Generational Turning Point 

Doug Nolan


There is an overarching issue I haven’t been able to get off my mind: Are we at the beginning of a new cycle or in the waning days of the previous multi-decade cycle?

May 5 – Wall Street Journal (James Mackintosh): 

“We could be at a generational turning point for finance. 

Politics, economics, international relations, demography and labor are all shifting to supporting inflation. 

After more than 40 years of policies that gave priority to the fight against rising prices, investor- and consumer-friendly solutions are becoming less fashionable, not only in the U.S. but in much of the world. 

Investors are woefully unprepared for such a shift, perhaps because such historic turning points have proven remarkably hard to spot. 

This may be another false alarm, and it will take many years to play out, but the evidence for a general shift is strong across five fronts.”

The “five fronts” underscored in Mr. Mackintosh’s insightful piece are as follows: 

1) “Central banks, led by the Federal Reserve, are now less concerned about inflation.” 

2) “Politics has shifted to spend even more now, pay even less later.” 

3) “Globalization is out of fashion.” 

4) “Demographics worsen the situation.” 

5) “Empowered labor puts upward pressure on wages and prices.”

The analysis is well-founded, as is the article’s headline: “Everything Screams Inflation.” 

After surging another 3.7% this week (lumber up 12%, copper 6%, corn 9%), the Bloomberg Commodities Index has already gained 20% this year. 

Lumber enjoys a y-t-d gain of 93% - WTI Crude 34%, Gasoline 51%, Copper 35%, Aluminum 26%, Steel Rebar 32%, Corn 51%, Soybeans 22%, Wheat 19%, Coffee 18%, Sugar 13%, Cotton 15%, Lean Hogs 59%... 

The focus on inflation is clearly justified. 

Yet Mackintosh began his article suggesting a “a Generational Turning Point for finance” - rather than inflation. 

Let’s explore…

I mark the mid-eighties as the beginning of the current super-cycle. 

A major collapse in market yields (following Paul Volcker’s tightening cycle) promoted financial innovation and the expansion of non-bank Credit expansion. 

Markets were turning increasingly speculative, while the economic boom was spurring increasingly destabilizing trade and Current Account Deficits. 

These deficits were helping feed Japan’s Bubble, fueled both by international financial flows, as well as the misguided Japanese policy response seeking to use monetary stimulus to boost U.S. goods imports and rectify its ballooning trade surpluses. 

In the U.S., increasingly acute Monetary Disorder led to the “Black Monday” – October 19th, 1987 stock market crash. 

The Greenspan Fed’s crash response launched a regime of activist central bank measures specifically directed at supporting the securities markets. 

U.S. stocks swiftly recovered, while loose financial conditions stealthily promoted the evolution of non-bank finance. 

Post-crash Bubble reflation developments cemented the “decade of greed” moniker. 

Michael Milken and the proliferation of junk bonds and leveraged finance. 

Insider trading, Ivan Boesky, the LBO boom, Charles Keating, and the Savings & Loan (S&L) fiasco. 

And, importantly, post-crash reflationary measures pushed Japan’s Bubble to catastrophic “Terminal Phase Excess.” 

After ending 1987 at 21,564, the Nikkei Index traded to an all-time high of 38,916 on the final trading session in 1989.

All kinds of things went wrong in 1990 – including war and recession. 

Late-eighties U.S. bubbles burst in unison, including coastal real estate, junk bonds, LBOs, and the S&Ls. 

Japan’s Bubble began to unravel. 

Collapsing Bubbles left the U.S. banking system badly impaired, with multiple major failures and even concerns for the solvency of Citicorp. 

Already huge fiscal deficits were at risk of exploding uncontrollably, due to ballooning costs of bank and S&L recapitalizations. 

“The Maestro” pushed central bank activism to a whole new level, collapsing rates and manipulating the yield curve. 

Banks were encouraged to borrow short (cheap) and lend long (dear), pocketing easy spread profits while rebuilding capital. 

Finance, financial structure and policymaking were changed forever. 

Greenspan’s policies were a godsend to the fledgling leveraged speculating community that prospered on hugely profitable “carry trades” and levered derivatives strategies – and never looked back. 

When the bond/derivatives Bubble burst in 1994, the rapidly expanding GSEs were elevated to quasi-central banks. 

The GSEs began aggressively buying debt securities during periods of market instability, creating a liquidity backstop that fundamentally altered the risk vs. reward dynamics of leveraged speculation and derivatives strategies more generally. 

With their implicit government debt guarantees, the GSEs enjoyed unlimited access to cheap market-based borrowings. 

Meanwhile, the Mexican bailout and global policy responses (including the IMF) to a series of devastating EM Bubble collapses (SE Asian “Tigers” to Russia) reinforced the market perception that central banks, governments and inter-governmental agencies were all now fully committed to backstopping the rise of market-based “Wall Street finance”.

The 1998 LTCM bailout – and post-crisis GSE/Fed reflation measures – pushed the U.S. “tech” Bubble in 1999 to dangerous “Terminal Phase Excess.” 

The Fed’s post-Bubble reflationary measures then stoked the more expansive and systemic “mortgage finance Bubble”. 

And yet another post-Bubble reflation stoked this super-cycle’s “Terminal Phase” “global government finance Bubble.”

The pandemic erupted at a critical Bubble juncture. 

