What's causing the wave of Economic Collapse?

 

Do Government Bailouts of Banks Worsen Economic Conditions?

 Ruchir Sharma in The FT 

As bank runs spread, it has become clear that anyone who questions a government rescue for those caught underfoot will be tarred as a latter-day liquidationist, like those who advised Herbert Hoover to let businesses fail after the crash of 1929. 

Liquidationist is now challenging fascist as the most inaccurately thrown insult in politics. True, it’s no longer politically possible for governments not to stage rescues, but this is a snowballing problem of their own making. The past few decades of easy money created markets so large — nearing five times larger than the world economy — and so intertwined, that the failure of even a midsize bank risks global contagion. 

More than low interest rates, the easy money era was shaped by an increasingly automatic state reflex to rescue — to rescue the economy from disappointing growth even during recoveries, to rescue not only banks and other companies but also households, industries, financial markets and foreign governments in times of crisis. 

The latest bank runs show that the easy money era is not over. Inflation is back so central banks are tightening, but the rescue reflex is still gaining strength. The stronger it grows, the less dynamic capitalism becomes. In stark contrast to the minimalist state of the pre-1929 era, America now leads a rescue culture that keeps growing to new maximalist extremes. 

Today’s troubles have been compared to bank runs of the 19th century, but rescues were rare in those days. America’s founding hostility to concentrated power had left it with limited central government and no central bank. In the absence of a financial system, trust was kept at a personal, not an institutional level. Before the civil war, private banks issued their own currencies and when trust failed, depositors fled. 

Had the US Federal Reserve existed at the time, it would not have helped much. The ethos of contemporary European central banks was to help solvent banks with solid collateral — in practice they were tougher, protecting their own reserves and “turning away their correspondents in need”, as a Fed history puts it. 

A restrained government was a key feature of the industrial revolution, marked by painful downturns and robust recoveries, resulting in strong productivity and higher per capita income growth. Right into the 1960s and 1970s, resistance to state rescues still ran deep, whether the supplicant was a major bank, a major corporation or New York City. 

Though the early 1980s is seen as a pivotal moment of broader government retreat, in fact this era was marked by the rise of rescue culture when Continental Illinois became the first US bank deemed too big to fail. In a move that was radical then, reflexive now, the Federal Deposit Insurance Corporation extended unlimited protection to Continental depositors — just as it has done for SVB depositors. 

Recent bank runs have been compared to the savings and loan crisis of the 1980s. Triggered in part by regulation that made it impossible for S&Ls to compete in an environment of rising rates, the crisis was resolved by regulators who wound down more than 700 of these “thrifts” at a cost to taxpayers of about $130bn. The first preventive rescue came in the late 1990s, when the Fed organised support for a hedge fund deeply tied to foreign markets, in order to avoid the threat of a systemic financial crisis. 

Those rescues pale next to 2008 and 2020, when the Fed and Treasury smashed records for trillions of dollars created or extended in loans and bailouts to thousands of companies across finance and other industries at home and abroad. In each crisis, rescues held down the corporate default rate to levels that were unexpectedly low, compared with past patterns. They are doing the same now even as rates rise and bank runs begin. 

The hazards are not just moral or speculative, as many insist — they are practical and present. The rescues have led to a massive misallocation of capital and a surge in the number of zombie firms, which contribute mightily to weakening business dynamism and productivity. In the US, total factor productivity growth fell to just 0.5 per cent after 2008, down from about 2 per cent between 1870 and the early 1970s. 

Instead of re-energising the economy, the maximalist rescue culture is bloating and thereby destabilising the global financial system. As fragility grows, each new rescue hardens the case for the next one. 

No one who thinks about it for more than a minute can wax nostalgic for the painful if productive chaos of the pre-1929 era. But too few policymakers recognise that we are at an opposite extreme; constant rescues undermine capitalism. Government intervention eases the pain of crises but over time lowers productivity, economic growth and living standards.

The SVB debacle has exposed the hypocrisy of Silicon Valley

US tech innovators have a culture of regarding government as an innovation-blocking nuisance. But when Silicon Valley Bank collapsed, investors screamed for state protection writes John Naughton in The Guardian 

So one day Silicon Valley Bank (SVB) was a bank, and then the next day it was a smoking hulk that looked as though it might bring down a whole segment of the US banking sector. The US government, which is widely regarded by the denizens of Silicon Valley as a lumbering, obsolescent colossus, then magically turned on a dime, ensuring that no depositors would lose even a cent. And over on this side of the pond, regulators arranged that HSBC, another lumbering colossus, would buy the UK subsidiary of SVB for the princely sum of £1.

Panic over, then? We’ll see. In the meantime it’s worth taking a more sardonic look at what went on.

The first thing to understand is that “Silicon Valley” is actually a reality-distortion field inhabited by people who inhale their own fumes and believe they’re living through Renaissance 2.0, with Palo Alto as the new Florence. The prevailing religion is founder worship, and its elders live on Sand Hill Road in San Francisco and are called venture capitalists. These elders decide who is to be elevated to the privileged caste of “founders”.

To achieve this status it is necessary to a) be male; b) have a Big Idea for disrupting something; and c) never have knowingly worn a suit and tie. Once admitted to the priesthood, the elders arrange for a large tipper-truck loaded with $100 bills to arrive at the new member’s door and cover his driveway with cash.

But this presents the new founder with a problem: where to store the loot while he is getting on with the business of disruption? Enter stage left one Gregory Becker, CEO of SVB and famous in the valley for being worshipful of founders and slavishly attentive to their needs. His company would keep their cash safe, help them manage their personal wealth, borrow against their private stock holdings and occasionally even give them mortgages for those $15m dream houses on which they had set what might loosely be called their hearts.
The most striking takeaway was the evidence produced by the crisis of the arrant stupidity of some of those involved

So SVB was awash with money. But, as programmers say, that was a bug not a feature. Traditionally, as Bloomberg’s Matt Levine points out, “the way a bank works is that it takes deposits from people who have money, and makes loans to people who need money”. SVB’s problem was that mostly its customers didn’t need loans. So the bank had all this customer cash and needed to do something with it. Its solution was not to give loans to risky corporate borrowers, but to buy long-dated, ostensibly safe securities like Treasury bonds. So 75% of SVB’s debt portfolio – nominally worth $95bn (£80bn) – was in those “held to maturity” assets. On average, other banks with at least $1bn in assets classified only 6% of their debt in this category at the end of 2022.

