion here on residential real estate would have far more lasting effects than the short-term fiscal relief, which has little more than a three-month shelf life).

Is that kind of price correction likely? 

Maybe. 

But there’s more to this story. 

And while I agree that mean reversion is a real phenomenon, the data that we are going to examine suggests it may take quite some time for that mean reversion to come about, and may not be as dramatic as if it were all that happened in 2021/22.

Shrinking Inventory

When I write about specialized topics like real estate, I look for experts. 

Fortunately, I know quite a few of them, and no one knows more about housing and mortgages than Barry and Dan Habib of MBS Highway. (Definitely check it out if you are in that industry.) I first met Barry around 2006, and he became part of my regular New York dinner crowd. 

And he quickly became my go-to source on housing market questions. 

He is a three-time winner of the Zillow/Pulsenomics Crystal Ball, awarded to the most accurate real estate trend forecaster, with three out of the last five years and the last two in a row. 

Barry and Dan know this market cold.

So, this week we had a phone call, which turned into a Zoom call so we could go through a dizzying array of charts. 

The amount of data they track is staggering. 

Even more impressive is the way they can distill it into useful conclusions.

The bottom line is this: Looking at big-picture supply and demand factors, this housing bubble isn’t a bubble at all. 

Yes, it’s overheated in some places, but housing trends move in slow-motion compared to stocks. 

That makes it critical to look at long-term data and ignore the monthly/quarterly noise.

The first thing Barry explained is that housing “supply” isn’t the number of houses, but the number of houses for sale

When that number is low relative to the number of prospective buyers, prices rise.

You might think the US, being a dynamic if slow-growing economy the last decade, would have plenty of homes available. 

Not so. Inventory has actually been dropping for years.


Source: MBS Highway


The single-family home for sale inventory peaked in 2007 and has fallen sharply since then, despite a growing population and economy. 

Other things being equal, that alone would probably push prices much higher. 

But all else wasn’t equal. 

In early 2020 the world went upside down as the pandemic struck and much of the economy came to a near standstill. 

In many places, that included home construction.


Source: MBS Highway


This wasn’t just because shutdown orders made contractors stop work. Even in places where construction continued, material and labor shortages slowed progress. 

The industry, which was already operating at a slower pace than in the past, basically lost about six months’ worth of production in 2020. 

Higher existing home listings simply couldn’t replace that lost inventory.

Material shortages were a factor, too, particular lumber. Back when I was younger and actually did work around the home, I remember buying plywood sheets for under $10. 

It was still in that range as recently as 2018. 

Last Saturday a friend was telling me about expanding his garage in New Orleans. 

He is paying $87.50 for a 4 x 8 sheet of 5/8 inch plywood. 

Ouch! 

He says it has now become the Garage Mahal.

Lumber prices have tripled from just a few years ago, if you can get it. 

This all pushes construction costs higher, which further reduces supply.


Source: Trading Economics


So, the supply part of the equation was  already tilted and the pandemic made it more so. 

That’s why those ratios in Dave Rosenberg’s charts above were rising so steadily in recent years. Prices should rise if supply contracts, as long as demand remains at least steady.

But demand hasn’t been steady. 

It is booming. 

And it’s not just the pandemic.

Millennial Demand

The key factor in housing demand is household formation.

Single people tend to live in apartments or rental homes. 

They turn into homebuyers when they think about having children, because they need more space and stability.

The age at which this happens has been remarkably steady around 33. 

See the pink line in this chart from Bloomberg.


Source: Bloomberg


As Barry and Dan Habib point out, this means the number of 33-year-old Americans is crucial to housing demand, particularly at the less-expensive starter home end of the market. 

More people of that age mean more homebuyers, and vice versa. 

Of course, they have a chart to prove it.


Source: MBS Highway


In other words, to gauge housing demand in any given year, look at birth rates 33 years earlier. 

As the chart shows, the number of births fell quite a bit for several years beginning in 1973. 

That meant fewer 33-year-old first-time homebuyers in 2006 and several years afterward. 

It is not coincidence the housing market ran into trouble about that time, though other factors (like easy credit for people who wanted to flip houses) contributed as well.

