Necessarily Aggressive 

Doug Nolan


The Wall Street Journal ran with the headline “What if China’s Property Crackdown Goes Overboard Too?” for its Tuesday’s “Heard of the Street” article. 

A Bloomberg piece went with “China Property Crackdown Alarms Analysts as Economic Risks Grow.”

September 7 – Bloomberg (Sofia Horta e Costa): 

“Warnings that China’s campaign to cool its property market will go too far are multiplying. 

Economists at Nomura Holdings Inc. are calling the curbs China’s ‘Volcker Moment’ that will hurt the economy. 

The credit squeeze in the property sector is ‘unnecessarily aggressive’ and may weigh on industrial demand and consumption, wrote colleagues at Bank of America Corp. 

A prominent Chinese economist cautioned of a potential crisis should home values drop below mortgages. 

Stabilizing China’s housing market under the mantra of ‘housing is for living, not for speculation’ is one of the many campaigns being waged by Xi Jinping as he seeks to reduce the cost of raising a family and defuse risks in the financial system. 

Yet it’s also one of the toughest goals to achieve given the vital importance of the sector to the economy -- the industry accounts for more than 28% of gross domestic output.”

The Wall Street Journal article (Jacky Wong) concluded with the following: 

“Longtime China watchers may expect the government to dial back property curbs when they start to bite in the usual on-again, off-again fashion. 

The risk is that in the current fevered political and regulatory environment, the ‘on’ button might stay pressed a bit too long -- with very serious consequences for financial stability and growth.”

The U.S. mindset holds that if markets faltered on a Fed taper announcement – or, God forbid, a 25 bps rate increase – this would provide unequivocal evidence of a policy blunder. 

Long forgotten is the more traditional alarm when a central bank fails to move in a timely manner to tighten policy - “falling behind the curve.” 

Markets in the past feared the Fed being late to respond to inflation and excess. 

This circumstance would at some point require an aggressive policy response. 

The job of the Federal Reserve is “to take away the punch bowl just as the party gets going.” 

This critical insight from the great central banker, Marriner Eccles, is dismissed as hopelessly archaic. 

These days, it’s more a central bank’s job to spike the punch at the earliest indication the party might be losing its momentum.

A view took hold that inflation had been permanently defeated – that enlightened central bankers possessed the tools and mastery to ensure inflationary pressures would remain under tight control. 

And with inflation well-harnessed, there was no reason to fear elevated asset prices that were in the past vulnerable to Fed-orchestrated tightening cycles. 

And with inflation dead and buried, the availability of open-ended QE ensured central bankers enjoyed unparalleled capacity to respond with overwhelming stimulus in the event of faltering securities and asset markets. 

Asset inflation and Bubbles are no longer to be feared, and they certainly don’t justify monetary tightening that might unduly jeopardize economic prosperity.

As is too often the case, conventional thinking is more wishful than wisdom. 

Inflation is very much alive, and it’s definitely not controlled by central banks. 

And, importantly, asset inflation and Bubbles pose momentous systemic risk to economic, financial and social stability. 

The assumption is that a cautious Beijing will “dial back property curbs when they start to bite” – just as they’ve repeatedly succumbed in the past. 

There is so much at risk – to China’s maladjusted economy, the bloated financial system, and vulnerable social stability. 

To be sure, risks have inflated to such extremes, specifically because Beijing developed a habit of flinching. 

As I’ve written over the years, “Bubbles scoff at timid.” 

Inflationary dynamics gather momentum over time; inflationary biases become increasingly entrenched. 

Mr. Eccles’ wording “just as the party gets going” was not happenstance. 

There’s a steep price that will have to be paid for not quashing inflationary dynamics early. 

In China’s case, not only did officials fail to repress housing inflation and speculation, their propensity to back off early worked to further invigorate Bubble Dynamics. 

Literally tens (hundreds?) of millions of property (apartment) speculators became emboldened. 

Beijing would ensure their housing wealth only inflated. 

Housing was for living, while housing speculation became the ticket to a better life. 

Beijing recognizes it has an urgent problem. 

Its historic apartment Bubble has created enormous economic imbalances. 

It poses a great threat to China’s financial system. 

Moreover, Bubble excess is exacerbating social inequality, with mounting risk to social stability. 

They are forced into being Necessarily Aggressive because previous feeble tightening attempts failed.

The pertinent question has become: how much pain are they willing to tolerate? 

Having fallen significantly “behind the curve,” speculative dynamics will be restrained only through the administration of pain. 

Speculators have to suffer. 

Ditto for lenders. 

Lessons must be learned the hard way. 

But at this stage, a determined tightening risks a Bubble collapse with serious systemic risk. 

And if Beijing again loses its nerve, it will display weakness. 

At this phase of the cycle, a revived bubble would have disastrous consequences. 

September 9 – Bloomberg: 

“Regulators in Beijing have signed off on a China Evergrande Group proposal to renegotiate payment deadlines with banks and other creditors, paving the way for a temporary reprieve as the cash-strapped developer struggles to come to grips with more than $300 billion of liabilities. 

China’s Financial Stability and Development Committee, the nation’s top financial regulator, gave its blessing to Evergrande’s plan last month after the property giant missed interest and principal payments on some loans, a person familiar with the matter said…”

Evergrande’s four-year bond yields rose to 62% in Wednesday trading, before the above news of lender forbearance sparked a relief rally (yields ended the week at 52.5%). 

Other troubled developer bonds also reversed higher. 

Yet an index of Chinese high-yield bonds ended the week with yields not far off highs since March 2020.

My assumption is there’s no turning back for Beijing this go round. 

They intend to break speculative psychology – orchestrating a so-called “Volcker Moment.” 

And this is consistent with the signal sent this year from safe haven global bond markets. 

