The Nation's Financial Condition

[HooDat]

This chart sums up what I have been saying about our economy favoring capital over production (and rear-ending the working class in the process). The gap between the lines represent the shift in benefits of productivity to capital holders vs workers...



https://www.epi.org/blog/growing-inequa ... al-worker/

“The Federal Trade Commission took an a bold move on Thursday aimed at shifting the balance of power from companies to workers.

The agency proposed a new rule that would prohibit employers from imposing noncompete agreements on their workers, a practice it called exploitative and widespread, affecting some 30 million American workers.

"The freedom to change jobs is core to economic liberty and to a competitive, thriving economy," said FTC Chair Lina M. Khan in a statement. "Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand."

https://www.npr.org/2023/01/05/11471380 ... a-khan-ban

yep, this is a step in the right direction.

[HooDat]

This chart sums up what I have been saying about our economy favoring capital over production (and rear-ending the working class in the process). The gap between the lines represent the shift in benefits of productivity to capital holders vs workers...



https://www.epi.org/blog/growing-inequa ... al-worker/

And the only team with a plan out of this mess is TeamBernie.

We haven't heard a plan from Republicans for 20 years. Unless you want to count "borrow trillions and shotgun it through the economy, and hope the working class gets a taste" as a "plan".

And from what I'm seeing from the House and from guys like DeSantis? We're about to lose another generation to these clods.

So will the Dems turn to the libs with Nancy Departing? Or will it be more of the Clintonian economic trickle down policies?

My guess is that short of something truly radical, we are doomed for more of the same. The powerful are just to engrained into our institutions.

And while the non-compete stuff is good, let's not kid ourselves into thinking it even begins to help the people Bernie used to look out for - hourly employees and labor do not have non-competes. Executive level white collar people have non-competes - this is little more than the "Ivy League" taking care of their "working class" classmates...

[a fan]

And while the non-compete stuff is good, let's not kid ourselves into thinking it even begins to help the people Bernie used to look out for - hourly employees and labor do not have non-competes. Executive level white collar people have non-competes - this is little more than the "Ivy League" taking care of their "working class" classmates...

I'm sure you're correct as a whole....but in the brewing, distilling, and winemaking industry? Non-competes are common for 5 figure jobs. They take proprietary knowledge pretty seriously. They're usually structured to keep you from working for a direct, localized competitor.

[Seacoaster(1)]

Here we go:

https://mobile.twitter.com/joshtpm/stat ... 4617780253

[PizzaSnake]

This chart sums up what I have been saying about our economy favoring capital over production (and rear-ending the working class in the process). The gap between the lines represent the shift in benefits of productivity to capital holders vs workers...



https://www.epi.org/blog/growing-inequa ... al-worker/

And the only team with a plan out of this mess is TeamBernie.

We haven't heard a plan from Republicans for 20 years. Unless you want to count "borrow trillions and shotgun it through the economy, and hope the working class gets a taste" as a "plan".

And from what I'm seeing from the House and from guys like DeSantis? We're about to lose another generation to these clods.

So will the Dems turn to the libs with Nancy Departing? Or will it be more of the Clintonian economic trickle down policies?

Well, Hillary was a Goldwater Girl…

And you meant, “psis down my leg and tell me it’s raining”, right?

[a fan]

This chart sums up what I have been saying about our economy favoring capital over production (and rear-ending the working class in the process). The gap between the lines represent the shift in benefits of productivity to capital holders vs workers...



https://www.epi.org/blog/growing-inequa ... al-worker/

And the only team with a plan out of this mess is TeamBernie.

We haven't heard a plan from Republicans for 20 years. Unless you want to count "borrow trillions and shotgun it through the economy, and hope the working class gets a taste" as a "plan".

And from what I'm seeing from the House and from guys like DeSantis? We're about to lose another generation to these clods.

So will the Dems turn to the libs with Nancy Departing? Or will it be more of the Clintonian economic trickle down policies?

Well, Hillary was a Goldwater Girl…

And you meant, “psis down my leg and tell me it’s raining”, right?

That's the one, yup.

[Farfromgeneva]

This chart sums up what I have been saying about our economy favoring capital over production (and rear-ending the working class in the process). The gap between the lines represent the shift in benefits of productivity to capital holders vs workers...



https://www.epi.org/blog/growing-inequa ... al-worker/

And the only team with a plan out of this mess is TeamBernie.

We haven't heard a plan from Republicans for 20 years. Unless you want to count "borrow trillions and shotgun it through the economy, and hope the working class gets a taste" as a "plan".

And from what I'm seeing from the House and from guys like DeSantis? We're about to lose another generation to these clods.

So will the Dems turn to the libs with Nancy Departing? Or will it be more of the Clintonian economic trickle down policies?

My guess is that short of something truly radical, we are doomed for more of the same. The powerful are just to engrained into our institutions.

And while the non-compete stuff is good, let's not kid ourselves into thinking it even begins to help the people Bernie used to look out for - hourly employees and labor do not have non-competes. Executive level white collar people have non-competes - this is little more than the "Ivy League" taking care of their "working class" classmates...

Non competes have filtered down to line level college educated employees at a tom of jobs. If you make more than $75-$80k odds are good your seeing an NDA these days.

Lot of the divergence between wealth and income goes back to the tax code change in 2001 which set cap gains at 20%.

[PizzaSnake]

Back to work! Nothing to see here!

“On the morning of 27 December 2022 at the Amazon DEN4 warehouse in Colorado Springs, Colorado, 61-year-old Rick Jacobs died on the job after experiencing a cardiac event, right before a shift change. What happened next has angered his former colleagues.

Witnesses say a makeshift barrier around the deceased worker using large cardboard bins was used to block off the area on the outbound shipping dock where the incident occurred, and workers criticized the response and lack of transparency about the incident. Amazon denied boxes were used to cordon off the area, but said managers stood around to make sure no one came near for privacy and security.”

[Farfromgeneva]

Couple of interesting consumer pieces in a FinTech rag today. After a CFOB enforcement action against Wells from Right before Xmas. Consumer finance is going to be a mess in 2023 no Diggity doubt. I should add I was approached by a indirect auto lender today who wants me to help them sell some $400mm in subprime auto loans with coupons in the low-mid teens today.

Consumers Took on 7.1% More Debt in November

BY PYMNTS
JANUARY 9, 2023

Consumers Took on 7.1% More Debt in November
Consumers’ debt grew at a seasonally adjusted rate of 7.1% in November.

The Federal Reserve reported in a Monday (Jan. 9) statistical release that revolving credit leapt at an annual rate of 16.9% during the month, while nonrevolving credit grew at an annual rate of 3.9%.

Total outstanding consumer credit totaled $4.76 trillion in November, up from $4.73 trillion the previous month, Seeking Alpha reported Monday. That total included $1.19 trillion of revolving credit and $3.57 trillion of nonrevolving credit, which were up from $1.17 trillion and $3.56 trillion, respectively, in October.

Consumer credit grew more than expected during November, with the $27.96 billion rise outpacing the $25 billion consensus forecast, according to the report.

PYMNTS research has found that households that live paycheck to paycheck may be more likely to borrow money or rely on credit to make ends meet, which can lead to debt and financial strain.

Fifty-seven percent of paycheck-to-paycheck consumers reported that high inflation has diminished their capacity to reach their long-term financial goals, according to “New Reality Check: The Paycheck-to-Paycheck Report,” a PYMNTS and LendingClub collaboration.

What’s more, compared to a year earlier, 42% of consumers living paycheck to paycheck with issues paying bills reported a decrease in the portion of their paycheck that they can save, compared to 32% of all consumers who said the same, the report found.

This news from the Federal Reserve comes three days after it was reported that Wall Street and banks are growing concerned about car buyers’ growing debt load.

The size of outstanding auto loans — which rose from $1.44 trillion in the third quarter of 2021 to $1.52 trillion in the same quarter of 2022, according to the Federal Reserve Bank of New York — puts both borrowers and lenders at risk.

As PYMNTS reported in December, the rise in stretched consumers has seen more banks and FinTechs looking to help them.

With weakened consumer buying power, banks and FinTechs are increasingly investing in new ways to help so-called “cusp consumers” boost their credit scores and improve overall financial wellness with the help of programs that support — and report — responsible payment behavior.

Fed Reserve statistical release referenced

https://www.federalreserve.gov/releases ... nt/g19.pdf

Second piece:

Goldman to Report $2B Loss in Credit Card, Installment Businesses
PUBLISHED BY
PYMNTS
24 HOURS AGO
Goldman Sachs
Goldman Sachs is reportedly set to unveil a $2 billion loss in its new business.

The loss in its credit card and installment-lending business Platform Solutions were made worse by new accounting regulations, under which the firm had to set aside more money as loan volumes grew, according to a Bloomberg report Sunday (Jan. 8), citing a source with knowledge of the matter.

The firm will also eliminate 3,200 jobs, its largest round of layoffs ever.

It will begin the cuts this week, with the total number of workers impacted not exceeding 3,200.

The job cuts are part of a wave of bank layoffs happening amid a worldwide downturn in mergers and acquisitions and other dealmaking.

More than a third of the layoffs will come from Goldman’s trading and banking units, the Bloomberg report said. A Goldman spokesperson declined to comment Sunday evening.

The report notes that the job cuts will come the same week that Goldman Sachs holds its annual year-end compensation discussions. Those figures are expected to fall, the report said, particularly for people working in investment banking.

The news comes weeks after reports that Goldman’s layoffs could reach as high as 4,000 workers. The cuts follow the company’s laying off of 500 employees in September. It also revealed its intentions last month to trim hundreds of staff related to its retail banking business — a number that is included in the larger layoffs.

Last year also saw Goldman reportedly embark on one of the largest reorganizations in its 150-plus year history, streamlining itself into three divisions: investment banking and trading, asset and wealth management, and transaction banking. The change involved folding Marcus, its retail banking operation, into the bank’s wealth unit.

CEO David Solomon told analysts at the time that Goldman Sachs’ new direct-to-consumer (D2C) strategy will mean focusing “on existing deposit customers and consumers that the bank already has access to through channels like workplace and personal wealth, rather than seeking to acquire customers on a mass scale.”

As PYMNTS reported last month, investment bank layoffs have hit Europe’s financial centers too, with Citi, Barclays, Credit Suisse, Deutsche Bank and Lloyds all cutting staff with their investment banking teams as European operations have been especially hard hit by lower performance in their investment banking and institutional client services operations.

Meanwhile, the last six months of 2022 saw a record drop in global merger-and-acquisition (M&A) activity, with the volume of deal-making dropping from $2.2 trillion in the first half of 2022 to $1.4 trillion in the second half of the year.

Then there’s this from right before Xmas that slipped past many:

CFPB Orders Wells Fargo to Pay $3.7 Billion for Widespread Mismanagement of Auto Loans, Mortgages, and Deposit Accounts

Company repeatedly misapplied loan payments, wrongfully foreclosed on homes and illegally repossessed vehicles, incorrectly assessed fees and interest, charged surprise overdraft fees, along with other illegal activity affecting over 16 million consumer accounts
DEC 20, 2022
SHARE & PRINT
WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) is ordering Wells Fargo Bank to pay more than $2 billion in redress to consumers and a $1.7 billion civil penalty for legal violations across several of its largest product lines. The bank’s illegal conduct led to billions of dollars in financial harm to its customers and, for thousands of customers, the loss of their vehicles and homes. Consumers were illegally assessed fees and interest charges on auto and mortgage loans, had their cars wrongly repossessed, and had payments to auto and mortgage loans misapplied by the bank. Wells Fargo also charged consumers unlawful surprise overdraft fees and applied other incorrect charges to checking and savings accounts. Under the terms of the order, Wells Fargo will pay redress to the over 16 million affected consumer accounts, and pay a $1.7 billion fine, which will go to the CFPB's Civil Penalty Fund, where it will be used to provide relief to victims of consumer financial law violations.

“Wells Fargo’s rinse-repeat cycle of violating the law has harmed millions of American families,” said CFPB Director Rohit Chopra. “The CFPB is ordering Wells Fargo to refund billions of dollars to consumers across the country. This is an important initial step for accountability and long-term reform of this repeat offender.”

Wells Fargo (NYSE: WFC) is one of the nation's largest banks serving households across the country. It offers a variety of consumer financial services, including mortgages, auto loans, savings and checking accounts, and online banking services.

According to today’s enforcement action, Wells Fargo harmed millions of consumers over a period of several years, with violations across many of the bank’s largest product lines. The CFPB’s specific findings include that Wells Fargo:

Unlawfully repossessed vehicles and bungled borrower accounts: Wells Fargo had systematic failures in its servicing of automobile loans that resulted in $1.3 billion in harm across more than 11 million accounts. The bank incorrectly applied borrowers’ payments, improperly charged fees and interest, and wrongfully repossessed borrowers’ vehicles. In addition, the bank failed to ensure that borrowers received a refund for certain fees on add-on products when a loan ended early.
Improperly denied mortgage modifications: During at least a seven-year period, the bank improperly denied thousands of mortgage loan modifications, which in some cases led to Wells Fargo customers losing their homes to wrongful foreclosures. The bank was aware of the problem for years before it ultimately addressed the issue.
Illegally charged surprise overdraft fees: For years, Wells Fargo unfairly charged surprise overdraft fees - fees charged even though consumers had enough money in their account to cover the transaction at the time the bank authorized it - on debit card transactions and ATM withdrawals. As early as 2015, the CFPB, as well as other federal regulators, including the Federal Reserve, began cautioning financial institutions against this practice, known as authorized positive fees.
Unlawfully froze consumer accounts and mispresented fee waivers: The bank froze more than 1 million consumer accounts based on a faulty automated filter’s determination that there may have been a fraudulent deposit, even when it could have taken other actions that would have not harmed customers. Customers affected by these account freezes were unable to access any of their money in accounts at the bank for an average of at least two weeks. The bank also made deceptive claims as to the availability of waivers for a monthly service fee.
Wells Fargo is a repeat offender that has been the subject of multiple enforcement actions by the CFPB and other regulators for violations across its lines of business, including faulty student loan servicing, mortgage kickbacks, fake accounts, and harmful auto loan practices.

Enforcement action

Under the Consumer Financial Protection Act, the CFPB has the authority to take action against institutions violating federal consumer financial laws, including by engaging in unfair, deceptive, or abusive acts or practices. The CFPB’s investigation found that Wells Fargo violated the Act’s prohibition on unfair and deceptive acts and practices.

The CFPB order requires Wells Fargo to:

Provide more than $2 billion in redress to consumers: Wells Fargo will be required to pay redress totaling more than $2 billion to harmed customers. These payments represent refunds of wrongful fees and other charges and compensation for a variety of harms such as frozen bank accounts, illegally repossessed vehicles, and wrongfully foreclosed homes. Specifically, Wells Fargo will have to pay:
More than $1.3 billion in consumer redress for affected auto lending accounts.
More than $500 million in consumer redress for affected deposit accounts, including $205 million for illegal surprise overdraft fees.
Nearly $200 million in consumer redress for affected mortgage servicing accounts.
Stop charging surprise overdraft fees: Wells Fargo may not charge overdraft fees for deposit accounts when the consumer had available funds at the time of a purchase or other debit transaction, but then subsequently had a negative balance once the transaction settled. Surprise overdraft fees have been a recurring issue for consumers who can neither reasonably anticipate nor take steps to avoid them.
Ensure auto loan borrowers receive refunds for certain add-on fees: Wells Fargo must ensure that the unused portion of GAP contracts, a type of debt cancellation contract that covers the remaining amount of the borrower’s auto loan in the case of a major accident or theft, is refunded to the borrower when a loan is paid off or otherwise terminates early.
Pay $1.7 billion in penalties: Wells Fargo will pay a $1.7 billion penalty to the CFPB, which will be deposited into the CFPB’s victims relief fund.
Read today’s order.

