A Giant Consumptive Force

By John Mauldin 

The SIC was in full swing this week. I am finishing this on Friday morning, a few hours before the start of the last official day and then a “Plus Day” on Tuesday. My mind is swimming with new connections and revelations.

While the live events are mostly over now, your SIC pass gives you full video, downloadable audio, slide presentations and (soon) written transcripts of every session. 

They are all still quite fresh and relevant, so don’t feel like you missed the opportunity. (Note: I’ve never heard a greater discussion of inflation and/or deflation from so many perspectives. We will go into that in detail in the coming weeks.)

In fact, all this material gives you a chance to customize your experience. 

You can watch the recorded sessions on your own schedule, in whatever order suits you—though I would urge you if possible to watch in the sequence we presented them. 

I arranged the agenda as it is for specific reasons. 

But however you do it, get your pass now.

My next few letters will be reflections on the wide-ranging SIC presentations. 

I find it takes a little time for all the information to coalesce into conclusions. 

I’ll try to do this thematically, linking together some of the varying thoughts on different topics. 

Last week I teased you about the China panel, so that seems like a good place to start.

We’ll review that conversation and then bring in some China comments from later sessions.

Cold War or Not?

I placed our China panel on Day 1 of the conference because, in the big picture, it is one of the more important long-term discussions that we need to have. 

China’s entry into the modern world economy, and especially the WTO in 2001, may be the most significant development of the last half-century. 

Its sheer size and rapid growth are simply unprecedented in human history. China affects everything.

To unpack the latest China developments, I pulled together Louis Gave, George Friedman, Emily de La Bruyère (remember that name, I promise you are going to hear more from her in the future, and not just from me) and asked Mark Yusko to moderate. 

Mark has been going to China for decades and was one of the original investors in Alibaba when it was private.

They started with the increasingly common view that the US and China are in a “Cold War.” 

Is that really the best way to describe it?

George, who saw the previous Cold War up close, thinks not. 

The US, USSR, and their respective allies had large military forces deployed across a fortified border. 

Both had nuclear weapons at the ready. 

They occasionally met in not-so-cold proxy battlefields like Vietnam, Central America, and Africa. 

That Cold War featured very little economic engagement but a fair amount of death, which could easily have been much greater. 

Today’s US-China situation is nothing like the Cold War. 

We are adversaries in many ways, but also economically interdependent.

What many probably did not pick up on but I knew from my relationship with George was his comment, “It’s not a War if there aren’t bullets involved.” 

Let’s just say that in a former life in a galaxy far, far away George may have been involved in a proxy war or two where there were real bullets involved. 

He immigrated from Hungary where there were real bullets involved. 

War has a different meaning to him and his generation.

Emily picked up on this, framing the relationship as a “long-term peacetime competition.” 

You can use war as a metaphor, but the two countries compete for access to labor, capital, and knowledge. 

Artificial intelligence and microchips are the weapons of choice. 

They seek to gain the upper hand by shaping the various mechanisms of international integration: trade agreements, shipping routes, capital markets.

Louis Gave jumped in to note the antagonism that now seems normal is actually a recent development. 

Just a decade ago people saw a bright future together, contriving words like “Chimerica” to describe a deep and growing codependence. 

(I believe the term was actually coined by Niall Ferguson, who helped introduce it at a previous SIC along with his new book.)

What changed, in Louis’s view, was the 2012 ascent of Xi Jinping. 

China gained a different kind of leader, one with greater ambitions for China’s role in the world. 

This changed the Western view, and contributed to Donald Trump’s rise a few years later. 

Today challenging China is one of the few points on which Republicans and Democrats largely (though not entirely) agree. 

Even when they disagree, it is on nuance and not substance.

The US wants to preserve not just its global dominance but also its security and prosperity by depriving China of advantageous technologies that can be used for military purposes. 

No one really cares about cars or T-shirts, or who assembles phones with products from 30 different countries

But China has ways to respond. As Emily pointed out, both governments have enormous influence over the other’s economy. 

China is the main supplier of the deflation that has kept interest rates low, enabling US debt and spending. 

These “asymmetric dependencies” change the rules of competition. 

Military power, in a world in which neither side actually wants to use it in a kinetic confrontation, is less important than manufacturing, infrastructure, and other economic strengths.

One of those asymmetries is money itself. 

China is working to level that playing field, and maybe even tilt it.

Digital Yuan

One reason the US dominates the world economy is our “exorbitant privilege” of issuing the world’s reserve currency. 

Most international transactions are settled in US dollars through the US banking system. 

This gives Washington leverage, or at least influence, over pretty much everything.

We too often take that privilege for granted. 

Jim Bianco reminded us at the conference and then in his Bloomberg column on Wednesday:

The history of modern finance has seen several monetary orders, from the gold standard of the 19th century to the current fiat-based era starting in 1971. 

Each period had its dominant reserve currency, starting with gold and then moving to the British pound and US dollar. 

The current system is 50 years old, about the average length of previous monetary orders.

The currency privilege is also a vulnerability. 

US companies import goods from China and pay for them with dollars. 

China uses those dollars to buy US Treasury securities, helping to keep our rates low. 

OPEC countries did the same before China’s rise.

