In the Blind Spot (Jackson Hole meets Alpbach)

Dear Subscribers,

Welcome to the end of August. It’s Jackson Hole weekend. But it’s also the European Forum at Alpbach in Austria, where I have finally arrived.

My Alpine location is one of the reasons the newsletter is coming on a Sunday. My arrival at Munich was scuppered on Thursday night by electrical storms, which meant I landed at some ungodly hour in the wrong location — Nuremberg — and had to spend a small fortune getting to the right location, ruining my Friday writing schedule. But, it’s not all bad. There were a number of embargoed reports that I wanted to reference that weren’t out until Saturday, and now I can.

Alpbach is sometimes described as a Davos challenger, but it actually predates Davos by a number of decades. “The forum was founded in 1945 as “International College Weeks” by Otto Molden, who had been active in the Austrian resistance movement, and Simon Moser.” says Wikipedia.

I’m due to speak on a crypto panel on Monday morning. The format was intended to be a hiking panel but the stormy and rainy weather isn’t budging, so that might be rethought. I, err, hope, at least.

This week’s newsletter was, as usual, compiled by myself, Izabella Kaminska, with the help of Dario Garcia Giner.

Happy Sunday.

The hole in the Jackson Hole coverage

The theme of this year’s Jackson Hole symposium was “structural shifts in the global economy” and many were anticipating the BRICS summit, which preempted it by a few days, to set the tone for the meeting.

But it didn’t. Powell instead stuck to the WSJ pre-casted messaging of “higher for longer” with markets taking the usual cue from that signalling, and there was very little acknowledgment of the wider economic debate going on about lifting the overall inflation target to 3 percent:

If there was any dedollarisation talk it was in what was hinted at, but never explicitly stated, in Christine Lagarde’s speech, which was largely a reiteration of her April multipolarity speech without specific mention of the dollar. The context — how structural, climate and geopolitical shifts will influence inflation — was, however, mostly the same.

The same theme was echoed in Darrell Duffie’s panel, “Structural changes in financial markets,” but the supporting paper focused instead on the impact the new regulatory environment is having on US Treasury market liquidity due to reduced dealer balance sheet capacity. However, it’s not a new story.

What was slightly new was Duffie’s de facto admission that the line separating QE purchases from “market-function purchase programmes” is very thin, as epitomised in the Bank of England’s September 2022 debacle when its dealing division had to intensively intervene to restore order to the market. Here are the relevant pars from the paper:

The Fed’s March 2020 program of market-function purchases eventually became a quantitative-easing (QE) program. Market participants may not have had a clear perception at each point of time of how much of current purchases would have sufficed for monetary policy objectives alone. This suggests the transparency value to monetary policy transmission of a clearly demarcated market-function purchase program (Duffie and Keane, 2023). Purchases that are designated to cure a market dysfunction would be expected have the same monetary-policy impact as concurrent qe purchases, dollar for dollar, but the opposite conclusion applies only to the extent that markets are actually dysfunctional.

Moreover, market-function purchases may be needed just when monetary policy objectives imply tightening, thus sales of government securities! For example, on September 22, 2022, the monetary policy committee of the Bank of England voted to begin selling gilts for the purpose of quantitative tightening. Within a day of this announcement, a UK fiscal policy shock triggered fire sales of gilts by liability-driven investors that destabilized the gilt market. On September 28, the financial policy committee of the Bank of England instituted a program of gilt purchases that restored market stability.

On October 22, Bank of England Governor Andrew Bailey stated that there may appear to be a tension here between tightening monetary policy as we must, including so-called quantitative tightening, and buying government debt to ease a critical threat to financial stability. This explains why we have been clear that our interventions are strictly temporary and have been designed to do the minimum necessary.

Of more interest for Blind Spot readers, and what didn’t get half the attention it should have, was Barry Eichengreen’s paper “Living with High Public Debt”, where the discussant was none other than “This time is different” Carmen Reinhart.

Eichengreen’s point is that “for better or worse, high public debts are here to stay” and that, over the long term, this will require the formation of coping strategies, some of which may have to be unorthodox. Historically, the antidote for high public debt has been to run extended primary surpluses. But this time, that is not an option, says Eichengreen.

Unfortunately, the economic and political conditions making this possible in the past are no longer present. Nineteenth century debt retirement preceded the rise of social spending and its competing claims on the government’s resources. The franchise today is no longer limited to creditors, so those claims are more intense. The need to devote revenues to defense spending rather than debt retirement is back with a vengeance. Governments will have to devote yet additional revenues to meeting the existential crisis of climate change.