Read CFPB Director Chopra’s remarks on a press call announcing the action.

The CFPB wishes to thank members of the public who submitted complaints through the CFPB’s complaint system across Wells Fargo product lines. These complaints aided in the detection of some of the illegal activity uncovered in the CFPB’s investigation.

The CFPB is also grateful for the cooperation and the substantial work performed by the Office of the Comptroller of the Currency, whose efforts have contributed to the significant remediation received by consumers harmed by the bank’s illegal activity, and the Federal Reserve Board of Governors.

Consumers who are experiencing ongoing problems with Wells Fargo, or other financial providers, can submit complaints by visiting the CFPB’s website or by calling (855) 411-CFPB (2372). The Bureau also has resources for consumers about mortgage servicing, auto loans, and deposit accounts:

Mortgage servicing: https://www.consumerfinance.gov/consume ... mortgages/

Auto loans: https://www.consumerfinance.gov/consume ... uto-loans/

Deposit Accounts: https://www.consumerfinance.gov/consume ... -accounts/

[youthathletics]

In a perfect world your benefit programs would balance out the regressive nature of a consumption / transaction tax. In a perfect world people would realize those programs make sense and in a perfect world the poor wouldn't be villainized in the first place for not paying federal income tax considering how little they make and how much they do contribute in state, local, and trickle up federal taxes vs what they earn. In a perfect world we could utilize our current system of taxation fairly without major changes.

In the end after my rambling the main point is: the current people complaining about being overtaxed won't change their tune.

Yeah, you're right. But you have to admit that it's very, very funny watching a bunch of lifelong Republicans turn into liberals in 20 short months.

They're realizing, subconsciously at least, that they can't hack it without Federal government help. So now making the government protect workers makes sense to them, after a lifetime of Union-bashing. Protectionist tariffs are worse than Unions in a liberal/conservative sense, in that Unions are private groups, and the protectionist tariffs come from the government.

But you're right. Guys like Bandito will find another target, as they move further and further to the left.....sucking up more and more tax dollars, all while insisting they are free market conservatives. It's insane to watch delusion like this on a global level.

Posterity in motion

https://trendingpoliticsnews.com/just-i ... um=twitter

[Farfromgeneva]

Solid note passed along to me today. I’m circumspect about rate reductions in 2024 but the inverted yield curve is pricing that in currently.

————————

Unspoken fact that VCs won’t talk about in Dec 2022: most tech companies are not worth their liquidation preference.

What does this mean ?

It means that a company’s current value would not clear the amount of investment dollars raised, and many VC portfolios and their marketing materials with high IRR and TVPI are stuffed with illiquid and unrealizable paper prices.

During the 2020-22 tech bubble, many tech startups raised money at valuations of 20-100+ times their revenue. So if a startup generates $1MM in annual recurring revenue, they could often raise investment at $20M - $100M valuation.

The VC assumption is that these companies would continue growing at 100-300%+, so the eventual revenue multiple would rationalize to public comps of 10-20x multiple.

Investors had to buy forward 2+ years of perfect execution, and that was the clearing price of making the best VC investments in 0% interest rate land.

However, in Dec 2022 with risk-free interest heading to 5%, top software companies that are industry leaders with celebrity CEOs now trade at 4-6x revenue. Companies can no longer get away with 2+ years of assumed perfection. Companies need to perform today.

If a VC invested 20MM into a 100MM valuation company in 2021 at 1M ARR, and the company executed well and grew 200% to 3MM ARR, a fair valuation comp today might be $18M.

Growing ARR from $1MM to $3MM in a year is non trivial, yet this hypothetical company might actually see it’s valuation down 80%. This is exactly how public tech stocks have performed in 2022.

This is depressing, so what should you do ?

1. You’re a founder: Don’t raise money right now because you’ll get extorted with high liquidation preferences or all sorts of structure that will likely nuke all your value as a common stock holder. Talk to your customers, make sure you’re building and selling them something they actually must buy. Cut anything that doesn’t contribute to the above.

2. If you’re a VC: focus on your existing portfolio companies. Coach them to manage burn and operate efficiently. No founder wants to cut as they’re optimists by nature and thus they all believe they are the special snowflake that breaks the rules. Most likely they aren’t, and you’ll have to be the adult in the room to advise them otherwise.

(If you are or involved with the special snowflake, then you don’t need my advice. Have fun being amazing!)

3. If you’re a LP: talk to your GPs and see how intellectually honest they are about their portfolio and how their strategy will evolve in 2023. Half the GPs I know have embraced the new reality, the other half seem utterly delusional.

—

Interest rates will come back down at some point. I’m guessing after Q2 2024. You must prepare to survive until then and bide time for multiples and thus valuations to expand.

Survive and be a ruthlessly efficient and durable cockroach over the next 18+ months, and you’ll be deservedly rewarded for your blood sweat and tears.

[Farfromgeneva]

CPI on top of expectations, 5.7% core. 6.5% nominal YOY (delta between core and nominal closing as energy costs come down)

https://www.bls.gov/cpi/

Transmission of material in this release is embargoed until USDL-23-0017 8:30 a.m. (ET) Thursday, January 12, 2023
Technical information: (202) 691-7000 • [email protected] • www.bls.gov/cpi Media contact: (202) 691-5902 • [email protected]
CONSUMER PRICE INDEX – DECEMBER 2022
The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in December on a seasonally adjusted basis, after increasing 0.1 percent in November, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 6.5 percent before seasonal adjustment.
The index for gasoline was by far the largest contributor to the monthly all items decrease, more than offsetting increases in shelter indexes. The food index increased 0.3 percent over the month with the food at home index rising 0.2 percent. The energy index decreased 4.5 percent over the month as the gasoline index declined; other major energy component indexes increased over the month.
The index for all items less food and energy rose 0.3 percent in December, after rising 0.2 percent in November. Indexes which increased in December include the shelter, household furnishings and operations, motor vehicle insurance, recreation, and apparel indexes. The indexes for used cars and trucks, and airline fares were among those that decreased over the month.
The all items index increased 6.5 percent for the 12 months ending December; this was the smallest 12- month increase since the period ending October 2021. The all items less food and energy index rose 5.7 percent over the last 12 months. The energy index increased 7.3 percent for the 12 months ending December, and the food index increased 10.4 percent over the last year; all of these increases were smaller than for the 12-month period ending November.

[Farfromgeneva]

I’m getting older I know but I feel like an entire generation who left college after 2008 believes in skimming and fraud as a business model.

JP Morgan Says Startup Founder Used Millions Of Fake Customers To Dupe It Into An Acquisition

Alexandra S. Levine06:04pm EST
JP Morgan Says Startup Founder Used Millions Of Fake Customers To Dupe It Into An Acquisition
The financial giant is suing the founder of a Mark Rowan-backed startup it acquired, claiming the fintech, Frank, had sold the financial giant on a “lie.”

JPMorgan Chase is suing the 30-year-old founder of Frank, a buzzy fintech startup it acquired for $175 million, for allegedly lying about its scale and success by creating an enormous list of fake users to entice the financial giant to buy it.

Frank, founded by former CEO Charlie Javice in 2016, offers software aimed at improving the student loan application process for young Americans seeking financial aid. Her lofty goals to build the startup into “an Amazon for higher education” won support from billionaire Marc Rowan, Frank’s lead investor according to Crunchbase, and prominent venture backers including Aleph, Chegg, Reach Capital, Gingerbread Capital and SWAT Equity Partners.

The lawsuit, which was filed late last year in U.S. District Court in Delaware, claims that Javice pitched JP Morgan in 2021 on the “lie” that more than 4 million users had signed up to use Frank’s tools to apply for federal aid. When JP Morgan asked for proof during due diligence, Javice allegedly created an enormous roster of “fake customers – a list of names, addresses, dates of birth, and other personal information for 4.265 million ‘students’ who did not actually exist.” In reality, according to the suit, Frank had fewer than 300,000 customer accounts at that time.

“Javice first pushed back on JPMC’s request, arguing that she could not share her customer list due to privacy concerns,” the complaint continues. “After JPMC insisted, Javice chose to invent several million Frank customer accounts out of whole cloth.” The complaint includes screenshots of presentations Javice gave to JP Morgan illustrating Frank’s growth and claiming it had more than 4 million customers.

The same week JP Morgan filed its suit against Javice, Javice filed a suit against JP Morgan. The former Frank CEO’s complaint claimed that the bank last spring “commenced a series of groundless investigations into Ms. Javice’s conduct,” and later “manufactured a for-cause termination in bad faith” and “worked to force Ms. Javice out of the [JP Morgan] organization,” to deny her millions in compensation that she was owed. As part of those investigations, the complaint said, JP Morgan “falsely accused Ms. Javice of misconduct” during and after the Frank acquisition.

“After JPMC rushed to acquire Charlie's rocketship business, JPMC realized they couldn't work around existing student privacy laws, committed misconduct and then tried to retrade the deal,” Javice’s lawyer, Alex Spiro, said in a statement emailed to Forbes. “Charlie blew the whistle and then sued. JPMC’s newest suit is nothing but a cover.”

Asked in her 30 Under 30 submission the biggest hurdle the company was facing, Javice said: “Scaling.”

Frank’s chief growth officer Olivier Amar is also named in the JP Morgan complaint. It alleges that Javice and Amar first asked a top engineer at Frank to create the fake customer list; when he refused, Javice approached “a data science professor at a New York City area college” to help. Using data from some individuals who’d already started using Frank, he created 4.265 million fake customer accounts—for which Javice paid him $18,000—and had it validated by a third-party vendor at her direction, JP Morgan alleges. The complaint includes screenshots of the professor’s invoices and claims that Javice went to notable lengths to ensure documentation of this work was either destroyed or altered to avoid raising eyebrows. Amar, meanwhile, spent $105,000 buying a separate data set of 4.5 million students from the firm ASL Marketing, per the complaint. Amar and ASL Marketing did not yet respond to a request for comment.

Bipartisan members of Congress had sounded alarms about Frank back in 2020, calling on the FTC to investigate its “deceptive practices” and issue a temporary restraining order on the company to stop them. “We are concerned that Frank is creating false hope and confusion for students while contributing to unnecessary extra work for financial aid administrators,” the lawmakers, including Reps. Lloyd Smucker and Haley Stevens, wrote in a letter. “We further suspect that the company may be using the data collected from misled students to make a profit by selling data to third party advertisers. … This tool does not make it any easier for students to get relief funds and appears instead to be a way for Frank to mine and exploit students’ data for profit.” Frank subsequently received a warning letter from the consumer protection agency. Javice’s lawyer Spiro did not immediately respond to a request for comment about the FTC letter.

When JP Morgan acquired Frank in September of 2021 it brought on Javice, Amar and other Frank staffers as employees. Javice graduated from Wharton at the University of Pennsylvania and was named to the Forbes 30 Under 30 list in finance in 2019. She told Forbes then that Frank had helped 300,000 students apply for financial aid; when she announced the JP Morgan acquisition on LinkedIn two years later, she said it was then “serving over 5 million students at over 6,000 colleges.” (Asked in her 30 Under 30 submission the biggest hurdle the company was facing, Javice said: “Scaling.”)

“Javice chose to invent several million Frank customer accounts out of whole cloth.”

JP Morgan complaint against Frank's founder and former CEO
Since Frank was acquired, she’d been a managing director at JP Morgan overseeing student-focused products at Chase, according to her LinkedIn. She received nearly $10 million as part of the merger, negotiating an additional $20 million retention bonus to be paid after a later vesting date if she remained in good standing. Amar, who was made executive director of student solutions at JP Morgan, according to his LinkedIn, received about $5 million from the deal and similarly bargained for a $3 million retention bonus, the complaint said. The suit was reported earlier by the Wall Street Journal.

Once the deal went through, JP Morgan asked Frank for its customer list so the bank could begin marketing its products and services to those students, the suit says. Javice and Amar sent over a list of data derived from ASL Marketing and another third-party vendor, Enformion, according to the suit. When JP Morgan sent test marketing emails to what it thought were 400,000 Frank customers, the results “were disastrous,” it claims. Only about a quarter of the emails were delivered, and of those, just 1 percent were opened, the suit alleges.

As a result of the “unusually poor returns” from that campaign, JP Morgan revisited what it thought it knew about Frank and discovered what it now claims to be fake lists.

“In every aspect of her interactions with JPMC, Javice had a choice between (i) revealing the truth about her startup and accepting Frank’s actual value and (ii) lying to inflate Frank’s value and reaping the rewards from that inflation,” the suit says. “Javice chose each time to lie, and the evidence shows that time and again she layered fraud upon fraud to deceive JPMC. Javice and Amar used the Fake Customer List and other knowingly false Merger Agreement representations to fraudulently induce JPMC to enter into the Merger.”

Javice’s complaint against JP Morgan said the bank failed to “harness Ms. Javice and Frank’s acumen for attracting a young, diverse new audience to Chase’s services” and instead pursued “poorly conceived business plans” focused on “Frank’s historical customers.”

“Chase grossly mismanaged its investment from the start, and it decided it would rather walk the investment back than work on it further,” Javice’s complaint said.

Amar was fired in October and Javice, in November. Several other former Frank employees still appear to work at JP Morgan, according to LinkedIn.

Asked in the Forbes 30 Under 30 submission the worst advice she ever received, Javice answered: “Be patient.”

[Farfromgeneva]

https://www.financialresearch.gov/annua ... t-2022.pdf

EXECUTIVE SUMMARY
The 2022 OFR Annual Report reviews financial market developments, describes potential emerging threats to U.S. financial stability, and assesses global economies, financial markets and liquidity, financial institutions, digital assets, cybersecurity risks, climate change risks, and the performance of the Office.

Overall risks to U.S. financial stability are elevated and have increased since last year’s report. This report discusses the Office’s assessment of risks associated with the U.S. financial system and identifies areas causing stress, such as the following:

Weaker economic growth and monetary tightening.
Elevated volatility in the Treasury and short-term funding markets.
Surges in commodity pricing and hedge fund leveraging and interconnectedness.
Crypto asset volatility and the depegging of the third-largest stablecoin.
Increased state-sponsored cyberattacks and resulting changes in the cyber insurance market.
Climate-related financial risks.

February 2022 marked the beginning of major events that would stress the financial system. Contributing factors to the financial and economic stress included Russia’s war against Ukraine, the Federal Reserve’s tightening monetary policy to reduce inflation, lingering supply disruptions as economies worked past the COVID-19 pandemic, and economic uncertainty based on the slowing of global growth.

Strong consumer demand, labor supply shortages, and supply disruptions in commodities markets were among the major triggers of global inflation. With rising interest rates, certain sectors are more susceptible to credit risks. The total reported market capitalization of all crypto assets has fallen by more than 70% from its peak of $3 trillion in November 2021. The increased frequency of cyberattacks and the growing costs to guard against them continue to pose risks. Finally, climate change introduced vulnerabilities to the financial system, yet assessing the risk is complicated by the threat’s medium- to long-term nature.

Macroeconomy
The U.S. labor markets remain tight, although real wages have fallen, and the participation rate remains below its pre-pandemic level due to shifting economic dynamics post-pandemic. The job market’s strength supports households but raises concerns about continued inflationary pressures.

Overall, macroeconomic risks to U.S. financial stability have increased since 2021. High inflation and a slowdown in growth posed risks to household balance sheets, residential and commercial real estate, and other parts of the financial system. In addition, the rising interest rate environment affected sovereign debt risk and segments of the corporate debt market. Consumer price inflation began rising in the spring of 2021. It continued to rise through the start of 2022, climbing to high levels not seen in several decades and remaining well above the Federal Reserve’s target of 2% per annum. Several factors drove higher prices, including strong aggregate demand, a post-pandemic reopening of the economy, and a material shift from services to goods.

