Glenn Hubbard: ‘The economy needs more than neoliberal medicine’

The Columbia economics professor says that Reaganism has to be rethought — but Biden’s approach does not add up

Gillian Tett

   © Leonie Woods

In the autumn, Glenn Hubbard, a former dean of Columbia Business School and longstanding Republican economic adviser, thinker and policymaker, stuck out his neck.

At a time when many Republican thinkers were too scared to directly criticise Donald Trump because they thought he could win the 2020 election race, Hubbard lambasted Trump’s team for their lack of any tangible economic plan. 

“[Trump] has no economic plan. I don’t mean that I don’t like it, it doesn’t exist,” he said. 

“Maybe [he should] talk about fiscal reform, or trade in a way that engaged our allies.” 

He lamented the fact that the then president had not done that.

That criticism might seem like ancient history, given that Joe Biden won the election — and is now producing dramatic policy proposals, like $4tn-odd spending bills. 

But it is not: as the Republicans tear themselves apart over non-economic issues (such as Trump’s claim of electoral fraud), the question of what economic policies the party stands for is becoming increasingly fraught.

Should it back an infrastructure bill? 

Does debt still matter? 

Where do Republicans stand on issues such as income inequality, or the free-market vision espoused by Milton Friedman? 

Should Republicans back the Fed’s ultra-easy monetary policy? 

Or is Larry Summers — the former White House economic adviser — correct to warn about inflation risks? 

In this interview, the FT’s editor-at-large, US, Gillian Tett, pitched these questions to Hubbard, who is well placed to answer them since he was a former chief White House economic adviser himself, for George W Bush, and has a book coming out later this year, The Wall And the Bridge, which lays out a new manifesto.

The bottom line? 

Hubbard thinks that 1980s-style neoliberalism — or the mantra of Ronald Reagan — needs to be rethought for the 21st century, with a new embrace of Adam Smith. 

But Biden’s approach, he insists, does not work.

Gillian Tett: Glenn — or Professor Hubbard — it’s fantastic to talk today, because we’re dealing with at least three things [in the economy] now. 

Gross domestic product data show that the economy is rebounding very fast from the pandemic; the Federal Reserve just said that it doesn’t intend to raise rates any time soon; and President Joe Biden has pledged a massive fiscal package. 

So what is your forecast for the American economy? 

Glenn Hubbard, former chief White House economic adviser, says the Biden administration has to tell the public that if it wants a big government, it will have to pay for it © David Paul Morris/Bloomberg

Glenn Hubbard: Re-opening as the virus recedes would always lead to a very significant pop in GDP growth. 

So the near-term is not really the big question. 

There will certainly be a transitory increase in inflation. 

But I think the Fed on balance is correct, that boost is likely to be transitory. 

My worry is when I hear the Fed talk, as its chair Jay Powell has done, about wanting to watch for labour market “re-healing” to finish. 

The problem in the labour market is [largely] structural. 

Just running the economy hot by the Fed doesn’t fix that.

On fiscal policy, this is not just a “boost”. 

The first Biden plan was a boost. 

The American Rescue Plan was intended as stimulus. 

But the American Jobs Act, the American Families Plan, those are really a remaking of the size of government. 

It has to be paid for and arithmetically can’t be paid for by taxes on the rich. 

There’s just not enough there. 

So the honest conversation with the American people is a matter of public choice: if you want a big government that does what President Biden wants [it to do], you’ll have to pay for it. 

GT: How confident are you that inflation pressures are transitory?

GH: One can never be completely confident, but I think if the Fed had a clearer policy story I could be confident that commodity price increases are transitory. 

What worries me is the Fed thinking it can lean against structural changes in the labour market with monetary policy. 

One might worry a bit about inflation risks in the long-term — some of the structural headwinds against inflation to do with demography and growth in the emerging world, particularly in China, are going away. 

GT: Do you think that the Fed should be indicating that it’s willing to raise rates if inflation rises?

GH: I think the Fed is unlikely to do that. 

[But] one of the reasons you are seeing implied volatility in rates and credit markets so high relative to equities, is the fear in the bond market that, maybe, the Fed is saying one thing but if backed into the corner could do another. 

Remember that the Fed bought around half of Treasury issues last year, and owns 40 per cent of all of the outstanding 10-year plus maturity treasuries, so the Fed’s thoughts there, which aren’t really clear to the bond market, are very, very important. 

GT: Larry Summers has said this is way too much [stimulus], way too fast and will create inflation risks. 

You and Larry don’t often agree, but would you agree on this? 

GH: I would agree on the risk, but it’s [not] the problem that is worrying me the most. 

What worries me even more is [in trying to] create a government that large . . . the budget math that we’re being shown is dishonest. 

We’re being presented [with a scenario where] a few years of spending will be paid for by many more years of taxes. 

We’re hiding from the American people that if you want a government that does those things, tax burdens will have to be higher.

If you look at the math on the tax burden, the [proposed] corporate tax increase or capital gains tax increase are not remotely large enough. 

The other structural thing that worries me is that I do see productivity reductions and investment reductions as a result of these large tax increases. 

GT: Biden said if you are earning less than $400,000 a year you will not see your taxes go up. 

GH: Well, it’s just not true, [neither] in the near-term [nor] the long-term. 

Take the corporate tax. 

Many economists have concluded that much of the burden of the corporate tax is borne by workers. 

In the 1970s and early 1980s, we thought it was capital that bore the burden of the corporate taxes. 

[But] that is not what economists believe today. 

So you simply cannot say that people who make less than $400,000 aren’t going to bear a part of the burden of the tax. 