Today we have a different situation. 

Those who are 33 now were born in 1987 and 1988. 

At that point, births had been rising since the 1970s low and would accelerate further for a few more years. 

That’s why the last few years saw heavy demand from first-time buyers, and why it should continue a while longer. 

If you look at the graph you can see there’s another three or four years of rising demographics, then a fairly slow decline.

Now add to this the retiring Baby Boomers who also want smaller homes as they enter downsizing mode. 

As I wrote earlier, many people are looking to move to different locations as they are able to work from home much of the time. 

We have sharply rising demand combined with sharply lower supply. 

Of course, home prices have been rising. 

They can hardly do otherwise.

But can the Millennials afford houses without higher wages? 

Barry had a point there, too. 

It’s really simple math. 

Say home prices rise 10% and wages rise only 2%. 

Houses are now less affordable, right? 

Not exactly. 

The key is that your house payment isn’t your entire income.

Say you are considering a home purchase and the mortgage payment will be $1,000. 

Your monthly income is $5,000. 

That’s 20% of your income, which is fairly typical.

If the home price is 10% higher and mortgage rates stay the same, the payment would go up to $1,100. 

If your wages rise 2%, you would be making $5,100 a month. 

Your income rose enough to pay for the higher-priced home. 

Houses can stay affordable even if wages rise more slowly than home prices. 

Not indefinitely so, but for a while.

Now, we may have a problem if mortgage rates keep rising, as they have recently.


Source: FRED


This is a potential problem for housing. 

But it depends on Treasury yields, which I feel relatively confident that the Federal Reserve will not allow to rise much more. 

What exactly they will do is anyone’s guess. 

Some kind of yield curve control is a good bet as the federal debt spirals higher. 

It will likely come in the form of more quantitative easing and an Operation Twist situation where they start buying longer-dated bonds. 

They have little choice.

Intended or not, the policies that bail out our government should also serve to cap mortgage rates at historically low levels. 

That’s another bullish factor for home prices.

All that to say, housing may look like a bubble, but it’s only a tiny one. Our real problems are elsewhere.

Some Thoughts on Inflation

In the middle of our conversation on housing, Barry, Dan, and I began to talk about the effects of inflation on mortgage rates. 

I have noted before that the comparisons from one year ago beginning in March/April will make “headline inflation” appear to be soaring in the next few months. 

That is because we had very low inflation this time last year, and prices are rising on many items across the board. 

Barry agreed and showed me his own estimated inflation chart.


Source: MBS Highway


Note that annual core inflation was just 1.3% a few months ago. 

Inflation is roughly rising 0.2% a month, which is a reasonable base assumption. 

If that is the case, we should see 1.5% inflation in March (reported in April). 

But it will quickly rise to 2.1% and then 2.4% in April and May, at that relatively benign 0.2% assumption.

I have smart and talented friends who believe the base assumption should be higher for the next six months. 

I would not be surprised to see a 3% inflation number. 

Jerome Powell and other Federal Reserve officials will tell us the number is transitory, and I would generally agree. 

As we go back to normal, as supply chains actually get fixed, I expect the inflation numbers to go down. 

Further, one year from now the comparisons will be from a much higher base so it is likely that inflation will once again be below 2%.

For whatever reason, and I think it’s a silly reason, the Federal Reserve wants to keep rates low until we get back to 3.5% unemployment. 

That is a number we have only seen twice in the past 60 years, once during the Vietnam War when we had half a million soldiers out of the workforce and again at the end of 2019. 

Try as I might, I cannot see the linkage between financial repression with low rates and the unemployment rate again reaching an all-time low. 

I would much rather have stable pricing and some actual coupon return on my bond investments.

The standard 60/40 (stocks to bonds) portfolio is broken because bonds are broken. 

Look at this chart from Ray Dalio courtesy of my friend Steve Blumenthal of CMG. 

We literally have negative real rates in the bond markets and many institutional bond funds. 

The bond part of the 60/40 strategy was supposed to reduce volatility and provide income. 

When rates are rising it’s actually costing you money. 

