Federal Reserve Folly

By John Mauldin 


Great news: The US economy is officially out of recession. 

We know this because the National Bureau of Economic Research’s official recession-calling committee said so this week. 

The economy has been in an expansion phase since last April, making this the shortest recession on record at only two months.

The NBER committee always makes these calls in hindsight—both the beginning and end of recessions. 

Literally everyone could see the economy coming to a halt in March and April. 

The signs weren’t subtle. 

Yet it wasn’t until June 8, 2020, that they said the economy had peaked in February, marking the recession’s onset. 

I don’t blame them for waiting to see the data, though. Caution is appropriate on these things.

But really, 15 months to affirm the economy has been expanding? 

Their statement was quite specific. 

They call April 2020 the bottom because that month showed clear troughs in unemployment, GDP, PCE, and personal income ex-transfers. 

All this was known long ago.

Unlike NBER, a private group with no formal power, the Federal Reserve can actually do something with this kind of information. 

Nor does the Federal Open Market Committee have to wait for confirmation. 

It can act whenever it sees a need, which it certainly did when the pandemic struck.

Here’s a handy timeline summarizing the Fed’s near-daily actions in March and April 2020. 

They did far more than just open the Quantitative Easing spigots ($120 billion a month and counting) and lower the Fed Funds rates to zero.


Source: AAF


As I said back then, the Fed’s dramatic response (accompanied by the federal government’s equally dramatic fiscal response) was appropriate given what was known at the time. 

It was an unprecedented situation, potentially threatening the economy and financial system’s core stability. 

They had to act quickly and aggressively.

Where we can/should blame Fed leadership, though, is in the failure to recognize the time to slowly end the extraordinary measures, which are now having extraordinary and harmful side effects. 

Today I want to describe what is happening and tell you what I think the Fed should do. 

Though, to be frank, I have little hope they will.

Let me be very clear. 

I believe the Federal Reserve has already made a significant policy error that can lead directly to recession. 

An accompanying fiscal policy error by the US Congress could compound the Fed’s error, although that remains to be seen, as it is not clear what will pass Congress.

Unneeded Fire Trucks

I greatly admire the skill and bravery of firefighters. 

I once had the personal benefit of their help (recounted here) and was glad they came.

In watching how firefighters work, I have noticed some patterns. 

When notified of an emergency like a high-rise fire, which could be either very serious or a mild annoyance, they assume the worst

They arrive quickly and in force. 

Once on-scene, they decide exactly what is needed and the chief then either calls for reinforcements or releases the extra capacity to go elsewhere. 

But they initially bring it all “just in case.” 

This is prudent when lives may be at stake.

What they don’t do is stay on the scene in full force once the emergency is over. 

Of course, large fires can smolder for days. 

They might leave a small crew to extinguish any flare-ups but they won’t tie up the entire department when it may be needed elsewhere.

Now imagine the Federal Reserve is our financial fire department. 

It got a 12-alarm call in March 2020 and rolled out every truck it had. 

That was the right response. 

But within a few months, or at most a few quarters later, it was clear the Fed’s part of the emergency was over.

COVID-19 wasn’t over, of course (and still isn’t), nor was the economy in a great position. 

But the systemic meltdown risk had passed. 

The fire was still smoldering but at that point, it was mainly a fiscal fire. 

Fire Chief Jerome Powell himself said so, repeatedly begging Congress to deal with unemployment and business failures more effectively. 

He admitted there was little else his fire trucks could do but he kept them there anyway in the form of massive quantitative easing and keeping rates at the zero bound. 

They are still on-scene now.

It is my opinion that this has the potential to go down as the greatest policy error in central bank history. 

I know that’s saying a lot. 

Arthur Burns and G. William Miller letting inflation rise in the 1960s and 1970s ranks up there. 

Alan Greenspan kept rates too low for too long. 

Failing to better regulate the mortgage industry was a major problem. 