Speculative excess had already turned problematic. 

Financial and economic fragilities were manifesting globally, particularly in Bubble heavyweight U.S. and Chinese financial systems. 

In the summer of 2019, China was facing instability at its Credit system’s “periphery”, notably within the giant “small banking” sector. 

In the U.S., the eruption of repo market (a key source of finance for leveraged speculation) instability provoked the latest iteration of activist/inflationist monetary management – so-called “insurance” monetary stimulus. 

The Fed redeployed QE in the face of highly speculative markets (stocks near records) and unemployment at multi-decade lows. 

Arguably, this stimulus and resulting Bubble excess contributed to latent fragilities that erupted in the near market collapse in March 2020. 

The Fed’s balance sheet has more than doubled (108%) in 86 weeks to $7.81 TN. 

A full-fledged mania erupted – stocks, cryptocurrencies, corporate Credit, SPACs, derivatives, houses, etc. 

Washington ran a $4.8 TN, or almost 25% of GDP, deficit in only 18 months.

Considering the unprecedented nature of recent excess, there is today every reason to contemplate a secular shift in inflation dynamics. 

The Fed is locked into runaway monetary inflation, while its new inflation-targeting regime specifically seeks to promote above-target inflation. 

Washington had grown comfortable with massive deficits even prior to covid. 

Now, the Biden administration is pushing gargantuan spending programs, in what is a predictable political response to flagrant inequality and derelict infrastructure. 

There is also the astronomical cost of adjusting to climate change. 

Mr. Mackintosh’s above article highlights the major factors supporting the secular inflation thesis. 

But what about finance? 

Central bank policies now command market trading dynamics, while government-related debt dominates system Credit expansion. 

There is every reason to believe state-directed lending, after reaching new extremes during the pandemic, will become only more obtrusive going forward. 

A compelling case can be made this new age of government directed finance and spending is now driving a new inflationary cycle.

However, I certainly don’t want to dismiss end-of-cycle dynamics. 

“Blow-off” dynamics, after all, are proliferating. 

One can start with the trajectory of the Fed’s balance sheet, along with unbounded fiscal deficit spending. 

There are, as well, myriad indications of “Terminal Phase” speculative excess, including numerous manias, over-leverage, ETF flows, corporate bond issuance, the ARK funds, etc. 

The breadth and scope of such extreme behavior portend change is in the offing. 

These days, markets and about everyone anticipates that historic monetary and fiscal stimulus will continue to fuel historic asset bull markets. 

The existing cycle is very much intact, it is believed, with New Age central banking continuing to underpin unrestrained fiscal spending. 

But could both monetary and fiscal authorities have pushed things too far? 

Could we be nearing a major adjustment, where the respective interests of an expansive government and the markets finally diverge? 

Could a bout of market discipline catch Washington, along with about everybody, by complete surprise? 

A crazy thought.

This history of monetary inflation informs us that once it begins in earnest, it becomes extremely difficult to rein in. 

After expanding assets by $4.0 TN in about 18 months – and stoking historic manias in the process – any Fed retreat in the direction of “normalization” will prove highly destabilizing (a dynamic clearly not lost on Fed officials). 

A similar dilemma holds true for the Federal government after it’s $4.8 TN deficit spending free-for-all. 

Meanwhile, “melt-up” speculative market dynamics are similarly problematic. 

There is no reason to expect the type of historic excess we’ve been witnessing to end with a whimper.

All the key dynamics shaping finance have been pushed to such egregious “Terminal Phase” extremes. 

Shouldn’t we today be contemplating how such end-of-cycle dynamics might play out? 

A harsh market reaction to reckless Washington policymaking would appear long overdue. 

The flow of magma to the surface has been restricted for far too long. 

Could an inflation scare prove the catalyst for a market eruption?

Credit has been expanding rapidly throughout this most-protracted cycle. 

There has been tremendous debasement, yet for various reasons consumer price inflation remained relatively contained. 

Liquidity flowed into the securities and asset markets, while bond yields collapsed despite a historic increase in supply/issuance. 

Markets were more than happy to accommodate huge fiscal spending and the attendant supply of government bonds. 

Of course it’s easy to extrapolate this wondrous dynamic far into the future.

But the markets’ failure to impose discipline had predictable consequences. 

Governments succumbed to late-cycle massive over-issuance, pushing the limits of market accommodation while also stoking general inflationary pressures. 

To this point, however, the Fed’s ongoing massive QE buying has masked deepening fragility. 

This has only emboldened deficit spending proponents, while throwing more fuel on both speculative manias and mounting pricing pressures throughout the real economy.

It all points to a major shakeout. 

An inflation upside surprise could come with momentous ramifications. 

The bond market would face major instability. 

Beyond debasement, there would be fears of a destabilizing de-risking/deleveraging dynamic taking hold. 

And market instability and illiquidity become even greater issues at the point when inflationary pressures weaken the Fed's propensity for quick QE liquidity injections. 

Suddenly, the marketplace would be forced to reassess the reliability of its coveted liquidity backstop.

There’s a scenario we need to contemplate: Mounting inflationary pressures spook the bond market concurrent with the Fed moving forward its plans to wind down QE and commence rate increases. 

Bond market instability unleashes a bout of de-risking/deleveraging, a particularly problematic development for a highly levered corporate bond complex, as well as quite speculative equities markets. 