Likewise with capital gains, the president says: “I’m only going after 0.3 per cent of taxpayers,” meaning [those] that make more than a million dollars a year and have capital gains. 

But those individuals don’t have 0.3 per cent of the capital gains — they likely have the bulk of them. 

So if there are any effects on risk-taking, on saving and investment, the [risks] are very large.

Those effects are borne by the economy, not by the top 0.3 per cent, so in the near term the statement is simply a lie. 

And in the longer term it’s most definitely a lie, because if you look at the budget math here, there’s going to be a large revenue hole. 

Somebody has to pay for it. 

GT: Well, what about that “somebody” being companies? 

GH: Let’s put the tax changes into two buckets. 

On the rates, I don’t think we want to go as high as the president is proposing, certainly not back to the old rates. 

On the base, president Biden is proposing a tax increase by base broadening — it’s a very, very big change. 

I expect companies will acknowledge they need to pay some minimum level, but the math isn’t going to add up. 

GT: What about taxes under the guise of climate change action, such as a fuel tax or value added tax?

GH: I think it’s a great idea. 

For years I have supported a carbon tax because I do believe that it is one of the best ways to deal with climate change. 

I’m very sceptical of subsidies in green things but if you put a price on carbon, businesspeople will rush around and innovate and do it efficiently and it does not have to be regressive. 

I don’t understand why the administration that calls itself both progressive and green is walking away from the one instrument that might be able to help with both! 

About VAT — there is no question that if we want the government President Biden is suggesting, you absolutely have to have a VAT.

European states that have much bigger [state sectors] than the American state as a share of GDP are not financed with taxes on capital. 

In fact, in many European countries capital taxes are lower than they are in the United States. 

They’re financed by consumption taxes. 

GT: It is baffling that the Biden administration hasn’t put carbon taxes on the table. 


GH: There is a fascination on the left with command and control regulation. 

But that’s not nearly as efficient as just pricing the bad rather than subsidising the purported good.

GT: Why do you think Biden’s package is undermining productivity? 

GH: Let me just take one step back. 

Some discussions of secular stagnation come from insufficient aggregate demand. 

Another school of thought thinks that structurally we have a problem with productivity growth, in terms of the supply side of the economy and the economy’s potential to grow. 

That is where I’m coming from. 

The tax plans are definitely anti-investment, as the lack of capital deepening explains low productivity growth and capital gains tax increases can affect risk-taking. 

There’s certainly nothing to enhance productivity [in Biden’s plans] and a lot to discourage productivity. 

It is not just the tax policy. 

I worry about a monetary policy that could lead to zombification of firms — an environment of very low interest rates that sustain low-productivity firms. 

To President Biden’s credit, pieces of what he’s proposing that are true infrastructure could, in fact, raise productivity, but that is a small part of what he’s actually calling infrastructure. 

GT: Are you concerned about a future debt crisis? 

GH: Well, we are the reserve currency country, and we are borrowing in our currency, so I think a slow and steady malaise is more likely. 

To give a practical example, the Medicare trust fund could run out of money within a year or so, social security within five or so years. 

That will force discussions in Washington as to whether the public may wish to have a government this size. 

GT: So you don’t expect a debt crisis per se because of the reserve currency status?

GH: [Not] at the moment. 

GT: Should Republicans be co-operating to create a bipartisan bill? 

GH: You could get bipartisan support for a new “GI bill” to prepare workers to adjust from the Covid world, for example, support in community colleges.

I’m not talking about free community college but supply side support — increasing their capacity to train people. 

Where you won’t get bipartisan support is [for] the notion that we need to move away from a work-supported social insurance system to a broader cradle-to-grave safety net.

The administration really fuzzed that up by calling it an infrastructure bill. 

Infrastructure doesn’t have to be just roads and bridges and airports — it could be broadband. 

But not healthcare. 

GT: Are childcare support and elderly support part of “infrastructure”? 

GH: No — those are social spending. 

GT: One of the interesting ways you frame this debate is with the contrast between Keynes and Hayek, ie whether you’re trying to prop up the current system or encourage more rapid transformation. 

What do you mean?

GH: You could think of Covid [in terms of] a Keynesian response — we have a collapse in demand. 

The Keynesian response is not fanciful. 

But Hayek would say the new world after Covid isn’t going to look like the old world, so why support every single business? 

Both are right. 

We did a good job in policy on the Keynesian part. 

[But] we’ve done less well [thinking about Hayek]. 

GT: What do you think about Larry Summer’s concept of secular stagnation? 

GH: There’s a scene in Dickens’ A Christmas Carol, when Scrooge asks, [something like] “are these the shadows of things that are or might be?”. 

I feel the same way about Bob Gordon’s descriptions of the American economy — Larry and Bob are talking about the shadows of things that could be if we have bad enough public policy, going back to the anti-productivity story. 

But I don’t think they’re inevitable. 

Every businessperson with whom I speak is pretty optimistic about the technology frontier in productivity. 

If there’s a reason for pessimism, it’s more about the political system’s ability and willingness to let that productivity growth [run free].

GT: Do you think that the Republican party knows what it stands for with economics?

GH: I think it is a huge open question. 

I give [former] president [Trump] classic GOP credit for things like business tax changes or cost-benefit analysis in regulation, but obviously things like protectionism, anti-immigrant-ism are not classic Republican ideas. 

For the party today, I think there is a sense of what’s lost, but not of what needs to be gained. 

The economy as a whole needs more than neoliberal medicine. 

What’s next? 

One flavour is protectionism — antitrade fears and anti-foreign labour immigrants. 

