Dangerous Addiction 

Doug Nolan


July 20 – Reuters (Karen Pierog): 

“Risk-off sentiment that drove Monday’s sell-off on Wall Street and rally in U.S. Treasuries widened credit spreads on corporate bonds to multi-month highs. 

The spread on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, spiked from 318 bps on Friday to 344 bps as of the last update late Monday, its highest level since late March, according to Refinitiv data. 

It was also the biggest widening in a day since last June.”

The S&P500 dropped 1.6% in Monday trading, as U.S. stocks followed global equities lower. 

The VIX Index spiked to 25, a two-month high, while 10-year Treasury yields dropped to a five-month low 1.17%. 

Germany’s DAX and France’s CAC 40 indices sank 2.6% and 2.5% - to lows since May. 

Hong Kong’s Hang Seng Index fell another 1.8%, with the Hang Seng China Financials Index trading this week at an eight-month low. 

Global “Risk Off” was gathering momentum.

July 20 – Bloomberg: 

“Fresh signs of a cash crunch at China Evergrande Group sent shares and bonds of the world’s most indebted developer to new lows on Tuesday, stoking fears of broader market contagion. 

The property giant’s stock tumbled to the lowest level since April 2017, extending its two-day loss to 25%. 

Several of Evergrande’s local and offshore bonds sank to records, with its dollar note due 2025 falling to as low as 54 cents. 

Bonds of other junk-rated Chinese borrowers declined, while a gauge of developer shares dropped to a nearly three-year low. 

The nation’s bank stocks also slumped.”

July 20 – Bloomberg (Rebecca Choong Wilkins and Alice Huang): 

“Rising concerns over the financial health of China Evergrande Group are weighing down the broader market of high-yield bonds as contagion fears rise. 

Property developers are leading declines among China’s offshore junk bonds Tuesday. 

Kaisa Group Holdings Ltd.’s 2025 note fell 3.3 cents on the dollar to 92.3 cents, and Guangzhou R&F Properties Co.’s bond due 2023 declined 1.6 cents to 96.8 cents… 

Deepening doubts over Asia’s biggest issuer of dollar junk bonds are spilling over into other parts of the offshore market as investors cut their exposure to riskier borrowers.”

After a brief respite, Chinese Credit stress contagion was again escalating – at least early in the week. 

But the S&P500 then surged 3.6% in four sessions to end the week at all-time highs.  

No adjustments.  

No corrections.

July 22 – Bloomberg (Alexander Weber, Jeannette Neumann and Carolynn Look): 

“Christine Lagarde promised that the European Central Bank has learned from the errors of past crises and won’t derail the current economic recovery by withdrawing emergency support too early. 

The ECB president spoke Thursday as the central bank put into action the new monetary policy strategy it hammered out over the past 18 months. 

It revised guidance on interest rates, tying policy shifts more tightly to hitting its new 2% inflation goal, and said it won’t necessarily react immediately if price growth exceeds that target for a ‘transitory’ period. 

The measures reinforce the ECB’s efforts to convince markets that it will keep ultra-loose policy… in place for as long as needed to revive price stability.”

German bund yields ended the week at a five-month low negative 0.42%. 

Italian yields declined another nine bps to 0.62%, with Greek yields down two bps to 0.65%. 

Ten-year Treasury yields ended the week at 1.28%, despite abundant evidence from company quarterly earnings reports of heightened inflationary pressures and further price increases. 

Again this week, it seemed rather obvious that QE and associated liquidity excess have severely distorted both global bond and stock markets. 

“One myth that’s out there is that what we’re doing is printing money. 

We’re not printing money. 

The amount of currency in circulation is not changing.” 

- Chairman Ben Bernanke, CBS’s 60 Minutes, March 2009


“Sometimes you hear that the Fed is printing money in order to pay for the securities that we acquire… 

As a literal fact, the Fed is not printing money to acquire these securities… 

The amount of currency in circulation has not been affected by these activities. 

What has been affected is… reserve balances. 

Those are the accounts that commercial banks hold with the Fed, and they’re assets of the banking system – and liabilities of the Fed – and that’s basically how we pay for those securities. 

The banking system has a large quantity of these reserves, but they are electronic entries at the Fed – they basically just sit there. 

They’re not in circulation. 

They’re not part of any broad measure of the money supply. 

They’re part of what’s called the monetary base. 

They certainly aren’t cash.” 

- Fed chair Ben Bernanke, presentation at George Washington University, May 2012


While the Bank of Japan first dabbled with QE in 2001, it was the Federal Reserve’s adoption of quantitative easing during the 2008 financial crisis that initiated a fundamental change in global monetary management. 

The globe’s preeminent central bank, guardian of the world’s reserve currency, unleashed monetary inflation around the globe. 

It was one of the most momentous governmental policy actions of the past century.

I argued back in 2008 against Dr. Bernanke’s assertion that the Fed wasn’t “printing money.” 

