Unstablecoins

Why regulators should treat stablecoins like banks

Cryptocurrencies are not yet a threat to the financial system, but the dangers are growing



Twelve years after bitcoin was born, governments are still struggling to cope with cryptocurrencies. 

Britain has banned Binance, a crypto exchange and the European Union’s regulators want transactions to be more traceable. 

On August 3rd Gary Gensler, the head of America’s Securities and Exchange Commission, said cryptocurrency markets were “rife with fraud, scams and abuse” and called on Congress to give his agency new regulatory powers. 

The price of bitcoin, the biggest cryptocurrency, gyrates with regulators’ every word.

Governments have an obligation to fight the deception, tax evasion and money laundering that plagues the crypto world. 

Police seizures of bitcoin suggest that they are becoming more zealous. 

The harder issue they must grapple with is whether cryptocurrencies threaten the financial system. 

Were bitcoin to collapse, our crypto “stress test” suggests that its holders would lose hundreds of billions of dollars but that the fallout would be manageable. 

Yet there is another danger posed by “stablecoins”, a special type of cryptocurrency that pegs its value to conventional money.

Pledges of stability often lead to financial crises. 

Because banks offer deposits that are redeemable on demand and superficially riskless, but which are backed by longer-term, less liquid and riskier assets, they are vulnerable to runs. 

Stablecoins are similar. 

The biggest, Tether, has issued $62bn-worth of tokens which it says are redeemable for a dollar apiece. 

But of the assets backing the tokens in March only about 5% were cash or Treasury bills, according to Tether’s public disclosures. 

It says it will update the figures soon and that it is “fully backed by reserves”.



Most of the assets were riskier—about half of them commercial paper. 

Stablecoins’ growth from a value of $14bn in August 2020 to over $100bn today has given them a big financial footprint. 

Extrapolating Tether’s disclosures implies that it owns over $30bn-worth of commercial paper, which probably makes it the asset class’s seventh-largest investor, not far off funds run by Vanguard and BlackRock, according to JPMorgan Chase. 

With estimated leverage of 383-to-1, Tether would be unable to honour all its tokens after losses of just 0.26%—a safety cushion that regulators would never allow at a bank.

Few stablecoins say much about their balance-sheets. 

Tether’s disclosures of the breakdown of its assets are puny and fall far below the standards expected of a bank. 

In February Tether was among the defendants who agreed to an $18.5m fine with New York’s attorney-general, which said that in 2017 Tether had misled the market about its us dollar backing and that it had not accurately disclosed the transfer of $625m of its assets to Bitfinex, an online trading platform. 

Tether says the funds were repaid and that it has a “total commitment to transparency”.

No wonder Mr Gensler calls cryptocurrencies a Wild West. 

Some policymakers have compared stablecoins to the period of “free banking”, when privately issued banknotes of uncertain backing and worth circulated in America’s economy in the 19th century. 

A more useful comparison is with money-market funds, which were created in the 1970s to circumvent rules limiting the interest banks could pay depositors. 

After promising to maintain the value of their shares at a dollar, money-market funds blew up in 2008 in the global financial crisis. 

American taxpayers stepped in to forestall a fire sale of their assets and a crash in the market for commercial paper, on which the real economy depends. 

A collapse of stablecoins could look similar.

Regulators must act quickly to subject stablecoins to bank-like rules for transparency, liquidity and capital. 

Those failing to comply should be cut off from the financial system, to stop people drifting into an unregulated crypto-ecosystem. 

Policymakers are right to sound the alarm, but if stablecoins continue to grow, governments will need to move faster to contain the risks.

It may be tempting to ban stablecoins, especially if central banks launch their own digital currencies—much as private banknotes were replaced with government monopolies on physical cash. 

Yet it is possible that regulated private-sector stablecoins will eventually bring benefits, such as making cross-border payments easier, or allowing self-executing “smart contracts”. 

Regulators should allow experiments whose goal is not merely to evade financial rules. 

But first they must prevent the repackaging of risks with which the world is all too familiar. 

The fight over the Fed

The new Powell doctrine

The Fed has taken a bold gamble under Jerome Powell. Will he get to see it through?


NO ONE CAN accuse him of inconsistency. 

Over the past year Jerome Powell, chairman of the Federal Reserve, has again and again used the same phrasing to kick off his press conferences after it sets interest rates. 

“Good afternoon. 

At the Federal Reserve, we are strongly committed to achieving the monetary-policy goals that Congress has given us: maximum employment and price stability.” 

It may not be an opening that sets pulses racing. 

But that is just how Mr Powell wants it: a projection of control, in terms any high schooler can understand.

The simple wording belies a remarkable evolution in Fed policy and practice on his watch. 

Mr Powell has overseen a giant monetary response to the covid-induced slowdown. 

The Fed has bought more than $4trn in assets during the pandemic (equivalent to 18% of GDP), dwarfing the scale of its actions after the global financial crisis, and swelling its total balance-sheet to $8.3trn. 

Mr Powell has refined the way the central bank communicates, targeting his messages at ordinary Americans rather than at economists. 

