The Looming Stagflationary Debt Crisis

Years of ultra-loose fiscal and monetary policies have put the global economy on track for a slow-motion train wreck in the coming years. When the crash comes, the stagflation of the 1970s will be combined with the spiraling debt crises of the post-2008 era, leaving major central banks in an impossible position.

Nouriel Roubini



NEW YORK – In April, I warned that today’s extremely loose monetary and fiscal policies, when combined with a number of negative supply shocks, could result in 1970s-style stagflation (high inflation alongside a recession). 

In fact, the risk today is even bigger than it was then.

After all, debt ratios in advanced economies and most emerging markets were much lower in the 1970s, which is why stagflation has not been associated with debt crises historically. 

If anything, unexpected inflation in the 1970s wiped out the real value of nominal debts at fixed rates, thus reducing many advanced economies’ public-debt burdens. 

Conversely, during the 2007-08 financial crisis, high debt ratios (private and public) caused a severe debt crisis – as housing bubbles burst – but the ensuing recession led to low inflation, if not outright deflation. 

Owing to the credit crunch, there was a macro shock to aggregate demand, whereas the risks today are on the supply side.

We are thus left with the worst of both the stagflationary 1970s and the 2007-10 period. 

Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years.

For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. 

The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies (SPACs), the crypto sector, high-yield corporate debt, collateralized loan obligations, private equity, meme stocks, and runaway retail day trading. 

At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.

But in the meantime, the same loose policies that are feeding asset bubbles will continue to drive consumer price inflation, creating the conditions for stagflation whenever the next negative supply shocks arrive. 

Such shocks could follow from renewed protectionism; demographic aging in advanced and emerging economies; immigration restrictions in advanced economies; the reshoring of manufacturing to high-cost regions; or the balkanization of global supply chains.

More broadly, the Sino-American decoupling threatens to fragment the global economy at a time when climate change and the COVID-19 pandemic are pushing national governments toward deeper self-reliance. 

Add to this the impact on production of increasingly frequent cyber-attacks on critical infrastructure and the social and political backlash against inequality, and the recipe for macroeconomic disruption is complete.

Making matters worse, central banks have effectively lost their independence, because they have been given little choice but to monetize massive fiscal deficits to forestall a debt crisis. 

With both public and private debts having soared, they are in a debt trap. 

As inflation rises over the next few years, central banks will face a dilemma. 

If they start phasing out unconventional policies and raising policy rates to fight inflation, they will risk triggering a massive debt crisis and severe recession; but if they maintain a loose monetary policy, they will risk double-digit inflation – and deep stagflation when the next negative supply shocks emerge.

But even in the second scenario, policymakers would not be able to prevent a debt crisis. 

While nominal government fixed-rate debt in advanced economies can be partly wiped out by unexpected inflation (as happened in the 1970s), emerging-market debts denominated in foreign currency would not be. 

Many of these governments would need to default and restructure their debts.

At the same time, private debts in advanced economies would become unsustainable (as they did after the global financial crisis), and their spreads relative to safer government bonds would spike, triggering a chain reaction of defaults. 

Highly leveraged corporations and their reckless shadow-bank creditors would be the first to fall, soon followed by indebted households and the banks that financed them.

To be sure, real long-term borrowing costs may initially fall if inflation rises unexpectedly and central banks are still behind the curve. But, over time, these costs will be pushed up by three factors. 

First, higher public and private debts will widen sovereign and private interest-rate spreads. 

Second, rising inflation and deepening uncertainty will drive up inflation risk premia. 

And, third, a rising misery index – the sum of the inflation and unemployment rate – eventually will demand a “Volcker Moment.”

When former Fed Chair Paul Volcker hiked rates to tackle inflation in 1980-82, the result was a severe double-dip recession in the United States and a debt crisis and lost decade for Latin America. 

But now that global debt ratios are almost three times higher than in the early 1970s, any anti-inflationary policy would lead to a depression, rather than a severe recession.

Under these conditions, central banks will be damned if they do and damned if they don’t, and many governments will be semi-insolvent and thus unable to bail out banks, corporations, and households. 

The doom loop of sovereigns and banks in the eurozone after the global financial crisis will be repeated worldwide, sucking in households, corporations, and shadow banks as well.

As matters stand, this slow-motion train wreck looks unavoidable. 

The Fed’s recent pivot from an ultra-dovish to a mostly dovish stance changes nothing. 

The Fed has been in a debt trap at least since December 2018, when a stock- and credit-market crash forced it to reverse its policy tightening a full year before COVID-19 struck. 

With inflation rising and stagflationary shocks looming, it is now even more ensnared.

So, too, are the European Central Bank, the Bank of Japan, and the Bank of England. 

The stagflation of the 1970s will soon meet the debt crises of the post-2008 period. 

The question is not if but when.


Nouriel Roubini, Chairman of Roubini Macro Associates, is a former senior economist for international affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank, and was Professor of Economics at New York University's Stern School of Business. His website is NourielRoubini.com, and he is the host of NourielToday.com.