Another approach Republicans could take is to go past the neoliberalism to liberalism (with a small L), to Adam Smith. 

He was anti-mercantilist — that’s what got him angry in The Wealth of Nations — and he was very interested in the ability of everybody in the economy to compete.

So a new Republican agenda might do more to help people compete — that sounds more like Lincoln, or like Roosevelt’s GI bill. In that lies a new agenda. 

But I don’t see the party really moving in that direction. 

GT: What about the second book of Smith’s, The Theory of Moral Sentiments? 

GH: Smith referred to “mutual sympathy”, which today we would call empathy. 

Forward-leaning businesspeople and business leaders think that way. 

I don’t see ESG as somehow an enemy of shareholders — this isn’t Milton Friedman versus socialism — it’s more a matter of what really is in the long-term interest of the firm.

Remember, Smith railed against the British East India Company, which he thought of as a cancer. 

He thought you had to be very careful in the social framing of corporations. 

Businesspeople today need to understand the corporate structure is a social gift. 

In fact, capitalism is a social gift. 

If the public doesn’t want it, it won’t happen. 

GT: I have a book coming out in a few weeks’ time that stresses this social and cultural aspect of business and finance and economics, and argues that business leaders need to move beyond tunnel vision to use lateral vision. 

Do you agree with this? 

GH: Yes. 

When I teach students political economy, I remind them that great thinkers like a Friedman or Hayek or Smith wrote [for] the times in which they lived. 

Friedman and Hayek were writing in response to a very slovenly and inefficient corporatist economic system and were horrified by fascism. 

If Ronald Reagan were with us today, I don’t think he would be the 1980s Ronald Reagan. 

If Friedman and Hayek were with us today, they might have a different view. 

Context shifts.

GT: Friedman was also operating when people assumed that they could outsource the difficult social decisions to government and when there wasn’t radical transparency and customers, clients and employees couldn’t see exactly what firms were doing. 

Does that matter?

GH: Yes. 

If Friedman were here he might correctly remind us that there are big social externalities no one company can fix. 

But there is no reason businesspeople can’t be leaders. 

When the Marshall Plan was passed, that was not because Congress in its great wisdom decided to do something. 

It was because the business community came together and said: “Good Lord, we are going to have communism in western Europe and what’s that going to do to our economic system?” 

They pushed Congress. 

I understand that [today business is] afraid. 

But it’s not an excuse not to act. 

At many companies, their own employees are going to put pressure [on them to act]. 

GT: You are starting to see a level of company collaboration which was unimaginable when we had Thatcherism and Reaganism. 

Will this last? 

GH: I do [think so] and Hayek would have celebrated this co-ordinated response because it bubbled up from the bottom. 

If you compare the production of vaccines, which was largely a private-sector activity, to the distribution of vaccines, which was more a public-sector activity, I think we know which one seemed to work better.

There are things that could help that — imagine if Biden put applied research centres all around the country that were linked with universities. 

That might help companies fix localities, as well as solving big problems like vaccines. 

GT: Why is no one in the Republican party coming out with this positive policy agenda? 

GH: I think it will happen — but [now] there’s a vacuum. 

Nihilism isn’t going to defeat Biden — President Trump lost by seven-plus million votes, that’s not close. 

So people will ultimately get [new policies] because what else is there for the Republican party to do? 

The other choice would be to go back to straight neoliberalism and I don’t know that Ronald Reagan could become president today if that were his platform! 

GT: Are you concerned that we have an ESG bubble?

GH: I am, in several aspects. 

We are running the risk of industrial policy and rent seeking, with just subsidising “green things”. 

I also worry about how CEOs can deal with this — you don’t want the CEO spending half of his or her day responding to social concerns.

GT: What about protectionism? 

Can the Republicans present an alternative voice on this? 

GH: I hope so, but I’m not sure. 

Like almost all economists, maybe other than Peter Navarro, I believe in free trade. 

So why is something that is obvious in Econ 101 not so popular with the public?

I think for two reasons. 

One is whenever your Econ 101 professor talked about the gains from trade, he or she always [had] the idea that there would be losers, but compensation would somehow occur — and it hasn’t.

[Second] free trade is one of those examples, like the old classical gold standard, of a system that’s outside-in. 

You have to sign up for the rules of the game and then you just adjust. 

I think we need to go back to a period that says, look, we do need to understand domestic constituencies. 

That could mean much more support for training, it could be wage insurance, it could be lots of things rather than just saying free trade. 

GT: So it’s about trying to talk about free trade with both parts of Adam Smith. 

GH: Yes, exactly. 

Even Smith, who was the champion for openness, would not have countenanced whole areas just being left behind. 

Smith talked a lot about places — he said something like a man is a sort of luggage that’s hard to move, meaning you really have to look after places, not just jobs . . . its culture. 

GT: Hey, anthropology can mingle with economics! 

GH: Exactly — two social sciences, peas in a pod. 

GT: So what’s happening to the economics profession? 

With issues like [the debate around Larry Summers’ criticism of Biden’s policies] are we seeing a tribal warfare break out between economists? 

Is there a rethink of economics? 

Is Biden moving away from them?

GH: Well, let me start with some good news: the young stars in the [economics] profession today tend to be people who are talking about big problems with new tools and techniques, ranging from development to monetary policy to labour markets. 

I think that’s entirely healthy. 

I think the government needs people who have big macro views [too]. 

If I were in Janet Yellen’s shoes, I’d want to be talking to economists who could continue to give me that perspective, but also get micro perspectives from labour and financial markets. 