This is, however, necessarily a high-risk strategy, with Chinese officials keen to avoid a “Lehman Moment” – the type of panic and acute market dislocation that would unleash grave systemic instability. 

So, Beijing will attempt a controlled process of Bubble deflation. 

We’ve already witnessed a Huarong bailout and some forbearance for Evergrande. 

As for the big picture, China’s strategy is similar to Fed efforts during the late-twenties: Try to tighten finance for speculative endeavors, while promoting lending for productive investment. 

It didn’t work for the Fed, and I don’t expect a successful outcome for Beijing. 

Late in a major speculative cycle, levered speculation becomes a primary source of system Credit and liquidity. 

Faltering Bubbles and resulting deleveraging ensure a contraction of speculative Credit. 

This could be somewhat offset by Credit growth in “productive” sectors, though this is much easier in theory than in actual practice. 

Throwing Credit at such an acutely imbalanced economy at a cycle inflection point is fraught with risk. 

I expect the faltering Chinese real estate Bubble - and the associated unwieldy changes in financial flows through the economy - to prove highly destabilizing.

China’s August lending data was generally disappointing. At $460 billion, Aggregate Financing (system Credit) bounced back (from July’s $164bn) to beat estimates, bolstered by strong growth in government bond issuance. 

Bank Lending, however, was notably weak. 

At $189 billion, New Loans were about 15% below estimates. 

This was about 5% below August 2020 and only slightly ahead of August 2019. 

While Consumer Loans somewhat recovered from a dismal July, at $89 billion they were down about a third from August 2020 and 12% lower than August 2019. 

According to Reuters, “Some major Chinese banks had stepped up lending toward the end of August and reduced a backlog in property loans after being advised by the central bank to increase loan quotas for the month.”

Corporate Loans jumped from July’s exceptionally weak $67 billion to $108 billion, though August was second only to July for the weakest growth so far this year.

September has in the past been a seasonally strong month for lending, so perhaps we’ll have a clearer view of China’s Credit dynamic next month. 

At 10.3%, August’s year-over-year growth in Aggregate Financing was the weakest since December 2018. 

It’s worth noting the abrupt slowdown in China’s M2 monetary aggregate continued in August. 

At $25 billion, M2 growth was only about a quarter of the August 2020 level – with expansion over the past three months slowed to a mere $10 billion. 

At this point, the benefit of the doubt goes to the China Credit slowdown thesis.

September 5 – Bloomberg: 

“China’s Vice Premier Liu He made a strong pledge to continue supporting private businesses after a spate of regulatory crackdowns in sectors from after-school tutoring to Internet platforms rocked financial markets. 

‘The principles and policies for supporting the development of the private economy have not changed,’ Liu, who is President Xi Jinping’s top economic adviser, said… 

‘They don’t change now, and will not change in the future.’ 

China must stick to socialist market economy reforms and persist in opening up the economy, Liu said, vowing the country will protect property rights and intellectual property rights.”

Frog in the pot syndrome. 

The Shanghai Composite surged 3.4% this week. 

For how long can the semblance of Beijing having every under control hold? 

All eyes on China’s real estate markets. 

September 8 – Yicai Global: 

“Sales of second-hand homes in China’s first-tier cities such as Shanghai and Shenzhen plunged last month amid ongoing policy adjustments to rein in the country’s housing market. 

Some 18,000 pre-owned homes sold in Shanghai last month, down 40% from a year earlier, the biggest drop so far this year… 

The total value of the deals fell 44% to CNY57.4 billion (USD8.9 billion). 

The average price was CNY3.18 million (USD492,000), a 7% drop… 

In Shenzhen, sales fell for the fifth straight month, plunging 82% to a 10-year low of 2,043 units…

The number of deals also fell in Beijing, dropping 10.7% from July to 15,942 units. 

Guangzhou, another first-tier city, recorded 7,000 new home sales, the lowest in the past 15 months.”

U.S. equities markets were under some broad-based selling pressure. 

The VIX spiked into Friday’s close, ending the week at almost 21. 

Curiously, U.S. corporate Credit was bullet proof. 

Still dancing… 

September 10 – Bloomberg (Brian Smith): 

“The U.S. investment-grade primary market completed its busiest week in history after an eyebrow-raising 54 high-grade companies sold debt in just four days to break the record for number of deals… 

Weekly volume of $77.8bn ranks fifth all time, trailing only four weeks in 2020 when issuers rushed to the capital markets in search of liquidity… 

Bond sales nearly doubled projections of $40bn-45bn, accounting for more than half of the $140bn expected for the entire month…”

September 10 – Bloomberg (Lisa Lee): 

“The leveraged finance market is bracing for a surge in new deals, fueled by booming demand for M&A financing and investors hungry to get their hands on anything offering an alternative to rock-bottom interest rates. 

September could see as much as $110 billion of U.S. high- yield bond and leveraged loan sales, according to bankers…, making it one of the busiest months in years. 

The leveraged loan market already saw 12 deals launch on Tuesday, and there’s little sign the deluge is set to slow anytime soon… 

The impending onslaught adds to what’s already been a historic year. U.S. junk-bond issuance of about $346 billion is on pace to surpass last year’s record $432 billion. 

Leveraged loan supply of around $400 billion, excluding repricings, is already the most since Bloomberg began tracking the data in 2013.”

Off the charts bond issuance. 

Euphoric. 

August job openings “JOLTS” data were reported Wednesday, with a record 10.934 million unfilled positions. 

August Producer Prices rose at a stronger-than-expected 8.3% annual rate (China’s up a larger-than-expected 9.5%). 

National home prices were reported up 18% y-o-y, the strongest annual housing inflation in the 45-year history of the data series. 

And the latest thinking is the Fed will pass on beginning tapering at its September 22nd meeting. 

Why is the Fed dragging its heels? 