Beijing would rather not finance Washington’s debt, but presently has no choice. 

Xi’s central bankers would like to give the world another currency system—a digital one that may work as well as dollars.

There are real-world reasons in terms of cost and flexibility for considering a digital currency. 

Almost two years ago I wrote about Facebook’s “Libra” plan

Along with a bunch of (non-bank) partners, Facebook envisioned an electronic medium of exchange backed by deposits of “real” currencies. 

I noted several problems with their plan, which still hasn’t launched and was recently renamed Diem.

China has something different in mind. 

Their digital yuan would be issued and backed by their central bank, the People’s Bank of China, giving it instant legitimacy. 

The SIC China panel thinks this is a major development. 

Louis Gave noted currencies are kind of like computer operating systems (Windows vs. Mac, for example). 

People in general, and especially large organizations, don’t move from one to the other easily. 

For change to happen, the alternative must be not just better, but massively better. 

If China wants to displace the dollar as the global reserve currency, it needs to offer more than an alternative. 

It needs something way better than USD.

(Sidebar: Elon Musk says the same things about cars. 

He says you can’t make a car just a little bit better. 

You have to make it obviously superior to get consumers to take a chance on something new as opposed to a trusted brand. 

The dollar is currently the trusted brand, which means that the Federal Reserve’s stewardship and the probity of Congress in budgets is important in maintaining trust in the dollar’s brand. 

Losing that trust would be highly problematic.)

The Chinese plan is moving slowly. 

The PBOC has issued small amounts of digital yuan through state-owned banks. 

Users access it via a smartphone app that lets them make purchases from selected merchants. 

Chinese consumers are already accustomed to similar non-bank systems like Alipay, so it’s not a huge leap.

How this will proceed is unclear. 

The PBOC may let the digital yuan grow slowly from the bottom up, encouraging merchant and customer usage. 

But they can move fast if they want. 

Emily noted that China isn’t just big; its government has the ability to dictate standards, leaving businesses and consumers little choice. 

And not just domestically, but also with some of its trading partners. 

The digital yuan could easily have a billion users a few months after launch.

Then of course, they have the potential to launch that same platform into many Belt and Road countries. 

A potentially frictionless currency transaction that is acceptable and transferable to your local currency, and that is easier, especially to those who lack bank accounts. 

How can this happen, you ask? 

Go to Africa. 

One of the primary mechanisms for commercial transaction is the telephone. 

Many Africans have no bank account, but they have a telephone with a digital equivalent of the bank account. 

It does have some “friction,” in that the company you use charges a transaction fee. 

Adoption in Africa was still blazingly fast. 

When you start with a billion users in China it could happen faster than many Westerners think.

All this is happening in a certain context, too. 

China got where it is today by becoming an export powerhouse—the world’s low-cost factory, so to speak. 

Now it is transitioning to a consumer-driven economy like the US. 

The vast (and still impoverished, as George pointed out) interior is urbanizing and growing. 

China is becoming what Mark Yusko called “a giant consumptive force.” 

Instead of “Made in China” we see goods being made for China.

The investment aspect of this is that China is a growing part of global benchmarks. 

MSCI is making some of their global indexes as much as 20% Chinese stocks. 

That means institutions can’t really avoid investing there. 

Their choices are to be either neutral or overweight, because being underweight in a fast-growing major economy guarantees your performance will lag.

Yesterday in a prep call for our closing panel, I brought up this concept of a Chinese digital currency. 

Former Dallas Fed president Richard Fisher, who is extremely conversant on the topic, pushed back hard. 

He pointed out there is an extreme difference between private cryptocurrencies and a Chinese digital currency. 

In the latter, you are giving the Chinese government 100% access and visibility into your life. 

You also give them control over the value of your currency. 

It is the opposite reason for the development of Bitcoin and other cryptocurrencies.

Sclerotic, Fragile, and Dangerous

A few days later I interviewed Ian Bremmer on the geopolitical picture, of which China is a key element. 

Ian dissented on this China Juggernaut vision (which he had just recently vigorously engaged with on Bill Maher’s show).

China is obviously big and doing big things, Ian said, but it’s not the US. 

We don’t see Americans or other citizens of the world clamoring to move to China. 

Some do, yes, but far greater numbers of Chinese are doing all they can to move their assets, their children (and especially their children’s education), and themselves to the US or other Western countries.

He also noted China hasn’t covered itself in glory during this pandemic crisis. 

The virus emerged there (though exactly how is not yet clear) but the government’s initial denials wasted precious time, letting it spread out of control, forcing brutal measures to stop it. 

Now China’s home-grown vaccine is proving far less effective than the Pfizer-BioNTech and Moderna MRNA vaccines. 

The head of their own CDC admitted their vaccine doesn’t work well. 

Their “vaccine diplomacy” plan isn’t working well.

Several important countries—Australia and the Philippines being the latest—are having serious disputes with China. 

In capitals around the world, leaders may not trust Washington but they trust Beijing even less. 

Corruption is so entrenched through their entire system that things often just don’t work. 

Buildings fall down because someone took a bribe to use inferior materials. 

Ian had a lot of data about their construction quality. 

New buildings in China last half as long as the same buildings built in the US (or the West) because of building codes, materials, and corruption. 

