Ending shadow banking means ending modern central banking

Ann Petitfor has a not-so-long essay in ‘Prospect’ magazine on how the world could exit QE. It is an interesting and thought-provoking essay. Some extracts:

As Claudio Borio of the Bank for International Settlements explained in 2019: “bar a few who have sailed into these waters, money has been allowed to sink by the macroeconomics profession. And with little or no regrets.”

This one is elegantly put:

… What’s forgotten is that if the world’s economic activity actually had to be calibrated to fit an arbitrarily fixed volume of circulating cryptocurrency, then—exactly as under the gold standard—the world would experience prolonged and painful depressions.

This is a good way of arguing that economic activity dictates the demand for money and that the supply of money should not dictate the level of economic activity. But, we have now swung to the other extreme: We don’t care what the economic activity is. We will provide unlimited amount of money and we believe that this should cause economic activity to pick up! In a way, the QE-adherents are presenting the other side of the coin of the Gold bugs. In doing so, they make many of us – including yours truly – crave for the discipline imposed by the Gold Standard.

But, then, this goes back to the quote attributed to Claudio Borio. We have not quite figured out the role for money.

Between 1981 and 2014, 30 countries fully or partially privatised their public mandatory pensions. Coupled with cross-border capital mobility, the move to private retirement savings steadily generated vast cash pools for institutional investors…

…Note that this whole system avoids reliance on the social construct of credit, upheld by trust and enforced by law, which traditional banks had to work within. Instead, the system is one of deregulated exchange in which cash is simply one more commodity—no more regulated than any other.

These sentences, arranged separately in the article, lay out the rationale for QE:

Today one asset management firm, BlackRock, manages in excess of $8 trillion of the world’s savings. Such companies have outgrown the capacity of “main street” banks to provide services. No traditional commercial bank could absorb these sums; few governments are willing to guarantee individual accounts of more than $100,000. ….Like pawnbrokers, who practised an earlier form of unregulated credit, shadow banks exchange the savings they hold for collateral. … Replete with cash, they can provide “liquidity” on a vast scale to businesses or investors who need it….private financiers rely heavily on government bonds as the safest collateral for their repo trades….

… It is estimated that two out of three euros borrowed through shadow banks are underpinned by the collateral of sovereign bonds issued within the Eurozone. Any decline in the value of government bonds as a consequence of shadow banking activity will influence the government’s cost of borrowing, and—ultimately—fiscal decisions….Which brings us back to quantitative easing—the remedy that central bankers reach for in the face of this recurrent threat.

It clarifies a lot of things, actually. In other words, without QE, the shadow banking system will cease to exist. If it ceases to exist, then the real economy crashes. So, central bankers can assuage themselves by saying that by providing the liquidity that the leveraged shadow banking system needs, they are indirectly supporting the real economy or preventing the real economy from collapsing.

Her conclusion is quite appropriate:

Whenever the vast shadow banks wobble, there is the threat of a disastrous contraction of the credit for the real economy, which could bring everything crashing down. As long as the system is allowed to stand, there is no alternative to taxpayer-backed central banks rescuing private markets.

The only way to call time on QE, if that is what we truly want, is to deconstruct and then reconstruct, regulate and stabilise the whole financial system, so that the extraordinary privilege of credit creation is always balanced by a responsibility not to take undue risks. And if footloose capital responds by skipping across borders and away from oversight, then we may also need to look at controls on that front too. Only then will the world stand any chance of kicking the QE habit, address those dangerous imbalances and finally escape this grim shadowland of money.

But, on their own, central banks will be afraid to do the job of deconstructing and reconstructing. It is a political project because, in reality, it would amount to cutting both shadow banking and central banking to size. That is why central bankers would resist it actually. Ending the last forty years of financialisation will also end central banking as it has evolved in the last forty years. Central bankers will go back to operating in the shadows, if shadow banking were to be ended!

Will politicians be up to the task? I doubt.

The risk is that, in doing so, the ‘House of cards’ aka ‘the real economy’ will collapse. No one wants it on their watch. If the world of shadow banking has to end, it will happen through exogenous shocks. Both QE (i.e., modern central banking) and the world of shadow banking have to collapse from being unable to bear the sheer weight that they have grown into.

A cataclysmic climax

Just read Sohrab Ahmari’s article in unherd.com with the header, ‘President Kamala would destroy America’. Brilliant. What has not been discussed in the comments below and mostly passed over – and that is a pity – is the article’s reference to the lack of unity on the ‘Right’ that brings about the cataclysmic climax that it imagines. Well done!

So, in the end, it is all about the failure of leaders to put society above self – it just comes in different garbs, different ideologies, arguments and slogans.

If the article evokes derision, laughter, mirth or worse, it might be good to pause and also read this article in ‘Newsweek’.  This is about how Democrats are finessing the ongoing Cuban protests even though the Cuban protesters are black! Their lives don’t seem to matter.

If this too is not enough, then the observations of Andrew Sullivan about the Democratic Party and that of Shekhar Gupta about the Congress Party in India would help complete the picture:

(1) This is what Andrew Sullivan wrote in his ‘Weekly Dish’ column this weekend (10-11 July):

Or check out Kevin Drum’s analysis of asymmetric polarization these past few decades. He shows relentlessly that over the past few decades, it’s Democrats who have veered most decisively to the extremes on policy on cultural issues since the 1990s. Not Republicans. Democrats.


On immigration, Republicans have moved around five points to the right; the Democrats 35 points to the left. On abortion, Republicans who advocate a total ban have increased their numbers a couple of points since 1994; Democrats who favor legality in every instance has risen 20 points. On guns, the GOP has moved ten points right; Dems 20 points left.

It is also no accident that, as Drum notes and as David Shor has shown: “white academic theories of racism — and probably the whole woke movement in general —have turned off many moderate Black and Hispanic voters.” This is why even a huge economic boom may not be enough to keep the Democrats in power next year.

(2) This is what Sekhar Gupta wrote about the Congress Party in India in May:

The future of their party is now hard-Left. That’s why it allies with the Left Front and draws a blank while fighting it in Kerala. If only it had aligned with Mamata instead, on whatever terms, it might have had a clearer pitch against the Left in Kerala, a state it could have won. And may have won at least a few seats in West Bengal.