Supply chain distortions have been larger and more persistent than markets anticipated, putting upward pressure on prices. New waves of COVID-19 infections continue to disrupt overseas supply chains (particularly in China) and the domestic services sector. As a result, domestic and global energy prices increased significantly throughout the year, affecting domestic producers and importers. The high price of energy was a key contributor to the recent record inflation, with energy as one of the fastest-rising components of several price measures. In addition, Russia’s war against Ukraine significantly disrupted European energy markets, driving up costs in the global market.

At the same time, the post-pandemic recovery in the U.S. labor market has been remarkable, and indicators show that the labor market remains tight. The unemployment rate is currently near a 50-year low. On the other hand, Russia’s war against Ukraine impacted global growth and trade. The war decreased expectations of global macroeconomic growth. The World Bank reduced its global growth forecast for 2022 to 2.9% (from 4.1%) and forecasted a contraction of 4.1% in Europe and Central Asia.

High inflation led to considerably tighter conditions in financial markets globally. Interest rates broadly increased. The Federal Reserve began hiking the federal funds’ target rate in March 2022 after maintaining a target rate of 0% - 0.25% since March 2020. As of September 2022, the target range of federal funds stood between 3.0% - 3.25% and is expected to increase. The Federal Reserve also began reversing its quantitative easing policy and is now engaging in quantitative tightening. Central banks around the world implemented similar measures. In June, the European Central Bank (ECB) announced that it raised its key policy rate for the first time in over 11 years. The ECB raised interest rates from -0.50% in July to 1.5% in October, with further increases planned. Despite inflation rising to reach the Bank of Japan’s target of 2% for the first time in years, the bank intends to maintain rates at just below zero with no expected rate increases.

The global economy is experiencing high inflation driven by strong demand following the COVID-19 pandemic and disruptions in the supply of energy and other commodities:
U.S. economic growth has slowed as financial conditions have tightened, partly due to interest rate hikes and quantitative tightening. The U.S. labor market remains strong, but the labor force participation rate and the employment-to-population ratio are below pre-pandemic levels.
Higher inflation in the post-pandemic global economy and a dramatic rise in commodity prices following Russia’s war against Ukraine have hampered global growth prospects. European economies are particularly vulnerable to rising energy costs that affect labor productivity and consumption. As a result, many European economies entered into a recession in 2022.
Central banks are raising interest rates to fight inflation but must balance this against the risk of overtightening. European central banks are facing the prospect of stagflation as the U.S. dollar continues to strengthen and the war in Ukraine drags on. Moreover, increasing yields in peripheral eurozone countries have given rise to fragmentation concerns and a potential return of the European debt crisis of the 2010s.
In emerging markets, food and energy prices remain high, hampering economic growth and raising social tensions. In addition, increasingly tight financial conditions may push some debt burdens to unsustainable levels.

Credit Risk from Tighter Financial Conditions
Corporate leverage remains elevated, but it has declined from the peak. Credit risk premiums, the difference in yield between a corporate bond and a Treasury bond of the same maturity, increased sharply in 2022 and are above historical medians. As the U.S. economy transitions from an era of unprecedented quantitative easing and zero interest rates to one with quantitative tightening and higher rates, the outlook for the corporate credit cycle is more uncertain. As a result, corporate sector vulnerabilities could amplify stress in the economy and financial markets.

The 2007-09 financial crisis illuminated financial-stability channels related to the household sector and how systemic shocks to the financial system can originate from household balance sheet issues. The net worth of U.S. households declined to $143.8 trillion in Q2 2022 from its peak of $149.8 trillion in 2021, based on the Federal Reserve’s Financial Accounts data. Adjusting for inflation and expressed in real terms, household net worth remains slightly higher today compared to pre-pandemic levels, or $123.8 trillion compared to $116.4 trillion in Q4 2019. Household debt increased over the past year to levels not seen since 2007. The year-over-year aggregate growth in household debt is 7.0% in September 2022, or $15.6 trillion.

A depressed commercial real estate (CRE) market can cause and has caused past financial stability issues, such as during the 1990-91 recession, when depository failures were primarily due to CRE lending-related losses. However, we have seen limited CRE market stress in recent years as the CRE market has performed well with strong occupancy rates, rising rents, and property values. However, offices in dense central business districts such as New York and San Francisco had physical office occupancy rates well below their pre-pandemic usage, due to the work-from-home (WFH) phenomenon.

Tighter financial conditions expose credit risk vulnerabilities:
Nonfinancial firms with floating-rate debt or near-term maturities face larger financing burdens. This headwind is amplified by weaker fundamental trends.
The CRE market’s performance is softening after exceptional performance in recent years. Unlike previous market downturns, credit losses on CRE loans are not expected to pose a significant risk to financial stability. The longer-run performance of the office sector is unclear, especially in dense central business districts where WFH appears to be a permanent development.
Household leverage remains at historically low levels because low interest rates and COVID-19 pandemic-related support programs aided households in decreasing debt obligations. Household financial conditions have deteriorated for some, due to inflationary pressures. Delinquency rates have increased more rapidly for renters compared to homeowners among the most vulnerable households.
Rapidly rising mortgage rates dampened home price appreciation, though the risks to the economy are lower than they were in the period leading up to the 2007-09 financial crisis.

Financial Markets and Liquidity
Short-term funding markets support core functions of the financial system, providing liquidity to borrowers and allowing corporations, financial firms, and other investors to meet immediate and near-term cash needs. Funding markets are relatively stable, but market liquidity remains fragile. In addition, market volatility and the impact of Federal Reserve interest rate increases are magnified in short-term markets.

In Treasury markets, the persistent specialness in certain securities may have resulted from the repositioning around Federal Reserve tightening combined with one-sided positioning and limited supply. As tightening continues, there is a possibility that liquidity challenges may persist if high levels of uncertainty remain about the future path of policy. In the market for short-term Treasury securities, substantial increases in investors’ cash balances have led to demand outpacing the supply of new Treasury bills.

While market risk, or volatility in asset prices, is not the same as financial-stability risk, market risk may interact with and reinforce other vulnerabilities where the combination amplifies financial-stability risk. For example, negative nominal and real yields distorted asset prices and encouraged borrowers to maintain high leverage levels. The normalization of yields reduces these effects and provides a more robust set of investment opportunities for fixed-income investors, reducing incentives to reach for yield.

The overall health of the municipal market was strong after municipalities received support during the onset of the COVID-19 pandemic. In addition, states entered the monetary-tightening cycle in a strong position due to the 2021 economic expansion, which increased tax receipts and saw a decline in fuel and energy costs. Infrastructure spending continued to be a significant issue because municipal issuers invested in repairing or replacing failing bridges, dams, utilities, and other projects. Since the 1960s, the proportion of U.S. infrastructure spending to GDP has declined by 47%. This lack of expenditures has placed municipalities and states at risk of catastrophic infrastructure failures. The economic impact of infrastructure failures is significant and can impact communities for decades through higher taxes, reduced productivity, and higher costs.

Fixed income and equity investors experienced large losses from a sharp increase in risk-free rates and may face more declines if market sentiment deteriorates:
Treasury market volatility is elevated, and liquidity remains tight amid monetary policy uncertainty. More generally, bond market stress measures are showing levels comparable to March 2020 and the early days of the 2007-09 financial crisis.
Short-term funding market conditions have tightened as investors become more risk averse amid economic and monetary policy uncertainty. Structural vulnerabilities remain in some segments of the short-term funding market, such as money market funds and other cash management vehicles.
Asset prices have fallen sharply, but many valuation metrics are either elevated or near historical averages. Further price declines are possible if economic conditions weaken materially or if another shock emerges.
State and local governments emerged from the COVID-19 pandemic with strong balance sheets but face increasing cost pressures from energy and wage inflation, which siphon resources from needed infrastructure spending.

Financial Institutions
After enjoying a relatively benign economic and financial climate in 2021, buoyed by strong profitability and limited credit losses, U.S. banks entered a period of heightened uncertainty. Higher inflation and interest rates, a greater risk of recession, and enhanced global risks due to Russia’s war against Ukraine lowered the sector’s outlook. Nevertheless, despite headwinds, in aggregate, the U.S. banking sector remained well capitalized and maintained risk-based capital ratios well above regulatory minimums.

While the insurance industry was not immune to the stresses of 2022, it is unlikely to meaningfully affect the U.S. financial system’s near-term stability. Yet, there remain important issues impacting the insurance industry, including the following:

Changes in insurers’ investment policies as interest rates rise and fall.
Rising claim costs due to inflation.
Increased life sector involvement by private equity–affiliated insurers.
The increasing stress on the ability of the private insurance industry to cover large and growing risks.

Since the market downturn in March 2020, hedge fund leverage and asset class exposures have grown significantly, although these increases have moderated in the past year. Hedge funds engaged in various trading strategies to maximize risk-adjusted returns. While many hedge funds sought to mitigate the sensitivity of their performance to adverse market movements, certain fund classes were not able to mitigate with the rise of inflation.

In February and March 2022, the surge in commodity prices following Russia’s war against Ukraine forced several commodity-focused central counterparty (CCP) clearinghouses to raise initial margins on various commodity contracts. The increases were most significant in Europe, where margins nearly doubled compared to the prior year’s average. In the U.S., the initial margin increase at commodity CCPs was 20%-30%. The sudden increase in volatility would have led to even larger increases were it not for the residual effects of market volatility in early 2020, which led CCPs to maintain high resource levels in the U.S. due to the lengthy lookback period of their risk models. Although increased margin demands have put a temporary strain on the liquidity of some members, the resulting elevated levels of posted collateral can aid in easing concerns about potential CCP defaults going forward.

Financial institutions face uncertainty and unique challenges due to higher interest rates and inflation, slower economic growth, and geopolitical risks:

In aggregate, the U.S. banking sector remains well capitalized and has maintained risk-based capital ratios well above regulatory minimums.
Insurers have increased the risk profile in their investment portfolios in response to low interest rates in recent years, thereby making them more exposed to investment losses during an economic downturn. Inflation continues to negatively affect property and casualty insurers as claim costs rise, especially for homeowners and automobile insurance.
Bond fund flows are sensitive to interest rate increases. Significant outflows may strain fixed-income markets. During historical periods of rising interest rates, the size of bond funds was much smaller, and dealer capacity to intermediate was much greater.
The hedge fund industry has experienced negative returns but has been able to outpace broad market indices during this high inflationary period in 2022. The industry’s asset exposures and leverage moderated in 2022 after rebounding from the 2020 downturn. Despite declines in aggregate industry leverage, some funds are highly leveraged and may pose a threat to financial stability.
The surge in commodity prices in March and September 2022 triggered large increases in initial margins at some CCPs. Several commodity-centric CCPs faced significant stress, although no CCP member defaulted. The size and concentration of member positions in commodity markets have raised questions about the transparency of exposures across CCPs, making it difficult to set effective margins.

Digital Assets
Risks in the digital-assets markets were highlighted when several crypto asset lenders suspended customer withdrawals following the decline in crypto asset prices in June 2022. Central banks can issue central bank digital currencies (CBDCs), which are digital liabilities of the central bank. As discussed in the 2021 OFR Annual Report, CBDCs should be immune to the run risk of stablecoins but may increase flight-to-safety concerns. U.S. regulators are currently exploring CBDCs. The Federal Reserve issued a CBDC consultation paper in January 2022 and is continuing its independent research into and experimentation with CBDCs. Globally, around 90% of central banks now report studying or working on developing a CBDC. Four central banks issued CBDCs (the Bahamas, the Eastern Caribbean Currency Union, Jamaica, and Nigeria), and over 30 CBDCs are in development or pilot phases.

Digital assets experienced a volatile 2022, with the total market capitalization falling from over $2.2 trillion in January 2022 to under $1 trillion in August 2022. Losses to date appear largely contained within the digital-asset sector, although the risk of contagion looms.
Many prominent crypto asset trading and lending platforms suspended customer withdrawals. Some also filed for bankruptcy.
The third largest stablecoin at the time depegged in May 2022. During that month, the $18.5 billion loss in value highlighted risks associated with stablecoins and spillover risks in the digital-assets space.

Cybersecurity Risk
Russia’s war against Ukraine heightened the prospect of state-sponsored cyberattacks and the importance of vigilance and planning in technology infrastructure. Prior events—such as the 2012 coordinated denial-of-service cyberattack, where several major U.S. financial institutions suffered simultaneous outages—were believed to be in response to the U.S.-imposed economic sanctions on Iran. Furthermore, beyond attacks directly targeting U.S. financial services institutions, there were concerns of unintended spillovers from cyberattacks stemming from state-sponsored actions, as demonstrated by the NotPetya malware incident in 2017. This alleged Russian attack infected software used by Ukrainian organizations and then spread to companies worldwide, leading to billions of dollars in U.S. corporate losses.

Organizations are continually working to mitigate the consequences of attacks in response to these various actors’ threats to the financial system. Otherwise, there is the potential that a successful attack will cause significant harm not only to the organization but to the financial systems in which they operate. Three mechanisms can be used to prepare for potential cyber incidents:

Mechanism 1 - technology security, resiliency, and recovery. This consists of preventing attacks by minimizing vulnerabilities that adversaries could exploit, such as active cyber defense, cybersecurity hygiene, and insider threat management.
Mechanism 2 - coordination and information sharing. Cybersecurity discussions tend to focus on reducing risk for the individual through means such as multifactor authentication and zero-trust architecture, coordination, and communication across firms and government agencies, such as the Cybersecurity and Infrastructure Security Agency (CISA), the Office of Cybersecurity and Critical Infrastructure Protection (OCCIP), and the Financial Services Information Sharing and Analysis Center (FS-ISAC).
Mechanism 3 - cyber insurance. This can offer vital financial support and recovery assistance to an entity suffering from a cyberattack. Increased numbers of written policies and premiums per policy have driven rapid growth in this sector. As a result, annual policy premiums grew at a double-digit rate or (in some cases) a triple-digit rate, depending upon the risk-and-loss profile of the insured.
The increasing frequency of cyberattacks and the growing cost to guard against them pose risks to the financial system:
Russia’s war against Ukraine has substantially increased the perceived risk of state-sponsored cyberattacks in the U.S. financial services sector, although the majority of attacks have been focused on theft. The cyber posture of the sector has responded through increased information sharing and focused readiness exercises.
Firms can implement cyber-defense mechanisms that reduce financial stability risk. These include undertaking internal/individual security measures, such as the application of the zero-trust framework; information sharing and coordination among firms and the government; and cyber insurance.
As the cyber insurance market matures and adapts to new threats, substantial changes are emerging.
The number of policies written continues to grow as the need for cyber risk insurance becomes increasingly evident and cyber risk coverages are excluded from general insurance policies.
Obtaining cyber insurance has become more challenging because insurers have tightened their underwriting standards and insurance premiums for cyber policies have risen substantially.

Climate-related Financial Risk
Climate-related financial risk is the risk of financial losses due to rising global temperatures and accompanying environmental shifts, such as rising sea levels and more severe weather events. Climate-related financial risk poses physical and transition risks to the financial system. Physical risks describe the potential destruction or damage of physical assets, the impact on economic activity, and other losses from extreme weather events. Transition risk, created by technological advances, policy changes, and preferences shifts, can be more challenging to quantify economically. Governments face financial risks related to climate change. An increase in climate-related events is likely to cause firms and households to increasingly rely on the insurance and banking sectors. At the same time, local municipalities and state governments are likely to rely on the federal government for financial support. Some households and businesses might be left without insurance as private insurers may become increasingly unwilling or unable to insure against climate-related physical risks. Climate-related damages in the U.S. have grown to about $133 billion per year, with the federal government often stepping in with emergency relief and acting as an insurer of last resort.