Powell’s predecessors Ben Bernanke and Janet Yellen also kept fire trucks on scene even though the crisis was over. 

In fact, they even deployed additional trucks (QE2 etc.) long after the recession ended. 

But Powell is doing it on a vastly larger scale.

This might be tolerable if these financial fire trucks were just parked and waiting. 

That’s not the case. 

They are blocking traffic, preventing deliveries, and slowing progress. 

Their revved-up engines are spewing fumes, choking innocent bystanders. 

And the highly-skilled firefighters are actually losing their skills as the needless deployment consumes their training time.

Leaving rates at the zero bound is financial repression. 

It harms savers and retirees. 

Buying $40 billion worth of mortgage bonds every month to hold down mortgage rates in the midst of an extraordinarily significant rise in housing costs seems counterproductive, especially for first-time buyers.

Even more egregious is the Fed seems to have assumed a third mandate: keeping the stock market rising. 

Not only does this exacerbate wealth disparity, it borders on malpractice because, at some point, the Fed will have to take its foot off the accelerator. 

When that happens the potential for another “taper tantrum” is significant. 

The Fed absolutely should not think the stock market is its responsibility. 

To do so (as I believe they are) sets up all of us for extreme future volatility.

Supply chain problems are going to get fixed, albeit slower than we would like. 

Eventually, the fiscal stimulus will go away and everyone will have to adjust. 

Monetary policy isn’t the solution for that particular problem.

This has to stop. 

The economy is growing now. Unemployment, while still elevated, is improving. 

Creditworthy borrowers can easily get financing. 

Even if another major COVID-19 wave strikes, we have thankfully progressed beyond the need for economy-stifling restrictions.

The emergency is over, at least from the perspective of the need for quantitative easing and low rates. The Fed should bring its fire trucks home.

Unfortunately, that’s not happening… and it’s having an effect.

Slamming the Brakes

Everyone agrees inflation would be a problem if we had enough of it for an extended period. 

Then the agreement breaks down. 

Are rising inflation benchmarks “transitory” or will they persist? 

If they do persist, do they even mean anything for most people?

We wrestled with these questions at the SIC in May (see Expecting Inflation and Deflation Talk). 

I’ve been more on the “transitory” side, but small differences matter. 

The Fed has a 2% inflation target. 

Sounds minor, but 2% annual inflation compounds to 22% higher prices over 10 years. 

Fed leaders think it’s fine. 

It is not fine. 

Even “low” inflation harms savers and consumers.

Worse, the Consumer Price Index is a terrible proxy for consumer prices. 

It is massaged and adjusted, sometimes for good reasons, but the adjustments disguise inflation’s impact on segments like housing. 

The “cost of living” grows faster than official inflation for many people, and in some cases far faster. 

The inflation we see today is especially pernicious for the lower 60% of the income and wealth brackets.

One argument, to which I am somewhat sympathetic, is that this doesn’t matter because the Fed can’t generate inflation even if it wants to. 

It’s been trying and failing for over a decade. 

What we see now is less about Fed policy and more about pandemic-driven supply chain disruptions. 

As that passes, the Fed will be trapped again.

Moreover, some of this is outside the Fed’s control. 

The rising prices that add up to inflation are the result of producer and consumer expectations for the future. 

It’s a decentralized, complex process that can easily get out of hand—and force the Fed’s hand.

In general, a loose monetary policy is by definition inflationary. 

And while Powell can make a real argument about inflation being “transitory,” his monetary policy, coupled with an expansionary fiscal policy, is extending the period of time that we call transitory.

Businesses are raising prices. 

You can see businesses, small and large, specifically saying so in their quarterly calls, in the Beige Book, and other sources. 

You can also see it when you go to the store or shop online. 

Prices are rising. 

Clearly wages are rising. 

Those price increases and especially wage increases are going to be “sticky.” 

Consumer inflation expectations are growing. 