It was reported this week that a number of Fed officials have been actively trading their stock accounts. 

For an institution in the process of destroying its credibility, they should be smarter than that. 

Legal Loggerheads

Stewing Conflict Between German High Court and the EU Could Boil Over

The European Union's highest court and Germany's Constitutional Court are facing off over which institution has the last say when it comes to major political issues. The government in Berlin is desperately trying to play down the severity of the conflict.

By Markus Becker, Sophie Garbe, Ralf Neukirch und Christian Reiermann

The ultimate escalation: Justices at the Federal Constitutional Court in Karlsruhe, Germany Foto: Uli Deck / PICTURE ALLIANCE / DPA


How do you eliminate a problem you can’t solve? 

The German government has chosen a pragmatic approach: It is denying that the problem even exists.

Last week, the government announced it had sent a "communication from the Federal Republic of Germany to the European Commission" in Brussels. 

It is the answer to an infringement procedure that the European Commission initiated against Germany because it disliked a ruling made by the country’s high court, the Federal Constitutional Court.

On the surface, the proceedings are about who has the last word when it comes to European law – the European Court of Justice (ECJ) or the Federal Constitutional Court. But behind the legal conflict lies a much bigger question: How deep should European integration go, and who gets to make that decision?

The EU initiated the proceedings following a ruling made by the German high court in May. 

The justices found that the European Central Bank (ECB) hadn’t sufficiently examined the proportionality of its PSPP bond-buying program.

Worse yet, the German court claimed that the European Court of Justice (ECJ), which took a different view, wasn’t doing a thorough enough job reviewing the ECB's activities. 

Moreover, it said the European court in Luxembourg had acted "ultra vires," meaning it had gone beyond its jurisdiction. 

The German court ruled that the ECJ’s ruling was "simply not comprehensible" and, as such, had been "objectively arbitrary."

The ruling was the ultimate escalation in a long-running dispute. 

For the first time, Germany’s Federal Constitutional Court had declared an ECJ decision to be non-binding. 

Some commentators at the time, not only viewed the primacy of EU law over national law as threatened, but also the very European Union itself. 

The Federal Constitutional Court "is a danger to the state," the Süddeutsche Zeitung raged in an editorial.

From Brussels’ point of view, that couldn’t have been expressed more aptly. 

The European Commission stated at the time that the court’s ruling "constitutes a serious precedent."

"The last word on EU law is always spoken in Luxembourg," European Commission President Ursula von der Leyen said right after the ruling. 

The Commission then initiated the infringement procedure against Germany.

It was a delicate step. 

What is the German government supposed to do? 

Put the Federal Constitutional Court in its place and put a question mark over its judicial independence?

In Berlin, a decision was made to resolve the dispute by declaring it moot. 

The letter sent to Brussels by the German government last week makes no mention of the fundamental conflict between the German and European understanding of the law. 

The ruling made by the Federal Constitutional Court is explained in detail, but much is left out. 

It gives the impression that the Karlsruhe court is in line with the ideas of Brussels and the ECJ.

The court recognizes the autonomy of EU law and considers itself bound by the "principle of compatibility with European law," the document reads. 

It goes on to state that the court also recognizes that the judgments of the ECJ must, in principle, be observed as a binding interpretation of EU law. 

But the letter ignores the fact that, from the perspective of the Constitutional Court in Karlsruhe, the primacy of European law is by no means unlimited.

Instead, the German government asserts that it will use all means at its disposal to "ensure full respect for the principles of autonomy, primary of application and effectiveness and uniform application of Union law."

The letter reflects the attitude of the German government, which has often been irked by decisions issued on European law by the Constitutional Court. 

The justices in Karlsruhe, however, are not pleased with the contents of the letter, which they view as a snub of the Constitutional Court.

European Commission President Ursula von der Leyen at the Salzburg Festival in July: One former Constitutional Court justice says the Commission wants to "coldly” create a "federal European state.” Foto: BABIRADPICTURE / ANDYKNOTH


But the letter is primarily intended as a peace offering to the Commission, which must now make a decision on how to proceed. 

The "serious precedent" hasn’t been eliminated by the declaration. 

And how could it be? 

The German government can’t influence decisions of the Federal Constitutional Court and it has no power to overrule them.

Politicians in Brussels knew that before they initiated the procedure. Above all, the move was made to send a message to other countries. 

The Commission is concerned that the decision by the Federal Constitutional Court will serve as a pretext for countries like Poland to ignore ECJ rulings and further dismantle the rule of law. 

Polish Prime Minister Mateusz Morawiecki called the Constitutional Court ruling "one of the most important decisions in the history of the European Union."

The approach taken by Brussels hasn’t been very convincing. 

The infringement proceedings against Germany "aren’t without irony," says Alexander Thiele, a professor and European law expert at the University of Göttingen. 

"The Commission is taking action against the Polish government to protect the independence of Poland's judiciary and is now pursuing proceedings against the German government with the aim of influencing the judiciary."

How Brussels will react is an open question. 

A spokesperson said that the Commission does not provide information about ongoing proceedings. But there are some indications that it could be dropped entirely.

The Commission could point out that Germany has conceded the primacy of EU law. It’s unlikely the Polish government would be willing to provide such an assurance. 

It would then be difficult for Warsaw to cite the Karlsruhe ruling to justify its judicial policy.

Ending the procedure would be a halfway face-saving path for the Commission to extract itself from a situation that it maneuvered itself into. 

After all, if Brussels finds the German explanation insufficient, it would have to formally demand that Germany respect EU law. 

If the situation doesn’t change – and how could it? – the Commission could refer the case to the European Court of Justice.

The Luxembourg court would then be forced to rule on a case in which it is a party. 