A lot of their shiny new toys will have to be replaced before the debt which paid for them is recovered.

As Ian says, however, this doesn’t mean China can’t do amazing things on technology, artificial intelligence, infrastructure, and so on. 

But their system is more sclerotic, fragile, and vulnerable than the US system—which also has its share of faults. 

Our political dysfunction is deeply problematic, Ian says. 

It reduces our ability to promote transparency, democracy, and rule of law. 

As he put it, the US is one of the least functional democracies while China is the most functional authoritarian state. 

That’s a problem.

Ian was somewhat less confident than the China panel about China as a military threat. 

This was an important insight for me. 

The US seems clearly superior for now, but only if any armed conflict plays out by the old rules. 

We have more and better ships, fighter jets, missiles, and so on. 

But the Chinese may have different ideas. 

We’ve seen in numerous cyberattacks how a foreign power can create havoc from afar without firing a shot. 

Advanced drone technology has overwhelmed conventional airpower in several real-world scenarios.

One of our problems, Ian said, is that US defense planning has been captured by a handful of defense contractors whose profitability depends on selling weapons systems that may not be what we really need. 

The Chinese are investing in technology for the battlefields of the future. 

We in the US and the West need to stop fighting the last war. 

He mentioned a new novel, 2034, by retired Admiral James Stavridis, in which a China-US conflict unfolds unlike previous wars.

Consider all that in the context of Taiwan, an island Beijing considers a rebellious province, and which is now the world’s major source of microchips. 

Could China take Taiwan by force? 

Would it? 

We don’t know. 

But as Ben Hunt (another SIC speaker) says, Taiwan is now Arrakis. 

That’s an allusion to Frank Herbert’s Dune series, in which a planet called Arrakis is the only source of a drug everyone needs for faster-than-light space travel. 

It was the single most important planet in the galaxy.

Geopolitically, Taiwan is becoming something like Saudi Arabia: the swing producer of a critical resource, and therefore a place of great interest to leading world powers. 

But in any event, China is certainly a place of great interest to investors. 

You really need to hear these full sessions.

How to Deal with Volatility in Your Portfolio

The markets are showing great volatility. 

The bond market is broken and no longer provides the protection it used to. 

You have to make sure your investment portfolio is not playing that game. 

There are other ways to manage your portfolio and your future.

If you would like to find out how you can not only survive but thrive in these times, I suggest you talk to one of the professionals of CMG and find out what’s in the Mauldin Investment Kitchen. 

There are ways to generate cash flow without resorting to a broken bond market. 

You should be diversifying trading strategies and not stocks. 

There are opportunities to access the coming technological revolutions in a rifle shot manner.

I am part of a small consortium of firms that have come together to share research and resources to help you with your goals. 

Click on this link to CMG (where I am the chief economist and co-portfolio manager) and we will send you white papers as well as share with you our approach to preserving and growing your assets. 

Find out how I am positioned personally. 

I am very proud of what we are doing and I urge you to see how we approach all the issues that we’re dealing with at the SIC.

(Please note, Mauldin Economics is not affiliated with CMG)

New York, Maine, and the Timing of Panels

Sometime in June, I am going to get on a plane and go to New York for some greatly missed meetings with clients and dinners with friends. 

Then in August I will make my annual fishing trip to Maine with scores of economists and friends. 

My youngest son Trey (now 26) will be with me. 

He first went with me when he was 12 years old. 

What a great father-son tradition

In just a few hours, Bill White and Richard Fisher will join me and Felix Zulauf for this year’s final panel. 

After yesterday’s prep call, I can promise it will be powerful. 

But in hindsight, it is going to be powerful because of the timing. 

The same panel in 2014 would have been informative, but have nowhere near the impact because we live in far more interesting times.

It is time to hit the send button. 

Mark Yusko will open the last conference day in an hour, as he traditionally does. 

The fastest 50 minutes of the conference. 

You have a great week and follow me on Twitter.

Your head about to explode analyst,

John Mauldin
Co-Founder, Mauldin Economics

US borrowers cut credit card debt despite economic revival

Federal Reserve researchers ‘confounded’ by decline in balances amid retail recovery

Gary Silverman and Colby Smith in New York

US credit card balances fell in the first quarter by the second-biggest amount in a statistical series dating back to 1999 © Olivier Douliery/AFP via Getty Images

Americans pared back their credit card borrowings by $49bn in the first quarter as the US recovery gathered pace, a development that Federal Reserve researchers described as “confounding” and “remarkable” in the context of an economic revival.

A report from the Federal Reserve Bank of New York showed that total US household debt hit a record $14.6tn in the first three months of the year, up 0.6 per cent from last year’s fourth quarter, as mortgage originations remained near record highs and balances for auto and student loans increased.

However, US credit card balances fell by the second-greatest amount in a statistical series dating back to 1999, surpassed only by the $76bn decline in the second quarter of last year as the pandemic forced the lockdown of the US economy, the New York Fed said.

“One of the most confounding changes in debt balances is that of credit cards,” New York Fed researchers said in a blog post. 

“The decline in the first quarter of 2021 is remarkable because it stands in sharp contrast to the recovery under way in the retail sector as the US economy reopens and travel resumes.”