So there needn’t be a war. 

[But] I do worry from the way the Biden administration is talking about policies that economists just aren’t very involved at all. 

That’s not the first administration I’ve seen that happen — but it is a concern for the economics profession. 

GT: What is next for you? 

Do you want to try and fashion the new Republican vision of economics? 

GH: I do — not because it’s Republican, but because I think it’s just an important policy vision.

Glenn Hubbard is the author of the book ‘The Wall and the Bridge’ due out later this year

Gillian Tett’s forthcoming book Anthro-Vision: A New Way To See In Business And Life is published in June.

This above transcript has been edited for brevity and clarity

A shockingly possible war

China’s growing military confidence puts Taiwan at risk

All-out conflict may not feel imminent, but America is deeply concerned

On june 29th 1950 the uss Valley Forge, flagship of America’s Seventh Fleet, passed through the Taiwan Strait. 

A battle group defended her flanks, America’s first naval jets sat in her hangar, and a new vision of American-dominated Asian security unfurled in her wake.

Only a few months before, America’s secretary of state, Dean Acheson, had declared that “The Asian peoples are on their own, and know it.” 

But on June 25th Stalinist North Korea launched an invasion of its southern neighbour, and a country confronting communism could no longer leave Asia alone. 

America would fight with South Korea. It was to join in that defence that the Valley Forge was steaming north from Subic Bay.

Her route had added purpose. 

Containing Asian communism meant more than fighting North Korea. 

It also required making sure that Mao Zedong—mainland China’s ruler since the previous year—did not take the island of Taiwan from the Nationalist regime led by Chiang Kai-shek, who had been forced to retreat there. 

On June 27th President Harry Truman announced a new Taiwan policy: America would defend the island from attack; the Nationalists must, for their part, cease air and sea operations against the mainland. 

“The Seventh Fleet will see that this is done,” the president declared, with nicely laconic menace. 

Hence the Valley Forge’s show of strength.

From that week on, to the relief of some and the frustration of others, Asian peoples were no longer on their own.

The Korean war transformed the region into a theatre of ideological struggle just as fraught as divided cold-war Europe. 

For nearly three decades the Taiwan Strait saw ships of the Seventh Fleet acting as a tripwire between the two Chinas. 

There were early battles over outlying islands, including a crisis in 1958 in which Mao’s brinkmanship nearly started a nuclear war. 

But over time the rivals to the west and east of the strait settled into an uneasy half-peace, both adamant that they were the one true China, neither able to act on the conviction.

Over time Taiwan became the prosperous, pro-Western democracy of 24m people which it is today. 

While the mainland saw traditions and social codes destroyed by Maoist fanaticism, Taiwan has a rich religious and cultural life. 

It has come to enjoy raucous free speech and a marked liberal streak: it was the first Asian country to legalise gay marriage.

A generation ago, it could matter greatly whether someone’s grandparents had arrived from the mainland in 1949 or had deeper roots on the island. 

That has now changed, especially among the young. 

In 2020 a poll by the Pew Research Centre, a Washington-based research outfit, found that about two-thirds of adults on the island now identified as purely Taiwanese. 

About three in ten called themselves both Taiwanese and Chinese. Just 4% called themselves simply Chinese.

Leaders in Beijing differ; they consider them all Chinese. 

They tell their own people that most citizens of Taiwan agree, and that the historical necessity of national unification is being thwarted by secessionist troublemakers egged on by America.

Once, Taiwan was a point of compromise between the two powers. 

On January 1st 1979, the day that America recognised the People’s Republic of China, the economic reformers running the mainland changed their Taiwan policy from armed liberation to “peaceful reunification”, soon afterwards adding a promise of considerable autonomy: “one country, two systems”. 

But for the past 25 years that conciliatory offer has been accompanied by an unprecedented military build up.

In recent years China’s rhetoric towards Taiwan has sounded new notes of impatience. 

And the crushing abnegation of its promise to observe “one country, two systems” in Hong Kong over the past two years has deepened Taiwanese distrust. 

Last year the issue helped Tsai Ing-wen of the Democratic Progressive Party (dpp) to be re-elected president.

In principle the dpp favours the creation of a Taiwan that is formally its own nation; but to declare independence in that way would trigger massive Chinese reprisals. 

To keep that crisis at bay, Ms Tsai, a moderate, cat-loving academic, relies on an artful diplomatic dodge: that she governs a country which, while proudly Taiwanese, uses the legal name of the Republic of China which it inherited from the Nationalists who arrived in 1949. 

China’s leaders detest her.

The passage of time poses a dilemma for China. 

Every year, China’s ability to coerce Taiwan economically and militarily grows greater. 

And every year it loses more hearts and minds on Taiwan. 

Should rulers in Beijing ever conclude that peaceful unification is a hopeless cause, Chinese law instructs them to use force.

Present fears

This dynamic alarms the heirs to Acheson. 

Though the accord of 1979 cast Taiwan into non-state limbo, the island’s security remained—as a matter of American law—a question of “grave concern”. 

When in 1996 China sought to intimidate the Taiwanese, about to vote in their first free presidential election, by means of missile tests, President Bill Clinton ordered the uss Nimitz, a nuclear-powered aircraft-carrier, and her attendant battle group to the waters off Taiwan. 

The missile tests stopped.

    A man with a PLAN

American military commanders are increasingly open about their concerns that, in the context of Taiwan, the balance of military power between China and America has swung in China’s direction. 

A 25-year campaign of shipbuilding and weapons procurement, begun in direct response to the humiliation of 1996, has provided the People’s Liberation Army Navy (plan) a fleet of 360 ships, according to American naval intelligence, compared with America’s 297. 