Anything would be better than zero. But this Congress is besotted with the Communists, especially the younger ones. For evidence, watch who runs their social media operations, and how.

Communicating numbers and risk

Just came across the ‘Lunch with FT’ published in April this year. FT had lunch with Sir David Spiegelhalter, statistician. He is the author of ‘The Art of Statistics’ and is also a Fellow of the Royal Society. I was led to that conversation over lunch through this article which discusses sensibly the poll that ‘Economist’ has been peddling. The poll is about how many Britons prefer a permanent state of recourse of Non-Pharmaceutical Interventions: social distancing, night curfew, masking, travel restrictions, quarantines on return and what not. 

The article in FT correctly points out that responses of humans depend on how the question is framed. We know this so well and yet deliberately choose to overlook it. Two points made in the FT article:

Third, the “permanently, regardless of the risk from Covid-19” option contains a scary word. As “Professor Risk” himself Sir David Spiegelhalter told us recently over an oyster Lunch with the FT, “risk” is a very loaded term: The problem with ‘risk’ is that it only addresses the downside — you say there’s a good chance of winning the lottery or of something good happening . . . I much prefer thinking in terms of potential benefits and harms, which is clumsier but really expresses what we’re faced with in every decision that we make.

We would add that “regardless” is a bit loaded in this context too. If the option had been worded as, say, “permanently, even if there was little to no risk from Covid-19”, we would guess that we might have got a different set of results. [Link]

Ms. Jemima Kelly seems to be able to think straight and ask the right questions. Her article is a sensible one.

The conversation that Ms. Jemima Kelly has had with Sir David Spiegelhalter had many thoughtful observations. I am just capturing them here, in no particular order:

Numbers are not emotion-free:

He wants people to see numbers and statistics “as arguments that can change our emotions”, rather than simply as cold, hard facts. “They can be manipulated, chosen and framed . . . to support whatever arguments the communicator wants to make,” he says. “One has to have that critical ability, which involves examining one’s feelings and examining motivations, in order to understand numbers . . . It’s so easy to come to the wrong conclusions, or any conclusions.” He gazes out over the estuary. “Sometimes you can’t come to a conclusion.”

He is right about the choice of words like ‘risk’ and ‘chance’. They are loaded. They are not neutral words:

But the word “risk” is actually one he shies away from. “It’s a very loaded term,” he says. “The problem with ‘risk’ is that it only addresses the downside — you say there’s a good chance of winning the lottery or of something good happening . . . I much prefer thinking in terms of potential benefits and harms, which is clumsier but really expresses what we’re faced with in every decision that we make.” 

His comments on algorithms and AI bear repetition:

But although he recognises the growing importance of AI in all parts of our lives, he is sceptical about anyone who claims it’s a quick fix for a problem. “It’s almost always a sign that people don’t know what they’re talking about,” he says. “It’s essential that they are held up to scrutiny. That means scrutinising carefully what the algorithm is saying, and also what is being said about the algorithm. Both need to be trusted.”

This is a gem:

Spiegelhalter has had the difficult task of communicating the idea that everything is uncertain, and that “following the science” actually means very little. But he believes strongly in the importance of doing this. “What this whole thing has displayed is . . . firstly the need to acknowledge uncertainty, and secondly to admit when you’re wrong. And I try to do that, but it is difficult.”

He is absolutely right. ‘Follow the science’ has become a convenient and conveniently loaded term to shut down diverse scientific views. As with many things, it has become ‘your scientists’ vs. ‘my scientists’. Second, even when the so-called scientific opinion has been thoroughly discredited and proven wrong, reputations survive. So-called scientists still pen open letters to ‘The Lancet’ and they are cited, despite the reputation of ‘The Lancet’ taking such a big hit in the last one and half years. By the same token, other scientists who pen opposite views are not accorded coverage.

Both the FT and Bloomberg have, far instance, taken the view that the UK is erring by opening up the country and removing almost all Covid related NPIs. I blogged on it here and here is one more sample. Based on whatever we know, including the record of Texas, Florida and Sweden, it is not a ‘open-and-shut’ case that the UK government is making a very bad ex-ante error. That is far from the case. But, these two outlets are painting such a picture with sly and false innuendoes and dog’s whistles. Not sure of ‘Economist’ since I have stopped reading it long ago.

There is absolutely nothing that is not driven by political agenda – even by the so-called non-political players, institutions and agencies.

Very difficult and challenging world for ‘dis-interested’ observers to understand what truly is going on.

The strange fascination with lockdowns

I was quite struck by the far-too-cold reception to the UK’s proposed lockdown relaxation to be effective from July 19. Bloomberg wrote that businesses were concerned. Really?! I thought it would be the opposite. FT wrote an edit cautioning the government. Then, FT has followed it up with another article, ‘Scientists accuse UK government of ignoring ‘Long Covid’ threat’. The article made for very sad reading.

It was terribly disappointing to see the FT engage in such writing. The other day there was an Edit cautioning the British government against its relaxation.  Now, this scare-mongering article without presenting the facts as they stand. The presentation is slanted. 

The collateral damage from lockdowns is insidious and much longer-lasting. The NHS is rightly worried about cancer cases and mortality arising therefrom in the years to come.  Psychological growth of children is affected with the on-again and off-again school openings. Not to mention the setbacks to learning of cognitive skills itself.

Prof. Martin Kuldorff’s article, ‘Why I spoke out against lockdowns?’ (https://bit.ly/3huPmjE) is worth reading and reflecting upon. It is not at all an issue of the trade-off between lives and livelihoods.  On either side of the aisle – Covid and non-Covid diseases, there is a trade-off between lives and livelihoods. 

One of the readers has given the link to a pre-print article that mentions sociodemographic background and pre-existing conditions as critical determining factors in the Long Covid phenomenon. 

This FT article gives the impression that long Covid is a given which is not the case at all, especially among the non-hospitalised. That fact is mentioned but with such a wide-range (10% to 20%) and with no substantiation.