If you own a 10-year Treasury fund, you are down about 6% this year. 

At a 1.7% yield, it will take the over three years just to get back to breakeven and that’s assuming that yields don’t rise even more. 

Bonds are not providing either the income nor the volatility hedge. 

Traditional passive 60/40 investing is dead.

There are places you can find income in the private markets, but those don’t show up in ETFs or mutual funds. 

There are reasonably good funds with trading strategies that produce bond-like characteristics. 

Again, not the traditional choice for most investment advisors.


Source: Steve Blumenthal


The Federal Reserve is forcing investors to move out the risk curve to generate income from their portfolios that they spent decades accumulating, hoping for enough to live on. 

For Boomers and people looking to retire in the next 10 years, this is an absolutely insane policy. 

But that is a topic for another letter and for the upcoming SIC.

I Can’t Wait to Get on the Road Again

Mauldin Economics readers have already signaled major interest in signing up for the SIC 2021, which again is all-virtual this year, for your safety and convenience. 

I cannot tell you how delighted I am to see this level of enthusiasm.

The SIC 2021 is less than a month away now (May 5–14), and we’ll reveal the full list of our blue-ribbon faculty next week. 

We’re almost done confirming speakers, and I think you will be very, very pleased. 

This is easily the finest lineup we’ve ever had. 

If you haven’t yet, you can watch my welcome video with more details here

This is also where you can pre-order your own SIC 2021 Pass at a substantial discount. 

Trust me. 

You are not going to want to miss this event.

Interesting factoid on Barry Habib: Aside from being a mortgage and real estate whiz, he’s an accomplished Broadway and film producer. 

You may have enjoyed his Rock of Ages

My sources are both brilliant and versatile.

Speaking of show business, Willie Nelson’s classic song, “On the Road Again” has been running through my mind the past few weeks.

While I might not make music with my friends, I do have wonderful times and miss it. 

Some of my business partners are coming to Puerto Rico for a planning session at the beginning of May, then the SIC. 

It looks like I will be in Palm Beach near the end of May, and I hope to get to New York City soon after and then Maine in August. 

Other places and friends are calling my name as well. 

For what it’s worth, I had almost no reaction to my two vaccine shots except a sore arm.

And with that, I will hit the send button, and wish you a great week. 

Stay safe and stay in touch by following me on Twitter.

Your looking forward to seeing old and new friends over dinner analyst,



John Mauldin
Co-Founder, Mauldin Economics


Fiscal Wrecktitude

Why Joe Biden isn’t afraid of debt any more

Donald Trump and the covid pandemic have changed the politics of spending big



IN 1993, WHEN Bill Clinton held his first full press conference as president, the national debt stood at 63% of GDP, and America was in a recession. 

He took pains in his opening remarks to emphasise that he would cut the deficit before he spoke about any plans to stimulate the economy.

In 2009, when the next Democratic president, Barack Obama, held his first press conference, the public debt was 77% of GDP, and America was reeling from the Great Recession. 

Before taking a question, he also tried to pre-empt criticism of his spending plans, arguing that “doing a little or nothing at all will result in even greater deficits”.

Today, as spending has spiked and the economy has faltered, the debt stands above $27trn, or around 130% of GDP. 

The federal deficit tripled last year to more than $3trn. America is once again trying to kick-start its economy, this time with a fiscal jolt of $1.9trn, far more than Messrs Clinton or Obama dared. 

And yet when Joe Biden held his first press conference as president on March 25th, he felt no need to mention deficits at all. 

After some 38 minutes, unbidden, he brought up the cost of his stimulus plan, but only to mock Republican officials’ newfound concerns about it as hypocritical, given their support for Donald Trump’s tax cuts. 

“I love the fact that they found this whole idea of concern about the federal budget,” he said. “It’s kind of amazing.”

Mr Biden sketched out his next mammoth initiative, a plan to invest in infrastructure that could reportedly cost as much as $3trn. 

No reporter asked about any of this spending, much less how it might be paid for.

It is difficult to overstate how diminished the once-potent politics of deficit spending have become. 

