Give Proust a chance — as an audiobook. Photographer: THOMAS SAMSON/AFP via Getty Images
Niall Ferguson is the Milbank Family Senior Fellow at the Hoover Institution at Stanford University and a Bloomberg Opinion columnist. He was previously a professor of history at Harvard, New York University and Oxford. He is the founder and managing director of Greenmantle LLC, a New York-based advisory firm.
Maybe you stayed safe in the plague year. Most of us have. But did you stay sane? A growing body of research shows that the damage to our health caused by COVID-19 went far beyond the disease itself. In addition to multiple physiological conditions that have claimed lives because people eschewed medical care they would normally have sought, a great many of us have suffered psychologically — some from fear of infection, some from protracted incarceration with their nearest and dearest, many from the enforced isolation that does not come naturally to our species. Survey data from the United States, China and other countries point to a pandemic of depression, anxiety and stress.
I’ve had the good fortune to avoid both physical and mental illness in 2020. As a repressed misanthrope — who for many years was forced by circumstances to be much more gregarious than I really am — I have positively relished nine months in one place with a social circle confined to my wife, my two youngest children, and a handful of local friends. (I cannot speak for the other inhabitants of my bubble.)
As the year nears its end — and with the plot twist of a new and more contagious U.K. variant of the SARS-CoV-2 virus, as if to reconcile the Europeans to Brexit — I feel duty bound to share some tips for maintaining mental health. In honor of the process formulated in 1935 by Bill Wilson and Robert Holbrook Smith, the founders of Alcoholics Anonymous, here are my twelve steps to staying sane (or at least getting no more insane) in a pandemic:
Step One: Drink tea, not booze. I began 2020 with my first ever trip to Taiwan, where I was cured of making tea like a Brit, i.e., chucking a teabag, boiling water and some milk in a mug. Sitting cross-legged in the Shi Yang Shan Fang tea house, which perches on the side of Yangming Mountain to the north of Taipei, on a night of torrential rain, I experienced my first gong fu tea ceremony. A young man conducted the ceremony, which involves multiple pots and cups, all made of delicate, unglazed clay. “Are you a tea master?” I asked him, somewhat crassly. “No,” he replied serenely. “I am the servant of the tea.”
Ever since that evening, I have served tea this way three times a day, beginning with Taiwanese gaoshan (high mountain) tea in the morning, followed by Wazuka Yuki Oolong Cha at lunchtime, and concluding with Japanese sencha (green tea) in the afternoon—all ordered from the wonderful Sazen Tea. More than anything else I have done this year, the tea ceremony has kept me sane in the solitude of my study.
Step Two: Read Walter Scott (ideally with your mother). I had been thoroughly put off the novels of Scott as a schoolboy by adults who dismissed him as boring and stuffy. They lied. By some strange telepathic process, my mother and I—separated by nearly five thousand miles— decided to set aside prejudice and simultaneously begin reading “Waverly” (1814), the glorious, gripping tale of an ingenuous young Englishman who gets mixed up in the Jacobite Rising of 1745. As we progressed, at the rate of roughly one novel every three weeks, we found Scott as gifted a writer as Dickens, but funnier and shrewder. There are unexpected anticipations of Wilkie Collins and R.L. Stevenson in his darker characters — for example, the magnificent madwoman Meg Merrilies in “Guy Mannering” (1815) who recurs as Madge Wildfire in “The Heart of Midlothian” (1818), or the diabolical, dastardly Rashleigh Osbaldistone in “Rob Roy” (1817).
Reading Scott in tandem provided my mother and me with a desperately needed topic of conversation other than the pandemic. Our weekly calls became literary seminars rather than lamentation sessions. By this route of printed pages, each of us was able to revisit our native Scotland in our imaginations and to understand, for the first time, how much that country used to be Scottland — for it was Scott, more than anyone, who made its emergence from Afghan-like misery into Enlightenment dynamism both intelligible and irresistible to the Victorians.
Step Three: Have Proust read to you. On at least four previous occasions, I have tried and failed to get through the first volume of À la recherche du temps perdu. The solution was to listen to “Swann’s Way,” in the C. K. Scott Moncrieff translation, read exquisitely for Audible by John Rowe. If you have ever struggled with the ineffably sensitive Marcel, as I once did, then this is the way. For me, the breakthrough came with Swann’s all-consuming infatuation with the unsuitable but enthralling Odette and his descent into green-eyed jealousy.
Step Four: Listen to Bruckner. This was also the perfect year to immerse yourself in the work of a composer you had previously failed to appreciate. I chose the self-effacing Austrian genius Anton Bruckner, whose Symphony No. 4 in E Flat Major, “Romantic,” provided exhilaration and exaltation — both in short supply in the world at large. Other plague-year discoveries have included Mendelssohn’s “Lieder ohne Worte,” Schubert’s exquisite Piano Sonata No. 18 in G Major, D. 894, and, as I wanted to hear music from the time of the Black Death, the plangent Messe de Nostre Dame of Guillaume de Machaut.
Step Five: Practice a musical instrument. Since I took up playing the double bass at the age of 18, I have learned two important life-lessons. First, ensemble playing is very good for the mind and the soul, though not necessarily for the liver. Second, being mediocre is fine — you really don’t need to strive for perfection in everything you do (just in one thing). The jazz band of which I have been the mediocre member since we played at Oxford back in the 1980s, A Night in Tunisia, has a tradition of performing together twice a year. The plague put a stop to that this year and our experiments with online collaboration risibly failed. (You cannot jam on Zoom.) The solution was to try to practice in new ways — not easy to sustain through the long days of internal exile, but the payoff will come when the band strikes up again next year. I may rise above mediocrity.
Step Six: Watch “Doctor Who” with your children or grandchildren. I more or less gave up watching television at around the same time I took up bass-playing. There is one exception to this rule: “Doctor Who,” without a doubt the greatest television series of them all, which predates me by a year, having begun in 1963. The revival of “The Doctor” in 2005 was the single best thing the BBC has ever done. With my son Thomas, who turns nine this week, I’ve been catching up with 15 years of the series’ exceptional science fiction — which magically combines time travel, terrifying aliens and British irony — though we still cannot decide who was the best Doctor: David Tennant or Matt Smith? Or was it actually Tom Baker?