This would violate fundamental legal principles and would be disastrous for the rule of law, Berlin-based international law expert Christian Tomuschat recently wrote in an article on Verfassungsblog, a legal website. No one in Brussels is interested in having that happen.

Behind the legal conflict lies a much bigger question: How deep should European integration go, and who decides?

If the Commission does not wish to declare the case to be closed, it also has the option of postponing the procedure. 

"The Commission can take as much time as it wants,” Thiele says.

Regardless how the Commission decides, it will not get any closer to solving the real problem. 

This lies in the nature of the conflict itself. It cannot be solved by legal means.

The European Court of Justice argues that it alone can judge how EU treaties are interpreted and applied and insists that Union law must have primacy over national law so that the same law applies in all member states. 

The court argues this can only be ensured through that primacy.

In principle, the Federal Constitutional Court does recognize the primacy of European law. 

But it also examines which powers Germany has actually transferred to the EU and whether that has an impact on Germany’s constitutional identity. 

Only the German Constitutional Court can determine a violation of the country’s constitution, the Basic Law.

Both stances make good sense, but they are also completely incompatible. 

What seems like legal hair splitting has a highly political background. 

The heart of the matter is the question of who gets to decide on the future of European integration.

The German Constitutional Court fears that more and more power is shifting from the member states to the EU without sufficient democratic legitimacy. 

Andreas Vosskuhle, the former president of the Constitutional Court, has expressed this in particularly drastic terms, complaining at a public appearance that the Commission wants to "coldly" create a "federal European state."

It may sound a little bit like a conspiracy theory, but there is some truth to Vosskühle’s accusation. 

The Commission is keen to regulate as many things as possible at the European level. 

The EU often extends "the transferred powers extremely far, so that that area of competence of the member states and thus also the field of application of the national constitution and national democracy is undermined," says former Constitutional Court justice Dieter Grimm. 

German justices accuse the European Court of Justice of giving this behavior pass rather than keeping the EU institutions in line.

Many constitutional and European law experts were sharply critical of the German court’s ruling on PSPP. And that criticism may be legally justified. 

But rulings by the Constitutional Court on EU policies are rarely motivated solely by legal considerations. 

The justices in Karlsruhe keep a close eye on the consequences their decisions will have. 

And politically, the PSPP ruling makes sense.

In June 2016, the court approved the ECB’s OMT program, which allowed the European Central Bank to buy unlimited amounts of government bonds during the euro crisis. 

ECB chief Mario Draghi had announced at the time that the bank would do "whatever it takes" to save the euro. 

These words alone and the ECB decision were enough to calm the financial markets and the program ultimately didn’t have to be implemented.

There is much to suggest that the court in Karlsruhe was already of the opinion at the time that Draghi had overstepped the ECB’s powers. 

But if the court had ruled against the bond-buying program, the consequences would have been immeasurable, and not just for the common currency zone. 

The entire EU would have been at risk. 

So they ruled the program to be legal despite "considerable concerns."

According to justices at the court, the EU is getting closer and closer to the point where such allowances will no longer be possible. 

If, for example, the rescue package for the bloc for the economic consequences of the pandemic, which entails the issuance of joint EU bonds, were to be made a permanent redistribution instrument without a change to the EU treaties. 

The ruling is a warning to politicians not to let things go that far.

It is no coincidence that the conflict between the Federal Constitutional Court and the EU over the euro is escalating. 

The design flaws of the European Monetary Union (EMU) have been apparent for years now. 

It was clear from the outset that it would be problematic to transfer monetary policy to the European level while leaving financial and economic policy with the member states. 

The weakness of the construct became clear during the euro crisis.

There are plenty of proposals on how to protect the euro in future crises. 

But a prerequisite for the implementation of those measures would be for the member states to amend the European treaties and transfer responsibility for important parts of their fiscal and economic policy to the EU. 

"What the German judges are telling European leaders … is that decisions for which they ought to take ownership should not be delegated to an unelected body," French economist Jean Pisani-Ferry wrote in an editorial in the Spanish daily El Pais in May. 

But governments lack the will and the courage to undertake real reforms.

As long as that remains the state of affairs, any proposals for solving the problem are futile. 

It is only a matter of time before the conflict will heat up again.  

The spectre of high inflation returns to haunt Latin America

Central banks in the region are forced to raise rates, some aggressively

Michael Stott 

Brazil is among countries most affected. Figures had annual headline inflation at a five-year high of 9.7 per cent in August. © REUTERS



While policymakers at the US Federal Reserve conduct a drawn-out discussion over the pros and cons of starting to withdraw their multitrillion dollar pandemic stimulus, south of the border the debate is already over.

Inflation is back with a vengeance and Latin American central banks are raising rates, some aggressively.

Leading the pack is Brazil, where the newly independent central bank is struggling to prevent inflation from hitting double digits. 

“Brazil really had a very big inflation shock,” central bank governor Roberto Campos Neto admitted on September 1. 

Days later figures were published showing annual headline inflation at a five-year high of 9.7 per cent in August.

Brazil has already raised its reference interest rate four times since March to 5.25 per cent and investors expect another increase of at least 1 percentage point this month, with more to follow.


Inflation causes particular alarm in Latin America because of the region’s long history of price instability, particularly in the 1970s and 1980s. Newly empowered central banks brought prices under control in most of the major economies over the past two decades but the region has never completely exorcised its inflationary demons.


Venezuela had the world’s worst inflation of 5,500 per cent in 2020 and prices in Argentina are rising more than 50 per cent a year as the central bank prints money merrily to fund a deficit — another bad old Latin American habit.

In Mexico, core prices rose last month at their highest rate since 1999 and Citibank expects inflation for 2021 of 6.1 per cent. Although the central bank never cut rates as aggressively during the pandemic as its peers, it has tightened policy twice this year and Citi expects two more rises before the year end, taking the policy rate to 5 per cent.