A future, but with Chinese characteristics

Communist Party leaders do have dreams other than just remaining in power. But achieving communism is no longer really one of them


As columns of smoke rose from Tiananmen Square and tanks took up positions along Beijing’s central thoroughfare, it was hard to imagine the Communist Party celebrating its 100th birthday still firmly in charge. 

It was the day after the army had slaughtered hundreds, if not thousands, of people on June 3rd-4th 1989. 

The massacre had crushed a nationwide pro-democracy movement. 

But the city seethed with anger. 

How could that fury remain bottled up for ever?

Few people had heard of Xi Jinping, then party chief in Ningde, in Fujian province. 

Now he is Uncle Xi—the “people’s leader”, as the Politburo called him in December 2019, just as covid-19 was brewing in Wuhan. 

That tested the party again. 

Rage boiled up over the death of a doctor reprimanded by police for daring to discuss the new virus online. 

Some observers hoped the cover-up would be China’s Chernobyl: an episode that helped force political change. 

Once more they were proved wrong.

In the West the party’s resilience causes surprise and disappointment. 

Its ability to adapt to the demands of a fast-growing middle class, tweak its message to suit the public mood and even act on public suggestions is underappreciated. 

The leadership blamed the cover-up in Wuhan on local officials and honoured the late doctor (a party member) as a “martyr”. 

The party emerged seemingly unscathed. 

But it is also a mistake to dismiss party leaders’ fears. 

A book published by the party last September was entitled “Extracts from Discourses by Xi Jinping on Countering Risks and Challenges and Responding to Sudden Incidents”. 

The 251-page volume ranges from soaring debt and property bubbles to plots by the West to foment “colour revolutions” in China.

The unrest in Hong Kong in 2019 is often derided as one such foreign-orchestrated attempt to undermine the party. 

This explains the viciousness of the response, which has made it clearer than ever that China’s government is calling the shots in the territory (the party still does not operate openly there, but the central government’s representative is chief of the “Hong Kong Work Committee”). 

Taiwan looks anxiously on. 

The island has been in the party’s sights since 1949, when the government of Chiang Kai-shek, defeated by Mao’s forces, fled there. 

Its rulers say Taiwan is an independent country. 

The party says it is ready to use force to “reunify” it with the mainland if other means fail. 

That appeals to China’s nationalists, who often bray for a showdown.

But Mr Xi is cautious. 

That is evident in his remarks about Taiwan. 

He talks of China’s great rejuvenation by 2049, and links that idea with reunification. 

But he makes no promise about achieving this on his watch. 

He wants to appeal to nationalists, not tie himself down. 

His threatening military manoeuvres in the Taiwan Strait and his talk of inevitable reunification play well at home. 

Nationalists buy his promise that China will be “prosperous, strong, democratic, culturally advanced, harmonious and beautiful” by mid-century—even though they know that “democratic” is party-speak for an efficient dictatorship.

So it is with Mr Xi’s professed belief in Marxism. 

By vaunting it, he ensures support from party conservatives. 

But he does not let it hamstring policies, which display the same ideological pragmatism that all leaders of the post-Mao era have shown. 

They give priority to the needs of urban residents: migrants from the countryside are second-class citizens. 

The super-rich are showered with honorary titles. 

Of about 5,100 people who are members of China’s parliament and its advisory body, more than 140 have fortunes of at least 2bn yuan ($320m), reckons Hurun Report, a Shanghai-based group (see chart). 

Between 2013 and 2018 the combined wealth of the 100 richest delegates (about 3.9trn yuan) had doubled.


In the build-up to the party’s birthday, Mr Xi has tried to show support for underdogs. 

On his watch, the final 100m people have been declared free of extreme poverty, helped by public spending of more than 1.6trn yuan. But income inequality is high and the welfare net is thin. 

Mr Xi is wary of those who take Marxism literally. Several members of a Marxist club at Peking University were arrested in 2018 for supporting strikers in Shenzhen. 

Censors often delete articles on WeChat groups run by neo-Maoists, who denounce the “bureaucrat-capitalists” running China.

Mr Xi occasionally puts the squeeze on tycoons, not because they are rich but because he wants to ensure they do not challenge the party. 

Several wealthy businessmen have been arrested or otherwise reined in. 

One recent target is Jack Ma, founder of the e-commerce giant, Alibaba (and a party member). 

Mr Ma’s business empire seems one the party should like. 

Alibaba and its financial-services company, Ant Group, have more than 200 party branches with 7,000 members, said Alibaba’s party chief in 2018. 

Yet Mr Ma stepped out of line by attacking regulators in a speech. 

That led to the halting of what would have been the world’s biggest initial public offering: listing Ant Group on exchanges in Hong Kong and Shanghai. 

Mr Ma dropped out of public sight for three months. 

Regulators forced Ant Group to restructure and fined Alibaba more than 18bn yuan for violating antitrust law.

The plight of such businesspeople suggests a difficulty with Mr Xi’s mission to keep the party in power while turning China into a technological and financial colossus. 

Most industries at the forefront of innovation in China are private. 