Persistently low interest rates have eased many economists’ fears about the danger of public debt, once an obsession of office-holders, candidates, press and policy wonks alike. 

Just a few years ago cutting the deficit seemed virtuous, generating bipartisan murmurs of solemn approbation. 

Now, among Democrats, it elicits little more than a roll of the eyes as a dumb if not immoral custom of a blinkered era. 

From Congresswoman Alexandria Ocasio-Cortez to the economic advisers around Mr Biden, influential Democrats worry instead about not spending enough to confront an array of problems, be they rusting bridges or warming oceans. 

“When did billions become trillions?” asks Maya MacGuineas, president of the Committee for a Responsible Budget, who for many years has warned of the long-term dangers of rising deficits. 

“It seems like just a minute ago we were worried about borrowing an additional $10bn.”

Mr Biden has the public on his side. 

Pollsters report strong support for his stimulus spending and minimal concern about debt. 

In the latest Gallup survey, just 3% of respondents cited the debt or deficit as the most important problem facing the country. 

“Republicans don’t care, Democrats don’t care—nobody cares,” said Frank Luntz, a Republican pollster. “We assume that somebody else will pay for it.”

Low interest rates have kept down the cost of servicing the public debt, though at about $300bn annually it is still far more than the federal government spends on housing the poor. 

Based on the current debt, before any spending on infrastructure, an increase of one percentage point in interest rates would increase interest payments by another $300bn this year, according to the Committee for a Responsible Budget.

 Progressive politicians favour increasing taxes to reduce income inequality, and Mr Biden is reported to be considering tax increases to offset the cost of his infrastructure plan, including raising taxes on corporations and the very wealthy. 

But such changes are certain to be fought by Republicans and are unlikely to pay for the whole plan. Supporters of Mr Biden argue that investments in infrastructure will pay for themselves over time through increased growth.

For decades Mr Biden was a deficit hawk. Like Mr Clinton, he was part of a rising generation of “New Democrats” seeking to escape the image of spendthrift liberals that Republicans had successfully attached to their party. 

As far back as 1984 (federal debt: 37% of GDP) he supported a freeze on all federal spending to deal with what he called the “runaway deficits” of Ronald Reagan’s administration. 

“Within the next 12 to 18 months this country will face an economic and political crisis of extraordinary proportions if Congress refuses to take decisive action on the deficits we face,” he warned, wrongly, as it turned out.

Despite Reagan’s false piety about the deficit—it ballooned under him and his successor, George H.W. Bush—Democrats continued to labour under public suspicion as the party of big spending. 

In 1996, when Gallup found that Americans considered the deficit to be the biggest problem facing the country, Mr Clinton promised in his state-of-the-union address to balance the budget and declared, “The era of big government is over.”

Mr Clinton went on to deliver four surpluses in a row while creating a health-insurance programme for poor children—a combination considered a triumph on the left until recently. 

His aides projected surpluses “as far as the eye can see”. 

But these surpluses were vaporised by a market crash, the attacks of 9/11 and the wars that followed, and tax cuts under George W. Bush.


And yet Mr Obama felt the same pressure Mr Clinton did. Barely a month into his presidency he convened a “Fiscal Responsibility Summit”. 

It was opened by his vice-president, Mr Biden, who saw “a real opportunity to both put our economy back on track and restore fiscal responsibility”. 

Under Mr Obama the deficit fell by more than half, measured against the high baseline set by the extraordinary spending during the financial crisis.

Then came the Trump tax cuts, sold on promises they would pay for themselves through increased growth. 

Like Mr Trump’s campaign promise to wipe out deficits and then pay down the debt within eight years, that result did not materialise. 

And Republican senators who had seemed sincere in their commitment to deficit reduction supported the tax bill. 

In the eyes of independent analysts, this was a breaking point for centrist Democratic legislators, who concluded Republicans were truly interested in deficit reduction only as a political cudgel. 

“You know what I call the Republicans?” asks Rahm Emanuel, who served as a policy adviser to Mr Clinton and chief of staff to Mr Obama. “Seasonal deficit hawks. 

They come around every fall when a Democrat wins.”