He has led a landmark shift in the way it thinks about interest rates. 

And in the process, he has presided over a bold gamble, keeping policy ultra-loose even as inflation soars. 

To his supporters—of whom there are many—he saved America from an economic catastrophe. 

To his critics, he is steering it into danger.

These days much of the conversation about Mr Powell focuses on whether President Joe Biden will reappoint him. 

His four-year term as chairman ends in February 2022. 

Mr Biden is expected to announce in the coming weeks whether he will renew Mr Powell’s term or nominate a replacement, giving markets time to brace for the change, if there is one. 

Progressives within the Democratic Party would prefer a chairperson who is tougher on banks, accusing Mr Powell of slowly dismantling rules intended to make the financial system safer. 

Lael Brainard, the lone Fed governor who has consistently opposed moves to, for instance, soften banks’ leverage limits, is their preferred candidate.


Still, most Fed watchers expect that Mr Powell will get a second term. 

Betting markets assign it an 85% probability. 

Most Democrats and Republicans think he has done a good job in tough circumstances. 

The economy is recovering and stocks are near all-time highs. 

Why rock the boat? 

The politics would look good, too. 

Mr Biden would re-establish a precedent, broken by President Donald Trump, of reappointing Fed chiefs first chosen by a president from another party. 

It would also make sense to anyone tracing the arc of Mr Powell’s leadership. 

Over the past four years he placed his big bets. 

The test of whether he was right or rash will come in the next four.

An assessment of Mr Powell’s record can be divided into three periods. 

The first was before the pandemic. 

His most notable achievement was arguably political. 

The Fed faced the gravest challenge to its independence in decades when Mr Trump railed against its interest-rate rises. 

Mr Powell defused it, sticking to the Fed’s agenda and patiently explaining that the president had no authority to fire him, but otherwise refusing to get drawn into a war of words. 

Mr Powell also displayed intellectual flexibility. 

When inflation dipped in 2019, the Fed swiftly reversed gear and cut interest rates—and held them low even as unemployment declined to levels that economists had assumed might lead to upward price pressures. 

“He let the economy push farther and farther than anyone thought it could go,” says Jason Furman, an economic adviser to President Barack Obama.

The second period came with the onset of the pandemic. 

As the American economy came to a sudden stop in March 2020, stocks plunged and credit markets seized up. 

Mr Powell wasted no time in engineering a massive rescue, slashing rates to zero and buying up a wide range of assets—not just Treasuries and mortgage-backed securities but also, for the first time, corporate bonds. 

Within three months the Fed’s asset holdings had increased by $3trn.

The third period of Mr Powell’s tenure, unfolding now, is the most contentious. 

Many who applauded the Fed’s stimulus during the depths of the pandemic think it should have started rolling it back. 

Monthly asset purchases of $120bn make little sense, and indeed may be storing up trouble, when inflation is running above 5%. 

Move too slowly to unwind, and financial markets could overheat (some prominent investors such as Jeremy Grantham argue that they are already red-hot). 

Move too quickly, and a market crash would be a self-fulfilling prophecy, rippling through the global economy. 

Sonal Desai of Franklin Templeton, an asset manager, calls it the “hardest high-wire balancing act we’ve seen in a long time”.

Mr Powell is trying to pull it off by giving markets plenty of warning, in the hope of avoiding a repeat of the “taper tantrum”, which spooked markets in 2013. 

On August 27th, when he speaks at an annual Fed jamboree—usually held in Jackson Hole, Wyoming, but being conducted online for the second year running because of covid-19—Mr Powell is expected to say that a tapering of asset purchases could start later in the year. 

Many observers expect a three-step shift: a pre-announcement at the central bank’s rate-setting meeting in September that a tapering announcement will come at its November meeting, followed in December by actual tapering.

Priced to perfection

Guesses about the tapering schedule, though, are only one element of the debate now swirling around Mr Powell’s agenda. 

Last year he introduced a new framework for monetary policy (building on a shift that started under his predecessors, Janet Yellen and Ben Bernanke), announcing that the Fed would target an average of 2% inflation over the longer run, while also seeking to let the economy reach full employment. 

He has also pledged that the Fed will not raise rates until inflation is at 2% and is forecast to stay above it for some time. 

Tapering can begin earlier, as long as there is “substantial further progress”—a deliberately vague phrase—towards meeting the inflation and employment targets. 

What he could not have foreseen was the extremely uneven recovery from the pandemic, with prices climbing but the unemployment rate still nearly two percentage points higher than at the start of 2020.

“The Fed has tied its hands to be quite late to remove monetary-policy accommodation,” says William Dudley, former president of the New York Fed. 

Mr Dudley thinks that the Fed’s new framework is correct, but worries that the implementation has been too rigid. 

He says that he would have argued for less extreme conditions to taper or raise interest rates. 

Mr Furman warns that Mr Powell could be paving the way for unpredictable policy, which would give rise to the very market shocks he has wanted to avoid. 

“There’s been a bit of assuming that everything’s going to work out exactly right, and not having much public communication about what will happen if it doesn’t,” he says.