The same story is repeated along the Andes. 

Annual inflation in Chile hit 4.8 per cent in August, almost double February’s level. 

The central bank published a hawkish inflation report, signalling further tightening after doubling rates last month. 

In neighbouring Peru, inflation reached 4.95 per cent in August and the central bank has started tightening while in Colombia prices rose 4.4 per cent a year in August.

“The picture is getting uglier by the day with the inflationary pressures rapidly disseminating ”, said Alberto Ramos, head of Latin America economics at Goldman Sachs. 

“It will likely take a significant amount of policy tightening to put the inflation genie back in the lamp.” 

Latin America was hit harder by the combined health and economic impact of coronavirus than any other region. 

Rapidly rising interest rates now threaten to choke off a recovery which was already losing steam as government stimulus programmes wound down and prices for commodity exports levelled off. 

JPMorgan expects that growth of 6.4 per cent in the region this year will slow to just 2.4 per cent next year.


“Central banks in the region don’t have a choice,” said Ernesto Revilla, head of Latin America economics at Citibank. 

“They have to tighten monetary policy despite a weak economy because they can’t allow inflation expectations to drift off. 

It’s the curse of emerging market central banks”.

Latin American policymakers are casting envious glances at the US, where the Fed has so far been able to continue its multi-trillion-dollar economic stimulus despite inflation hitting a 13-year high in July. 

“The Fed can keep saying that inflation is transitory and there is no need to overreact,” said Claudio Irigoyen, head of Latin America economics at Bank of America.

“Eventually it will pay a price but the reality is that the world pays in dollars . . . Latin American central banks don’t have the luxury of saying ‘this is a temporary change in inflation’”.

The rising threat of inflation comes ahead of an election cycle that will see new presidents elected in Chile, Colombia and Brazil over the next 13 months, while Peru and Ecuador chose new leaders earlier this year. 

Voters are venting their anger over pandemic missteps on incumbents and favouring radical outsiders, a dynamic which bodes ill for central banks.

Banco de Mexico’s rate rises have already triggered a political row with populist president Andrés Manuel López Obrador. 

“Although Banco de Mexico should be paying attention to inflation and growth . . . for a long time they have only been concerned with inflation,” he said at his morning news conference last month.

Irigoyen said he saw “a decent chance” of more radicalisation in the upcoming election. 

“This will create a lot of pressure on currencies and a demand for high spending, which will put pressure on central banks,” he added. 

“In the US there are more and more people claiming that the Fed should accommodate fiscal deficits. 

People in Latin America will say ‘if they can do it, why can’t we?’” 

BlackRock’s China Blunder

Pouring billions into the country now is a bad investment and imperils U.S. national security.

By George Soros

PHOTO: DAVID GOTHARD


BlackRock, the world’s largest asset manager, has begun a major initiative in China. 

On Aug. 30 it launched a set of mutual funds and other investment products for Chinese consumers. 

The New York-based firm is the first foreign-owned company allowed to do so. 

The launch came just weeks after BlackRock recommended that investors triple their allocations in Chinese assets. 

This will push billions of dollars into China. 

“The Chinese market represents a significant opportunity to help meet the long-term goals of investors in China and internationally,” BlackRock Chairman Larry Fink wrote in a letter to shareholders.

BlackRock takes its responsibilities for its clients’ money seriously and is a leader in the environmental, social and governance movement. 

But it appears to misunderstand President Xi Jinping’s China.

The firm seems to have taken the statements of Mr. Xi’s regime at face value. 

It has drawn a distinction between state-owned enterprises and privately owned companies, but that is far from reality. 

The regime regards all Chinese companies as instruments of the one-party state.

This possible misunderstanding could explain BlackRock’s decision, but there may be another explanation. 

The profits to be earned from entering China’s hitherto closed financial markets may have influenced their decision. 

The BlackRock managers must be aware that there is an enormous crisis brewing in China’s real-estate market. 

They may believe that investment funds flowing into China will help Mr. Xi handle the situation, but the president’s problems go much deeper. 

China’s birthrate is much lower than official statistics indicate and Mr. Xi’s attempts to increase it have made matters worse. 

The president recently launched his “Common Prosperity” program, which is a fundamental change in direction. 

It seeks to reduce inequality by distributing the wealth of the rich to the general population. 

That does not augur well for foreign investors.

Pouring billions of dollars into China now is a tragic mistake. 

It is likely to lose money for BlackRock’s clients and, more important, will damage the national security interests of the U.S. and other democracies. 

Mr. Xi faces an important hurdle in 2022. Many believe he intends to overstep the term limits established by Deng Xiaoping and make himself ruler for life. 

He is bound to have enemies, whom he must prevent from uniting against him. 

Thus, he needs to bring to heel any entity rich enough to exercise independent power.

This process has been unfolding in the past year and reached a crescendo in recent weeks. 

It began with the abrupt cancellation of a new issue by Alibaba’s Ant Group in November 2020. 

Then came the disciplinary measures against Didi Chuxing after it floated an issue in New York in June. 

Things culminated with the banishment of U.S.-financed tutoring companies from China. 

This had a profoundly negative effect on offshore markets, hammering New York-listed Chinese companies and shell companies. 

Chinese financial authorities have tried to reassure markets ever since.

The leaders of Western asset-management firms, such as Stephen Schwarzman, co-founder of investment firm Blackstone, and former Goldman Sachs President John L. Thornton, have long been interested in the Chinese consumer market—and in the prospect of business opportunities dangled by Mr. Xi.

BlackRock is only the latest company trying to engage with China. 

Earlier efforts could have been morally justified by claims that they were building bridges to bring the countries closer, but the situation now is totally different. 

Today, the U.S. and China are engaged in a life and death conflict between two systems of governance: repressive and democratic.

