Thoughts through the cycle: w4 November ’20

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The Great Reset – great idea, great big price tag

  • In the era of fake news, sometimes it takes an historian to frame the debate around the issue of facts, events, sources and how they are combined to create a truthful account of affairs. ‘The Hitler Conspiracies’ by Richard J. Evans, Regius professor of History at Cambridge University, is one such work. With respect to the pursuit of the truth, historical or otherwise, Evans is beyond reproach – he was for example the expert witness for the defence in the defamation trial brought by the holocaust-denier David Irving in 1999. For those interested in that story, Mick Jackson’s 2016 film ‘Denial’ is an excellent introduction.
  • In Evans’ new book, amongst other things he examines how conspiracies often involve the creation of a causal relationship between apparently chance events and subsequent outcomes, especially if the latter are of great benefit to one particular group, based on the idea that something so beneficial couldn’t have happened just by chance, and therefore had to have happened by design. The example Evans uses is the Reichstag fire of February 1933 – the work of one individual unconnected to the Nazi party, but an event which allowed Hitler to suspend parliament and set Germany on the road to dictatorship. So convenient was this to Hitler that the left could not accept it was not a Nazi-orchestrated event, and from this view, a conspiracy grew.
  • So when Canada’s prime minister Justin Trudeau referred in a recent UN speech to the ‘Great Reset’ and then mentioned the plan to ‘build back better’ (a Biden campaign slogan subsequently co-opted by Britain’s Boris Johnson), the conspiratorial element of the twitter-sphere went into overdrive with the sad old meme about a global elite conspiracy to rule the world (“The baseless ‘Great Reset’ conspiracy theory rises again”, NY Times, 16/11/2020).
  • The origins of the expression ‘The Great Reset’ are fairly prosaic. Back in May 2020, Britain’s Prince Charles and Klaus Schwab, head of the World Economic Forum (WEF), announced a meeting for heads of state to discuss climate change and the rebuilding of the world economy following the Covid-19 pandemic. While the WEF is a supra-national body whose meetings are attended by heads of state, this doesn’t necessarily make it ‘shadowy’. In the more enlightened days in which we now live, one cannot be taken seriously if one characterises Herr Schwab as some sort of James Bond villain just because he is old, bald and has a German accent. Sadly, conspiracy thrives on crude stereotyping.
  • What does Herr Schwab stand for? In article for Project Syndicate (‘Post COVID Capitalism’, 12/10/2020), Schwab issues a broad-side on ‘Free-market fundamentalism’ and then demands a rethink of capitalism and the very meaning of capital:

‘But we must rethink what we mean by “capital” in its many iterations, whether financial, environmental, social or human. Today’s consumers do not want more and better goods and services for a reasonable price. Rather, they increasingly expect companies to contribute to social welfare and the common good. There is both a fundamental need and an increasingly widespread demand for a new kind of “capitalism.”’

  • One can see how Schwab’s tone could seem elitist. Exponents of the market such as Hayek would argue that only the individual knows what they want and any deviation from this restricts market economics and with it, individual liberty (cf. Hayek, ‘The Constitution of Liberty’, 1960 – the book incidentally which Margaret Thatcher once held up saying ‘this is what we believe in’). Schwab’s goal is as follows:

‘If the COVID crisis has shown us anything, it is that governments, businesses, or civil-society groups acting alone cannot meet systemic global challenges. We need to break down the siloes that keep these domains separate, and start to build institutional platforms for public-private cooperation. Equally important, younger generations must be involved in this process, because it is inherently about the long-term future.’