There was, however, one fly in this ointment. As every schoolboy (and girl) knows, when interest rates go up, the market value of long-term bonds goes down. And the US Federal Reserve had been raising interest rates to combat inflation. Suddenly, SVB’s long-term hedge started to look like a millstone. Moody’s, the rating agency, noticed and Mr Becker began frantically to search for a solution. Word got out – as word always does – and the elders on Sand Hill Road began to whisper to their esteemed founder proteges that they should pull their deposits out, and the next day they obediently withdrew $42bn. The rest, as they say, is recent history.

What can we infer about the culture of Silicon Valley from this shambles? Well, first up is its pervasive hypocrisy. Palo Alto is the centre of a microculture that regards the state as an innovation-blocking nuisance. But the minute the security of bank deposits greater than the $250,000 limit was in doubt, the screams for state protection were deafening. (In the end, the deposits were protected – by a state agency.) And when people started wondering why SVB wasn’t subjected to the “stress testing” imposed on big banks after the 2008 crash, we discovered that some of the most prominent lobbyists against such measures being applied to SVB-size institutions included that company’s own executives. What came to mind at that point was Samuel Johnson’s observation that “the loudest yelps for liberty” were invariably heard from the drivers of slaves.

But the most striking takeaway of all was the evidence produced by the crisis of the arrant stupidity of some of those involved. The venture capitalists whose whispered advice to their proteges triggered the fatal run must have known what the consequences would be. And how could a bank whose solvency hinged on assumptions about the value of long-term bonds be taken by surprise by the impact of interest-rate increases? All that was needed to model the risk was an intern with a spreadsheet. But apparently no such intern was available. Perhaps s/he was at Stanford doing a thesis on the Renaissance.

Is Capitalism a Religion?

 

Adani vs Hindenburg Saga I An alternative viewpoint

 

Family and other Relations in Indian Judiciary

 

Thoughtful Negotiation Principles

 

Usury, Interest and Islamic Banking

Pervez Hoodbhoy in The Dawn

FINANCE Minister Ishaq Dar has taken on the ungodly, un-Islamic, interest-charging banks of Pakistan. Your days are numbered, he thunders, because our government will implement the Federal Shariat Court’s ruling to end bank interest by Dec 31, 2027. On his orders, appeals challenging the FSC judgement made by the State Bank and National Bank will be withdrawn.

Some will applaud Mr Dar’s new-found religious zeal; others will find this crass opportunism. With national elections around the corner — and with PML-N’s arch-rival Imran Khan having pushed politics rightward — this smells of one-upmanship. Every politician in the government or opposition, clean or corrupt, wants to prove his sainthood.

But most readers will simply yawn — they’ve heard it before. Way back in 1991, the FSC had ordered Pakistan’s economy to dump interest within 12 months. Nothing happened. So recycling an order from 30 years later is no big deal.

Let’s imagine that Dar wins. Rewards or penalties for him in the Hereafter cannot, of course, be known. But this will not end ideological bickering on what interest-free banking actually is. Its two versions, soft and hard, are totally incompatible opposites. 

In the first, at the end of a stipulated period the depositor expects — and receives — a sum exceeding his initial deposit. In another country, the excess is known as interest but in Pakistan they call it profit.

The depositor is clueless about wheeling-dealings inside board rooms and management offices. Nevertheless, heavy use of Arabic words and absence of ‘interest’ gives an Islamic veneer to the bank.

The hard version is uncompromising. In 2014, the top ulema of the Fiqhi Majlis declared that so-called Islamic banking merely re-labels interest as profit and so is hiyal (legalistic trickery).

They point to the explicit Quranic injunction: “Allah has permitted trade and has forbidden interest” (2:275). ‘Forbidden’, they say, is not negotiating low or middle or high. Forbidden means zero — haram is haram and interest is usury.

The influential Maulana Taqi Usmani, among others, takes this position. Bangladesh’s finance minister Dr Abul Muhith is blunter. He says Islamic banking deceives Muslims and is ‘all fraud’.

Early Muslim scholars thought similarly and had equated interest with usury. Since banks rely on income, banking in Muslim lands was absent until very recently. This impeded industrialisation, leaving Muslim countries far behind Europe. Eventually, realising that global trade and commerce are impossible without these Western innovations, Turkish and Egyptian rulers soft-pedalled religious restrictions.

The very first bank in a Muslim country was the Imperial Ottoman Bank (1856) followed by the Egyptian Arab Land Bank (1880).Pragmatic rulers first sought muftis willing to rubber-stamp European-style banking. Else they found those who could invent new definitions or rules.

Pakistan is doing similarly. Commercial banks repackage global financial products with some changed conditions. After a board of clerics chosen by the bank approves a product, it is advertised as Sharia-compliant.

This sanctifies credit cards, derivative products, cross-currency swaps, equity swaps, adjustable mortgages, etc. Are Bitcoin and cryptocurrency halal or haram? Believe whichever you prefer; muftis abound on either side.

One central fact, however, cannot be hidden. Commercial banks in a capitalist economy are profit-making businesses for their owners and shareholders. For this to happen, customers must be drawn into owning more cars, bigger houses, and fancy stuff. If fish could somehow pay, banks would be advertising deals for underwater TVs with 60-inch plasma screens.

Hence a much larger question: is it morally right for a bank to encourage conspicuous consumption amidst an ocean of poverty? The poorest and richest Pakistanis are denizens of different worlds that are poles apart in literacy levels, health outcomes, and living standards.

Urban slums reeking in misery stand in stark contrast to DHAs for the ultra-rich or those just out of uniform. When banks — Sharia-compliant or otherwise — persuade people to borrow more and consume more, does it signify devotion to God?