I didn’t want to believe he was being blatantly untruthful. 

Yet it seemed more than semantics – “printing money” versus “currency in circulation” and “cash.” 

I was left with the uncomfortable feeling the astute academic economist turned preeminent Fed theorist and lead official didn’t fully comprehend the nature of contemporary market-based finance.

It was exhausting. 

I would try to explain how Fed purchases created new reserve balances that flowed into the banking system in exchange for new deposits. 

These new bank deposits created purchasing power in the securities and asset markets, as well as for the real economy. 

Invariably, I would get responses akin to Bernanke’s assertions: “They are electronic entries between the Fed and the banking system; they basically just sit there. They can’t be in two places at once.” 

Conventional analysis completely disregarded the simultaneous expansion of bank deposits. 

There was no serious discussion of QE logistics and impacts. 

Granted, the Fed’s initial QE program worked to accommodate the deleveraging of speculative securities holdings. 

Much of the Fed’s balance sheet expansion was essentially a transfer of positions from leveraged speculators (i.e. Lehman and the broker/dealers, AIG and other non-banks, hedge funds, commercial banks, etc.) to the Federal Reserve. 

While Fed QE did create new bank deposits, there was during that cycle the simultaneous unwind of securities Credit (deleveraging). 

The end result was somewhat of a “wash” in terms of the monetary aggregates. 

Importantly, there was generalizing from the workings of QE during the 2008/2009 deleveraging episode, and how the mechanism would function during different market and economic backdrops. 

We’ve witnessed since March 2020 a QE program that, rather than accommodating deleveraging, actually spurred further speculative leverage. 

The Fed’s QE-related purchases created new Fed liabilities exchanged for bank deposits, while additional deposits were created during the process of expanding speculative leverage (also from lending in the economy). 

M2 expanded about $300 billion in 2009. 

It surged $4.9 TN, or 32%, in the first 15 months of the pandemic (March 2020 through May 2021).

These days, it would be indefensible for Bernanke or anyone else to suggest the Fed is not directly responsible for a massive inflation of the “money” supply – i.e. “printing money.” 

And finally, there is a credible investigation of the impact of QE – compliments of The Economic Affairs Committee of the U.K.’s House of Lords, with their insightful report, “Quantitative Easing: A Dangerous Addiction?” 

We can only hope this commences a serious debate regarding the precarious effects of history’s most monumental global monetary inflation.

Cogent insight from the UK report: 

“What is quantitative easing? 

Quantitative easing is a monetary policy tool that central banks can use to inject money into the economy through the purchase of ‘financial assets’, usually government bonds. 

Quantitative easing is also known as ‘asset purchasing’… 

Whenever the Monetary Policy Committee decides that it needs to undertake additional quantitative easing, the Bank of England creates new money to purchase Government or corporate bonds from private sector entities, such as pension funds or insurance companies. 

Once the Bank of England has purchased bonds from, for example, a pension fund, the pension fund receives new money in the form of a deposit in a commercial bank. 

The commercial bank has the deposit (a liability to the pension fund) and additional interest-paying reserves—a type of money that commercial banks use to pay each other—in the Bank of England (an asset).”

The Economic Affairs Committee should be commended for its 62-page comprehensive examination of the Bank of England’s QE program. 

I’ve extracted key passages that certainly apply to the Federal Reserve, along with global central banks more broadly.

“While the UK can be proud of the economic credibility of the Bank of England, this credibility rests on the strength of the Bank’s reputation for operational independence from political decision-making in the pursuit of price stability. 

This reputation is fragile, and it will be difficult to regain if lost. 

While the Bank has retained the confidence of the financial markets, it became apparent during our inquiry that there is a widespread perception, including among large institutional investors in Government debt, that financing the Government’s deficit spending was a significant reason for quantitative easing during the COVID-19 pandemic. 

These perceptions were entrenched because the Bank of England’s bond purchases aligned closely with the speed of issuance by HM Treasury. Furthermore, statements made by the Governor in May and June 2020 on how quantitative easing helped the Government to borrow lacked clarity and were likely to have added to the perception that recent rounds of asset purchases were at least partially motivated to finance the Government’s fiscal policy. 

We recognise that it is not easy to distinguish actions aiming to stabilise bond prices and the economy from actions oriented to funding the deficit. 

Nevertheless, if negative perceptions continue to spread, the Bank of England’s ability to control inflation and maintain financial stability could be undermined significantly.”

“We took evidence from a wide range of prominent monetary policy experts and practitioners from around the world. 

We concluded that the use of quantitative easing in 2009, in conjunction with expansionary fiscal policy, prevented a recurrence of the Great Depression and in so doing mitigated the growth of inequalities that are exacerbated in economic downturns. 

It has also been particularly effective at stabilising financial markets during periods of economic turmoil. 

However, quantitative easing is an imperfect policy tool. 