Also, there is even ongoing research whether long Covid could be psychological. Psychologist Stuart Ritchie wrote in unherd.com (https://unherd.com/2021/06/does-long-covid-really-exist):

“In rhetorical terms, Long Covid seemed the perfect stick with which to beat the Covid Sceptics — it added extra weight to our case by bolstering the already scary death statistics, and was the perfect comeback to a breezy “let it spread” attitude. So perfect that I hesitated while typing it out. Could it be too good to be true?….a substantial proportion of those who identify as having Long Covid cannot actually prove (https://bit.ly/3wsOrVf) they had a coronavirus infection to begin with…..There’s a tendency on the part of those who want Covid to be taken more seriously to try to iron out the wrinkles of Long Covid, making it seem more clear-cut and well-understood than it really is……But Long Covid patients aren’t mere pawns in our debates over pandemic policy…..Scientific results, after all, tend not to hew conveniently to political beliefs.” 

In the FT article, there is a reference to a letter by scientists in Lancet cautioning against the relaxation. By now, we know about the credibility and conflicts of interest of scientists and some of this journals that the least one can do is to present opinions of other scientists and experts who caution against continued lockdown restrictions. The newspaper makes no such effort.

Singapore is preparing to live with Covid as it has lived with Dengue. After trial and error and iterations Singapore has weighed the trade-offs and is preparing to live with Covid.

Instead of educating and informing its readers objectively, FT has done what Stuart Ritchie has cautioned against: ‘hew scientific results conveniently to political beliefs’. 

It is quite sad, actually. It need not be this way.

Oil hypocrisy and more

(1) Someone shared this article in ‘The Guardian’. It is about holding the so-called oil companies responsible for environmental damage. Some legal suits are on the way, apparently. Right! Just wondering: Will the suit also hold as defendants all the citizens who kept replacing their cars, bought SUVs, resisted taxes and protested against higher fuel prices and also automobile companies? Sheer hypocritical non-sense.

(2) An interesting news channel to follow. [Link]

(3) It is worth listening to the 4-minute speech by a ninth grader in the USA [Link]

(4) Lots of interesting and  useful data here on inequality in India, viewed from the angle of corporate profits and corporate wage growth, esp. when companies are arranged size-wise, in terms of sales turnover. Workers in small and smaller companies have been affected the most. [Link]

(5) Soaring heat and drought in American Northwest sets off speculation about water wars in American Northwest [Link]

(6) Niall Ferguson on his trans-Atlantic flight. He does not recommend travelling across continents yet. [Link]. There is a link to a recent NBER paper (‘The intergenerational mortality tradeoff of Covid-19 lockdown policies, NBER Paper no. 28925, June 2021) in this article on what lockdowns mean for children’s health and life expectancy, going forward.

(7) Prof. Martin Kuldorff’s article on why he opposed lockdowns is worth a read [Link]

(8) The death spiral of American academia [Link]

(9) America is ready to make public all their collected evidence on unidentified aerial objects [Link]

The inequity of the tax system

Based on the headline of this post, it may be possible to make the case that it applies to India as well, esp. after the data for 2020-21 revealed that India’s indirect tax collection exceeded the direct tax collection and within the latter, personal income tax collection exceeded the corporate tax collection. But, analysing the Indian situation is for another occasion. Let us now stick to the United States of America where the inequity is more glaring, arguably.

I came across and read the full article by Anand Giridhardas in New York Times published on the 13th June 2021. The title of the article leaves nothing for imagination: ‘Warren Buffett and the Myth of the ‘Good Billionaire’.

Vinod Khosla tweeted in response:

Amazingly nonsensical views from someone who hasn’t done anything material except pontificate. They have no notion of how to help the have-nots. Anand should try moving to a socialist state. The current system needs radical updates not revolution. [Link]

Other useful reads:

  • The original Big Story in ProPublica on how much billionaires pay in taxes.
  • Another article (by the authors of the article in ‘ProPublica’) that explains their methodology used for the article in above.

We can set aside Anand G.’ rant. I listened to a 7-minute clip of his conversation with Arthur Laffer in the Mehdi Hasan show. It was way over the top. Since that was my ‘benchmark’, this NYT article of his comes across as far more gentlemanly. He was being overly dramatic and calling Laffer a criminal. Ridiculous. So many things had to come together to make his ideas become policies. Second, we don’t know what are the things that Laffer recommended and what the politicians cherry picked. Third, putting someone on the defensive and ‘shaming’ him is good theatre, no doubt, but not something that helps make the world better.

So, notwithstanding Anand Giridhardas, we can still think about the manner in which incomes and capital gains & dividends are taxed. I see three issues, at my level.

There needs to be a discussion on unrealised capital gains and dividends. Dividends are avoided and companies buy stocks back to avoid dividend tax. What if the tax policies take away that choice?

Second, even if we accept that only realised capital gains are to be taxed, why are they taxed at much lower rates than tax on wages?

The logic was that capital-starved countries needed to attract capital. Second, capital investments in productive assets is considered to have a higher multiplier on economic growth and employment. In labour-rich countries it creates an ethical dilemma. So, the tax system favours the scarce resource (capital) and ignores the one that the country has more of (labour). As a result, labour resources are not fully utilised because there are relatively fewer incentives to deploy labour. The third aspect is that, since the Great Plague, the global economy has revolved and evolved around capital-intensive technology. It started in the West. Through their intellectual and other forms of domination, including colonisation, it spread everywhere, even to countries that were labour-rich. The Great Plague shifted the paradigm and economies had to grow according to that paradigm. That is why labour-rich countries began to lag in the global prosperity and economic growth league tables since the beginning of the 19th century.

Third, even if we accept this logic (which, in addition to the above arguments, is also a reflection of who made those laws, their incomes and wealth status, etc., over time and across the world) of the primacy of capital, for the sake of argument and hence accept the conclusion that capital gains will be treated differently from regular labour income, then the question is one of defining short-term and long-term. Why should short-term be just one  year? In economics, anyone’s definition of short-term is not one year but a business cycle, i.e., minimum three years. Extending the definition of ‘short-term’ to 36 months from 12 months will earn more revenues.

Incidentally, the IRS Sheet on calculating capital gains taxes in America comes across as rather complicated. See here.

There needs to be a better discussion on the way historically governments have taxed wages and taxed capital.

Given that extremely low interest rates have fostered asset price gains and asset price gains are not taxed until realised while tax on wages continues to be taxed annually and at higher rates, it is fairly straightforward to conclude that monetary policy and liquidity have actively helped capital gains grow faster than otherwise.