The answer, of course, should be an emphatic ‘no’. Indeed, the larger FSC judgement states that Pakistan as an Islamic state must have “an equitable economic system free from exploitations and speculations”. But what on earth does riba have to do with present-day inequities of wealth? Even as it flaunts religious symbols, Pakistan’s rapacious elite enriches itself through state capture.

According to the 2021 UNDP report, insider dealings yielded a staggering $17.4bn in the form of subsidies to the military, corporate sector, property developers, feudal landlords, and the political class.

Even this enormous figure pales before the vast wealth of Pakistan’s real estate, estimated at around $300-400 billion. Much of this came from kicking peasants off the lands they once tilled. Land reforms promised by Ayub Khan and Zulfikar Ali Bhutto never happened.

The FSC drove the final nail in the coffin in March 1990. Decreeing that land reform violates Islamic principles, it asserted the absolute right of a Muslim to limitless wealth. This flatly contradicts its own ruling on creating “an equitable economic system”.

Mr Dar’s victory will open another question: how is Pakistan to deal with the outside world after Jan 1, 2028? The FSC judgement is explicit: “the government is directed to adopt Sharia-compliant modes in the future while borrowing either from domestic or from foreign sources.”

Realistically, can Pakistan actually choose who to borrow from? For a country teetering at the edge of default, the answer is no. FSC’s religious scholars optimistically say, “China is also willing to utilise the Islamic mode of financing for CPEC projects”. But do they know how intensely China dislikes Islamic symbols? And that it is deliberately erasing the Islamic identity of Uighur Muslims?

To conclude: Mr Dar’s jihad to eliminate bank interest is a bid to distract from the grimness of the present economic landscape and the damning inequities therein. In fairness to him, fixing fundamental problems such as the small tax base, high indirect taxation, and heavy consumption of imported luxury items is beyond his pay scale. But such posturing could further embolden those — such as the fast rising TTP —who seek to dismantle Pakistan and recreate it as a theocratic state. As such it is a step backward.

Raising interest rates to tame inflation will only cause more pain

Central banks are set on a path to cause recession – and marginalised people will pay the price writes Joseph Stiglitz in The Guardian

Higher interest rates will not do what people need, such as lower the price of food. 



Central banks’ unwavering determination to increase interest rates is truly remarkable. In the name of taming inflation, they have deliberately set themselves on a path to cause a recession – or to worsen it if it comes anyway. Moreover, they openly acknowledge the pain their policies will cause, even if they don’t emphasise that it is the poor and marginalised, not their friends on Wall Street, who will bear the brunt of it. And in the US, this pain will disproportionately befall people of colour.

As a new Roosevelt Institute report that I co-authored shows, any benefits from the extra interest rate-driven reduction in inflation will be minimal, compared with what would have happened anyway. Inflation already appears to be easing. It may be moderating more slowly than optimists hoped a year ago – before Russia’s war in Ukraine – but it is moderating nonetheless, and for the same reasons that optimists had outlined. For example, high auto prices, caused by a shortage of computer chips, would come down as the bottlenecks were resolved. That has been happening, and car inventories have indeed been rising.

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Optimists also expected oil prices to decrease, rather than continuing to increase; that, too, is precisely what has happened. In fact, the declining cost of renewables implies that the long-run price of oil will fall even lower than today’s price. It is a shame that we didn’t move to renewables earlier. We would have been much better insulated from the vagaries of fossil fuel prices, and far less vulnerable to the whims of petrostate dictators such as the Russian president, Vladimir Putin, and Saudi Arabia’s own leader, Crown Prince Mohammed bin Salman (widely known as MBS). We should be thankful that both men failed in their apparent attempt to influence the US 2022 midterm election by sharply cutting oil production in early October.  

Yet another reason for optimism has to do with markups – the amount by which prices exceed costs. While markups have risen slowly with the increased monopolisation of the US economy, they have soared since the onset of the Covid-19 crisis. As the economy emerges more fully from the pandemic (and, one hopes, from the war) they should decrease, thereby moderating inflation. Yes, wages have been temporarily rising faster than in the pre-pandemic period but that is a good thing. There has been a huge secular increase in inequality, which the recent decrease in workers’ real (inflation-adjusted) wages has only made worse.

The Roosevelt report also dispenses with the argument that today’s inflation is down to excessive pandemic spending, and that bringing it back down requires a long period of high unemployment. Demand-driven inflation occurs when aggregate demand exceeds potential aggregate supply. But that, for the most part, has not been happening. Instead, the pandemic gave rise to numerous sectoral supply constraints and demand shifts that – with adjustment asymmetries – became the primary drivers of price growth.

Consider, for example, that there are fewer Americans today than there were expected to be before the pandemic. Not only did Trump-era Covid-19 policies contribute to the loss of more than a million people in the US (and that is just the official figure) but immigration also declined, owing to new restrictions and a generally less welcoming, more xenophobic environment. The driver of the increase in rents was thus not a large increase in the need for housing but rather the widespread shift to remote work, which changed where people (particularly knowledge workers) wanted to live. As many professionals moved, rents and housing costs increased in some areas and fell in others. But rents where demand increased rose more than those where demand fell decreased; thus, the demand shift contributed to overall inflation. 

Let us return to the big policy question at hand. Will higher interest rates increase the supply of chips for cars, or the supply of oil (somehow persuading MBS to supply more)? Will they lower the price of food, other than by reducing global incomes so much that people pare their diets? Of course not. On the contrary, higher interest rates make it even more difficult to mobilise investments that could alleviate supply shortages. And as the Roosevelt report and my earlier Brookings Institution report with Anton Korinek show, there are many other ways that higher interest rates may exacerbate inflationary pressures.

Well-directed fiscal policies and other, more finely tuned measures have a better chance of taming today’s inflation than do blunt, potentially counterproductive monetary policies. The appropriate response to high food prices, for example, is to reverse a decades-old agricultural price-support policy that pays farmers not to produce, when they should be encouraged to produce more.

Likewise, the appropriate response to increased prices resulting from undue market power is better antitrust enforcement, and the way to respond to poor households’ higher rents is to encourage investment in new housing, whereas higher interest rates do the opposite. If there was a labour shortage (the standard sign of which is increased real wages – the opposite of what we are currently seeing), the response should involve increased provision of childcare, pro-immigration policies, and measures to boost wages and improve working conditions.