We found that the available evidence shows that quantitative easing has had a limited impact on growth and aggregate demand over the last decade. 

There is limited evidence that quantitative easing had increased bank lending, investment, or that it had increased consumer spending by asset holders. 

Furthermore, the policy has also had the effect of inflating asset prices artificially, and this has benefited those who own them disproportionately, exacerbating wealth inequalities. 

The Bank of England has not engaged sufficiently with debate on trade-offs created by the sustained use of quantitative easing. 

It should publish an accessible overview of the distributional effects of the policy, which includes a clear outline of the range of views as well as the Bank’s view.”

“No central bank has managed successfully to reverse quantitative easing over the medium to long term. 

In practice, central banks have engaged in quantitative easing in response to adverse events but have not reversed the policy subsequently. 

This has had a ratchet effect and it has only served to exacerbate the challenges involved in unwinding the policy. 

The key issue facing central banks as they look to halt or reverse quantitative easing is whether it will trigger panic in financial markets, with effects that might spill over into the real economy.”

“The Bank of England expects these actions to have effects that will boost the economy. 

These effects are sometimes referred to as ‘transmission mechanisms’ and they include: 

Portfolio rebalancing: by buying large amounts of Government bonds, quantitative easing pushes up their price and lowers their interest rate for investors. 

Because interest rates on Government bonds tend to affect other interest rates in the economy, the Bank of England hopes that this will lower long-term interest rates offered on other loans, such as mortgages or business loans, making it cheaper for businesses and households to borrow and spend money. 

When investors sell assets to the Bank of England, their bank accounts are credited with the proceeds which provides liquidity. 

Some, or all, of that new money will be spent on purchasing a range of financial or real assets, such as shares or property, thus raising their price. 

Those higher asset prices should stimulate spending, either directly or by lowering the cost of financing new investment.”

“Signalling: by purchasing bonds, the Bank of England in effect signals to the financial markets and lenders that it will keep interest rates low for a longer period of time. 

This reduces long-term interest rates in the economy and provides some certainty to banks that people can afford to borrow money. 

Market liquidity: by buying Government bonds, the Bank of England reassures investors that they can sell these bonds if they wish. 

That makes them a safe asset to hold and reassures investors that they will be able to access liquidity by selling them even when financial markets are in distress. 

Wealth effects: quantitative easing can boost a range of financial asset prices, such as bonds and shares. 

This increases the value of these assets, which makes businesses and households holding them wealthier. 

The Bank of England hopes that this makes them more likely to spend money on goods and services, which would boost economic activity.”

“Some witnesses warned of the risks of giving central banks too many objectives which may bring them into conflict. 

Otmar Issing, President of the Center for Financial Studies and former Chief Economist at the European Central Bank, said, ‘Too many targets make it almost impossible to focus monetary policy on maintaining price stability.’ 

Daniel Gros, Distinguished Fellow at the Centre for European Policy Studies, said, ‘The more independent a central bank is, the narrower its mandate has to be.’ 

Lord Macpherson of Earl’s Court… said, ‘if we overload the Bank with objectives—bear in mind that it only has so many instruments—we risk dragging it into political areas where it will be criticised unnecessarily.’”

Answering the report’s overarching question, former Bank of England governor Mervyn King’s Bloomberg Opinion piece was titled “Quantitative Easing Is a ‘Dangerous Addiction’: QE is not a cure-all. 

Central banks have seemed to assume that any adverse shock justifies another round of bond buying. 

QE has become a universal remedy for almost any macroeconomic setback. 

But only certain shocks merit a monetary-policy response. 

The explanations provided by central banks to justify the scale of QE in 2020 changed over the course of the year, and failed to distinguish between shocks that justified a monetary response and those that didn’t… 

QE poses risks for central-bank independence. 

The committee looked closely at the relationship between QE and the public finances. 

QE has made it easier for governments to finance exceptionally large budget deficits in the extraordinary circumstances of Covid-19.”

I am not alone in recognizing the Dangerous Addiction – the central role QE has played in dangerously fueling massive government indebtedness, market dysfunction, speculative assets Bubbles, and inflation. 

The debate has begun. 

Tragically, it’s too late. 

Reflation trade unwind wrongfoots several big-name hedge funds

Bets on higher inflation ‘rinsed’ after Federal Reserve takes more hawkish rate outlook

Colby Smith in New York and Laurence Fletcher in London

Betting against the price of US government bonds was a winning play earlier this year, but recent gyrations have led investors to question remaining in the trade. © FT montage; AFP/Getty Images


Investors are reassessing their commitment to the reflation trade that has captivated Wall Street this year after a hawkish tilt by the US central bank inflicted losses on some fund managers.

Betting against the price of US government bonds was a winning play earlier this year, with hedge funds and other investors raking in sizeable gains as the economic recovery gathered pace. 