Step Seven: Step. Do not fail to go for a walk every day, regardless of the weather. I write these words after an hour in a fully-fledged blizzard. A walk is infinitely preferable to any gym. If no one will come with you, take Proust.
Step Eight: Improve your curry making. If you haven’t been cooking this year, shame on you. I recommend applying some turmeric, cumin, red chile and coriander seeds to some of that leftover turkey.
Step Nine: Dress like an Oxford don, every weekday. Back in the spring, the beard, T-shirt and sweatpants combo was not conducive to the production of great thoughts. And yet I found it hard to take seriously the people who donned suits and ties to broadcast from their bedrooms. After months of slovenliness, I hit on the solution. I purchased a Fair Isle sleeveless sweater and dug out some maroon corduroy trousers, once part of the costume of an Oxford professor. This restored self-discipline and enabled me to finish writing a book. (I couldn’t quite bring myself to go full Tolkien by buying a pipe, but I was sorely tempted.)
Step Ten: Disable notifications on Twitter. It occurred to me with a flash of insight that I don’t in the least care what the people I don’t follow on Twitter think, otherwise I would follow them. “Would you let all these other people into your garden?” I asked my wife one day. “If not, why would you let them inside your head?” Goodbye, snark!
Step Eleven: Do not watch sports. Just don’t. To me, soccer and rugby without fans is about exciting a spectacle as two dozen men playing blind man’s buff. When we watch sport on television, we are imagining ourselves in the crowd, which is the real source of the adrenaline surge — not the flight of the ball from foot to goal. Without the ebb and flow of singing, cheering and booing, there’s just no thrill.
Step Twelve: OK, drink booze, too. But only after 6 p.m., otherwise you’ll end up like Agnes in Douglas Stuart’s “Shuggie Bain” (without a doubt the best book published this year). Tea’s all very well during the day, but I couldn’t have retained my sanity after dark without the following liquids: Bent Nail IPA, a delicious beer brewed by Red Lodge Ales; the Veneto winemaker Inama’s smooth yet peppery Carmenere Più; and Laphroaig, my favorite peat-infused Scotch, which they began making the same year Scott published “Guy Mannering.”
As I pointed out eight months ago, “all the great pandemics have come in waves.” This one has managed three in the United States and two in Europe, and we’re still at least four or five months away from herd immunity. So, while you await your vaccination this holiday season, don’t go nuts. My twelfth step would have appalled the founders of Alcoholics Anonymous. But just as there are no atheists in a foxhole, there are precious few teetotalers in a pandemic.
Happy New Year!
No, money isn’t free. Photographer: Matthew Lloyd/Getty Images
After the disease, the debt. After the plague, the pile of IOUs. It is a veritable mountain — a reminder that the original public debt in medieval Venice went by the name monte. According to the International Monetary Fund’s October Fiscal Monitor, the Covid-19 pandemic and associated lockdowns have prompted a plethora of fiscal measures amounting to $11.7 trillion, around 12% of global GDP — and that number has probably risen since it was calculated on Sept. 11. “In 2020,” according to the Fund, “government deficits are set to surge by an average of 9 percent of GDP, and global public debt is projected to approach 100 percent of GDP, a record high.”
In advanced economies, public debt relative to output has increased as much since the late 1970s as it did between 1914 and 1945. Together, the global financial crisis and the pandemic have had roughly the same doubling effect as World War II. While Covid-19 will not kill as many people globally as history’s biggest war, the ultimate U.S. death toll is very likely to be higher. The pandemic’s financial cost also looks similar to that of a world war.
The IMF’s global averages conceal huge variations between countries. The deficits of seven developed countries — Canada, the U.K., the U.S., Brazil, Italy, Spain and Japan — have each risen by more than 10% of GDP. In all these countries, gross public debt will exceed 100% of GDP this year, with Japan’s reaching 266%. The IMF’s projection for U.S. gross debt is 131%.
In many advanced countries, public debt will exceed 100% of GDP this year
Source: International Monetary Fund
Because the Federal Reserve has purchased most of the new Treasury bonds created this year, the increase in the federal debt held by the public is not so daunting. 1 The Congressional Budget Office projects that it will be just under 100% this year (98.2%), but that is still nearly three times what it was at the beginning of this century. Next year it is forecast to surpass the level in 1945.
But the story doesn’t end there, because the federal government is expected to keep borrowing as far as the eye can see, with the deficit rising inexorably from 4% in the late 2020s to over 12% by mid-century. The CBO’s baseline projection is for the federal debt in public hands to reach 195% of GDP by 2050, nearly twice as high as at the end of World War II.
U.S. debt in public hands could near 200% by 2050, nearly twice as high as at the end of World War II
Source: U.S. Congressional Budget Office
Historically, large public debts have had a terrible reputation. In his “Rural Rides,” which he began in 1822 and published in 1830, the English radical William Cobbett inveighed against the vast national debt incurred during the Napoleonic Wars. The political purpose of the debt, Cobbett argued, had been “to crush liberty in France and to keep down the reformers in England” but its principal effect after the war was redistributive. “A national debt, and all the taxation and gambling belonging to it, have a natural tendency to draw wealth into great masses … for the gain of a few.”
“The Debt, the blessed Debt,” he continued, was “hanging round the neck of this nation like a millstone.” It was a “vortex,” sucking money from the poor to a new plutocracy.
Cobbett was not wrong. According to the best estimates from the Bank of England, Britain’s wars between 1776 and 1815 drove up the debt/GDP ratio from 86% to more than 172% by 1822. In those days, government bonds were almost entirely owned by a tiny wealthy elite, while taxation was largely indirect, on imports and consumption, and therefore highly regressive. Moreover, real (inflation-adjusted) long-term interest rates were strongly positive, averaging 5.27% in the 1820s.
