Given the unprecedented times we’re living in, we started a new service of sending once a week, a summary of 3-4 articles which reflect the new realities and their potential impact on our lives and assets. Our assessment is that it may take at least 3-4 years until we return to the pre-Covid 19 normalcy. Below are summaries of four intriguing articles with some unique insights.

Our plan is to publish our commentaries on Tuesdays, the summary of the articles on Thursdays, and the weekly summary of market developments on Saturdays. Our clients will continue receiving private emails regarding market developments from our Managing Director.

Federal Reserve Bank of St. Louis Economic Research – Bad Medicine? Federal Debt and Deficits after COVID-19

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In response to the impending deep recession, fiscal policymakers have approved about $2.75 trillion in coronavirus relief, adding to a federal budget deficit already projected to be over $1 trillion in January of this year. The excess spending has occurred through the issuance of debt by the Treasury, much of which was purchased by the Federal Reserve, eroding public finances and setting the stage for a staggering deficit-to-GDP ratio of nearly 18%. This increase in spending combined with an expected contraction of GDP due to the economic lockdowns will effectively shift both the level of debt held by the public and the debt as a percentage of GDP upwards in a one-time event. However, accounting for the effects of a deep recession brings the 2050 debt-to-GDP ratio to 227%, nearly six and a half times as large as the level prior to the Global Financial Crisis. While these numbers are staggering, it is important to remember that projections tend to have higher error when predicting further into the future.

Financial Times – China-US rivalry and threats to globalisation recall ominous past

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The recent clashes between the US and China echo the rivalries of the early days of the 20th century which ultimately led to war. In that era of the “first globalization” the relative economic strength of the United Kingdom fell while Germany, Russia, and the US rose. Markus Brunnermeier, Harold James, and Rush Doshi argue in their paper that the US-China rivalry today has an “uncanny resemblance” to the one between Germany and Great Britain. In both instances, the world was/is experiencing an era of economic globalization and rapid technological innovation. In addition, we see in both rivalries a rising autocracy with a state-protected economy challenging an established democracy with a free-market system. Furthermore, each rivalry featured countries “enmeshed in profound interdependence” that were at the same time threatening each other with tariffs, stealing technology, leveraging their financial power against one another, and investing in infrastructure projects to their advantage. World War II was what ended the rivalry between Great Britain and Germany. Will the end of the US-China rivalry bear a similar resemblance? 

The rising tensions between the US and China as well as the weakening of globalization have been evident since the 2008-09 global financial crisis. Covid-19 is accelerating these trends. The current trends are leading us towards a much less cooperative and open world on the other side of this pandemic. The world is far more integrated than it was a century ago, therefore making the costs of deglobalization much greater. We must not forget how great-power competition has ended in the past. It is absolutely critical that we recognize that these are dangerous times and that a higher level of global cooperation is necessary. 

Barron’s – The Global Trading System Is in Crisis. Here’s How the U.S. Should Fix It.

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Despite Covid-19 upending the global economy, Senator Josh Hawley believes this is the perfect time to fix the international trading system. He believes the US should lead a coalition of “all free peoples” in order to remake the global trade system and stop “the imperialists in Beijing”. He also argues its best for the US to leave the World Trade Organization (WTO) and negotiate new agreements with key Asian and European partners. While leaving the WTO would be a bad idea due to the essential role the organization plays in settling trade disputes and negotiating agreements, Senator Hawley makes several interesting points. 

The WTO encourages “coalitions of the willing” to form their own trade blocs. The European Union is a prime example. Furthermore, the WTO does not stand in the way of the US creating the economic relationships with its Asian and European allies that Hawley says he wants. Multilateral trade agreements with other democracies are definitely worth pursuing. In fact, the US was successful in negotiating two such agreements, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.

Senator Hawley has also called for an international deal to limit destabilizing international investment flows. Excess financial inflows are the result of extreme inequality and underconsumption elsewhere, which in turn, inflates asset prices, leads to debt bubbles, and pushes up the US dollar, making American exports unaffordable to the rest of the world. An international agreement to regulate cross-border flows could allow the world to preserve the benefits of cross-border investing while at the same time limiting the costs. The inefficiencies in our global trade system must be addressed so that we can retain the benefits and come out of the Covid-19 crisis stronger.

New York Times – Why China’s Move to Rein In Hong Kong Is Just the Start

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As the coronavirus continues to sweep across the world, China has taken several aggressive moves to assert its dominance, including bypassing the Hong Kong legislature to pass “national security laws” which would reduce the autonomy of the territory. The international health crisis seems to have emboldened Chinese president Xi Jinping to further his dream of a “great rejuvenation” of China, leveraging nationalistic themes to deflect criticism away from China’s part in the origin of the virus. Even as Hong Kong residents have taken to the streets in protest of the new measures, Beijing has accused the U.S. and others of supporting “separatists” and “terrorists” in order to overthrow the Communist Party.

This is but the latest flashpoint in the quickly degrading U.S.-China relationship. The Trump administration has imposed trade and technology restrictions and drawn attention to perpetual sore points for Beijing, such as the second inauguration of Taiwanese president Tsai Ing-Wen. 

Mr. Xi’s actions against Hong Kong bring to mind echoes of Russian president Vladimir Putin’s forceful seizure of Crimea in 2014, although China has yet to use military force to enact Beijing’s wishes in Hong Kong. The international community has often spoken against these autocratic moves but enacted little actual punishment. China has become “a state which no longer apologizes for being authoritarian,” according to Oxford China Center director Rana Miller. This has been seen in aggressive military posturing in India, Taiwan, and the South China Sea, which in the words of assistant U.S. Secretary of State Alice Wells, indicates “Chinese aggression is not always just rhetorical.”