But recent gyrations and the spectre of a policy pivot from the Federal Reserve have heaped significant doubt on whether investors should remain in the trade.

“It is obvious that the reflation trade got rinsed,” said Thanos Bardas, deputy chief investment officer for fixed income at Neuberger Berman. 

“The market overreacted, [but] the uncertainty has increased.”

Several big-name hedge fund were caught up in the maelstrom, including Andrew Law’s Caxton Associates and Chris Rokos’s Rokos Capital.

The rationale for the reflation trade had centred around expectations that the accelerating US vaccination programme and removal of Covid-19 lockdown measures would usher in a period of high growth and inflation as business activity began to normalise.

The Fed’s insistence that it would also look past rapidly rising US consumer prices, which it deemed temporary, before adjusting its ultra-accommodative monetary policy further emboldened investors to take a stance against longer-dated Treasuries. 

Longer-term debt tends to suffer disproportionately from inflation since it erodes the value to investors of interest payments that are “fixed” for a period that spans many years.


Hedge funds piled in to the trade, betting that it was the next big win after they profited from rallying prices for US Treasuries last year. 

Caxton, one of the top-performing hedge funds in 2020, wrote in December that “the stage may well be set for a great reflation”. 

Some funds bet bond prices will fall, while others put on positions against the dollar.

Recent months have taken the shine off of this trade, with renewed buying in 10-year Treasuries sending yields falling well off of recent highs recorded in March 2021 despite larger than expected jumps in consumer prices. 

But it was June’s meeting of US central bankers and nascent signals that the Fed may not be as tolerant of higher inflation as previously expected under the new policy framework it unveiled last August that delivered the most significant blow to date. 

After initially selling off sharply after the meeting — which opened the door to two interest rate increases in 2023 — US government bond prices shot higher as investors grappled with how to decipher the Fed’s slightly less dovish tone. 

This rise in price pushed the benchmark 10-year yield as low as 1.35 per cent this month, from highs of nearly 1.8 per cent in March. 

It has since steadied at about 1.50 per cent.

The two-year note, which is more sensitive to monetary policy adjustments, shifted higher, with yields up 0.11 percentage points since the start of the month to 0.26 per cent. 

That led to a swift flattening of the yield curve, which tracks the difference between long and short-dated Treasury yields.

“What happened was a bit of a reinterpretation of what the Fed’s [framework] really means,” said Michael De Pass, global head of US government bond trading at Citadel Securities. 

“The ‘let it run hot’ narrative is maybe not quite as pronounced as market participants were anticipating.”


He added: “Confidence in the [reflation trade] has been dented.”

The price swings were in part amplified by how funds were positioned heading into the Fed meeting. 

So-called “steepener” bets that profit when longer-dated Treasury prices decline at a faster pace than shorter-dated notes were particularly crowded ahead of the Fed meeting, according to CFTC data.

Caxton suffered a drop of about 8 per cent in its $2bn Macro fund, which is still up this year, said people who had seen the numbers.

Brevan Howard has lost roughly 1.5 per cent in its main fund in June and 2.9 per cent in a fund run by trader Alfredo Saitta. 

Rokos has lost about 4 per cent this month, according to people familiar with its performance. 

Rokos and Brevan declined to comment, while Caxton did not respond to a request for comment.

While some managers have been burnt by the reversal of the reflation trade, others are holding firm, using the recent “positioning washout” — as one trader put it — as a buying opportunity. 

“Nothing in our view has changed. 

We are all in on the reflation trade,” said Bob Michele, chief investment officer at JPMorgan Asset Management, who noted that his team added to its steepened bets in recent days. 

“We think there is a lot of growth and inflationary pressures that are building in the economy . . . [and] we are only halfway through the reopening domestically.”

Dan Ivascyn, group chief investment officer at Pimco, is also of the view that long-dated Treasury yields are likely to rise from here, given that inflation risk is “to the upside”. 

But he cautioned the path forward could be bumpy.

“You are in a period where valuations are much more stretched, [and] it takes less bad news to create the same amount of volatility,” said Ivascyn. 

“You want to keep checking your thinking.”

Mixed messages

The anatomy of a growth scare

Depending on where you look, the economic recovery is either on track or in trouble



So much is unfamiliar about the pandemic that it has never been easy to make sense of what is going on. 

Yet in recent days uncertainty has gone into overdrive. 

Stockmarkets are volatile; uncertainty about the path of inflation and labour markets is high. 

The fate of the economic recovery seems to hinge on the answers to a number of big questions. 

Will the spread of the Delta variant of the coronavirus derail the global recovery? 

Will underlying weaknesses be revealed as governments unwind stimulus? 

How enthusiastic are households and firms about spending? 

But the answers are unclear. 

And four gauges of the recovery—market prices, “high-frequency” activity indicators, hard data and economists’ forecasts—are all giving mixed signals.

Start with markets. 

America’s Treasuries are a haven in uncertain times. 