Yet many other economists and Fed veterans support Mr Powell’s approach. 

The average-inflation framework was designed with the broader backdrop in mind: steadily lower inflation was keeping interest rates low and limiting the Fed’s monetary space. 

Covid-19, though an extreme challenge, is unlikely to alter these long-standing structural forces. 

Much of the recent surge in inflation appears to stem from ephemeral factors such as gummed-up global supply chains. 

David Wilcox, a former research director at the Fed, says that as long as inflation expectations remain anchored at 2%, the Fed is likely to have the patience to wait it out. 

“In that context an abrupt move to tighten could be a costly mistake,” he argues.

If inflation persists and filters into wages a year or so from now, that would be a different story—but a modest overshoot would not necessarily be an unwelcome one. 

“If inflation runs to the upside, that’s a problem they want to have, and they have the tools for dealing with it,” says Alan Levenson of T. Rowe Price, an asset manager. 

Nathan Sheets, who has worked at both the Treasury and the Fed, adds that there is a case for monetary policy to err on the loose side. 

“We have faced this blistering asymmetry, where if we get soft performance, it's very hard to stimulate. But if it gets a little hot, we know how to temper that,” he says. 

As it stands, the central forecast of members of the Fed’s rate-setting committee is for inflation to return to roughly 2% next year. 

Market pricing of Treasury bonds points to much the same outcome.

For all the controversy about Mr Powell’s monetary policy, it is his approach to financial regulation that has been the biggest lightning-rod for his political opponents, especially from the progressive wing of the Democratic Party. 

“I see one move after another to weaken regulation over Wall Street banks,” Senator Elizabeth Warren said at hearings in July. 

Defenders of Mr Powell say that such a characterisation is unfair. 

The Fed did, for instance, scrap pandemic-era limits on most banks’ stock buybacks and dividend payments at the end of June, but that was only after subjecting them to three stress tests to confirm that they had more than enough capital. 

In other areas, Mr Powell’s Fed has been strict. 

In March it rebuffed banks’ requests to extend an exemption on leverage caps that had helped them during last year’s slowdown.

If Mr Biden wants to keep Mr Powell in his job but also to signal a tougher stance on regulation, he has an obvious solution. 

Randal Quarles’s term as the Fed vice-chairman responsible for banking supervision ends in October. 

Instead of nominating Ms Brainard as the next chairperson, he could choose her as Mr Quarles’s replacement. 

For markets, such a reshuffle would minimise the turbulence from changing personnel at such a critical juncture. 

Politically, it would be deft. 

And it would give Mr Powell a chance to answer the fundamental question posed by his policies: whether the great monetary loosening, so necessary last year, can be unwound now without doing great harm to the economy.

IMF chief: how the world can make the most of new special drawing rights

Poor and vulnerable countries need help to fight their way out of the pandemic

Kristalina Georgieva 

An elderly woman receives a dose of AstraZeneca’s Covid-19 vaccine at Kathmandu Durbar Square in Kathmandu, Nepal, earlier this month © Narendra Shrestha/EPA/Shutterstock


On Monday, IMF member countries start receiving their shares of the new $650bn special drawing rights allocation — the largest in the fund’s history. 

This injection of fresh international reserve assets marks a milestone in our collective ability to combat an unprecedented crisis.

In 2009, during the global financial crisis, a $250bn SDR allocation helped to restore market confidence. 

This time around, as the world continues to grapple with the Covid-19 pandemic, SDRs are even more important. 

The additional liquidity will bolster confidence and global economic resilience.

SDRs can help countries with weak reserves reduce their reliance on more expensive domestic or external debt. 

And for states hard pressed to increase social spending, invest in recovery and deal with climate threats, they offer a precious additional resource.

It is crucial, however, that these SDRs are used as effectively as possible — with accountability and transparency, and with as much as possible going to countries most in need.

So how can we make the most of the new allocation?

First, by making SDRs available to member countries quickly. 

With SDRs distributed in proportion to IMF quota shares, closely related to a country’s economic size, about $275bn is going to emerging and developing countries. 

Low-income countries are receiving about $21bn — over 6 per cent of gross domestic product in some cases.

Vulnerable countries will be able to use the new SDRs to support their economies and step up the fight against the virus and its variants. 

Combined with grants and other essential support from the international community, this will help achieve the goal of vaccinating at least 40 per cent of the population in every country by the end of 2021, and at least 60 per cent by the first half of 2022.

Second, every effort should be made to ensure SDRs are used for the benefit of member countries and the global economy. 

The decision on how best to utilise them rests with member countries of the IMF. 

They can hold them as part of their official reserves, or use them by converting them into US dollars, euros or other reserve currencies.

But while this is a sovereign decision, it must be prudent and well-informed. The fund will work with its members to help ensure accountability and transparency.

We are providing a framework for assessing the macroeconomic implications of the new allocation, its statistical treatment and governance, and how it might affect debt sustainability. 

The fund will provide regular updates on all SDR transactions, plus a follow-up report on their use in two years’ time.