Now, the Federal Reserve in America has decided that it would be more patient in raising interest rates when employment picks up, wages rise and inflation rises.

That is a partial movement in the direction of being less hostile to wage inflation as compared to asset price inflation. But, notice that this policy continues to keep the real cost of capital low (even lower) and boosts asset prices for some more time.

So, monetary policy has not stopped helping capital owners disproportionately so.

On top of this, regulatory and tax policies are being tweaked fairly slowly as political and social momentum in favour of a better balance in taxation on labour income and capital income is building up only slowly.

In America, the 2020 Presidential election began the process of moving that balance away from being extremely favourable towards capital income. But, the election result was not decisively in favour of a thorough overhaul of the tax system, for two reasons.

One, the other side that recommends a far stricter tax code on capital income argues like Anand Giridhardas does. So, it scares away a lot of people. It helps to polarise the discussion, no doubt. But, it stokes anger and division. Even centrists are scared since normal middle and upper income Americans benefit from stock market and property wealth gains too.

By gunning for revolution, protagonists like Anand G. forego evolutionary gains. In any case, the track record of revolutionary regimes is nothing to speak of, in this matter. They have left their lands penurious. That is because the balance of power is always with capital owners. They eventually prevail.

So, a shrill approach does not make for a more equitable society.

The second reason is that baby boomers are still substantial and still influential. Come 2024 elections, they may become less influential. Millennials and Generation Z would be numerically more. If, in the next three years and plus, their situation does not improve, they may become more assertive and even aggressive in their demands and in their approach towards the problem – both via policies and in the streets.

There is a fair number of capitalists in America who recognise the problem and are willing to pay their fair share. It makes practical and policy sense to co-opt them rather than to stigmatise them as Anand G. does. More than that, his approach to solving the problem at hand is guaranteed to yield almost nothing.

G-7, Lab-Leak, Stagflation and MacKenzie Scott

This blog post must be seen as a free-flowing, loose and not-so-rigorously thought-through or argued post. It is random stuff. Well, if some of you think, ‘What’s new?’ then you got it.

(1) A journalist writing for The New York Times, reportedly, missed out that a G-7 meeting was held in 2019. That was a simple verifiable fact. Chris Balding, in his tweets, points out that the communication in the 2019 meeting – when the US had reportedly alienated its European allies under a truculent President – was almost the same as it was last week. On China, that is. Hence, he found it amusing that the faithful media parroted the line that Biden had managed to mobilise his European allies to take a united stand against China. The summit declaration is here. The 2019 summit declaration is here. You decide. I could not see a strong statement on China except for a reference to Hong Kong. Perhaps, this screenshot of Chris Balding is from 2018 summit.

Perhaps, he did not. Perhaps, he did, because there seems to be some breakthrough in the longstanding dispute on the issue of subsidies to Airbus, with Boeing crying foul. Of course, in the meantime, Boeing has had several other problems. A culture that went awfully bad. I am sure books have been written on it. Sample this one.

Babylonbee’s humourous imaginary story on NYT moving its HQ to Beijing since its staff did not want to see anymore American flags rang quite authentic!

(2) On the lab-leak theory, Josh Rogin is dismayed that the US administration is playing truant. Anthony Blinken, Secy. of State, expects WHO to come up with the goods on a second round of investigation. Wow! That is guaranteed to deliver the goods, no doubt. Rogin wonders what the follow-up action is, if there is a dead-end? Blinken did not have an answer. Josh Rogin has a podcast with Megn Kelly. I did not listen. Heard some snippets. This blog has always been sceptical of US ability and willingness to trace the origins of the virus. Both America and China are intertwined in so many uncomfortable ways with the former compromised in many areas and with the latter doing the compromising.

(3) There is much hyperventilation (sample) on India’s CPI inflation print of 6.3% for May. If I were RBI, I would ignore it. There is nothing to see. Under the circumstances, that is. In fact, been thinking that NDA should take a page out of the book of UPA II on stimulus. Not that big but somewhat along those lines. Of course, of course, the world was different then. Growth was booming everywhere. India was just sowing the seeds for a NPA crisis then. Now, banks are not keen on lending. So, will banks lend even if the government stimulates? Good questions and no clear answers. But, one thing is that UPA II did succeed in stimulating the economy too well. RBI played its part as now. So, let us see.

(4) My friend Amol Agrawal has a blog post on South Africa’s lost decade. Let us include Brazil too. That is the point. India’s growth stagnation of the 2020s (especially in the last four years of the decade and in 2012 and 2013) has to be seen in the larger EM context.

(5) There was an interesting discussion in the family WhatsApp group about Mackenzie Scott giving away her alimony from her husband (Jeff Bezos). So, women in the group were boasting that women were more generous. Here, the man generated wealth that could then be given away. The story does not end there. How did the man generate the wealth? He decimated the Main Street pretty much in many cities in America and has reached out to the world. Perhaps, he is going to outer space to decimate Main Street there. If only Amazon had not done any of this, would the world have been a better place, overall, notwithstanding Ms. Scott’s generosity? I am wondering. Not easy to answer. Matt Stoller has an interesting (damning) post on Amazon Prime.

(6) There is new footage of Bat Reservoirs (cages) in the Wuhan Lab. Well, nothing to see here. Move on.

Conviction and humility – can the twain meet?

In response to my post, ‘Humility over hubris’, my friend Raghuraman shared an interesting article by Brian Resnick in vox.com with me. It explored the balance between conviction and humility. What follows are extracts from the article, followed by comments:

At the same time, when we are wrong — out of ignorance or error — and realize it, our culture doesn’t make it easy to admit it. Humbling moments too easily can turn into moments of humiliation.

The first rule of the Dunning-Kruger club is you don’t know you’re a member of the Dunning-Kruger club.”

Some moments of humility could be humiliating. But this fear must be vanquished if we are to become less intellectually arrogant and more intellectually humble.

Yes, it is a matter of practice.

But even if you’re motivated to be more intellectually humble, our culture doesn’t always reward it.

The brain learns to practice or repeat a particular behaviour if it is associated with pleasant memories or good incentives. If it is the other way, then we automatically shut down such behaviour.