In such a scenario, the Fed would be under intense pressure to employ large QE purchases to underpin marketplace liquidity. 

A failure to act would be highly destabilizing for the markets. 

At the same time, another huge bout of QE in a backdrop of heightened inflationary concerns might also prove problematic for bond investors. 

It is worth recalling the chaos that ensued early in the March 2020 pandemic policy response. 

Markets continued a panicky de-risking/deleverage even as the Fed announced major liquidity operations. 

It was not until the Fed ratcheted up the response to monumental liquidity injections that crash dynamics were reversed. 

But speculation and leverage have surely expanded significantly over the past year, raising the issue of the scope of the next QE bailout necessary to again hold Bubble collapse at bay. 

I believe another massive QE bailout program is inevitable. 

And such a program in the face of rapidly building inflationary pressures would risk a bond market backlash. 

This could throw Fed monetary doctrine into disarray: does it inflate its balance sheet to provide liquidity support to the markets, or must it focus instead on reining in inflationary policy measures to stabilize unsettled bond markets? 

A crisis of confidence in Federal Reserve policymaking would be a distinct possibility. 

And such a scenario would risk ending the past three decades’ nexus between progressively activist monetary management and ever-expanding financial Bubbles.

Markets have enjoyed reliable liquidity backstops going back to the GSEs in the mid-nineties. 

When accounting irregularities at Fannie and Freddie eventually ended their open-ended growth, the Fed’s balance sheet took over liquidity backstop operations. 

It’s a much different financial and economic world without a reliable Fed/central bank market liquidity backstop.

And while the assertion the Fed will always be there to backstop the markets has some merit, there are major challenges developing. 

Previous QE programs essentially directed liquidity into the markets. 

U.S. investment booms were for the most part disinflationary, with spending on new technologies, services, and digitized output creating an endless supply of “output” devoid of traditional upward pricing pressures.

Going forward, the investment boom will shift to infrastructure, along with a domestic manufacturing push. 

Climate change will require enormous investment in physical capital stock and associated manufacturing capacity. 

A strong case can be made this changing investment dynamic will play a significant role in evolving inflation dynamics. 

There will be tremendous demand for various commodities as well as skilled labor. Moreover, this will be a global phenomenon.

When the Fed initially employed QE in 2008, there were inflation concerns. 

But that was in a post-Bubble backdrop replete with powerful real economy disinflationary forces. 

The liquidity and resulting inflationary effects remained largely contained within the securities markets. 

The “QE2” near doubling of the Fed’s balance sheet between 2011 and 2014 injected liquidity into a system with ongoing real economy disinflationary pressures, but with increasingly powerful inflationary Bubble Dynamics in the securities markets – at home and abroad. 

Market Bubbles, furthermore, were fueling an investment boom throughout the broader technology sector with minimal inflationary impacts to the broader economy. 

Actually, the massive increase in supply of myriad technology gadgets, services and digitalized downloads acted as a sponge for absorbing what would have traditionally been inflationary spending power.

There is already evidence the latest round of QE is fueling divergent inflationary dynamics. 

For one, it’s at such a greater scope. 

Secondly, it has unfolded concurrently with unprecedented fiscal spending. 

Thirdly, QE was employed in an environment of already heightened real economy inflationary pressures – i.e. labor, housing, commodities, physical investment beyond new technologies, etc. 

And, finally, massive monetary stimulus comes following decades of inflationary dynamics that profoundly benefited securities prices and the wealthy at the expense of the working class. 

The inevitable social and political backlash, further energized by covid-related inequities, has spurred a flurry of wealth redistribution policy initiatives. 

There is indeed every reason to contemplate the possibility of a momentous secular shift in inflation dynamics. 

This doesn’t necessarily mean CPI begins rising dramatically, although the likelihood of such an outcome is rising. 

But the strongest inflationary biases are poised to shift from the securities markets back to a more traditional real economy impact. 

This implies the Fed going forward will face obstacles in its “whatever it takes” open-ended QE doctrine. 

Rising inflation and a fragile bond market will force it to contemplate the risk of additional QE, while QE liquidity will now gravitate more toward inflationary dynamics within the real economy. 

This dynamic is already observable in booming commodities markets.

But back to the original question: Are we witnessing the start of something new - or the previous cycle’s end-game? 

There’s an understandable focus on how central banks and governments have hijacked Credit systems. 

To this point, this “money” has created an extraordinarily stable dynamic relative to runaway monetary inflation and debt growth. 

Though bastardized by government intrusion, Credit remains dominated by market-based finance. 

Is this cycle of market-based Credit underpinned by activist central bank management sustainable? 

Or has the massive expansion of non-productive Credit, egregious monetary inflation, manic market excesses and associated inflationary pressures created fragilities that place the existing financial structure at risk?

The Fed is in no hurry to find out. 

QE to the tune of $120 billion a month masks fragilities, while holding market adjustment at bay. 

And the mania rages on, while Washington luxuriates in blank checkbook overindulgence. 

Inflationary pressures mount. 

It’s worth noting the Dollar Index dropped 1.1% this week and is now only a couple percent from 2018 lows. 

The future could not be murkier. 

Everyone is prepared for unchecked monetary and fiscal stimulus as far as the eye can see. 

But is existing market structure sustainable in a backdrop of unrelenting non-productive debt growth, rising inflation, waning central bank flexibility and shifting political priorities? 