So what’s to be done? One historical option, according to Eichengreen, is financial repression, which would mean caps on interest rates or bonds, or policies that forcefully drive investments into bond markets — all of which are mechanisms to allow de facto debt monetisation via inflation. But, it turns out, even this isn’t guaranteed to work this time because, in reality, negative real rates are hard to sustain, especially without significant wartime-style controls. Historically, he adds, it is high growth that allowed for such strategies to work, not the negative real rates themselves. And on that front: “Unfortunately, such high growth rates in the advanced countries are not in the cards today,” says Eichengreen.

As he further notes:

In sum, the policy of capping interest rates on Treasury securities after World War II reflected a constellation of factors that is highly unlikely for the foreseeable future. Central bank independence is less than absolute, but it’s greater today than during the war and its aftermath. The Fed, Treasury, and broader investing public would not accept policies that caused inflation to oscillate from +17 percent to -2 percent to +21 percent. These conclusions apply not just to the U.S. but to the advanced countries as a group.

The other option is engineering inflation rates that purposefully erode the debt. His conclusion on this option, however, is the most interesting of all. Apparently, it only works historically if the induced inflation comes as a surprise to the market and if the debt pile is mostly long-term in nature. Once the inflation is expected, rates adjust in such a way that overall legacy debts cannot be easily eroded. The market also responds by being increasingly unprepared to lend long.

This analysis thus points to limited scope for reducing today’s high debt ratios via inflation, given the absence of restrictions on interest rates and capital flows. To exert a significant impact, inflation must be substantial. But, in most countries, there would be strong political opposition to substantial inflation. It would also have to be a surprise (as it was, to most, in 2020-21). But once the tactic was tried, surprises would become increasingly difficult to engineer.

That last point does make you think, doesn’t it?

With hindsight, it certainly might be considered fortuitous that consensus thinking failed so spectacularly to expect higher inflation after one of the biggest public debt binges of all time. Just how much of an accident was it really?

Even so the overall conclusion is not reassuring. “Caps on nominal interest rates and policies of financial repression that render the debt-reducing effects of inflation more durable are less feasible in our financial liberalized world.” Restructuring too has its limits, as does the prospect that the benefit of large debt piles — the ample availability of safe assets — is undermined if and when safe asset status is re-rated. “There is the possibility that safe assets could be re-rated as unsafe owing to the issuer’s recourse to financial sanctions,” notes Eichengreen, while concluding that there is as yet no solid evidence to suggest dedollarisation is a notable factor. That said, the advice is clear: “Governments (a.k.a the US) must take care to avoid actions that cause their safe assets to be re-rated as unsafe.”

All of which leaves us thinking that central bank Jedi mindtricks are only going to intensify.

Business, Economics, Finance, etc…

• Global bond yields were on the rise, including, most notably of all those of Japan.
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• The latest figures from the ONS showed U.K. public-sector borrowing came in well under target this year, thanks in no small measure to inflation.
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  • Everyone has mostly been focused on the costs of inflation — especially with regard to the amount of interest payable on index-linked gilts. As Geoff Smith at Politico noted, “That’s now up to £22.6 billion so far this fiscal year, according to our scanning of the ONS numbers. But with inflation now heading down, the amount of uplift on debt servicing costs from the Retail Price Index should also start to fade reasonably quickly.” But there’s an upside too, which comes in the shape of higher tax receipts. “Higher-than-expected tax receipts kept public-sector borrowing to ‘only’ £4.3 billion in July, with receipts from self-assessment coming in nearly 20 percent ahead of the Office for Budget Responsibility’s forecasts of £9.9 billion. That also bodes well for August’s data, given that self-assessment payments usually straddle those two months. The numbers certainly reflect the record wage growth in recent months and, according to UBS Global Wealth Management’s Paul Donovan, also reflect the likelihood that the ONS’s other data aren’t capturing the amount of actual activity in the economy.”
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• The U.S. Senate Budget committee accused Credit Suisse of failing to fully investigate its historic accounts with alleged Nazi links. Over 64,000 sets of “potentially relevant records related to Nazi-linked accounts” were not part of a Credit Suisse investigation initiated after a Jewish ‘Nazi Hunt’ revealed, in March 2020, that some historic Argentinian links were not properly brought to light during the 1999 Jewish settlement with Swiss banks. Also of note is that the chief ombudsmen reviewing the investigation was strangely let go by the bank during the probe. Some of the dormant accounts were supposedly being supported as recently as 2020. Any substance to the claims could leave the new UBS Credit Suisse entity exposed to fresh reparations.
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• “Big Parma” was at it again. Parmesan cheese producers have reportedly turned to edible microchips to help protect their goods from counterfeits.
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• CNN reported that Italian businesses were resorting to ever more creative means to mark up their products to customers. One couple was allegedly charged two euros to cut their ham sandwich in half in Ostia, while a pair of tourists in Sardinia were charged 60 euros for two coffees and two small bottles of water.
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• But that wasn’t the only bit of price-gouging going on in Europe: St Tropez’s mayor Sylvie Siri threatened to strip restaurants that were found using databases of former clients, irrespective of data protection laws, to filter high-paying customers from low-paying ones, of their licences.
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• The Climateer Investing blog questioned why so many people lie about the American shoplifting epidemic. Several news stories were highlighted that underline the dramatically worsening nature of shoplifting in the Bay Area and San Francisco.
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• Target, meanwhile, reported a $500m loss due to the shoplifting epidemic.
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• Harvard economist Jason Furman advocated for a hawkish pivot to a higher inflation target of 3 percent in an op-ed for the Wall Street Journal. Paul Krugman endorsed the idea, but was surprised to discover that central bankers feared such a policy was not viable because it would undermine their credibility. Krugman, nonetheless, suggested they could get away with it if they adopted a policy of “strategic hypocrisy”, meaning targeting 3 percent without admitting to it until it was proven a success.
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• Ofgem fined Morgan Stanley more than £5.4m for failing to record and retain electronic trading communications made by wholesale energy traders on privately owned phones regarding energy market transactions. This follows the US Securities and Exchange Commission fining Wall Street around $3.8bn for employee communications on LinkedIn and other messaging services.
  