The drop in credit card balances helped to offset increases in auto and student loan balances, pushing non-housing balances $18bn lower than the previous quarter. 

Mortgage originations, including refinancings, reached $1.1tn, only slightly below the record of last year’s fourth quarter, as mortgage balances rose $117bn to $10.2tn.

The New York Fed researchers cautioned in a blog post that the “varied and irregular” impact of the pandemic on consumer borrowers meant that the decline in credit-card balances “should be interpreted with caution”.

But they added that “surging retail sales volumes suggest stimulus checks, forbearance programmes, increasing consumer confidence, and pent-up demand may be both supporting consumption and serving to help borrowers reduce expensive revolving debt balances”.

The Fed researchers said it appeared that both upper-income and lower-income households were paying down credit card debt. 

But they added that younger people have been borrowing more on their cards in recent months in contrast to older borrowers.

“We think this reflects, to an extent, the differential response to the risks from the virus itself — younger people have begun to resume their outside activities, while older people were more likely to remain cautious about the risk, opting to continue to stay home,” they said.

The reshaping of the US financial landscape by government and bank forbearance programmes was also underscored by the report.

Consumer credit delinquencies fell further below their levels at the start of the pandemic. 

The New York Fed said 3.1 per cent of outstanding household debt was in some stage of delinquency, 1.5 percentage points lower than in the first quarter of 2020.

Home foreclosures hit their lowest level in the statistical series dating back to 1999.

Hacking China

China’s domestic surveillance programmes benefit foreign spies

An aversion to encryption makes the country’s networks vulnerable

In march elon musk, the world’s third-richest man, spoke to a conference in Beijing by video link. 

The cars that Tesla sells in China do not, Mr Musk insisted, share data with American security services. 

He was responding to the news that the Chinese armed forces had banned Teslas from their facilities over such concerns. 

A month later the firm took to Chinese social media to assure customers that the numerous cameras in their vehicles were “not activated outside North America”, and so could not be used to snoop.

Concerns about security define the trade of technology between America and China. 

Most attention is focused on the extent to which Chinese giants such as TikTok and Huawei might be infiltrating America for nefarious purposes.

But China has had concerns of its own. 

After the contours of American surveillance were laid bare in 2013 by Edward Snowden, a National Security Agency (nsa) contractor and whistleblower, the Chinese government began a campaign to replace all Western technology in government offices, lest it be used to spy. 

The brouhaha over Tesla’s cars shows how much security concerns have grown in the decade since Mr Snowden’s revelations. 

As connectivity becomes part of more consumer products, paranoia about their other uses rises.

China’s suspicion contains an irony, however. 

Removing Western devices from Chinese networks will not keep China secure from its adversaries, because the Chinese government itself insists upon weakening the security of those networks and devices for its own purposes. 

Though America tends to hyperventilate about Chinese intrusion, it is China whose digital security is more precarious.

This is because of the Chinese government’s insistence on being able to monitor and control the information that flows through the country’s digital networks. 

For instance, all messages sent on WeChat, China’s most widely used messaging application, must pass through central servers as plain text, unencrypted, so that the company can filter and censor them according to the government’s requirements. 

This makes those servers a ripe target for any foreign agents who want to spy on Chinese citizens, who between them have more than a billion WeChat accounts.

Tencent, the app’s corporate owner, must build elaborate digital-security systems to allow it to keep inspecting its users’ messages while simultaneously denying that ability to attackers. 

That is a difficult task. 

“If I were a Western intelligence agency, those servers would be incredibly valuable,” says Matthew Green, a cryptography expert at Johns Hopkins University.

Weak security is the rule, not the exception, in digital services for the Chinese public. 

Email and social media must all facilitate state access, as must industrial networks used to run factories and offices, even if the extent to which the government uses that access varies. 

In August it banned the most up-to-date version of a protocol used to encrypt web traffic, known as tls, from the Chinese internet, because it makes online surveillance harder.

The government has different security standards for itself, but these are secret. 

Speculation about the devices and systems that senior party members use to communicate is common. 

In 2013 Peng Liyuan, the wife of President Xi Jinping, was photographed using an iPhone, one of the few devices available in China which does offer a measure of security through its iMessage program. 

It was news around the world. Within a year Ms Peng was seen using a Chinese device.

Internet users in China have long objected to the low standards of data protection. 

Online crime and leaked databases are rife. 

Last year someone stole the account details for all 538m users of Sina Weibo, a microblog, and posted them on the dark web for sale. 

The government has responded by promoting programs for companies to improve customer-data protection, even as it simultaneously enforces weakness in the security of all systems. 

But as long as the government demands access to data on Chinese people, those data can never be robustly protected.

Though the American government does not publicise its cyber-operations, leaks demonstrate their extent. 

The documents provided to journalists by Mr Snowden show that the nsa found its way inside Huawei’s networks starting in 2007, looking for evidence they were being used as a back door by the Chinese government (if it found any, it was never made public). 

There is little question that spy agencies in America and other countries use China’s weak security to their advantage.

China’s jeopardy increases as the value of data which flow through poorly secured networks goes up, both in economic and national-security terms. 

The Chinese government’s plan for economic growth ensures that this is what will happen. 