Climate change impacts numerous aspects of the financial markets, often in unanticipated ways. In addition to transition risks, a myriad of physical risks can affect the financial markets. Climate risks are being priced into financial assets, but the extent varies depending upon the market, and not all risks are priced for the market. For example, the potential risk of mispricing lies in the mortgage industry. Lenders may be indirectly encouraged to underwrite mortgages without accounting for flood risks and then pass these loans to government sponsored mortgage companies (GSMC) to securitize into mortgage pools. This may indirectly encourage households to locate or, after disaster strikes, rebuild in areas prone to risks such as flood, hurricane, and wildfire. Recent evidence suggests this hasn’t been the case, but it could be a source of future risk.

Climate-related financial risk has introduced vulnerabilities into the financial system, although assessing the risk to financial stability is complicated by the medium- to long-term nature of the threat.
Physical and transition risks have already affected the broader economy.
Assessing and forecasting these risks to financial stability can be challenging.
Emerging areas of research highlight how interactions and networks in financial markets might amplify these risks.
The costs of climate change related to damages and mitigation may be transferred to third parties.
Firms and households affected by climate disasters are increasingly relying on the insurance and banking sectors to finance repairs and fund mitigation efforts.
State and local governments are likely to rely on federal support for recovery efforts, disaster relief, and insurance programs.
Climate-related risks could affect financial institutions and GSMCs through securitization, especially in flood-prone areas.
To facilitate the dissemination of data, the OFR, in collaboration with the Federal Reserve, piloted an OFR-hosted Climate Data and Analytics Hub that provided staff from the Federal Reserve Board and Federal Reserve Bank of New York access to public climate and financial data, high-performance computing tools, and analytical and visualization software.

[Farfromgeneva]

Fantastic piece written by a pretty sharp and successful hedge fund operator (meaning one has to be aware of folks talking their own book, like the recent headline regarding Jeff Gundlach which was, to paraprhase: "bond guy prefers bonds to stocks"..)

OPINION
Why Does Private Equity Get to
Play Make-Believe With Prices?
Investors and managers are playing a dangerous game of “volatility laundering,” Cliff Asness writes.

Cliff Asness
January 06, 2023
Illustration by II
Illustration by II
If you wanted to come up with the one-liner about investing most likely to make my head explode, you might try, “The way to choose investments is to just jump on whatever’s done the best over the past three to five years.” Or, getting more creative: “Hey, did you know Cathie Wood is still getting inflows?” Yet more creative: “The war in Ukraine was caused by stock buybacks.” But you couldn’t do much better than “Interim valuations don’t really matter,” as Christopher Schelling says in reference to private equity investing. If exploding my cranium was the goal, then well played, sir. Otherwise, oh, hell no.

Although not alone, I have, IMHO, become one of the chief gadflies of the PE industry. But I’m a selective gadfly. I’m certainly not negative on the whole idea of private investing. Some companies aren’t ready to be public (I’m lumping in venture now). Some need active outside restructuring expertise. Some are just being misvalued by the public markets (more on this later). Private investing serves a vital economic purpose. Furthermore, though to what degree and how much the premium has diminished over time can be debated, there’s little doubt PE has been a historical success (of course, adjusting for factor risk, there are still some cynics). And I live in Greenwich, Connecticut, where the slightly modified cliché that “some of my best friends are PE managers” is literally true — and these men and women know more about how actual companies work than I could ever dream.

My criticism has been narrowly focused on PE’s lack of mark-to-market valuations and some of the implications this brings. The illiquidity and nonmarking were once implicitly acknowledged, appropriately, as a bug, but are now clearly sold as a feature. The problem is logically you get paid extra expected return for accepting a bug (possibly explaining some of PE’s historical success), but you pay by giving up expected return for being granted a feature. This is a potential problem going forward.

Let me sum up Schelling’s entire argument: It’s okay not to mark things to market — it’s even preferred — as the market is grossly inefficient, with prices that are often wildly wrong, and thus just using PE managers’ own marks is, doggone it, better for everyone.


Schelling and I actually agree on a lot here. I was never a pure efficient marketer, even in the 1980s when I was Gene Fama’s Ph.D. student (my dissertation on the success of price momentum was a hint!). Living through the tech bubble, the global financial crisis, and the insane trouncing of value stocks from 2018 to 2020 led me to drift even further away from pure market efficiency. I still think markets are the best way for society to allocate capital, but that’s as much about how bad nonmarket alternatives are. So although the issues are complex, I am quite sympathetic to the feeling that sometimes market prices are pretty far away from what’s really justified.

Of course, in the public markets we don’t get to not tell our investors the current market valuations of our investments just because we think the markets are wrong. In early 2000 (i.e., the tech bubble peak), after losing a ton on long-short value investing, we didn’t tell our clients, “Your money is all still there; it’s just in a bank we call ‘short the Nasdaq.’” No, we told them, “We’re down X percent, and here’s why we expect to make back more than X percent when you need it most.” (Narrator: “They did.”) Yes, I argued this because I thought market prices were wrong. But I didn’t get to play make-believe.

So why does PE get to? Though some will plead the opposite, it’s not that hard to adjust even private marks in line with the market. If you’re levered long equities (and yep, PE’s “low-risk and low-beta” investments are often levered long) and equities fall by 25 percent, you probably dropped at least that. Perfect estimates are not the point, and shouldn’t be the enemy of good estimates (for instance, some argue private equity betas are near 1.0 even with leverage, but nobody serious argues they are near zero). Sure, sometimes it’s more complicated. But remember, PE managers are among the world’s foremost experts in company valuation. You wouldn’t think the question “Approximately what would we get if we sold in today’s market?” would be particularly tricky for them. That is, of course, if they actually wanted to tell you the answer and if you actually wanted to hear it. It does take two to do the nonmarking tango.

Many retort, “But doesn’t the illiquidity leave investors better off long-term, as they act more rationally?” Sure, maybe, sometimes . . . well, actually, it depends. It certainly induces some behavior we advocate in the public markets, such as taking a true long-term perspective. But a few problems emerge.


First, if investors increasingly value the “PE is easier to stick with as the prices don’t move so much” feature, they’ll invest more and more in PE (sound familiar?), and, as with any asset class or strategy, this can lower future expected returns. Anecdotally (i.e., like you might hear if you got a PE manager a little tipsy on Greenwich Avenue), this is going on through private deal valuations that are higher than they used to be because there are more bidders for the same deal, credit is less investor-friendly than previously (I believe “covenant light” is the term), etc. Maybe this ain’t David Swensen’s PE market anymore.

Unlike Swensen’s PE market, which was primarily about earning extra return, today’s PE market is now seemingly as much about not having to report market prices. That kind of investment should return less over the long term than the appropriate levered public equity benchmark (and I haven’t even gone into the fees on fees on fees). Admittedly, this is educated conjecture. The net of the above could be a smaller return premium for private versus public equity, as opposed to a deficit. But I do stand by my conjecture, and though the magnitude is impossible to be precise about, it’s difficult to imagine the drop-off is not directionally right and nontrivial.

What 2022 Taught Us About Equity Market Sectors
SPONSORED

What 2022 Taught
Us About Equity
Market Sectors
Second, it’s dangerous to understate risk. Many investors use PE to up their overall equity allocations while avoiding the occasional short-term excruciation that accompanies public equity market investing. The only way this increased risk can be justified without simply announcing, “We’re taking it up a notch” is to assume that this ever-growing PE allocation is relatively low-volatility and low-correlation. You can find many examples of these assumptions — people like to tweet them at me! — though whereas some managers are certainly honest or smart enough to avoid them, others lean in, shamelessly bragging that the assets they don’t mark to market outperform in a bear market. Some have taken to calling the understatement of PE risk “volatility laundering.” Okay, that’s mainly me, but it’s catching on, and volatility as a risk measure more generally gets a bad rap from those who erroneously think it means “short-term fluctuation that you definitely get back and shouldn’t worry about.”

Those understated risk assumptions likely become a problem only in a real extended bear market — not a one-to-three-year bear like we’ve occasionally seen in the past few decades, nor, certainly, a super short crash and rebound like the one in spring 2020. PE can ride those out using its patented ostrich technique (though the GFC was starting to get scary). But say we get an ugly ten-to-20-year bear market, not just “end to end” (like 2000–2009, which started out at a bubble peak and ended in a bear market trough, even though both ugly periods were only two-to-three-year affairs). This hasn’t happened in the U.S. in a long time but is well within the realm of possibility. If and when that happens, your starting assumptions of high-single-digit volatility and low correlation to public equity markets for your private, levered equity portfolio will not save you. And what is risk management about if it is not concerned with this low-probability but extreme long-term wealth-destroying outcome?


Third, doesn’t admitting what you’re doing break the spell? Once you say out loud, “We know the prices move, but it’s useful to fool ourselves,” doesn’t the fooling yourself part stop working? Well, apparently not! Once you, the investor, admit to yourself, “This may be levered equity exposure likely offering less versus public markets than in the past, but I’m doing it this private way so I can stick with it long-term,” why on earth can’t you be long-term in public markets? Asking for a friend :-). Okay, I do admit part of my motivation here is professional jealousy. For reasons that obviously escape me, many investors can’t be as long-term in public markets as in private ones, and we in the public markets actually have to live with day-to-day market reality. Heck, I was so jealous I once even took my own shot at marketing a private investment fund. It didn’t catch on.

But seriously, run the thought experiment where PE managers actually told investors their best guess of what the portfolio could be sold for (not in a panic sale) today. If they did this but still delivered market-beating returns, would all their investors flee? Would the appeal be gone? If so, isn’t that telling? Now run it backward. If a liquid strategy that had a healthy positive long-term expected return was able to report its returns like PE, would the appeal go way up?

It’s hard to avoid the idea that my confusion over “Why be long-term only in privates?” is resolved by noting a principal–agent problem where the PE managers get paid a ton so intermediaries can then report unrealistically rosy assumptions and unrealistically calm returns. The chickens come home to roost only if long-term returns no longer beat public markets (i.e., no bear market needed here, just a reversal of the historical illiquidity premium) or, even scarier, a real long-term bear hits and the portfolio’s risk was seriously underestimated. But both parties involved, principal and agent, may be assuming that in ten-plus years that’ll be someone else’s problem. With this bare-knuckles truth-telling, I’m running a real risk of upsetting my clients, many of which have healthy PE allocations. But I am truly trying to help, and, as usual, I will let the chips fall where they may. Truth be told, it’s whoever the agents report to who really need to improve here (i.e., understanding that asset prices actually move and not needing to be fed imaginary unchanging numbers) — not the agents themselves, who are just responding to incentives.

Of course, I’m certainly not alone in my worries. For instance, a survey of top academics agrees PE is understating its volatility, and some rather obscure yet somewhat successful active stock pickers seem to agree too.

So basically, Schelling is right about one important thing. Markets aren’t perfectly efficient, and sometimes they’re grossly inefficient. We both heartily endorse leaning against this in your portfolio while taking a truly long-term perspective, as inefficiencies can be a hard thing to fight short-term. Where we differ: I don’t endorse (1) doing so by making up prices and returns you think are more metaphysically accurate than the market’s current prices; (2) quite possibly today, unlike in the past, accepting a lower expected return on privates versus truly comparable public markets for this volatility-smoothing “feature”; and (3) seriously understating the true long-term risks to client portfolios if a real long-term bear market hits. I do endorse valuing your portfolio at where you think you could sell it today in a reasonably orderly fashion — and if you think that’s too low, making that case to your investors, as the rest of us have to do in the real world.

Given the massive popularity of private investing today, it may very well be true that, as a great man once almost said, “Never have so many paid so much to so few for the privilege of being told so little.”


Cliff Asness is the co-founder of AQR Capital Management.

[Farfromgeneva]

Global analysis but applies easily to this country as well if one looks at the map

https://www.mckinsey.com/mgi/our-resear ... -chapter-1

Pixels make the picture: A guided tour through the granular world

Residential buildings bathed in evening light on a slope in the capital city, La Paz, Bolivia. The buildings are so densely packed that they resemble pixels when viewed from afar.
We start the story uncovered by McKinsey Global Institute’s latest research on human development in Mapusa, a small town along a historic trade route in the Indian state of Goa, and in Porto, the second largest city in Portugal. Both places had virtually the same GDP per capita of $33,000 in 2019. 1

At the country level, they are worlds apart: India’s GDP per capita was $6,700 in 2019, compared to $34,900 in Portugal—overall more than five times less.

Buildings set amongst greenery and palm trees in Mapusa, India.Mapusa, India
Colorful European buildings nestled on a tiered hill along a calm waterfront with boats in the Ribeira neighborhood of Porto, Portugal.Porto, Portugal
Similar discrepancies mar our perspective of well-being, blurred out by country-level averages. People living in Lima, Peru, and in Manchester, England, share the same average life expectancy, 78.5 years. At the country level, we see that citizens of the United Kingdom lived 6.8 years longer on average than those living in Peru.

Data at the country or subcontinental level often obscures precisely where that progress has occurred and just how extensive it is. Just as the invention of the microscope in 1590 by Hans and Zacharias Janssen began revealing previously hidden worlds invisible to the eye, new research techniques—such as satellite-enabled luminosity studies—help us compile and understand the granular details that challenge existing assumptions and improve our understanding of human progress.

Our research embraces a microscopic perspective to zoom in and build a high-resolution view of the world and its progress as measured by population, life expectancy, and GDP per capita from 2000 to 2019. (In this report, we use the terms “GDP per capita” and “income” interchangeably.)

Here one bubble represents the whole world with 7.6 billion people who had an average life expectancy of 73.1 years and average income of $16,800 in 2019.

Now we break the bubble into ten different bubbles, each representing a subcontinent. The highest bubble on the chart is Advanced Asia, while the two largest bubbles represent China and India.

The bubbles in this third view, perhaps the one we are most accustomed to, represent countries. At this level, the spread of human progress is already apparent. The 178 countries represented averaged 40 million people, 700,000 square kilometers, and $700 billion of GDP in 2019.

Look here at how our pixels change that view. For the first time at a global level we can see the world as more than 40,000 microregions, a 230 times increase in resolution. Each microregion covered an average of 3,000 square kilometers with $3 billion of GDP and some 180,000 people in 2019.

The world through a microscope

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Life expectancy in 2019, years
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GDP per capita in 2019, log scale, $

This pixelated perspective uncovers the true breadth and depth of humanity’s progress and brings into sharper relief places that are being left behind.

Going forward, we hope data at this resolution helps us unlock more hidden insights into how to ensure the fruits of progress are enjoyed and sustained by even more people.

In this chapter, we demonstrate the power of this granularity and why microregions matter. Like all human progress, the tour starts with meaningful stories. But we can back the stories up—or improve their accuracy—with our granular data, since a country level view blurs the true lived experience in many places.

Pixelated maps


Any intrepid traveler understands the value of maps. In the following maps, we guide you through the peaks and valleys of economic activity and life expectancy across microregions around the world. In the same way a trekker or nomad may pay little heed to geopolitical boundaries in search of adventure or water, we find that human progress sometimes depends on local conditions as much as or more than national ones.

Disappearing borders

Consider Cambodia and Laos, where average life expectancies at the national level in 2019 were 69.8 years and 67.9 years respectively, a difference of roughly two years. The real differences appear within these countries, where life spans in microregions differed by more than ten years, ranging from 61.4 to 74.6 years.


People living in the microregions of Cambodia along the border with Laos, for example, had shorter lives than their compatriots living in microregions along the country’s coast and around Phnom Penh and Siem Reap, its largest cities.