On April 23rd state media hailed the symbolism of a ceremony in which China’s supreme leader, President Xi Jinping, commissioned three large warships on the same day: a destroyer, a helicopter-carrier and a ballistic-missile submarine. 

The second of these is ideal for airlifting troops to a mountainous island, the media noted with glee. 

The third is a way of deterring superpowers.

America still boasts more, better carriers and nuclear submarines. 

It has much more experience of far-flung operations, and it has allies, too. 

But America’s forces have global duties. 

China would be fighting close to home and thus enjoying the benefit of the pla’s land-based aircraft and missiles. 

Lonnie Henley, who was until 2019 the chief Pentagon intelligence analyst for East Asia, sees the radars and missiles of the integrated air-defence system along China’s coast as the “centre of gravity” of any war over Taiwan (see map). 

Unless those defences are destroyed, American forces would be limited to long-range weapons or attacks by the stealthiest warplanes, Mr Henley told a congressional panel in February. 

But destroying those defences would mean one nuclear power launching direct attacks on the territory of another.

And the Chinese build-up continues apace. 

History is an imperfect guide, but offers precedents to ponder, says a senior American defence official. 

“The world has never seen a military expansion of this scale not associated with conflict.”

It is not just a matter of numbers. 

China has carefully focused its efforts on the ability to defeat American forces that might trouble it. 

It has missiles designed expressly for killing carriers, and others that would allow precision strikes on the American base on Guam. 

The defence official lists other fields in which China has worked to neutralise areas of American strength, whether that means investment in anti-submarine weapons and sensors or systems to jam or destroy the satellites on which American forces rely.

Copying an American method, China has set up a training centre with a professional opposing force that mimics enemy (in this case American) doctrines and tactics.

Horrible imaginings

The head of Indo-Pacific Command, Admiral Phil Davidson, told a Senate hearing in March that China’s fielding of new warships, planes and rockets, when considered alongside the regime’s unblushing readiness to crush dissent from Hong Kong to Tibet, makes him worry that China is accelerating its apparent ambitions to supplant America and its allies from their position atop what he called the rules-based international order—a phrase that China sees as code for Western hegemony. 

Pondering the specific risks of a Chinese attack on Taiwan, the admiral told senators that “the threat is manifest during this decade, in fact in the next six years.”

Admiral John Aquilino, nominated to be Admiral Davidson’s successor as head of Indo-Pacific Command, told a confirmation hearing in March that work to shore up America’s ability to deter a Chinese attack on Taiwan is urgent. 

While he stopped short of endorsing his predecessor’s timeline of six years, he called the prospect of a Chinese use of force “much closer to us than most think”. 

Anxiety has been raised further by war games involving Taiwan scenarios, both secret and unclassified, that were won by officers, spooks or scholars playing the role of China.

The admirals’ worries mix judgments about China’s capabilities with hunches about its intent. Bonnie Glaser of the German Marshall Fund, a public-policy outfit, notes that their mission is to make plans, in this case to win a war over Taiwan. 

Once they realise that victory may elude them, or may only be possible at great cost, panic is understandable. 

That does not mean they are correctly assessing China’s incentives to act soon. 

Strikingly, some of the intelligence officers paid to analyse the world for admirals and generals are noticeably calmer. 

“The trends are not ideal from a Chinese perspective,” says Mr Henley. “But are they intolerable? I just don’t see them being in that grim a mindset.”

When the battle’s lost and won

A broader American angst is driven by the knowledge of what defeat would mean. 

Niall Ferguson, a historian, recently wrote that the fall of Taiwan to China would be seen around Asia as the end of American predominance and even as “America’s Suez”, a reference to the humbling of Britain when it overreached during the Suez crisis of 1956. 

Asked about this idea in early April Matt Pottinger, who was head of Asia policy in the Trump White House, agreed and added another reason for Asian allies to fear such a public loss of American credibility. 

When Britain stumbled at Suez, America had already taken its place as the leader of the Western world, Mr Pottinger told a Hoover Institution podcast. 

Today, he observed, “There's not another United States waiting in the wings.”

For all its newfound strength Chia faces daunting odds. 

A full-scale amphibious invasion of Taiwan, a mountainous island that lies across at least 130km of water, would be the most ambitious such venture since the second world war. 

America has spent years nagging its Taiwanese allies to capitalise on their natural insular advantages, for instance by buying lots of naval mines, drones and coastal-defence cruise missiles on mobile launchers to sink Chinese troop ships, rather than continuing to splurge on tanks and f-16 fighters. 

Randall Schriver, the assistant secretary of defence for Indo-Pacific Security Affairs in 2018-19, promoted efforts to help Taiwan disable Chinese radar and other sensors: “If we are able to just blind the pla, that would be a huge contribution to the fight.”

If a Chinese amphibious invasion of Taiwan were to fail, or military conflict to reach a stalemate, would it fight on? 

Outsiders offer no consensus. 

Mr Henley suggests that a failed invasion might evolve into a long-term blockade—a strategy to which Western defence planners are paying increasing attention. 

There is a much-heard view that once China starts fighting anything short of victory would mean regime-toppling humiliation. 

But Mr Schriver is sceptical. “This is part of Beijing’s win-without-fighting strategy. 

To make everyone believe that they climb the escalation ladder all the way to nukes if they have to.”

The risks and costs of war, even a successful one, bring home the point that capabilities in themselves are never the determining factor. 

Intentions matter too, and are far more opaque—especially when, as in China, they reside largely in the mind of one man. 