After more than a decade of ultra-low interest rates, it makes sense to “normalise” them. But raising interest rates beyond that, in a quixotic attempt to tame inflation rapidly, will not only be painful now; it will leave long-lasting scars, especially on those who are least able to bear the brunt of these ill-conceived policies. By contrast, most of the fiscal and other responses described here would yield long-term social benefits, even if inflation turned out to be more muted than anticipated.

The psychologist Abraham Maslow famously said: “To a man with a hammer, everything looks like a nail.” Just because the US Federal Reserve has a hammer, it shouldn’t go around smashing the economy.

The Pakistan Army flies the flag of its motherland, but loves its own land more

 

The US Elections - "Key Issues not Discussed"!

 

Rishi Sunak’s first job? Clearing up his own mess

 A clever man, with a penchant for bad ideas writes The Economist

Oct 25th 2022

Rishi sunak entered Downing Street clutching an invisible dustpan and broom. “Mistakes were made,” declared the new prime minister on October 25th, all but rolling up his sleeves. “I have been elected as leader of my party…to fix them.” The voice was passive but the identity of the culprit was clear—Liz Truss, Mr Sunak’s hapless predecessor, who managed just 49 days in the job. It is the morning after the night before in the Conservative Party. The grown-ups have returned to find the house has been trashed. Now Mr Sunak must start the clean-up.

There is just one problem with this narrative. Mr Sunak is a cause of the problem as well as the solution. The new prime minister is helping tidy up a mess that he helped create.

When the Conservative Party has erred in recent years, Mr Sunak has nearly always been in favour of the mistake rather than the fix. There were many reasons to support Britain leaving the eu. Mr Sunak, however, picked the worst one: he thought it was a cracking idea. Britain will be “freer, fairer and more prosperous outside,” wrote Mr Sunak in 2016. It was a pragmatic decision, not a romantic one. The fundamental problem at the heart of his own government will be a policy for which he long campaigned. Likewise, Mr Sunak was comfortable with a “no deal” Brexit so long as Britain actually left the eu. Mr Sunak has pledged a more constructive relationship with the bloc. Better not to have broken it at all.

After the referendum triggered three years of political deadlock, Mr Sunak supported an extraordinary solution to the mess: Boris Johnson. That decision can be put down to cynicism. Mr Johnson was likely to win regardless of whether he was endorsed by Mr Sunak, at the time a junior minister in the department for local government. But intellectual contortions were required to join the bandwagon. Theresa May was competent and diligent yet also a total failure, ran Mr Sunak’s logic, so it did not matter that Mr Johnson was neither competent nor diligent. In July Mr Sunak resigned from his position as chancellor of the exchequer, prompting a cascade of ministerial departures that ended Mr Johnson’s reign. But why put him in Downing Street in the first place?

Mr Sunak embodies the tension between the Tories’ lust for low taxes and their habit of making big-state promises. Colossal spending programmes during the pandemic made Mr Sunak briefly the most popular politician in the country. Yet these were also the decisions he most resented; he tried to curtail schemes such as furlough prematurely in a bid to save cash. In the spring of this year, Mr Sunak similarly dragged his feet on offering support for ballooning energy bills. He is, at heart, a small-state Conservative, even if he has showed a commendable ability to overcome his natural instincts when urgent need arises.

If fiscal conservatism comes first for Mr Sunak, what comes after is much more erratic. As an ambitious backbencher Mr Sunak supported low-tax “freeports”, which shuffle economic activity around rather than generating it. As chancellor Mr Sunak championed the “Eat Out to Help Out” scheme, when the government in effect paid unvaccinated people to sit together during a pandemic and infect each other. Mr Sunak pushed the Royal Mint to issue a non-fungible token this summer, just as the market for these digital assets crashed. Support for quixotic policy is the norm for Mr Sunak rather than the exception.

In politics, however, luck sometimes masquerades as judgment. Losing the leadership contest to Ms Truss this summer was a big stroke of fortune. During that campaign Mr Sunak predicted that Ms Truss would be a disaster, and she was. He warned that reckless spending commitments would force mortgage rates higher; his campaign team even put together a calculator, pointing out the high bills that would hit households if rates hit even 5%. Yet mortgage rates were heading up regardless of Ms Truss’s rash budget. Her errors have obscured the fact that, had Mr Sunak won in the summer, rising interest rates would have left him with tricky questions to answer. Instead he can pin it all on Ms Truss.

During the summer campaign, and throughout his time on the front benches, Mr Sunak has taken a path long followed by the Conservative Party, which has governed in its narrow political interest rather than the national one. Pledges to curtail onshore wind and solar development please a few zealots but make it harder for Britain to reach its climate goals. Slashing fuel duty as chancellor provided a few days of positive headlines, but failed to put much money in people’s pockets and did not help the environment. There is little evidence that Mr Sunak will take on the vested interests, often in his own party, that hold back Britain’s economy.

Standing on the shoulders of dwarves

The prime minister is a cut above most of his peers. But this is as much a function of a Conservative civil war that killed off competent colleagues as Mr Sunak’s own talents. Elected only in 2015, Mr Sunak has not been doing the job very long. Inexperience, even with copious intelligence, is always a problem. Yet the Conservative Party had nowhere else to turn. It would be comforting to think of Mr Sunak as a clever cynic, a gambler who bet big on Brexit and Mr Johnson and (with a helping hand from Ms Truss) became the youngest prime minister in two centuries. A more worrying analysis is that he is a bright and decent man with bad ideas.

On this reading Mr Sunak does not mark a change from the Tory policies that have left Britain in such a state. Rather he personifies them. The rot in the Conservative Party did not begin with Ms Truss. Britain’s departure from the eu, which Mr Sunak supported, is the thing that acts as a handbrake on the country’s economic prospects. Mr Johnson’s chaotic reign, which he also supported, caused even more ruin. It is the Conservative Party’s failure to take on its supporters that does so much damage to the country. Mr Sunak may be the only available man to fix the government’s errors. But he also helped make them.