In March investors sold them off as they took fright at rising inflation, pushing the ten-year Treasury yield up to 1.7%. 

But it has slowly slipped back since, as doubts about the continued strength of the economic recovery have taken hold. 

The growth scare seemed to intensify on July 19th, when the ten-year yield dipped to 1.19%. 

The s&p 500, America’s main stock index, fell by 1.6%, with smaller companies hit hardest. 

Commodity prices also took a knock. 

That of Brent crude oil fell by 7% to $69 a barrel. 

The dollar strengthened against other rich-world currencies.

All this seems consistent with concerns about the recovery and, in particular, a reassessment of what is known as the “reflation trade”, where investors buy assets most likely to benefit from an economic upswing. 

Yet by the next day the growth scare had seemingly blown over. 

Stockmarkets reversed their fall. 

The oil price and bond yields recovered a little.

High-frequency data present a similarly muddled picture. 

Global mobility measures are still edging up, according to a recent report by JPMorgan Chase, a bank, suggesting continued growth in gdp. 

Yet Britain, the first big, rich country to be hit hard by the Delta variant, is telling a different story. 

Our “economic-activity index” for the country, using Google data on visits to workplaces, transit stations and sites of retail and recreation, has dropped by about 5% since peaking in June (and there is little sign of greater mobility from July 19th onwards, when England lifted all domestic covid-19 restrictions). 

The British story seems likely to set a trend to a degree. 

In America surveys suggest that the uptick in coronavirus infections linked to the Delta variant has been accompanied by a pickup in people’s reported fear of the virus.


The hardest sort of data—releases from official statistical agencies—do not yet reflect the impact of rising covid-19 infections. 

But they also give contradictory signals. 

Measures of economic “surprise” in activity indicators (ie, a comparison of the published numbers with economists’ forecasts) still look fairly positive, especially in Europe. 

Housebuilding in America is proving more vigorous than almost anyone expected; Britain’s government is borrowing less than economic forecasters thought it would, a sign of a decent recovery in tax receipts. 

But there have also been disappointments. 

In America, for instance, the University of Michigan’s index of consumer sentiment declined in July, against expectations of an increase.

Owing in part to the movements in activity indicators, economists’ revisions to their expectations of gdp growth—our fourth measure—also send mixed messages. 

Analysts at JPMorgan reckon that American output will rise at an annual rate of 4.3% in July, which is lower than what they had forecast a week ago (yet represents an acceleration compared with the month of June). 

Economists at Goldman Sachs, another bank, see downside risks to the global economy but still expect a robust recovery in 2021.

Bring all this together and the picture is one of increasing uncertainty about whether or not the global economic recovery carries on at a rapid clip. 

In the rich world consumers are still sitting on piles of hoarded savings, and workers are in high demand. 

Yet the biggest rebound in activity, flattered by a favourable comparison with last year’s lockdown-induced depths and, in America, generous stimulus cheques, has passed. 

In its place are niggling doubts about whether the recovery can be sustained. 

Governments’ emergency stimulus programmes are coming to an end. 

There are growing fears that, as the Delta variant of the coronavirus spreads, the resurgence in cases could impinge on economic growth, especially in places with large unvaccinated populations. 

Under the Latin American Volcano

Most of Latin America is still far from the horrific conditions prevailing in Venezuela, where output has fallen by a staggering 75% since 2013. But, given the ongoing humanitarian catastrophe there, and the specter of political instability elsewhere, investors should not take a sustained economic recovery for granted.

Kenneth Rogoff


CAMBRIDGE – The current disconnect between market calm and underlying social tensions is perhaps nowhere more acute than in Latin America. 

The question is how much longer this glaring dissonance can continue.

For now, the region’s economic data keep improving, and debt markets remain eerily unperturbed. 

But seething anger is spilling out into the streets, particularly (but not only) in Colombia. 

And with the rate of new daily COVID-19 cases in Latin America already four times higher than the emerging-market median, even as a third wave of the pandemic sets in, the region’s 650 million people face an unfolding humanitarian disaster.

As political uncertainty rises, capital investment has stalled in a region already beset by low productivity growth. 

Even worse, a generation of Latin America’s children have lost nearly a year and a half of schooling, further undermining hopes of achieving educational catchup with Asia, much less the United States.

For Cuba, Russia, and China, which already have a beachhead in Venezuela, the pandemic presents an opportunity to make further inroads. 

Markets seem relieved that the apparent winner of Peru’s presidential election, Pedro Castillo, a Marxist, appears to have at least a couple of mainstream economic advisers, but it remains to be seen what real influence they will have.

Moreover, Latin American economic data so far this year are good only in the sense that they are not as awful as in 2020, when output fell by 7%. 

In April, the International Monetary Fund forecast that the region’s GDP would grow by 4.6% in 2021; more recent estimates are closer to 6%. 