Inflation fear embedding itself into the average economic mindset. 

That is dangerous. 

Those of us who lived through the 1970s know inflation expectations have a way of becoming ingrained.

The always-excellent Jesse Felder described it well in one of his letters last week (Over My Shoulder members can read it here), A brief excerpt:

… (T)he Fed might be able to afford to pursue the most aggressive monetary policy experiment in US history so long as inflation expectations remain in check. 

However, if inflation expectations take off then the jig is up.

Because once inflation expectations become unanchored, consumer and business behavior shifts in a way to ensure that inflation is more than “transitory.” 

People begin stockpiling things they fear they won’t be able to get in the future due to rising prices or shortages. 

This pushes up prices further, exacerbating these very fears, inspiring even more stockpiling and so on.

At this point, the Fed would be forced to break the inflationary psychology by rapidly reversing monetary policy to something far more hawkish than almost any market participant can imagine today. 

For some perspective, the last time core CPI hit 4.5%, as it did last month, the Fed Funds rate was over 5% versus 0% today.

As Mohamed El-Erian put it, “The facts on the ground call for the world’s most powerful central bank to start easing its foot off the stimulus accelerator. 

By refusing to do so, the Fed runs a higher risk of having to slam the policy brakes down the road.” 

The longer the central bank waits to curb inflationary psychology, the harder they will have to hit the brakes when the time comes.


See, at some point inflation gets worse simply because enough people expect inflation to get worse. 

Then what?

In the 1970s, Burns and then Miller accommodated that inflation, not wanting to risk recession in order to control inflation. 

Then things got out of hand. 

Rather than small, controlled tightening efforts, we needed a massive shock to the system, producing the worst back-to-back recessions since World War II.

That’s how we got Paul Volcker, incidentally. 

Jimmy Carter installed him in 1979 because inflation was so high. Volcker then did what should have been done earlier. 

Neither Powell nor any likely successors appear eager to normalize Federal Reserve policy. 

That creates severe economic danger, possibly forcing the Fed toward things it doesn’t want to do.

Force-Feeding Liquidity

There’s another way to look at the inflation question: Maybe we actually have major inflation already. 

Instead of CPI or PCE, it’s showing up mostly in asset prices—mainly stocks and residential real estate. 

Both have risen significantly lately, arguably due to Fed policies and programs.

The connection is real. 

Stock prices and home prices both respond to liquidity, and the Fed is stuffing the economy with as much liquidity as it can. 

It injects another $120 billion into Treasury securities and mortgage-backed securities every month. 

Recent activity far outstrips what they did in the Great Financial Crisis and following, which was itself unprecedented at the time.


Source: FRED


Look at the upper right of this chart. 

That sharp vertical line is the Fed responding aggressively and quickly to the unfolding crisis last year. 

They injected staggering amounts of liquidity which, at the time, made sense. 

Maybe they overdid it but, like those fire trucks I described above, they erred on the side of having too much help ready. 

Okay, fine.

But what happened after the initial alarm is less forgivable. 

Instead of pulling back, they brought in yet more horsepower, as shown in the jagged line. 

This is why stocks and home prices are rising. 

It’s not so much the near-zero short-term interest rates, though that helps too. 

The Fed is simply force-feeding liquidity into the economy and it has to go somewhere. These assets are the path of least resistance.

Now, you might say Fed officials surely know this. 

Why are they still pumping? 

An excellent question. 

We may get an answer someday, years from now, when the people making those calls are able to talk more freely. 

For now we can only guess, and my best guess is that the Fed is effectively monetizing the giant and fast-growing government debt. 

They aren’t technically monetizing because they don’t have that authority, but it amounts to the same thing.

But why do that? 

Why encourage fiscal profligacy? 

Maybe because they think it will happen anyway, and they want to minimize the economic hit. 

The alternative is to let the Treasury issue trillions in new debt that would push interest rates far higher. 

That might end the inflation threat, but would have other serious consequences.