It plans to expand its digital economy, automating factories and creating smart-transport infrastructure. 

As with WeChat, if the government wishes to monitor these systems, it will build them to be less secure than they could be and so vulnerable to foreign interference in a way that equivalent networks in the West do not have to be.

“The Chinese government knows the trade-off,” says Matt Perault, a technology-policy scholar at Duke University in North Carolina. 

“They are willing to bear it, which suggests that they are willing to tolerate a significant amount of foreign surveillance on their citizens.”

The government’s calculation is unlikely to change. 

Its focus on surveillance and censorship of its own people is growing. 

But the tension between security against enemies within and those without will intensify. 

Cyber-attacks using weaknesses that the government itself has demanded might prove embarrassing. 

If the stand-off with Taiwan were to escalate, China’s weak security would be a serious disadvantage. 

And the more entrenched its reliance on surveillance and censorship becomes, the harder it will be to remove the weakness on which that control is built, should the day ever come when it no longer believes the trade-off worthwhile. 

Chile votes for radicals and independents to write new constitution

Traditional parties from left and right largely shunned in election for constitutional body

Benedict Mander in Buenos Aires and Michael Stott in London 

Votes being counted at a polling station in Santiago. Chile’s president Sebastián Piñera said the country had ‘sent a loud, clear message to traditional political forces’ © Rodrigo Arangua/AFP/Getty

Chile’s stock market dived after voters backed hard-left, radical and independent candidates to write the country’s new constitution, in a poll that largely shunned traditional parties of the left and right.

Investors were particularly alarmed by the poor performance of President Sebastián Piñera’s ruling centre-right coalition, Chile Vamos. 

It won only 37 of the 155 seats in the constitutional assembly, far short of the one-third required to block major changes.

Chile suffered weeks of sometimes violent social protests in 2019, which were calmed by a decision in a referendum to draw up a new constitution to address longstanding grievances over inequality and inadequate pensions and public services.

However, the results of the weekend constituent assembly election defied forecasts of a moderate body. 

The traditional centre-left managed only 25 seats, official results showed, meaning that the left and right blocs, which have dominated Chilean politics since the Pinochet dictatorship ended in 1990, managed only 62 seats between them, just over a third of the assembly.

Instead, the results suggested that two radical blocs — one hard left including the communists, and the other of independent leftists — appeared to have secured between them 52 seats in the new chamber, allowing them to block any changes they dislike. 

Another 30 seats went to indigenous representatives and regionalist groupings.

Interpretation of the results was made harder by the plethora of independents elected, many of them little-known.

Gabriel Boric, of the far-left Broad Front, predicted that the election would mean major changes in Chile, the world’s largest copper producer. 

“We are looking for a new treaty for our indigenous populations, to recover our natural resources, build a state that guarantees universal social rights,” he said, according to Reuters. 

“We’re going to start from scratch and build a new Chile”.

Piñera, meanwhile, said that “citizens have sent a loud, clear message to traditional political forces”

Turnout in the complex election, which also included gubernatorial, mayoral and municipal polls that were postponed because of the pandemic, was below 40 per cent for the members of the constitutional assembly, far less than the four-fifths who opted for a new charter in a referendum last year.

“People with vague convictions didn’t go to the polls, while people with intense convictions did go,” said Andrés Velasco, a former Chilean finance minister who is dean of public policy at the London School of Economics.

Chile has not been spared the coronavirus second wave that has hit Latin America despite it having the highest vaccination rates in the region. 

Confirmed infections reached their highest-ever level last month, although numbers have since declined. 

The country has in recent decades become one of Latin America’s wealthiest nations, but remains an unequal society. 

The 2019 protests were triggered by a fare rise on the Santiago metro but quickly snowballed into weeks of riots which presented a major challenge to Piñera’s government.

Piñera, a billionaire former businessman, has repeatedly been accused of being out of touch, and the government has suffered repeated defeats in Congress, notably over pensions reform. 

Chile will elect a new president in November.

 Boom and gloom

The coming global economic boom could have a sting in the tail

Supply shortages are acute in America

The global economy is entering unfamiliar territory. 

After a decade of worries about inadequate demand and spending power in the aftermath of the global financial crisis, signs of insufficient supply are now emerging. 

A lack of goods, services and people means that red-hot demand is increasingly met slowly or not at all. 

There are already signs that supply bottlenecks may lead to nasty surprises which could upset the post-pandemic recovery. 

Nowhere are shortages more acute than in America, where a boom is under way. 

Consumer spending is growing by over 10% at an annual rate, as people put to work the $2trn-plus of extra savings accumulated in the past year. 

More stimulus is still being doled out.

The boom is creating two kinds of bottleneck.

The first relates to supply chains. 

There are shortages of everything from timber to semiconductors. 

The cost of shipping goods from China to America has tripled. 

Companies have not reported supplier delays this severe in decades. 

In the past year many firms have cut their investment in logistics. 

Lockdowns have left some container ships stranded. 

Companies are trying to go from 0 to 60 and it shows.

The second kind of bottleneck is in labour markets. 

In April America created only 266,000 jobs, many fewer than the 1m or more that had been expected. 

Yet job vacancies are at all-time highs, and so firms are struggling to fill positions. 