  This is arguably getting out of hand. It’s becoming a classic example of regulators fining people for poor controls and processes because they seem to find it so hard to fine people for actual wrong doing — IK

• Shipping professionals argued that Californians can’t afford unachievable maritime mandates proposed by the California Air Resources Board because the “emission-reducing” technologies needed are as yet unavailable or unsafe for American mariners.

China, China, China

• Bloomberg revealed that China’s subsidy-fuelled EV boom had resulted in now-obsolete EVs piling up in gigantic car lots.
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• China’s central bank and major financial regulators instructed bank executives to boost loans to support their ailing economy’s recovery. The instruction added to international concerns that Chinese policymakers are worried about their deteriorating economic outlook.
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• Brad Setser noted Chinese state banks were using their balance sheets to help the People’s Bank of China manage the yuan, a reality that has only been accepted by Western observers in the past year (but not by the IMF).
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• Russia remained the single largest crude supplier to China in July, despite higher oil prices and narrower discounts on Russian crude. Chinese imports of Russian crude represented a 13 percent increase compared to July 2022, though imports this month were lower than in June 2023.
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• Paul Krugman penned an op-ed for the New York Times where he argued the effects of a Chinese economic crisis would be mostly limited to China, likely without a spillover into the American economy. But Stephen Roach disagreed. Roach argued instead that America draws much economic support from global growth. Since China has accounted for 35 percent of the rise in global GDP since 2008, a China crisis would undermine this support for American economic growth.
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• Gavekal‘s Louis-Vincent Gave pushed back against the media’s growing consensus that China was facing an impending financial crisis, citing a number of indicators that suggest the opposite story. “You can look at recent market behavior and conclude that as Chinese banks have spent the last year outperforming US treasuries, the immediate problem is not in the Chinese financial system, but in the US treasury market itself. If so, we are entering a new world in which US treasuries can no longer be thought of as the bedrock on which to build portfolios.”
  

  Gave’s critique of the media went further still:

  “People have the China-US treasury meltdown relationship all wrong. The Iraqi weapons of mass destruction, the Covid hysteria, the push for vaccination, the “Hunter Biden laptop is a Russian plant” story have all shown that critical thinking within the Western media is in short supply these days, and that most journalists would now rather be wrong with the consensus than be right alone. As a result, when a narrative starts to develop, Western media latch on to it, and lay it on thick.”

• In an “extraordinary” move, Xi Jinping unexpectedly pulled out of the BRICS summit in South Africa.
  

  Many were expecting the BRICS summit to set the tone for Jackson Hole and to up the ante on dedollarisation. While the summit did see the formal expansion of the bloc to include six new entrants, among them unlikely bedfellows Saudi Arabia and Iran, the reality is it failed to set any such tone. The lack of cohesion between the group is only going to get more obvious now. The Eurozone may have its problems, but its members have far more in common with each other than any of the expanded BRICS do. A BRICS single currency seems doomed to fail. — IK

Cryptocurrency evangelism:

• The WSJ warned Crypto’s largest exchange, Binance, was facing legal risks over its exposure to Russian money and facilitation of Russian finance flows abroad.
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• Coinbase said it would increase the rate it was prepared to buy back $150m of its 3,625 percent Senior Notes, due 2031, from 64.5 percent on the dollar to 67.5 percent on the dollar after only $50m worth of uptake at the former level.
  