One possible explanation for this variance is that some 40 percent of Cambodia’s doctors and almost three-quarters of its specialized physicians work in Phnom Penh, the capital, while 80 percent of the country’s population resides in rural areas. This mismatch between where medical care is available and where people live is exacerbated by inadequate sanitation and limited access to clean water, which contribute to an infant mortality rate roughly three times higher in the Cambodian countryside.

Moving to Latin America, GDP per capita in Peru was higher at $13,000 than in Bolivia at $8,700 in 2019. Still, zooming into microregions uncovers large differences within each country—and again, a border that previously seemed sharp simply disappears.


In Peru, the coastal Costa region is the most prosperous and most populous in the country. Home to more than half the population, it occupies just over 10 percent of Peru’s land mass. While primarily arid, it is nonetheless wealthier than the Selva and Sierra regions due to its proximity to trade, to the agricultural output of the fertile valleys between the Andes and the Pacific, and to Lima, the capital. Moquegua at the southern end of Peru’s coast was the wealthiest area in the country due to the mining and agriculture there.

With GDP per capita of $38,500, Moquegua was many times wealthier than other parts of Peru, such as the Iquitos district in the Peruvian Amazon, where income was $9,900 in 2019.

In Bolivia, Charaña, a microregion within the La Paz department is among the microregions with the highest GDP per capita at $22,400, similar to the income in Tacna across the border in Peru. Much of the rest of the country, especially areas with large indigenous populations, was much poorer, with income between $4,000 and $10,000.

Our concentrated geographic footprint

Let’s now zoom back out to the entire world. The concentration of global economic activity looks very different under a microregional lens, too.

Half of the additional GDP generated from 2000 to 2019 came out of 3,600 microregions from our total of 40,000 as ranked by the increase in GDP per square kilometer. While this economic growth was concentrated, it was geographically dispersed.

These 3,600 microregions were scattered across 130 countries yet cover just 0.9 percent of the world’s land mass—collectively the size of South Africa. Twenty-seven percent of the global population lived in them in 2019, totalling two billion people.


In China, high growth places such as Bao'an District in Shenzhen and Guangzhou and Dongguan in Guangdong were among these places. India and the United States were home to the next largest pool of microregions that were economic powerhouses. Microregions in countries as diverse as Romania, Brazil, Indonesia, and Nigeria contributed, too, for example, São Paulo, Brazil, and Bogor City, the sixth largest city in the Jakarta metropolitan area in Indonesia.

The patterns of population growth explain part of this concentration phenomenon: Half of the 1.5 billon people added to planet Earth from 2000 to 2019 lived on just 1.1 percent of its surface.

Fighting the tyranny of averages


We typically think of prosperity and well-being by country because that is how statistics are commonly aggregated and reported. But this tyranny of averages prejudices our conclusions. That is, we often lump together all the people living in a country and regard all of them as having the same average GDP per capita or life expectancy. Our microregional lens doesn’t entirely resolve the tyranny—for example, a municipality is also an average of its neighborhoods—but it certainly provides a much more precise picture of development and reveals differences within countries, as the disappearing borders in the previous examples have demonstrated. Now we’ll turn to examples where national averages are misleading and show how our understanding shifts when we employ a microregional lens.

A problem of misclassification

We start with a problem of misclassification. To illustrate it, we first identified countries in the world where GDP per capita growth in dollars was in the top 30 percent, or $7,100 or more from 2000 to 2019.

Some 2.3 billion people lived in those places, which were scattered in 28 countries including China, Malaysia, Türkiye, and the United States.


However, the country lens misclassified the progress of some 1.4 billion people.


Looking at microregions, we found about 700 million more people living in microregions outside those 28 countries that also achieved GDP per capita gains putting them in the top 30 percent globally, or at least $7,100. We call this the exclusion error.

Another 700 million people who did live in those 28 countries actually resided in microregions that had not in fact made enough gains to remain in the top 30 percent. We call this the inclusion error.

Let’s look at two countries, the United States and India, to illustrate the scope of misclassification. On average, they achieved very different leaps in income from 2000 to 2019, an increase of $12,500 for the United States versus $4,150 for India. Under the top 30 percent criteria, the United States would be fully highlighted in our maps, while India would not be highlighted at all. (Of course, since India’s GDP per capita started at a lower point, its leap is proportionally more impressive. Over 20 years, India’s GDP per capita grew to 2.6 times its 2000 level compared to 1.3 times in the United States.)

What happens if we take a microregional lens instead?

In the United States, 120 million people, or a little more than one-third of the population, lived in 1,400 microregions where GDP per capita increased by less than $7,100, putting them outside the most fortunate 30 percent. The country average, as indicated, included them.


In India, on the other hand, we find 270 microregions home to 114 million people in 2019 where GDP per capita did actually grow more than $7,100. The country average excluded them.


An overlapping world

The national and subcontinental lens traditionally applied to examine human progress also hides the world’s commonalities: microregions in the same decile of income or life expectancy. Zooming in with a microregional perspective, we find such commonality in unexpected places.

Here, we divide all of the world’s microregions by GDP per capita into deciles of equal population. This allows us to explore the distribution of microregions within a subcontinent across income deciles.

Sub-Saharan Africa, for example, spans nearly 50 countries and 12,200 microregions. In 2019, GDP per capita in sub-Saharan Africa was $3,900, which would place it in the second decile globally. This subcontinental average collapses data from microregions home to 1.1 billion people into one number.

Taking a microregional view instead, we see much more variation in GDP per capita. Microregions in sub-Saharan Africa were represented in significant numbers all the way from the first to the eighth deciles. In fact, 3 percent of the population in the world’s eighth decile lived in sub-Saharan African microregions in 2019.

Next, have a look at India. In 2019, India’s GDP per capita was $6,700, representing the average income of 1.4 billion people living in 2,300 microregions, placing the country in the fourth decile globally.

Under a microregional lens, however, we see that the average obscures impressive variation among microregions in India, which had levels of GDP per capita ranging from the first decile all the way to the ninth decile globally in 2019.

Moving to China, its average GDP per capita was $16,000 in 2019.

When we instead look at 2,400 Chinese microregions, we see that the 1.4 billion people there also had levels of GDP per capita spanning the first through tenth deciles.

Latin America and the Caribbean and Emerging Asia had microregions in all deciles of the income distribution, too. In other words, the microregions in these subcontinents fell into the very top and the very bottom of the global income distribution and everywhere in between.

Look at all the subcontinents across the globe, and strikingly, each one had microregions in the eighth decile of GDP per capita. Subcontinents as different as sub-Saharan Africa, India, Western Europe, and North America had microregions with similar levels of income.

For life expectancy (not shown on our charts) we find a similar story: eight of the ten subcontinents had microregions in the top three deciles of longevity.

This diversity and commonality have large implications for businesses, governments, and civil society. For businesses from consumer goods companies to financial institutions, this degree of similarity could inform strategic decisions across multiple dimensions, from product mixes to store footprints across and within countries. Or imagine how the development community might use granularity as it works to lift living standards in places that have fallen behind. The level of precision that can be achieved with a microregional analysis can improve our understanding of development and enhance the quality of our decisions and actions.

China, India, and the United States

We live in a world of increasing overlap. Some 194 Chinese prefectures, home to 228 million people, and 14 Indian regions, home to 4 million people, were in the ninth and tenth deciles of GDP per capita by 2019. In the United States, 2,600 counties, home to 311 million people, were at this level of economic prosperity. This means 500 counties, home to 18 million people, were in the eighth decile of GDP per capita or below.

Bao'an, a district of Shenzen, for instance, had comparable GDP per capita to Queens, New York, in 2019. Inhabitants of Karaikal in the Union Territory of Puducherry in India, lived on average with a GDP per capita equivalent to that in Pasco, Florida. Several districts in Beijing had GDP per capita similar to Baldwin, Alabama.

In 2000, such overlap was much smaller. The world meeting on the same curve is a relatively new phenomenon. The extent of this overlap is visible only in pixelated view. In 2000, Karaikal’s GDP per capita was about 50 percent less than that of Pasco, while Bao'an’s and Beijing’s GDP per capita were a third of that in Queens and Baldwin County, respectively.


The trend is even more striking in the case of life expectancy. For comparability purposes, we reduce the level of granularity in all three countries to analyze life expectancy, due to India’s data limitations. We look at states in India and the United States, and provinces in China. In 2019, in China, 360 million people—a quarter of the total population—lived in eight provinces with life expectancy greater than 78.7 years, placing them in the top two deciles globally.


Compare this to the 216 million people—65 percent of the total population—living in 32 different US states where life expectancy estimates put them in the top two deciles by 2019. In terms of lifespan, Colorado and Massachusetts look very similar to Tianjin and Shandong. In India in 2019, two microregions—Kerala and Andaman and Nicobar, together home to 34 million people—had life expectancy of 76 years in 2019, which was higher than in microregions in the United States and China that were home to 17 million and 147 million people, respectively.

A new 80/20 rule

Uneven economic prosperity and growth is the reality within many countries. As we have seen in this chapter, country averages, while useful indicators of overarching economic progress, obscure differences in microregional realities.

To test this claim more systematically, we regressed five-year moving average annual growth rates at the microregional level on annual growth at the country level, which helps us estimate the explanatory power of country-level growth. The bottom line: a country’s GDP per capita growth rate can explain only 20 percent of the variation in the microregional growth rates in that country.


Given differences in microregional characteristics, such as sectoral composition, productivity growth, and population changes, it is no surprise that national averages explain only a minor portion of the differences we see using a microregional lens. Local variation matters—we can and should learn more about it.

The benefits of a microscopic peek into human progress are clear—we see local progress that a country view obscures, identify locales where governments and businesses can find opportunities and challenges, and better assess quality of life for the world’s population. In the next chapter, we examine microscopic progress in detail to see just how far the world has come since 2000.

[Typical Lax Dad]

Globalisation, already slowing, is suffering a new assault
Subsidies, export controls and curbs on foreign investment are proliferating

Trade ministers are not known for histrionics. Yet South Korea’s, Ahn Duk-geun, is alarmed. The world is on the verge of opening Pandora’s box, he warned last month. If the European Union follows through on threats to mimic America’s protectionist industrial policies, “Japan, Korea, China, every country will engage in this very difficult race to ignore global trading rules.” The international system of trade and investment, painstakingly negotiated over decades, will be upended.

William Reinsch, who used to oversee America’s export controls as an undersecretary of commerce, is just as blunt. America has always wanted to maintain a technological edge over other economic powers, he says. These days, however, it is pursuing that goal in a new way: “We have moved from a ‘run faster’ to a ‘run faster and trip the other guy’ policy.” The great powers are coming to see economic advances, at least in the broad swathe of industry they define as strategic, in zero-sum terms. The implications for global prosperity are bleak.

In a speech in September America’s national security adviser, Jake Sullivan, spelled out the basic tenets of this beggar-thy-neighbour approach. Merely retaining a technological lead over China and other rivals was no longer enough, he argued. Instead, he said, America had to pursue “as large of a lead as possible” in chipmaking, quantum computing, artificial intelligence, biotechnology and clean energy. To that end, America needed not only to welcome clever people and foster innovation, but also to impede technological advances in countries like China and Russia.

Mr Sullivan described two main ways to ensure American supremacy: using subsidies and other forms of industrial policy to shift supply chains away from geopolitical rivals, and stricter investment screening and export controls to keep advanced technology out of unfriendly hands. As America, once the world’s loudest advocate of free trade and open economies, adopts and reinforces such policies, other countries are mimicking its approach. The result is a proliferation of obstacles to international trade and investment at a time when both were already stagnating.

The sudden enthusiasm for industrial policy in America and elsewhere epitomises the trend. In 2022 Congress passed two lavish bills aiming to bolster domestic industry, in the name of national security, job creation and decarbonisation. The chips Act, which provides $52bn of incentives for the semiconductor industry, attempts to reverse a multi-decade decline in America’s share of chip manufacturing. The Inflation Reduction Act (ira) will spend nearly $400bn to boost clean energy and reduce dependence on China in important supply chains, such as for batteries for electric vehicles (evs).

Handouts be praised
It is not just America which is trying to boost domestic industry at the expense of foreign rivals. According to the un, more than 100 countries accounting for over 90% of the world’s gdp have adopted formal industrial strategies. Spending on subsidies among g7 countries has risen sharply in recent years, from 0.6% of gdp on average in 2016 to 2% in 2020. In part, this is a response to the pandemic: the European Union, for example, adopted a gargantuan recovery package, involving more than $850bn in spending, including many handouts for business. But although spending on subsidies has fallen from its peak in 2020, it remains well above its pre-covid levels.

Multinationals having second thoughts about manufacturing in China are in some cases being paid to relocate. Japan included incentives for such relocations in its budget in 2020. India is trying to lure footloose firms in 14 different industries by offering up to $26bn of production-linked incentives over five years. Such overtures may become common if commerce begins to fragment and firms are required to choose a side.

Another reason for the ballooning handouts is breast-for-tat subsidies, which aim to counteract the incentives offered in other countries. The $52bn payout to chipmakers under America’s chips Act sounds lavish, but it is only a small part of the $371bn earmarked for the semiconductor industry over the next decade in the seven most generous countries, according to ubs, a bank. (China, the eu, India, Japan, South Korea and Taiwan are the other big spenders.) This week Taiwan approved new tax breaks for its chipmakers.

ev batteries, of which China produces 70%, are another magnet for subsidies and other forms of state support. Since 2020 Indonesia has banned the export of nickel to encourage battery manufacturing at home. Australia and Canada are shelling out billions of dollars to boost mining and processing of ores. A controversial element of the ira is a $7,500 tax credit for American consumers purchasing evs. One half of the credit is available if a vehicle’s battery components are manufactured or assembled in America; the other half is based on the origin of the battery’s minerals. Final assembly of the vehicle must take place in America, too.

Foreign evs that do not meet either of these thresholds will be hugely disadvantaged. Consider Hyundai, a South Korean carmaker which sells more evs in America than any other firm bar Tesla. Its vehicles are not eligible for the credit since they are currently assembled abroad. It is building a $5.5bn ev plant in America, but it will not start production until 2025. Even then, it is not clear if Hyundai’s cars will qualify for the mineral-related component of the credit, since the American authorities have not yet published detailed regulations about acceptable sources.

Other governments are likely to respond to America’s coddling of domestic producers with more breast-for-tat subsidies. In December the finance ministers of both France and Germany, as well as Ursula von der Leyen, the president of the European Commission, called for a European version of the ira. Margrethe Vestager, the eu’s competition tsar, who polices subsidies within the bloc, appears open to the idea of prolonging a pandemic-induced loosening of the rules to allow member-states to counter the competitive challenge posed by the ira.

The potential scale of spending is staggering. If seven other market-oriented economies (Australia, Britain, Canada, the eu, Japan, India and South Korea) adopt subsidies as large as America’s—about 2% of gdp—the total bill in the eight countries would be $1.1trn. In the industries that are receiving the most handouts the effect is even more pronounced: subsidies for semiconductors amount to more than 60% of the industry’s annual sales. Western taxpayers are spending lavishly to make an all-important part of the world economy far less efficient.

Investment screening is another policy that Mr Sullivan champions as a means to preserve America’s technological edge. Selling to the highest bidder is not as straightforward as it used to be, especially if that bidder is Chinese. unctad, a un agency which tracks investment policies around the world, counted a record number of new measures restricting foreign investment in 2020 (see chart 1). unctad calculates that 63% of global investment flows were subject to a screening regime last year, up from 52% in 2020.

The Committee on Foreign Investment in the United States (cfius), a body charged with identifying and blocking deals that might threaten national security, is the model for many of these new regimes. In 2018 new legislation broadened cfius’s jurisdiction over transactions involving “critical” technology and infrastructure and sensitive personal data. An order issued by Mr Biden in September directs the committee to focus its attention on the security of supply chains and technological leadership.

