Neil Howe On The Fourth Turning: How Bad Will It Get, How Long Will It Last & What Comes Next? (Part 1)

33:29
i mean actually a good example of that
33:31
would be
33:32
boomeranging back home
33:34
boomers did not boomerang okay
33:37
and i remember uh the the great
33:40
recession of of uh 8283 you know when
33:43
you went into the reagan administration
33:45
volcker was tightening rates and so on
33:47
it was a really pretty bad recession
33:49
boomers would do anything rather than
33:51
return they would like sleep under a
33:53
bridge or something right but they would
33:55
not go back home right
33:57
that boomerang stuff started with gen
34:00
xers in the 90s
34:02
and with millennials they don’t return
34:04
home they just never leave
34:06
they just keep their bedroom there and
34:08
you know they’re always
34:09
and you understand what i mean just a
34:11
very different kind of relationship
34:14
uh where i think there’s a little bit of
34:16
inversion is when it came to actually
34:19
major structural substantive reforms and
34:22
how the system worked and how it
34:23
actually you know allocated income and
34:25
rewards and how we actually built for
34:28
our future
34:29
pumas had no problem with the gis were
34:31
doing i mean they obviously ran things
34:33
really well in fact the whole problem
34:35
with the gi generation is they ran
34:36
things too well they invested too much
34:38
right it’s too much repression you know
34:40
we need to enjoy yourself more for today
34:43
the millennial problem with boomers is
34:46
just the opposite right
34:48
boomers can’t run anything
34:50
they can’t exercise authority they can’t
34:53
invest in anything they can’t do
34:55
anything for the long term right they
34:57
don’t know how to run the system at all
34:59
and this is why i say that the
35:01
fundamental problem in an awakening
35:03
is that the public senses that
35:05
institutions are supplying too much
35:07
order
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but the fundamental problem of a crisis
35:10
the fourth journey
35:12
is that the public be particularly the
35:14
younger public begins to sense that
35:16
institutions aren’t supplying enough
35:18
order and that is always the context for
35:21
a crisis right
35:23
and by the way i mean just just
35:25
mentioning you know you said where might
35:26
this lead
35:27
every fourth turning in american history
35:30
has featured a total war
35:33
um
35:34
and all total wars in american history
35:37
have come in a fourth turn right you
35:38
don’t want to think about that you know
35:40
this goes all the way back to the
35:41
anglo-american
35:43
circular you know going back in the
35:44
early modern era you know in the british
35:47
history
35:48
but this is a pattern now sometimes it’s
35:50
um
35:51
it’s so it is
35:53
we don’t say that war is necessary
35:56
for a fourth turning but that sense of
35:58
total public urgency and the need to
36:01
band together and create a new sense of
36:03
community
36:04
is always required at some point before
36:06
the fourth turning is over okay
36:09
so this is something that’s just simply
36:11
i just observe historically now
36:14
sometimes this struggle
36:16
this conflict
36:18
is we think of it mostly in terms of you
36:20
know america taking on enemies abroad
36:22
right and i think that’s the idea that
36:24
good war and we we all think of world
36:26
war ii you know we took on the axis
36:28
powers and we conquered half the world
36:30
right uh you know fascism and yeah
36:33
exactly yeah you know germany and italy
36:35
and japan
36:37
uh but we forget that that era started
36:39
out with the new deal which was
36:42
not exactly a civil war but it was a
36:44
highly contentious ideological conflict
36:47
in america right which deeply divided
36:49
americans about the new role of
36:51
government and you know it had its court
36:54
packing threats and you know everything
36:56
else that happened uh in the first new
36:58
deal and the second new deal and and fdr
37:01
finally getting this incredible victory
37:03
in 1936 right finally just becoming
37:06
absolutely dominant politically
37:08
and pushing through these new
37:11
this whole new role for government and
37:12
the economy right
37:15
um but ultimately we all remember how it
37:17
all came together in world war ii which
37:19
is more kind of you know america versus
37:20
the world but it’s useful to go back in
37:23
earlier conflicts and many of these
37:25
actually had a very major
37:27
a civil dimension of conflict obviously
37:29
the civil war was literally
37:32
a civil war right no need to explain
37:34
there the american revolution however is
37:37
interesting for people to know that the
37:39
american revolution at the time was
37:42
referred to by most more americans as a
37:45
civil conflict as a civil war rather
37:47
than as a revolution it had a very
37:50
strong element of patriot-on-tory
37:52
conflict within the united states
37:54
particularly within the southern states
37:56
the backwoods regulators actually
37:58
supported the british because they hated
38:00
these big plantation owners near the
38:02
coast who were always lording it over
38:04
them right in other words it exploited
38:07
and the british at one point did what
38:08
abraham lincoln did he promised freedom
38:11
to the blacks
38:12
and one of the things the british
38:14
couldn’t understand as well these
38:15
planters were you know constantly
38:17
talking about liberty
38:19
you know and and yet they had all these
38:21
things so the british said well we’re
38:22
gonna use that as a weapon we’re gonna
38:24
we’re gonna promise freedom to anyone
38:26
who wants to help that’s exactly what
38:28
abraham lincoln did right with his
38:30
emancipation proclamation about 80 90
38:32
years later
38:34
um
38:36
in dittos you go back in earlier crisis
38:38
in other words very often there’s a very
38:40
strong internal component
38:42
to the crisis even while it also has an
38:44
ex i mean obviously there’s an external
38:46
component the american revolution we had
38:48
to fight
38:49
you know fight the british and uh you
38:51
know defeat them finally at yorktown and
38:54
and you know they all evacuated by uh
38:56
1783 they were gone
38:59
but then again we were in chaos after
39:01
that right and then we had to actually
39:03
forge a new constitution and in some
39:05
ways that was the real climax of the era
39:08
as being able to actually then agree on
39:10
a powerful central government
39:13
and to some extent i would say that
39:14
there was the miracle of of 1788 which
39:17
is even more amazing than the miracle of
39:20
you know 1781 which is the the defeating
39:24
of uh
39:25
of uh you know clinton and cornwallis so
39:29
so anyway that’s i i think that but it
39:31
probably illustrates your point that
39:32
there is an important
39:34
internal dimension i think it’s no
39:36
be no surprise today
39:39
looking in america that people are going
39:40
to say yeah i get the internal component
39:44
right now right red zone versus blue
39:46
zone i mean my god the two sides don’t
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even talk to each other you know i live
39:50
in dc i mean i’ve been sort of a dc guy
39:54
uh they don’t even talk to each other
39:55
now i mean there’s literally practically
39:57
no communication there’s nothing to say
39:59
at this point adam
40:01
you know
40:02
right so when you have mutually
40:04
exclusive ideas
40:06
of what the country’s future is
40:09
how does democracy work right are you
40:12
going to completely forfeit your future
40:14
just because the other guy gets i don’t
40:16
know half a percent more votes
40:18
no it doesn’t work that way does it and
40:21
here’s the irony and this has been
40:22
pointed out by some you know brilliant
40:25
uh carl becker pointed that out in 1940
40:28
just as we were going into world war two
40:29
he said one of the problems with
40:31
democracy
40:33
this democracy only works
40:35
really well
40:36
when the problems you’re trying to solve
40:38
are pretty trivial
40:42
i mean think about it if it’s a
40:44
fundamental problem how does democracy
40:46
work
40:48
right and and i think
40:50
kovid may have even sort of reinforced
40:51
that argument where you looked at some
40:53
of the more totalitarian governments and
40:55
you can say whether it’s right or wrong
40:57
uh but they certainly took measures to
40:59
clamp down uh
41:01
and and really stop the virus spreading
41:03
its tracks in a way that a democracy
41:05
just couldn’t i agree and there’s a
41:07
there’s a great uh a wonderful
41:10
compendium of worldwide polls done run
41:12
by the cambridge institute for for a
41:15
democracy
41:16
uh by a guy named roberto fowa and he
41:18
and
41:19
have written a lot on this issue of
41:20
growing inequality but particularly
41:23
in the turning away of younger
41:25
generations in america
41:27
particularly millennials
41:29
not just in america but around the world
41:31
from the whole idea of liberal democracy
41:34
it’s it’s becoming less popular less
41:36
interesting and important
41:38
amazingly enough there are a lot more
41:40
younger people today
41:41
who are willing to say yeah let a
41:43
dictator you know handle things for a
41:45
while right
41:47
meaning that
41:48
this liberal democracy that all these
41:51
boomers and silent talk about
41:53
has done nothing for us
41:56
it just feathers the bed of all these
41:59
older people and all these in you know
42:01
uh dysfunctional institutions which
42:04
aren’t doing anything for our future
42:06
right
42:07
and that sense of that sense of being
42:09
turned off
42:11
uh and being much more willing and open
42:14
to a more autocratic it doesn’t really
42:17
matter too much whether it’s on the left
42:18
or the right you understand what i mean
42:20
or it could be some crossbreed between
42:22
them
42:23
well in in you know in some ways um
42:27
you know
42:28
can you blame the younger generation um
42:30
in the sense that it’s seeing all the
42:32
spoils go to the older generations as
42:34
we’ve talked about
42:35
um and you know you get
42:38
somebody that’s promising them for
42:40
education free health care whatever you
42:42
know the the platforms of those more
42:45
progressive uh you know political
42:47
parties sound pretty appealing right hey
42:49
look if i’m if i’m going to struggle i
42:50
may as well you know struggle and get
42:52
something so you said you know part of
42:53
the fourth turning is
42:55
is basically seeing the rise of a
42:57
recentralization of power
42:59
and i think that that’s probably one of
43:01
the drivers that will will drive you
43:04
know the um
43:05
resumption of central state power and
43:07
here in the states i mean we’re we’re
43:09
seeing this state get involved in ways
43:11
that it hasn’t been a long time
43:13
right no you’re right well i mean think
43:15
about it for for uh most of the year in
43:17
2020
43:19
uh the state took over everything i mean
43:21
we all became words of the state right
43:24
businesses households everyone i mean
43:26
nothing
43:27
remotely close to that has happened in
43:29
american history
43:31
now that example won’t go away quickly
43:34
you know what i mean people will
43:35
remember that yeah that you can do that
43:38
right
43:39
every window is dependent on the state
43:41
even major corporations you know to
43:44
renew their turnover their loans i mean
43:46
everything right the combination of
43:48
huge fiscal largesse plus the fed policy
43:52
right yeah the stimulus has been i mean
43:54
unprecedented yeah and and it and it by
43:57
the way it rewrites the rules of the
43:59
regime
44:01
um and you know i’ve pointed that out i
44:03
mean if you look at the six quarters of
44:06
the pandemic
44:08
and compare them to the quarter before
44:10
the pandemic you know the last quarter
44:12
of 2019
44:14
we’ve had something like a
44:16
seven percent growth in real disposable
44:19
personal income
44:20
at the same time we’ve had a two percent
44:22
decline or nearly three percent decline
44:25
actually in real gdp
44:28
that is unprecedented right a 10
44:31
percentage point gap between what we’re
44:34
earning to be able to spend
44:36
and what our economy is producing i’ve
44:38
gone back and look at all the earlier
44:40
recessions that gap is never more than
44:42
like one and a half percent
44:44
so where did all that free money come
44:46
from
44:47
it came from
44:48
borrowing it came from borrowing and it
44:52
came from
44:53
first of all borrowing by the federal
44:55
government
44:56
which we’ve seen it ramped up we went
44:58
into the recession by the way already
45:00
under trump at a
45:02
federal deficit of nearly five percent
45:04
of gdp that was already a record for a
45:07
non-recession year before the panda we
45:10
were 4.8 percent of gdp
45:13
um and you know everyone was fine with
45:15
that
45:16
uh
45:18
uh jerome powell is fine with that you
45:19
know donald trump is obviously fine with
45:21
that
45:23
and then
45:24
the next two years are at 12.5 percent
45:27
of gdp right so that was an extra five
45:30
and a half percent of gdp kicker in two
45:32
years well that translates into about 10
45:35
of dpi right disposable personal income
45:37
so that’s how you get there right
45:40
this changes the rules of the regime and
45:44
the reason why so many people have been
45:46
faked out in the market
45:48
and i mean if you had told if you had
45:50
told people back in the worst days of
45:52
march
45:53
back in 2020
45:55
that we were going to
45:57
you know the s p 500 was gonna double
45:59
again
46:01
in three well i think if you told them
46:02
first the global economy is you know
46:04
gonna shrink in in the next one yeah but
46:06
eight months what do you think’s gonna
46:07
happen the s p nobody would guess it
46:09
would double
46:10
well exactly that it was gonna double
46:12
and oh by the way and they would have
46:14
already disbelieved you but if you told
46:16
them that in addition to doubling
46:19
uh the
46:20
employment level in america would still
46:22
be would still be lingering about five
46:24
percent below where it was at the
46:27
beginning and that we’d be having close
46:29
to 2 000 deaths per day
46:31
after 18 months and yet we’d see this
46:34
and picked up they would have thrown you
46:35
out of the room right
46:37
and and meanwhile we’ve had the the 40th
46:39
anniversary of the of the you know bond
46:42
uh bull market right we we we saw
46:45
september 30 1980 we had bonds 10-year
46:49
yield at 15.8 something i think 15.84
46:54
what’s going on with that at a time now
46:56
when the economy is recovering the
46:58
the s p 500 doubled
47:01
i mean how do you see bonds so low well
47:03
turns out now they’re they’re not quite
47:04
so low
47:06
maybe they’re
47:07
maybe they’re shifting in a slightly
47:08
different direction now
47:10
but here’s the point why do the old
47:12
rules don’t work why do the all those
47:15
all those valuation rules you know that
47:17
we talked about like like you know
47:19
schiller’s pe
47:21
you know
47:23
you know earnings to sales ratios or or
47:25
uh right they just haven’t mattered for
47:28
the past half decade yeah
47:30
so they’ve all you know they’re they’re
47:32
off the charts they’ve all been
47:33
screaming
47:34
sell but if you had sold recently you
47:37
would have been killed right
47:39
so i this is a really important question
47:41
for investors
47:42
why are all these rules not working and
47:44
i would submit that we’re changing
47:46
regimes now
47:48
we’re going from an old regime which we
47:50
we call you know sort of the neoliberal
47:52
regime the fed just you know buys and
47:55
sells the short end influence interest
47:57
rates over the business cycle and they
47:59
and the federal government keeps the
48:01
budget reasonably balanced because they
48:02
can’t expect the fed to bail it out
48:04
right and then you know a little bit
48:06
maybe uh in a crisis the fed will
48:10
offer credit at penalty rates kind of
48:12
the old budget rule
48:14
in the new regime which you could call
48:16
the mmt regime right
48:20
well what what what what is it now the
48:22
fed can buy any asset
48:24
at any maturity it can flatten the
48:26
entire year curve down it can also go
48:29
after high risk credit it can do
48:30
anything it wants and the federal
48:32
government can basically cut taxes or
48:36
expand benefits any way it wants to and
48:38
the fed will just monetize right
48:40
monetize the difference right yeah so
48:43
sorry interrupt but this is such an
48:44
important um question that so many of
48:47
the viewers have been asking themselves
48:48
of late which is um
48:51
are we going to see in this fourth
48:53
turning kind of will reality re-express
48:55
itself and it certainly may amongst
48:58
things like you know physical resource
48:59
limitations and stuff like that because
49:01
you can’t necessarily print those up
49:03
overnight
49:04
um
49:05
but well sort of economically here will
49:07
will reality re-express itself and all
49:10
those old fundamentals of investing and
49:12
whatnot begin to matter again
49:14
or have we crossed a rubicon where the
49:18
fed is just going to be intervening in
49:19
any and all cases going forward and it’s
49:21
not we’re not going to return to that
49:23
because they require very different
49:25
investing strategies we hope you’ve been
49:27
enjoying this discussion with researcher
49:29
neil howe
49:30
the interview continues in part two
49:32
where neil details the economic and
49:34
market dynamics that he foresees will
49:36
play out during this current fourth
49:38
turning to watch part two just click on
49:41
the link provided in the description of
49:43
this video below
49:44
or go to youtube.com
49:47
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49:49
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okay i’ll see you over at part two of
50:27
our interview with neil howe