Of course, there are other reasons as to why it is so hard to preen ourselves of certain views and convictions. One, it is intellectual laziness. If our strongly-held convictions are conclusively proven wrong or even if sufficiently strongly challenged, we have to start all over again. It is almost as though we have wasted years of intellectual pursuit for nothing. That is very hard. We have to go back to Kindergarten, after finishing a Ph.D., That is how the mind feels.

One more thing and that is related to the first. Just as human loss aversion is widely documented and proven, it is the same with respect to convictions too. ‘Losing’ a conviction is as painful as losing your wealth. It is a prized possession that you are losing, when you are challenged. That is another reason why it hurts badly.

“I don’t know if I can tell you that humility will get you farther than arrogance,” says Tenelle Porter, a University of California Davis psychologist who has studied intellectual humility. [Emphasis mine]

That is very realistic. I like it.

I just think more humility, sprinkled here and there, would be quite nice.

To me, that sounds just about right. Because one can always become proud about one’s humility! In other words, possess it as strongly as one holds on to views. In the end, there is no difference between these two attitudes!

We need convictions, because “an apathetic electorate is no electorate at all,” he says. And we need humility because we need to listen to one another. Those two things will always be in tension.

That tension is inevitable, ever-present and realistic in individuals and in societies. How we balance the two and how we dexterously switch between the two, depending on the circumstances is the challenge. One proof of the pudding of our successful balance between humility and conviction is how well our personal relationships have endured, i.e.,
in relationships where both – conviction and humility – have to be constantly balanced.

What is left to investigate?

I just finished reading the article in ‘Newsweek’ on how the Wuhan Lab-Leak theory surfaced. It is very well written. I read the one in VanityFair (VF) as well. I found the story in Newsweek well put together. But, the VF article has many exhibits that lend it some more authenticity and drama. Of course, the article in Newsweek too has many links.

The Indian ‘seeker’ is given far better coverage in the ‘Newsweek’ story than in VF. The efforts of Team DRASTIC, I must say, gives one goosebumps. In its own way, it leaves us optimistic about the world.

More than a month ago, Ian Birrell had praised (‘The Covid dissidents taking on China’, 13th April 2021) the work of Team DRASTIC in an article for Unherd.com (a site that I often visit and recommend. They get the balance right):

This nugget about Dr Feng’s disturbing dual role — as a voice of the WHO study into pandemic origins while also party to a Communist dictatorship’s clampdown on unfettered scientific discussion — was dug out by an Indian architect and film-maker, who shared it earlier this month on social media under his moniker ‘The Seeker’. “I know how to use a search engine,” he told me.

Last year, he made an even more significant discovery: a thesis that discussed how three miners died of a mysterious respiratory disease, eerily similar to Covid 19, they caught while clearing out bat droppings in a cave network in Yunnan, southern China. The trio were infected in an abandoned copper mine where scientists from Wuhan Institute of Virology sampled RaTG13, the closest known relative of Sars-Cov-2.

‘The Seeker’ is a member of Drastic, an informal guerilla group of internet sleuths, scientists and data experts who have spent the past year scouring a multitude of digital sources for such vital pieces of evidence. Some members have expertise in areas such as microbiology, genetics and virology. Others are data specialists, engineers or simply obsessed with discovering the truth about the origin of this wretched pandemic. Some hide their identities; others are open. They have been accused of hacking and fiercely deny it. Occasionally they hurtle down blind alleys.

Yet there is no doubt their collective efforts — and some of the illuminating evidence they have uncovered — have been crucial in challenging both China and the scientific establishment to ensure the lab leak theory is properly investigated. “We have exposed so many things they wanted to cover up, while there has been too much geo-politics around the issues,” said Gilles Demaneuf, a French data scientist who works at a New Zealand bank and is another Drastic member. “Many people now accept there is a possibility that a lab leak was the cause of the pandemic and that this is not a conspiracy theory as claimed at the outset.”

It has been fascinating to see, in the course of my investigations over the past year, how this group of activists — in tandem with few brave scientists — has forced the lab leak hypothesis from the shadows. …

…. Another member of the team is Monali Rahalkar, an Indian microbiologist, who wondered why prominent scientists seemed so certain the virus had natural zoonotic origins. So she started ploughing through scientific papers during her lockdown in Pune last March. …. Working with her husband, a fellow scientist, she carried out “blast” tests on genetic sequences taken from another strain of bat coronavirus found by Professor Shi Zhengli — the celebrated Wuhan-based virologist known as “Batwoman” for her expeditions to gather samples in caves where the mammals roost hundreds of miles from her lab. [Link]

Ian Birrell himself is worth following on matters pertaining to this virus and the pandemic. On 26th May 2021, he wrote in Unherd.com:

Some analysts believe the shocks could be so seismic that President Xi Jinping would be deposed in a bid to recover face — and possibly that the entire Communist apparatus of control might crumble amid intense public anger. These views highlight the geo-political importance of the debate over the origins issue. …

…. “China will do whatever it can to deny it,” said Lianchao Han, a leading dissident and former Chinese government official. “Xi will mobilise his massive propaganda machine to fabricate stories and facts to shake off his responsibility and liabilities. We already passed the point to depose him for mishandling the pandemic if it’s proved to a lab leak.”….

….. It is a grim sign of the times that so many in the media — with a few noble exceptions — felt more inclined to believe a highly repressive Communist regime rather than an elected US president. [Link]

The last line above is critical. That shows the extent of corruption and capture of Western institutions and individuals by Chinese influence, by the lure of Chinese market and money, a point that Mike Pompeo stresses in his conversation with Bari Weiss.

That is why it is important that, in his latest short piece for Wall Street Journal, Nicholas Wade calls out Dr. Kristian Andersen as well. That man has a huge conflict of interest on account of the sheer fact that he is a virologist even if he was not pursuing G-o-F research or has collaborated with the Wuhan Institute of Virology.

Just as in the world of marketing and selling, anyone who has a bullish (positive) view of the product they are selling has a natural conflict of interest. What else would one expect from them? So, they have to give a more compelling proof of their integrity and conviction than others have to. Mr. Andersen is in that space. Hence, as a commoner, I remain unimpressed by his protestations and his seeking refuge under ‘Science’.