Third, with increasingly divergent economic fortunes due to the pandemic, we need to go further to ensure more SDRs go to those who need them most. 

That is why the IMF is encouraging voluntary channelling of SDRs from countries with strong external positions to the poorest and most vulnerable nations.

By magnifying the impact of the new allocation, redirecting SDRs could help those most in need, while reducing the risk of social and economic instability that could affect us all.

The good news is that we can build on progress achieved so far. 

Over the past 16 months, some better off member countries have pledged to lend a total of $24bn, including $15bn from existing SDRs, to the IMF’s Poverty Reduction and Growth Trust, which provides concessional loans to low-income countries. 

We hope to see further support to the PRGT from the new SDRs.

The IMF is also engaging with its members on a possible new Resilience and Sustainability Trust that could use SDRs to help poor and vulnerable countries with structural transformation, including climate-related challenges. Another possibility could be channelling SDRs to support lending by multilateral development banks.

Of course, SDRs are not a silver bullet. 

They must be part of a broader programme of collective action by countries and international institutions. 

Since the pandemic began, the IMF has played its part, providing about $117bn in new IMF financing to 85 countries — and debt service relief to 29 low-income nations. 

The fund also joined forces with the World Bank, World Health Organization and World Trade Organization to promote the urgent task of vaccinating the world.

The poet Robert Frost wrote of the “road not taken”. 

We now have a unique opportunity to take the right road as the world strives for a more resilient future. 

We at the IMF pledge to do our best to ensure that this historic SDR allocation, used wisely, plays its part in promoting a strong and sustainable global recovery.


The writer is managing director of the IMF

America’s recovery: is Joe Biden’s presidency vulnerable to inflation?

Rising prices are giving Republicans a chance to label the administration as reckless big spenders

James Politi in Washington and Aime Williams in Glenside, Pennsylvania

© FT montage; Getty Images


For small business owners in Glenside in the northern suburbs of Philadelphia, rising prices have become a common gripe.

“It’s really affecting my bottom line,” says Alisa Kleckner, who sells masks and costumes, primarily using leather, for theatre productions. 

“The cost of raw goods has gone up, the cost of transportation has gone up, and also the entertainment industry is suffering,” she says.

Joe Sparacio, who runs the Crate and Press Juice Bar, is worried about the possible hit to come. 

“The cost of all our produce went up,” he says, “strawberries, blackberries, almond milk. 

Chicken went up threefold. 

For now it’s not a problem because the customers are paying more, but if that stops then it’ll be a big problem.”

The inflationary spike running through the country has injected a lot of uncertainty into the local economy, admits Napoleon Nelson, a Democratic state representative in one of America’s most politically contested battleground regions. 

“It’s more than the usual gas prices,” he says. 

We’re not sure how long this will last. 

It’s a struggle.”


America’s bounceback from the depths of the pandemic has been remarkably vigorous this year, after President Joe Biden approved $1,400 in direct payments to low and middle-income households and vaccinations spurred a quick lifting of restrictions on activity and a burst of spending. 

US economic growth in the first half of the year averaged 6.5 per cent on an annualised basis, potentially setting the stage for its strongest performance since 1984 — while employment has jumped by 3m since the start of the year.

It is the sort of economic picture that should provide a boost to the party in power and leave the opposition Republicans struggling for political oxygen.

However, the one blot on an otherwise encouraging picture is higher than expected inflation, which has put private sector forecasters, Federal Reserve officials and Biden administration economists on edge.

June data showed the labour department’s consumer price index rising by 5.4 per cent compared with a year earlier, while an alternative measure, the commerce department’s personal consumption expenditure index, increased by 4 per cent over the same period. 

Core prices, stripping out volatile food and energy, have been tamer, but are still elevated at 4.5 per cent for the CPI and 3.5 per cent for the PCE. 

The Fed’s inflation target is 2 per cent, on average.

Many US economists and policymakers believe that over the coming months, as supply chain bottlenecks such as semiconductor shortages ease up and the reopening effect on prices of some goods and services subsides, price pressures will fade away and inflation will fall back. 

While some prices have soared this year, they are in many instances simply recovering the ground they lost during the pandemic, and may not move much higher.


President Joe Biden’s stimulus plans have stoked a solid rebound and reduced poverty, but Republicans are betting that it will backfire, both economically and politically © Kevin Dietsch/Getty Images


Even so, the current rise in prices is already emerging as a source of political vulnerability for Democrats and the White House as they try to keep the American public onside and supportive of their sweeping economic agenda ahead of the midterm elections in 2022.

Beyond the $1.9tn stimulus package enacted in March, the US president has backed a $1tn bipartisan infrastructure plan, as well as further spending worth up to $3.5tn to bolster the US social safety net that he is looking to pass solely with Democratic votes.

Republicans sense inflation provides an opening — a chance to label the Biden administration as reckless big spenders and the recovery a short-term sugar-high. 

Party strategists say the Republicans intend to make the jump in living costs a central message to bludgeon both the White House and congressional Democrats.