But with his relentless emphasis on ideology and occasional blows against uppity entrepreneurs, Mr Xi spreads fear among those whose support he most needs if China is to challenge American economic supremacy. 

In 2018 a social-media account owned by Qiushi, a party journal, published an article entitled “The theory of the communists may be summed up in the single sentence: abolition of private property.” 

The revival of that sentence from the Communist Manifesto sowed alarm. 

Mr Xi went on to reassure private businessmen that their property was safe, but many still wonder.

By demanding unquestioning obedience, Mr Xi is also creating another problem. 

One secret of the party’s longevity has been its willingness to give low-level officials freedom to be creative and even bend the rules. 

They have usually been judged more on their ability to boost economic growth than on their ideological correctness. 

A big drawback to this laissez-faire approach has been collusion between party officials and mafia-like gangs in industries such as property and transport. 

Mr Xi’s war against “black society”, as such criminality is called, has been popular. 

But he has also terrorised the bureaucracy, sucking the initiative out of local government. 

Jessica Teets of Middlebury College in Vermont says there are “really high resignation rates” among local officials.

None of these problems suggests a party that is near collapse. 

But Mr Xi may test it over his own succession. 

Since 1949 the party has managed only one smooth transfer of power, from Jiang Zemin to Hu Jintao in 2002, and that was hardly a full transfer as Mr Jiang (now 94) remained military chief for another two years. 

Before Mr Xi, leaders tried to avoid traumatic successions by picking a replacement before stepping down. 

Mr Xi shows no sign of doing this. 

His sudden death or incapacity could throw Chinese politics into turmoil that could also destabilise society.

But after Mr Xi may come another like him. 

For all the misgivings about Mr Xi that are doubtless shared by victims of his purges, as well as their associates, many senior officials share his view of the party’s vulnerabilities. 

It would take much daring for a new leader to loosen the reins. 

The party may not remain a political force in 100 years’ time. 

But the world should be prepared for it (and Xi-style rule) to last long into the future.

Buttonwood

A new phase in the financial cycle

The Treasury-bond yield curve flattens


Growing up is hard to do but growing old is harder. 

As the business cycle matures and ages, it goes through phases, just as people do. 

These are mirrored in financial markets. 

Strategists like to talk in terms of early-, mid- or late-cycle investing. 

It is tricky to say when one stage ends and another begins, just as it is hard to delineate adulthood from adolescence. 

The markets drop some hints, though. 

The slope of the Treasury yield curve is one.

In the first quarter, the message from the yield curve seemed clear. 

A steepening in its slope—a rise in long-term yields relative to short-term yields—said the economy was accelerating and inflation was coming. 

A lot of that steepening has since been reversed, to the surprise of many. Of the many interpretations of this change, one stands out. 

It says the early-cycle phase is over. 

The markets have entered a new and more difficult stage.

Start with the shift in the yield curve. 

A standard measure of its slope is the gap between two- and ten-year interest rates. 

The wider the gap is, the steeper the slope. 

At the start of the year the gap was 0.82 percentage points. 

Three months later it had widened to 1.58 percentage points, almost all because of a rise in long-term yields (see chart). 

A marked shift in fiscal policy in America was a big influence. 

By March a bumper $1.9trn spending bill had been signed into law. 

An even bigger package to finance infrastructure was in the works.


Yet in early April the curve began to flatten. The yields on two-, three- and five-year Treasury bonds perked up as money markets began to price in the prospect that the Federal Reserve would raise interest rates in 2023. 

There were bigger moves at the long end of the curve. 

By this week the ten-year yield had fallen to 1.5%, more than 0.2 percentage points lower than at the end of March. 

The 30-year yield fell by even more.

Whatever lies behind this, it cannot really be laid at the Fed’s door. 

The decline in long-term yields started long before last week’s Fed meeting, which sounded a more hawkish tone on inflation. 

Some put it down to “technical factors”—bond trades made for reasons of risk management, to rebalance portfolios or follow price momentum. 

Global influences surely played a role. 

Ultra-low interest rates in Japan and Europe act as a check on yields in America. 

They can only go up so far before the weight of buying by yield-starved foreigners pushes them down.

However, there is a deeper message. 

The bond market is hinting that the early-cycle phase in which risk assets are embraced almost without discrimination has come to a close. 

The peak in economic growth may have passed. 

Output and orders readings in the manufacturing purchasing managers’ index (pmi), a closely watched marker of activity, probably peaked in May. 

Other cyclical indicators have rolled over. 

The prospect of further fiscal stimulus is also more uncertain. 

America’s infrastructure bill is stuck; whatever now emerges from Congress will have a far smaller price tag than the $2trn-3trn figure widely touted just weeks ago.

Markets are forward-looking. 

They now have less to look forward to. 

If peak gdp growth lies in the past, the scope for further upward revisions to forecasts for stockmarket earnings is limited. 

The s&p 500 index already trades at a high multiple of prospective earnings. 

A lot of good news is already priced into risky assets. 