CONFIDENCE GAME

AN INTERVIEW WITH JAMES RICKARDS

Octavian Report: Could you take us through what you see happening to the monetary system? 

James Rickards: The dollar, the yen, the euro — all are forms of money. I would say gold is a form of money. Bitcoin is a form of money. In times past, feathers and clam shells have been money. One of the criticisms of many  modern forms of money, of central bank money and Bitcoin in particular, is that they are not backed by anything.

I make the point — and I’m not the first one to say this, I actually learned this from Paul Volcker — that it is backed by one thing, which is confidence. Meaning if we have confidence that something is money, then it’s money. If you and I think something’s money, and you’re willing to take it from me in exchange for goods and services, and furthermore you believe that you can give it to someone else in exchange for goods and services and make investments, then it’s money. It functions as money. But the problem with confidence is that it’s fine as long as it lasts, but it’s very fragile and it’s very easily lost. Once it’s lost, it’s impossible to get back, or at least extremely difficult to get back.

When I talk about the collapse of the international monetary system, people think I must be an apocalyptic doom-and-gloomer. End of the world, we’re all going to be living in caves, eating canned goods. I say no, not at all. I don’t think it’s the end of the world, I just think it’s the end of a system that has in fact collapsed three times in the past 100 years. There’s nothing unusual about breakdowns in the international monetary system. When it happens, the major trading financial powers get together, sit around a table, and rewrite what they call the rules of the game. “Rules of the game” is actually a phrase, a term of art in international finance, for the operating system (just to use modern jargon) of the international monetary system.

All I’m doing is looking at the system dynamics. It’s very easy to see the collapse coming based on that, and then ask the question: when the collapse comes, what will the new system look like? That is, what will it look like after the next Bretton Woods, or the next Smithsonian agreement, or for that matter Genoa in 1922? The next time the powers sit around the table, what deal will they come up with? Then I work backwards from that to today, and ask: what can I or should I do with my portfolio now  to prepare for this new deal?

That’s the scenario. Now, I have the view that basically all the central-bank models, all the risk-management models used on Wall Street and in capital markets around the world are obsolete. There are much better tools available today. The three that I use most frequently — not the only three — are complexity theory, behavioral psychology, and causal inference. Causal inference also goes by the name inverse probability, and it’s also known as Bayes’ theorem. Three branches of science: one’s physics, one’s applied mathematics, and one’s social-psychological. That’s my tool kit, along with some other things.