“What you have is a president who is looking at bringing an economy back up to speed, which Americans are ready for, and they’re primed for,” says Amy Walter, editor-in-chief of the Cook Political Report, a non-partisan newsletter, in Washington. 

“But what happens if our current inflationary troubles . . . turn out to be not so transitory?

“Then it becomes a big challenge for his party in the midterm elections,” she adds, “to defend votes on big spending, big-ticket items.”


Spending plan

When Biden entered the White House in January with his party controlling both chambers of Congress, Democrats wanted to demonstrate to Americans that government spending could help households in very tangible ways, particularly in times of need such as the pandemic.

Many in the party, as well as left-leaning economists, believe that fiscal policy was excessively austere under Barack Obama after the 2008 financial crisis, leading to a sluggish recovery that failed to help the middle class. 

To avoid repeating the same mistake in 2021, they wanted to achieve a booming, high-pressure economy that would lift wages and help the country return to full employment as rapidly as possible.

Biden’s stimulus plan — which included direct payments as well as expanded unemployment benefits, a subsidy for children, and aid to state and local governments — has stoked a solid rebound and reduced poverty. 

Yet Republican lawmakers are betting that it will backfire, both economically and politically.

Builders work on a highway intersection in Miami, Florida. Beyond his $1.9tn stimulus package, Joe Biden has backed a $1tn bipartisan infrastructure plan and further spending worth up to $3.5tn to bolster the US social safety net © Joe Raedle/Getty Images


Some Republicans have even harked back to the 1970s stagflation years to paint an alarming picture of the economic environment that will unfold under Biden. 

Republicans have already started airing ads targeting vulnerable Democrats in swing states and districts on inflation and one party aide tells the Financial Times that high prices are becoming a “continuous message” in their political communications.

“As the product of a single-parent household, I know just how hard this inflation is hurting families trying to make it work on shoestring budgets,” says Rick Scott, the Florida Republican senator who is leading his party’s efforts to win control of the Senate next year.

Although the midterm elections are still 15 months away and could be decided by a wide array of factors, the political battle over Biden’s economic plans — including high inflation — is expected to be fought most intensely in swing districts like those in the suburbs of Philadelphia. 

Glenside and its surrounding areas helped the Democrats take control of the House of Representatives in 2018 and Biden prevail in the 2020 election against Donald Trump, and Republicans are looking for arguments to win them back.

“Americans are rightfully concerned about the rising cost of everyday goods. 

Voters will hold Democrats accountable for their harmful economic policies that are making everything more expensive,” says Matt Berg, a spokesman for the National Republican Campaign Committee, which is charged with winning control of the House from the Democrats next year.

A lab worker makes chips at a factory in Jiangsu province, China. The Biden administration has tried to address some of the current supply chain disruption, particularly in the semiconductor sector, that has driven up the cost of cars and other goods © AFP via Getty Images


But it is far from clear that the Republican messages will stick. 

Biden does not appear to be suffering from a backlash on the scale of the Tea Party revolts against Barack Obama’s healthcare reform that dominated his first summer in office in 2009.

According to the Realclearpolitics.com polling average, Biden’s approval ratings have dipped slightly, from 55.5 per cent in late January after inauguration, to 51.3 per cent this year, but remain in a relatively healthy state given the deep divisions and polarisation in the US electorate.

Inflation worries have in recent weeks taken a back seat to the resurgence of the Delta variant of coronavirus in large swaths of the country, which could potentially chill economic activity and cool prices down in the coming weeks and months.

Despite that, Biden has still felt the need to vow vigilance on inflation and acknowledge the struggles of ordinary Americans suddenly facing higher prices for food, petrol, housing and other key expenses.

“My administration understands that if we were to ever experience unchecked inflation over the long term, that would pose real challenges to our economy,” Biden said on July 19. 

“So while we’re confident that isn’t what we are seeing today, we’re going to remain vigilant about any response that is needed.”


Demonstrators in New York in 1973 protest against rising food prices. Some Republicans have harked back to the 1970s stagflation years to paint an alarming picture of the economic environment that will unfold under Joe Biden © Keystone/Hulton Archive/Getty Images

Adjusting wages

High prices do not only provide a target for Republicans, but could weaken Democratic enthusiasm for the White House’s economic agenda. 

One big worry within the party’s base is that inflation might make housing costs too onerous for low and middle-income families.

They also want to ensure that wages are increasing at least as fast as inflation, to avoid a big loss of purchasing power for households that would undercut the benefits of their stimulus measures and planned expansion of the social safety net.


Republican Rick Scott, who is leading his party’s efforts to win control of the Senate next year, says: ‘As the product of a single-parent household, I know just how hard this inflation is hurting families trying to make it work on shoestring budgets’ © Drew Angerer/Getty Images


“Large and unexpected surprise inflation . . . can reduce real wages — especially if employers do not build cost-of-living adjustments into their wage increases,” warned Jason Furman and Wilson Powell of Harvard University in a paper released on Friday by the Peterson Institute for International Economics. 