The Right Course

As I’ve said in the past, decades of policy errors leave the Fed with no good options. 

All the choices are bad and they can only choose the least bad. 

Not a good position to be in, but it’s where they are. 

And the rest of us are with them, like it or not.

I was critical during the last period of tightening, with the Fed both raising rates and reducing their balance sheet at the same time. 

It was a risky two-variable experiment. 

Today is somewhat different. 

Here’s what the Fed should do, in my opinion:

  • Slowly begin reducing balance sheet growth, say by $10 or $20 billion a month, and sometime early next year begin slowly raising the Fed funds rate, meeting by meeting, Greenspan style.
  • Stop being an arm of the US Treasury, which they certainly appear to be today, and let the government be responsible for its own mistakes.

The Fed’s primary job is to control price inflation. 

I think its obsession with 2% inflation is a serious mistake. 

It’s not “price stability” to reduce everyone’s buying power by 22% in 10 years and 50% in 36 years.

It is certainly not beneficial to retirees who no longer have the ability to earn income and under the current financial repression can’t even keep up with inflation. 

And while I know that Congress gave the Fed a mandate to maximize employment, nobody has been able to explain to me how monetary policy can do that. 

Yes, low rates make it easier for businesses to expand, but they also harm savers and retirees. 

Robbing Peter to pay Paul distorts markets.

I would like to go back to a time when we didn’t wake up in the morning wondering what the Federal Reserve would do. 

Its actions have distorted the economy, repressed savers, and made the wealth and income divide far greater than it should be.

Quick plug: There are things you can do as an investor to hedge/protect/grow your portfolio. I don’t mean the normal approach to markets. 

There is an entire world of outstanding alternative investments out there. 

By the way, over the last month, we had a “small” opportunity to participate in a very unique income fund, mostly funded by large, well-known endowments and pensions. 

Our connectivity gave us a small slice that we showed to current clients. 

You really do want to be at the table when those opportunities present themselves. 

It didn’t take a lot of time to develop that relationship, but it will pay big dividends.

Washington, DC, Maine, Colorado, and Personal Losses

I plan to go to Washington, DC, for a few days before heading out to Grand Lake Stream for Camp Kotok, the annual fishing and economic fest. 

This year my youngest son Trey (who is now 26) will once again accompany me, which he has done for most years since he was 12. 

Then I will go to Steamboat, Colorado, for a speaking engagement at Gobundance. 

Sounds like a fun group.

Those of us of a certain age begin to notice more and more of our friends “shuffle off this mortal coil” way too frequently. 

This week I was deeply grieved that my longtime friend Toby Goodman died of a heart attack at the relatively young age of 72. 

He was my personal/family lawyer but so much more. 

He personally rewrote the family law code while he was in the Texas House of Representatives. 

He was deeply involved in the community, but to me he was a confidant and friend. 

It is without exaggeration that I can say we shared at least 100 Italian meals, talking politics, philosophy, and personal lives. 

Requiescat in Pace, Toby.

On a lighter note, Shane and I and friends went to a small park in downtown San Juan and took salsa lessons. 

It was fun, and we will do it again, but you won’t see me on Dancing with the Stars

Maybe Shane. 

And Trey and Tiffani, granddaughter Lively and friends show up this next week.

And with that I will hit the send button. 

Don’t forget to follow me on Twitter

I seem to binge once or twice a week, and for the most part enjoy the intellectual back and forth.

You have a great week. 

I think I will spend more time on the phone with friends.

Your not happy about Fed policy analyst,



John Mauldin
Co-Founder, Mauldin Economics

China advances in challenge to dollar hegemony

Progress in developing digital renminbi aids quest to undermine global order based on US currency

Diana Choyleva 

Given that China is the second-largest economy and the world’s biggest trading nation, the renminbi should be used far more extensively than it is © REUTERS


China has already made one attempt to turn the renminbi into an international currency and reduce its dependence on the dollar. 