The US’s selfish war on inflation will tip the world into recession

Phillip Inman in The Guardian


As the Fed raises interest rates, dollar-denominated loans become an unsustainable burden to states around the globe

The Federal Reserve is planning a second interest rate rise in a year this month. Photograph: Chris Wattie/Reuters 


Later in July US interest rates are expected to jump for a second time this year, and that’s going to wreck any chance of a global recovery.

The Federal Reserve could push its base rate up by as much as a full percentage point, ending 15 years of ultra-cheap money, intended to promote growth.

This jump, to a range of 2.5%-2.75%, would take the cost of borrowing money in the US to more than double the Bank of England’s 1.25%. And yet the Fed could just be taking a breather as it contemplates even higher rates.

This column, though, is not about the US. It is concerned with the terrible impact on Britain and countries across the world of America’s selfish disregard when it decides to tackle high inflation with higher borrowing costs. Britain is already feeling the effects of the Fed’s pledge to tackle inflation until it is “defeated”, come what may.

Higher interest rates in the US make it a more attractive place for investors to store their money. To take full advantage, investors must sell their own currency and buy dollars, sending the price of dollars rocketing higher.

In July the US dollar increased in value against a basket of six major currencies to a 20-year high. The euro has slipped below parity with the dollar in the last few days. The pound, which has plunged by more than 10% this year to below $1.20, is losing value with every week that passes.

In Japan, the central bank has come under huge pressure to act after the yen tumbled to its lowest level against the dollar since 1998.

There are two important knock-on effects for those of us that live and work outside the US.

The first is that goods and raw material priced in dollars are much more expensive. And most commodities are priced in dollars, including oil.

Borrowing in dollars also becomes more expensive. And while getting a loan from a US bank is beyond the average British household, companies do it all the time, and especially those in emerging economies, where funds in their backyard can be in short supply.

The Bank of England interest-rate setter Catherine Mann recently said that her main motivation for wanting significant increases in the UK’s lending rates was her fear that the widening gap with the dollar was pushing up import prices. And higher import prices meant higher inflation.

If only she could persuade her colleagues on the Bank’s monetary policy committee that the devaluation of the pound was a serious issue, maybe they would push up the Bank’s base rate in line with the Fed rate increases. After the Fed makes its move, more may join her.

Until January this year, Britain’s inflation surge was on course to be short-lived. Now it seems the Russian invasion of Ukraine and a splurge of untargeted handouts by the Biden administration during the pandemic, which have served to push up prices in America, will keep inflation in the UK high into next year. 

Those governments that have borrowed in dollars face a double whammy. Not only will they need to raise domestic interest rates to limit the impact of import price rises, they will also face a massive jump in interest payments on their dollar borrowings.

Emerging markets and many developing-world countries will be broke when these extra costs are combined with a loss of tourism from the Covid pandemic. Sri Lanka has already gone bust and many more could follow.

For the past three decades, western banks have marketed low-cost loans across the developing world as a route to financial freedom.

Zambia’s government borrowed heavily before the pandemic to become self-sufficient in electricity. It is a laudable aim, but has left the central African state with a ratio of debt to national income (GDP) much the same as France’s – about 110%.

The problem for Zambia is not the same as for France, which pays an interest rate of 1.8% to finance its debts, measured by the yield on its 10-year bonds. The Zambian 10-year bond commands a rate of 27%. Now Zambia, like France and so many other countries, must borrow simply to live. To invest is to borrow more.

There is no sign that the US will change course. Joe Biden is in a panic about the midterm elections, when fears of spiralling inflation could favour the Republicans. This panic has spilled over to the Fed, which has adopted hysterical language to persuade consumers and businesses that higher rates are coming down the track and to curb their spending accordingly.

The Fed knows inflation is a problem born of insufficient supply that only governments can tackle. But that doesn’t look like stopping it from pushing the US economy, and everyone else’s, into recession.

Science is political

People who say “science is political” usually aren’t just stating facts - they’re trying to push something on you. Don’t let them

Stuart Ritchie
 

The statue of David Hume on Edinburgh’s Royal Mile


Imagine you heard a scientist saying the following:


I’m being paid massive consultation fees by a pharmaceutical company who want the results of my research to turn out in one specific way. And that’s a good thing. I’m proud of my conflicts of interest. I tell all my students that they should have conflicts if possible. On social media, I regularly post about how science is inevitably conflicted in one way or another, and how anyone criticising me for my conflicts is simply hopelessly naive.

I hope this would at least cause you to raise an eyebrow. And that’s because, whereas this scientist is right that conflicts of interest of some kind are probably inevitable, conflicts are a bad thing.

We all know how biases can affect scientists: failing to publish studies that don’t go their way; running or reporting the stats in ways that push the results in a favoured direction; harshly critiquing experiments they don’t like while letting equally-bad, but more sympathetic, ones off the hook. Insofar as a conflict of interest makes any of these (often unconscious) biases more likely, it’s not something to be proud of.

And that’s why we report conflicts of interest in scientific papers - both because it helps the reader understand where a particular study is coming from, and because it would be embarrassing if someone found out after the fact if nothing had been said. We also take steps to ensure that our conflicts don’t affect our research - we do double-blinding; we do replications; we post our data online; we try and show the world that the results would’ve been the results, regardless of what we were being paid by Big Pharma.

We can also all agree that conflicts of interest aren’t just financial. They can be personal - maybe you’re married to someone who would benefit if your results turn out a particular way. They can be reputational - maybe you’re the world’s no.1 proponent of Theory X, and would lose prestige if the results of this study didn’t support it. And they can be political - you can have a view of the world that comports with the research turning out one way, but not another.

When it comes to political conflicts of interest, I’ve noticed something very strange. I’ve noticed that, instead of treating them like other kinds of conflicts—where you put your hands up and admit to them but then do your best to make sure they don’t influence your science—scientists sometimes revel in political conflicts. Like the fictional conflicted scientist quoted above, they ostentatiously tell us that they’re being political and they don’t care: “don’t you know”, they scoff, “that science and politics are inseparable?”