“Price growth has been more rapid than compensation growth, and so real compensation has been falling.”

Democrats also fret that in this environment the Fed, which has the most powerful weapon to curb inflation — interest rates — might be tempted to tighten policy more quickly than expected in order to stave off higher prices, thereby choking off the recovery before it reaches full employment. 

Although the Fed is debating a reduction to its $120bn per month asset purchase programme, it has indicated that any increase in interest rates is far in the future, but there is still nervousness among Democrats that the central bank’s patience in keeping policy loose may run thin.

A man changes the fuel prices at a service station in Florida. The president has felt the need to vow vigilance on inflation and acknowledge the struggles of Americans facing higher prices for food, petrol, housing and other key expenses © Joe Raedle/Getty Images


“My concern is that a misplaced diagnosis playing out with inflation could cause the Federal Reserve to prematurely raise rates and constrain wage and employment gains that have been beneficial to millions of Americans,” Alexandria Ocasio-Cortez, the progressive New York congresswoman, told Jay Powell, the Fed chair, at a hearing of the House financial services committee last month.

The Biden administration has limited options to try to rein in prices on its own if needed. 

It has already moved to try to address some of the supply chain disruption, particularly in the semiconductor sector, that has driven up the cost of cars and other goods. 

It has also proposed to overhaul US antitrust policy to crack down much more aggressively on monopolistic behaviour by large corporations. 

And officials have argued that their additional spending plans on infrastructure, education and the social safety net would be disinflationary — making the economy run more smoothly and equitably.

“If your primary concern right now is inflation, you should be even more enthusiastic about this plan,” Biden said in July.

Research from Moody’s Analytics by Mark Zandi, a former economic adviser to the late Republican senator John McCain’s 2008 presidential race, supported Biden’s view, saying much of the “additional fiscal support being considered is designed to lift the economy’s longer-term growth potential and ease inflation pres­sures” — including steps to boost housing supply and reduce the cost of prescription drugs.

Joel Benenson, Obama’s pollster and adviser during his 2012 re-election campaign, says the White House and Democrats have some key advantages in the argument over inflation. 

One is that middle-class Americans are more likely to believe Biden is “working for them every day” compared with “obstructionist” Republican congressional leaders; another is that “traditional, conventional thinking” that higher prices will be a political liability may not apply during a time of great economic and social upheaval due to the pandemic.

Philadelphia business owner Alisa Kleckner, who sells masks and costumes: ‘The cost of raw goods has gone up, the cost of transportation has gone up, and the entertainment industry is suffering’ © Alisa Sickora Kleckner


But he says Biden may still want to be cautious as he presses ahead with the rest of his economic agenda. 

“People in the Democratic party will always want to make packages bigger and bigger. 

Politically, it is smart to know how much the public can tolerate and at the same time be able to accomplish what you need,” says Benenson. 

“You really don’t want to jeopardise a lot of Democrats in swing districts in the midterms by overshooting the runway.”

Adrienne Elrod, a Democratic strategist and former Biden campaign official, dismisses the notion that the administration’s message was being muddied or derailed by rising inflation. 

“We’re in a very, very good place economically and those numbers can be improved even more by passing the infrastructure package and the overall Build Back Better agenda,” she says. 

“I think Republicans are just looking for whatever they can find right now to criticise, because there’s not a whole lot out there to criticise.”

According to a Monmouth University poll released last week, just 5 per cent of American voters listed inflation as their top concern, but a greater share — 11 per cent — was worried about being able to pay their bills.


A woman walks past a job advert in New Hampshire. US economic growth in the first half of the year averaged 6.5% on an annualised basis, while employment has jumped by 3m since the start of the year © Charles Krupa/AP


In Glenside, Philadelphia, local residents — despite their worries about inflation — are generally giving Biden the benefit of the doubt, at least for now. 

Shannon Dougherty, the owner of a café in the town, says she has been tearing her hair out this year over staff shortages while bemoaning the cost of the chicken wings she serves. 

But she believes the disruptions will be resolved. 

“I believe that as the country recovers we will see prices drop and staffing improve,” she adds.

Politically, the battle lines around Biden’s economic agenda are clearly forming over the issue of high prices. 

Although high inflation has not reared its head for decades in America and has not been a factor since the 1970s, it dogged both incumbent presidents Gerald Ford and Jimmy Carter during that era, a worrying precedent for Biden that Republicans will try to replicate.

“Republicans are going to argue that Joe Biden came into office saying he was a moderate. 

Instead, they just keep spending money we don’t have, it’s driving up inflation, it’s driving up our debt, it’s hurting our grandkids,” says Walter, the political analyst. 

“You can expect that regardless of what the inflation number actually is.”

Delta Variant

The Vaccinated Are Worried and Scientists Don’t Have Answers

By Kristen V Brown and Rebecca Torrence


 Anecdotes signal surprising number of infections in vaccinated

 Officials must formulate plans despite a dearth of hard data

Anecdotes tell us what the data can’t: Vaccinated people appear to be getting the coronavirus at a surprisingly high rate. 