The BlackRock initiative imperils the national security interests of the U.S. and other democracies because the money invested in China will help prop up President Xi’s regime, which is repressive at home and aggressive abroad. 

Congress should pass legislation empowering the Securities and Exchange Commission to limit the flow of funds to China. 

The effort ought to enjoy bipartisan support.


Mr. Soros is founder of the Open Society Foundations. 

Here’s an Inconvenient Truth: The Growth Slowdown Goes Beyond the Delta Variant

By Lisa Beilfuss

The Covid-19 resurgence has undoubtedly had an impact on economic growth, but it’s far from the only reason many economists are paring their third-quarter GDP estimates. Here, a Chicago supermarket on a recent day. Scott Olson/Getty Images


Everyone knew that economic growth was going to slow from the second quarter. 

But it wasn’t supposed to happen so soon—or so sharply. 

The Covid-19 Delta variant is the obvious and convenient explanation, but it’s an incomplete one.

Over the past week, economists across Wall Street have shredded third-quarter gross-domestic-product forecasts. 

To name a few: Goldman Sachs cut its forecast to 3.5% from 5.25%, Oxford Economics revised its call to 2.7% from 6.5%, and Morgan Stanley lowered its estimate to 2.9% from 6.5%. 

That’s as the Atlanta Fed’s GDPNow model predicts 3.7% for the quarter, down from 5.3% at the start of the month. 

President Biden’s workforce vaccine mandate unveiled on Thursday highlights just how fraught the economy is.

It would be silly to say the fast-spreading Delta variant, sprung on the U.S. just as consumers and businesses thought the pandemic was over, isn’t to blame. 

The Federal Reserve in its latest beige book, meanwhile, said economic growth “downshifted” across the nation in August from July, with the central bank’s latest collection of regional anecdotes attributing the deceleration in economic activity to a pullback in dining out, travel, and tourism, reflecting renewed safety concerns due to the rise of the Delta variant.

To fully ascribe the growth cliff to Delta, however, is to assume the weakness is temporary. 

To the contrary, there are plenty of reasons that investors should question whether anything is transitory anymore and is instead reflective of a new economy that won’t be post-Covid for the foreseeable future.


Take ongoing supply shortages. 

Thomas Simons, an economist at Jefferies, says widespread, persistent shortages are the primary reason that economic growth is hitting a falling ceiling. 

But, he adds, the problems are bigger than the latest Covid wave.

“I’m not sure that, in the absence of Delta, these shortages would have been mitigated,” says Simons. 

If supply chains would be just as jammed even if Delta hadn’t appeared, how can economists and investors dismiss slowing growth as a function of a temporary phenomenon?

For evidence that Delta belies deeper economic issues, we point to weekly survey data from the Census Bureau. 

Last year, the bureau began collecting data to measure household experiences during the pandemic, asking consumers about everything from employment status, child-care arrangements, and household spending, and then disseminating the data in near-real time.

In the most recent week’s survey, 41% of households said they used some form of government assistance to pay usual expenses. 

For the sake of a pre-Delta comparison, we backed out child tax credit payments that started in July. 

That leaves the share at 31%, effectively unchanged from the share of households saying they relied on government aid to pay household bills in early June—before concerns about Delta starting rising in the U.S.

Taken together, the data suggest that economic conditions are dire for a swath of America, with or without the Delta variant. 

The macroeconomic implications of emergency measures, including enhanced unemployment benefits, stimulus checks, and eviction moratoriums, are complicated, but one thing seems clear: A significant number of people have depended on the emergency money, raising questions about what happens as assistance fades.

Economists at Goldman Sachs recently downgraded their third-quarter consumption growth forecast to minus 0.5% annualized. 

As they put it, “Although we expect the Delta setback to be brief, two longer-standing concerns pose challenges for consumption growth over the next few quarters.”

For one thing, the rotation to services from goods is under way, and economists say the rest of the service-sector recovery will be much slower than the easy phase that followed mass vaccinations. 

More important, they note that fiscal support boosted disposable income to 9% above the prepandemic trend on average in the first half of this year. 

That has already dropped off substantially, they say, setting up a situation where the so-called fiscal impulse will fade sharply through the end of 2022.

That is where a couple of big currents cross. 

The Census Bureau’s household data are concerning, says Jefferies’ Simons, especially looking toward the next few months as government assistance fades. 

“You wonder where those households will find positive cash flow,” says Simons.

The optimistic view? 

The fact that so many people say they are barely getting by even with government aid may portend a coming boost to labor-force participation, as enhanced unemployment benefits have now fully expired for millions of workers and some eviction and foreclosure moratoriums end.

A less optimistic outcome, of course, is that workers stay on the sidelines. 

Some lawmakers are pushing for a fourth round of stimulus checks, and the Biden administration’s budget package includes an expansion of the new child tax credits that some critics say are already hindering the return of some low-wage workers.

Add it all up and central bankers might be right about one thing: Growth prospects don’t look great, and in a certain way, the economy may be a little sicker than even slashed forecasts suggest. 


The inelastic markets hypothesis, or, buybacks may be even more important than we thought 

Robert Armstrong


Regular readers will know how it pains me to acknowledge the work of rival media outlets, but here is a grudging hat-tip to The Economist, which recently highlighted a really interesting paper about what moves stock prices, by Xavier Gabaix and Ralph Koijen, of Harvard and the University of Chicago. 

But I think there is more to say about the paper, so here goes. 

One thing we can be absolutely sure of with stock markets (because of the work of people like Robert Shiller) is that they overshoot. 

The fundamental factor used to make sense of the price of stocks (some version of future cash flows) goes up and down some, but stocks go up and down a whole lot more. 

We explain this, in general, by saying something along the lines of “people are irrational and they get overexcited or unduly pessimistic”.

And surely this is broadly true. 

But how does it work? 