Now the era of big government being over appears, itself, to be over.

Russia’s Economy: Surviving but Not Thriving

Moscow has not solved its structural problems, and the scale of its informal economy won’t help.

By: Ekaterina Zolotova


The Russian economy has ostensibly avoided disaster during a difficult year in which it faced the threat of new sanctions, dramatic fluctuations in oil prices and pandemic-induced restrictions on economic activity. 

Exports and investment inflows fell, but output as a whole was better than expected and better than in several other developed countries. 

The numbers raise questions about the Russian economy’s resilience to external pressure, and whether reforms are reducing the state’s dependence on revenues from energy exports. 

But although this looks like good news for Russia, the official statistics don’t cover every aspect of life in Russia. Beneath the surface, the picture is graver than it appears.

Surviving COVID-19

The Kremlin has certainly suffered a series of setbacks during the pandemic. Gross domestic product fell by 3.1 percent in 2020 according to preliminary estimates, the largest drop since the 2009 crisis. 

The federal budget deficit grew to 3.8 percent, or 4.1 trillion rubles ($54 billion). Foreign direct investment fell to levels last seen in the traumatic 1990s. 

Energy exports – traditionally the most important aspect of the Russian economy, accounting for more than 60 percent of all exports – hit a 20-year low, making up only half of exports. 

The energy sector is the main source of money for Russia’s economic and social programs, but in 2020 it accounted for only 30 percent of the contributions to the federal budget, down from 40 percent in 2019.



At the same time, the Kremlin kept unemployment and inflation largely stable. 

It spent an estimated 4.5 percent of GDP on coronavirus relief, and the Russian tax service may actually collect 2.5 percent more in taxes and fees in 2020 than in 2019, despite a tax deferment scheme. 

The decline in energy exports was partially offset by a rise in exports of precious metals and especially agricultural products and foodstuffs, which increased by 20 percent by both value and volume compared to 2019.

And contrary to concerns that the price of oil is not sufficient to form a cushion in the National Wealth Fund, in January 2021 the fund reached $183.36 billion, or 11.7 percent of GDP, which is enough not only to cover the budget deficit for several years but even to support national projects and periodic social assistance.

The Russian economy’s unexpected resilience even in the face of reduced oil cash flows raises a number of questions. 

Is Russia less dependent on the oil and gas trade than we thought? 

Has the state’s attempted transformation of the economy in recent decades succeeded? 

The answer in both cases is no. 

The Russian economy still relies on revenues from oil and gas exports, and the federal budget is still funded mainly through taxes on oil and gas extraction and sales. 

What’s more, there are a number of microeconomic indicators, many of which don’t factor into the official statistics, that give a more complete picture of the economic situation.

Potemkin Village

A significant amount of Russia’s economic activity is hidden in the shadow economy, which is not included in real GDP, real wages and other important statistics. 

According to the federal statistics office, Russia’s informal economy is valued at as much as a fifth of its official GDP (other sources say it’s 40 percent or more), and so-called envelope wages may be 30 percent of official wage bill. 

Almost half of the Russian labor force, or about 33 million people, is employed in the gray market. The largest share of informal production is in real estate, agriculture, trade and construction, and about 40 percent of transactions for services are carried out without proper registration. 

The Kremlin is creating small taxes on the self-employed and is offering incentives to try to tax these hidden incomes, but with little result.

Some experts say the lockdown was especially damaging for the shadow economy, since those in the informal sector were excluded from state income support, but we tend to disagree. 

During the height of the lockdowns in Russia, the informal economy was the only part of the economy that was still operating, especially in Moscow. 

Hair salons, tutors, doctors and others in the shadow economy just switched to working from home. 

Even those with official employment who saw their wages or hours cut rejoiced at any part-time work, even if it was unofficial. By definition, the size of the informal economy is impossible to pin down, but in Russia it is certainly huge, and it feeds a lot of families in both the good times and the bad.

Another underappreciated aspect of Russia’s economic performance is the undervalued ruble. 

The government and the central bank have been pursuing a policy of artificial devaluation for the past year and a half, during which the ruble fell by almost 20 percent against the dollar. 