It is common to hear Western analysts state that Mr Xi has staked his legacy and legitimacy on Taiwan’s return. 

Hard evidence for this alarming belief is in short supply. 

The most cited is that, in a new-year speech in 2019, he linked union with Taiwan to the ambition that he has placed at the core of his leadership, namely the “great rejuvenation of the Chinese nation”. 

He also repeated what he had said to a Taiwanese envoy in 2013: that cross-strait differences should not be passed from generation to generation.

Having abolished the term limit on his role as president in 2018, 67-year-old Mr Xi can hardly expect to be succeeded by another member of his generation. 

Following his own logic, it thus falls to him to make sure that the task is not passed on. 

In an October 2019 meeting in Beijing, Chinese scholars and military experts shared with Oriana Skylar Mastro of Stanford University their understanding that it is imperative for Taiwan to be recovered during Mr Xi’s time as leader.

Though some semi-official Chinese commentators already say that they see no hope for unification without some use of violence, there is no agreement among foreign governments as to whether that is the settled view of China’s rulers. 

China continues to try to shape Taiwanese opinion with a mix of sticks and carrots, which suggests that negotiation has not been abandoned. 

The biggest carrot, access to its vast markets, continues to be dangled in front of Taiwanese business interests. 

Ms Glaser notes that Mr Xi sounded a patient note in March when he visited Fujian, the coastal province nearest to Taiwan, urging officials to explore new paths of cross-strait integration and economic development.

To the sticking place

But China’s carrots and sticks can clash. 

To punish the Taiwanese for electing a dpp government China has reduced official and semi-official cross-strait contacts to “nearly zero”, says Andrew Nien-Dzu Yang, a former Taiwanese deputy defence minister, now at the Chinese Council of Advanced Policy Studies, a think-tank in Taipei. 

That raises the danger of misunderstandings.

So does China’s increased military activity around the island. 

Psychological operations and “grey-zone” warfare have been intensifying. In 2020, according to Taiwan’s government, Chinese warplanes made 380 sorties into Taiwan’s Air Defence Identification Zone (adiz), a buffer zone of international airspace where foreign planes face questioning by controllers and potential interception by Taiwanese fighters. 

Such a tempo of operations has not been seen since 1996. 

On April 5th the Chinese navy promised patrols by its aircraft-carriers around Taiwan on a regular basis. 

On April 12th 25 Chinese planes entered the adiz, a record for a single day.

This may be a test of the new Biden administration, says a senior Taiwanese diplomat, or a bid to create a “new normal” in which Chinese forces are routinely present in a zone formerly controlled by Taiwan.

China knows that Taiwan will not fire first, so “the Chinese will continue to push,” the diplomat says. The constant incursions wear down Taiwanese defences, raise the chances of accidental collisions and would make it harder to spot a rush to real war. 

Beyond the constant drumbeat of military pressure, China is “trying to divide society, trying to sow the seeds of chaos,” says the diplomat. 

“They also conduct cyber-activities and disinformation campaigns.”

Wang Zaixi, a former deputy head of the Association for Relations Across the Taiwan Straits, a semi-official Chinese body, advocates a “third way” between all-out war and political negotiations, one in which a massive display of firepower cows Taiwan into submission. 

In Chinese media interviews he has cited the (not wholly reassuring) precedent of Red Army troops surrounding Beijing in 1949 in such intimidating numbers that the city fell with rather few casualties, an approach he calls “using war to force peace”.

In some polls less than half of Taiwanese say they would fight in a war with China, or want relatives to do so (compulsory military service was sharply reduced in 2013, by a government keen on closer ties with China). 

If the island loses more than half of its defences in the first waves of an attack, the public’s will to fight might collapse, frets Mr Yang. 

A swift collapse would make America’s position yet harder. 

If American reinforcements arrive to find China’s troops already on the island, asks Ms Skylar Mastro, can they start firing if no Chinese unit has shot at Americans? 

“I think that would be a very hard call for a us president to make.”

If the Taiwanese appetite for a fight is unclear, so too is America’s. 

Taiwan’s government is painfully aware that preserving their friendly, successful democracy is not in itself a vital national interest for anyone else. 

Instead, Taiwanese officials stress the extraordinary importance of the island’s semiconductor industry to global supply chains. 

They also emphasise how grim and frightening the Asia-Pacific would feel if America ever broke its commitments and ducked a fight with China. 

Japan’s prime minister, Suga Yoshihide, recently went further than any recent predecessor, when he mentioned the importance of stability in the Taiwan Strait in a joint statement with Mr Biden.

Japan fears Taiwan becoming a Chinese bastion just to its south, explains Michishita Narushige of the National Graduate Institute for Policy Studies in Tokyo. 

But it also has much to lose if America is chased out of the Pacific: “If the fall of Taiwan means the disengagement of the us from this region, that would be a vital interest.”

Some in America want to make clear that maintaining its Asian role is central to America’s interests, too. 

Senator Chris Coons of Delaware, a Democrat close to Mr Biden, is co-sponsor of the Strategic Competition Act, a bill with strong bipartisan support that would deepen ties with Taiwan—whether by offering the island trade deals, weapons sales, expanded contacts with American officials or support in its attempts to take part in international forums—as one of several measures to push back against what he calls China’s growing global aggression. 

To explain the island’s importance to voters he talks of how dependent modern life is on the chips it makes. 

He also cites the importance of America being seen to keep its word and linking arms with allies to counter China, rather than trying to lead the world through “bluster”.

The seeds of time

It may sound a bit narcissistic for Americans to assume that China’s plans for Taiwan turn on how strong America looks to China. 