It is now trying again, and this time things really could be different.

The renewed effort to dethrone the dollar is based in large part on China’s technological prowess. 

It is banking that the development of the necessary financial infrastructure, the country’s world-beating mobile payments systems and a successful launch of the digital version of the renminbi will make it easier to use and promote the currency beyond China’s borders.

The approach is unorthodox. 

But if Beijing succeeds in its quest it will undermine the dollar-led global order, at least in China’s sphere of geopolitical influence, and challenge the way America wields power.

Given that China is the second-largest economy and the world’s biggest trading nation, the renminbi should be used far more extensively than it is. 

However, Beijing’s determination to retain capital controls has prevented it from following a conventional path to reserve currency status.

China is still operating restrictions on money flows, so why has the outlook for the renminbi brightened?

A reserve currency has to serve as a medium of exchange, a store of value and a unit of account. 

According to Mark Carney, the former governor of the Bank of England, history has showed that the most important of these attributes is the first one.

Since its first abortive bid to challenge the dollar between 2009 and 2015, China has made progress in setting up a digital renminbi payments system that, by being cost-effective and easy to use, satisfies Carney’s criterion for usefulness.

The People’s Bank of China is well advanced in preparations for the digital renminbi, which will initially serve the domestic economy. 

But the central bank is also working with its counterparts in Hong Kong, Thailand and the United Arab Emirates, alongside the Bank for International Settlements, on using a digital ledger of transactions that is distributed among counterparties. 

The aim is to harness central banks’ digital currencies to make multicurrency cross-border payments simpler and cheaper.


Success will depend partly on other countries’ willingness to embrace China’s financial innovations and western nations could well resist. 

But the project offers benefits that should appeal in particular to emerging markets poorly served by current arrangements in which a “correspondent” bank often acts as intermediary for another to facilitate transfers.

China has also made progress on boosting the renminbi’s attractiveness as a store of value, establishing its credentials as a stable, low-inflation economy even as financial markets worry that unprecedented fiscal and monetary stimulus will unleash inflation in the US, tarnishing the dollar.

Importantly, central banks and financial institutions that regard the renminbi as a credible store of value now have more rein to express their view. 

China has opened its capital markets more to foreign investors, triggering hefty inflows into stocks and bonds over the last couple of years.

True, China retains capital controls. 

But a successful rollout of the digital renminbi, which will be firmly under the control of the PBoC, is likely to make the Communist party more comfortable with relaxing controls because the authorities will have full visibility over two-way flows.

Finally, the renminbi’s functions as a unit of account have also increased since the initial bid to internationalise the renminbi. 

Trade invoicing in renminbi still has to regain its peak 2015 levels, but in the meantime China has launched renminbi-denominated futures contracts in a number of commodities, including oil and gold.

Those who doubt the renminbi will become a reserve currency will point to the absence of the rule of law in China, the lack of independent institutions, and the opaque and unpredictable policymaking of an authoritarian regime. 

But those who doubt the dollar can remain the undisputed apex currency only have to point to the recent attacks in the US on the democratic institutions that are also meant to be an indispensable underpinning of reserve currency status.

China is now striving to capitalise on a reputation for innovation in payments to carve out a sphere of currency influence, defined not by common interests or political culture but by shared infrastructure and technical standards. 

While interests can change, the hard wiring of digital and economic connectivity is far harder to break once established. 

And it is China that enjoys first-mover advantage.


The writer is chief economist at Enodo Economics.

IMF COUNTRY FOCUS

Boosting the Economy: The Impact of US Government Spending Plans

By Andrew Hodge and Li Lin

IMF Western Hemisphere Department


Despite the tragic loss of life and immense challenges brought on by the pandemic, the US economy is making a remarkable recovery. 

The Biden administration’s proposed spending plans will add momentum, raising GDP by more than 5 percent from 2022 to 2024, and will create a lasting impact by increasing productivity and labor force participation.