Using those tools, it’s very easy to see the collapse coming for two reasons. One, in complex systems — and I would make the case that capital markets are complex systems nonpareil — the worst thing that you can have happen is an exponential function of scale. Meaning that as you scale up the system, you don’t increase the risk in a linear way, you increase it in an exponential way. To take a simple example, let’s say that J.P. Morgan tripled the gross notional value of its derivatives. You go to Jamie Dimon and say, “Okay, Mr. Dimon, you tripled your balance sheet. How much did the risk go up?” He would say: “Yeah, we tripled the balance sheet, but it’s long, short, long, short, long, short. The longs offset the shorts. You net it down, the actual risk is quite small relative to the gross notional value. That’s not the way to think about it. We tripled the balance sheet, but the risk went up a little bit.”

If you ask the everyday citizen, they would probably use intuition and say, “Well, if you tripled the balance sheet, sounds like you tripled the risk.” The correct answer is that Jamie Dimon’s wrong, and the everyday citizen using intuition is wrong. The correct answer is if you triple the scale of the system, you increase the risk by a factor of 10 or 100, some X-factor based on the slope of the curve, which is a power curve. It’s basically the degree, the distribution of severity and frequency of risk.

You go back to 2008: what did we hear about? Too big to fail, too big to fail, too big to fail. Today, the five largest banks in the United States are bigger than they were in 2008. They have a larger percentage of all the banking assets, and their derivative books are much bigger. Everything that was too big to fail in 2008 is much bigger today. Given the exponential function I just described, the risk is exponentially greater than 2008. Whatever you saw in 2008, get ready. A much bigger collapse is coming. Probably sooner than later.

I was general counsel of Long-Term Capital Management. I negotiated their bailout, so I had a front row seat for that. I was on the phone with the heads of the major banks. Jon Corzine at Goldman Sachs,  Sandy Warner at J.P. Morgan, David Komansky at Merrill Lynch, Herb Allison and others, and Bill McDonough and Gary Gensler from the Treasury in Washington. I basically negotiated that bailout and saw exactly how close the global system came to complete collapse. We were hours away from shutting every stock and bond exchange in the world. Literally hours away, and the bailout got done. Four billion dollars changed hands. The balance sheet was supported. A press release was issued and the crisis passed. But it was extremely close, and not a foregone conclusion at all that we could get that done.

Having witnessed that, and knowing the team at LTCM — we had sixteen Ph.D.s from MIT, Harvard, Chicago, Stanford, and Yale, and two Nobel Prize winners — I said, well, if the smartest people in the world in this field with 160-plus IQ’s can get it that badly wrong, they must be missing something. There must be something wrong with the theory, because they’re not stupid. Nobody likes to lose their own money, so there must be something wrong with the theory.

I spent the next 10 years working on this, about five years figuring out what was wrong, where the flaws were, and another five years figuring out what actually works to remedy them. I refined my models enough that in 2005 and 2006 I was warning people that a collapse was coming again. That it would be worse.

Now, I didn’t say, Bear Stearns’ hedge fund is going to fail at the end of July 2007. I didn’t say that Lehman Brothers was going to collapse in mid-September 2008. It wasn’t necessary. It was sufficient to say that the collapse was coming because none of the lessons of 1998 had been learned. I’m in the same state today: the lessons of 2008 have not been learned. I’m watching the dynamics, I’m watching it play out, and you can see the next collapse coming. Here’s the tempo. In 1998, Wall Street bailed out a hedge fund to save the world. In 2008, central banks bailed out Wall Street to save the world. Move forward 10 years — let’s say 2018, to pick a number — and who’s going to bail out the central banks? Each bailout gets bigger than the one before. Each collapse is bigger than the one before, which is exactly what complexity theory would forecast based on the scaling metrics and the dynamics I described.

So who bails out the central banks? There’s only one clean balance sheet left in the world. There’s only one source of liquidity. After all, the Fed took their balance sheet from $800 billion approximately in 2008 to a little over $4 trillion dollars today. The problem is they haven’t normalized. Now that the crisis is long over, they haven’t gone back to the $800-billion-dollar level, which would be a more normal balance sheet. They stayed at $4 trillion; they’re stuck there. They’re not doing more QE, but they are rolling over what they have and they can’t reduce the size of the balance sheet.

What are they going to do in the next crisis? Go to $8 trillion? To $12 trillion? What is the outer boundary of how much money they can actually print? Legally, there is no boundary. They could actually print $12 trillion if they wanted to. At some point, however, you cross this intangible, invisible confidence boundary that I described earlier — and that goes back to the original problem of confidence in any form of money. And all the other central banks are in the same situation. The People’s Bank of China, the Bank of England, the Bank of Japan, the European Central Bank. It’s not unique to the U.S. If the central banks don’t have the wherewithal to liquefy the world in the next panic, and if the next panic is coming and you can see it a mile away, where will the liquidity come from? There’s only one source of liquidity left in the world, which is the IMF. They can print world money, which are the special drawing rights or SDRs.

When you get to the endgame, they’re going to have to print trillions of SDRs (each SDR is worth about $1.50) to re-liquefy the world in a global financial panic. Will that work? In theory it could work, but I expect if it works, it will only be because nobody understands it, like something’s happening and, as Bob Dylan sang in “Ballad of a Thin Man,” “Something’s happening here and you don’t know what it is.” At best, it will be highly inflationary.

Now, maybe it won’t work. Maybe people will say, “I’ve lost confidence in Federal Reserve money and European Central Bank money and Bank of Japan money. Why should I have any more confidence in IMF money? It’s just another form of currency, and I’ve lost confidence in all of them and I’m going to go get some gold.”  If that actually happens, the world may have to go to a gold standard. Now, I guarantee there’s not a central bank in the world that wants a gold standard. They may have to go to one, not because they want to, but because they have no choice, because it’s the only way to restore confidence. That raises an interesting question: if you go to a gold standard, what’s the price of gold? I talk about this in The New Case for Gold, about the blunder of 1925 with Churchill taking the U.K. back to a gold standard at a price that Keynes warned him was deflationary. Keynes didn’t favor a gold standard at the time. He did in 1944 and he did in 1914. He didn’t in 1925, but he did tell Churchill if you’re going to do this, you need a much higher price to avoid deflation. Churchill ignored him and threw the U.K. into a depression.

So question is: what is the implied non-deflationary price of gold today? I’ll use M1 of China, U.S., and the ECB, just as a frame. The answer’s $10,000 now if you have 40 percent backing — and over $50,000 if you have 100 percent backing of M2, which is a broader money supply. I don’t think you have to use M2. I don’t think you need 100 percent. It’s a judgement that’s debatable. But even on the modest assumptions of M1 using 40 percent backing, gold would have to be $10,000 an ounce to support the money supply. You may or may not have a gold standard, but if you do gold will be $10,000 an ounce.

Now, if you don’t, if the SDR thing actually works, gold will get to $10,000 an ounce the other way, which is inflation. Gold is going to shoot much higher. In the SDR scenario it will shoot much higher because of inflation, and in the gold-standard scenario it will shoot much higher because it has to, to avoid deflation. It’s not really the price of gold going up, it’s the devaluation of the paper currency. It’s the same thing. The dollar price of gold is just the inverse of the value of the dollar.

OR: Why do you say gold has to be part of a new system? What do you say to the people who think it’s an anachronism?

Rickards: The flaw in that — and I think this is one of the biggest problems today, and certainly an issue with everyone from Milton Friedman to Janet Yellen — is that they take confidence for granted. If you assume that confidence in paper money is infinitely elastic, then there’s no reason why the money supply cannot be infinitely elastic.

There are a lot of gold bashers out there who will be very quick to tell you that gold’s a barbarous relic, blah blah blah. But there are some more thoughtful people out there, among whom I would include Stephanie Kelton, Warren Mosler, Richard Duncan, and others. They’re all different, but they’re smart people. I’ve met a lot of them. Paul McCulley, formerly of PIMCO and a close associate of Bill Gross. They call themselves modern monetary theorists.

I think Adair Turner is coming out this way in his new book, Between Debt and the Devil, and even Larry Summers in some ways. What they’re saying is that there’s nothing you cannot print yourself out of. You get too much deflation? Print more money. Deflation won’t go away? Print more. People won’t spend? The government can spend. Maybe you cannot force people to spend it, but the government loves to spend money, they know how to do that really well. If it increases the deficit, so what? Just issue more debt to cover the deficit, and if people don’t want your debt, the central bank can buy it. Don’t worry about paying it back because the central bank can convert the treasury bonds into perpetual bonds. The whole thing just goes away. You don’t have to worry about the national debtthe Fed can just buy the whole $19 trillion of it, sock it away on their balance sheet, make it a perpetual note, and go play golf. What’s the problem?

This is sometimes called “helicopter money.” It’s called “people’s QE” by Jeremy Corbyn, it’s called “fiscal dominance” by Rick Mishkin. It has different names, but it always says the same thing: there’s no outer boundary on how much money you can print, so what’s the problem?

My thesis — and here I’ll flip over to the behavioral-psychology side a little bit — is that it’s not a problem until it is. In other words, confidence can be sustained until it can’t. You can lose this very quickly, so I don’t believe that confidence is infinitely elastic. There’s nothing in human nature or history that says that. If you’re relying on confidence to say that money can be infinitely elastic, then you’re wrong. The concern is that the elites will go down this road — having been wrong about the wealth effect, about QE1, QE2, and QE3, about Operation Twist — and then they’ll somehow wake up and see they’re wrong again. But they’ll find out the hard way because confidence in the entire system will collapse. At which point, your only two remedies are SDRs and gold.