But Chinese experts and officials are sincerely convinced that America is delighted to be Taiwan’s security guarantor and thus gain a chance to meddle in China’s internal affairs. 

Without America to help, Taiwan will surrender in an instant, they argue, rather as Mr Yang fears. 

Their disdain for the idea that China might try to win over Taiwanese hearts and minds can be chilling. 

Unification will not be decided by Taiwan’s “playhouse politics” but by geopolitical power struggles, Zhu Feng of Nanjing University told an annual forum run by the Global Times, a jingoistic party newspaper.

     The fangs of history

Ni Lexiong, a Taiwan expert at Shanghai University of Political Science and Law, says that bellicose commentaries in the state media must, in some limited sense, enjoy official sanction. 

Such commentators “would be too scared to write about such things without approval”, he says. 

But he scoffs at Westerners who worry that Chinese leaders may feel compelled by the nationalism which such screeds stoke in the public. 

The views of the masses will not decide what happens, he says: “The key is military power.”

There is much to be said for America’s decades-long policy of strategic ambiguity. 

Though some American scholars believe it would usefully deter China to hear the Biden administration say it would join any war over Taiwan, it could also provoke China to rash acts or embolden some future leader on Taiwan to declare independence. 

Logic also supports the Pentagon’s desire to spend the next ten years arming Taiwan, buying new weapons and thus increasing the uncertainty of Chinese commanders and their political masters.

The challenge of such an approach is to generate enough anxiety to stay China’s hand, but not so much that Mr Xi sees Taiwan slipping permanently from his grasp. 

For all the alarm in Washington, China does not feel like a country on a war footing, or particularly close to one. 

Several sources briefed on a recent meeting in Alaska between China’s top foreign-policy officials, Yang Jiechi and Wang Yi, and the secretary of state, Antony Blinken, and national security adviser, Jake Sullivan, report that the Chinese delivered shrill and inflexible talking points on Taiwan, but used no new language that showed unprecedented urgency.

China’s public stance involves much sabre-rattling, to be sure. 

Viewers of state television are never far from their next sight of an aircraft-carrier, or gleaming jets screaming through azure skies. 

But calls for sacrifice to prepare the public for full-on hostilities are missing. 

The party’s claims to legitimacy in this, its centenary year, are overwhelmingly domestic and based on order and material prosperity: they are buttressed by images of gorge-spanning bridges and high-speed trains, villagers raised from poverty and heroic doctors beating back covid-19 even as it rages around the outside world.

Nevertheless, China’s visible capabilities and veiled intent are grounds for alarm. 

Its scorn for Western opinion, as over Hong Kong, is a bad sign. 

War over Taiwan may not appear imminent in Beijing. 

But nor, shockingly, is it unthinkable.

Gold is Laughing at Powell

By Matthew Piepenburg

Recently, my colleague, Egon von Greyerz, and I had some unabashed yet blunt fun calling out the staggering levels of open hypocrisy and policy desperation unleashed by former Fed Chairman, Alan Greenspan.

Poor Alan was an easy target of what I described as the “patient zero” of the reckless interest rate suppression and unbridled monetary expansion policies of the Fed which have always led to equally reckless boom and bust cycles in markets and economies.

But let us be fair to comical Fed Chairmen like Greenspan, as he is not alone in making a mockery of his post at the Eccles Building.

With the exception of Paul Volker and William Martin, the sad truth is that nearly every person who has sat in that lead Chair of a private bank masquerading as a “Federal” reserve has made the bank, and themselves, a public embarrassment.

As the legendary private investor Jim Rogers recently observed on Kitco news, almost all central bankers effectively lie and obfuscate facts as part of their job description (and job preservation) at the Fed.

A Central Banker’s Job Description

For the most part, over-hyped Fed Chairs know how to run up debt levels and create lots of money to appear “accommodative” to markets in the short term and then blame “animal spirits” on the disasters which always follow longer term.

In fact, if I had to come up with the most honest and historically-confirmed job description for a Fed Chairman, I would post the following job-post on LinkedIn:

“Seeking D.C.-based expert fluent in double-speak, comfortable with unsustainable debt expansion and handy with a money printer. Ivy League credentials a plus.”

The Latest Nonsense from Powell

As for double-speak, Mr. Powell is now seeking to outshine ol’ Mr. Greenspan’s art of spin with stunning elan.

At a recent economics club in Washington, Powell was both shameless and brilliant in his ability to spew fantasy with the skill of a circus promotor yet maintain the straight face of a circuit judge.

Specifically, Powell tried to downplay the U.S. debt elephant in the room by admitting to its horrific size yet promising a miracle policy shift sometime down the road…

That is, he was unable to deny what he described as the “unsustainable path” of current U.S. debt levels growing “meaningfully faster than economic growth,” but was quick to comfort anyone gullible enough to believe him that for now “there is no question of our ability to service our debt for the foreseeable future.”


Such calming words, such confidence, such market-placating guidance.

A Brief Translation of Fed-Speak

But now, let’s translate Powell’s Fed-speak into real-speak and get a deeper look into the mind of a first-rate spin-seller.

When Powell says “there is no question of our ability to service our debt for the foreseeable future,” he is actually telling a kind of partial truth. 

Congratulations Jerome.

Yes, so long as the Fed decides to print trillions more fiat dollars and artificially cap yields and interest rates, the Fed can indeed “service” it’s nearly $30T in public debt for the “foreseeable future,” as the cost of that debt is forced to the basement of history.