Economists argue over whether generous unemployment benefits are giving people a reason not to look for work. 

It also takes time for people to move from dying industries to growing ones.

As booming demand runs up against tight supply, inflation is in the spotlight. 

In April American consumer prices rose by 4.2% year on year, up from 2.6% in March. 

This partly reflects “base effects”: oil prices are only as high as they were in 2019, but 272% higher than in April 2020. 

It also reflects a genuine underlying rise in global prices. 

China’s factory-gate prices are rising at the fastest rate in over three years.

Central banks insist that their maximal stimulus must continue for fear of jeopardising the nascent recovery. 

Lael Brainard, a governor of the Federal Reserve, has said that the inflation spike as the economy reopens will be “largely transitory”. 

Jerome Powell, the chairman, sees little reason to worry. 

The Fed will tolerate somewhat above-target inflation for a bit, in part because it expects prices soon to fall back. 

So do many forecasters.

Yet this approach carries dangers. 

One is that inflation fades slowly. 

The supply bottlenecks of the early phase of the pandemic in 2020 cleared fast, but there is no guarantee this will happen now. 

Inflation expectations may also rise if people come to believe that central banks will act slowly and too late. 

Many companies are now discussing inflation with their investors. 

Bond-market traders think the Fed will be forced to act sooner than it wants. 

Bill Dudley, a former governor, worries that the Fed will have to raise interest rates to as high as 4.5% to cool the economy.

This points to the danger that sharp rate rises rock markets. 

So far the main event has been a sell-off in tech stocks, which is manageable. 

Banks are well capitalised. 

Yet the recent implosions of Archegos, a hedge fund, and Greensill Capital, a finance firm, are a reminder of the hidden leverage in a financial system that has come to depend on low interest rates. 

The post-pandemic boom may not always be exciting for the right reasons.

Can We Learn to Live With Germs Again?

The health of our bodies and microbiomes may depend on society’s return to lifestyles that expose us to bacteria, despite the risks.

By Markham Heid

A person clad in goggles, a mask and a reflective vest dusts a plane’s cabin with a fine mist of disinfectant. 

The chemical spray is charged with “breakthrough” electrostatic technology that helps it coat every surface and lay waste to any microscopic threats that may be lurking, specifically the coronavirus.

United Airlines produced and uploaded this particular video last April, but the sanitization regimen is not unique. 

Mass transportation authorities and countless businesses have gone to similar lengths in an effort to abide by guidelines and to mollify a rightly fearful public. 

And for the most part, the efforts have been welcome. 

One of the top comments posted to the United video reads, “Even after this pandemic you guys should keep this up.”

For more than a century — since scientists first learned that unseen germs cause infection and illness — we’ve tended to think of sterile environments as the safe ones. 

And at the start of the outbreak, when we didn’t know any better, it was sensible to disinfect as much as possible, including our groceries, clothing and personal spaces.

It took time for coronavirus researchers to figure out that the risk of surface transmission is low — the Centers for Disease Control and Prevention only recently pegged it at generally less than one in 10,000 — and that masks, physical distancing and ventilation are our most-effective safeguards.

Despite the now consensus recognition that air transmission, not surface spread, is more important, most pandemic sanitation practices have continued. 

We continue to annihilate every microbe in our midst, even though most are harmless. 

The New York City subway, for example, has been undergoing a 24-hour cleaning protocol that includes ultraviolet light and a variety of disinfecting solutions. 

Survey data shows most subway riders feel safer because of it.

But some health experts are watching this ongoing onslaught with a mounting sense of dread. 

They fear that many of the measures we’ve employed to stop the virus, even some that are helpful and necessary, may pose a threat to human health in the long run if they continue.

Their worries center on the human microbiome — the trillions of bacteria that live on and inside our bodies. 

They say that excessive hygiene practices, inappropriate antibiotic use and lifestyle changes such as distancing may weaken those communities going forward in ways that promote sickness and imperil our immune systems. 

By sterilizing our bodies and spaces, they argue, we may be doing more harm than good.

In January, a global consortium of health researchers published a paper in the Proceedings of the National Academy of Sciences (PNAS) in which they raise the alarm about the microbial fallout that may follow in the pandemic’s wake. 

“We’re starting to realize that there’s collateral damage when we get rid of good microbes, and that has major consequences for our health,” says B. Brett Finlay, first author of the PNAS paper and a professor in the department of microbiology and immunology at the University of British Columbia.

Almost everything we know about the microbiome is uncertain, including how our activities and environments influence its makeup. 

But Dr. Finlay and others argue that our collective health may depend on our willingness to holster our sanitizers and cleansers, moderate our use of bacteria-slaying drugs, and resume old habits that nourish our microbial communities. 

In other words, we’re going to have to live with germs again.


The world and just about everything in it, including people, are awash in microbes. 

Bacteria blanket our surfaces, suffuse the air we breathe and saturate certain areas of our bodies, especially the gut. 

While some microbes and other microscopic particles are a threat to us, a vast majority are benign. 

And there’s mounting evidence that our health relies on our early and ongoing interactions with them.

Dr. Graham Rook, an emeritus professor of medical microbiology at University College London, likens the immune system to a computer. 