OR: What’s your take on central banks and gold?

Rickards: With regard to central banks and gold, I always say watch what they do, not what they say. If the U.S. has a budget problem, and we’re sitting on about $380 billion in gold, why don’t you just sell the gold and get some money? That’s what Canada did. That’s what the U.K. did. Why are we hanging onto it?

The question answers itself. Obviously, it has some value. Obviously, it has some role in the monetary system. In my book, I write about a discovery I made — one of those discoveries that’s hiding in plain sight. I had been working on a thesis that the Fed is, at least on occasion, insolvent. My basis for that was to look at the Fed’s balance sheet. They’re leveraged today about 113 to one. That’s unheard of. I’ve been in the hedge-fund business, I’ve been in the investment-banking business, I’ve been in the banking business for decades. Banks leverage maybe 12 to one, broker-dealers and investment banks leverage maybe 15 to one, a hedge fund will lever two or three to one (although that’s getting a little risky). Even Long-Term Capital Management was never leveraged more than 20 to one, and we were very aggressive about leverage. 113 to one is way, way off the charts.

Now, just to be clear, the Fed does not mark its value sheet to market. My thought experiment is: what if they did? There’s a lot of data out there about the composition of the bond holdings of the Fed, particularly those held at the New York Fed. It’s not difficult to get that information, to do some bond math, and mark it to market. Doing that, I discovered that they were in fact insolvent at various times along the way. I had this conversation with several Fed officials. One member of the board of governors, another individual who was not a member of the board, but a very, very close advisor to Bernanke and Yellen, a true insider, a Ph.D. economist, a friend of mine. I was able to have this conversation with him. Interestingly, the member of the board of governors more or less conceded my point, but her rejoinder was, “Well, maybe we’re insolvent, but it doesn’t matter.” In other words, central banks don’t need capital. That’s a point of view.

The other conversation was with the insider: he was adamant that they’ve never been insolvent, ever. Regardless of bond-market moves. He wouldn’t tell me why, so I got to thinking about it. I went back to the balance sheet to see what I was missing. And lo and behold, there was this gold item valued at $42 an ounce. I said, “Well I should mark that to market. If I’m going to mark the bonds to market, I need to mark the gold to market.”

Now, as I was doing this I noticed a couple things. The Fed’s gold holdings are approximately 8,000 tons exactly. Close to exactly the amount held by the U.S. Treasury. In intelligence work, the first rule is there are no coincidences, and this non-coincidence explains why the Treasury stopped selling gold in 1980. Bven as late as the late 70’s, the Treasury was still dumping gold to suppress the price. That’s not speculation; there’s declassified correspondence among President Ford, Henry Kissinger, Arthur Burns, and the Chancellor of Germany that lays this out. The Treasury was actually dumping thousands of tons of gold in the late 1970s, but then in 1980 it just stopped on a dime. The U.S. has sold almost no gold since. Instead, we got everyone else to dump their gold. We got the U.K. to dump six hundred tons in the beginning of 1999. We got Switzerland to dump over a thousand tons in the early 2000s. We got the IMF to dump four hundred tons in 2010. The U.S. has been prevailing upon all these other people to sell their gold, but we won’t sell any ourselves. Why? They can’t. The Treasury has to hold the gold they’ve got in order to honor, on legal and constitutional grounds, the certificate held by the Fed. This was received in exchange for the gold (with an explicit guarantee that the gold was there to backstop the Fed’s balance sheet).

So I was wrong the first time. The Fed has never been insolvent; my insider friend was correct. The reason I was wrong was not because of the bond portfolio, which would have made them insolvent, but because of the gold, which adds about $350 billion to the balance sheet. When you add that to capital on a mark-to-market basis, the leverage ratio drops from 113 to one to about 13 to one, which is pretty healthy for a normal bank. On top of everything else we’re discussing, you find that the Federal Reserve has a hidden asset, which is the value of gold, and that it’s well capitalized — if you count the gold. What does it mean when central bankers and public officials disparage gold, tell you it’s an anachronism, tell you it’s a tradition, tell you it’s a barbarous relic, tell you that you’re a fool to own it — and yet they themselves are propped up and made solvent by gold?

OR: More and more physical gold is leaving the tradable system as China and Russia stockpile it, yet huge derivatives are still being written on it. Can you talk about that disconnect?

Rickards: Well, there is a world of paper gold and there’s a world of physical gold. Now, paper gold to me is not paper gold. It’s paper, but it references the price of gold. There’s not going to be any actual large difference between the paper price and the physical price quoted whether it’s in London or Beijing, because of the arbitrages.

I just recently returned from Switzerland where I met with the head of the country’s biggest gold refinery, who told me that he’s seeing severe shortages in supply. This guy, he knows who all the big sellers are, he knows who all the big buyers are because he’s the biggest gold refiner and he takes it in and ships it out. He knows who all the players are and this is, again, in the physical world. He said that with regard to his selling side, he has more demand than he can handle. He’s sending the Chinese 10 tons a week; they want 20 tons. He won’t provide it because he doesn’t have that much gold and he has other customers to take care of.

The physical shortages are already showing up and they’re getting worse. I’ve heard similar things from wholesale dealers — people who deal directly with London Bullion Market Association members and Comex-approved warehouses. These are the large holders of gold in the world, and they are saying that it is taking longer and longer to fill deliveries. The supply situation is stretched and probably about to break.

Meanwhile, the paper gold market continues to expand with 100-to-one leverage. Warehouses continue to get drawn down, contracts continue to be written. You have a very, very large inverted pyramid, with a broad base of paper gold on top and a tiny sliver of physical gold supporting the whole thing. It’s becoming wobbly, and it’s about to tip over.

Any break in that market — coming back to the issue of confidence — would lead directly to what I would call the mother of all short squeezes and a buying panic. What would I mean by a break? Well, most likely a failure to deliver. Suppose some dealer, some large bank, some exchange, some intermediary somewhere has sold a lot of paper gold and has been called upon by the buyers to deliver. They say, “I don’t want to roll over my contract, I don’t want cash settlement, I want the gold, please. Give me the gold.”

They’re not going to be able to get it. That failure will become public, because it always does, and will create a crisis of confidence. Everyone will run down to their dealers, their exchanges, and their brokers all at once and say, “Give me my gold!”  They’ll then discover that there’s only about one percent of what’s needed to fulfill that demand, and there’s nowhere near enough gold in the world at anything close to today’s prices (even if you could find it, which you probably will not be able to) to satisfy those contracts.

What would happen next? The answer is that, since you cannot deliver the gold, you’re going to have to terminate the contract, and it will come as a surprise to a lot of paper gold buyers that such terminations are totally legal. If you actually read the contracts gold buyers sign you’ll find what are called force majeure clauses or material adverse change clauses, meaning gold exchanges have the power to suspend delivery.  There’s also what’s called trading for liquidation only, which means you can roll over your contract or close it out, but you cannot take delivery. They have emergency powers to do, really, whatever they want to maintain orderly markets. So what they’ll do is they’ll terminate all these contracts using these contractual and governance provisions. They won’t steal your money, they’ll send you a cash settlement for yesterday’s price. But meanwhile the price of gold today will be going up $200, $300, $400, $500 an ounce. Day after day you’ll be sitting there, watching the exact hyperbolic price movements that were the reason you bought the gold in the first place — and you will not be participating in them.

You will be closed out at exactly the time when you most want the contract. That always happens. That’s the conditional correlation effect. The time you most want it is the time you won’t have it, because it doesn’t work for the other guy. They close you out, send you a check for yesterday’s price, and you’ll miss the move. And by the way, even if you want to jump back in, you won’t be able to buy any. Dealers will be sold out, mints will be backlogged, refiners will be backlogged. They won’t even take your calls. That’s what my friend in Switzerland told me. He said if I didn’t know you and you weren’t already a customer, I wouldn’t take your call. I’m not taking any new business because I cannot supply it.

OR: Can you talk about the so-called war on cash and the potential confiscation of gold?

Rickards: The war on cash is over. The government won. We hear about the cashless society and I think Sweden may be the first to get there. Others are considering it. Larry Summers writes an op-ed on abolishing the 100-dollar bill, and there’s a movement in Europe to get rid of the 500-euro note, so there are a lot of significant legal and political trends against cash. It’s really irrelevant, because we don’t use cash anywhere. You might have a few bucks in your wallet, but people get their paychecks from direct deposit, they get their retirement checks from direct deposit, they pay their bills online, they use their credit cards, they use their debit cards, and there hasn’t been a paper Treasury security issue, I think, since the late 1970’s. The dollar is already a digital currency, and so are all the other major currencies.

To the extent we have any paper money at all, it’s a token. To the point where you buy a two-dollar candy bar, you don’t even reach in your pocket and get out a five, you just swipe your debit card. We already live in a world of digital currencies, with respect to the dollar, the major currencies.

People say, “Yeah, but it’s still legal. I can go down to the bank and get $10,000 or $20,000 and stick it in a safe to avoid negative interest rates or have it for an emergency.” They’re wrong. It’s not that easy. If you go actually do it, actually go down to the bank and ask them for $15,000 or $20,000, you will be treated like a drug dealer or a tax evader. Some banks will tell you to come back in a couple days, that they have to order the cash. There’ll be reams of paperwork to fill out. They’ll file a report with the Treasury.