But in per capita terms – now understood as a better way to measure recovery from deep economic crises – most Latin American economies will not return to pre-pandemic levels until well into 2022, or beyond.

Worryingly, much of the region’s real growth this year stems from rising commodity prices fueled by recovery elsewhere, not from genuine productivity improvements that will sustain income through the commodity cycle. 

To make matters worse, low-income households have been hit especially hard by the pandemic and the associated economic downturn.

To understand Latin America’s policy challenges, we need only look at its two largest economies, Brazil and Mexico, which together account for more than half of the region’s output. 

Superficially, they are governed by polar opposites: Brazil by right-wing President Jair Bolsonaro, and Mexico by left-wing President Andrés Manuel López Obrador (widely known as AMLO). 

But the two men are similar in important ways.

While AMLO’s political instincts are rooted in the radical worldview of the 1970s, and Bolsonaro seems nostalgic for Brazil’s era of military rule, both are erratic autocrats. 

Moreover, both remain reasonably popular despite their catastrophic mishandling of the pandemic and a rash of other ill-advised economic decisions. 

AMLO canceled Mexico City’s badly needed new airport project soon after taking office in late 2018, despite the fact that it was well underway. 

And although he campaigned on a promise of rapid economic growth, Mexico’s GDP was shrinking even before the pandemic – by 0.1% in 2019.

Bolsonaro, when he is not threatening to raze the Amazon, has continued to be successful in blaming Brazil’s problems on the left-wing opposition Workers’ Party (PT) that governed the country until 2016. 

Several of the PT’s leaders, including former President Luiz Inácio Lula da Silva, were jailed for corruption.

Nevertheless, it is entirely possible that, in a few years’ time, Brazil will again have a left-wing president – perhaps Lula, whose convictions were overturned in March – while Mexico is back in the hands of a centrist. 

The two countries’ future policy course is thus hard to predict.

Why aren’t debt markets spooked by all this uncertainty? 

In part, it is because both countries have remained fairly conservative in their debt management. 

True, Brazil’s government debt is projected to reach nearly 100% of GDP this year. 

But it is mostly denominated in local currency, and domestic residents hold as much as 90% of the total, up from 80% five years ago. 

Even corporate foreign borrowing has been contained, with the country’s external debt still only around 40% of GDP.

Mexico’s public debt is lower than Brazil’s, at 60% of GDP. 

For all his radicalism, AMLO has so far been a fiscal conservative, much as Lula was in Brazil. 

The lesson that debt crises can derail a populist revolution has been well learned.

True, governments across the region have mounted a surprisingly robust macroeconomic response to the pandemic. 

But they have far less scope than the US to continue using deficit finance. 

To raise spending and tackle inequality on a sustainable basis, Latin American countries must also find a way to increase budget revenues.

Ironically, the protests in Colombia began not in response to benefit cuts, but because the government tried to raise taxes on the middle class to provide more and better pandemic relief to the country’s poorest citizens. 

Governments seeking to redistribute income need to raise taxes on better-off citizens rather than temporarily paper over problems with additional debt.

In recent decades, the US has been reluctant to become deeply engaged in resolving Latin America’s problems, but perhaps this will change. 

For starters, the region needs massive vaccine assistance in order to get back on its feet. 

America can also help by strengthening trade – especially by addressing pandemic-induced bottlenecks and removing lingering Trump-era protectionist measures.

Most of Latin America is still far from the horrific conditions prevailing in Venezuela, where output has fallen by a staggering 75% since 2013. 

But, given the ongoing humanitarian catastrophe there, and the specter of political instability elsewhere, investors should not take a sustained economic recovery for granted.


Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.

Which covid-19 vaccine is the most widely accepted for international travel?

A patchwork of complicated cross-border travel rules is causing confusion


PERHAPS THE best litmus test of the post-pandemic world will be how much international travel returns. 

In 2020 international tourism arrivals fell by 74% compared with 2019, to just 380m—by contrast the fall was just 4% during the financial crisis. 

In recent months international travel has begun to recover. 

With 3.7bn vaccine doses administered around the world, many people are raring to pack their bags for a foreign trip. 

But not every vaccine-acquired antibody automatically allows you freely to jet off overseas.

Many governments are welcoming only recipients of certain covid-19 vaccines as visitors. 

This month the European Union said it would not admit visitors who were jabbed with the Covishield vaccine—even though it is identical to the AstraZeneca vaccine which is used in the EU—because it has not been approved by the EU’s medicines regulator. 

The government of India, where the vaccine is manufactured, threatened to retaliate. 

The policy may also affect Covishield recipients elsewhere in the world: 5m doses have been delivered in Britain.

Data from VisaGuide.World, a travel website, demonstrate just how variable the patchwork of vaccine recognition is. 

The AstraZeneca vaccine is the most widely accepted, with 119 governments recognising it—it is the most-used vaccine and it is also approved by the World Health Organisation (along with Pfizer-BioNTech, Moderna, Johnson & Johnson and two Chinese vaccines). 