He says that the microbes we encounter in daily life — on other people and in our spaces — are the data that the immune system relies on to program and regulate its operations.

Deprived of these exposures, especially at the start of life, the immune system is prone to malfunction. 

The result can be allergies, asthma, autoimmune disorders, obesity, Type 2 diabetes and other chronic medical conditions.

The “hygiene hypothesis,” introduced in 1989 by the epidemiologist David Strachan, first made the case that bodies deprived of contact with microbes could be at risk for health problems. 

The hygiene hypothesis has evolved over time, and experts continue to debate many of its finer points. 

But it’s now clear that exposure to “good” bacteria is necessary for a person’s health, and that living in too-sterile environments may threaten us in ways scientists are only just beginning to grasp.

Before the pandemic, there was growing recognition among both doctors and the public that aspects of modern life may be upsetting our balance of healthy microbes, perhaps especially in our guts, and hurting our health as a result. 

This idea is not so much controversial as simply too new to be fully appreciated; roughly 95 percent of the published microbiome scholarship has come in just the last decade, and two-thirds of it only in the last five years. 

But already, research has revealed that, apart from training the immune system, our bacteria produce molecules that affect the workings of our every cell and organ.

“The microbes we carry in our gut could affect the function of the brain, the spinal cord, the joints or things far from where those microbes live,” says Dr. Eran Elinav, another of the PNAS paper’s authors and a principal investigator at the Weizmann Institute of Science in Israel.

While the gut microbiome has thus far garnered the most scientific attention, humans have other reservoirs of microbes — on our skin, in our lungs, maybe even in our brains — that also seem to perform crucial jobs, from strengthening tissues to influencing the function of our heart and hormones. 

While scientists don’t know exactly how these tiny communities form and work, or how much people’s environmental exposures influence them, researchers know enough to recognize that indiscriminately killing microbes could have irreversible consequences.

There’s some conjecture that the imbalance or loss of good microbes may heighten a person’s susceptibility to infection — including, perhaps, to the coronavirus. 

Late last year, researchers based in Hong Kong observed a link between certain microbiome characteristics and severe Covid-19. 

Experts have hypothesized that unwell gut microbiomes may partly explain why older adults and adults with conditions such as obesity or Type 2 diabetes seem to be at greater risk of serious Covid-19 illness. 

There’s even some speculation that microbiome factors play a part in so-called long Covid — the brain fog, fatigue and other persistent symptoms that afflict many in the aftermath of the infection.

“There’s a wealth of evidence to suggest the microbiome has an influential role in our response to viral infections,” says Brent Williams, an assistant professor in the department of clinical pathology and cell biology at Columbia University. 

This raises intriguing questions about how the microbiome might influence disease outcomes for Covid, he says, “or how it might be altered by Covid, and whether those alterations persist.”


The picture that’s emerging is that the human body, much like a rain forest, is home to a vast and symbiotic ecosystem of organisms. When that ecosystem is disrupted, there are consequences.

“We can look at many of the things we’re doing now to prevent infection and see how this could have major effects,” says Dr. Finlay.

Topping the list of concerns, he and others say, is our injudicious use of powerful antibiotics — drugs that can kill some pathogens but can also wipe out healthy bacteria in the body. 

A recent analysis found that during the first six months of the pandemic, among the hospital admissions studied, more than half of Covid-19 patients received antibiotics even in situations where the benefit of those drugs was uncertain.

Lance Price, a professor at George Washington University’s Milken Institute School of Public Health and the founding director of the Antibiotic Resistant Action Center at George Washington, says that as doctors have figured out how best to treat the coronavirus, antibiotic use has dropped. But, he says, 

“Even before the pandemic, we know that half of antibiotic use was inappropriate.”

In addition to antibiotic overuse, Dr. Finlay says that “hyper-hygiene” is, quite literally, overkill. 

“Wiping down or spraying every surface with antimicrobial agents gives people comfort, but it’s probably not doing much to protect us from Covid,” he says.

Hygiene zealotry not only deprives people of interactions with helpful bacteria, but it may also be driving some essential microbes into extinction. 

“We really don’t know what effect all this hyper-hygiene and hyper-cleanliness will have,” Dr. Finlay says. 

“This is the biggest experiment in a century, and unfortunately we have more questions than answers.”

While improper antibiotic use and excessive sanitization are two threats to our microbes that we can probably dispense with now, some other pandemic safety measures involve thornier risk-reward trade-offs. 

In the months to come, the health of our microbiomes may partly depend on the willingness of those who are vaccinated and at low risk to take off their masks and intermingle with one another, as we all used to do.

“A lot of things people do when they’re together that we didn’t use to think about — shaking hands or embracing, kissing or hugging — these sorts of sociocultural practices could play a part in the exchange of microbes,” says Tamara Giles-Vernick, another of the PNAS paper’s authors and a medical anthropologist at the nonprofit Pasteur Institute in Paris.

Already, there’s been some debate about whether people should eventually “go back” to shaking hands or congregating indoors in large numbers. 

These sorts of interactions undoubtedly expose people to pathogens. 

And as we learned last year, ditching them would most likely help to spare us the worst of the cold-and-flu season. 