People are kidding themselves about the ease with which they can get cash. They are locked into a digital system. The war on cash is over and the government won. That’s just the prelude to negative interest rates. It’s like slaughtering pigs: you don’t chase the pigs around a field. You get them into a pen and then you slaughter them. What’s happening with savers is that everyone’s being rounded up into one of four or five digital pens, i.e. Citi and J.P. Morgan and Wells Fargo, and they’re going to be led to the slaughterhouse of negative interest rates.

OR: Do you think we are seeing a currency war going on internationally at the moment?

Rickards: About currency wars, let me say I’m always amused when I see a journalist or someone write a story saying “Oh gee, there’s a currency war. Look at this. China’s weakening against the yen.” I make the point that the most recent currency war started in 2010. I talk about it in my book on the subject which came out in 2011. It’s the same currency war. Wars consist of many battles, wars are not continuous fighting all the time. There are big battles and little battles; there are quiet periods and then a new battle erupts. You have an occasional D-Day or Battle of the Bulge, but some episodes are more intense than others.

Currency wars are the same. There are quiet periods, but it’s the same war. What I call Currency War One lasted from 1921 to 1936. What I call Currency War Two lasted from 1967 to 1987. I make the point that the world is not always in a currency war, but when we are they can go on for a very long time because they have no logical conclusion. It’s just back and forth, with a race to the bottom via competitive devaluations. The only conclusion to a currency war is either systemic reform or systemic collapse. Either the system breaks down completely or people get together, as they did at the Plaza Hotel in 1985, to give the system some coherence.

I don’t see the leadership, I don’t see the giants today. I don’t see people like James Baker, Bob Rubin, George Schultz, or John Maynard Keynes. I don’t see people like that on the landscape. I see a lot of people not of that stature in positions of power. I don’t see any awareness that this collapse is coming. So given the two possible outcomes — systemic reform or systemic collapse — I think systemic collapse is the more likely. But we are in a currency war and have been since 2010. We will be perhaps until 2025. Unless the system collapses earlier, which is what I expect.

If We Had a Real Leader

Imagining Covid under a normal president.

This week I had a conversation that left a mark. It was with Mary Louise Kelly and E.J. Dionne on NPR’s “All Things Considered,” and it was about how past presidents had handled moments of national mourning — Lincoln after Gettysburg, Reagan after the Challenger explosion and Obama after the Sandy Hook school shootings.

The conversation left me wondering what America’s experience of the pandemic would be like if we had a real leader in the White House.

If we had a real leader, he would have realized that tragedies like 100,000 Covid-19 deaths touch something deeper than politics: They touch our shared vulnerability and our profound and natural sympathy for one another.

In such moments, a real leader steps outside of his political role and reveals himself uncloaked and humbled, as someone who can draw on his own pains and simply be present with others as one sufferer among a common sea of sufferers.

If we had a real leader, she would speak of the dead not as a faceless mass but as individual persons, each seen in unique dignity. Such a leader would draw on the common sources of our civilization, the stores of wisdom that bring collective strength in hard times.

Lincoln went back to the old biblical cadences to comfort a nation. After the church shooting in Charleston, Barack Obama went to “Amazing Grace,” the old abolitionist anthem that has wafted down through the long history of African-American suffering and redemption.

In his impromptu remarks right after the assassination of Martin Luther King, Robert Kennedy recalled the slaying of his own brother and quoted Aeschylus: “In our sleep, pain which cannot forget falls drop by drop upon the heart until, in our own despair, against our will, comes wisdom through the awful grace of God.”

If we had a real leader, he would be bracingly honest about how bad things are, like Churchill after the fall of Europe. He would have stored in his upbringing the understanding that hard times are the making of character, a revelation of character and a test of character. He would offer up the reality that to be an American is both a gift and a task. Every generation faces its own apocalypse, and, of course, we will live up to our moment just as our ancestors did theirs.

If we had a real leader, she would remind us of our common covenants and our common purposes. America is a diverse country joined more by a common future than by common pasts. In times of hardships real leaders re-articulate the purpose of America, why we endure these hardships and what good we will make out of them.

After the Challenger explosion, Reagan reminded us that we are a nation of explorers and that the explorations at the frontiers of science would go on, thanks in part to those who “slipped the surly bonds of earth to touch the face of God.”

At Gettysburg, Lincoln crisply described why the fallen had sacrificed their lives — to show that a nation “dedicated to the proposition that all men are created equal” can long endure and also to bring about “a new birth of freedom” for all the world.

Of course, right now we don’t have a real leader. We have Donald Trump, a man who can’t fathom empathy or express empathy, who can’t laugh or cry, love or be loved — a damaged narcissist who is unable to see the true existence of other human beings except insofar as they are good or bad for himself.

But it’s too easy to offload all blame on Trump. Trump’s problem is not only that he’s emotionally damaged; it is that he is unlettered. He has no literary, spiritual or historical resources to draw upon in a crisis.

All the leaders I have quoted above were educated under a curriculum that put character formation at the absolute center of education. They were trained by people who assumed that life would throw up hard and unexpected tests, and it was the job of a school, as one headmaster put it, to produce young people who would be “acceptable at a dance, invaluable in a shipwreck.”

Think of the generations of religious and civic missionaries, like Frances Perkins, who flowed out of Mount Holyoke. Think of all the Morehouse Men and Spelman Women. Think of all the young students, in schools everywhere, assigned Plutarch and Thucydides, Isaiah and Frederick Douglass — the great lessons from the past on how to lead, endure, triumph or fail. Only the great books stay in the mind for decades and serve as storehouses of wisdom when hard times come.

Right now, science and the humanities should be in lock step: science producing vaccines, with the humanities stocking leaders and citizens with the capacities of resilience, care and collaboration until they come. But, instead, the humanities are in crisis at the exact moment history is revealing how vital moral formation really is.

One of the lessons of this crisis is that help isn’t coming from some centralized place at the top of society. If you want real leadership, look around you.

W.T.O. Chief Quits Suddenly, Adding to Global Turmoil

Roberto Azevêdo, director-general of the World Trade Organization, has been a proponent of international cooperation, putting him at odds with the Trump administration.

The head of the organization charged with bringing a semblance of order to international trade relations resigned unexpectedly Thursday, adding another element of uncertainty to commerce in the midst of the coronavirus pandemic and escalating trade conflicts.

Roberto Azevêdo, a career Brazilian diplomat, resigned as the director-general of the World Trade Organization effective Aug. 31, the Geneva-based organization said. His second four-year term was not scheduled to end until September 2021.

The W.T.O.’s operations have been crippled since late last year as a result of actions by the Trump administration, which has refused to approve nominees to fill vacancies on a crucial appeals panel that rules on trade disputes.

With Mr. Azevêdo’s departure, which caught officials in Geneva and Brussels by surprise, the organization will lose an advocate of open trade and international cooperation whose views clashed with President Trump’s preference for bilateral power politics.

His resignation also leaves a leadership vacuum at a perilous moment for the world economy.

The pandemic “is the worst shock to global trade that has happened in our lifetimes,” said Josh Lipsky, director of the global business and economics program at the Atlantic Council, a research organization in Washington. “To lose the leader of the W.T.O. is a serious blow. There is a broken global trading system, and it needs leadership to fix it.”

Mr. Azevêdo, 62, did not link his departure to tensions with the Trump administration. Rather, he said he wanted to give W.T.O. members a head start on choosing a successor, which is often a difficult process.

The coronavirus pandemic has brought complex negotiations on issues such as fishing subsidies to a standstill and made it unlikely that agreements would be reached until next year. A debate at the same time about the next W.T.O. director would interfere with attempts to overcome trade disputes, Mr. Azevêdo said.

“The selection process would be a distraction from — or worse, a disruption to — our desired outcomes,” he said during an online meeting with W.T.O. members. “We would be spending valuable time on a politically charged process that has proved divisive in the past.”

World trade was already declining because of Mr. Trump’s trade wars with Europe and China, and has plunged further since the pandemic brought economic activity in many countries to a standstill. The W.T.O. has predicted that global trade could fall by one-third, a decline not seen since the Great Depression in the 1930s.

Recently Mr. Azevêdo has expressed frustration that the United States, Europe, China and other large countries were not coordinating their response to the coronavirus emergency. Mr. Trump has recently stepped up his criticism of China.

“Either we shape up and begin to talk to each other and find common solutions or we are going to pay a heavy price,” Mr. Azevêdo told CNN in April.

Robert Lighthizer, the United States’ top trade official, was conciliatory Thursday. “Despite the many shortcomings of the W.T.O., Roberto has led the institution with grace and a steady hand,” Mr. Lighthizer said in a statement. “He will be difficult to replace.”

Mr. Azevêdo, who was previously a top trade negotiator for Brazil and has worked in Geneva since 1997, also cited personal reasons for his departure. The W.T.O. makes decisions by consensus, which means even one of the organization’s 164 members can stymie progress. The director-general must find a way to thread conflicting national interests and reach accord, a laborious and exhausting task.

Mr. Azevêdo said Thursday that, while he had no serious health problem, he recently had knee surgery. Between that and the lockdown, he said, “I have had more time than usual for reflection.”

What Trump’s refusal to wear a mask says about masculinity in America

From the president to stay-at-home protesters, a mask-less face has become a stand-in for manliness.

When reporter BrieAnna Frank showed up to a Honeywell plant last week in Arizona to cover President Donald Trump’s visit, she was sure to wear a mask.