The “Blessed Debt”
In the 19th century, Britain’s war debts and high real rates enriched a new plutocracy
Source: Bank of England
The good bad news is that today’s public debts have a very different character. Ownership is more evenly distributed, as most bonds are held institutionally by insurance and pension funds and other financial institutions. Taxation everywhere is far more progressive than it was in the early 19th century, a time when income taxes were regarded as wartime expedients. And, as we have seen, a significant portion of today’s public debts are held by central banks, meaning that one part of the government owes money to another.
In an important new paper, economists Jason Furman and Lawrence Summers argue that public borrowing today offers something very like that rarity in economics: a free lunch. The key is the historically low level of nominal and real interest rates. On the one hand, low rates mean that “monetary policy cannot be relied on to stabilize the economy.” On the other hand, low rates also mean that “fiscal expansions themselves can improve fiscal sustainability by raising GDP more than they raise debt and interest payments.”
Today’s interest rates mean that debt/GDP ratios are a bad way to measure debt burdens. After all, the accumulated public debt is a stock, whereas GDP is a flow. If debt is measured relative to estimates of the present value of GDP or prospective tax receipts, then “current debt levels are at low rather than high levels.”
Furman and Summers are not saying — as the proponents of modern monetary theory do — that debt doesn’t matter and the sky is the limit. They are simply arguing that “traditional ideas of a cyclically balanced budget on the grounds that [high debt] would likely lead to inadequate growth and excessive financial instability” are anachronistic. Fiscal policy can support growth with ongoing deficits so long as real debt service (i.e., interest payments adjusted for inflation) does not rise above 2% of GDP over the coming decade.
If governments borrow to finance investment, then, so much the better because “many public investments pay for themselves, or come close to paying for themselves, and the risk of not undertaking these investments is larger than the risk of doing too little deficit reduction.”
“Currently,” Furman and Summers conclude, “the primary worry for policy in the United States and several other countries is doing too little to expand the debt, not doing too much.” Democrats hoping for dual victories in next month’s Senate run-off elections in Georgia will read these words with tears of joy in their eyes. If they can only replace Sen. Mitch McConnell with Vice President-elect Kamala Harris as master/mistress of the Senate, they can fulfill their campaign pledges of spending up to $4 trillion, with nothing to fear from the bond vigilantes that terrorized former President Bill Clinton’s administration in its early days.
Furman and Summers are by no means the first to argue that debt-to-GDP is the wrong way to measure fiscal sustainability. In 2001’s “The Cash Nexus,” for example, I made a similar point: What really matters is keeping the real growth rate above the real debt service rate. Like Furman and Summers, I cited the pioneering work of Laurence Kotlikoff, who focuses on the present value of projected spending and revenues, as well as on the distributional effects of fiscal policy between generations.
And credit where credit is due. In the debates on interest rates and inflation that followed the global financial crisis, Summers was the winner. His 2014 lecture on “secular stagnation” — which argued that for a variety of structural reasons (e.g. aging populations and inequality) interest rates would remain stuck close to zero for the foreseeable future — proved prescient. Those of us who worried (as I did briefly) that Fed purchases of bonds (quantitative easing) might be inflationary were wrong. So were the Fed economists who wanted to normalize monetary policy by raising rates preemptively. (Remember how well that went two years ago?)
The problem is that for there to be a free lunch, financed by borrowing that pays for itself, secular stagnation has to continue: In other words, interest rates have to stay at their present low levels, which isn’t what the CBO expects. In its most recent long-run forecasts, nominal and real rates rise over the course of the 2020s. That means that net interest payments would rise above 2% of GDP from 2030 onward and hit 8.1% in 2050.
No More Free Lunch
Rising rates would drive up the government’s net interest payments
Source: U.S. Congressional Budget Office
True, as Furman and Summers point out, the CBO has been consistently wrong about the future path of interest rates, overshooting repeatedly since 1990. True, any forecasts beyond a ten-year time horizon are subject to great uncertainty.
Even so, my Hoover Institution colleague John Cochrane has history on his side when he expresses concern. As he argued in National Review last week, the situation is very different today from the situation in 1945, the last time the U.S. had a debt mountain this big. “By 1945, the war and its spending were over. For the next 20 years, the U.S. government posted steady small primary surpluses, not additional huge deficits. Until the 1970s, the country experienced unprecedented supply-side growth in a far less regulated economy with small and solvent social programs. … [Today] we are starting a spending binge with the same debt relative to GDP with which we ended WWII.”
In any case, as noted above, around three-quarters of this year’s deficits have been financed by Fed money creation in the form of excess bank reserves. “When the economy recovers,” Cochrane argues, “people may want to invest in better opportunities than trillions of dollars of bank deposits. The Fed will have to sell its holdings of Treasury securities to mop up the money. We will see if the once-insatiable desire for super low-rate Treasury securities is really still there. If not, the Fed will have to raise rates much faster than their current promises.”
This goes to the heart of the matter. A debt mountain doesn't matter only so long as interest rates remain low. That implies that there could very well be a key role for monetary policy if market participants anticipate higher inflation and start selling their holdings of Treasury bonds. The Fed has a new framework now, which states that inflation above its 2% target is just fine, after 12 years mostly below that level, as long as it averages out around 2%. But that clearly means a prolonged period of negative returns on government bonds, made worse for foreign investors if the dollar continues to slide against other major currencies.
If market rates start to rise, the Fed will be put to the test. Will it behave as it did in World War II, intervening to keep rates low in order to avoid a rapid rise in government debt-servicing costs? There is a widespread belief that it will and that Japanese-style “yield curve control” lies ahead. But in 1945 that was a wartime expedient and it was ended with the Fed-Treasury Accord of 1951, which restored the separation of monetary policy from debt management.
Another way of thinking about this is to contrast the likely trajectory of the post-pandemic economy with the sluggish path of recovery after 2008-9. A financial crisis originates in overstretched balance sheets — in the case of the 2008-9, those of banks, shadow banks and subprime mortgage borrowers. It took the better part of a decade for balance sheets to be repaired, which was one reason for the slow pace of recovery in the Obama years — the background against which secular stagnation seemed the right diagnosis.