A Bloomberg headline from Friday evening: “Reflation, Inflation, Deflation: Stocks Can Live With Everything.” 

I’m not convinced the financial Bubble can live without QE. 

Is massive monetary inflation the only thing sustaining a multi-decade market cycle? 

The energy transition

Oil supermajors’ mega-bet on natural gas

Is the least grubby hydrocarbon a bridge fuel to a greener future, or a trap?


ENERGY COMPANIES have no seat at the climate high table convened by President Joe Biden on April 22nd and 23rd, to which he has invited 40 other world leaders to discuss how to speed up the shift from dirty energy. 

From the sidelines, coal firms will scowl at efforts to curb demand in Asia and oil drillers wince at support for electric cars. 

Watching particularly closely will be those firms which have bet big on natural gas. 

As the energy transition gathers momentum, no fuel’s future is smokier than that of the least grubby hydrocarbon.

Proponents see natural gas as the “bridge fuel” to a greener world. 

They include the five largest international oil companies: ExxonMobil, Chevron, Royal Dutch Shell, Total and BP. 

These supermajors saw gas rise from 39% of their combined hydrocarbon output in 2007 to 44% in 2019 (see chart 1). 

That year producers approved a record level of liquefied natural gas (LNG) capacity. 

Those projects will come online in a few years. 

Shell, which in 2016 paid $53bn for BG, a British gas behemoth, now says that its oil production peaked in 2019, but that it will expand its gas business with annual investments of about $4bn. 

Total expects its crude output to sink over the next decade, but for gas to rise from 40% to 50% of sales. 

In February Qatar Petroleum, a state-owned giant, said it would begin the largest LNG project in history.


Yet there is intensifying debate over whether gas proves a bridge or a dead end. 

Mr Biden and his counterparts in other countries appear to be serious about achieving net-zero emissions by 2050, which would require accelerating the phase-out of all fossil fuels, gas included, unless paired with technology to capture and store emissions.

Inexpensive wind and solar power already threaten gas-fired electricity, particularly in America and Europe. 

Even as demand looks uncertain, cheap gas from state-owned firms such as Qatar’s will add to global supply. 

Some companies’ bets will go bad.

On the demand side, gas remains a sensible gamble in some ways. 

A gas-fired power plant belches about half the emissions of a coal-fired one. 

The fuel benefits from diverse sources of demand, too. 

In addition to producing electricity, gas is used to make fertiliser and generate heat for buildings and industry. 

Unlike exhaust from a car, emissions from a factory can theoretically be captured and stored below ground. 

Gas can also be used to generate hydrogen, which may in turn serve as a form of long-term energy storage.

However, companies’ investments have not always gone as planned. 

A rush for gas between 2008 and 2014 was part of a broader stampede by energy giants, as higher energy prices spurred investments with little regard for costs, explains Michele Della Vigna, of Goldman Sachs, an investment bank. 

In late 2019 Chevron said it would write down as much as $11bn, largely owing to underperforming shale-gas assets in Appalachia. 

Gas comprised the bulk of the $15bn-22bn worth of impairments announced by Shell last June. 

In November ExxonMobil said it would write down the value of its gas portfolio by $17bn-20bn, its biggest impairment ever. 

ExxonMobil’s $41bn purchase in 2010 of XTO Energy, a shale-gas company, may be the worst-timed investment made by an oil major in the past 20 years.

Two big questions now hang over future demand, each difficult to answer with any certainty. 

The first is how fast governments limit carbon emissions. 

The extraction, liquefaction and transport of gas produce their own emissions, on top of those from its eventual combustion. 

Gas production also releases methane, a greenhouse gas that is about 80 times more potent than carbon dioxide over a 20-year period. 

Adding methane leaks from fracking or pipelines, the Natural Resources Defence Council, an environmental group, calculates that American LNG exports in the next decade may produce greenhouse gases equivalent to the annual emissions of about 45m new cars—not counting burning the stuff for energy.

Responding to climate concerns, the Netherlands and some Californian cities have already banned gas in new buildings. 

Britain will do so from 2025. 

“To put it mildly,” Werner Hoyer, head of the European Investment Bank, declared in January, “gas is over.” 

John Kerry, Mr Biden’s climate envoy, in January warned that gas infrastructure risked becoming stranded assets. 

The International Energy Agency (IEA), an intergovernmental group, reckons that demand growth will slow to about 1.2% a year until 2040, from an average of 2.2% in 2010-19. 

If governments move more aggressively to restrain temperatures, demand could be lower in 2040 than it was in 2019 (see chart 2). 

BP offers a more bearish scenario: if the world were to reach net-zero emissions by 2050, gas demand would peak within the next few years and nearly halve by mid-century. 

“For the business to survive,” argues Massimo Di Odoardo of Wood Mackenzie, an energy consultancy, “it’s not just about marketing gas. 

It’s about marketing gas and managing emissions.”


The second question with respect to demand is how quickly rival technologies advance. 

Already, about two-thirds of the world’s population lives in places where power from new wind and solar farms is cheaper than from new gas plants, according to BloombergNEF, a data provider. 

Electric heat pumps threaten gas in buildings. 

In future, gas with carbon capture and storage (CCS) may prove more expensive than hydrogen generated by renewable electricity. 