Indeed, this phrase—“Science and Politics are Inseparable”—was the title of a Nature editorial in 2020, and it’s not hard to find other examples in popular-science publications:


Science Has Always Been Inseparable From Politics (Scientific American)


News Flash: Science Has Always Been Political (American Scientist)


Science Is Political (Chemistry World)


Yes, Science Is Political (Scientific American)

When Nature, Science, the New England Journal of Medicine, and Scientific American all either strongly criticised the Trump administration, or explicitly endorsed Joe Biden for US President during the 2020 election campaign, they were met with surprise from many who found it unsettling to see scientific publications so openly engaging in politics. The response from their defenders? “Don’t you know science is political?”.

What does “science is political” mean?

Here’s a (non-exhaustive) list of what people might mean when they say “science is political”:

The things scientists choose to study can be influenced by their political views of what’s important;

The way scientists interpret data from scientific research can often be in line with their pre-existing political views;

Since scientists are human, it’s impossible for them to be totally objective - anything they do is always going to be tainted by political views and assumptions;

It’s easy for scientists to forget that human subjectivity influences a great many aspects of science - even things like algorithms which might seem objective but often recapitulate the biases of their human creators;

Even the choice to use science—as opposed to some other way of knowing—in the first place is influenced by our political and cultural perspective;

A lot of science is funded by the taxpayer, via governments, which are run by political parties who set the agenda. Non-governmental funders of science can also have their own political agendas;

People of different political persuasions hold predictable views on controversial scientific topics (e.g. global warming, COVID vaccines, nuclear power, and so on);

Politicians, or those engaged in political debate, regularly use “science” to back up their points of view in a cynical, disingenuous way, often by cherry-picking studies or relying on any old thing that supports them, regardless of its quality.

There’s no argument from me about any of those points. These are all absolutely true. I wrote a whole book about how biases, some of them political, can dramatically affect research in all sorts of ways. But these are just factual statements - and I don’t think the people who always tell you that “science is political” are just idly chatting sociology-of-science for the fun of it. They want to make one of two points.

1. The argument from inevitability

The first point they might be making is what we might call the argument from inevitability. “There’s no way around it. You’re being naive if you think you could stop science from being political. It’s arrogance in the highest degree to think that you are somehow being ‘objective’, and aren’t a slave to your biases.”

But this is a weirdly black-and-white view. It’s not just that something “is political” (say, a piece of research done by the Pro-Life Campaign Against Abortion which concludes that the science proves human life starts at conception) or “is not political” (say, a piece of research on climate change run by Martians who have no idea about Earth politics). There are all sorts of shades of grey - and our job is to get as close to the “not political” end as possible, even in the knowledge that we might never get fully get there.

Indeed, there’s a weird reverse-arrogance in the argument from inevitability. As noted by Scott Alexander at Astral Codex Ten:

Talking about the impossibility of true rationality or objectivity might feel humble - you're admitting you can't do this difficult thing. But analyzed more carefully, it becomes really arrogant. You're admitting there are people worse than you - Alex Jones, the fossil fuel lobby, etc. You're just saying it's impossible to do better. You personally - or maybe your society, or some existing group who you trust - are butting up against the light speed limit of rationality and objectivity.

Let’s restate this using a scientific example. We can all agree that Trofim Lysenko’s Soviet agriculture is among the worst examples of politicised science in history - a whole pseudoscientific ideology that denied the basic realities of evolution and genetic transmission, and replaced them with techniques based on discredited ideas like the “inheritance of acquired characteristics”, helping to exacerbate famines that killed millions in the Soviet Union and China. That’s pretty much as bad as politicised science gets (you can bet your bottom ruble, by the way, that Lysenko himself thought that “science is political”).

If you think you’re better than Lysenko in terms of keeping politics out of your science (and let’s face it, you totally do think this), you’re already agreeing that there are gradations. And if you agree that there are gradations, it would be daft—or highly conceited—to think that nobody could ever to do a better job than you. Thus, you probably do agree that we could always try and improve our level of objectivity in science.

(By the way, by “objectivity” I mean scientific results that would look the same regardless of the observer, so long as that observer had the right level of training and/or equipment to see them. In the case of Lysenkoism, the “science” was highly idiosyncratic to Lysenko - things could’ve been entirely different if we ran the tape of history again with Lysenko removed. In the case of, say, the double-helix structure of DNA, we could be pretty confident that, were there to have been no Watson or Crick or Franklin or Wilkins, someone would’ve eventually still made that same discovery).

We already have a system that attempts to improve objectivity. The whole edifice of scientific review and publication—heck, the whole edifice of doing experiments, as opposed to just relying on your gut instinct—is an attempt to infuse some degree of objectivity into the process of discovering stuff about the world. I think that system of review and publication is a million miles from perfect (again, I wrote a book about this), but that’s just another way of saying: “the objectivity of the system could be improved”.

And it could be. If scientists shared all their code and data by default, the process would be a little more objective. If scientists publicly pre-registered their hypotheses before they looked at the data, the process would be a little more objective. If science funders used lotteries to award grant funding, the process would be a little more objective. And so on. In each of these cases—none of which give us perfect objectivity, of course, but which just inch us a little closer to it—we’d also move further away from a world where scientists’ subjective views, political or otherwise, influenced their science.

The fact that we can’t get rid of those subjective views altogether can serve a useful purpose: there’s a good argument for having a pluralist setup where people of all different views and perspectives and backgrounds contribute to the general scientific “commons”, and in doing so help debate, test, and refine each other’s ideas. But that’s still not an argument against each of those different people trying to be as objective as they can, within their own set of inevitable, human limitations.

After a decade of discussion about the replication crisis, open science, and all the ways we could reform the way we do research, we’re more aware than ever of how biases can distort things - but also how we can improve the system. So throwing up our hands and saying “science is always political! There’s nothing we can do!” is the very last thing we want to be telling aspiring scientists, who should be using and developing all these new techniques to improve their objectivity.

Not only is the argument from inevitability mistaken. Not only is it black-and-white thinking. It’s also cheems. Even if we can’t be perfect, it’s possible to be better - and that’s the kind of progressive message that all new scientists need to hear.