By contrast, China's CanSinoBio is recognised by just a handful of governments (see right-hand chart).

The problem does not stop with travel. 

Although America is not requiring proof of vaccination for travel across its borders (they remain shut, however, to Brits, Europeans, Chinese and Indians, among other nationalities), Canadians who have received the AstraZeneca vaccine are worried they will be barred from entertainment venues that require FDA-approved vaccines for entry. 

America has ordered 300m doses of the AstraZeneca vaccine but has yet to approve it.

The travel industry is concerned that such restrictions will keep people at home. 

Nick Carreen of the International Air Transport Association, a trade group, says that the lack of agreement among governments is “one more hurdle to giving passengers confidence they can travel”. 

Mariangela Simao, an assistant director general at the WHO, says the European Parliament has recommended that countries consider accepting vaccines that have been emergency-listed by the WHO.

Over a dozen EU countries have since said they will ignore the EU rules and accept the Covishield vaccine as proof of immunity. 

But they are unlikely to be so easy on the Chinese vaccines. 

Although the Chinese ones have been given an emergency authorisation by WHO, there are gaps in the trial data for these jabs that are likely to worry some countries. 

Twelve million Chinese tourists visited the EU in 2019.

But a thumbs-up from the WHO is better than nothing. 

In the coming year it is likely that a number of vaccines will struggle to gain international recognition. 

For political reasons some countries have waved through home-grown, or -produced, vaccines through regulators. 

Others may not have stringent enough regulatory authorities to inspire confidence in medicines. 

Vaccines that are currently unlikely to get an easy ride from international authorities include Russia's Sputnik V, India’s Covaxin and Cuba’s Abdala vaccine.

To make matters worse, a number of American states have enacted laws banning vaccine passports. 

These include Alabama, Arizona, Indiana and Florida. 

On July 13th, Norwegian Cruise Line Holdings sued the state of Florida over its laws preventing businesses from requiring customers to show proof of vaccination. 

As it stands, cruise ships will have trouble operating unless they can be certain that passengers are jabbed. 

For travellers and the tourist industry alike, 2021 is likely to be remembered for the continued covid-19 frustrations and border bureaucracy. 

The globetrotting and holiday snaps will have to wait until next year. 

Jamie Dimon: can’t stop, won’t stop

JPMorgan chief’s acceptance of grant allowing him to buy 1.5m shares is curious at best

JPMorgan has included provisions that require Jamie Dimon to remain at the investment bank for the award to fully vest, unless he departs for government service © Seth Wenig/AP


On seven different occasions in JPMorgan’s most recent annual letter to shareholders, Jamie Dimon mentions the phrase “income inequality”. 

At one point, he refers to it as one of America’s “biggest challenges”. 

It is a sprawling document so perhaps the bank’s board of directors did not read that far down.

JPMorgan announced late on Tuesday that Dimon had been awarded a “special” grant of stock options allowing him to buy 1.5m shares, with the exercise price set at the current market price. 

The board cited Dimon’s “exemplary leadership” and “a highly competitive landscape for executive leadership talent”.

But Dimon already owns more than $1bn worth of JPMorgan shares. 

His annual remuneration consistently amounts to roughly $30m. 

What’s more, he enjoys his bully pulpit so much one senses he might actually pay JPMorgan to keep his job. 

The bank’s own analysis values this latest grant at $49m, which is hardly life changing for Dimon. 

Yet paying him so much raises questions about the judgment of those charged with overseeing a man who is so keen to hold on to the limelight.

One cannot deny JPMorgan’s performance and stability during Dimon’s 16 years at the top. 

Moreover, he has proved to be a role model for aligning his pecuniary interests with shareholders. 

Dimon spent tens of millions of his own cash buying shares in the bank at difficult moments in 2012 and 2016. 

Those purchases occurred when JPMorgan shares traded in the $30s and $50s. 

Today, those shares trade at roughly $150.

True that to profit from this latest grant the share price will have to appreciate. 

Moreover, he cannot exercise these options for five years. 

JPMorgan also has provisions that require Dimon to remain at the bank for the award to fully vest, unless he departs for government service.

In JPMorgan’s proxy filing this year, the company provided a chart that revealed Dimon’s pay relative to net profits between 2017 and 2019 — a ratio of 0.10 per cent — is a third less than his rivals at Morgan Stanley and Goldman Sachs.

Executive pay has proved to be particularly contentious this year at US companies, with shareholders rebuking the boards of General Electric, Starbucks and Activision Blizzard in non-binding votes. 

The steep ascent of chief executive pay, which is widening the chasm with ordinary workers, is a notable development in American society in the last four decades. 

Dimon, a student of history and purveyor of societal opinions, knows this, making his acceptance of this goody bag curious at best.