The ruble, despite the government’s efforts, remains dependent on oil prices – though less than it used to. 

In the event of negative trends in the global economy, the Russian government and central bank try to push the ruble down against the dollar so that commodity exporters can compensate for their lost income, which in turn means Russia continues to receive good income from taxes on energy giants even when demand is down. 

Right now, with oil at more than $60 per barrel, Russia decided to continue this policy to make up for the losses from low demand. 


Road to Recovery

But neither a bloated shadow economy nor an undervalued ruble will lead to recovery. 

The artificially depressed ruble means higher consumer prices, lower consumption and a general decline in living standards. 

This only exacerbates the poverty gap in Russia, where 34.4 percent of young households with children already have incomes below the subsistence level, and where almost every other child (49.4 percent) lives below the poverty line. 

This trend only encourages more people to wade into the informal economy, depriving the state of tax revenues and generally doing nothing to make the life of the average Russian better or safer. 

These trends allow the Russian economy to stay afloat but do nothing to contribute to long-term growth.

In light of all this, and with anti-Russian rhetoric and the threat of new sanctions growing in the West, the relatively stable Russian economy looks much less so. 

It’s not enough to look at macroeconomic indicators to judge the Russian economy. 

Much more valuable is the complex, unpublished microeconomic indicators, which to a greater extent determine the state of the economy. 

Russia has survived the coronavirus, but a hard road to recovery lies ahead, requiring structural changes to become less dependent on energy exports and improve productivity and wages. 

The Kremlin is aware of these weaknesses and is in no rush to spend the money in its reserve fund until the next major crisis. 

Brazilian Debt Jitters

Brazil seems determined to test the limits of financial markets' tolerance for debt accumulation. It is not hard to come up with scenarios in which the country's debt burden reaches 125% of GDP or more by 2025.

Andrés Velasco, Frank Muci


LONDON – Two things have changed in fiscal policy worldwide in recent years. 

The first is that sustained low real interest rates have enabled governments to run larger deficits and carry larger debts. 

The second is that the coronavirus pandemic has made using this enlarged fiscal space imperative to bail out households and businesses and to stimulate economic recovery.

Advanced economies are spending whatever it takes to keep their economies afloat. 

In the United States, skeptics argue that President Joe Biden’s $1.9 trillion package may be too large, but no one worries that investors will refuse to buy the resulting debt or demand a risk premium. 

The story is different among emerging economies, which are less indebted than rich countries, but face higher interest rates and have smaller and more volatile tax revenues.

Among emerging economies, Brazil seems determined to test the limits of debt. 

The good news is that Brazil responded vigorously to the pandemic. 

Discretionary fiscal measures totaling 8.3% of GDP – more than in most emerging economies and even many advanced economies – helped poor households and contained the pandemic-induced recession, with output falling “only” 4.1% in 2020.

The bad news is that markets are jittery about Brazil’s debt, which, at over 90% of GDP, is the largest in the emerging world (excluding small island states) after Egypt and Angola, surpassing even neighboring Argentina. 

Brazil is heavily indebted even when compared to advanced economies, exceeding the United Kingdom and the European Union average as a share of GDP.

As a result, the country’s borrowing costs, while still low (though moving up) for short-term bonds, rise steeply as the government tries to borrow at longer (and safer) maturities. 

Debt worries are also behind the persistent weakness of the Brazilian real, which hardly rallied when most emerging-market currencies did earlier this year, and depreciated again recently. 

That weak exchange rate has been pushing up inflation, forcing the Brazilian Central Bank to raise interest rates sharply this month, accompanied by strong hints that additional hikes are coming.

Brazil was in a challenging economic and fiscal position prior to the pandemic. 

Five years earlier, the country had experienced the worst economic contraction in its history. Growth slowed significantly in 2014 and turned sharply negative in 2015-16. 

Brazil’s total fiscal deficit ballooned to 10% of GDP in 2015, and was still 6% in 2019.

Successive governments enacted two reforms to limit the deficit and curb debt accumulation. 