But exactly how often isn’t clear, nor is it certain how likely they are to spread the virus to others. 

Though it is evident vaccination still provides powerful protection against the virus, there’s growing concern that vaccinated people may be more vulnerable to serious illness than previously thought.


There’s a dearth of scientific studies with concrete answers, leaving public policy makers and corporate executives to formulate plans based on fragmented information. 

While some are renewing mask mandates or delaying office reopenings, others cite the lack of clarity to justify staying the course. 

It can all feel like a mess.

“We have to be humble about what we do know and what we don’t know,” said Tom Frieden, a former director of the Centers for Disease Control and Prevention and the head of the nonprofit Resolve to Save Lives. 

“There are a few things we can say definitively. 

One is that this is a hard question to address.”

Absent clear public health messaging, vaccinated people are left confused about how to protect themselves. 

Just how vulnerable they are is a key variable not just for public health officials trying to figure out, say, when booster shots might be needed, but also to inform decisions about whether to roll back reopenings amid a new wave of the virus. 

On a smaller scale, the unknowns have left music lovers unsure if it’s OK to see a concert and prompted a fresh round of hang-wringing among parents pondering what school is going to look like. 

In lieu of answers, what has emerged is a host of case studies providing somewhat different pictures of breakthrough infections. 

Variables including when the surveys were conducted, whether the delta variant was present, how much of the population was vaccinated and even what the weather was like at the time make it hard to compare results and suss out patterns. 

It’s difficult to know which data might ultimately carry more heft.

“It’s quite clear that we have more breakthroughs now,” said Monica Gandhi, an infectious disease expert at the University of California, San Francisco. 

“We all know someone who has had one. 

But we don’t have great clinical data.”

Provincetown officials have issued a new mask-wearing advisory for indoors regardless of vaccination status. Photographer: Barry Chin/The Boston Globe via Getty Images


One of the best known outbreaks among vaccinated people occurred in the small beach town of Provincetown, Massachusetts, as thousands of vaccinated and unvaccinated alike gathered on dance floors and at house parties over the Fourth of July weekend to celebrate the holiday -- and what seemed like a turning point in the pandemic. 

About three-fourths of the 469 infections were among vaccinated people. 

Authors of a CDC case study said this might mean that they were just as likely to transmit Covid-19 as the unvaccinated. 

Even so, they cautioned, as more people are vaccinated, it’s natural that they would also account for a larger share of Covid-19 infections and this one study was not sufficient to draw any conclusions. 

The incident prompted the CDC to reverse a recommendation it had issued just a few weeks earlier and once again urge the vaccinated to mask up in certain settings.

Still, the particular details of that cluster of cases may have made that outbreak especially bad, according to Gandhi.

“The rate of mild symptomatic outbreaks in this population was higher because of a lot of indoor activity (including intimacy), rain that weekend, not much outside time and mixture of people with different vaccination status,” she said in an email.

A newly released, far larger CDC case study of infections in New York state, meanwhile, found that the number of breakthrough infections has steadily ticked up since May, accounting for almost 4% of cases by mid-July. 

Those researchers cautioned that factors such as easing public health restrictions and the rise of the highly contagious delta variant might impact the results. 

Yet another CDC case study, in Colorado, found that the breakthrough infection rate in one county, Mesa, was significantly higher than the rest of the state, at 7% versus about 5%.

The report suggested it was perhaps because the delta variant was circulating more widely there, but also noted the ages of patients in Mesa and the lower vaccination rate may have played a role.

Research out of Israel seems to back the idea that protection from severe disease wanes in the months after inoculation, and more recently, that breakthrough cases may eventually lead to an uptick in hospitalizations. 

The information is preliminary and severe breakthrough cases are still rare, but it bolsters the case that some people will need booster shots in coming months.

Customers at a bar in Detroit, Michigan, where the number of people in the state hospitalized with confirmed or probable Covid-19 nearly doubled over 10 days in August. Photographer: Emily Elconin/Bloomberg


Case studies and data from some states in the U.S. have similarly shown an increase in breakthrough cases over time. 

But with the delta variant also on the rise, it’s difficult to tell whether waning immunity to any type of coronavirus infection is to blame, or if the vaccinations are particularly ineffective against the delta variant. 

It could be both, of course. 

Changing behavior among vaccinated people could be a factor, too, as they return to social gatherings and travel and dining indoors.

All that said, some facts are well established at this point. 

Vaccinated people infected with the virus are much less likely to need to go to the hospital, much less likely to need intubation and much less likely to die from the illness. 

There’s no doubt that vaccines provide significant protection. 

But a large proportion of the nation -- almost 30% of U.S. adults -- have not been vaccinated, a fact that has conspired with the highly contagious delta variant to push the country into a new wave of outbreaks. 

“The big picture here is that the vaccines are working and the reason for the spike in the U.S. is we have too little vaccine uptake,” Frieden said. 

To a certain extent, breakthrough cases of any virus are expected. 

In clinical trials, no Covid vaccine was 100% effective -- even the best vaccines never are. 

The more the virus is in circulation, the greater the risk of breakthrough cases. 