The committee has been busy—between 2017 and 2021 cfius investigated 661 transactions, more than twice as many as during the previous five years. Although it blocks relatively few investments outright, many deals are called off under the glare of its scrutiny, before a final decision is reached (see chart 2). ByteDance, the Chinese parent of TikTok, a video app, remains locked in negotiations with it more than two years after Donald Trump issued an order, later revoked, demanding the divestment of TikTok’s American business.

The eu called on member states to set up or strengthen screening mechanisms in 2020. Nearly all of them now have one. In 2021 alone three members introduced new regimes and six tightened existing laws. Many are learning on the job. Last year was exceptionally busy for Germany’s watchdog, which intervened in the acquisition of Heyer Medical, a medical-technology firm, and a facility owned by Elmos, an automotive chipmaker. Long-awaited guidelines on France’s regime issued in September did little to limit the extraordinary discretion afforded regulators to review transactions. Britain’s screening regime began examining deals a year ago and has already blocked or unwound four (three of which involve a Chinese buyer of a semiconductor firm or technology).

More restrictions will surely follow. In December Canada announced legislation to strengthen its investment-review process weeks after ordering three Chinese investors to divest from its lithium miners. A new regime to screen foreign investment in the Netherlands is expected to come into force this year.

Although the number of deals blocked by investment-screening regimes is relatively low, their scope—and thus the effect they have on corporate decision-making—is vast. The regulations tend to apply only to “strategic” industries, but these are typically defined very broadly. Industries accounting for 60% of the value of America’s stockmarkets fall under the potential remit of cfius, judging by the deals submitted to it in 2021. The 17 industries covered by the British regime account for 35% of the big firms listed in Britain, we calculate. In 2021, 29% of foreign investments referred for screening in Europe underwent detailed scrutiny.

Mr Sullivan would like to go further. “We are making progress,” he said in his speech, “in formulating an approach to address outbound investments in sensitive technologies.” There is a broad consensus in Washington that American capital must not be allowed to “enhance the technological capabilities of our competitors”, as he put it (since 2000, for instance, American venture capitalists have invested more than $50bn in China). Some restrictions already exist: the chips Act bars firms that receive its subsidies from making big investments that could benefit China’s semiconductor industry, for instance. A comprehensive regime, however, might lead to big changes in the allocation of America’s $171bn a year in foreign direct investment in new projects. The European Commission has said that it, too, will consider screening outbound investments in 2023.

Export controls, which restrict the transfer of goods and services to certain countries, companies and people, are a third policy acclaimed by Mr Sullivan. Western governments have used them extensively against Russia since its invasion of Ukraine, curbing its access to all manner of goods, from chips to chemicals. The intention is not just to impede Russia’s war machine, but also to disrupt critical industries, such as oil refining. Mr Sullivan boasts that the controls have forced Russia to use chips from dishwashers in its military equipment.

America has long maintained a list of companies which must apply for permission to purchase goods with potential military uses. The number of Chinese firms on this “entity list” increased from 130 in 2018 to 532 in 2022. China accounts for more than a quarter of the firms on the list, the Carnegie Endowment for International Peace calculated last year. Another 36 names, including Yangtze Memory Technologies, a memory chip producer previously in talks to supply Apple, were added to the list in December.

Another American regulation, the foreign direct product rule, tries to restrict sales of items based on American technology, even if they are designed and manufactured abroad, by imposing penalties on the firms involved. This far-reaching instrument was successful in undermining the manufacture of smartphones by Huawei, a Chinese telecoms firm.

In October America’s Department of Commerce announced export controls on advanced chips used to power supercomputers and artificial-intelligence algorithms. The new rules in effect ban the sale of the most powerful chips, and the software and manufacturing equipment needed to produce them, to Chinese firms. Similar restrictions in other high-tech fields are expected this year.

The restrictions announced in October apply the foreign direct product rule on an unprecedented scale. No distinction is made between private Chinese firms and state-owned enterprises. Since advanced chipmaking requires continuous technological support in the form of software updates, replacement parts and engineering advice, which are also covered by the rules, “in the short term, the restrictions could reverse the capabilities of China in leading-edge chips”, says Gregory Allen, a researcher at the Centre for Strategic and International Studies, a think-tank. Barclays, a bank, reckons that the controls could reduce China’s annual gdp growth by 0.6 percentage points.

The restrictions are so severe America may struggle to persuade its allies to adopt equivalent measures. Yet without such unity, they will not work. Other countries with advanced semiconductor industries—in particular the Netherlands and Japan—could undermine their effectiveness by providing China with substitutes. American policymakers will find a worrying precedent in the satellite industry. After America introduced broad export controls against China in 1999, firms in Europe began designing satellites free from American parts to evade the new strictures. American firms lost revenue, but China did not lose access to cutting-edge satellites.

Foreign chipmakers are loth to forgo sales to China, the world’s largest market for semiconductors. America is pressing Japan and the Netherlands to follow its lead, without any clear result. Big semiconductor firms are grumbling: the boss of tsmc, the world’s largest contract chipmaker, points out that the controls will reduce the industry’s productivity and make it less efficient.

The same is true of all the new impediments to international trade and investment. As the logic of efficiency and comparative advantage gives way to a focus on security and economic nationalism, investments will be duplicated and costs will rise. The result will be higher bills for taxpayers and consumers and therefore diminished prosperity.

Foreign direct investment has already fallen from a peak of 5.3% of global gdp in 2007 to 2.3% in 2021. The deals that continue to go ahead are more heavily regulated. In 2022 a Chinese buyer was permitted to acquire only 25% of a port in Hamburg, rather than the planned 35%. In 2021 half of all approvals of cross-border investment in France came with conditions attached.

Meanwhile, subsidies programmes are altering capital spending. In the semiconductor industry, famed for its boom-and-bust cycles, the risk of oversupply is substantial. More than 40 new semiconductor projects have been announced across America since mid-2020, according to the Semiconductor Industry Association, including fabrication plants in Arizona to be built by Intel and tsmc at an estimated cost of $60bn. Firms in the ev supply chain are enjoying a similar binge. According to a report by Goldman Sachs, around $164bn in spending is needed this decade by American and European firms to localise the supply chain for batteries.

Consumers be warned
Viewed in isolation these plans increase investment in national economies; at the global level they represent an enormous increase in costs. By our calculation, duplicating the world’s existing stock of investments in semiconductors, clean energy and batteries would cost between 3.2% and 4.8% of global gdp. And the logic of the zero-sum world means further escalation in government intervention is likely: after all, if no country’s firms can be assured of equal treatment and open market access when operating abroad, it makes more sense for all countries to nurture and protect industries at home.

Countries like China and Russia do present a profound threat to the current global order. Russia’s curbing of gas exports to Europe in response to European support for Ukraine highlights the risks of relying on such places for crucial imports. The urge among Western democracies to hobble adversaries economically to diminish such dangers is understandable. But it will have huge costs. What is more, the economic policies being adopted in the name of national security and competitiveness are so sweeping and clumsy that they are hurting allies as much as enemies. The zero-sum mindset may or may not succeed in making the world safer for democracy. But it will certainly make the world poorer. ■

[Farfromgeneva]

Globalisation, already slowing, is suffering a new assault
Subsidies, export controls and curbs on foreign investment are proliferating

Trade ministers are not known for histrionics. Yet South Korea’s, Ahn Duk-geun, is alarmed. The world is on the verge of opening Pandora’s box, he warned last month. If the European Union follows through on threats to mimic America’s protectionist industrial policies, “Japan, Korea, China, every country will engage in this very difficult race to ignore global trading rules.” The international system of trade and investment, painstakingly negotiated over decades, will be upended.

William Reinsch, who used to oversee America’s export controls as an undersecretary of commerce, is just as blunt. America has always wanted to maintain a technological edge over other economic powers, he says. These days, however, it is pursuing that goal in a new way: “We have moved from a ‘run faster’ to a ‘run faster and trip the other guy’ policy.” The great powers are coming to see economic advances, at least in the broad swathe of industry they define as strategic, in zero-sum terms. The implications for global prosperity are bleak.

In a speech in September America’s national security adviser, Jake Sullivan, spelled out the basic tenets of this beggar-thy-neighbour approach. Merely retaining a technological lead over China and other rivals was no longer enough, he argued. Instead, he said, America had to pursue “as large of a lead as possible” in chipmaking, quantum computing, artificial intelligence, biotechnology and clean energy. To that end, America needed not only to welcome clever people and foster innovation, but also to impede technological advances in countries like China and Russia.

Mr Sullivan described two main ways to ensure American supremacy: using subsidies and other forms of industrial policy to shift supply chains away from geopolitical rivals, and stricter investment screening and export controls to keep advanced technology out of unfriendly hands. As America, once the world’s loudest advocate of free trade and open economies, adopts and reinforces such policies, other countries are mimicking its approach. The result is a proliferation of obstacles to international trade and investment at a time when both were already stagnating.

The sudden enthusiasm for industrial policy in America and elsewhere epitomises the trend. In 2022 Congress passed two lavish bills aiming to bolster domestic industry, in the name of national security, job creation and decarbonisation. The chips Act, which provides $52bn of incentives for the semiconductor industry, attempts to reverse a multi-decade decline in America’s share of chip manufacturing. The Inflation Reduction Act (ira) will spend nearly $400bn to boost clean energy and reduce dependence on China in important supply chains, such as for batteries for electric vehicles (evs).

Handouts be praised
It is not just America which is trying to boost domestic industry at the expense of foreign rivals. According to the un, more than 100 countries accounting for over 90% of the world’s gdp have adopted formal industrial strategies. Spending on subsidies among g7 countries has risen sharply in recent years, from 0.6% of gdp on average in 2016 to 2% in 2020. In part, this is a response to the pandemic: the European Union, for example, adopted a gargantuan recovery package, involving more than $850bn in spending, including many handouts for business. But although spending on subsidies has fallen from its peak in 2020, it remains well above its pre-covid levels.

Multinationals having second thoughts about manufacturing in China are in some cases being paid to relocate. Japan included incentives for such relocations in its budget in 2020. India is trying to lure footloose firms in 14 different industries by offering up to $26bn of production-linked incentives over five years. Such overtures may become common if commerce begins to fragment and firms are required to choose a side.

Another reason for the ballooning handouts is breast-for-tat subsidies, which aim to counteract the incentives offered in other countries. The $52bn payout to chipmakers under America’s chips Act sounds lavish, but it is only a small part of the $371bn earmarked for the semiconductor industry over the next decade in the seven most generous countries, according to ubs, a bank. (China, the eu, India, Japan, South Korea and Taiwan are the other big spenders.) This week Taiwan approved new tax breaks for its chipmakers.

ev batteries, of which China produces 70%, are another magnet for subsidies and other forms of state support. Since 2020 Indonesia has banned the export of nickel to encourage battery manufacturing at home. Australia and Canada are shelling out billions of dollars to boost mining and processing of ores. A controversial element of the ira is a $7,500 tax credit for American consumers purchasing evs. One half of the credit is available if a vehicle’s battery components are manufactured or assembled in America; the other half is based on the origin of the battery’s minerals. Final assembly of the vehicle must take place in America, too.

Foreign evs that do not meet either of these thresholds will be hugely disadvantaged. Consider Hyundai, a South Korean carmaker which sells more evs in America than any other firm bar Tesla. Its vehicles are not eligible for the credit since they are currently assembled abroad. It is building a $5.5bn ev plant in America, but it will not start production until 2025. Even then, it is not clear if Hyundai’s cars will qualify for the mineral-related component of the credit, since the American authorities have not yet published detailed regulations about acceptable sources.

Other governments are likely to respond to America’s coddling of domestic producers with more breast-for-tat subsidies. In December the finance ministers of both France and Germany, as well as Ursula von der Leyen, the president of the European Commission, called for a European version of the ira. Margrethe Vestager, the eu’s competition tsar, who polices subsidies within the bloc, appears open to the idea of prolonging a pandemic-induced loosening of the rules to allow member-states to counter the competitive challenge posed by the ira.

The potential scale of spending is staggering. If seven other market-oriented economies (Australia, Britain, Canada, the eu, Japan, India and South Korea) adopt subsidies as large as America’s—about 2% of gdp—the total bill in the eight countries would be $1.1trn. In the industries that are receiving the most handouts the effect is even more pronounced: subsidies for semiconductors amount to more than 60% of the industry’s annual sales. Western taxpayers are spending lavishly to make an all-important part of the world economy far less efficient.

Investment screening is another policy that Mr Sullivan champions as a means to preserve America’s technological edge. Selling to the highest bidder is not as straightforward as it used to be, especially if that bidder is Chinese. unctad, a un agency which tracks investment policies around the world, counted a record number of new measures restricting foreign investment in 2020 (see chart 1). unctad calculates that 63% of global investment flows were subject to a screening regime last year, up from 52% in 2020.

The Committee on Foreign Investment in the United States (cfius), a body charged with identifying and blocking deals that might threaten national security, is the model for many of these new regimes. In 2018 new legislation broadened cfius’s jurisdiction over transactions involving “critical” technology and infrastructure and sensitive personal data. An order issued by Mr Biden in September directs the committee to focus its attention on the security of supply chains and technological leadership.

The committee has been busy—between 2017 and 2021 cfius investigated 661 transactions, more than twice as many as during the previous five years. Although it blocks relatively few investments outright, many deals are called off under the glare of its scrutiny, before a final decision is reached (see chart 2). ByteDance, the Chinese parent of TikTok, a video app, remains locked in negotiations with it more than two years after Donald Trump issued an order, later revoked, demanding the divestment of TikTok’s American business.

The eu called on member states to set up or strengthen screening mechanisms in 2020. Nearly all of them now have one. In 2021 alone three members introduced new regimes and six tightened existing laws. Many are learning on the job. Last year was exceptionally busy for Germany’s watchdog, which intervened in the acquisition of Heyer Medical, a medical-technology firm, and a facility owned by Elmos, an automotive chipmaker. Long-awaited guidelines on France’s regime issued in September did little to limit the extraordinary discretion afforded regulators to review transactions. Britain’s screening regime began examining deals a year ago and has already blocked or unwound four (three of which involve a Chinese buyer of a semiconductor firm or technology).

More restrictions will surely follow. In December Canada announced legislation to strengthen its investment-review process weeks after ordering three Chinese investors to divest from its lithium miners. A new regime to screen foreign investment in the Netherlands is expected to come into force this year.

Although the number of deals blocked by investment-screening regimes is relatively low, their scope—and thus the effect they have on corporate decision-making—is vast. The regulations tend to apply only to “strategic” industries, but these are typically defined very broadly. Industries accounting for 60% of the value of America’s stockmarkets fall under the potential remit of cfius, judging by the deals submitted to it in 2021. The 17 industries covered by the British regime account for 35% of the big firms listed in Britain, we calculate. In 2021, 29% of foreign investments referred for screening in Europe underwent detailed scrutiny.

Mr Sullivan would like to go further. “We are making progress,” he said in his speech, “in formulating an approach to address outbound investments in sensitive technologies.” There is a broad consensus in Washington that American capital must not be allowed to “enhance the technological capabilities of our competitors”, as he put it (since 2000, for instance, American venture capitalists have invested more than $50bn in China). Some restrictions already exist: the chips Act bars firms that receive its subsidies from making big investments that could benefit China’s semiconductor industry, for instance. A comprehensive regime, however, might lead to big changes in the allocation of America’s $171bn a year in foreign direct investment in new projects. The European Commission has said that it, too, will consider screening outbound investments in 2023.

Export controls, which restrict the transfer of goods and services to certain countries, companies and people, are a third policy acclaimed by Mr Sullivan. Western governments have used them extensively against Russia since its invasion of Ukraine, curbing its access to all manner of goods, from chips to chemicals. The intention is not just to impede Russia’s war machine, but also to disrupt critical industries, such as oil refining. Mr Sullivan boasts that the controls have forced Russia to use chips from dishwashers in its military equipment.