Mr Biden’s proposed $2trn infrastructure bill includes support for CCS, but also for technologies that could challenge gas’s role across industry, power and heating.

The European Union aspires to make its members leaders in hydrogen, which some hope could one day replace gas in many applications while using existing pipelines and other infrastructure.

Then there is the matter of supply. 

Maarten Wetselaar, Shell’s gas chief, says that the industry once expected the market to be undersupplied and the price to be set by the marginal customer. 

Instead, he notes, American shale means the world has plenty of gas. 

On top of that, private companies must compete with state firms in Qatar and Russia, which can extract gas cheaply and have a political imperative to monetise reserves while they can. 

Qatar’s new project will increase its LNG capacity by 40% by 2026.

What is more, a growing spot market and shaky demand have made LNG buyers less interested in traditional long-term contracts. 

At least a quarter of LNG supply is now uncontracted, estimates Mr Di Odoardo. 

As approved projects come online, the share of uncontracted LNG may exceed 50% by 2030.

All this is prompting some in the industry to rethink their embrace of gas. 

Last July Dominion Energy, an American utility, cancelled plans for a controversial pipeline and sold its entire pipeline business to Berkshire Hathaway, a huge conglomerate, for $9.7bn. 

In November Engie, a French energy company, scrapped plans to sign an LNG contract with NextDecade, an American firm, over concerns about shale emissions. 

Other firms are trying to adapt to a gas business that looks set to grow both more competitive and more complex.

Big players are now applying a higher cost of capital to their hydrocarbon investments, notes Mr Della Vigna, with a greater focus on profitability. Scale is turning to their advantage, too.

Take Shell. 

The company’s share of gas production actually fell in recent years, as it sold off less profitable gas assets in America and Nigeria. 

Mr Wetselaar maintains that Shell is well positioned to deal with the market’s new realities. 

Unlike smaller players, which depend on long-term supply contracts to attract financing for new projects, Shell can use its balance-sheet. 

Trading capabilities make it easier to sell LNG to diverse buyers. 

For those who want zero-emissions energy, Shell has already sold ten “carbon neutral” LNG cargoes, paired with offsets.

Total, another European oil major, plans to double its LNG sales over the coming decade, while touting its plans to reduce methane emissions. 

ExxonMobil reckons that its new investments in CCS will both limit emissions and support its traditional business.

Such plans are unlikely to sway those who want investment in all fossil fuels to plunge. 

Companies’ plans can be disrupted by any number of forces—in March an attack in Mozambique prompted Total to suspend a giant LNG project there. 

The changing market means only the most profitable, safe projects backed by the strongest firms are likely to move forward.

NextDecade, having failed to secure Engie as a customer, has postponed a final investment decision on one proposed facility in Texas and scrapped another. 

It had sought to build an LNG import terminal in Ireland, too. 

In January Irish officials let a preliminary agreement with NextDecade expire. 

Gas may not quite be over. 

But the industry may increasingly be defined not by the projects that advance but those that do not.

The US infrastructure most in need of investment is human

Biden’s plan to spend billions on health, home care and education is good economics and politics

Rana Foroohar

© Matt Kenyon


Does caring for humans count as infrastructure? 

It’s a big debate in the US right now, in the wake of President Joe Biden’s $2.3tn American Jobs plan, which aims to repair the country’s crumbling roads and bridges and bolster its supply chains, but also to improve the health and childcare systems — if you can call the US’s paltry patchwork of coverage a “system”.

Under Biden’s plan, $400bn would be spent on home healthcare, mostly for the elderly. Another $25bn would go to support childcare. 

Nearly all Republicans, and some centrist Democrats, are worried about this expanded definition of infrastructure. 

Should “building back better” involve bolstering such services? 

I’d argue yes, and then some.

For starters, healthcare is where the jobs of the future are. 

Over the next decade, home health and personal care is predicted to grow faster than other job categories, according to the labour department. 

That’s due in part to ageing demographics, but also because so many other jobs are being automated.

Such tech-led job disruption will be painful for some, but it’s not inherently bad. 

Over the long term, based on historic experience, technology is a net job creator. 

But even in the short term, as economists Charles Goodhart and Manoj Pradhan argue in their book The Great Demographic Reversal, rich countries “will need all the automation that we can get in the rest of the economy in order to raise productivity adequately . . . [and] to compensate for that which will be lost to caring for the ageing population”.

Care jobs will be what’s left at the bottom end of the socio-economic spectrum. 

But, done well, they can release more productivity at the top. 

The McKinsey Global Institute estimates that better health outcomes could add $12tn to global GDP in 2040 — much of that from improving the productivity of existing workers who suffer from health issues or have care responsibilities.

Women in particular have much to gain from greater investment in the “care economy”. 

As Jay Powell, the US Federal Reserve chair, said recently, the US “used to lead the world in female labour force participation, a quarter-century ago, and we no longer do. 

It may just be that [our childcare] policies have put us behind.”

Women also took an extra hit during lockdown. 

They generally did a disproportionate share of the extra childcare and household work (don’t get me started on the mental health impact of that). 

They were also more likely to be laid off. 

As well as the $25bn in Biden’s infrastructure bill for upgrading child care centres, there is $39bn more for child minders in the Covid relief package. 

In an ideal world, this will expand and improve care jobs, and allow better educated women to fill higher productivity roles.