If you are an active trader, you now need something to go wrong to create a buying opportunity, says Eric Lonergan of m&g, a fund manager. 

Lacking fresh influences to drive prices up, risky assets are vulnerable to declines.

There are echoes here of early 2004, says Andrew Sheets of Morgan Stanley, a bank. 

When America’s unemployment rate peaked in 2003, it was a cue for economic recovery and a strong early-cycle rally in risky assets.

Stocks, commodities and corporate bonds performed very well, just as they have over the past year. 

As 2003 turned into 2004, the economy kept going. 

But markets slipped into something of a funk.

The outlook is similar, reckons Mr Sheets: a period of consolidation in the stockmarket; a slight widening in credit spreads; an episode of modest dollar strength. 

Not everyone will agree. 

It is hard to accept that the early-cycle phase might be over. 

It is barely a year since the trough in global gdp. 

But if you live as fast and burn as brightly as this business cycle, then mid-life arrives early. 

You then start to wonder how you got here and what on earth will now drive you on.

Exporting Chinese surveillance: the security risks of ‘smart cities’

Critics say the technology can be a tool for ‘digital authoritarianism’ and leaves countries vulnerable to cyber attack

James Kynge in Hong Kong, Valerie Hopkins in Belgrade, Helen Warrell in London and Kathrin Hille in Taipei

© FT montage | Facial recognition, tracking technology and number plate identification could create a web of surveillance across smart cities


Belgrade’s Republic Square is one of the cultural and social hubs of the Serbian capital, a popular meeting point lined with cafés and the site of the National Museum and the National Theatre.

It is also now at the centre of an international debate about the export of Chinese technology, authoritarian surveillance and cyber security.

The square is under constant observation by equipment made in China. 

A surveillance camera system installed by Huawei, the Chinese technology group, has the capacity to monitor the behaviour of people in the square and elsewhere in the city, recognise their faces, identify their vehicle number plates and make judgments on whether suspicious activities are afoot.

The cameras in central Belgrade represent the first among some 8,000 that the city plans to install as part of a comprehensive “safe city” partnership with Huawei.

Republic Square in Belgrade, which is under constant observation by equipment made in China © Robert Wyatt /Alamy


When the project was unveiled in 2019, Nebojsa Stefanovic, Serbia’s former interior minister, boasted that every street and building in the area of the square would be covered by cameras. 

“We will know from which street [a perpetrator] came, from which car, who was sitting previously in that car,” he said.

But although the Serbian government has a good relationship with Beijing — the pro-China president Aleksandar Vucic last year kissed the Chinese national flag in a video seen over 600m times on Chinese social media — the installation of such surveillance systems is causing controversy.

“Very delicate technology is in question which allows monitoring of the whole society — and enables a dystopian, Orwellian society,” says Zlatko Petrovic, assistant secretary-general to the Serbian Commissioner for Information of Public Importance and Personal Data Protection.

‘It can be dangerous in the hands of someone who is not responsible, and it can easily be misused,” adds Petrovic. 

His independent state agency advocates more debate and transparency about how biometric data should be stored, who can access it, how it will be used and for how long.

The controversy in Serbia is being repeated in different ways across the world as scores of countries — including several western democracies — install surveillance technology as part of “safe city” and “smart city” packages supplied by Chinese companies including Huawei, ZTE Corporation, Hangzhou Hikvision Digital Technology, Zhejiang Dahua Technology, Alibaba and others.

The growing use of these Chinese technologies around the world is one of the issues that will provide a backdrop to Friday’s G7 summit in Cornwall, where the leading democratic nations will swap notes on how best to respond to China’s growing global reach.

“Safe” and “smart” city technologies represent a complex new frontier for China’s projection of power — an indication that Beijing will use its influence not just to defend itself against outside pressure but to actively export its political values to other parts of the world.

To defenders of the Chinese-backed projects, they use surveillance systems that are already widely in use in many democratic countries while offering big efficiency gains as city operations are automated. 

It is unfair to single out Chinese technology, they say, when products made in other countries might pose many of the same risks.

Nevertheless, several intelligence sources, city officials, academic experts, and security industry executives interviewed in Europe, the US and Asia, told the Financial Times that Chinese “safe” and “smart” city systems carry a plethora of potential security and human rights threats.

Although they offer convenience and cost savings, these systems come with three specific risks, the experts say. 

The first is that authoritarian governments may use the capacity to monitor individual people on a real-time basis to impose a digital form of totalitarianism. 

The second is the risk that Chinese vendor companies — and thereafter possibly the Chinese security state — could gain access to sensitive data. 

The third is that, in extremis, a Chinese company could flick a “kill switch”, shutting down a city’s operations. 

Several cities have already begun to try to extract Chinese-made equipment from their monitoring systems.

“This represents the global expansion of the Chinese system of digital authoritarianism. 

When I say digital authoritarianism, I mean the ability to control, surveil and coerce societies using this type of safe and smart city technology,” says Xiao Qiang, an expert on China’s state surveillance at the University of California in Berkeley.