America has long maintained a list of companies which must apply for permission to purchase goods with potential military uses. The number of Chinese firms on this “entity list” increased from 130 in 2018 to 532 in 2022. China accounts for more than a quarter of the firms on the list, the Carnegie Endowment for International Peace calculated last year. Another 36 names, including Yangtze Memory Technologies, a memory chip producer previously in talks to supply Apple, were added to the list in December.

Another American regulation, the foreign direct product rule, tries to restrict sales of items based on American technology, even if they are designed and manufactured abroad, by imposing penalties on the firms involved. This far-reaching instrument was successful in undermining the manufacture of smartphones by Huawei, a Chinese telecoms firm.

In October America’s Department of Commerce announced export controls on advanced chips used to power supercomputers and artificial-intelligence algorithms. The new rules in effect ban the sale of the most powerful chips, and the software and manufacturing equipment needed to produce them, to Chinese firms. Similar restrictions in other high-tech fields are expected this year.

The restrictions announced in October apply the foreign direct product rule on an unprecedented scale. No distinction is made between private Chinese firms and state-owned enterprises. Since advanced chipmaking requires continuous technological support in the form of software updates, replacement parts and engineering advice, which are also covered by the rules, “in the short term, the restrictions could reverse the capabilities of China in leading-edge chips”, says Gregory Allen, a researcher at the Centre for Strategic and International Studies, a think-tank. Barclays, a bank, reckons that the controls could reduce China’s annual gdp growth by 0.6 percentage points.

The restrictions are so severe America may struggle to persuade its allies to adopt equivalent measures. Yet without such unity, they will not work. Other countries with advanced semiconductor industries—in particular the Netherlands and Japan—could undermine their effectiveness by providing China with substitutes. American policymakers will find a worrying precedent in the satellite industry. After America introduced broad export controls against China in 1999, firms in Europe began designing satellites free from American parts to evade the new strictures. American firms lost revenue, but China did not lose access to cutting-edge satellites.

Foreign chipmakers are loth to forgo sales to China, the world’s largest market for semiconductors. America is pressing Japan and the Netherlands to follow its lead, without any clear result. Big semiconductor firms are grumbling: the boss of tsmc, the world’s largest contract chipmaker, points out that the controls will reduce the industry’s productivity and make it less efficient.

The same is true of all the new impediments to international trade and investment. As the logic of efficiency and comparative advantage gives way to a focus on security and economic nationalism, investments will be duplicated and costs will rise. The result will be higher bills for taxpayers and consumers and therefore diminished prosperity.

Foreign direct investment has already fallen from a peak of 5.3% of global gdp in 2007 to 2.3% in 2021. The deals that continue to go ahead are more heavily regulated. In 2022 a Chinese buyer was permitted to acquire only 25% of a port in Hamburg, rather than the planned 35%. In 2021 half of all approvals of cross-border investment in France came with conditions attached.

Meanwhile, subsidies programmes are altering capital spending. In the semiconductor industry, famed for its boom-and-bust cycles, the risk of oversupply is substantial. More than 40 new semiconductor projects have been announced across America since mid-2020, according to the Semiconductor Industry Association, including fabrication plants in Arizona to be built by Intel and tsmc at an estimated cost of $60bn. Firms in the ev supply chain are enjoying a similar binge. According to a report by Goldman Sachs, around $164bn in spending is needed this decade by American and European firms to localise the supply chain for batteries.

Consumers be warned
Viewed in isolation these plans increase investment in national economies; at the global level they represent an enormous increase in costs. By our calculation, duplicating the world’s existing stock of investments in semiconductors, clean energy and batteries would cost between 3.2% and 4.8% of global gdp. And the logic of the zero-sum world means further escalation in government intervention is likely: after all, if no country’s firms can be assured of equal treatment and open market access when operating abroad, it makes more sense for all countries to nurture and protect industries at home.

Countries like China and Russia do present a profound threat to the current global order. Russia’s curbing of gas exports to Europe in response to European support for Ukraine highlights the risks of relying on such places for crucial imports. The urge among Western democracies to hobble adversaries economically to diminish such dangers is understandable. But it will have huge costs. What is more, the economic policies being adopted in the name of national security and competitiveness are so sweeping and clumsy that they are hurting allies as much as enemies. The zero-sum mindset may or may not succeed in making the world safer for democracy. But it will certainly make the world poorer. ■

Combine this with our demographic profile and rapidly declining supply/velocity of money in the US and that gets you????

[PizzaSnake]

Globalisation, already slowing, is suffering a new assault
Subsidies, export controls and curbs on foreign investment are proliferating

Trade ministers are not known for histrionics. Yet South Korea’s, Ahn Duk-geun, is alarmed. The world is on the verge of opening Pandora’s box, he warned last month. If the European Union follows through on threats to mimic America’s protectionist industrial policies, “Japan, Korea, China, every country will engage in this very difficult race to ignore global trading rules.” The international system of trade and investment, painstakingly negotiated over decades, will be upended.

William Reinsch, who used to oversee America’s export controls as an undersecretary of commerce, is just as blunt. America has always wanted to maintain a technological edge over other economic powers, he says. These days, however, it is pursuing that goal in a new way: “We have moved from a ‘run faster’ to a ‘run faster and trip the other guy’ policy.” The great powers are coming to see economic advances, at least in the broad swathe of industry they define as strategic, in zero-sum terms. The implications for global prosperity are bleak.

In a speech in September America’s national security adviser, Jake Sullivan, spelled out the basic tenets of this beggar-thy-neighbour approach. Merely retaining a technological lead over China and other rivals was no longer enough, he argued. Instead, he said, America had to pursue “as large of a lead as possible” in chipmaking, quantum computing, artificial intelligence, biotechnology and clean energy. To that end, America needed not only to welcome clever people and foster innovation, but also to impede technological advances in countries like China and Russia.

Mr Sullivan described two main ways to ensure American supremacy: using subsidies and other forms of industrial policy to shift supply chains away from geopolitical rivals, and stricter investment screening and export controls to keep advanced technology out of unfriendly hands. As America, once the world’s loudest advocate of free trade and open economies, adopts and reinforces such policies, other countries are mimicking its approach. The result is a proliferation of obstacles to international trade and investment at a time when both were already stagnating.

The sudden enthusiasm for industrial policy in America and elsewhere epitomises the trend. In 2022 Congress passed two lavish bills aiming to bolster domestic industry, in the name of national security, job creation and decarbonisation. The chips Act, which provides $52bn of incentives for the semiconductor industry, attempts to reverse a multi-decade decline in America’s share of chip manufacturing. The Inflation Reduction Act (ira) will spend nearly $400bn to boost clean energy and reduce dependence on China in important supply chains, such as for batteries for electric vehicles (evs).

Handouts be praised
It is not just America which is trying to boost domestic industry at the expense of foreign rivals. According to the un, more than 100 countries accounting for over 90% of the world’s gdp have adopted formal industrial strategies. Spending on subsidies among g7 countries has risen sharply in recent years, from 0.6% of gdp on average in 2016 to 2% in 2020. In part, this is a response to the pandemic: the European Union, for example, adopted a gargantuan recovery package, involving more than $850bn in spending, including many handouts for business. But although spending on subsidies has fallen from its peak in 2020, it remains well above its pre-covid levels.

Multinationals having second thoughts about manufacturing in China are in some cases being paid to relocate. Japan included incentives for such relocations in its budget in 2020. India is trying to lure footloose firms in 14 different industries by offering up to $26bn of production-linked incentives over five years. Such overtures may become common if commerce begins to fragment and firms are required to choose a side.

Another reason for the ballooning handouts is breast-for-tat subsidies, which aim to counteract the incentives offered in other countries. The $52bn payout to chipmakers under America’s chips Act sounds lavish, but it is only a small part of the $371bn earmarked for the semiconductor industry over the next decade in the seven most generous countries, according to ubs, a bank. (China, the eu, India, Japan, South Korea and Taiwan are the other big spenders.) This week Taiwan approved new tax breaks for its chipmakers.

ev batteries, of which China produces 70%, are another magnet for subsidies and other forms of state support. Since 2020 Indonesia has banned the export of nickel to encourage battery manufacturing at home. Australia and Canada are shelling out billions of dollars to boost mining and processing of ores. A controversial element of the ira is a $7,500 tax credit for American consumers purchasing evs. One half of the credit is available if a vehicle’s battery components are manufactured or assembled in America; the other half is based on the origin of the battery’s minerals. Final assembly of the vehicle must take place in America, too.

Foreign evs that do not meet either of these thresholds will be hugely disadvantaged. Consider Hyundai, a South Korean carmaker which sells more evs in America than any other firm bar Tesla. Its vehicles are not eligible for the credit since they are currently assembled abroad. It is building a $5.5bn ev plant in America, but it will not start production until 2025. Even then, it is not clear if Hyundai’s cars will qualify for the mineral-related component of the credit, since the American authorities have not yet published detailed regulations about acceptable sources.

Other governments are likely to respond to America’s coddling of domestic producers with more breast-for-tat subsidies. In December the finance ministers of both France and Germany, as well as Ursula von der Leyen, the president of the European Commission, called for a European version of the ira. Margrethe Vestager, the eu’s competition tsar, who polices subsidies within the bloc, appears open to the idea of prolonging a pandemic-induced loosening of the rules to allow member-states to counter the competitive challenge posed by the ira.

The potential scale of spending is staggering. If seven other market-oriented economies (Australia, Britain, Canada, the eu, Japan, India and South Korea) adopt subsidies as large as America’s—about 2% of gdp—the total bill in the eight countries would be $1.1trn. In the industries that are receiving the most handouts the effect is even more pronounced: subsidies for semiconductors amount to more than 60% of the industry’s annual sales. Western taxpayers are spending lavishly to make an all-important part of the world economy far less efficient.

Investment screening is another policy that Mr Sullivan champions as a means to preserve America’s technological edge. Selling to the highest bidder is not as straightforward as it used to be, especially if that bidder is Chinese. unctad, a un agency which tracks investment policies around the world, counted a record number of new measures restricting foreign investment in 2020 (see chart 1). unctad calculates that 63% of global investment flows were subject to a screening regime last year, up from 52% in 2020.

The Committee on Foreign Investment in the United States (cfius), a body charged with identifying and blocking deals that might threaten national security, is the model for many of these new regimes. In 2018 new legislation broadened cfius’s jurisdiction over transactions involving “critical” technology and infrastructure and sensitive personal data. An order issued by Mr Biden in September directs the committee to focus its attention on the security of supply chains and technological leadership.

The committee has been busy—between 2017 and 2021 cfius investigated 661 transactions, more than twice as many as during the previous five years. Although it blocks relatively few investments outright, many deals are called off under the glare of its scrutiny, before a final decision is reached (see chart 2). ByteDance, the Chinese parent of TikTok, a video app, remains locked in negotiations with it more than two years after Donald Trump issued an order, later revoked, demanding the divestment of TikTok’s American business.

The eu called on member states to set up or strengthen screening mechanisms in 2020. Nearly all of them now have one. In 2021 alone three members introduced new regimes and six tightened existing laws. Many are learning on the job. Last year was exceptionally busy for Germany’s watchdog, which intervened in the acquisition of Heyer Medical, a medical-technology firm, and a facility owned by Elmos, an automotive chipmaker. Long-awaited guidelines on France’s regime issued in September did little to limit the extraordinary discretion afforded regulators to review transactions. Britain’s screening regime began examining deals a year ago and has already blocked or unwound four (three of which involve a Chinese buyer of a semiconductor firm or technology).

More restrictions will surely follow. In December Canada announced legislation to strengthen its investment-review process weeks after ordering three Chinese investors to divest from its lithium miners. A new regime to screen foreign investment in the Netherlands is expected to come into force this year.

Although the number of deals blocked by investment-screening regimes is relatively low, their scope—and thus the effect they have on corporate decision-making—is vast. The regulations tend to apply only to “strategic” industries, but these are typically defined very broadly. Industries accounting for 60% of the value of America’s stockmarkets fall under the potential remit of cfius, judging by the deals submitted to it in 2021. The 17 industries covered by the British regime account for 35% of the big firms listed in Britain, we calculate. In 2021, 29% of foreign investments referred for screening in Europe underwent detailed scrutiny.

Mr Sullivan would like to go further. “We are making progress,” he said in his speech, “in formulating an approach to address outbound investments in sensitive technologies.” There is a broad consensus in Washington that American capital must not be allowed to “enhance the technological capabilities of our competitors”, as he put it (since 2000, for instance, American venture capitalists have invested more than $50bn in China). Some restrictions already exist: the chips Act bars firms that receive its subsidies from making big investments that could benefit China’s semiconductor industry, for instance. A comprehensive regime, however, might lead to big changes in the allocation of America’s $171bn a year in foreign direct investment in new projects. The European Commission has said that it, too, will consider screening outbound investments in 2023.

Export controls, which restrict the transfer of goods and services to certain countries, companies and people, are a third policy acclaimed by Mr Sullivan. Western governments have used them extensively against Russia since its invasion of Ukraine, curbing its access to all manner of goods, from chips to chemicals. The intention is not just to impede Russia’s war machine, but also to disrupt critical industries, such as oil refining. Mr Sullivan boasts that the controls have forced Russia to use chips from dishwashers in its military equipment.

America has long maintained a list of companies which must apply for permission to purchase goods with potential military uses. The number of Chinese firms on this “entity list” increased from 130 in 2018 to 532 in 2022. China accounts for more than a quarter of the firms on the list, the Carnegie Endowment for International Peace calculated last year. Another 36 names, including Yangtze Memory Technologies, a memory chip producer previously in talks to supply Apple, were added to the list in December.

Another American regulation, the foreign direct product rule, tries to restrict sales of items based on American technology, even if they are designed and manufactured abroad, by imposing penalties on the firms involved. This far-reaching instrument was successful in undermining the manufacture of smartphones by Huawei, a Chinese telecoms firm.

In October America’s Department of Commerce announced export controls on advanced chips used to power supercomputers and artificial-intelligence algorithms. The new rules in effect ban the sale of the most powerful chips, and the software and manufacturing equipment needed to produce them, to Chinese firms. Similar restrictions in other high-tech fields are expected this year.

The restrictions announced in October apply the foreign direct product rule on an unprecedented scale. No distinction is made between private Chinese firms and state-owned enterprises. Since advanced chipmaking requires continuous technological support in the form of software updates, replacement parts and engineering advice, which are also covered by the rules, “in the short term, the restrictions could reverse the capabilities of China in leading-edge chips”, says Gregory Allen, a researcher at the Centre for Strategic and International Studies, a think-tank. Barclays, a bank, reckons that the controls could reduce China’s annual gdp growth by 0.6 percentage points.

The restrictions are so severe America may struggle to persuade its allies to adopt equivalent measures. Yet without such unity, they will not work. Other countries with advanced semiconductor industries—in particular the Netherlands and Japan—could undermine their effectiveness by providing China with substitutes. American policymakers will find a worrying precedent in the satellite industry. After America introduced broad export controls against China in 1999, firms in Europe began designing satellites free from American parts to evade the new strictures. American firms lost revenue, but China did not lose access to cutting-edge satellites.

Foreign chipmakers are loth to forgo sales to China, the world’s largest market for semiconductors. America is pressing Japan and the Netherlands to follow its lead, without any clear result. Big semiconductor firms are grumbling: the boss of tsmc, the world’s largest contract chipmaker, points out that the controls will reduce the industry’s productivity and make it less efficient.

The same is true of all the new impediments to international trade and investment. As the logic of efficiency and comparative advantage gives way to a focus on security and economic nationalism, investments will be duplicated and costs will rise. The result will be higher bills for taxpayers and consumers and therefore diminished prosperity.