First was a fiscal rule approved during President Michel Temer’s administration, which capped inflation-adjusted federal expenditures at the 2016 level for 20 years. 

Next, early in President Jair Bolsonaro’s term, came a pension reform that increased the retirement age (pension spending is extraordinarily high in Brazil, accounting for 44% of the federal budget). 

Then the virus arrived, and budget deficits went sky-high once again.

Viewed in a longer-term perspective, not all the news is bad. 

Interest rates may be edging up again, but they have fallen dramatically over the past two decades: the central bank policy rate went from a high of 26% in 2003 to just 2% in early 2021. 

Similarly, the government issued a great deal of short-term debt during 2020, but the average maturity of debt remains longer than during much of the last decade.

Still, pessimists have plenty to worry about. 

It is not hard to come up with scenarios in which debt reaches 125% of GDP or more by 2025. 

These scenarios are sensitive to assumptions about what happens to growth and interest rates, so they must be taken with more than a grain of salt. 

Still, debt ratios cannot rise forever. A recently adopted constitutional amendment will help slow down debt accumulation (and ensure that, at least formally, the legally-mandated debt cap is not violated), but that change alone will not be enough.

Rollover risk is another concern. 

In the first three quarters of 2021 more than R$1 trillion ($173 billion) in bond debt comes due, which the Brazilian Treasury will have to roll over. 

An extreme panic in which investors simply refuse to buy the new debt seems unlikely, but – especially if market interest rates keep rising in the United States – investors may demand much higher returns or be willing to buy only ever shorter-maturity debt. 

Either scenario would only aggravate existing vulnerabilities. 

Brazil has been there before.

Such an outcome is not pre-ordained. 

It helps that most public debt is in local currency, and that its holders are overwhelmingly domestic. International experience suggests that countries with large domestic-currency debts are less exposed to rollover risk. 

The reason, of course, is that the central bank can always serve as lender of last resort to the fiscal authority.

How can Brazil solve its debt conundrum? 

Given that many government expenditures automatically rise with the rate of inflation, and that much of the debt is indexed – either to consumer prices or to the short-term interest rate – the potential for inflating away the problem is limited. 

Debt default or restructuring would be toxic, not least because the financial system holds R$1.4 trillion (or 20% of GDP) in government securities. 

A large haircut applied to public debt could wreck the balance sheets of banks, pension funds, and insurance companies, and would wipe out overnight the existing equity of the financial system.

Brazil illustrates the point that despite low interest rates worldwide, there are limits to debt and deficits in the post-pandemic world. 

Brazil’s tax burden, at over one-third of GDP, is already high for an emerging economy, so taxation alone is unlikely to quash the rising fiscal risks. 

And expenditure cuts face obvious difficulties, especially given the country’s political fragmentation and high income inequality.

Regardless of the path Brazil chooses, inaction is not an option. 

Brazil’s poor and middle class were the victims of previous fiscal crises. 

They should be spared another one.


Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities. 

Frank Muci is a policy fellow at the Harvard University and London School of Economics and Political Science Growth Lab.

America’s new religious war

Religious fervour is migrating into politics

The evangelical culture warriors of the right take on the Democrats’ new Puritans


To start the holiest week in the Christian calendar, Joe Biden is expected to attend Palm Sunday mass at Holy Trinity in Georgetown. 

He is the most religiously observant president since Jimmy Carter. 

Considering how organised religion is collapsing, this is yet another way in which his presidency is a throwback.

He presides over a country in which more people claim to have “no religion” than to be Catholic or evangelical Christian. 

Yet unlike European countries, America is not becoming clearly less devotional as its churches retreat. 

Even Americans who have abandoned churchgoing are likelier to say they pray and believe in God than German or British Christians. 

They have rejected the institutions of religion, in other words, but not the religious urge—including a yearning for moral certainty and communal identity—that churches and synagogues have traditionally catered to.

This is giving rise to a lot of heterodox thinking even within America’s shrunken congregations. 

Nearly a third of self-described Christians say they believe in reincarnation. 