Masks were the reason the president was there: The former aerospace plant in Phoenix has pivoted to producing them in recent months amid a nationwide shortage of personal protective equipment (PPE).

But the dozen or so people who had gathered outside the facility to cheer on the president were not there to support masks. They had their faces uncovered, Frank told Vox.

As she approached members of the crowd to interview them, the conversation quickly got heated. “They started to yell that me and the other journalists there were trying to incite fear and panic and paranoia” by wearing masks, said Frank, who works for the Arizona Republic.

One man in particular seemed to take issue with the male journalists wearing masks, she recalled. “It’s submission, it’s muzzling yourself, it looks weak,” he said, “especially for men.”

“I felt that it was a statement that people should know about,” said Frank, whose tweets about the encounter went viral. To the crowd in front of the factory, she said, “Masks clearly symbolized something beyond, ‘I am trying to protect my health.’”

They’re not alone. Trump himself declined to wear a mask while being photographed at the plant, though he claims he wore one “backstage.” Vice President Mike Pence was criticized for failing to wear a mask during a tour of the Mayo Clinic in April. And when armed protesters showed up at the Michigan statehouse on April 30 to protest stay-at-home orders amid the coronavirus pandemic, many were mask-free. One shouting, bare-faced man who was photographed at the rally later said he was “not at all” worried about the virus and would never wear a mask — “ever.”

Since the pandemic began, the issue of wearing masks has further exposed America’s racial and gender prejudices. Earlier on, wearing masks was associated with Asian countries and often dismissed because of racist assumptions about those countries. Then, as many cities began to require residents to wear masks, police began targeting black men for covering their faces, profiling them as criminals rather than as people trying to abide by health guidelines. And for a certain subset of mostly white, conservative men, not wearing a mask seems to have become a hallmark of manliness.

For unmasked protesters like the ones in Michigan, “There’s an assumption of a kind of invincibility that is tied to this idea of white masculinity,” Jonathan Metzl, a professor of sociology and psychiatry at Vanderbilt University and the author of Dying of Whiteness: How the Politics of Racial Resentment Is Killing America’s Heartland, told Vox.

It’s not just men — Frank noticed many women among the unmasked Trump supporters gathered at the Honeywell plant. And, of course, many men are happy to follow the recommendation from the Centers for Disease Control and Prevention to cover their faces in public. Still, a narrative has emerged on the right that wearing a mask is weak and refusing to wear one is somehow strong. And that narrative could put everyone at risk.

One thing about [being] macho is being fearless,” Melanye Price, a political science professor at Prairie View A&M University, told Vox. “But that fearlessness comes at a cost for every single person around you.”

The CDC recommends masks. Not everyone is listening.

Long before the pandemic hit, masks were common in East Asian countries, where they’re seen as a simple way to protect yourself (and others) from disease, as Refinery29’s Connie Wang wrote in March. Wuhan, China, where the coronavirus outbreak began, started requiring them in January. The US was much slower to recommend masks for the general public, but in early April — with confirmed coronavirus cases jumping by the day — the CDC recommended that everyone wear a cloth mask in certain public settings. Some cities, like New York and Los Angeles, began mandating the wearing of masks in certain settings as well.

Like much about the coronavirus, the impact of wearing masks on transmission isn’t entirely clear. But many experts believe that even cloth masks can offer some degree of protection for wearers — and perhaps greater protection for the people around them. The virus seems to spread “when germ-containing droplets make it into a person’s mouth, nose, or eyes,” as Vox’s German Lopez previously reported, and it’s true that “masks stop people from spreading their own droplets.” If everyone wears a mask — including those who are asymptomatic but may still be carrying the virus — it could help halt the spread of Covid-19.

Most Americans appear to be on board with the CDC’s recommendation. In a Morning Consult poll (conducted from April 7 to 9), 72 percent of respondents said they planned to start wearing a face mask in public places over the next two weeks.

Others, however, have chafed at the CDC’s advice. As people around the country protest their state’s shelter-in-place orders, many have appeared in public without masks. One example is the protesters in Michigan, which has become a hotbed of resistance to social distancing restrictions — a defiance Trump has encouraged via his tweets about “liberating” Michigan and other states. And on April 30, hundreds of protesters gathered at the state capitol in Lansing, some of them armed and many of them eschewing masks and standing close together in violation of social distancing guidelines, according to Reuters.

One of the mask-less protesters was Brian Cash, who was photographed shouting during the event. He later told the Detroit Free Press he believes the coronavirus was “intentionally released” by the Chinese government and that the state’s stay-at-home order is useless because people still go to grocery stores and pharmacies. “So what is the point of staying at home?” he asked.

The resistance to masks has also found support within the Trump administration. Pence, the head of the federal government’s coronavirus response, said he did not wear a mask while touring the Mayo Clinic in April because he is tested for Covid-19 regularly. (He later backpedaled and said he “should have” worn one.) But a mask-less Pence attended two events in Iowa on May 8, the same day his press secretary tested positive for the virusaccording to the Intercept. At one of those events, CEOs were reportedly asked to remove their masks before joining Pence onstage.

Trump, meanwhile, has consistently appeared in public without a mask. After he was photographed without one at the Honeywell plant in Arizona, he said he had worn one “backstage,” outside the view of cameras.

“But they said you didn’t need it, so, I didn’t need it,” he went on. “And by the way, if you noticed, nobody else had it on that was in the group.”

Aides tested positive for the virus days later, and staffers have since been asked to wear masks on White House grounds, according to the Washington Post. Trump, however, is still unlikely to wear a mask himself, aides say.

For Trump, not wearing a mask may be a way to project masculinity

The Trump administration’s behavior around masks has gendered overtones. For Trump and Pence, not wearing a mask may be a way to project a macho image, Metzl said, playing into “tropes of indestructibility.”

Appearing to play it safe contradicts a core principle of masculinity: show no weakness,” wrote social sciences professor Peter Glick at Scientific American. “Defying experts’ warnings about personal danger signals ‘I’m a tough guy, bring it on.’”

Trump’s messaging has also helped promote the idea that ignoring the risks of coronavirus is the tough or strong thing to do. Despite warnings from public health experts about the dangers of reopening the country too early, he said at the Honeywell plant that “the people of our country should think of themselves as warriorsbecause “our country has to open.”

Trump’s militaristic, tough-guy messaging around wearing face masks may be encouraging people to minimize the risk of contracting and spreading coronavirus.
 Brendan Smialowski/AFP via Getty Images

Such militaristic, tough-guy messaging, along with Trump’s refusal to wear a mask, may encourage ordinary people — especially men — to minimize the risk of coronavirus for the sake of appearing manly.

While the refusal to wear masks isn’t an exclusively male phenomenon — a Michigan woman was arrested last month after police said she attacked a grocery store employee who told her to leave because she wasn’t wearing a mask — there is some evidence that men may view mask recommendations with more skepticism than women. In the April Morning Consult poll, 76 percent of women said they planned to wear a face mask in public over the next two weeks, compared with 67 percent of men.

Though Trump’s narrative around the virus may be reinforcing gender stereotypes, the issue of masks is revealing Americans’ racial biases as well. While white men have been able to appear in public without masks — and with guns — as part of a protest, black men have been targeted by police, both for wearing and for not wearing masks. In Philadelphia, officers were caught on video forcibly removing a black man from a bus for not covering his face, just one day after the city began requiring it, Fabiola Cineas reported for Vox in April. And a police officer in Miami handcuffed and arrested Armen Henderson, a black doctor who tests homeless people for Covid-19, as he loaded equipment into a van in front of his home — while wearing a mask.

Black Americans often have to engage in “social signaling” to make white people feel comfortable in public spaces, said Price, the political science professor. “You say good morning first, you smile first,” she said. “None of that can be done with masks.”

White people often already perceive black people as dangerous or not belonging in public places, Price said. “But a black body with a mask is something that somehow expresses even more danger.”

Meanwhile, for white protesters like those in Michigan, not wearing a mask may signal a kind of immunity from danger — or at least a perceived immunity. As white Americans, they’re unlikely to encounter the same kind of police brutality that black people face when they engage in protest. “Imagine 10 black men and rifles walking up to any state capitol in the United States,” Price said. “They would be shot before they ever made it up the steps.”

But congregating in crowds without masks is also a statement of perceived immunity from the virus, Metzl said. The unmasked protesters seemed to be sending the message that “nothing’s going to happen to me because of my whiteness,” he explained. “If you thought you were really going to get the coronavirus, you wouldn’t act like that.”

The fact that black and Latinx Americans in many communities are disproportionately likely to become infected and die of Covid-19 may be influencing such attitudes. “I think for a lot of the country, people feel like this is something that’s happening to someone else,” Metzl said.

But people who refuse to wear masks may be putting others, not just themselves, at risk

Obviously, the feeling of invincibility that leads protesters to avoid masks could backfire if they get sick. Pence and Trump may also find themselves rethinking their stance in the coming days since White House officials tested positive — Pence himself is reportedly keeping his distance from Trump and other staffers to avoid potentially exposing them.

But the especially disturbing thing about refusing to wear a mask is that, while it may seem like an expression of toughness, it actually increases the risk to others more than yourself, Metzl said. While some may feel that not wearing a mask expresses their own invincibility, “You could also think about this in terms of all the other people you’re putting at risk by not wearing a mask,” he added — your family, friends, colleagues, the rest of society. The failure to wear one is “symbolic of a kind of loss of a bigger common sense of responsibility to each other.”