IMF Managing Director Opening Remarks for the United States 2021 Article IV Consultation

International Monetary Fund


Welcome to the press conference on our conclusions from this year’s U.S. Article IV consultation.  

We had a very useful discussion earlier today with Chair Powell and Secretary Yellen about the current state of the economy and the challenges ahead as the U.S. emerges from the shadow of the pandemic. 

I would like to thank them and staff of the Federal Reserve, the Treasury, and other agencies for their time and insights over the past few weeks. 

Let me give you a brief summary of the main messages from the consultation.

First, the US economy is coming out on a strong footing from the very difficult circumstances of the past year. 

We expect the economy to grow at 7 percent this year, the fastest annual growth rate since 1984, and continue with very strong momentum into next year. 

This is very good news for the U.S. and for the world economy.

Our outlook is based on the assumption that the American Jobs Plan and American Families Plan are legislated later this year, and in a form that is similar to that proposed by the administration. 

It is worth noting that these two packages would put in place many of the policies proposed in Article IV consultations over the past several years. 

We believe that these two packages will add to near-term demand, raising GDP by a cumulative 5¼ percent over 2022-24.

And—perhaps more importantly—our assessment is that GDP will be 1 percent higher even after 10 years, thanks to the significant, positive effects on labor force participation and productivity introduced by these two plans. 

Rather than just offering a short-term boost to demand that then fades away, the Jobs and Families Plans are expected to produce a lasting improvement in income and living standards for many years to come. 

In this regard, it is welcome to see the bipartisan agreement to move forward legislation on the physical infrastructure parts of these two packages. 

Today’s agreement in the House is an important step forward.

I am particularly impressed by the administration’s commitments to strengthen social safety nets and increase the progressivity of the tax system. 

We know that the burden of the pandemic has been borne disproportionately by the poor, by women, and by minority households. 

Many of the proposed policies--—including paid family leave, the refundable child tax credit, support for childcare and healthcare, investments in education, and a higher minimum wage—will directly support working mothers, markedly help black and Hispanic families, and boost participation in the labor market.

Second, we are cognizant of the vibrant public debate about inflation in the U.S. 

Certainly we have seen large consumer price movements in recent months, and we think that those fairly high inflation readings will continue for a few months. 

However, I want to emphasize that the evidence suggests that this inflation will be transitory and is largely a product of relative price movements that are occurring as the economy rebounds from the impact of the pandemic, sometimes in a rather uneven way. 

We estimate that core inflation—excluding volatile food and energy prices—could get close to 4 percent by the end of the year. 

After those temporary factors play out, we expect inflation to be around 2½ percent by end-2022.

We do not see overheating as the most likely outcome. 

At the same time, we cannot ignore the risk that a sustained, faster rise in inflation would pose for the U.S. and world economy.  

The introduction of the Federal Reserve’s new Flexible Average Inflation Targeting framework last August was timely. 

It has helped policymakers negotiate the uncertainties created by the pandemic and appropriately provided significant accommodation for the economy as it recovers. 

It also emphasizes the importance of communication and forward guidance in shaping both inflation and inflation expectations. 

We believe the Fed has been clear in communicating its intentions, and we anticipate that such transparent and proactive communications will continue as asset purchases are scaled back and, eventually, as interest rates move upwards. 

This matters for sustaining robust growth in the US, as well as for the impact interest rates in the US have on the world economy, especially on countries with high levels of dollar denominated debt. 

This takes me to my third point, the US’s leadership in seeking multilateral solutions to the world’s most pressing challenges.  

I welcome the U.S. administration’s efforts to provide vaccine assistance to a broad range of countries, as well as its support for the proposed SDR allocation. 

I would also like to express strong support for the proposal to establish a global minimum corporate tax which will help reduce incentives to shift taxable income to low-tax jurisdictions. 

I join Secretary Yellen in welcoming the widespread endorsement among 130 countries for this plan.

On trade, our discussions revealed the administration’s commitment to an open, transparent, and rules-based international system. 

We are also supportive of the administration’s priority to ensure that trade creates tangible benefits for the American people. 

We do not think these two objectives are in conflict. 

Indeed, we believe that—with the ongoing efforts to increase productivity and make the U.S. more competitive—a rolling back of recent trade restrictions and tariffs, as well as a level playing field in federal procurement, will be important forces to create good, well-paying jobs and to strengthen living standards.

Finally, I want to welcome the administration’s renewed focus on reducing carbon emissions and to boost investments in climate change mitigation and adaptation. 

U.S. leadership in this area is critical for the well-being of our planet and for our future. 

Proposed spending on green infrastructure and efforts to remove fossil fuels subsidies are valuable steps forward. 

And more will have to follow. In this consultation, we have particularly argued for a greater focus on curbing emissions in the agriculture sector, and for pricing carbon, best done through a federal carbon tax, for the benefits of jobs and growth in the U.S. and of the goal of addressing the global climate challenge.