The post-pandemic economy will be very different — and this is the bad good news. This year, thanks to Covid-19, the U.S. household savings rate has had its most volatile year since modern data began in 1948. In the second quarter, it jumped to an unprecedented 26%, compared to 7.3% a year before. As lockdowns and other restrictions were relaxed, the rate declined to 16% in the third quarter.
To expect such high rates to persist into 2021, as the OECD does in its latest Economic Outlook, is surely wrong. This was forced saving of income boosted by government handouts, prompted by a supply-led shock (lockdowns), not balance-sheet repair as after 2008-9. According to our estimates at Greenmantle, U.S. households are now sitting on roughly $1 trillion of excess savings as a result. Many are itching to spend a large chunk of that money as soon as they can.
The best analogy for the Covid-induced economic slump is not a normal recession but a war. With vaccine distribution in sight, society is now preparing to demobilize. As World War II wound down, many esteemed economists — notably Alvin Hansen, who coined the term “secular stagnation” — wrongly predicted an enduring economic crisis. Instead, the gradual removal of wartime restrictions led to a boom in consumption. Something similar seems in prospect next year.
The key question is how inflationary that post-pandemic boom will be. Most economists seem to agree with Furman and Summers that secular stagnation is here to stay. Charles Goodhart of the London School of Economics is one of the few to predict a “surge of inflation” as soon as next year. If he is right, the promised debt-funded free lunch could turn out to be a very expensive dinner.
While I doubt Goodhart’s prediction that inflation might rise to 5% next year, inflation can come at you fast, as my Bloomberg colleague John Authers pointed out last week. The U.S. housing market has roared back. Home equity withdrawals have soared. Bank deposits are way up and household debt-service ratios are at all-time lows. We are heading for a roaring 2021, if not the full Roaring Twenties. With a weak dollar and rising commodity prices, inflation might just give the Fed a fright.
I am not a macroeconomist; I am a mere economic historian. To me, past experience is more compelling than any model. The lesson of history is indeed that there is no correlation between debt-to-GDP ratios and long-term interest rates, just as there is no simple relationship between the size of central bank balance sheets and inflation.
But history also teaches us that debt and power are connected: A great power or empire that accumulates too high a mountain of debt and fails to keep growth ahead of debt service is destined to decline. The Bourbons, the Ottomans and the British all learned this hard lesson. So the post-pandemic debt dynamics matter not just for markets but for geopolitics.
In a new book published in online installments, “The Changing World Order,” Bridgewater Associates LP founder Ray Dalio argues that the U.S. is in the wrong stage of classic debt cycle. “When the government runs out of money (by running a big deficit, having large debts, and not having access to adequate credit) it has limited options,” he writes in chapter 9:
It can either 1) raise taxes and cut spending a lot or 2) print a lot of money, which depreciates its value. Those governments that have the option to print money always do so because that is the much less painful path, but it leads investors to run out of the money and debt that is being printed. Those governments that can’t print money have to raise taxes and cut spending, which drives those with money to run out of the country, state, or other jurisdiction because paying more taxes and losing services is intolerable. If these entities that can’t print money have large wealth gaps among their constituents, these moves typically lead to some form of civil war/revolution. This late-cycle debt dynamic is now playing out in the United States.
Scary stuff. And, to judge by an essay written by Guo Shuqing, chair of the China Banking & Insurance Regulator Commission and party secretary of the Chinese central bank, Dalio has influential readers in China, the inexorable rise of which is the other big theme of his book.
Still, I am old enough to remember Paul Kennedy’s argument in “The Rise and Fall of Great Powers” that the total U.S. federal debt in 1985 (then a mere 35% of GDP) was a sign of impending American overstretch reminiscent of “France in the 1780s, where the fiscal crisis contributed to the domestic political crisis.” What followed instead was the collapse of the Soviet empire and American triumph in the Cold War, not to mention Japan’s lost decades.
Most commentators are ending the year bullish on China — the only major economy that grew this year, and forecast by the OECD to grow by 8% next year. China’s gross public debt will be just 62% of GDP this year, less than half the U.S. figure.
But it is private debt that worries Chinese officials such as Guo and Vice Premier Liu He, not public debt. Since President Xi Jinping came to power in November 2012, according to the Bank for International Settlements, credit to households has doubled as a share of GDP to 59%, while credit to non-financial corporations has jumped by 38 percentage points to 162%.
China’s “Gray Rhino” Risk
The government is more worried about private debt as a share of GDP than public debt
Source: Bank for International Settlements
Guo’s fear is that excess leverage in the property sector — which accounts for about 39% of total outstanding bank lending — is the “biggest gray rhino risk” facing China’s financial system. The enduring impact of the pandemic has created a growing problem of non-performing loans, driving smaller lenders to insolvency. Last month saw a series of defaults by state-owned companies in China. And last week S&P Global Ratings warned that local government financing vehicles could be the next casualties as the authorities clean house.
After the disease, the debt. But it’s important to look not just at public debt but also at private debt when trying to see which great power has the steeper mountain to climb.
(Adds footnote in fourth paragraph to clarify what is included in federal debt held by the public. )
The federal debt held by the public excludes bonds held by federal trust funds such as Medicare and Social Security, but includes bonds bought by the Federal Reserve.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Virtual reality. Photographer: Ozan Kose/AFP/Getty Images
In “Shuggie Bain,” Douglas Stuart’s award-winning and harrowing depiction of alcoholism, sectarianism and deprivation in post-industrial Scotland, money is always scarce and often dirty. Deserted by her second husband and unable to hold down a job, Shuggie’s mother, Agnes, relies on her twice-a-week child benefit to feed her children — or her booze habit. As the latter nearly always wins, she and Shuggie are regularly reduced to desperate expedients to fend off starvation: Extracting coins from electricity and television meters, pawning their few valuable possessions, and ultimately selling their bodies for brutal sexual favors.