  Whether this is evidence that Coinbase noteholders have more confidence in the crypto exchange than expected, or just pure opportunism ahead of a likely death spiral, is yet to be determined. But I’d say the fact the company’s notes are trading at a 63 percent-on-the-dollar discount is not a good sign. For now, however, Binance’s troubles are likely to be Coinbase’s fortune — IK

Politico’s finest:

• Michael Shurkin wrote an exhortation to France to move on from the problematic Sahel region. After decades of mismanagement and an increasingly unpopular presence, Shurkin argued that France must reprioritise its strategic presence in the Indo-Pacific, and towards gearing up for a traditional peer conflict – something which the Sahel’s counter-terrorism operations are a distraction from.

Media matters:

• SkyNews unearthed a trove of facts regarding the secretive and lucrative fact-checking industry in Australia. Meta fact-checkers supposedly collaborated with the Royal Melbourne Institute of Technology to de-platform an Australian journalist on The Voice. SkyNews also found a University of Adelaide academic published inaccurate statistics on news coverage to further tarnish independent journalists on The Voice, while being funded by the Australians for a Murdoch Royal Commission. SkyNews condemned the significant extent to which these fact-checkers and their oft-unseen donors hold a strong and relatively unseen hand in influencing Australians before their upcoming constitutional referendum.

American political drama beyond *that* Trump mug shot:

• The Republican Chair of the House Oversight Committee, James Comer, who is looking into the Hunter Biden laptop, requested access to the National Archives to unearth emails Biden sent as Vice President under his three pseudonyms; Robert L. Peters, Robin Ware, and JRB Ware.
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• Glen Greenwald noted that the The New York Times and Politico had reported the Department of Justice under Biden was set to drop the Hunter Biden investigation until two IRS whistleblowers stepped up.
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• The New Yorker’s long read by Ronan Farrow highlighted how the row over Elon Musk’s threats to pull  Starlink out of Ukraine revealed the billionaire’s growing grip over the U.S. government.
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• The Atlantic platformed a piece arguing that “Americans vote too much” the same day that the New York Times’s Adam Grant questioned the wisdom of permanent electoral cycles. The original headline of the latter was “Elections are bad for democracy” and was later amended to “The Worst People Run for Office. It’s Time for a Better Way.”Grant’s piece argued instead in favour of random lotteries, on the basis the systems were successful in ancient Greece and that a type of lottery was used to select jurors in the United States.
  

  Sortition as a political system has a long and distinguished history — and it’s still included in many Western political processes. But it’s hardly flawless.

  Sortition is as old as democracy, and it was once viewed as inherently superior to elections. In Ancient Greece, Athenian’s concept of isonomia (equality) meant sortition determined the members of the citizen’s court, the Athenian upper house. This was a key tool in avoiding the type of manipulation, vote-buying and pork-and-barrel trading that characterises any oligarchy-heavy electoral society. Sortition, on the other hand, and in the words of Thomas Aquinas, were a way of “getting God to speak”.

  Sortition’s good name was revived with the democratic experiments carried out in medieval Italian city-states such as Venice and Lombardy. But it was only Florence that went into full sortition mode. For over a century from 1328, a little sack filled with names held the power to select magistrates and members of the ruling Signoria, the Florencian government.

  But where there is a will, there is a way. And the powerful guilds, bourgeois, and aristocratic families of Florence still found a way of manipulating the process. This could take any shape and form. Sacks with double bottoms, bribing the relevant official to get a candidates name in the sack several times, or simply paying the administrator who draws the paper to keep a previously agreed name clasped in his hand.

  Sortition is not a flawless solution. Electoral cycles have their own benefits — choosing a candidate for their skill and charisma is in many ways more sound than picking any citizen at random.

  The key question is whether it would help to reduce the loss of trust towards government in our societies, by making elections fairer and reducing electoral friction, as posited by Grant. It’s certain that sortition would reduce the burden of political activity on the citizen’s mind, and distance them from the frictions of elections.

  But ultimately, whether the main drawback of electoral cycles — electoral manipulation — outweighs its positives or not is moot. Sortition is only slightly less vulnerable to manipulations.