But it’s also possible that abandoning these customs, and spending more time isolated from one another, could deprive us of contact with healthy microorganisms.

This idea is controversial. 

“I’ve always felt that people don’t do enough to prevent cold and flu, and so in a sense many of these changes have been healthy,” says Jo Handelsman, an infectious-disease researcher and professor at the University of Wisconsin-Madison. 

She says it’s unclear whether shaking hands or spending time in crowded places meaningfully contributes to microbiome health, and so avoiding such risky practices may be all upside — a view that many infectious disease experts share.

The microbiome scientists all acknowledge the gaps in the research. 

But they say that what is known about the importance of our microbes should caution us against major changes to the ways we live and interact.

While experts are concerned about the threat the pandemic poses to our microbiomes, they all say it’s difficult to offer succinct, universally appropriate advice for how to behave. 

A person’s age, health, location, vaccination status and other variables all change the risk-reward equations.

“The general public always wants a straightforward answer, but in an evolving situation like this, we’re going to have to learn to be more nuanced about things,” says Marsha Wills-Karp, chair of the department of environmental health and engineering at the Johns Hopkins Bloomberg School of Public Health. 

“I’m married to an infectious disease physician, and he and I don’t always agree on what’s appropriate.”

In this moment, when so much of the population remains unvaccinated and at risk, she says that people must continue to wear masks and follow physical distancing directives. 

It’s also prudent to wash or sanitize hands, especially before eating.

“But trying to sterilize everything and create these artificially germ-free environments is probably not essential,” she says. 

“And for the people close to you, if you’re both vaccinated, I think it’s OK to get close again and hug.”

Undoubtedly, many will struggle to resume their old prepandemic habits. 

“Things that used to feel normal are initially going to feel weird and uncomfortable,” says Michelle Newman, an anxiety specialist and professor of psychology at the Pennsylvania State University. 

“Even to me, the thought of getting on a plane or going to a big conference feels more intimidating.”

But she says re-engaging with our old lifestyles will help quell any attendant anxieties. 

“If you associate a situation with discomfort, the more you put yourself in that situation, the easier and more comfortable it will become,” she says.

For those who aren’t yet able to mix and mingle — and right now, that’s most of us — there are other ways to support microbial health. 

“If you want to do something proactive right now, I would put eating a healthy diet high on your list,” says Dr. Emeran Mayer, a professor of medicine, physiology and psychiatry and co-director of U.C.L.A.’s Cure: Digestive Diseases Research Center. 

He says that plant foods (legumes, greens, whole fruits, a variety of vegetables), as well as fermented foods, support the richness and diversity of the gut microbiome. 

So, too, does limiting one’s intake of processed and fast foods, especially those that contain added sugar.

Other healthy habits like exercise and getting adequate sleep are all supportive of microbiome health. 

Gardening, hiking and other interactions with nature may be especially beneficial.

“The more we learn about our relationships with the microbial world, the clearer it is that we are connected to them and to the rest of the natural world,” says Brendan Bohannan, a professor of environmental studies and biology at the University of Oregon. 

“Getting outside and exposing ourselves to microbes beyond our indoor spaces may have many positive impacts.” 

Such exposure, he notes, might even counterbalance any negative effect that extended indoor stays might be having on our microbiomes.


For politicians and health officials, the great challenge of the pandemic has been weighing the immediate threat of the virus against the many detriments (social, economic, psychological, developmental) that accompany business and school closures, distancing imperatives and other measures intended to slow its spread. 

The longer the pandemic lasts, the more these collateral concerns start to feel like primary ones.

While there is much we can do, and much we can stop doing, to strengthen our microbial communities without exposing ourselves to undue risk, experts say that convincing a rightfully skittish public is a tall order. 

As this pandemic has made clear, all people are walking and coughing vectors for infectious disease. 

In the United States and elsewhere, there are also long-held and deeply embedded sociocultural norms that prioritize hygiene and denigrate dirt and bacteria.

Meanwhile, technology has made it easier than ever for us to live and work in isolation.

When he educates people about the importance of intermingling with microbes, Dr. Finlay likes to point out that our bodies contain at least as many bacterial cells as human cells. 

He also emphasizes that, before the pandemic, only one of the top 10 causes of death in America — influenza — was attributable to an infectious disease that someone could “catch.” 

Nearly all the rest, such as heart disease and stroke, cancer, brain disease and diabetes, are associated with poor microbiome health or dysfunction.

“You can’t change your genes, but you can change your microbes,” he says. “They’re our friends.”

He and other experts will continue to work to raise awareness about the importance of bacteria and the microbiome. 

But for many people, only the passage of time and the suppression of the coronavirus will assuage fears of hidden pathogens.

“What I’m most worried about after this pandemic has passed is that people will be nervous about being exposed to microbes, and so they won’t interact with other people and with the world,” says Dr. Bohannan. 

“That’s totally understandable — we’re all going to be traumatized by this. 

But like a storm, this will pass. 

And after the storm we’re going to need to go outside and be with each other again.”

Markham Heid is a health and science journalist who writes regularly about the microbiome and human health. His work has appeared in Time, Popular Mechanics, Everyday Health, Sports Illustrated and elsewhere.

Photographs by Maisie Cousins for The New York Times.