Last year, Chinese leader Xi Jinping exhorted south-east Asian countries to help build a ‘digital silk road’ © Nicolas Asfouri/Getty

Accelerated adoption

The distinction between “safe” and “smart” cities is blurred. 

“Safe” cities are mainly concerned with automating the policing of society using video cameras and other digital technologies to monitor and diagnose suspicious behaviour. 

“Smart” city technology often also includes video surveillance but is primarily devoted to automating municipal functions such as traffic control, garbage collection, power distribution and water systems.

New data shown exclusively to the FT reveals that the adoption of China’s safe and smart city technology by countries around the world is accelerating. 

A study by RWR Advisory, a Washington-based advisory, shows that out of a total of 144 safe and smart city contracts involving Chinese vendors signed outside China since 2009, 49 were scheduled for installation in 2018 or later.

The data also show a clear predominance of illiberal regimes placing orders. 

The RWR Advisory study shows that out of 64 countries that have signed up to install the safe and smart city technology of Chinese companies, 41 were ranked as “not free” or “partly free” by Freedom House, a US non-governmental organisation. 

The remaining 23 were in countries classified as “free”.



“Many, but not all, of the countries that are installing safe and smart city packages are illiberal regimes that are deciding to depend on these Chinese companies to run their infrastructure for them,” adds Xiao, who is also founder and editor-in-chief of the China Digital Times, a news website.

Countries in south-east Asia and the Middle East have signed the most contracts, with 20 and 19 respectively since 2009. 

Both regions have been identified as crucial to the success of the Belt and Road Initiative, Beijing’s signature policy to build infrastructure and win influence around the world.

Late last year, Chinese leader Xi Jinping exhorted south-east Asian countries to help build a “digital silk road”, a scheme that falls under the broad BRI umbrella and is charged with promoting the adoption of Chinese “safe” and “smart” city tech — as well as other digital technologies and services — around the world.

A labourer works at a construction site that is part of a Chinese-funded project for Port City in Colombo, Sri Lanka, under the Belt and Road Initiative © Ishara S Kodikara/AFP via Getty


“Chinese surveillance technology companies are gaining a dominant position in this sector globally with the assistance of state support that takes a number of different forms,” says Andrew Davenport, chief operating officer at RWR Advisory.

Indeed, recent research by CSIS, a Washington-based think-tank, revealed that in the narrowly defined areas of cloud infrastructure and e-government services, Huawei was also making rapid inroads, signing 70 deals in 41 countries for these services from 2006 to April this year. 

Jonathan Hillman, a senior fellow at CSIS, says this means that Huawei’s cloud infrastructure and e-government services are handling sensitive data on citizens’ health, taxes and legal records in these countries.

“Huawei is building a strategic position as a cloud provider to governments in the developing world, where its sales pitch is sweetened by Chinese state financing,” Hillman says. 

“For its part, the Chinese government stands to shape global standards, gain intelligence and build coercive capabilities as developing countries become digitally dependent on Beijing.”

A spokesperson for Huawei said: “We firmly believe that any future security principles should be based on verifiable facts and technical data rather than ideology or a vendor’s country of origin, and that network security and resilience can best be achieved by diversifying suppliers.”

An executive at another Chinese surveillance company, who requested anonymity, says the country’s surveillance equipment vendors follow relevant regulations on data privacy. 

Projects were owned by city managers who had control over the devices and the data, the executive adds.

Hikvision, Dahua, ZTE and Alibaba did not respond to requests for comment for this article.

Surveillance cameras made by Hangzhou Hikvision Digital Technology are mounted on a post at a testing station near the company’s headquarters in Hangzhou, China © Qilai Shen/Bloomberg

Political significance

The extraordinary success that Chinese surveillance corporations have had in popularising their digital infrastructure and services internationally suggest that repeated US warnings about the sector in recent years have fallen largely on deaf ears.

The administrations of Donald Trump and current president Joe Biden have alleged that Chinese surveillance companies helped Beijing carry out human rights abuses in detention camps in the Xinjiang region, where some 1m Uyghurs are estimated to be detained. 

Beijing has denied western allegations of human rights abuses against Uyghurs as “slanderous attacks”.

The Trump administration also put several surveillance companies — including Huawei, Hikvision and Dahua — on to a blacklist that prohibits US-based companies from exporting products to them.

Biden took further steps this month, signing an executive order to prohibit US investments in 59 Chinese defence and surveillance tech companies in an effort to stop US capital from being used by China to undermine national security. 

The White House said in a statement as it announced the prohibition that the “use of Chinese surveillance technology outside [China], as well as the development or use of Chinese surveillance technology to facilitate repression or serious human rights abuses, constitute unusual and extraordinary threats”.

US president Joe Biden this month signed an executive order to prohibit US investments in 59 Chinese defence and surveillance tech companies © Saul Loeb/AFP via Getty Images

Growing backlash

Evidence is now growing that a backlash toward Chinese surveillance technology is gathering momentum not only in the US but also in Europe and parts of Asia.