Frankly, after reading the Newsweek article, I feel there is really nothing left to investigate. Team DRASTIC has covered all the bases. Now, Angus Dalgleish and Birgor Sorensen (Mr. Dalgleish created the world’s first HIV vaccine) have published their paper as well in which they state that they establish beyond reasonable doubt that the virus was not  natural. Their paper is here.

What is there to investigate? Except to cover up, perhaps or throw some doubt into the wheels of this seemingly unstoppable juggernaut?

What follows are key extracts from the article in Newsweek:

  • Shortly after The Seeker posted the theses, China changed the access controls on CNKI so no one could do such a search again.
  • When asked about the missing database in January 2021, Shi Zhengli explained that it had been taken offline during the pandemic because the WIV web server had become the focus of online attacks. But once again, DRASTIC poked holes in this explanation: the database was taken down on September 12, 2019, shortly before the start of the pandemic, and well before the WIV would have become a target.
  • In the WIV’s grant applications and awards, The Seeker found detailed descriptions of the Institute’s research plans, and they were damning: Projects were underway to test the infectivity of novel SARS-like viruses they’d discovered in human cells and in lab animals, to see how they might mutate as they crossed species, and to genetically recombine pieces of different viruses—all being done at woefully inadequate biosecurity levels. All the elements for a disaster were on hand.
  • The Wuhan Institute of Virology had spent years collecting dangerous coronaviruses, some of which it has never revealed to the world. It was actively testing these viruses to determine their ability to infect people, as well as what mutations might be necessary to enhance that ability—likely with the ultimate goal of producing a vaccine that would protect against all of them. And the ongoing effort to cover this up implies that something may have gone wrong.
  • WIV researchers had been so concerned about a new SARS-like outbreak that they’d tested the blood of neighboring villagers for other cases. And they had known the genetic sequences for the eight other SARS-like viruses from the mine—which could have helped researchers to understand more about SARS-CoV-2 in the early days —long before the pandemic started, and had kept the information to themselves, until DRASTIC called them out.
  • If there had been any remaining doubt about the WIV’s pattern of deception, these new theses put it to rest. They indicated that the WIV researchers had never believed a fungus had killed the Mojiang miners, contradicting Shi’s remarks in Scientific American and elsewhere. In fact, WIV researchers had been so concerned about a new SARS-like outbreak that they’d tested the blood of neighboring villagers for other cases. And they had known the genetic sequences for the eight other SARS-like viruses from the mine—which could have helped researchers to understand more about SARS-CoV-2 in the early days —long before the pandemic started, and had kept the information to themselves, until DRASTIC called them out.

Prof. Bret Weinstein is his usual mix of optimistic and cautious self as to the lessons of the recent revelations. At one level, he is happy that nature is not so brutal and merciless. At another level, he wonders if humans and the corrupted institutions of science and media are capable of or are willing to learn at all:

…. we should hope that Covid-19 was caused by human error. As terrible as the implications of that are — millions dead, incalculable suffering and loss; all caused by scientific misjudgement — at least it tells us how to make ourselves safer going forward: we should stop doing the thing that creates that danger. If, on the other hand, Covid-19 is Mother Nature’s handiwork, then logically we are condemned to a sequence of pandemics; some natural, others accidental, some better and others far more deadly. Not a happy scenario by any stretch….

…. There are innumerable unknown viruses in nature, a tiny fraction of which have some potential to infect people. But I strongly suspect that we, collectively, have an exaggerated sense of how likely we are to face novel zoonotic pandemics of the scale of Covid-19 or worse in the future…..

….. SARS2 is a master of this trick, but the closest wild relatives seem to be neutralised, with spike proteins built to invade horseshoe bat cells, not human cells. To trigger a pandemic in people they need substantial evolutionary retooling…..

….. When SARS2 first appeared in Wuhan in late 2019, it was, from the very first moment, pre-adapted to spread through the human body and from one person to another. That’s all but impossible — a major evolutionary mystery….

….. as it stands, science is plagued by a system of perverse incentives in which scientists are condemned to constantly compete for jobs and grant money just to stay in the game. The repercussions of this have been clear for decades, as scientists exaggerate, distort and mislead in order to get their own work (or their field’s work) funded….

…. In order to win at the funding and prestige game — in order to deliver a really great pitch – -you have to be a true believer. Indeed, I suspect the “Gain of Function” research community really thought they were racing against the clock to save the world; experimenting in a reckless manner was a risk they were willing to take. But they were like drunks behind the wheel, with the rest of the world unwittingly along for the ride….

….. But the biggest danger exposed by Covid-19 comes from our universally corrupted institutions. If SARS2 emerged from the lab, then the failure of our institutions is the root cause, and fixing them should be our top priority.

That will no doubt be a Herculean task. Our virologists, the press, the international regulatory bodies and all the major social media platforms are already dragging their feet, doing everything in their power to avoid learning the lesson the virus’s likely origin. And in doing so, they are preventing us from learning it, too. In the coming years, if the world needs saving from anything, it is surely that. [Link]

Unsurprisingly, his diffidence that all those who needed to learn their lessons are unlikely to do so is echoed by Freddie Sayers too. He analysed Facebook’s cryptic admission that it would now not censor views that hold that the virus could be man-made:

….. the trend towards removing and shadow-banning content on still-developing controversies on the grounds of official untruth is censorship of a different order. In the realms of science and politics, the “truth” is always evolving. It is an epistemological fantasy to assume that it can be determined using censorship rather than inquiry…..

….. Big Tech got its “misinformation” policy wrong on the lab leak hypothesis — and, if its behaviour in the past week is any indication, it hasn’t learnt its lesson. [Link]

Inflation – it is everywhere – and its consequences

(1) So, it is not just a developing world problem. Short-termism was perhaps imported from the West?!

He and other farmers say drought has been exacerbated by California’s lack of investment in water storage infrastructure over the last 40 years. [Link]

(2) It is because of this:

While droughts are common in California, this year’s is much hotter and drier than others, evaporating water more quickly from the reservoirs and the sparse Sierra Nevada snowpack that feeds them. The state’s more than 1,500 reservoirs are 50% lower than they should be this time of year, according to Jay Lund, co-director of the Center for Watershed Sciences at the University of California-Davis. [Link]. Lots of pictures in the article.