2. The activist’s argument

The second point that people might be making when they say that “science is political” is what we could call the activist’s argument. “The fact that science is political isn’t just an inevitability, but it’s good. We should all be using our science to make the world a better place (according to my political views), and to the extent that people are using science to make the world worse (according to my political views), we should stop them. All scientists should be political activists (who agree with my political views)”.

If my opening example of the scientist who’s proud of his or her conflict of interest moved you at all, you already have antibodies to this idea. You should ask what the difference is between a financial conflict of interest and an ideological one.

The activist’s argument is often invoked in response to other people politicising science. For example, after the recent mass shooting in Buffalo, New York, it was discovered that the white nationalist gunman had written a manifesto that referenced some papers from population- and behaviour-genetics research. This led to explicit calls to make genetics more political in the opposite direction (including banning some forms of research that are deemed too controversial). An article in WIRED argued that, in the wake of the killings:

…scientists can no longer justify silence in the name of objectivity or use the escape tactic of “leaving politics out of science.”

This argument—which is effectively stating that two wrongs do make a right—seems terribly misguided to me. If you think it’s bad that politics are being injected into science, it’s jarringly nonsensical to argue that “leaving politics out of science” is a bad thing. Isn’t the more obvious conclusion that we should endeavour to lessen the influence of politics and ideology on science across the board? If you think it’s bad when other people do it, you should think it’s bad when you do it yourself.

Of course, a lot of people don’t think it’s bad - they only think it’s bad when their opponents do it. They want to push their own political agenda and just happen to be working in science (witness all the biologists—why is it always biologists?—who advertise their socialism, or even include a little hammer and sickle, in their Twitter bio; or on the other hand, witness all the people complaining about “wokeness” invading science who don’t bat an eyelid when right-wingers push unscientific views about COVID or climate change). There’s probably little I can do to argue round anyone who is happy to mix up their politics and their science in this way.

But there are a lot of well-meaning, otherwise non-ideological people who use the argument too. At best, by repeating “science is political” like a mantra, they’re just engaging in the usual social conformism that we all do to some extent. At worst, they’re providing active cover for those who want to politicise science (“everyone says science is inevitably political, so why can’t I insert my ideology?”).

If you explicitly encourage scientists to be biased in a particular direction, don’t be surprised if you start getting biased results. We all know that publication bias and p-hacking occur when scientists care more about the results of a scientific study than the quality of its methods. Do we think that telling scientists that it’s okay to be ideological when doing research would make this better, or worse?

If you encourage scientists to focus on the “greater good” of their political ideology rather than the science itself, don’t be surprised if the incentives change. Don’t be surprised if they get sloppy - what are a few mistakes if it all goes toward making the world a better place? And don’t be surprised if some of them break the rules - I’ve heard enough stories of scientific fraudsters who had a strong, pre-existing belief in their theory, and after they couldn’t see it in the results from their experiment, proceeded to give the numbers a little “push” in the “right” direction. Do we think a similar dynamic is more, or less likely to evolve if we tell people it’s good to put their ideology first?

If we encourage scientists to bring their political ideology to the lab, do we think groupthink—a very common human problem which in at least some scientific fields seems to have stifled debate and held back progress—will get better, or worse?

And finally, think about the effect on people who aren’t scientists, but who read or rely on its results. Scientists loudly and explicitly endorsing political positions certainly isn’t going to help those on the opposite side of the political aisle to take science more seriously (there’s some polling evidence for this). Not only that, but the suggestion that some results might be being covered up for political reasons can be perfect tinder for conspiracy theories (remember what happened during the Climategate scandal).

A better way

When scientific research is misappropriated for political ends, either by extremists or by more mainstream figures, the answer isn’t to drop all attempts at objectivity. The answer is to get as far away from politics as we can. Instead of saying “science is political - get over it”, we could say:

We’ll redouble our efforts to make our results transparent and our interpretations clear - we’ll ensure that we explain in detail why the conclusions being drawn by political actors aren’t justified based on the evidence;

We’ll make sure that what we think are incorrect interpretations are clearly described and refuted;

We’ll do the scientific equivalent of putting our results in a blind trust, by using the kinds of practices discussed above (open data, pre-registration, code sharing) and others, to lessen the effect of our pre-existing views and ensure that others can easily check our results;

We’ll tighten up processes like peer-review so that there’s an even more rigorous quality filter on new scientific papers. If they’re subjected to more scrutiny, any bad or incorrect results that are the focus of political worries should be more likely to fall by the wayside;

We’ll expand our definition of a conflict of interest, and be more open about when our personal politics, affiliations, memberships, religious beliefs, employments, relationships, commitments, previous statements, diets, hobbies, or anything else relevant might influence the way we do our research;

We’ll stop broadcasting the idea that it’s good to be ideological in science, and in fact we’ll make being ostentatiously ideological about one’s results at least as shameful as p-hacking, or publishing a paper with a glaring typo in the title;

We’ll restate our commitment to open inquiry and academic freedom, making sure that we keep an open—though highly critical and sceptical—mind when assessing anyone’s scientific claims.

To repeat: I don’t think it’s possible to fully remove politics from science. But it’s not all-or-nothing - the point is to get as close to non-political science as we can. By following some of the above steps (and I’m sure you can think of many other ways - another one that’s been discussed is the idea of adversarial collaboration), we can combat misrepresentation of research by using high-quality research of our own.

This is all rather like the discussion of the “Mertonian norms” of science, which are supposed to be the ethos of the whole activity - universalism (no matter who says it, we evaluate a claim the same way), communalism (we share results and methods around the community), organised scepticism (we constantly subject all results to unforgiving scrutiny), and, most relevant to our discussion here, disinterestedness (scientists don’t have a stake in their results turning out one way or another). These aren’t necessarily descriptions of how science is right now, but they’re aspirational - we should do our best to organise the system so it leans towards them. The idea that we should loudly and proudly bring in our political ideologies does violence to these already-fragile norms.

And we really should aspire to disinterestedness. The ideal scientist shouldn’t care whether an hypothesis comes out one way or another. And since, because they’re human beings, the vast majority of them really do, we should set the system up so their views are kept at arms’ length from the results. At the same time, we should remind ourselves of some very basic philosophy via David Hume in 1739: “is” and “ought” questions are different things. The “is” answers we get from science don’t necessarily tell us what we “ought” to to, and just as importantly, the “ought” beliefs from our moral and political philosophy don’t tell us how the world “is”. To think otherwise is to make a category error.