Naive people say things like “people are excited, so they are buying stocks and money is flowing into the market”. 

At which point sophisticated people who write Wall Street newsletters have a self-satisfied laugh, because everyone knows that any time someone buys a stock someone else sells it, so the idea of “money going into stocks” is for dopes. 

What Gabaix and Koijen do is make sense of the idea of new money going into the market, and then argue that these flows affect prices — a lot. 

This is a big deal, given that the standard picture is one in which stock prices reflect only information (or at least beliefs) about fundamental value, not supply and demand. 

Gabaix and Koijen’s core insight about flows is that most buyers of stocks are very insensitive to price; that is to say, in the stock market, the price elasticity of demand is very small. 

The big buyers are institutions working under strict mandates governing their portfolio mix, whether it be 100 per cent equities, or 70/30 stocks and bonds, or what have you. 

When an investor gives such a fund a fresh $1 to invest in stocks (“money going in”), the fund must put it to work according to its mandate. 

Fundamentals have little to do with it. 

On the classic model, this purchase might drive the price away from fundamental value but (the market being efficient) sellers quickly drive it back. 

But there is — to exaggerate only slightly — no such seller. 

There is just a bunch of other funds working under inflexible mandates. 

Hedge funds, for example, just don’t own enough stocks to modulate the price impact of these flows (the authors seem to assume, quixotically, that hedge funds are value arbitrageurs, rather than just chasing momentum like everyone else). 

So flows just force prices up. 

Gabaix and Koijen argue — using both an economic model and with evidence comparing flows to prices — that a $1 flow can push the value of the market up by three to eight times that much.

The nice thing about this model is that it replaces airy explanations which wave at either “fundamentals” or “animal spirits” with something more concrete: 

The mystery of apparently random movements of the stock market, hard to link to fundamentals, is replaced by the more manageable problem of understanding the determinants of flows in inelastic markets . ..

one can replace the “dark matter” of asset pricing (whereby price movements are explained by hard-to-measure latent forces) with tangible flows and the demand shocks of different investors

Of course fundamentals, at certain moments, could affect flows — but mapping out the psychology and sociology of how and when that happens seems more scientific than rattling on about “efficiency”. 

One area where the Gabaix and Koijen model has very interesting implications is share buybacks, because they are by far the dominant source of inflows. 

Here is a (slightly hard to read, sorry) chart from Citigroup, comparing net flows from buybacks to equity mutual funds and ETFs since 2005:

No alt provided


It’s not an exaggeration to say that buybacks are the only flows that amount to much over time. 

Now, Gabaix and Koijen seem to think — for technical reasons I frankly don’t understand — that the market response to buybacks is less dramatic than for fund flows, but it is still significant.

Most people think that buybacks are good for investors because (a) they increase corporate financial leverage, boosting returns (b) they increase earnings per share growth and (c) they signal management confidence. 

But it may be that it’s simpler than that: they simply bid up the price of stocks.

Gabaix and Koijen make the point that the demand elasticity of individual stocks can be quite different from that of the very inelastic broad market (we know this because not all companies that do a lot of buybacks see their shares go up, though it sure seems to help). 

But if you think flows have a direct impact on price, then it probably matters which sectors buy back a ton of stocks. 

Here is a table of the composition of buybacks in the S&P 500, by sector, from the great Howard Silverblatt of S&P Dow Jones Indices. 

Look at information technology! 

 No alt provided


Why have tech stocks led the market recently? 

Maybe it has less to do with growth prospects and more to do with the fact that the sector accounts for something like a third of all buybacks.

I have lots of questions for Gabaix and Koijen. 

I’ll try to get them on the phone and report back. 

Yet one more thought on ageing and inflation

I have now been blathering for a couple of days about Goodhart and Pradhan’s demographic argument for a coming rise in interest rates and inflation. 

Some of you are now probably bored of the whole thing. 

But I received a note from my friend Andrew Smithers, economist and frequent correspondent with Unhedged, who made a point that I think is important.

Smithers argues that the biggest risk from the demographic shift that G & P describe — which is, basically, a labour supply shock as the world ages — is that it increases the probability of a very bad central bank policy mistake. 

The effect of the inclusion of China and eastern Europe in the global work force thirty or forty years ago was to increase the supply of labour and lower its price per unit. 

With those changes came lower inflation expectations and a lower non-accelerating inflation rate of unemployment (Nairu), which is the lowest level of employment possible before inflation goes up. 

The ageing of the world population will have the opposite effect.  

In a world with a higher Nairu, employment and participation rates have to be lower if inflation is to be avoided (a rather anti-intuitive impact of a labour supply shock, but there it is). 

But this is an adjustment that the economy can make without too much trauma. 

The trauma comes if policymakers don’t take note of what has happened:

If, as seems sadly possible, central banks fail to allow for this, inflationary expectations will pick up and the level of unemployment needed to rein them in again will be even higher than the change in demography alone would cause

The picture is, the Fed doesn’t get the memo about demographic change, so they let inflation run a bit, and inflation expectations dig in. 

The rate tightening then needed to get expectations back under control will be Paul Volker-like, with a key difference: the stock market was much cheaper back then, and the debt level was much lower, so it will be uglier this time.  

Blood in the Sand

For decades, the American political class has intervened relentlessly and recklessly in countries whose people they hold in contempt. And once again they are being aided by America’s credulous mass media, which is uniformly blaming the Taliban victory on Afghanistan’s incorrigible corruption.

Jeffrey D. Sachs


NEW YORK – The magnitude of the United States’ failure in Afghanistan is breathtaking. 

It is not a failure of Democrats or Republicans, but an abiding failure of American political culture, reflected in US policymakers’ lack of interest in understanding different societies. 

And it is all too typical.

Almost every modern US military intervention in the developing world has come to rot. 