Stuart vividly captures the miseries of a Glasgow of greasy coins and filthy banknotes. After one of many wretched copulations in the back of a taxi, one of Agnes’s lovers inadvertently showers her with coins from his pocket. Shuggie’s father briefly reappears at one point, handing his son two 20-pence pieces from his taxi’s change dispenser by way of a gift, grudgingly adding four 50-pence pieces when the boy looks nonplused. (“Don’t ask for mair!”) The “rag-and-bone man,” who goes from house to house buying old clothes and junk, pays “with a roll of grubby pound notes” bound by an old Band-Aid. The image is especially startling because banknotes have so rarely featured in the narrative. The only credit in this world is from rent-to-own catalogues, the Provident doorstep lender, and a few hard-pressed shopkeepers.
I grew up in middle-class, mostly sober Glasgow, but I still remember the tyranny of those damned coins: the nightmare of having too few for a bus fare or the wrong sort for a phone box. To my children, all this is as much a part of ancient lore as pirate chests of doubloons once were to me. Coins are fast fading from their lives, soon to be followed by banknotes. In some parts of the world — not only China but also Sweden — nearly all payments are now electronic. In the U.S., debit card transactions have exceeded cash transactions since 2017. Even in Latin America and parts of Africa, cash is yielding to cards and a growing number of people manage their money through their phones.
We are living through a monetary revolution so multifaceted that few of us comprehend its full extent. The technological transformation of the internet is driving this revolution. The pandemic of 2020 has accelerated it. To illustrate the extent of our confusion, consider the divergent performance of three forms of money this year: the U.S. dollar, gold and Bitcoin.
The dollar is the world’s favorite money, not only dominant in central bank reserves but in international transactions. It is a fiat currency, its supply determined by the Federal Reserve and U.S. banks. We can compute its value relative to the goods consumers buy, according to which measure it has scarcely depreciated this year (inflation is running at 1.2%), or relative to other fiat currencies. On the latter basis, according to Bloomberg’s dollar spot index, it is down 4% since Jan. 1. Gold, by contrast, is up 15% in dollar terms. But the dollar price of a bitcoin has risen 139% year-to-date.
This year’s Bitcoin rally has caught many smart people by surprise. Last week’s high was just below the peak of the last rally ($19,892 according to the exchange Coinbase) in December 2017. When Bitcoin subsequently sold off, the New York University economist Nouriel Roubini didn’t hold back. Bitcoin, he told CNBC in February 2018, had been the “biggest bubble in human history.” Its price would now “crash to zero.” Eight months later, Roubini returned to the fray in congressional testimony, denouncing Bitcoin as the “mother of all scams.” In tweets, he referred to it as “Shitcoin.”
Fast forward to November 2020, and Roubini has been forced to change his tune. Bitcoin, he conceded in an interview with Yahoo Finance, was “maybe a partial store of value, because … it cannot be so easily debased because there is at least an algorithm that decides how much the supply of bitcoin raises over time.” If I were as fond of hyperbole as he is, I would call this the biggest conversion since St. Paul.
Roubini is not the only one who has been forced to reassess Bitcoin this year. Among the big-name investors who have turned bullish are Paul Tudor Jones, Stan Druckenmiller and Bill Miller. Even Ray Dalio admitted the other day that he “might be missing something” about Bitcoin.
Financial journalists, too, are capitulating: On Tuesday, the Financial Times’s Izabella Kaminska, a long-time cryptocurrency skeptic, conceded that Bitcoin had a valid use-case as a hedge against a dystopian future “in which the world slips towards authoritarianism and civil liberties cannot be taken for granted.” She is on to something there, as we shall see.
So what is going on?
First, we should not be surprised that a pandemic has quickened the pace of monetary evolution. In the wake of the Black Death, as the historian Mark Bailey noted in his masterful 2019 Oxford Ford lectures, there was an increased monetization of the English economy. Prior to the ravages of bubonic plague, the feudal system had bound peasants to the land and required them to pay rent in kind, handing over a share of all produce to their lord. With chronic labor shortages came a shift toward fixed, yearly tenant rents paid in cash. In Italy, too, the economy after the 1340s became more monetized: It was no accident that the most powerful Italian family of the 15th and 16th centuries were the Medici, who made their fortune as Florentine moneychangers.
In a similar way, Covid-19 has been good for Bitcoin and for cryptocurrency generally. First, the pandemic accelerated our advance into a more digital word: What might have taken 10 years has been achieved in 10 months. People who had never before risked an online transaction were forced to try, for the simple reason that banks were closed. Second, and as a result, the pandemic significantly increased our exposure to financial surveillance as well as financial fraud. Both these trends have been good for Bitcoin.
I never subscribed to the thesis that Bitcoin would go to zero after it plunged in price in late 2017 and 2018. In the updated 2018 edition of my book, “The Ascent of Money” — the first edition of which appeared more or less simultaneously with the foundational Bitcoin paper by the pseudonymous Satoshi Nakamoto — I argued that Bitcoin had established itself as “a new store of value and investment asset — a type of ‘digital gold’ that provides investors with guaranteed scarcity and high mobility, as well as low correlation with other asset classes.”
“Satoshi’s goal,” I argued, “was not to create a new money but rather to create the ultimate safe asset, capable of protecting wealth from confiscation in jurisdictions with poor investor protection as well as from the near-universal scourge of currency depreciation … Bitcoin is portable, liquid, anonymous and scarce … A simple thought experiment would imply that $6,000 is therefore a cheap price for this new store of value.”
Two years ago, I estimated that around 17 million bitcoins had been mined. The number of millionaires in the world, according to Credit Suisse, was then 36 million, with total wealth of $128.7 trillion. “If millionaires collectively decided to hold just 1% of their wealth as Bitcoin,” I argued, “the price would be above $75,000 — higher, if adjustment is made for all the bitcoins that have been lost or hoarded. Even if the millionaires held just 0.2% of their assets as Bitcoin, the price would be around $15,000.” We passed $15,000 on Nov. 8.
What is happening is that Bitcoin is gradually being adopted not so much as means of payment but as a store of value. Not only high-net-worth individuals but also tech companies are investing. In July, Michael Saylor, the billionaire founder of MicroStrategy, directed his company to hold part of its cash reserves in alternative assets. By September, MicroStrategy’s corporate treasury had purchased bitcoins worth $425 million. Square, the San Francisco-based payments company, bought bitcoins worth $50 million last month. PayPal just announced that American users can buy, hold and sell bitcoins in their PayPal wallets.