USA and the IMF

The economic impact of the American Jobs Plan (AJP) and American Families Plan (AFP) was the focus of the IMF’s annual economic and policy review of the United States. 

After completing discussions with the country’s authorities, IMF staff issued a statement today summarizing their conclusions, which will be discussed by the IMF’s Executive Board on July 16.

The AJP and AFP will increase spending and tax expenditures by US$4.3 trillion over the next decade (about 18.7 percent of 2021 GDP), although the final size and composition of these plans will be subject to negotiation in the US Congress. 

The spending would be partly financed by raising taxes on corporate profits and high‑income households.

Addressing key challenges

The proposed plans are designed to address a range of challenges that have held back the economy. 

Many of these challenges have been magnified by the pandemic, which has worsened income inequality and had a disproportionate impact on historically marginalized groups. 

In this context, the AJP and AFP would make substantial investments in both physical and human capital to help alleviate these disparities and create greater opportunities for economic advancement. 

Significant investments in infrastructure, research and development, education, childcare, and in-home care would increase productivity and support participation in the labor force. 

The proposals for a refundable child tax credit, expanded earned income tax credit, and expanded healthcare coverage would reduce poverty and support lower-income groups.

The output impact

Overall, IMF staff estimate that the AJP and AFP will add a cumulative 5.3 percent to the level of US GDP during 2022-24, as spending ramps up over the next few years. 

This estimate takes into account how different types of government spending have different ‘fiscal multipliers,’ meaning that they affect the economy in distinct ways and to varying degrees. 

For example, cash transfers to households, such as the child tax credit, are likely to boost spending in the economy, while childcare support may also increase participation of parents in the labor force. 

Spending on the construction of physical infrastructure, research and development, and education may raise productivity over a longer horizon.

IMF analysis also shows that there is some uncertainty around the exact size and timing of these economic effects, which is reflected in the range of estimates produced by economic models, including the IMF’s G20MOD model and the Federal Reserve’s SIGMA model.

The inflation and debt sustainability implications

Inflation has been at high levels in recent months, but it is expected to decline over the rest of this year, as temporary inflationary factors subside. 

Starting next year, the proposed fiscal plans are expected to add moderate inflation pressures. 

The fiscal packages will be rolled out gradually over a ten-year window and are expected to boost the supply capacity of the economy, which will help alleviate concerns that the boost to demand will fuel underlying inflation. 

Overall, inflation is forecast to be around 2.5 percent by end-2022. 

The US has adequate fiscal space to implement these spending plans, although additional steps will be needed over the medium term to bring down public debt.

An inclusive recovery

The US recovery must be inclusive, and its benefits should be shared by all of society. 

As the pandemic recedes and the economy rebounds, it is more important than ever to support communities that have been historically underserved, marginalized, or affected by poverty. 

The proposed spending and tax changes will benefit female-headed households, who make up a disproportionate share of the poor, as well as Black and Hispanic families. 

Research has shown the importance of childcare support, universal pre-school, and generous “work-based” tax credits in supporting more women, minorities, and lower income workers to participate in the labor force. 

Investment in much-needed physical infrastructure should also benefit marginalized communities. 

The boost to productivity that these investments will produce can support more jobs with sustainably higher wages, in a more equitable economy.

The Better Crisis Response

We can and should prepare for all the specific shocks we can imagine. And what we've learned over the past 30 years is that the best way to prepare for the unforeseeable is to help people live healthier and more prosperous lives in good times, and to offer as much help as possible to everyone who needs it when bad times come again.

Simon Johnson



WASHINGTON, DC – If a meteor hits Earth, a major natural disaster strikes, or any other shock of previously unanticipated dimensions occurs, how should economic policymakers respond? 

There are two plausible alternatives: focus on helping the financial sector, along the lines of what was done in 2008-09, or go as big as possible in helping everyone who needs help, as was done in 2020-21. 