(3) In theory (ok, it is a joke), drought should make wood dry and available plenty as trees turn into wood. But, this article says home-building has never been more expensive in the US:

From lumber to paint to concrete, the cost of almost every single item that goes into building a house in the U.S. is soaring. In some cases, the price increases have topped 100% since the pandemic began.

There are any number of factors at play—from rock-bottom mortgage rates to city dwellers’ rush to the suburbs to shortages of materials—but the simplest explanation is that there is just too much demand for builders and their suppliers to handle. All of this makes housing an extreme manifestation of the inflationary pressures percolating through the booming U.S. economy. [Link]

But, clearly, there is inflation in the prices of materials used in home-building but also in the prices of homes themselves. That is, prices are passed on. The Bloomberg article above has a nice graphic on how the price of a home to the buyer has gone up by 61% since 2019, just two years. This is worse than the 2006-08 bubble.

The Case-Shiller Home Price index confirms the story:

Source: JS Blokland

This article in Wall Street Journal is well written. It is a story about small-town buyers coming home crying because their bids are not attractive enough to the sellers. It is crazy. The story manages to convey the effect rather well that the bubble is far bigger than it was in 2006-08.

(4) As in 2006-08, the bubble has gone global this time too, for at least two reasons. The pandemic is global so all countries have loosened their purse strings – monetary and fiscal. Two, the accommodative US monetary policy propels all countries towards an accommodative stance lest their currencies appreciate too much. That is the problem in crowning one currency as the global reserve and transaction currency and when that country’s central bank does not follow any ‘rules of the game’ but only ‘rules of the whim’.

This Bloomberg article gives a chart of the top fifteen countries with higher prices. The numbers are too small, considering the article in (3) above shows a typical home price having risen by 61% in America. The chart in this article shows US housing price growth of 13%. Perhaps, it is just for one quarter – 1Q2021.

Here is a Reuters story on house price inflation in Australia as well. Well, the RBA is not interested in doing anything about it.

(5) The wicked universe is now showering on the world the problem of cyber attacks, even as Taiwan’s drought appears to have relented:

Meatpacker JBS SA was hit by a ransomware attack that took a big chunk of U.S. beef-and-pork processing offline, sending buyers scrambling for alternatives and raising pressure on meat supplies.

The attack ratcheted up pressure on a food-supply chain already under strain from labor shortages, production constraints and high transportation costs. [Link]

(6) The drought in Taiwan may have relented, but with droughts in California and reported in Brazil, it is no surprise that food prices are at a decade high.

A United Nations gauge of world food costs climbed for a 12th straight month in May, its longest stretch in a decade. The continued advance risks accelerating broader inflation, complicating central banks efforts to provide more stimulus.

Drought in key Brazilian growing regions is crippling crops from corn to coffee, and vegetable oil production growth has slowed in Southeast Asia. That’s boosting costs for livestock producers and risks further straining global grain stockpiles that have been depleted by soaring Chinese demand. The surge has stirred memories of 2008 and 2011, when price spikes led to food riots in more than 30 nations…..

…..The prolonged gains across the staple commodities are trickling through to store shelves, with countries from Kenya to Mexico reporting higher food costs. The pain could be particularly pronounced in some of the poorest import-dependent nations, which have limited purchasing power and social safety nets as they grapple with the pandemic. [Link]

Separately, this gets interesting. Was it just a massive famine in China that led to this or was it geo-strategic?:

Gains in the past year have been fueled by China’s “unpredictably huge” purchases of foreign grain, and world reserves could hold relatively flat in the coming season, Abbassian said. [Link]

With global food prices rising, then the transmission to India’s food prices will be there, if I recall from a IMF ‘Selected Issues’ paper/note published in 2014 or in 2015. Then, it would spill over into the overall inflation rate. Real rates in India will be steeply negative. No point in further cutting rates or lowering small savings interest rates, in this milieu.

Ok, I found it. It was in ‘Selected Issues’ for India released in March 2016 by the Fund:

Moreover, as MSPs and domestic wholesale prices of cereals are influenced by and move in line with international prices, the global market price will remain important in defining Indian cereal prices in the long-term. [Link]

By definition, the impact of inflation on the incomes of informal workers and sectors are not easily tracked because they are informal. They are only captured in surveys. If the private sector does these surveys and if the findings are adverse, they are dubbed ‘biased’. The government itself has withheld release of the 75th round of the NSS Household Consumption Expenditure Survey because the findings did not read well. Now, the planned conduct of the surveys in 2020-21 and 2021-22 is unlikely to happen due to the circumstances. Then, there is no feedback. In these times, it could be dangerous.

(7) Predictably, this article talks of more cyber attacks. Yes, we had the colonial oil pipeline, JBS and in India, we learnt that AIR INDIA’s ticket booking system was compromised. More attacks are predicted now. It could be a prediction overcompensation. But, who knows? I am beginning to read ‘Meltdown’, the book that came out in 2018. Complex and tight systems (no slack) – when they fail, the failure cascades quickly.

(8) With ships avoiding a port in China because of an outbreak of the Covid virus there, supply chains are going to get longer and shipments to America and Europe will be delayed. Higher prices, I guess, is the outcome, at least temporarily. But, do prices come down as quickly as they go up, especially when far too much money is chasing all sorts of goods and services. Monetary theory of inflation might have failed the empirical test in the last three decades or so but when tested with a massive injection of money on a global scale, it might still have teeth.

(9) A new term has been coined as another form in which inflation shows up. Apparently, it is called shrinkflation where sizes and measures of goods are lowered instead of prices rising. With droughts and food prices at 10-year highs, it is easier and also ‘sensible’ to shrink quantities per package, as well. Sensible for sellers, that is.

The way it shows up is in extracting more spending out of wallets without you noticing. Measured inflation won’t rise but household budgets would bleed more money. This is also a behavioural flaw in human nature which sellers are exploiting. We inspect the ticker and think that we are doing due diligence but quantity and price are two sides of the same coin.

Since the government is still flooding the economy with more freebies and the central bank is bankrolling the government in its money-shower, what is there to worry about, really?