The UK presents a prime example of this trend. The FT discovered in May that a deal for “smart place” services supplied by Alibaba to the southern English town of Bournemouth had been aborted at the last minute. 

Alibaba declined to comment on the Bournemouth deal.

Another English town, Milton Keynes, has cancelled a contract with Huawei for a smart city project that used 5G telecoms equipment and is planning to strip out the Chinese company’s telecoms kit following Downing Street’s decision last year to eradicate Huawei equipment entirely from its network by 2027.

Since then, guidance from UK security officials to councils throughout the country highlights the risk that overseas smart city technology suppliers may come under pressure to “access and exfiltrate data” on behalf of security and intelligence services in their countries of origin.

A deal for ‘smart place’ services supplied by Alibaba to the English town of Bournemouth was aborted at the last minute © Ian Brown/Alamy


In May, an official identified only as “Dean” from the National Cyber Security Centre, a branch of the UK’s GCHQ signals intelligence agency, made rare on-the-record comments about the risk of smart city technology being misused.

“I think with any bulk data store, there’s going to be threats of attack and risk of accidents,” Dean told a cyber security conference. “It’s clear from various incidents reported, the extraordinary lengths our adversaries and actors will go to to obtain data of this nature.”

He added: “We need to make sure that these services are resilient, and they are not easily disrupted by cyber attack. 

If a [smart city] is compromised, there will be a potential impact on local citizens.”

In Taiwan too, concerns over data privacy have led to the eschewal of China-made smart city technology.

“Our direction in Taiwan is try not to use Made in China,” says Lee Chen-yu, director, Taipei Smart City Project Management Office. 

“We understand that with regard to some small, very tiny components this may be unavoidable sometimes, but we still try to mainly rely on Taiwanese vendors. ”

“There are some chips where there is a risk of a backdoor, where data could be transferred out,” Lee adds. 

“The vendors themselves must not be Chinese, and the requirements with regard to certain products, such as cameras, where there have been issues in the past about data being sent back to China, are particularly strict.”

Jonny Wu, senior director at Ability Enterprise, a Taiwanese smart city vendor, confirmed the change in attitudes toward China-made technology.

Milton Keynes in England has cancelled a contract with Huawei for a smart city project that used 5G telecoms equipment © British Retail Photography/Alamy


“Many companies in Taiwan previously would repackage made-in-China components. Now [they are] all forced to change,” Wu says. 

“Last year, the Taiwan government started changing public surveillance and IP cam systems and getting rid of all China-made ones.”

Alexi Drew, a specialist in emerging technology and security at King’s College London, says smart city contracts provided Chinese vendors with all-important access points to a potential trove of sensitive information.

“In pure cyber security terms, one of the most difficult parts of any malicious activity is gaining access,” Drew adds. 

“If we’re providing access to a hostile state actor as part of a smart city contract, then we’re looking at a wide suite of local authority infrastructure which at some point potentially overlaps with national infrastructure.”

Another industry executive, who declines to be identified, says the regular software updates served by safe and smart city vendors provided opportunities to insert “backdoor” routes into the system that are almost impossible to detect. 

Thus, a safe or smart city system may start off clean but over time become riddled with access points for snooping.

Historical hacks

There have been various public allegations related to Chinese-built infrastructure and data vulnerabilities. 

A 65-page report funded by the Australian government and published last year found that a data centre built by Huawei for Papua New Guinea contained glaring errors that would have made the facility vulnerable to hacks.

Huawei also won a contract to install communications equipment inside the headquarters of the African Union building in Addis Ababa in 2012. 

African Union officials subsequently accused China of hacking the building’s computer systems every night for five years and downloading confidential data.

A Huawei spokesperson said that while the company supplied equipment for the African Union projects, it has never collected data illegally.

Such privacy concerns have ignited a debate on how best to benefit from the efficiencies of automating certain city functions while observing citizens’ rights and safeguarding security.

Facial recognition software on display at a mobile internet conference in Beijing © Damir Sagolj/REUTERS


Lee says Taipei has developed several approaches and standards. 

It deploys video cameras, for instance, but does not use facial recognition because “that is individual, private digital information”.

Only the police department is allowed to access footage from the cameras, he adds. 

“Other government departments, even if I am the transportation department, I cannot access them,” Lee says.

In Belgrade, resistance to safe city technology is also growing. 

The facial recognition feature on the cameras installed in the centre of the city has not been activated while the government prepares a legal framework governing its use.

Meanwhile, Danilo Krivokapic, director of the Belgrade-based NGO Share Foundation, has been stirring opposition towards the surveillance technology by crowdsourcing photos of the Huawei cameras. 

Local residents are asked to upload images and geo-tags of new cameras to an ever-growing list.

“We are a post-socialist country and there is a persistent fear of the government watching everyone, especially when you talk about digital surveillance,” says Krivokapic.


Exporting Chinese surveillance: the security risks of ‘smart cities’ | Financial Times (ft.com)

Less for more

How America Inc is coping with rising inflation

Companies face a long-forgotten problem


PROPERTY INSURERS price policies today but face payouts a year from now. 