This process of adoption has much further to run. In the words of Wences Casares, the Argentine-born tech investor who is one of Bitcoin’s most ardent advocates, “After 10 years of working well without interruption, with close to 100 million holders, adding more than 1 million new holders per month and moving more than $1 billion per day worldwide,” it has a 50% chance of hitting a price of $1 million per bitcoin in five to seven years’ time.
Whoever he is or was, Satoshi summed up how Bitcoin works: It is “a purely peer-to-peer version of electronic cash” that allows “online payments to be sent directly from one party to another without going through a financial institution.” In essence, Bitcoin is a public ledger shared by a network of computers. To pay with bitcoins, you send a signed message transferring ownership to a receiver’s public key. Transactions are grouped together and added to the ledger in blocks, and every node in the network has an entire copy of this blockchain at all times. A node can add a block to the chain (and receive a bitcoin reward) only by solving a cryptographic puzzle chosen by the Bitcoin protocol, which consumes processing power.
Nodes that have solved the cryptographic puzzle — “miners,” in Bitspeak — are rewarded not only with transaction fees (5 bitcoins per day, on average), but also with additional bitcoins — 900 new bitcoins per day. This reward will get cut in half every four years until the total number of bitcoins reaches 21 million, after which no new bitcoins will be created.
There are three obvious defects to Bitcoin. As a means of payment, it is slow. The Bitcoin blockchain can process only around 3,000 transactions every 10 minutes. Transaction costs are not trivial: Coinbase will charge a 1.49% commission if you want to buy one bitcoin.
There is also a significant negative externality: Bitcoin’s “proof-of-work” consensus algorithm requires specialized computer chips that consume a great deal of energy — 60 terawatt-hours of electricity a year, just under half the annual electricity consumption of Argentina. Aside from the environmental costs, one unforeseen consequence has been the increasing concentration of Bitcoin mining in a relatively few hands — many of them Chinese — wherever there is cheap energy.
But these disadvantages are outweighed by two unique features. First, as we have seen, Bitcoin offers built-in scarcity in a virtual world characterized by boundless abundance. Second, Bitcoin is sovereign. In the words of Casares, “No one can change a transaction in the Bitcoin blockchain and no one can keep the Bitcoin blockchain from accepting new transactions.” Bitcoin users can pay without going through intermediaries such as banks. They can transact without needing governments to enforce settlement.
Source: Bank for International Settlements
The advantages of scarcity are obvious at a time when the supply of fiat money is exploding. Take M2, a measure of money that includes cash, bank accounts (including savings deposits) and money market mutual funds. Since May, U.S. M2 has been growing at a year-on-year rate above 20%, compared with an average of 5.9% since 1982. The future weakness of the dollar has been a favorite 2020 talking point for Wall Street economists such as Steve Roach. You can see why. There really are a lot of dollars around, even if their velocity of circulation has slumped because of the pandemic.
The advantages of sovereignty are less obvious but may be more important. Bitcoin is not the only form of digital money that has flourished in 2020. China has been advancing rapidly in two different ways.
Nowhere in the world are mobile payments happening on as large a scale as in China, thanks to the spectacular growth of Alipay and WeChat Pay. Those electronic payment platforms now handle close to $40 trillion of transactions a year, more than double the volume of Visa and Mastercard combined, according to calculations by Ribbit Capital. The Chinese platforms are expanding rapidly abroad, partly through investments in local fintech companies by Ant Group and Tencent.
At the same time, the People’s Bank of China has accelerated the rollout of its digital currency. The potential for a digital yuan to be adopted for remittance payments or cross-border trade settlements is substantial, especially if — as seems likely — countries participating in the One Belt One Road program are encouraged to use it. Even governments that are resisting Chinese financial penetration, such as India, are essentially building their own versions of China’s electronic payments systems.
Some economists, such as my friend Ken Rogoff, welcome the demise of cash because it will make the management of monetary policy easier and organized crime harder. But it will be a fundamentally different world when all our payments are recorded, centrally stored, and scrutinized by artificial intelligence — regardless of whether it is Amazon’s Jeff Bezos or China’s Xi Jinping who can access our data.
In its early years, Bitcoin suffered reputational damage because it was adopted by criminals and used for illicit transactions. Such nefarious activity has not gone away, as a recent Justice Department report makes clear. Increasingly, however, Bitcoin has an appeal to respectable individuals and institutions who would like at least some part of their economic lives to be sheltered from the gaze of Big Brother.
It is not (as the term “cryptocurrency” misleadingly implies) that Bitcoin is beyond the reach of the law or the taxman. When the Federal Bureau of Investigation busted the online illegal goods market Silk Road in 2013, it showed how readily government agencies can trace the counterparties in suspect Bitcoin transactions. This is precisely because the blockchain is an indelible record of all Bitcoin transactions, complete with senders’ and receivers’ bitcoin addresses.
Moreover, the Internal Revenue Service is perfectly prepared to demand information on bitcoin accounts from exchanges, as Coinbase discovered in 2016. A rumor of new U.S. Treasury regulations requiring greater disclosures by exchanges caused a sharp crypto selloff over Thanksgiving. The point is simply that the financial data of law-abiding individuals is better protected by Bitcoin than by Alipay. As the Stanford political theorist Stephen Krasner pointed out more than 20 years ago, sovereignty is a relative concept.
Rather than seeking to create a Chinese-style digital dollar, Joe Biden’s nascent administration should recognize the benefits of integrating Bitcoin into the U.S. financial system — which, after all, was originally designed to be less centralized and more respectful of individual privacy than the systems of less-free societies.
Life in the East End of Glasgow in the 1980s was nasty, brutish and short of money. But all those transactions in grubby pounds and pence — genuine shitcoins — were, if nothing else, private. If Agnes Bain bought Special Brew instead of oven chips, it was a matter for her, the shopkeeper, and her long-suffering kids; the state was none the wiser. That was scant consolation to poor Shuggie. But, as we have learned again this year, a free society comes at a price that is not always payable in cash.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
T-shirt diplomacy. Photographer: Tim Rue/Bloomberg
A little French word that used to play a big role in global politics is poised for a comeback: detente. The word was first used as a diplomatic term in the early 1900s, for example when the French ambassador in Berlin attempted — in vain as it proved — to improve his country’s strained relationship with the German Reich, or when British diplomats attempted the same thing in 1912. But detente became familiar to Americans in the late 1960s and 1970s, when it was used to describe a thawing in the Cold War between the U.S. and the Soviet Union.