As with the $100bn earmarked for schools, such investments improve human capital. 

Increasingly, this is the only kind of capital that matters, as digital business simply doesn’t require as much physical capital as old economy companies. 

The US should also allow companies to write off investment in worker training and other investments in people, as they currently do with machinery. 

This is something that nearly every business and labour leader I know would support.

Done properly, investing more in the infrastructure of care could fuel innovation. 

The White House is concerned about supply chains partly because manufacturing generally fosters more innovation and productivity than other sectors. 

But as manufacturing continues to automate, it will never again create as many jobs as it once did, regardless of how supply chains are organised or if they reshore.

Could the caring economy fill that employment void? 

Experts such as Harvard economist Gordon Hanson, who studies the interaction between labour markets and their location, say that in some places it could. 

“The areas that bounce back better tend to have good universities or healthcare complexes that can function as job engines,” says Hanson.

It may seem fanciful to imagine that a nursing home or child care centre could ever be an innovation hub in the same way as a big factory or R&D complex? 

Yet some already are.

Consider places like the Cleveland Clinic, a non-profit medical centre that integrates clinical and hospital care with research and education. 

The subject of a Harvard Business School case study, it has become a national and international job creator but also a hub of cutting edge innovation in areas like drug and device development, and medical procedures. 

This is in large part by leveraging big data, digital platforms and robotics, but also by working in a cross-disciplinary way inside and outside the clinic.

At the very least, investing more in health and education would boost the kind of social capital that characterises successful communities. 

We need much more of that right now, everywhere. Only 1.5 per cent of the World Bank’s concessional grants are for health, and only 1.9 per cent are for education.

In rich and poor countries alike, investment still focuses primarily on physical capital. 

It’s time to recognise that, perhaps more than any other form, human capital is the infrastructure of the 21st century.

‘They can’t take it any more’: pandemic and poverty brew violent storm in Colombia

Joe Parkin Daniels in Bogotá

Demonstrators take cover behind makeshift shields in Cali, Colombia, on 30 April. Photograph: Luis Robayo/AFP/Getty Images


Yina Reyes, a 39-year-old nurse from the downtrodden neighbourhood of Siloé in the Colombian city of Cali, knows only too well what Covid-19 can do to a person – and to a community. 

Her mother was hospitalized with the disease, and came close to death.

As a home care nurse, she has seen patients get sick and neighbours die. 

In the early days of the pandemic, her husband lost his job as a chauffeur, leaving her to provide for their daughter and his parents, who share their home.

“I’ve seen this virus face-to-face, I know what it can do, and I know how to protect myself against it,” Reyes said. “But the real terror is the Colombian government.”

Siloé has become the center of a brutal nationwide crackdown on protests against poverty and inequality which have been exacerbated by the coronavirus pandemic. Demonstrations that began with a general strike on 28 April quickly descended into violence, with images of smoke-filled streets dominating the nightly news.

As many as 37 protesters have been killed across the country, according to Temblores, a local watchdog, while hundreds have been injured by police officers who have shown little restraint with their billy clubs, flash-bangs and teargas.

“This is the Colombia of Centro Democrático,” said David López, a community leader in Siloé, referring to the governing party of President Iván Duque. 

“A country where people are getting poorer and they can’t take it any more.”

Demonstrators and riot police clash in Cali, Colombia, on 29 April. Photograph: Paola Mafla/AFP/Getty Images


The protests erupted suddenly – ostensibly in response to a since-abandoned plan for tax reform – but they reveal deep social fault lines. 

Similar demonstrations broke out in late 2019 during a wave of unrest across Latin America.

Colombia was an unequal country then and Covid-19, which has claimed more than 75,000 lives and continues to ravage public health, has only widened the gap between the rich and the poor.

“One of the core dynamics as to why these protests are taking hold so strongly is that there’s an enormous gap between the political establishment and the street,” said Elizabeth Dickinson, a researcher with International Crisis Group (ICG), a thinktank. 

“It’s almost like they are on two different planets and talking past each other.”

Amid one of the longest lockdowns in the world, the number of Colombians living in extreme poverty grew by 2.8 million people last year. 

Red rags were hung outside homes, in a desperate signal that those inside were hungry. 

And as people got poorer, they also got sicker, with those from the poorest neighbourhoods 10 times more likely to be hospitalized or die from Covid-19 than those from the wealthiest.

“The level of economic distress is enormous,” Dickinson said. 

“Like the rest of Latin America, Colombia has been hit hard by the pandemic and as a result we have had to live with a year of on-and-off lockdowns – and who was the face of implementing those lockdowns? 

It was the police.

Colombia’s militarized police fought for decades on the frontlines of the country’s war against leftist rebel groups and has long been accused of human rights violations; earlier this year, Temblores denounced “structural and systematic” abuses in the force which killed 86 people in 2020.

But relations between the police and the Colombian population further deteriorated during a year in which officers were empowered to slap people with hefty fines for not correctly wearing a mask or for drinking alcohol in public.

Anti-police demonstrations broke out in September after officers in Bogotá killed a lawyer, Javier Ordóñez, with a Taser electrical weapon after initially detaining him for drinking beer on the street.

Police kiosks across the capital were torched in the following unrest while the police killed at least 10 protesters.

But the current protests, now entering their 11th day, have been met with even more brutality. 

Each morning, Colombians wake to news of a new outrage.