While the 2008 crisis response was better than many alternatives, what was achieved in 2020 should become our reference point for dealing with systemic cataclysms.

Next time, however, we need to do even better in terms of helping people at the lower end of the income distribution. 

This requires significant investments in social infrastructure that should really start today.

In the aftermath of the 2008 global financial crisis, the consensus among policymakers in the United States and Europe was that rescue measures should focus on helping prevent bankruptcy in the financial sector. 

This meant providing additional equity capital on advantageous terms and attempting to boost asset prices as much as possible. 

The amount of support provided directly to homeowners and the unemployed was small by comparison, and there was also no consideration given to non-financial firms (restaurants, shops, hotels, and so on) that were blindsided by the disaster.

In 2020, things were different. 

The financial system was also in jeopardy, but this time there was much more political appetite to help innocent people outside of finance.

Of course, most people who lose their jobs or suffer income losses in any economic downturn should be considered innocent bystanders. 

But economic policymakers conventionally consider such losses normal or unavoidable – or even, in the ultimate misleading euphemism, a necessary part of “creative destruction.”

Keep in mind that people at the higher end of the income scale rarely suffer such losses. 

A few might go bankrupt, but in general more educated and prosperous people are likely to keep their positions – or find a new job and bounce back faster once the economy turns the corner. 

Rich people with deep pockets, meaning cash in hand, often do well in downturns, because they can buy up assets cheaply.

As former US President Donald Trump said in 2006 of a potential crash in housing prices, “I sort of hope that happens because then people like me would go in and buy.” 

When pressed on this point in 2016 by Hillary Clinton, in a presidential debate, Trump responded: “That’s called business, by the way.”

What we learned in the COVID-19 crisis, however, is that it does not have to be this way. 

By providing generous (relative to historical levels) unemployment insurance and other forms of support (such as protection against eviction), the government was able to keep people housed and fed – and to prevent a downward spiral in asset prices, wealth, and prospects.

In fact, asset prices have been remarkably buoyant over the past 18 months. 

The total wealth of Americans rose $13.5 trillion in 2020, partly owing to booming equity prices, but largely because house prices have risen rather than fallen.

Billionaires did well in 2020, just as they did after 2008. 

The difference this time is that ordinary households were better protected.

Of course, the system of public support proved far from perfect. 

It has been far too difficult to get cash into the hands of people who need it, including lower-wage service-sector workers. 

Small businesses applying for support have had to navigate onerous bureaucratic red tape. And access to public health resources has remained extremely uneven.

We know how to fix these problems. 

Create a central bank digital currency that would allow the direct provision of funds to individuals, under appropriate circumstances. 

Use the latest technology to understand the financial needs of firms that are hit by an unforeseeable shock. 

And make sure that everyone has routine access to quality medical care (which is the best way to build up trust in doctors, so that people listen to their guidance when it matters, for example on the topic of vaccines).

The good news is that the US Congress is moving in this direction in its plans for new infrastructure investment. 

The latest consensus apparently includes financing to expand access to broadband.

There will be future shocks, and there is no reason to think they will be smaller than those that are in most people’s living memory. 

In the past 30 years, the Berlin Wall fell, China rose, terrorists attacked the US, the housing market blew up, and a global pandemic shut down pretty much everything.

We can and should prepare for all the specific shocks we can imagine. 

But every one of those major disruptions was regarded by most people – and all the policymakers who mattered – as a low-probability event.

But by now, we should know better. 

The best way to prepare for the unforeseeable is to help people live healthier and more prosperous lives in good times, and to offer as much help as possible to everyone who needs it when bad times come again.


Simon Johnson, a former chief economist at the International Monetary Fund, is a professor at MIT's Sloan School of Management and a co-chair of the COVID-19 Policy Alliance. He is the co-author, with Jonathan Gruber, of Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream and the co-author, with James Kwak, of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown.