Being a traitor

My friend Rohit Rajendran shared the article by Sebastian Mallaby in ‘Foreign Affairs’.

Essentially it is about the fear of the return of inflation and whether the central bank would be able to stop it. But, it is not about the President of USA vs. Chairman, FRB of USA. It is about Wall Street/Asset Prices/Boomers who are breathing down hard on Chairman, FRB. Will he/she stand up to them as well as the President of the USA? That is the salient question. By posing the question as one of President vs. Chairman, FRB, he grossly oversimplifies the problem although not atypical of the scholarship of the times.

Surreal global debt issuance data

Some of the eight U.S. investment-grade companies that brought bond sales Thursday helped tip year-to-date supply past $1 trillion at the fastest rate ever. European borrowers passed 900 billion euros ($991 billion) on Wednesday, two months earlier than in 2019, and got up to 921.5 billion euros with Thursday’s haul.

Issuance has been rampant since the Federal Reserve and European Central Bank each announced programs to buy corporate bonds in March, enticing borrowers to tap the market at a frantic pace. Credit risk has eased with additional fiscal stimulus, especially from the European Union Wednesday.That’s helped encourage riskier debt sales, including those from hotel chain Marriott International Inc., borrowing in the U.S. market for the second time Thursday in as many months.

Several European banks including Commerzbank AG and Credit Agricole SA sold so-called Tier 2 bonds, a kind of lower-grade debt issued by financial firms.

In Asia, dollar bond sales for the month are at $23.5 billion, putting the region on track for the busiest May ever, even amid mounting geopolitical tensions with China. [Link]

How to Fix Globalisation – for Detroit, Not Davos

If we just restored the IRS to its previous size, judged relatively to the economy; if we moved past the massive injustice represented by the fact that you’re more likely to get audited if you receive the earned income tax credit (EITC) than if you earn $300,000 a year or more; if we made plausible use of information technology and the IRS got to where the credit card companies were 20 years ago, in terms of information technology-matching; and if we required of those who make shelter investments the kind of regular reporting that we require of cleaning women, we would raise, by my estimate, over a trillion dollars. Former IRS Commissioner Charles Rossotti, who knows more about it than I do, thinks the figure is closer to $2 trillion. That’s where we should start. [Link]

The para above is from an interview of Larry Summers conducted by ‘The American Interest’ magazine. Title of the interview is the title of the blog post.

I wonder if tax officials, globally, have a common manual.

The choices we make

Lives matter

The above chart is from this reasonably well-written article in Bloomberg on why Britons seem to favour lockdown more than opening up. It has some interesting behavioural explanations. Not unreasonable.

The counterpoint to lives saved in lockdown is not about avoiding an economic recession. It is also about lives lost due to other causes. Now, sample this one from ‘The Economist’:

Lives matter too

An informed (no doubt, tough and tragic) debate and choice is between lives (saved by locking down) and lives (saved by resuming economic activity) and how best to balance both.

Such a reasoned debate and hence reasonable decisions have been precluded by the frenzy displayed by many media outlets around the world

We are all Japan now

By now, enough has been written about the shifting global supply chain dynamics that readers should not expect to take away anything new from this post. If they do, that would be as much due to their creativity as to the content of this post. I am putting this up here just to remember the origins of this discussion about two months ago, nearly.

Noah Smith wrote on March 24th that offshoring left the United States unprepared for the virus:

Economics predicts that businesses decide what to produce based on what makes a little bit more profit. The siren song of marginal profit drew the U.S. relentlessly away from mask production….

… If businesses will always make decisions on the margin, then it’s government’s job to insure the country against big shocks such as pandemics and wars….

The U.S. could have used trade barriers and government support to make sure that the entire supply chain for medical equipment stayed in the country….

… The coronavirus crisis should cause advocates of unrestricted free trade to rethink their blanket opposition to protectionism. [Link]

The Chief Economist of EBRD echoes Noah Smith here:

… almost three-quarters of blood thinners imported by Italy come from China. The same is true for 60 per cent of antibiotics imported by Japan and 40 per cent imported by Germany, Italy and France. …

… This means building in redundancy and perhaps even moving away from the practice of holding near-zero inventories. Costs will certainly rise but, in the post-Covid world, concerns about supply chain fragility will come right after those over cost. Firms will be expected to assess resilience of their second and third-tier suppliers, too. [Link]

This ‘Wall Street Journal’ article on supply-chain financing suggests that there is more to it than what meets the eye. It is not simply a question of borrowing from a bank to pay your supplier. These borrowings are securitised. Buyers – i.e., companies who borrow to pay suppliers – report them differently, etc. What a tangled web, we weave when we financialise things?! A slightly more detailed explanation of supply chain financing is here.

In the end, the accent on margins and wafer-thin inventory that put profitability ahead of safety depended on an inter-dependent and smoothly functioning world. Geopolitics was beginning to change that partly in response to rising domestic inequality and worker insecurity. Voters had to be heeded.

The virus, by putting lives on the line, has lent a huge dose of legitimacy to the moves to re-shore production. In the end, as this article puts it well, “we are all Japan”:

Japan has always consciously viewed its economy as the sum of its companies, their tangible assets and intellectual property, says a retired official from the Ministry of Economy, Trade and Industry. But it has tended, to the intense frustration of investors, to take a much broader view than other countries of which ones needed to be protected to keep that economy intact.

Japan, says the senior executive of one of the country’s largest companies, has long built its policy around the anxieties of an island: coronavirus is now requiring everyone else to do the same. [Link]

The journalist who wrote the above piece has anticipated well:

Manfred Weber, a senior German conservative and head of the centre-right EPP grouping in the EU Parliament, told Germany’s Welt am Sonntag newspaper that he was in favour of declaring a twelve-month ban for Chinese investors who want to buy European firms. [Link]

Stories over statistics, any day

Stories are more powerful than statistics because they take less effort for your brain to contextualize complex issues.

“Housing prices in relation to median incomes are now above their historic average and typically mean revert,” is a statistic.

“Jim just made $300,000 flipping homes and can now retire early and his wife thinks he’s amazing” is a story. And it’s way more persuasive in the moment.

It’s more persuasive because the gap between what works in a spreadsheet and what’s practical in real life can be a mile wide. This usually isn’t because we don’t know the statistics. It’s because spreadsheets are cold and rational, but real life is messy and involves all kinds of variables from different parts of the world that are easy to leave out of spreadsheets but easy to tell in stories.

On paper, or to outside observers, decisions should be made with facts. In reality, to those in the field, they’re made with facts contextualized with things like social signaling, time horizon, office politics, government politics, year-end bonus targets, making up for past mistakes, massaging insecurities, and so on. There are so many moving parts that the easiest way to answer the question “What should I do?” is to be guided by a story that makes sense to you. Not a statistic, and not a fact. A good tale.

That’s not ideal. But it’s realistic and reasonable. And it helps explain why people keep doing things long after they’re factually unsustainable. [Link]

It has got two lessons. One for change-agents/decision-makers and one for their critics. Decisionmakers must sell change not with statistics but with stories.

Critics must remember that decisions are not made with data alone but a whole lot of other things that influence decisions, as Morgan Housel mentions.

The Sixth Sense and the Fourth Turning

My friend Aru Arumugam was the first one to share this with me last afternoon and, after that, the floodgates opened. Several others shared the same link. It is a blog post on the website of the American Institute of Economic Research about how American parents, the American society and newspapers handled the 1968-69 Hong Kong flu (they all originate from a particular part of the world, don’t they?).

Some extracts from that blog post:

Nothing was closed by force. Schools mostly stayed open. Businesses did too. You could go to the movies. You could go to bars and restaurants. John Fund has a friend who reports having attended a Grateful Dead concert. In fact, people have no memory or awareness that the famous Woodstock concert of August 1969 – planned in January during the worse period of death – actually occurred during a deadly American flu pandemic that only peaked globally six months later. There was no thought given to the virus which, like ours today, was dangerous mainly for a non-concert-going demographic….

…. Stock markets didn’t crash because of the flu. Congress passed no legislation. The Federal Reserve did nothing. Not a single governor acted to enforce social distancing, curve flattening (even though hundreds of thousands of people were hospitalized), or banning of crowds. No mothers were arrested for taking their kids to other homes. No surfers were arrested. No daycares were shut even though there were more infant deaths with this virus than the one we are experiencing now. There were no suicides, no unemployment, no drug overdoses attributable to flu. 

Media covered the pandemic but it never became a big issue. 

As the author goes on to say later, we will be trying to figure this one out for decades. Many guesses are possible. I had shared my guess here. It is a combination of a sense of entitlement and paranoia. There is hubris too. Playing God: “I shall not permit a virus to kill me” just as central bankers vowed: “no business cycle recession on my watch.”

Jonathan Sumption wrote on April 5 (feels like centuries ago) that we were so afraid of death that no one bothered to ask if the cure was worse than the disease. Well, President Trump asked and he was shouted down. Paranoia added agendas as days progressed.

In a more recent piece, he calls it the greatest interference with personal liberty in our history. Some powerful sentences in his piece linked above (dt.: 2nd May 2020) are worth repeating:

They now find themselves trapped by their own decisions…

…Ending the lockdown is a political decision, not a scientific one….

… We went to war in 1939 because lives were worth losing for liberty. We allow cars on the roads because lives are worth losing for convenience. We travel by air although pollution kills. We tut-tut about it, but we willingly do it. ….There is more to life than the avoidance of death.

He is right that ending the lockdown is a political decision for evidence keeps accumulating that the new Covid-19 virus is as lethal (or slightly worse than) as a standard seasonal flu corona virus.

There is a reason why death occurs – not just for humans – but for all animate and inanimate things. Neil Howe and William Strauss explain it brilliantly:

Try to unlearn the obsessive fear of death (and the anxious quest for death avoidance) that pervades linear thinking in nearly every modern society. The ancients knew that, without periodic decay and death, nature cannot complete its full round of biological and social change. Without plant death, weeds would strangle the forest. Without human death, memories would never die, and unbroken habits and customs would strangle civilization. Social institutions require no less. Just as floods replenish soils and fires rejuvenate forests, a Fourth Turning clears out society’s exhausted elements and creates an opportunity for fresh growth.

Finally, unlearn the linear view that positive change always comes willingly, incrementally, and by human design.

A Fourth Turning lends people of all ages what is literally a once-in-a-lifetime opportunity to heal (or destroy) the very heart of the republic.

Source: William Strauss and Neil Howe: ‘The Fourth Turning: What the cycles of history tells us about America’s next rendezvous with destiny’ (1997).

The humanity awaits and is in need of its ‘Fourth Turning’