People protest Gov. Jay Inslee’s stay-at-home order outside the capitol building in Olympia, Washington, on May 9, 2020.
 Jason Redmond/AFP via Getty Images

Remedying that loss is not going to be as simple as sending the message that “tough guys wear masks,” Metzl said. (Washington Post humor columnist Alexandra Petri has suggested a tagline for a potential “Masks For Him” line of accessories: “We put the ‘mask’ in ‘toxic maskulinity.’”) Rather, the country has to look at what the current mask debate says about racism and other prejudices. “What we need is a much more concerted effort to address the bigger issues that are represented by masks,” Metzl said.

For the Arizona Republic’s Frank, the confrontation over masks outside the Honeywell plant is part of a wider narrative around the virus. She recalled another incident in which a female reporter was accosted, this time by a woman, for wearing a mask. “I do think that what happened to all of us out there in the field on Tuesday is indicative of a larger issue” with how masks are viewed in the US, Frank said.

But for her, wearing a mask is about one thing: public health. Frank lives with her mother, a nurse who treats Covid-19 patients. “I try to be really careful,” she told the people gathered outside the plant. “I try to protect myself and those around me.”

The Wisconsin Supreme Court’s conservative majority strikes down state stay-home order

Lame-duck Justice Daniel Kelly, who just lost election in a landslide, cast the deciding vote.

On Wednesday evening, Republicans on the Wisconsin Supreme Court issued a broad order striking down that state’s stay-at-home order, which was issued by the head of the state’s health department to prevent the spread of coronavirus. Among other things, the court’s decision concludes that the state health department exceeded its authority by instructing people to stay at home, and by “forbidding travel and closing businesses” deemed nonessential.

The case is Wisconsin Legislature v. Palm.

The Court’s order was 4-3, with Justice Brian Hagedorn, a Republican initially appointed to a lower state court by former Gov. Scott Walker (R), writing one of three dissenting opinions. Justice Daniel Kelly, a lame duck who recently lost an election to retain his seat by nearly 11 points, cast the key fourth vote to strike down the stay-at-home order. If not for a Wisconsin law that allows Kelly to serve until August, the stay-at-home order may well have been upheld.

The decision appears to be animated by the kind of political considerations that are more at home on conservative talk radio than in a court of law. During oral arguments last week, when a lawyer defending the stay-at-home order pointed out that there was recently an outbreak of coronavirus in Brown County, Wisconsin, Chief Justice Patience Roggensack dismissed the significance of that outbreak because it primarily impacted factory workers.

“These were due to the meatpacking, though,” Roggensack said. “That’s where Brown County got the flare. It wasn’t just the regular folks in Brown County.”

At that same oral argument, Justice Rebecca Bradley compared the state’s stay-at-home order to “‘assembling together and placing under guard all those of Japanese ancestry in assembly centers’ during World War II.”

The majority opinion, by Chief Justice Roggensack, is not at all clear as to whether this decision takes effect immediately, or whether the stay-at-home order remains in effect for another week. Roggensack also concludes that Andrea Palm, the head of the state’s health department, exceeded her lawful authority. But then Roggensack’s opinion contains this extraordinary line: “We do not define the precise scope of DHS authority under Wis. Stat. § 252.02(3), (4) and (6) because clearly Order 28 went too far.”

Thus, as Hagedorn notes in dissent, the majority opinion “has failed to provide almost any guidance for what the relevant laws mean, and how our state is to govern through this crisis moving forward.” Wisconsin now has no stay-at-home order preventing the spread of coronavirus — or maybe it does have such an order for just one more week. And it is not at all clear which powers the state health department still has to fight the spread of a pandemic.

Moreover, one consequence of the Court’s decision is that if Palm does want to take additional steps to fight the spread of a deadly disease, she will likely need to jump through a series of procedural hoops that, at best, take weeks to complete. And her decisions can now be overridden by Republicans in the state legislature.

In the meantime, there is no court decision ordering coronavirus to stop spreading.

State law gives Palm broad authority to fight a pandemic

Wisconsin law gives the state Department of Health Services extraordinarily broad power — or, at least, it did until today — to confront a public health crisis.

Among other things, the department may “close schools and forbid public gatherings in schools, churches, and other places to control outbreaks and epidemics.” It may “issue orders … for the control and suppression of communicable diseases,” and these orders “may be made applicable to the whole or any specified part of the state.” And, on top of all that, an additional provision permits the health department to “authorize and implement all emergency measures necessary to control communicable diseases.”

Yet the majority opinion in Wisconsin Legislature diminishes this power considerably by imposing procedural limits on Palm’s authority. Much of Roggensack’s majority opinion rests on a distinction between “rules” and mere “orders.”

The reason this distinction matters is that a mere “order” from a state agency can go into effect immediately, but a “rule” can take weeks or even months to promulgate. Even under an expedited process for “emergency” rules, a state agency must first draft a “statement of the scope of the proposed emergency rule.” That statement must be reviewed and approved by the governor and the state Department of Administration, and then appear in an official state publication that only publishes once a week.

After the statement is published, the agency must complete a 10-day waiting period before it is allowed to move forward, with no apparent way to waive this requirement. And then the rule can be delayed even longer if certain legislative leaders require the agency to hold a public hearing on the new rule. Then the new rule can potentially be suspended by a legislative committee — which may require the agency to start this process all over again.

Nevertheless, the Court’s Republican majority concludes that Palm’s stay-at-home order exceeds her power to issue mere orders. Under the Court’s decision, any order that applies to a class of people that “is described in general terms,” and that can be expanded to more individuals, must be issued as a rule. That means that new efforts to fight the coronavirus are likely to be delayed for weeks or more.

There are several problems with the Court’s conclusion, but the biggest one is that it is inconsistent with the text of the state’s public health law. That law gives the health department the power to “promulgate and enforce rules or issue orders for guarding against the introduction of any communicable disease into the state” or “for the control and suppression of communicable diseases,” and it provides that “any rule or order may be made applicable to the whole or any specified part of the state.”

Thus, the statute explicitly states that the health department may issue an “order” and not just a “rule” that is applicable to the entire state.

As Justice Rebecca Dallet notes in one of three dissenting opinions, the state legislature purposely added this language to the state’s public health law to expand the health department’s power to issue statewide orders. “Originally,” Dallet writes, the state public health law “did not allow for the issuance of orders; DHS could only ‘adopt and enforce rules and regulations.’” And these rules had to comply with limits similar to the ones the state Supreme Court imposed in Wisconsin Legislature.

But “in 1982, at the beginning of the AIDS epidemic, the Legislature amended the [public health law] to explicitly include as part of DHS’s power the ability ‘to issue orders’ of statewide application.” So the state legislature explicitly amended the law during a previous public health crisis to give the health department a broad power to issue statewide orders. The Court’s decision in Wisconsin Legislature effectively nullifies that 1982 amendment.

The Court’s decision is incompetently drafted

Having stripped the state health department of much of its authority, and having done so in the middle of the pandemic, the majority opinion then descends into confusion.

For one thing, it is not at all clear if the Court’s decision takes effect immediately, or if it does not take effect for several days.

Although the Republican-controlled state legislature, which is the plaintiff in this case, requested a six-day stay of the Court’s decision, the majority opinion does not grant such a stay. Nevertheless, Roggensack, who wrote the majority opinion, also wrote a separate concurring opinion where she states that “although our declaration of rights is effective immediately, I would stay future actions to enforce our decision until May 20, 2020.”

So it is unclear whether Roggensack voted to grant a stay or not. She authored the majority opinion, which does not grant a stay. But she also wrote a vague concurring opinion saying that she “would stay” enforcement of the Court’s decision.

Roggensack’s decision to cast Schrödinger’s vote inspired an incredulous dissent from Justice Ann Walsh Bradley. “Assuming Chief Justice Roggensack is actually voting for a stay, as her concurrence seemingly indicates, there appear to be four votes for issuing a stay (Chief Justice Roggensack and Justices Ann Walsh Bradley, Dallet, and Hagedorn),” Bradley writes. “So, is there a stay or isn’t there? It can’t be both ways.”

Similarly, after Roggensack’s majority opinion concludes that the health department must use a “rule” and not a mere “order” if it wants to hand down something like the stay-at-home order, Roggensack then tacks on several additional pages concluding that the health department’s power to issue rules also must be limited. That’s the section that concludes with a declaration that “we do not define the precise scope of DHS authority.” And it’s the section that inspired Hagedorn to write that the majority “has failed to provide almost any guidance for what the relevant laws mean, and how our state is to govern through this crisis moving forward.”

This decision is a failure of democracy

The plaintiff in this lawsuit is the Wisconsin state legislature, which is controlled by Republicans. But the Wisconsin legislature is one of the most egregiously gerrymandered bodies in the nation. In 2018, Democratic candidates received 54 percent of the popular vote for the Wisconsin state Assembly, but Republicans won 63 of the body’s 99 seats.

Similarly, it is likely that the reason the Court did not vote 4-3 to uphold Wisconsin’s stay-at-home order is that Justice-elect Jill Karofsky, who defeated Justice Kelly in an April election, has not yet taken her seat.

Because Kelly will continue to sit for months as a lame duck, the state health department has now been stripped of much of its power to fight a deadly virus.