That makes their profits hostage to inflation. 

As swathes of America’s economy have begun rapidly reopening for business in recent weeks, thanks to falling rates of covid-19 infections and rising ones of vaccination, William Berkley has been paying close attention to prices of building materials and anything found inside homes, from lamps to laptops. 

The replacement value of a home in America may have leapt by 20%, year on year, Mr Berkley thinks. 

Since the eponymous founder of WR Berkley launched his firm over half a century ago, he has never witnessed a time like the past year—not even in the inflationary 1970s.

Economists debate whether the rapid climb in inflation, which rose at an annual rate of 4.2% in April, the fastest since September 2008, will prove as enduring as 50 years ago. 

The Federal Reserve insists that higher inflation will be “transitory”. 

Partly for that reason, chief executives of many big companies are wary of discussing inflation in public. 

When Darius Adamczyk, who heads Honeywell, a huge industrial conglomerate, mentioned during an earnings call in May that inflation “is here and it is probably a lot more pronounced that people think”, his comment went viral among financial types on the internet.

But with many supply chains clogged and American consumers flush with unspent pandemic-year savings, augmented by stimulus cheques from the government, many bosses are, like Mr Adamczyk and Mr Berkley, bracing for a period of higher costs. 

They are adapting their corporate tactics accordingly.

In the 1970s companies responded to rising input prices in a number of ways. 

First, they passed as much of the higher costs as possible on to customers. 

When that strategy was exhausted, they turned to automating operations or moving them to places with cheaper labour, either elsewhere in America or abroad.

Companies are now dusting off that old formula, starting with price rises. 

In April Coca-Cola told analysts that its soft drinks are about to become more expensive. 

Likewise for Chipotle’s burritos and Whirlpool’s washing machines. 

Procter & Gamble plans to raise the prices of some of its consumer products by “mid to high single digits” in September. 

Some companies, such as Royal Canin, which makes pet food, have kept prices steady but cut the size of their portions.

Michael Goldman, who runs a furniture-maker called Carolina Castings in North Carolina, has seen the cost of resin shoot up by 75%, of lumber three- to four-fold, and of a container to ship materials from Asia by $16,000, to $20,000. 

He has increased his rates for customers twice so far this year. 

WR Berkley began repricing its premiums upwards last year but has accelerated the process in the past couple of months. 

Insurance brokers who sell the company’s policies have not grumbled; they expected as much, says Mr Berkley.

Pent-up consumer demand allows companies to get away with even large price rises. 

Returns, which held up in the first quarter, are expected to do so again in the second. 

Margins actually rose in that period at large American firms, according to Credit Suisse, a bank. 

This suggests that as yet, far from forcing companies to absorb the extra costs, inflation may have given them some extra pricing power.

Some firms are, however, preparing for a time when they can ratchet prices up no longer. 

Mr Adamczyk said in January that he had established an internal Honeywell task-force to respond to inflation (though he was vague about what exactly it might do). 

Lineage, a logistics firm with 200 cold-storage warehouses across America, says it has created several such teams. 

One focuses on recruiting workers in a tight market, another on avoiding supply bottlenecks in critical construction projects. 

Sridhar Tayur of the Tepper School of Business at Carnegie Mellon University, who consults with three large companies, says that each is redesigning products to eliminate waste and streamline manufacturing.

CEOs’ biggest headache by far is rising labour costs. 

Companies are trying to keep a lid on future wage rises by using one-off inducements such as signing bonuses. 

Bank of America reckons that American manufacturers are paying existing employees about 4% more than a year ago. 

But, the lender estimates, workers can expect a pay rise of 13% if they switch jobs. 

Even so, many firms are having trouble filling vacancies. 

“It is hard to tell how much it costs to hire someone because you can’t find anyone,” sighs Mr Goldman. 

His “help wanted” ads often go unanswered; many of those who respond fail to turn up for interviews. 

Given Americans’ apparent reluctance to get back to work, be it because of continued fears of infection with covid-19, generous unemployment insurance, or both, wages may need to rise further.

If inflation does prove stickier, some firms will contemplate shifting production to places with more plentiful and cheaper labour. 

All three companies advised by Mr Tayur are pondering whether and where to move, within America and abroad. 

Others may want to get rid of human workers altogether. 

America Inc has ramped up business investment by 15% this year. 

Part of this is going towards automation, and not just in manufacturing. 

Erik Gordon of the University of Michigan points to restaurant chains, some of which are installing automatic grills and letting diners place orders on an app, enabling staff to focus on serving customers rather than waiting for them to make up their mind at the counter. 

As hotels reopen, robot floor-cleaners are becoming more common.

Many such productivity-boosting investments make good business sense even in a low-inflation world. 

That is the outcome many chief executives will still be hoping for. 

It is certainly what policymakers are banking on. 

In the 1980s the Securities and Exchange Commission required companies to publish balance-sheets and income statements both in nominal terms and adjusted for inflation. 

This requirement has been watered down over the years. 

In November the markets regulator appears to have all but binned the last explicit vestige of it. 