It’s also common for some aspects of viral immunity to naturally wane over time.



For the time being, there are simply more questions than answers. 

Are breakthrough infections ticking up because of the delta variant, waning immunity or a return to normal life? 

Are vaccinated people more vulnerable to severe illness than previously thought? 

Just how common are breakthrough infections? 

It’s anyone’s guess.

“It is generally the case that we have to make public health decisions based on imperfect data,” Frieden said. 

“But there is just a lot we don’t know.”

The Summer of Disaster

A full year after the first indications that mRNA vaccines against COVID-19 would be highly effective and safe, the world is now reeling from even more dangerous variants of the virus. What does that say about us, particularly in the wealthy Global North?

J. Bradford DeLong



BERKELEY – The world is facing two disasters that are making the COVID-19 crisis doubly worse than it ought to be. 

The first is the rise of the Delta variant, which is twice as contagious and 1.5-2 times deadlier than the original coronavirus. 

The second disaster is that Global North governments have not committed the resources to increase vaccine production to the scale needed to immunize the global population by the end of this year. 

Worse, the longer we drag our feet, the more likely that the immunity furnished by vaccines and previous COVID-19 infections will begin to erode.

Given these problems, it is too early to start talking about the “post-pandemic” world economy. 

Public health should remain the top-line priority. 

As for the economy, the focus should be on keeping the basic economic engine running and avoiding a massive increase in poverty. 

With the Delta variant running rampant, we should postpone efforts to restore economies to full-employment “normalcy” until after we have achieved some combination of vaccine and acquired herd immunity.

After all, since we cannot know what state the global economy will be in six months from now, we don’t yet know which policies will be most appropriate for driving a smooth and sustainable recovery. 

By the same token, we should reject proposals to “cool down” the world economy in order to avoid some shadowy inflationary spiral or a return of bond-market vigilantes in the future. 

The Delta variant should be met not with cooling but warming.

Outside of a few truly informed experts who unfortunately are rarely heard above the noise, our ignorance about the pandemic’s range of possible trajectories is immense. 

We have no clear global picture. 

All we can do is consider narrower samples.

The United Kingdom serves as one petri dish. 

The country has suffered from incompetence and widespread carelessness. 

And no, Prime Minister Alexander Boris de Pfeffel Johnson did not do it all on his own, though he certainly has maintained his modus operandi of lying and somehow continuing to “fail up.” 

Without the rapid arrival of safe and effective vaccines, the country almost surely would have lost many more people to COVID-19 than the 130,000 (0.2% of the population) that it already has.

The well-performing East Asian countries offer a second petri dish. 

After long proving effective, their world-beating spread-control mechanisms are now cracking under the pressure of the Delta variant. 

We can conclude that these measures are necessary but not sufficient, with their uses limited to buying time for universal vaccination programs.

A third petri dish is the United States. 

The lesson here is not that an inept government can stumble into herd immunity because it has the power of the Global North’s biotech industry behind it. 

Nor are there lessons to draw about an evolving virus overcoming any and all infection-suppression measures. 

The real lesson from the US is that it is in a league of its own. 

More than 600,000 people have died from COVID-19, and that figure seems poised to rise by another 100,000 in the coming months.

Meanwhile, the message being blared by Fox News and most other right-wing outlets goes something like this:

‘Superman-President Donald Trump quarterbacked the incredibly successful Operation Warp Speed project, which performed biotech miracles and created a highly effective vaccine against a disease that is just like the flu. 

But now, the vaccines are untested and unsafe. 

We should never have worn masks. 

The virus is a Chinese bioweapon funded by Dr. Fauci, who constantly gave Trump bad advice about this gigantic hoax. 

The medical establishment is suppressing information about truly useful medications like ivermectin, hydroxychloroquine, and hydrogen peroxide.’

If this conspiratorial word salad sounds crazy, consider the terrifying fact that around one-quarter of the American population apparently believes it (or at least some part of it). 

One-fifth of Americans think that the US government is using COVID-19 vaccination to implant microchips into their bodies. 

Tens of millions of Americans have found sufficient reason to run a 1% risk of death by refusing an extremely effective, extremely safe, widely available vaccine.

Consider the implications of this successful act of brainwashing. 

A country where malevolent, cynical media and political operatives can trigger such deep psychological fractures in a significant share of the population is extremely vulnerable to a wide range of threats. 

What will Americans fall for next? 

Even if the next mass psychological hacking effort is motivated merely by a desire to sell more ads, what social destruction might it leave in its trail?

The bottom line today is the same as it was a year ago, when stage-three trials first suggested that the mRNA vaccines against COVID-19 were a huge success. 

The obvious next step is to cut through the bureaucracy and open the money spigots to mobilize as many resources as are needed to get high-quality vaccines into every arm in the world as fast as possible. 

We can sort out the financing and regulatory approval issues later.

It has been a full year since the biotech wizards gave us the tools that we need to beat the virus. 

Why are we still in the situation we are?


J. Bradford DeLong is Professor of Economics at the University of California, Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.