  That people are growing tired with electoral cycles is a sympton of our collapsing trust in government, not its cause. Pushing politics one step further away from the populace seems a step assured in ensuring a total collapse in trust. — DGG

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  The more notable thing, for me, is the limited blowback facing either the Atlantic or the NYT for questioning the mechanics of democracy when similar points have been made by voices on the right for a while. Again, there seems to be a general hypocrisy in play with respect to who can or cannot question the viability of democracy in the current environment. Extinction Rebellion, for example, are another movement that regularly advocates for the suspension of democracy on the basis it cannot address the urgency of the climate crisis efficiently enough.

  Both the Atlantic and the NYT make good points though, and in general these sorts of arguments are in keeping with the wider spirit and theory of Anacyclosis, as frequently recounted on these pages. — IK

You’re either in power or in prison:

• Slovak President Zuzana Caputova stated that Slovakia’s police did not carry out a coup in the country. A recent string of arrests against leaders of the country’s intelligence services had them accused of “establishing, forming and supporting a criminal group, the crime of abuse of public authority and the crime of obstruction of justice.” The controversy comes just weeks before the Slovak elections on September 30.
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• Young Sebastian Kurz, former Chancellor of Austria, was indicted for making false statements in a parliamentary inquiry in 2020. If convicted, Kurz, who now works at Thiel Capital, could face up to three years in prison.

Technological developments:

• Bill Gates said he was concerned about the 850 million people globally who lack an ID, being “shut out of a lot of services that could change their lives”. In response, Gates is touting MOSIP, an open-source technology backed by the Gates Foundation, that promises to become a critical piece of digital public infrastructure.
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• Russia’s Luna-25 spacecraft spun out of control and crashed into the lunar surface, while India’s lunar rover Chandrayaan-3 landed and went for a walk on the south lunar pole.
  

  After decades of inactivity in lunar exploration, this week officially inaugurated the new race for the moon. But why this new obsession with the moon? Minerals and forward bases galore, essentially.

  The new lunar gold rush is defined by the activities of four nations. The U.S., China, Russia and India. The United States’ new Artemis missions are intent on reaching the moon with a crewed spacecraft by 2024. Lunar Gateway landings on a built moon base are expected from 2028.

  But Russia’s own efforts, recently marred by failure, should not be scoffed at. Their planned Luna 26 and 27 orbital landers are still on the way, even if they are now significantly delayed. China’s own Lunar Exploration Programme plans to build a scientific research station by 2029, with India’s Chandrayaan-3’s mission to explore for minerals suggesting similar intentions.

  You may note that all of the above missions are focusing on one particular area of the moon, the Lunar South Pole. This area is of particular interest because of water ice trapped inside craters where the near-constant sunlight never reaches its interior. Beyond the necessity of drinking water, extracting hydrogen from this ice allows for the refuelling of spacecraft bound for re-entry missions, or to further planets. As such, these so-called “cold traps” would be ideal locations for the placement of lunar bases.

  Political wrangling over this new “scramble for the moon” has already begun. The United States unveiled its preferred political approach with the Artemis Accords, for instance. These represent the characteristic American tendency to establish supposedly democratic and peaceful principles for Moon exploration, which just so happen to prioritise American interests over those of weaker members of the alliance. Naturally, Russia and China have not signed the accords. Instead, Russia’s Roscosmos are looking to collaborate on a joint Russian-Chinese lunar landing mission.

  What is held in these craters holds promise. NASA has even spoken of a “lunar gold rush”, pointing to huge amounts of rare earth metals and Helium-3 that are becoming increasingly difficult to find on Earth. But we seem to be quite a way away still. Just see this recent tongue-in-cheek graph published by Jet Propulsion Laboratories:

  
  This next image holds more clues to how NASA would expect a permanent moon mission to look like. Logic would suggest that Russia, China, and India would broadly follow the same plan:
  
  But it’s not just the Russian programme that’s currently delayed. The American Artemis program is already suffering extensive delays, and India’s rover appears to have been damaged by the landing. Space exploration — and lunar landings — aren’t easy stuff.

  But unlike in the 1960s, now that we have a commercial reason to get to the moon, you can expect us to get there. And stay. Watch this space. — DGG

Covid isn’t over:

• Britain’s former Deputy Chief Medical Officer, Jonathan Van-Tam, has taken a role as senior medical consultant at Moderna. This hire forms part of Moderna’s reportedly aggressive spending in the “hope that the market for Covid-19 vaccines rebounds” both in the UK and internationally.
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• A new Covid variant was identified in Denmark and Israel named BA.X. Soon after the circulation of this news, scientific experts from reputable universities in the UK began calling for new mask mandates and some lockdown rules to be reimposed.
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• The British Royal Society submitted a report to the UK Covid-19 inquiry which found that mask-wearing, border controls, and lockdowns were most effective at cutting transmissions of the disease.