Or as Tom Chivers put it, somewhat more recently:

Finding out whether the Earth revolves around the Sun is a different kind of question from asking whether humans have equal moral value. One is a question of fact about the world as it is; to answer it, you have to go out into the world and look. The other is a question of our moral system, and the answer comes from within.

The inspiring, resounding peroration

The view that scientists should do their best to be as objective as possible is a boring, default, commonly-believed, run-of-the-mill opinion. It also happens to be correct.

The problem with boring, default, commonly-believed, run-of-the-mill opinions is that you don’t get a thrill from reciting them or shocking people with their counterintuitiveness. The fire that powers so much online activism just isn’t there, and the whole thing comes across as rather dull. So in an attempt to remedy that, let me try and make my position sound as exciting as possible. Ahem:

Science is political - but that’s a bad thing! We must RESIST attempts to make our science less objective! We must PUSH BACK against attempts to insert ideology—any ideology—into our science! We must STRIVE to be as apolitical as we possibly can be! I know that I’m a human being with my own biases, and so are you - but objective science is humanity’s best tool for overcoming those biases, and arriving at SHARED KNOWLEDGE. We can do better - TOGETHER.

Hmm. I’m not much of a speech-writer, and that felt a little bit embarrassing. But remember well that cringey feeling: that’s exactly how you should feel the next time someone tells you—with a clear, yet unspoken, agenda—that “science is political”.

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The Fed Chair must acknowledge that free money has made asset prices unsustainably high

Gillian Tett in The FT 

This week financiers’ eyes have been firmly fixed on the Federal Reserve. No wonder. On Wednesday the US central bank raised rates at the most aggressive pace for 22 years, as Jay Powell, Fed chair, finally acknowledged the obvious: inflation is “much too high”. 

But as investors parse Powell’s words, they should spare a thought for a central bank on the other side of the world: the Reserve Bank of New Zealand. 

In recent years, this tiddler has often been an unlikely harbinger of bigger global trends. In the late 20th century, for instance, the RBNZ pioneered inflation targeting. More recently, it embraced climate reporting ahead of most peers. 

Last year, it started tightening policy before most counterparts. And this week it went further: its latest financial stability report warns of a “plausible” chance of a “disorderly” decline in house prices, as the era of free money ends. 

Unsurprisingly, the RBNZ also said it hopes to avoid a destabilising crash. But the key point is this: the Kiwi central bankers know they have an asset bubble on their hands, since property prices have jumped 45 per cent higher in the last two years and “are still estimated to be above sustainable levels”. This reflects both ultra-low rates and dismally bad domestic housing policies. 

And it is now telling the public and politicians that this bubble needs to deflate, hopefully smoothly. There is no longer a Kiwi “put” — or a central bank safety net to avoid price falls. 

If only the Fed would be as honest and direct. On Wednesday Powell tried to engage in some plain speaking, by telling the American people that inflation was creating “significant hardship” and that rates would need to rise “expeditiously” to crush this. He also declared “tremendous admiration” for his predecessor Paul Volcker, who hiked rates to tackle inflation five decades ago, even at the cost of a recession. 

However, what Powell did not do was discuss asset prices — let alone admit that these have recently been so inflated by cheap money that they are likely to fall as policy shifts. 

A central bank purist might argue that this omission simply reflects the nature of Powell’s mandate, which is to “promote maximum employment and stable prices for the American people”, as he said on Wednesday. In any case, evidence about the short-term risk of asset price falls is mixed. 

Yes, the S&P 500 has dipped into correction territory twice this year, with notable declines in tech stocks. However, the American stock indices actually rallied 3 per cent on Wednesday, after Powell struck a more dovish tone than expected by ruling out a 75 basis point rise at the next meeting. 

And there is no sign of any fall in American property prices right now. On the contrary, the Case-Shiller index of home prices is 34 per cent higher than it was two years ago, according to the most recent (February) data. 

However, it beggars belief that Powell could crush consumer price inflation while leaving asset prices intact. After all, one key factor that has raised these prices to elevated levels is that the Federal Reserve’s $9tn balance sheet almost doubled during the COVID-19 pandemic (and has expanded it nine-fold since 2008.) 

And, arguably, the most significant aspect of the Fed’s decision on Wednesday is not that 50bp rise in rates, but the fact that it pledged to start trimming its holdings of mortgages and treasuries by $47.5bn each month, starting in June — and accelerate this to a $90bn monthly reduction from September. 

According to calculations by Bank of America, this implies a $3tn balance sheet shrinkage (quantitative tightening, in other words) over the next three years. And it is highly unlikely that the impact of this is priced in. 

After all, QT on this scale has never occurred before, which means that neither Fed officials nor market analysts really know what to expect in advance. Or as Matt King, an analyst at Citibank, observes: “The reality is that tightening hasn’t really started yet.” 

Of course, some economists might argue that there is no point in the Fed spelling out this risk to asset prices now, given how this might hurt confidence. That would not make Powell popular with a White House that is facing a difficult election, Nor would it help him achieve his stated goal of a “soft” (or “softish”) economic landing, given that consumer sentiment has wobbled in recent months. 

But the reason why plain speaking is needed is that a dozen years of ultra-loose policy has left many investors (and households) addicted to free money, and acting as if this is permanent. Moreover, since the Fed has repeatedly rescued investors from a rapid asset price correction in recent years — most recently in 2020 — many investors have an innate assumption that there is a Fed “put”. 

So if Powell truly wants to emulate his hero Volcker, and take tough measures for long-term economic health, he should take a leaf from the Kiwi book, and tell the American public and politicians that many asset prices have been pumped unsustainably high by free money. 

That might not win him fans in Congress. But nobody ever thought it would be easy to deflate a multitrillion dollar asset price bubble. And the Fed has a better chance of doing this smoothly if it starts gently and early. Wednesday’s rally shows the consequences of staying silent.

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