Foreign direct investment has already fallen from a peak of 5.3% of global gdp in 2007 to 2.3% in 2021. The deals that continue to go ahead are more heavily regulated. In 2022 a Chinese buyer was permitted to acquire only 25% of a port in Hamburg, rather than the planned 35%. In 2021 half of all approvals of cross-border investment in France came with conditions attached.

Meanwhile, subsidies programmes are altering capital spending. In the semiconductor industry, famed for its boom-and-bust cycles, the risk of oversupply is substantial. More than 40 new semiconductor projects have been announced across America since mid-2020, according to the Semiconductor Industry Association, including fabrication plants in Arizona to be built by Intel and tsmc at an estimated cost of $60bn. Firms in the ev supply chain are enjoying a similar binge. According to a report by Goldman Sachs, around $164bn in spending is needed this decade by American and European firms to localise the supply chain for batteries.

Consumers be warned
Viewed in isolation these plans increase investment in national economies; at the global level they represent an enormous increase in costs. By our calculation, duplicating the world’s existing stock of investments in semiconductors, clean energy and batteries would cost between 3.2% and 4.8% of global gdp. And the logic of the zero-sum world means further escalation in government intervention is likely: after all, if no country’s firms can be assured of equal treatment and open market access when operating abroad, it makes more sense for all countries to nurture and protect industries at home.

Countries like China and Russia do present a profound threat to the current global order. Russia’s curbing of gas exports to Europe in response to European support for Ukraine highlights the risks of relying on such places for crucial imports. The urge among Western democracies to hobble adversaries economically to diminish such dangers is understandable. But it will have huge costs. What is more, the economic policies being adopted in the name of national security and competitiveness are so sweeping and clumsy that they are hurting allies as much as enemies. The zero-sum mindset may or may not succeed in making the world safer for democracy. But it will certainly make the world poorer. ■

Combine this with our demographic profile and rapidly declining supply/velocity of money in the US and that gets you????

Will the US dollar cease to be the world's reserve currency? Going to be Argentina-like if that happens.

[Farfromgeneva]

Globalisation, already slowing, is suffering a new assault
Subsidies, export controls and curbs on foreign investment are proliferating

Trade ministers are not known for histrionics. Yet South Korea’s, Ahn Duk-geun, is alarmed. The world is on the verge of opening Pandora’s box, he warned last month. If the European Union follows through on threats to mimic America’s protectionist industrial policies, “Japan, Korea, China, every country will engage in this very difficult race to ignore global trading rules.” The international system of trade and investment, painstakingly negotiated over decades, will be upended.

William Reinsch, who used to oversee America’s export controls as an undersecretary of commerce, is just as blunt. America has always wanted to maintain a technological edge over other economic powers, he says. These days, however, it is pursuing that goal in a new way: “We have moved from a ‘run faster’ to a ‘run faster and trip the other guy’ policy.” The great powers are coming to see economic advances, at least in the broad swathe of industry they define as strategic, in zero-sum terms. The implications for global prosperity are bleak.

In a speech in September America’s national security adviser, Jake Sullivan, spelled out the basic tenets of this beggar-thy-neighbour approach. Merely retaining a technological lead over China and other rivals was no longer enough, he argued. Instead, he said, America had to pursue “as large of a lead as possible” in chipmaking, quantum computing, artificial intelligence, biotechnology and clean energy. To that end, America needed not only to welcome clever people and foster innovation, but also to impede technological advances in countries like China and Russia.

Mr Sullivan described two main ways to ensure American supremacy: using subsidies and other forms of industrial policy to shift supply chains away from geopolitical rivals, and stricter investment screening and export controls to keep advanced technology out of unfriendly hands. As America, once the world’s loudest advocate of free trade and open economies, adopts and reinforces such policies, other countries are mimicking its approach. The result is a proliferation of obstacles to international trade and investment at a time when both were already stagnating.

The sudden enthusiasm for industrial policy in America and elsewhere epitomises the trend. In 2022 Congress passed two lavish bills aiming to bolster domestic industry, in the name of national security, job creation and decarbonisation. The chips Act, which provides $52bn of incentives for the semiconductor industry, attempts to reverse a multi-decade decline in America’s share of chip manufacturing. The Inflation Reduction Act (ira) will spend nearly $400bn to boost clean energy and reduce dependence on China in important supply chains, such as for batteries for electric vehicles (evs).

Handouts be praised
It is not just America which is trying to boost domestic industry at the expense of foreign rivals. According to the un, more than 100 countries accounting for over 90% of the world’s gdp have adopted formal industrial strategies. Spending on subsidies among g7 countries has risen sharply in recent years, from 0.6% of gdp on average in 2016 to 2% in 2020. In part, this is a response to the pandemic: the European Union, for example, adopted a gargantuan recovery package, involving more than $850bn in spending, including many handouts for business. But although spending on subsidies has fallen from its peak in 2020, it remains well above its pre-covid levels.

Multinationals having second thoughts about manufacturing in China are in some cases being paid to relocate. Japan included incentives for such relocations in its budget in 2020. India is trying to lure footloose firms in 14 different industries by offering up to $26bn of production-linked incentives over five years. Such overtures may become common if commerce begins to fragment and firms are required to choose a side.

Another reason for the ballooning handouts is breast-for-tat subsidies, which aim to counteract the incentives offered in other countries. The $52bn payout to chipmakers under America’s chips Act sounds lavish, but it is only a small part of the $371bn earmarked for the semiconductor industry over the next decade in the seven most generous countries, according to ubs, a bank. (China, the eu, India, Japan, South Korea and Taiwan are the other big spenders.) This week Taiwan approved new tax breaks for its chipmakers.

ev batteries, of which China produces 70%, are another magnet for subsidies and other forms of state support. Since 2020 Indonesia has banned the export of nickel to encourage battery manufacturing at home. Australia and Canada are shelling out billions of dollars to boost mining and processing of ores. A controversial element of the ira is a $7,500 tax credit for American consumers purchasing evs. One half of the credit is available if a vehicle’s battery components are manufactured or assembled in America; the other half is based on the origin of the battery’s minerals. Final assembly of the vehicle must take place in America, too.

Foreign evs that do not meet either of these thresholds will be hugely disadvantaged. Consider Hyundai, a South Korean carmaker which sells more evs in America than any other firm bar Tesla. Its vehicles are not eligible for the credit since they are currently assembled abroad. It is building a $5.5bn ev plant in America, but it will not start production until 2025. Even then, it is not clear if Hyundai’s cars will qualify for the mineral-related component of the credit, since the American authorities have not yet published detailed regulations about acceptable sources.

Other governments are likely to respond to America’s coddling of domestic producers with more breast-for-tat subsidies. In December the finance ministers of both France and Germany, as well as Ursula von der Leyen, the president of the European Commission, called for a European version of the ira. Margrethe Vestager, the eu’s competition tsar, who polices subsidies within the bloc, appears open to the idea of prolonging a pandemic-induced loosening of the rules to allow member-states to counter the competitive challenge posed by the ira.

The potential scale of spending is staggering. If seven other market-oriented economies (Australia, Britain, Canada, the eu, Japan, India and South Korea) adopt subsidies as large as America’s—about 2% of gdp—the total bill in the eight countries would be $1.1trn. In the industries that are receiving the most handouts the effect is even more pronounced: subsidies for semiconductors amount to more than 60% of the industry’s annual sales. Western taxpayers are spending lavishly to make an all-important part of the world economy far less efficient.

Investment screening is another policy that Mr Sullivan champions as a means to preserve America’s technological edge. Selling to the highest bidder is not as straightforward as it used to be, especially if that bidder is Chinese. unctad, a un agency which tracks investment policies around the world, counted a record number of new measures restricting foreign investment in 2020 (see chart 1). unctad calculates that 63% of global investment flows were subject to a screening regime last year, up from 52% in 2020.

The Committee on Foreign Investment in the United States (cfius), a body charged with identifying and blocking deals that might threaten national security, is the model for many of these new regimes. In 2018 new legislation broadened cfius’s jurisdiction over transactions involving “critical” technology and infrastructure and sensitive personal data. An order issued by Mr Biden in September directs the committee to focus its attention on the security of supply chains and technological leadership.

The committee has been busy—between 2017 and 2021 cfius investigated 661 transactions, more than twice as many as during the previous five years. Although it blocks relatively few investments outright, many deals are called off under the glare of its scrutiny, before a final decision is reached (see chart 2). ByteDance, the Chinese parent of TikTok, a video app, remains locked in negotiations with it more than two years after Donald Trump issued an order, later revoked, demanding the divestment of TikTok’s American business.

The eu called on member states to set up or strengthen screening mechanisms in 2020. Nearly all of them now have one. In 2021 alone three members introduced new regimes and six tightened existing laws. Many are learning on the job. Last year was exceptionally busy for Germany’s watchdog, which intervened in the acquisition of Heyer Medical, a medical-technology firm, and a facility owned by Elmos, an automotive chipmaker. Long-awaited guidelines on France’s regime issued in September did little to limit the extraordinary discretion afforded regulators to review transactions. Britain’s screening regime began examining deals a year ago and has already blocked or unwound four (three of which involve a Chinese buyer of a semiconductor firm or technology).

More restrictions will surely follow. In December Canada announced legislation to strengthen its investment-review process weeks after ordering three Chinese investors to divest from its lithium miners. A new regime to screen foreign investment in the Netherlands is expected to come into force this year.

Although the number of deals blocked by investment-screening regimes is relatively low, their scope—and thus the effect they have on corporate decision-making—is vast. The regulations tend to apply only to “strategic” industries, but these are typically defined very broadly. Industries accounting for 60% of the value of America’s stockmarkets fall under the potential remit of cfius, judging by the deals submitted to it in 2021. The 17 industries covered by the British regime account for 35% of the big firms listed in Britain, we calculate. In 2021, 29% of foreign investments referred for screening in Europe underwent detailed scrutiny.

Mr Sullivan would like to go further. “We are making progress,” he said in his speech, “in formulating an approach to address outbound investments in sensitive technologies.” There is a broad consensus in Washington that American capital must not be allowed to “enhance the technological capabilities of our competitors”, as he put it (since 2000, for instance, American venture capitalists have invested more than $50bn in China). Some restrictions already exist: the chips Act bars firms that receive its subsidies from making big investments that could benefit China’s semiconductor industry, for instance. A comprehensive regime, however, might lead to big changes in the allocation of America’s $171bn a year in foreign direct investment in new projects. The European Commission has said that it, too, will consider screening outbound investments in 2023.

Export controls, which restrict the transfer of goods and services to certain countries, companies and people, are a third policy acclaimed by Mr Sullivan. Western governments have used them extensively against Russia since its invasion of Ukraine, curbing its access to all manner of goods, from chips to chemicals. The intention is not just to impede Russia’s war machine, but also to disrupt critical industries, such as oil refining. Mr Sullivan boasts that the controls have forced Russia to use chips from dishwashers in its military equipment.

America has long maintained a list of companies which must apply for permission to purchase goods with potential military uses. The number of Chinese firms on this “entity list” increased from 130 in 2018 to 532 in 2022. China accounts for more than a quarter of the firms on the list, the Carnegie Endowment for International Peace calculated last year. Another 36 names, including Yangtze Memory Technologies, a memory chip producer previously in talks to supply Apple, were added to the list in December.

Another American regulation, the foreign direct product rule, tries to restrict sales of items based on American technology, even if they are designed and manufactured abroad, by imposing penalties on the firms involved. This far-reaching instrument was successful in undermining the manufacture of smartphones by Huawei, a Chinese telecoms firm.

In October America’s Department of Commerce announced export controls on advanced chips used to power supercomputers and artificial-intelligence algorithms. The new rules in effect ban the sale of the most powerful chips, and the software and manufacturing equipment needed to produce them, to Chinese firms. Similar restrictions in other high-tech fields are expected this year.

The restrictions announced in October apply the foreign direct product rule on an unprecedented scale. No distinction is made between private Chinese firms and state-owned enterprises. Since advanced chipmaking requires continuous technological support in the form of software updates, replacement parts and engineering advice, which are also covered by the rules, “in the short term, the restrictions could reverse the capabilities of China in leading-edge chips”, says Gregory Allen, a researcher at the Centre for Strategic and International Studies, a think-tank. Barclays, a bank, reckons that the controls could reduce China’s annual gdp growth by 0.6 percentage points.

The restrictions are so severe America may struggle to persuade its allies to adopt equivalent measures. Yet without such unity, they will not work. Other countries with advanced semiconductor industries—in particular the Netherlands and Japan—could undermine their effectiveness by providing China with substitutes. American policymakers will find a worrying precedent in the satellite industry. After America introduced broad export controls against China in 1999, firms in Europe began designing satellites free from American parts to evade the new strictures. American firms lost revenue, but China did not lose access to cutting-edge satellites.

Foreign chipmakers are loth to forgo sales to China, the world’s largest market for semiconductors. America is pressing Japan and the Netherlands to follow its lead, without any clear result. Big semiconductor firms are grumbling: the boss of tsmc, the world’s largest contract chipmaker, points out that the controls will reduce the industry’s productivity and make it less efficient.

The same is true of all the new impediments to international trade and investment. As the logic of efficiency and comparative advantage gives way to a focus on security and economic nationalism, investments will be duplicated and costs will rise. The result will be higher bills for taxpayers and consumers and therefore diminished prosperity.

Foreign direct investment has already fallen from a peak of 5.3% of global gdp in 2007 to 2.3% in 2021. The deals that continue to go ahead are more heavily regulated. In 2022 a Chinese buyer was permitted to acquire only 25% of a port in Hamburg, rather than the planned 35%. In 2021 half of all approvals of cross-border investment in France came with conditions attached.

Meanwhile, subsidies programmes are altering capital spending. In the semiconductor industry, famed for its boom-and-bust cycles, the risk of oversupply is substantial. More than 40 new semiconductor projects have been announced across America since mid-2020, according to the Semiconductor Industry Association, including fabrication plants in Arizona to be built by Intel and tsmc at an estimated cost of $60bn. Firms in the ev supply chain are enjoying a similar binge. According to a report by Goldman Sachs, around $164bn in spending is needed this decade by American and European firms to localise the supply chain for batteries.

Consumers be warned
Viewed in isolation these plans increase investment in national economies; at the global level they represent an enormous increase in costs. By our calculation, duplicating the world’s existing stock of investments in semiconductors, clean energy and batteries would cost between 3.2% and 4.8% of global gdp. And the logic of the zero-sum world means further escalation in government intervention is likely: after all, if no country’s firms can be assured of equal treatment and open market access when operating abroad, it makes more sense for all countries to nurture and protect industries at home.

Countries like China and Russia do present a profound threat to the current global order. Russia’s curbing of gas exports to Europe in response to European support for Ukraine highlights the risks of relying on such places for crucial imports. The urge among Western democracies to hobble adversaries economically to diminish such dangers is understandable. But it will have huge costs. What is more, the economic policies being adopted in the name of national security and competitiveness are so sweeping and clumsy that they are hurting allies as much as enemies. The zero-sum mindset may or may not succeed in making the world safer for democracy. But it will certainly make the world poorer. ■

Combine this with our demographic profile and rapidly declining supply/velocity of money in the US and that gets you????

Will the US dollar cease to be the world's reserve currency? Going to be Argentina-like if that happens.

Still maintain we are the cleanest dirty shirt in the laundry. When it comes to transparency and prosperity rights there’s still (sadly for humanity at this stage) no one better out there.

Who Ya got as an alternative? (Not that I endorse this as a strategy but until there becomes some meaningful global change in paradigm, not just movement along a spectrum which is what lost people call structural change but kind of a misnomer)