It would be ironic if this now proved premature.

The Inflation Red Herring

Far from signaling the return of significant inflation, temporary price increases are exactly what one would expect in a recovery following an economic shutdown. Whether those peddling inflation fears are pursuing their own agenda or simply jumping the gun, they should not be heeded.

Joseph E. Stiglitz


NEW YORK – Slight increases in the rate of inflation in the United States and Europe have triggered financial-market anxieties. 

Has US President Joe Biden’s administration risked overheating the economy with its $1.9 trillion rescue package and plans for additional spending to invest in infrastructure, job creation, and bolstering American families?

Such concerns are premature, considering the deep uncertainty we still face. 

We have never before experienced a pandemic-induced downturn featuring a disproportionately steep service-sector recession, unprecedented increases in inequality, and soaring savings rates. 

No one even knows if or when COVID-19 will be contained in the advanced economies, let alone globally. 

While weighing the risks, we also must plan for all contingencies. 

In my view, the Biden administration has correctly determined that the risks of doing too little far outweigh the risks of doing too much.

Moreover, much of the current inflationary pressure stems from short-term supply-side bottlenecks, which are inevitable when restarting an economy that has been temporarily shut down. 

We don’t lack the global capacity to build cars or semiconductors; but when all new cars use semiconductors, and demand for cars is mired in uncertainty (as it was during the pandemic), production of semiconductors will be curtailed. 

More broadly, coordinating all production inputs across a complex integrated global economy is an enormously difficult task that we usually take for granted because things work so well, and because most adjustments are “on the margin.”

Now that the normal process has been interrupted, there will be hiccups, and these will translate into price increases for one product or the other. 

But there is no reason to believe that these movements will fuel inflation expectations and thus generate inflationary momentum, especially given the overall excess capacity around the world. 

It is worth remembering just how recently some of those who are now warning about inflation from excessive demand were talking about “secular stagnation” born of insufficient aggregate demand (even at a zero interest rate).

In a country with deep, longstanding inequalities that have been exposed and exacerbated by the pandemic, a tight labor market is just what the doctor ordered. 

When the demand for labor is strong, wages at the bottom rise and marginalized groups are brought into the labor market. 

Of course, the exact tightness of the current US labor market is a matter of some debate, given reports of labor shortages despite employment remaining markedly below its pre-crisis level.

Conservatives blame the situation on excessively generous unemployment insurance benefits. 

But econometric studies comparing labor supply across US states suggest that these kinds of labor-disincentive effects are limited. 

And in any case, the expanded unemployment benefits are set to end in the fall, even though the global economic effects of the virus will linger.

Rather than panicking about inflation, we should be worrying about what will happen to aggregate demand when the funds provided by fiscal relief packages dry up. 

Many of those at the bottom of the income and wealth distribution have accumulated large debts – including, in some cases, more than a year’s worth of rent arrears, owing to temporary protections against eviction.

Reduced spending by indebted households is unlikely to be offset by those at the top, most of whom have accumulated savings during the pandemic. 

Given that spending on consumer durables remained robust during the past 16 months, it seems likely that the well-off will treat their additional savings as they would any other windfall: as something to be invested or spent slowly over the course of many years. 

Unless there is new public spending, the economy could once again suffer from insufficient aggregate demand.

Moreover, even if inflationary pressures were to become truly worrisome, we have tools to dampen demand (and using them would actually strengthen the economy’s long-term prospects). 

For starters, there is the US Federal Reserve’s interest-rate policy. 

The past decade-plus of near-zero interest rates has not been economically healthy. 

The scarcity value of capital is not zero. 

Low interest rates distort capital markets by triggering a search for yield that leads to excessively low risk premia. 

Returning to more normal interest rates would be a good thing (though the rich, who have been the primary beneficiaries of this era of super-low interest rates, may beg to differ).

To be sure, some commentators look at the Fed’s balance-of-risk assessment and worry that it will not act when it needs to. 

But I think the Fed’s pronouncements have been spot on, and I trust that its position will change if and when the evidence does. 

The instinct to fight inflation is embedded in central bankers’ DNA. 

If they don’t see inflation as the key problem currently facing the economy, neither should you.

The second tool is tax hikes. 

Ensuring the economy’s long-run health requires much more public investment, which will have to be paid for. 

The US tax-to-GDP ratio is far too low, especially given America’s huge inequalities. 

There is an urgent need for more progressive taxation, not to mention more environmental taxes to deal with the climate crisis. 

That said, it is perfectly understandable that there would be hesitancy to enact new taxes while the economy remains in a precarious state.

We should recognize the current “inflation debate” for what it is: a red herring that is being raised by those who would stymie the Biden administration’s efforts to confront some of America’s most fundamental problems. 

Success will require more public spending. 

The US is fortunate finally to have economic leadership that won’t succumb to fearmongering.


Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is a former chief economist of the World Bank (1997-2000) and chair of the US President’s Council of Economic Advisers, was lead author of the 1995 IPCC Climate Assessment, and co-chaired the international High-Level Commission on Carbon Prices.