(10) Let us switch gears and talk about China or the US dollar. Well, are they two sides of the same coin? After all, what we are learning with respect to Covid is that the collaboration between both the countries is what has reduced the rest of us to sorry and sorrowful spectators. That is a different story.

This is a different virus and a different contagion:

A selloff in China Huarong Asset Management Co.’s bonds is once again broadening to the nation’s other major bad-debt managers, raising the stakes for Beijing as it weighs an industry overhaul…. The three Huarong peers have combined liabilities of 2.9 trillion yuan ($454 billion), including $28 billion of outstanding dollar bonds, according to their latest financial statements and data compiled by Bloomberg. [Link]

(11) But, at the same time, China, for trade purposes, does not want its currency becoming too strong. It is restricting dollar supply onshore by raising reserve requirements on foreign currency deposits. That is, making less dollars available to be lent out, onshore. So, dollars have to be purchased. That, all else being equal, pushes the dollar higher and yuan weaker. So goes the logic.

(12) In the meantime, peers of Huarong Asset Management are wondering where they would find the dollars. That is the problem with the balance-sheet and the income effects of a weak currency. The belief is that it helps the latter but invariably, it hurts the former.

(13) While China wants the dollar to strengthen as per (5) above but not as per (6) above (if you ask the firms, that is), Russia is symbolically declaring loss of confidence in the dollar. Geopolitics apart, cannot blame them though. Russian National Wealth Fund will get rid of all its US dollars. Interesting times.

Let us get back to the discussion on inflation.

(14) Central bankers do not seem to agree on whether there is an inflation problem in their jurisdictions and, if so, ow to handle it. Should that be news? But, well, are they disagreeing? Euro-area and Japan think that they are stuck in low-inflation or deflationary environment and the Fed thinks that inflation is transitory. So, they are agreeing! [Link]

(15) But, data must be somewhat annoying to the central banks:

The Organization for Economic Cooperation and Development Wednesday said consumer prices in its 36 members, which are mostly rich countries, were 3.3% higher than in April 2020. That was the largest increase since October 2008.

Across the Group of 20 leading economies, which account for about four-fifths of global economic activity, the annual rate of inflation rose to 3.8% from 3.1% in March, reaching its highest level in over a year. [Link]

(16) Yes, ultimately, this is the key to central banks taking inflation seriously. That has been my refrain. Until it is the case, they will continue to do jawboning to keep inflation expectations in check without actually tightening or tapering (this is not such a big barrier – they can do so).

“Many people are making the comparison with the 1970s, but the world is very different,” said Laurence Boone, the OECD’s chief economist. “We’re more open, we don’t have the same level of unionization and indexation, and the demographics are different.” [Link]

Well, central banks and governments are indeed pushing the labour-cost theory of inflation to its limit. With such expansion of government budgets and central bank balance sheets, they may breathe life – or will be forced to, – by political economy forces – into labour bargaining power and wage increases. Relationships in economics are non-linear. Money supply may have ceased to matter for inflation or so we think but it might have ceased to matter, within certain ranges. If one keeps pushing the limit, then we might discover that it has potency.

Let us see if wages in America will remain restrained after stimulus cheques stop coming.

(17) Chris Giles’ article in FT is a good read. It explores the theme of inflation. In Dec. 1964, the Federal Reserve in its monetary policy meeting concluded that inflation would not be a serious concern. They were wrong for seventeen years. Roger Bootle, formerly with HSBC Bank, wrote ‘The death of inflation’. Now, he is worried that it is reviving. The article sets out the theme of the risk of being complacent on inflation. The data and the charts are good. [Link]

(18) Germans are worried about inflation since their May inflation rate at 2.4% is the highest in two years. They are worried about the social costs of higher inflation. Some Germans think that it foments extreme nationalism and xenophobia! But, ECB is indifferent right now.

What is the price of asset price and and goods-and-service price inflation? Turn Left.

(19) Where prices rise and incomes are squeezed, it is but a matter of time before politics and policies turn towards distribution rather than production. When growth dries up and distribution has reached its limits, grievances take on a life of their own.

After Chile voted to give the Left and Far-Left parties a hand in re-writing the Constitution, it is Peru’s turn to worry about a Left turn in the country. Left-dictators are no better, or may be, worse than Right-dictators when it comes to civil liberties and expropriation of national wealth:

Described by many observers as a choice between the lesser of two evils, the second-round run-off election pits Pedro Castillo, a rural primary school teacher turned hard-left populist, against Keiko Fujimori, the widely disliked scion of an authoritarian president who ruled in the 1990s. Panic has seized the Peruvian elite at the prospect of a win by Castillo, whose political party Free Peru is led by a Marxist advocating widespread nationalisation, higher taxes, a new “people’s constitution” and import substitution policies in the world’s number two copper producer. [Link]

(20) Greg Ip of WSJ weighs in on the same issue. The Peru elections are due on Sunday. There is also a Bill under consideration, apparently, in Mexico that will give more powers to its Left-leaning President. When growth falters, the incumbent will lean Left or Left-Parties will gain the upper hand. It has implications for India too in 2022 or in the coming years, in general. So, all the more reason for the corporate leadership or business elites to anticipate and forestall this, by being fair, reasonable and generous. Hence, my two columns are worth re-reading. They are here and here.

Finally, articles and statements such as the one linked below do grate because it was both China and the United States that created this pandemic, based on recent evidence, and they both have their economies exceeding their pre-pandemic level already or real soon whereas there is deep uncertainty in India. What a logic and what an outcome?! But, if the article in Wall Street Journal sounds like it is too good to be true, well, it is so. It is unlikely to last. This is unsustainable.

When Covid-19 pandemic restrictions sent the U.S. economy into free fall last spring, economists and policy makers worried it would take years for workers and businesses to heal. They now expect the economy’s size to surpass pre-pandemic levels this quarter. Analysts project that by the end of this year gross domestic product will reach the path it was projected to follow had the pandemic never happened, and then exceed it, at least temporarily. [Link]

Here is one reason why:

On a month-to-month basis, real wages have fallen in three of the past four months, though they are up from two years ago.

However measured, the recent drop in real wages points to a risk should these trends be sustained. Government efforts to boost economic activity and hiring — through low interest rates and trillions of dollars in new federal spending — could widen inequality if they lead to continued outsize increases in the cost of living. [Link]