I have argued since last year that the U.S. and the People’s Republic of China are already embroiled in Cold War II. President Donald Trump did not start that war. Rather, his election represented a belated American reaction to a Chinese challenge — economic, strategic and ideological — that had been growing since Xi Jinping became general secretary of the Chinese Communist Party in 2012.
Now, Joe Biden’s victory in the U.S. presidential election (the various legal challenges to which will achieve nothing other than to salve Trump’s huge but hurt ego) creates an opportunity to go from confrontation to detente much sooner than was possible in Cold War I.
The Chinese government waited until Friday before offering Biden congratulations on his victory. Put that down to caution. As during the election campaign, Xi and his advisers have been striving not to provoke Trump, for whom they have come to feel a mixture of contempt and fear. But a few unofficial voices have ventured to express what Xi doubtless thinks. Wang Huiyao, the president of the Beijing-based Center for China and Globalization, said last week that he hoped a Biden administration would “provide China and the U.S. … with more dialogue and cooperation channels concerning energy saving and emission reduction, economic and trade cooperation, epidemic prevention and control.” Speaking at the same event, the former foreign vice-minister He Yafei talked in similar terms.
Such language might be expected to a ring a bell with the Democratic Party’s throng of foreign policy experts, who have spent the past four years — from the Brookings Institution to the Aspen Strategy Group to Harvard’s Kennedy School — bemoaning Trump’s assault on their beloved liberal international order.
It seems pretty clear that Biden himself would gladly return to the days of the Barack Obama administration, when his meetings with Xi, Premier Li Keqiang and other Chinese leaders were all about the “win-win partnership” that I used to call “Chimerica.” Eight years ago, he was pictured beside Xi holding up a T-shirt with the slogan “Fostering Goodwill Between America & China.”
Asked about superpower competition at an event in Iowa in 2019, Biden replied: “China is going to eat our lunch? Come on, man. They can’t even figure out how to deal with the fact that they have this great division between the China Sea and the mountains in the East, I mean the West. They can’t figure out how they’re going to deal with the corruption in the system. I mean, you know, they’re not bad folks, folks. But guess what? They’re not competition for us.”
Luckily for Biden, he had few opportunities to say more in this nonsensical vein, as this year’s election campaign — including both presidential debates — scarcely touched on foreign policy, depriving Trump of the opportunity to point out how much more in touch he is with public sentiment, which has grown increasingly hostile to China since Biden left office four years ago.
Detente should not be confused with amity. Whatever comes of the diplomacy of the new presidency, it is unlikely to be a new era of Sino-American friendship. Detente means reducing the tensions inherent in a cold war and reducing the risk of its becoming a hot one.
“The United States and the Soviet Union are ideological rivals,” wrote Henry Kissinger, who was in many ways the architect of detente in the 1970s. “Detente cannot change that. The nuclear age compels us to coexist. Rhetorical crusades cannot change that, either.”
For Kissinger, detente was a middle way between the appeasement that he believed had led to World War II, “when the democracies failed to understand the designs of a totalitarian aggressor,” and the aggression that had led to World War I, “when Europe, despite the existence of a military balance, drifted into a war no one wanted and a catastrophe that no one could have imagined.”
Detente, Kissinger wrote in his memoir, “The White House Years” — published in 1979, 10 years before the effective end of the first Cold War — meant embracing “both deterrence and coexistence, both containment and an effort to relax tensions.”
Today, it is the U.S. and China who find themselves — as Kissinger observed in an interview with me in Beijing last year — “in the foothills of a Cold War.” As I said, this Cold War was not started by Trump. It grew out of China’s ambition, under Xi’s leadership, to achieve something like parity with the U.S. not only in economics but also in great-power politics. The only surprising thing about Cold War II is that it took Americans so long to realize that they were in it. Even more surprising, it took a maverick real estate developer turned reality TV star turned populist demagogue to waken them up to the magnitude of the Chinese challenge.
When Trump first threatened to impose tariffs on Chinese goods in the 2016 election campaign, the foreign policy establishment scoffed. They no longer scoff. Not only has American public sentiment toward China become markedly more hawkish since 2017. China is one of few subjects these days about which there is also a genuine bipartisan consensus within the country’s political elite.
Unlike the president-elect himself, the members of Biden’s incoming national security team have spent the past four years toughening up their stance on China. In Foreign Affairs this summer, Michele Flournoy, the favorite to become secretary of defense in the new administration, argued that “if the U.S. military had the capability to credibly threaten to sink all of China’s military vessels, submarines and merchant ships in the South China Sea within 72 hours, Chinese leaders might think twice before, say, launching a blockade or invasion of Taiwan.”
Flournoy wants the Pentagon to invest more in cyberwarfare, hypersonic missiles, robotics and drones — arguments indistinguishable from those put forward by Christian Brose, a top adviser to the late Senator John McCain, in his book “The Kill Chain.”
Biden’s key Asia advisors, Ely Ratner and Kurt Campbell, have also acknowledged that the Obama administration, like its predecessors, underestimated the global ambition of China’s leaders and their resolve to resist political liberalization. Last year, Campbell and Jake Sullivan (who was Vice President Biden’s national security adviser in 2013-14), made what seemed like an explicit argument for detente in Kissinger’s sense of the term. “Despite the many divides between the two countries,” they wrote, “each will need to be prepared to live with the other as a major power.”
U.S. policy toward China should combine “elements of competition and cooperation” rather than pursuing “competition for competition’s sake,” which could lead to a “dangerous cycle of confrontation.” Campbell and Sullivan may insist that Cold War analogies are inappropriate, but what they are proposing comes straight out of Kissinger’s 1970s playbook.