A demonstrator holds a flower as she marches in the rain in Bogotá, Colombia, on 5 May. Photograph: Vizzor Image/Getty Images


On Friday morning, the country learned that a truck that carried violent agitators who attacked protesters belonged to the police. 

Twenty-four hours earlier, news broke that Lucas Villa, a young student who had been filmed dancing merrily at protests in Pereira, a city in the coffee region, had been sent to an intensive care unit after he was shot during a skirmish.

“How difficult a thing is this fear that we feel when night falls in Colombia,” tweeted Fernando Posada, a political scientist at University of Los Andes in Bogotá. 

“Fear of violence, barbarity, pain. 

And fear of waking up the next morning and reading the horrific reports of the night that passed. 

This country is heartbreaking.”

Few scenes have been quite so hellish as those in Siloé, Reyes’s mountainside home, where police have used live rounds, flown Black Hawks just above houses, and fired teargas for nights on end.

“They fumigate us like we’re insects,” Reyes said. 

“I’ve seen people with Covid on ventilators who can’t breathe and they seem in less pain than the kids drowning in those gases.”

Reyes has banded with some neighbours to provide first aid for the injured. 

Two residents have been killed, with a few still missing. 

Bloodstains, new each day, reveal the sites of previous night’s battle. 

“Obviously no one is out cleaning the street,” the nurse said.

Riot police officers in Bogotá, Colombia, on 5 May. Photograph: Anadolu Agency/Getty Images


The violence has been especially dispiriting for those who hoped for a peaceful future for Colombia when the country signed a historic deal with rebels of the Revolutionary Armed Forces of Colombia (Farc) in 2016.

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That deal, ended five decades of civil war that killed 260,000 people and forced more than 7 million to flee their homes, but also raised hopes that new spaces for the left would finally open in Colombia’s political spectrum. Instead, the government has smeared protesters as “vandals” and “terrorists” with links to insurgents.

Protesters have come under criticism for throwing up blockades which have caused food and fuel shortages, and cut off the country’s largest seaport, Buenaventura. 

But those on the streets are adamant that extreme measures are necessary.

“To win tomorrow, we have to lose today,” said Steven Ospina, 27, who has lived in Siloé all his life. 

“This government has been so cruel but we want to de-escalate, that way they can’t paint us all as criminals.”

Reyes argued that the government’s heavy-handed response is self-defeating. 

“The working classes are the engine of Colombia,” she said, ahead of another torturous night of skirmishes outside her home. 

“If they kill us all they won’t have anything for themselves.”

Buttonwood

The broader lesson from booming copper prices

Shortages in commodity markets offer a paradigm for the post-virus economy


Blessed are the cheesemakers. 

A revival in restaurant visits in America has fed demand for one of the more obscure financial instruments—cheese futures. 

The number of contracts traded on the Chicago Mercantile Exchange surged last month. 

It is not only cheese that has melted up. 

A year-long rally in broader commodity markets shows few signs of cooling. 

Iron-ore prices are at record highs. 

A boom in American housing has driven timber prices to a new peak. 

Corn and soyabean prices are at their highest since 2013.

If you are looking for a paradigm for the immediate post-virus economy, in which supply snags lead to higher prices as activity revives, then commodity markets provide it. 

Bottlenecks are everywhere. 

Corn production has been hurt by dry weather. 

The supply of industrial metals has been held back by slower ore production in virus-hobbled South American mines. 

The archetypal commodity is copper, which has broad uses in industry and construction. 

“Dr Copper” is closely watched in markets because of its ability to diagnose important shifts in the world economy. 

And on May 7th its price reached a record high on the London Metals Exchange.

Amid excitement about a new commodity “supercycle”, copper has one of the stronger bull cases. 

Plans for fiscal stimulus in America and Europe lean heavily towards greening the economy, which in turn favours copper demand. 

A bigger question-mark hangs over the supply response. 

Here Dr Copper may offer some uncomfortable lessons.

Commodity prices are subject to wild swings, reflecting periodic gluts and shortages. 

The market for copper and other commodities, including oil, is currently in “backwardation”, a state in which futures prices are below cash prices (see chart). 

In theory stock levels should respond to the spread between cash and future prices. 

In a backwardated market, the marginal benefit of adding to copper stocks is low. 

So backwardation is a prompt for stocks to be run down to meet immediate demand. 

It is a telltale sign of physical shortages. 

The opposite condition, in which futures prices are above spot, is “contango”. 

A market in steep contango signifies a short-term glut.


Some analysts believe that the current copper shortage will prove to be a structural feature. 

A recent note from Goldman Sachs, a bank, predicts that prices will rise to $15,000 per tonne by 2025, from $10,000 today, as the red metal undergoes a new supercycle, a longish period in which demand outstrips supply. 

The spur to rapid demand growth will come, not from China, whose urbanisation lay behind the supercycle of the first decade of this century, but from the greening of richer countries. 

As a pliable, cost-effective conductor of heat and electricity, copper is a vital input to green tech. 

It takes four or five times as much copper to build an electric vehicle as a petrol-fuelled one. 

Copper goes into the cabling for ev charging stations, and into solar panels and wind turbines. 

At present, annual “green” demand for copper is 1m tonnes, or just 3% of supply. 

Goldman reckons that will reach 5.4m tonnes by 2030.