Wilder ideas are rising among the unaffiliated, as the theologian Tara Isabella Burton has described in “Strange Rites”, a tour through the “wellness” cult, the “brutal atavism” of Jordan Peterson and the weird world of Harry Potter fandom. 

Politics looks increasingly like another such pseudo-religion. 

Righteous, moralistic, unforgiving and fervently adhered to, America’s national debate has taken on a religious complexion in both parties. 

A new academic paper notes that since 2018 American Twitter users have been likelier to identify themselves by partisan affiliation than religion; on that platform especially, it has been a seamless switch.

Some have hailed the displacement of religious fervour into the secular realm as proof of the “God-shaped hole”. 

This is a conviction, attributed to Blaise Pascal, a French polymath of the mid-17th century, that the religious impulse can never be quelled. 

Human history suggests he was on to something. 

But it also suggests outbursts of religiosity owe as much to their cultural, especially institutional, context as metaphysics. 

The contrasting ways in which Republicans and Democrats are practising the new religious-style politics underlines the truth of that.

The right might look more straightforwardly religious. 

Under Donald Trump, white evangelical Christians, a mainstay of the party for decades, became its most important group. 

But even if it includes some old-style values voters, this is no longer your father’s moral majority. 

Most white evangelicals backed Mr Trump—more zealously than they had any previous Republican—mainly for cultural reasons that had nothing to do with Christianity.

They were motivated far more by his immigration policies and racially infused law-and-order rhetoric than his judicial nominees. 

They have since shown little interest in Mr Biden’s faith. 

Or in his efforts to restore the civic religion—an age-old idea of America as a nation blessed by God and united in moral purpose—that Mr Trump disdained. 

Around a third of white evangelicals subscribe to the QAnon cult. 

This was apparent in the prominence of man-sized crosses and other Christian paraphernalia among the cultists who stormed the Capitol Building on January 6th.

This pseudo-religious makeover on the right was instigated by lapsed white evangelicals, who backed Mr Trump in the 2016 Republican primary when observant ones held back. 

Their continued self-identification as Christians, though they do not attend church, is often a proxy for ethno-nationalism. 

The same religious appropriation is evident, Tobias Cremer of Oxford University has shown, among Europe’s Christian nationalists, who often do not even believe in God. 

Yet on the American right, unlike Europe’s, it has received mainstream backing.

Christian leaders, confusing the decline of their congregations with the cultural threat of liberalism, made common cause with Mr Trump and the pseudo-evangelicals. 

For partisan reasons, the rest of the Republican coalition followed them. 

The party has never been more avowedly Christian or more clearly out of line with gospel doctrines.

The situation on the left is roughly the opposite. 

The most avowedly secular Democrats—well-educated “woke” liberals—are also the likeliest to moralise. 

Their Puritanical racial and gender politics sit in a long tradition of progressive Utopianism, rooted in mainstream Protestantism. 

Barack Obama’s Messianic first presidential campaign was also in that vein. 

Yet these new Puritans of the left, though (or perhaps because) they are more secular than earlier progressives, are far more extreme.

Their view of social justice has no place for forgiveness or grace—as Alexi McCammond recently learned, when the 27-year-old’s editorship of Teen Vogue was cancelled because of some bigoted Tweets she sent as a teenager. 

It is also more focused on purity and atonement within the liberal tribe (as that example also suggests) than making society less discriminatory. 

A clue to that is the fact that the Democrats’ many African-American voters largely ignore such activism. 

They are more concerned to get better health care. Not coincidentally, many also still go to church.

Never mix, never worry

Woke liberalism is less prevalent than many conservatives claim. 

The Democrats would not have nominated the pious, grandfatherly Mr Biden otherwise. 

His pragmatic espousal of social justice is different in kind from the woke fringe. 

His appeals to America’s better angels therefore went down with white liberals almost as badly as they did with white evangelicals. 

Yet on the cultural questions that now define American politics the Puritanical left is often as influential as the zealous right.

No wonder political compromise has become impossible. 

Not since the 1850s, when New England’s Puritans embraced the abolitionist case and southern Baptists preached a divine justification for slavery to thwart them, have politics and religion been so destructively confused. 

It is not a reassuring parallel.