Yet the lesson of detente is surely that a superpower ruled by a Communist Party does not regard peaceful coexistence as an end in itself. Rather, the Soviet Union negotiated the 1972 Strategic Arms Limitation Talks agreement with the U.S. for tactical reasons, without deviating from its long-term aims of achieving nuclear superiority and supporting pro-Soviet forces opportunistically throughout the Third World.
The crucial leverage that forced Moscow to pursue detente was the U.S. opening to China in February 1972, when Nixon and Kissinger flew to Beijing to lay the foundations of what, 30 years later, had grown into Chimerica. Yet the compulsive revolutionary Mao Zedong was never entirely at ease with his own opening to America. At one point in late 1973, when the U.S. offered China the shelter of its nuclear umbrella from a possible Soviet attack, Mao became indignant and accused Premier Zhou Enlai of having forgotten “about the principle of preventing ‘rightism.’”
For all its achievements, detente came to be a pejorative term in the U.S., too. It is often forgotten how much of Ronald Reagan’s rise as the standard-bearer of the Republican right was based on his argument that detente was a “one-way street that the Soviet Union has used to pursue its aims.”
The danger of detente 2.0 is that Biden will be Jimmy Carter 2.0. Throughout his four years in the White House, Carter was torn between the “progressive” left wing of his own party and hawkish national security advisers. He ended up being humiliated when the Soviet Union tore up detente by invading Afghanistan.
Consider how China will approach the new administration. Beijing would like nothing more than an end to both the trade war and the tech war that the Trump administration has waged. In particular, Beijing wants to get rid of the measures introduced by the U.S. Commerce Department in September, which effectively cut off Huawei and other Chinese firms from the high-end semiconductors manufactured not only by U.S. companies but also by European and Asian companies that use U.S. technology or intellectual property.
In the tech war, Team Biden seems ready to make concessions. Some of the president-elect’s advisers want to offer wider exemptions for the foreign chipmakers who supply Huawei and to drop Trump’s executive actions against the Chinese internet companies TikTok and Tencent. But in return for what? Is China about to halt its dismantling of what remains of Hong Kong’s semi-autonomy? Clearly not. Is China going to suspend its policies of incarceration and re-education of Uighurs in Xinjiang? Not a chance. Will China stop exporting its surveillance technology to any authoritarian government that wants to buy it? Dream on.
If China’s quid pro quo is nothing more than Xi’s recent commitment to be “carbon neutral” by the distant year 2060, then the Biden administration would be nuts to do detente. China is currently building coal-burning power stations with a capacity of 250 gigawatts, more than this country’s total coal-fueled power capacity. The country accounts for roughly half of all the new CO2 emissions since the Paris Agreement on climate change was signed. If Biden is determined to take the U.S. back into the Paris accord, he needs to say explicitly that it will soon be a dead letter without meaningful Chinese actions.
The microchip race is a bit like the nuclear arms race in Kissinger’s time. Beijing lags behind qualitatively, as the Soviet Union did, though it can win in terms of quantity. China cannot yet match the sophistication of the chips made by Taiwan’s TSMC.
Its goal is to buy time while catching up and achieving “technological self-reliance.” The obvious U.S. response is to try to stay ahead. Biden (who is going to need all the bipartisan issues he can find if Republicans retain control of the Senate) may well work with the GOP to pass the CHIPS Act, which aims to promote domestic semiconductor production.
Such technological races can go on for years. Similar races are underway in the fields of artificial intelligence, digital currency and even Covid vaccines. But the lesson of Cold War I is that the ultimate test of any national security policy is its first crisis. In 2021 there is a significant chance that North Korea will provide the Biden administration with its earliest foreign-policy challenge in the form of new missile or nuclear tests. But there is another scenario: a Taiwan crisis.
Biden should have no illusions about Xi. The Chinese leader’s ultimate goal is to bring to an end Taiwan’s de facto autonomy and democracy and bring it fully under Beijing’s control. This is not just about asserting the principle of “One China, One System.” There is the eminently practical argument that China would no longer need play catch-up in the chip race if it directly controlled Taiwan. Earlier this year, one nationalist blogger proposed a simple solution: “Reunification of the two sides, take TSMC!”
Meanwhile, as we have seen, there has been a bipartisan upgrade of the U.S. commitment to Taiwan, which dates back to the 1979 Taiwan Relations Act. Not long after Flournoy’s pledge to increase America’s capacity to deter Beijing from invading the island, Richard Haass of the Council on Foreign Relations argued for an end to the “ambiguity” of the U.S. commitment to defend Taiwan. “Waiting for China to make a move on Taiwan before deciding whether to intervene,” he wrote in September, “is a recipe for disaster.” But another recipe for disaster would be a showdown over Taiwan before a Biden administration has even begun beefing up deterrence.
Relations between Washington and Beijing reached an impasse this year. Strategic dialogue gave way to Twitter abuse. Detente 2.0 would be an improvement, if only at the level of superpower communication.
The rationale for detente, as Kissinger often argued in the 1970s, was the world’s growing interdependence. That argument has even more force today. The pandemic has revealed the immense extent of our interdependence and the impossibility of a world order based on — to use French again — sauve qui peut (“every man for himself”) and chacun a son gout (“to each his own”).
A novel virus in Wuhan has caused a global plague and the deaths of hundreds of thousands of Americans. Similar interdependence will be revealed if global warming has the dire consequences projected by the Intergovernmental Panel on Climate Change. Economically, too, the U.S. and China remain interdependent. Trump’s tariffs did nothing whatever to reduce the bilateral trade deficit.
Yes, the U.S. and China are in the foothills of a Cold War. But there is no good reason to go through decades of brinkmanship before entering the detente phase of this cold war. Let Taiwan in 2021 not be Cuba in 1962, with semiconductors playing the role of missiles.
Nevertheless, as in Kissinger’s time, detente cannot mean that the U.S. gives China something for nothing. If the incoming Biden administration makes that mistake, the heirs of Ronald Reagan in the Republican Party will not be slow to remind them that detente — diplomatic French for “let’s not fight” — was once a dirty word in American English.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.