It’s hard to think of an exception since the Korean War. 

In the 1960s and first half of the 1970s, the US fought in Indochina – Vietnam, Laos, and Cambodia – eventually withdrawing in defeat after a decade of grotesque carnage. 

President Lyndon B. Johnson, a Democrat, and his successor, the Republican Richard Nixon, share the blame.

In roughly the same years, the US installed dictators throughout Latin America and parts of Africa, with disastrous consequences that lasted decades. 

Think of the Mobutu dictatorship in the Democratic Republic of Congo after the CIA-backed assassination of Patrice Lumumba in early 1961, or of General Augusto Pinochet’s murderous military junta in Chile after the US-backed overthrow of Salvador Allende in 1973.

In the 1980s, the US under Ronald Reagan ravaged Central America in proxy wars to forestall or topple leftist governments. 

The region still has not healed.

Since 1979, the Middle East and Western Asia have felt the brunt of US foreign policy’s foolishness and cruelty. 

The Afghanistan war started 42 years ago, in 1979, when President Jimmy Carter’s administration covertly supported Islamic jihadists to fight a Soviet-backed regime. 

Soon, the CIA-backed mujahedeen helped to provoke a Soviet invasion, trapping the Soviet Union in a debilitating conflict, while pushing Afghanistan into what became a forty-year-long downward spiral of violence and bloodshed.

Across the region, US foreign policy produced growing mayhem. 

In response to the 1979 toppling of the Shah of Iran (another US-installed dictator), the Reagan administration armed Iraqi dictator Saddam Hussein in his war on Iran’s fledgling Islamic Republic. 

Mass bloodshed and US-backed chemical warfare ensued. 

This bloody episode was followed by Saddam’s invasion of Kuwait, and then two US-led Gulf Wars, in 1990 and 2003.

The latest round of the Afghan tragedy began in 2001. 

Barely a month after the terror attacks of September 11, President George W. Bush ordered a US-led invasion to overthrow the Islamic jihadists that the US had backed previously. 

His Democratic successor, President Barack Obama, not only continued the war and added more troops, but also ordered the CIA to work with Saudi Arabia to topple Syrian President Bashar al-Assad, leading to a vicious Syrian civil war that continues to this day. 

As if that was not enough, Obama ordered NATO to oust Libyan leader Muammar el-Qaddafi, inciting a decade of instability in that country and its neighbors (including Mali, which has been destabilized by inflows of fighters and weapons from Libya).

What these cases have in common is not just policy failure. 

Underlying all of them is the US foreign-policy establishment’s belief that the solution to every political challenge is military intervention or CIA-backed destabilization.

That belief speaks to the US foreign-policy elite’s utter disregard of other countries’ desire to escape grinding poverty. 

Most US military and CIA interventions have occurred in countries that are struggling to overcome severe economic deprivation. 

Yet instead of alleviating suffering and winning public support, the US typically blows up the small amount of infrastructure the country possesses, while causing the educated professionals to flee for their lives.

Even a cursory look at America’s spending in Afghanistan reveals the stupidity of its policy there. 

According to a recent report by the Special Inspector General for Afghanistan Reconstruction, the US invested roughly $946 billion between 2001 and 2021. 

Yet almost $1 trillion in outlays won the US few hearts and minds.

Here’s why. Of that $946 billion, fully $816 billion, or 86%, went to military outlays for US troops. 

And the Afghan people saw little of the remaining $130 billion, with $83 billion going to the Afghan Security Forces. 

Another $10 billion or so was spent on drug interdiction operations, while $15 billion was for US agencies operating in Afghanistan. 

That left a meager $21 billion in “economic support” funding. 

Yet even much of this spending left little if any development on the ground, because the programs actually “support counterterrorism; bolster national economies; and assist in the development of effective, accessible, and independent legal systems.”

In short, less than 2% of the US spending on Afghanistan, and probably far less than 2%, reached the Afghan people in the form of basic infrastructure or poverty-reducing services. 

The US could have invested in clean water and sanitation, school buildings, clinics, digital connectivity, agricultural equipment and extension, nutrition programs, and many other programs to lift the country from economic deprivation. 

Instead, it leaves behind a country with a life expectancy of 63 years, a maternal mortality rate of 638 per 100,000 births, and a child stunting rate of 38%.

The US should never have intervened militarily in Afghanistan – not in 1979, nor in 2001, and not for the 20 years since. 

But once there, the US could and should have fostered a more stable and prosperous Afghanistan by investing in maternal health, schools, safe water, nutrition, and the like. 

Such humane investments – especially financed together with other countries through institutions such as the Asian Development Bank – would have helped to end the bloodshed in Afghanistan, and in other impoverished regions, forestalling future wars.

Yet American leaders go out of their way to emphasize to the American public that we won’t waste money on such trivialities. 

The sad truth is that the American political class and mass media hold the people of poorer nations in contempt, even as they intervene relentlessly and recklessly in those countries. 

Of course, much of America’s elite holds America’s own poor in similar contempt.

In the aftermath of the fall of Kabul, the US mass media is, predictably, blaming the US failure on Afghanistan’s incorrigible corruption. 

The lack of American self-awareness is startling. 

It’s no surprise that after trillions of dollars spent on wars in Iraq, Syria, Libya, and beyond, the US has nothing to show for its efforts but blood in the sand.


Jeffrey D. Sachs, University Professor at Columbia University, is Director of the Center for Sustainable Development at Columbia University and President of the UN Sustainable Development Solutions Network. He has served as adviser to three UN Secretaries-General, and currently serves as an SDG Advocate under Secretary-General António Guterres. His books include The End of Poverty, Common Wealth, The Age of Sustainable Development, Building the New American Economy, A New Foreign Policy: Beyond American Exceptionalism, and, most recently, The Ages of Globalization.