  • What does this all mean? This is clearly the call to arms for a green revolution of some sort, and one pursued on a global basis. Its collective and communitarian tone obviously goes against the unilateral tendencies of the US under Trump, and it suggests that the boundaries of the public and private are to be blurred for a common aim.
  • To the warped mind of a conspiracist, the 2020 Covid-19 pandemic has been a crisis orchestrated to effect a grab for power by a do-as-I-say-not-as-I-do global elite. For more normal people, it is best understood in more conventional terms, even if the real implications are dramatic. The US deficit is currently around 16%, and the increased bond issuance resulting from it is in part being absorbed by the domestic banks, but mainly through central bank quantitative easing (QE). Foreigners are buying relatively little (Chinese treasury purchases are falling). That is the mechanics of debt monetisation, and with the largest non-crisis deficit going into 2020, the US deficit dynamic is not changing any time soon. The point is it cannot – austerity (falling government spending) now would cause a deep recession.
  • The mechanism is only part of it. Yes, there has been a fiscal-monetary fusion in the US and elsewhere, and even if it is only de facto, it is a practical example of the spirit of modern monetary theory (MMT), where the only limit on government spending is inflation, and that tends to be a lagging not a leading phenomenon, and one which, when left unchecked, is not simply stopped by hiking taxes per the MMT-folk. Their logic is that tax stops spending, and this reduces inflation. Good luck with that. When you get real inflation, you usually end up having to get a new money system, or at least a new basis for it in terms of an interest rate policy that radically alters the long-term balance of society, much in the way the Volcker Fed of the early 1980s did with its aggressive rate hikes bringing to an end the great inflation of the 1970s.
  • That there has been a revolution can be seen in the fact that no one, perhaps with exception of a few lizard-brained denizens the US Senate, has been really opposed to any of the fiscal measures introduced during the pandemic. Furlough payments are necessary, government interventions on behalf of small businesses are lauded, tax hikes are being universally disavowed as dangerous to the nascent recovery and so on. In the UK, a Tory government has spent in a way which goes beyond the most diabolic claret-and-cheese-induced nightmare that any country squire might have had this time last year as Corbyn’s Labour party took a tilt at power.
  • This is where our conspiracy theorists are wrong. There is a well-known trend with respect to government and power that the temporary tends to become permanent. On a grand scale, this is why the developed world was unable after the first world war to return to the classic gold standard, and why the shift toward a fully-fiat money system proved inexorable. To fight that war, governments had to mobilise national resources to a previously unimaginable extent. Once over though, the sinews of power remained, and were exercised, not least because of the social changes unleashed by the war itself, notably the slow social and political drive towards a welfare state and the like. With central banks co-opted into government financing, one can assume that the build back better and green revolution are merely policies which can now be implemented as a result of powers used and retained from the pandemic. As with the Reichstag fire, a chance event has provided the catalyst for this permanent change in the role of government.
  • From a moral perspective though, the green revolution is a million miles from the Nazi seizure of power. On the contrary, it is perhaps only from catastrophic events that sufficient political and social will can be garnered for change, and given what we now know about climate change, perhaps now is the moment for words to become deeds. In the UK, PM Boris Johnson’s announcement of a £12bn green revolution plan has immediately been criticised by opposition parties as too feeble, with France’s €30bn and Germany’s €40bn plans cited in comparison (‘Johnson’s green promises judged too meagre for net zero target’, FT, 19/11/2020). From a ‘no planet B’ standpoint, the bill is going to be large, and there is arguably a moral imperative that it be paid. This should be the starting point for all investment decision-making and asset allocation going forward, as it recognises not only that this thing is going to happen because governments can do it, but that there is largely a consensus that it should be done, and that doing it will help the recovery from pandemic. Let it be.
  • The last time countries acted like this was in the second world war. Britain, for example, bankrupted itself in the process, but there can be no question that despite the losses of blood and treasure, the stand against Nazi Germany was not only right but also morally imperative, and the nation’s pride in its achievement still resonates today. The transformation of the global economy to eliminate fossil fuels and to limit the negative effects of climate change on the environment is the sort of cause that many now feel is worth the cost. From an investment point of view, there is the question of capital allocation towards these ends, something which generally falls under the ESG banner but also goes beyond it. The lesson of Britain’s decline should be a key one for long-term asset allocation. While the effort may be just, investors ought to be looking for a way to mitigate the cost burden while allocating capital to effect the worthy outcome.
  • How was the second world war funded? In the US, it was through debt, and this was monetised through financial repression via the control of interest rates by the Fed. Interest rates were set at 0.875% at 1yr, 2% at 10yr, and 2.5% on the long bond. Real rates went deeply negative. The graph below (courtesy of and the US Bureau of Labor Statistics) shows the staggering inflation levels reached in the 1940s, with a 20% peak eating the inflationary lunch of the 1970s and 1980s. The use of yield curve control (YCC) is something the Fed is talking about – not actively considering, but at least acknowledging should the desired fiscal stimulus demand its implementation. The market should require no more warning about the likely direction of travel. With a Biden White House, it is likely that policy will start to move that way, if not through Congress then by executive order and all the funnies that come with that.

Source:, 31 October 2020.

  • Should there be any lingering doubt about what is coming, then one ought to refer to central banks themselves. The important ones (Fed, ECB, BoE) are talking about the limits of monetary policy at or below the zero bound for fiscal policy to do the heavy lifting, especially green spending. Cheerleader-in-Chief here is Mark Carney, former governor of the BoE. Former Fed chair Yellen is apparently in the running as Biden’s Treasury Secretary – her appointment would mark a symbolic fusion of the Fed and Treasury, if not in law but in spirit.
  • The final element of the equation is the wide-spread discussion of central bank digital currencies (CBDCs). China is leading the way, but the other G7 central banks are very much working on the project. The most recent update comes from BoE chief economist Andrew Haldane (‘Negative interest rates could encourage digital currency, says Haldane’, The Times 19/11/2020):

“What I am discussing here is a structural shift in the monetary regime and carries no implications for the costs and benefits of negative interest rates in the shorter term…Nonetheless, I believe it is important that these potentially large macroeconomic benefits of a digital currency are explored when evaluating the case for a new monetary order…The three Rs – recovery, rebalancing, revitalisation – are more important than ever. So too is the need for optimism about the opportunity this crisis will serve up, as all crises do.”

  • No mention of the fourth R, “Reset”, but perhaps Mr Haldane is social media savvy enough to avoid that naughty word which caused so much Twitter rage when the Canadian prime minister used it. A digital currency is a means by which government can simply ‘put’ money in people’s (and companies’) bank accounts. It is a means of getting money to people quickly, much more quickly than the donkey system of cheques the US used earlier this year with its $1,200-per-person pandemic hand out. It’s not that it’s coming, it’s happened – they just want to make the means of delivery more efficient.
  • Global digital currencies, deeply negative rates – not dissimilar to the US in the 1940s – effected by financial repression, and wartime spending plans, with the war this time on climate change as well as inequality and other things. Chances are all that is going to be a bit inflationary, wouldn’t you say?
  • The investment world is carrying on as though the vaccine means the world will go back to the way it was.
  • The reality is going to be different. The clock hasn’t been stopped or turned back, it has moved on, and with it, the asset allocation process needs to change and adapt not only to be congruent with the goals of the green revolution and build back better, but to protect investors where possible from the price of glory, as that price is probably going to be a pretty steep one, however worthy the outcome.

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