But what Powell forgets to say, quite cleverly, is that the “foreseeable future” of which he is telegraphing is nothing more than a future of equally foreseeable and grotesquely expanded, and hence, debased U.S. dollars, which is needed to monetize that truly unsustainable debt.

Needless to say, such money printing is great news for gold…

But Powell’s ability to spin fantasy gets even more pronounced with his next great lie masquerading as policy comfort.

Specifically, and to wit, Powell then says, in the same breath, that “at some point in the distant future, when the economy is in better shape,” the Fed will then be in a better position “to deal with the debt issue then.”


That’s just wonderful, no? 

At some point in the “distant future” the Fed will magically “deal” with our debt issue.


Did Powell Take a Math Course? Read a History Book?

But here’s the problem with Powell’s kindergarten logic and truth-challenged phraseology: That “distant future” of “economic growth” is mathematically and historically impossible.



Because once a nation crosses the Rubicon of 100% debt to GDP, and once a nation’s currency has lost greater than 98% of its inherent value due to fiat money expansion (as is the case today), economic growth has never, not once in the entire history of the financial world, ever occurred.

Stated more simply, that “distant future” of “economic growth” in which the Fed “deals” with our debt problem is an open lie, no different than Bernanke’s 2009 promise that QE1 was “temporary” and would end by 2010. 

If Powell would like, I am happy to send him (or Monsieurs Greenspan and Bernanke) a few high-school text books on basic math, or maybe one or two essays on market history to help him (them) regain both a conscience and facts.

Jerome, my weblink is found below.

Don’t Forget the Endless Larry Summers

Ah, but let us not just poke fun at central bankers’ struggles with history and math. 

Our increasingly sordid world of so-called “financial Leadership” hardly ends at Constitution Ave.

My former Harvard President and one-time Treasury Secretary, Larry Summers, for example, is no less of a master at promoting his image while ignoring his mistakes.

Mr. Summers, the god-father of deregulating the otherwise toxic, uber-levered and price-fixing OTC derivatives market, deserves an honorable mention.

Under his watch in 1998, that derivatives market went from $95T to $670T despite open warnings from Brooksley Borne at the CFTC. 

Meanwhile, Summers was openly insulting her while slapping backs with bankers and promising the world not to worry about their master plan to expand this once-safe futures exchange.

But less than a decade after telling Congress that he and his banker friends were more than capable of managing OTC derivatives risk, that same market, as well as the S&P (and the Harvard endowment) tanked by greater than 50% in a matter of weeks in 2008.

Today, the same Mr. Summers who helped crash the markets in 2008 is suddenly working on re-branding himself, warning the world, correctly, about the inflation to come.

In fact, he specifically observed that the U.S. has “embarked on one of the least responsible macro-economic policies that the US has had in the last 40 years.”

Well Larry, maybe the current inflationary direction of the U.S. is the worst thing seen in the last 40 years, but rest assured of this: Your de-regulation of the openly toxic derivatives marketcomes in at a close second for some of the worst policies I’ve seen in the last 40 years…

Turning to Gold

Well, one thing which folks like Powell and even Summers can agree is that there will be lots more money printing and debt expansion to come.

For those of us who can see through Fed-speak and track facts rather than fictions, there are two factors favorable to gold (rather than just golden tongues) which we can smile upon for the next “foreseeable” 5 years, namely: More growth in the broad money supply and more negative real interest rates.

As for the money supply, we’ve written about its promiscuous expansion at length elsewhere, but in case you’re curious what it looks like, just see for yourselves:

And as for negative real (i.e., inflation-adjusted) rates, we’ve also written at length about how well gold shines when inflation rates outpace yields on US Treasury bonds.

As Powell has already told us, repressed bond yields and repressed rates are inevitable in the coming years for no other reason that the Fed can’t afford for those rates to go much higher. 


Full stop.

And as for inflation outpacing those repressed rates, that too is no longer theoretical or debatable, as inflation is measured by the expansion of the money supply rather than the fictional math of the CPI scale, which despite even its openly bogus reporting, cannot hide the inflationary signals coming from commodity prices, rising M1 and M2 data and increased governmental control of the banking system.

In short, the “foreseeable future” is clearly one that favors inflation outpacing yields and thus smiling upon gold.

Getting Technical

Aside from such historically and fundamentally-confirmed tailwinds for this misunderstood precious metal, even the technical indicators are making gold smile.

Looking at last week’s daily price action in gold, we can see that after last August’s $2070 gold high, the subsequent (and expected) gold correction has both found and bounced off its technical support/bottom.

As the chartbelow confirms, gold reversed off a double-bottom line (far right) of historical support twice in March:

In addition to a critical double bounce off support, the daily gold price broke through, and then closed consecutively above, a technical resistance band in April.

Having broken resistance, gold pricing then created a new trendline up and to the right:

Such a bounce off a double bottom pattern plus consecutive price close confirmations above resistance is a classic chart confirmation of an upward technical direction in gold which may be of interest to those who trade this oh-so precious metal.

For us, a triple bottom support would have been better, and price swings, near-term, for gold are not outlawed.

Of course, we remain largely agnostic to the short-term price action of gold, as we see it as an investment rather than a speculation.

Far more importantly, we see gold as the ultimate answer to the emotional fact that fiat currencies are losing their punch by the second.

Gold will rise much higher simply because the dollar’s purchasing power will sink far lower.

Thus, despite the fictional “distant future” and “economic growth” of which Powell spoke above, we see an all too real distant future of increasing debt, increasing money supply and hence increasingly open and obvious currency debasement.

Given the facts above, we hope our words make more sense than Powell’s.