For some people, the case for another commodity supercycle has more holes in it than Swiss cheese. 

Policymakers in China, the world’s largest consumer of raw materials, are already putting the brakes on. Without a boom in China, there cannot be a supercycle. 

And high commodity prices are often their own nemesis. 

The response in agricultural products is simply to grow more crops. 

In the oil market, shale production can ramp up if prices warrant it.

But copper supply is far less flexible. 

It takes two to three years to expand output at an existing copper mine and a decade or more to develop a new one. 

And mining firms, burned by the commodities bust of the early 2010s, have focused more on paying out dividends than on investing in new supply. 

“Capital discipline” is an industry slogan. 

It will take further rallies in copper prices to chip away at this mindset.

That brings us to the wider lesson. 

The view of central bankers is that today’s supply shortages are likely to be temporary and inflation will prove transient. 

Recent history is on their side. 

Supply shocks have generally washed out of inflation quickly. 

If this time proves to be different, it will be because of a peculiar clash. 

Habits of capital discipline formed in the previous, slow-growth business cycle are not obviously well suited to an economy running hot. 

As the cycle unfolds, copper prices will signify just how smoothly supply is responding to demand. 

Dr Copper’s most important diagnosis may yet lie ahead.

A Commonsense Corporate Tax

In its efforts to generate more revenue to fund a massive infrastructure spending package, US President Joe Biden's administration is seeking to add more red tape to a corporate tax regime that already has too much of it. Fortunately, there is a perfectly sensible alternative.

Alan J. Auerbach



BERKELEY – As part of its massive infrastructure plan, President Joe Biden’s administration is seeking to raise the US corporate tax rate from 21% to 28%, with a 21% “minimum” tax on profits earned abroad by US corporations. 

In the words of Secretary of the Treasury Janet Yellen, the goal is to arrest an international “race to the bottom” by getting other countries to adopt similar minimum corporate taxes.

Unfortunately, the measures being proposed seem designed for an earlier era, when it was easy to identify the factories and refineries where companies produced and earned their profits, and when a corporation’s nationality was largely determined by the location of its main operations and its shareholders. 

In the modern era, multinational companies with international shareholder bases operate global supply chains, creating value using intangible capital with no natural location. 

As such, trying to modify a tax system based on a company’s residence and where its profits are earned amounts to trying to replace the race to the bottom with a race to the past.

If the United States adopts the proposed measures but fails to get others to go along, it will have saddled itself with a less competitive tax system. 

But even if it succeeds, it will have locked in a system that will require constant modification to keep up with economic realities that are departing ever further from the core concepts on which the system is based.

Fortunately, there are alternatives that are much more attuned to the realities of the modern economy. 

Policies enacted in the US at the state level in recent decades have steadily moved toward taxing corporations based on the location of their sales. 

For these jurisdictions, shifting away from taxes based on the location of payroll and tangible assets has proved salutary for investment and employment. 

Moreover, if adopted at the national level, “destination-based” taxation could solve the problem of international profit shifting that the Biden reforms are intended to confront.

The most decisive reform would be a “destination-based cash flow tax” (DBCFT). 

Among other things, this would provide immediate expensing for all investment, eliminate the tax advantage for corporate borrowing, and impose border tax adjustments to eliminate taxes on export revenues and tax deductions for import costs. 

At the end of the day, only domestic cash flows would be taxed. And, because transactions between domestic companies and related foreign parties would have no US tax consequences, the practice of profit shifting would disappear.

Moreover, the border tax adjustments would move the locus of taxation from where products are produced to where they are sold. 

Because domestic production would impose no additional tax on companies, America’s attractiveness as a location for employment-generating investment would be enhanced. 

A major added benefit would be that the welter of complicated tax rules aimed at preventing corporations from shifting profits and production abroad could be repealed as unnecessary artifacts of a bygone era, rather than being augmented even further under the Biden plan.

Likewise, with the tax system imposing no special burdens on US corporations, all measures aimed at preventing them from moving their headquarters abroad in order to escape US nationality could be consigned to history, rather than confounding matters further. 

And tying tax liability only to transactions within the US would relieve the Internal Revenue Service of the burden of chasing down information about companies’ foreign operations.

Readers may recognize the DBCFT from its appearance in 2016, when House Republicans Paul Ryan and Kevin Brady proposed it. 

The scheme ultimately did not make it into the 2017 Tax Cuts and Jobs Act, because its sponsors’ insistence on the immediate, full-scale adoption of a then-unfamiliar reform drew opposition from other Republicans. 

Moreover, the Trump administration’s belligerence toward America’s traditional allies created an adversarial relationship in which there was little attempt to explain the rationale for the reform, let alone push for its adoption abroad.

But the Biden administration, with its expressed desire for international cooperation and domestic bipartisanship, has a better chance at success. 

As an effective tax on corporate profits, the DBCFT is not only progressive; it is actually more progressive than the current US corporate tax, which makes US workers less productive by discouraging investment.

A straightforward tax that provides a sustainable, progressive source of revenue and incentives for domestic investment and employment (even if the tax rate is increased) should appeal to many in Congress, regardless of their political orientation. 

The choice between a modern corporate tax and a race to the past should be clear.


Alan J. Auerbach is Professor of Economics and Law at the University of California, Berkeley, and co-author of Taxing Profit in a Global Economy (Oxford University Press, 2021).