 

Coronavirus: A Theory of Incompetence

Leaders in the public and private sector in advanced economies, typically highly credentialed, have with very few exceptions shown abject incompetence in dealing with coronavirus as a pathogen and as a wrecker of economies. The US and UK have made particularly sorry showings, but they are not alone.

It’s become fashionable to blame the failure to have enough medical stockpiles and hospital beds and engage in aggressive enough testing and containment measures on capitalism. But as I will describe shortly, even though I am no fan of Anglosphere capitalism, I believe this focus misses the deeper roots of these failures.

After all the country lauded for its response, South Korea, is capitalist. Similarly, reader vlade points out that the Czech Republic has had only 2 coronavirus deaths per million versus 263 for Italy. Among other things, the Czech Republic closed its borders in mid-March and made masks mandatory. Newscasters and public officials wear them to underscore that no one is exempt.

Even though there are plenty of examples of capitalism gone toxic, such as hospitals and Big Pharma sticking doggedly to their price gouging ways or rampant production disruptions due to overly tightly-tuned supply chains, that isn’t an adequate explanation. Government dereliction of duty also abound. In 2006, California’s Governor Arnold Schwarznegger reacted to the avian flu by creating MASH on steroids. From the LA Times:

They were ready to roll whenever disaster struck California: three 200-bed mobile hospitals that could be deployed to the scene of a crisis on flatbed trucks and provide advanced medical care to the injured and sick within 72 hours.

Each hospital would be the size of a football field, with a surgery ward, intensive care unit and X-ray equipment. Medical response teams would also have access to a massive stockpile of emergency supplies: 50 million N95 respirators, 2,400 portable ventilators and kits to set up 21,000 additional patient beds wherever they were needed…

“In light of the pandemic flu risk, it is absolutely a critical investment,” he [Governor Schwarznegger] told a news conference. “I’m not willing to gamble with the people’s safety.”

They were dismantled in 2011 by Governor Jerry Brown as part of post-crisis belt tightening.

The US for decades has as a matter of policy tried to reduce the number of hospital beds, which among other things has led to the shuttering of hospitals, particularly in rural areas. Hero of the day, New York’s Governor Andrew Cuomo pursued this agenda with vigor, as did his predecessor George Pataki.

And even though Trump has made bad decision after bad decision, from eliminating the CDC’s pandemic unit to denying the severity of the crisis and refusing to use government powers to turbo-charge state and local medical responses, people better qualified than he is have also performed disastrously. America’s failure to test early and enough can be laid squarely at the feet of the CDCAs New York Magazine pointed out on March 12:

In a functional system, much of the preparation and messaging would have been undertaken by the CDC. In this case, it chose not to simply adopt the World Health Organization’s COVID-19 test kits — stockpiling them in the millions in the months we had between the first arrival of the coronavirus in China and its widespread appearance here — but to try to develop its own test. Why? It isn’t clear. But they bungled that project, too, failing to produce a reliable test and delaying the start of any comprehensive testing program by a few critical weeks.

The testing shortage is catastrophic: It means that no one knows how bad the outbreak already is, and that we couldn’t take effectively aggressive measures even we wanted to. There are so few tests available, or so little capacity to run them, that they are being rationed for only the most obvious candidates, which practically defeats the purpose. It is not those who are very sick or who have traveled to existing hot spots abroad who are most critical to identify, but those less obvious, gray-area cases — people who may be carrying the disease around without much reason to expect they’re infecting others…Even those who are getting tested have to wait at least several days for results; in Senegal, where the per capita income is less than $3,000, they are getting results in four hours. Yesterday, apparently, the CDC conducted zero tests…

[O]ur distressingly inept response, kept bringing to mind an essay by Umair Haque, first published in 2018 and prompted primarily by the opioid crisis, about the U.S. as the world’s first rich failed state

And the Trump Administration has such difficulty shooting straight that it can’t even manage its priority of preserving the balance sheets of the well off. Its small business bailouts, which are as much about saving those enterprises as preserving their employment, are off to a shaky start. How many small and medium sized ventures can and will maintain payrolls out of available cash when they aren’t sure when and if Federal rescue money will hit their bank accounts?

How did the US, and quite a few other advanced economies, get into such a sorry state that we are lack the operational capacity to engage in effective emergency responses? Look at what the US was able to do in the stone ages of the Great Depression. As Marshall Auerback wrote of the New Deal programs:

The government hired about 60 per cent of the unemployed in public works and conservation projects that

  • planted a billion trees,
  • saved the whooping crane,
  • modernized rural America, and
  • built such diverse projects as the Cathedral of Learning in Pittsburgh,
  • the Montana state capitol,
  • much of the Chicago lakefront,
  • New York’s Lincoln Tunnel and Triborough Bridge complex,
  • the Tennessee Valley Authority and
  • the aircraft carriers Enterprise and Yorktown. It also
  • built or renovated 2,500 hospitals,
  • 45,000 schools,
  • 13,000 parks and playgrounds,
  • 7,800 bridges,
  • 700,000 miles of roads, and
  • a thousand airfields. And it
  • employed 50,000 teachers,
  • rebuilt the country’s entire rural school system, and
  • hired 3,000 writers,
    • musicians,
    • sculptors and painters,
    • including Willem de Kooning and Jackson Pollock.

What are the deeper causes of our contemporary generalized inability to respond to large-scale threats? My top picks are a lack of respect for risk and the rise of symbol manipulation as the dominant means of managing in the private sector and government.

Risk? What Risk?

Thomas Hobbes argued that life apart from society would be “solitary, poor, nasty, brutish and short.” Outside poor countries and communities, advances in science and industrialization have largely proven him right.

It was not long ago, in historical terms, that even aristocrats would lose children to accidents and disease. Only four of Winston Churchill’s six offspring lived to be adults. Comparatively few women now die in childbirth.

But it isn’t just that better hygiene, antibiotics, and vaccines have helped reduce the scourges of youth. They have also reduced the consequences of bad fortune. Fewer soldiers are killed in wars. More are patched up, so fewer come back in coffins and more with prosthetics or PTSD. And those prosthetics, which enable the injured to regain some of their former function, also perversely shield ordinary citizens from the spectacle of lost limbs.1

Similarly, when someone is hit by a car or has a heart attack, as traumatic as the spectacle might be to onlookers, typically an ambulance arrives quickly and the victim is whisked away. Onlookers can tell themselves he’s in good hands and hope for the best.

With the decline in manufacturing, fewer people see or hear of industrial accidents, like the time a salesman in a paper mill in which my father worked stuck his hand in a digester and had his arm ripped off. And many of the victims of hazardous work environments suffer from ongoing exposures, such as to toxic chemicals or repetitive stress injuries, so the danger isn’t evident until it is too late.

Most also are oddly disconnected from the risks they routinely take, like riding in a car (I for one am pretty tense and vigilant when I drive on freeways, despite like to speed as much as most Americans). Perhaps it is due in part to the illusion of being in control while driving.

Similarly, until the coronavirus crisis, even with America’s frayed social safety nets, most people, particularly the comfortably middle class and affluent, took comfort in appearances of normalcy and abundance. Stores are stocked with food. Unlike the oil crisis of the 1970, there’s no worry about getting petrol at the pump. Malls may be emptying out and urban retail vacancies might be increasing, but that’s supposedly due to the march of Amazon, and not anything amiss with the economy. After all, unemployment is at record lows, right?

Those who do go to college in America get a plush experience. No thin mattresses or only adequately kept-up dorms, as in my day. The notion that kids, even of a certain class, have to rough it a bit, earn their way up and become established in their careers and financially, seems to have eroded. Quite a few go from pampered internships to fast-track jobs. In the remote era of my youth, even in the prestigious firms, new hires were subjected to at least a couple of years of grunt work.

So the class of people with steady jobs (which these days are well-placed members of the professional managerial class, certain trades and those who chose low-risk employment with strong civil service protections) have also become somewhat to very removed from the risks endured when most people were subsistence farmers or small town merchants who served them.

Consider this disconnect, based on an Axios-Ipsos survey:

The coronavirus is spreading a dangerous strain of inequality. Better-off Americans are still getting paid and are free to work from home, while the poor are either forced to risk going out to work or lose their jobs.

Generally speaking, the people who are positioned to be least affected by coronavirus are the most rattled. That is due to the gap between expectations and the new reality. Poor people have Bad Shit Happen on a regular basis. Wealthy people expect to be able to insulate themselves from most of it and then have it appear in predictable forms, like cheating spouses and costly divorces, bad investments (still supposedly manageable if you are diversified!), renegade children, and common ailments, like heart attacks and cancer, where the rich better the odds by advantaged access to care.

The super rich are now bunkered, belatedly realizing they can’t set up ICUs at home, and hiring guards to protect themselves from marauding hordes, yet uncertain that their mercenaries won’t turn on them.

The bigger point is that we’ve had a Minksy-like process operating on a society-wide basis: as daily risks have declined, most people have blinded themselves to what risk amounts to and where it might surface in particularly nasty forms. And the more affluent and educated classes, who disproportionately constitute our decision-makers, have generally been the most removed.

The proximity to risk goes a long way to explaining who has responded better. As many have pointed out, the countries that had meaningful experience with SARS2 had a much better idea of what they were up against with the coronavirus and took aggressive measures faster.

But how do you explain South Korea, which had only three cases of SARS and no deaths? It doesn’t appear to have had enough experience with SARS to have learned from it.

A related factor may be that developing economies have fresh memories of what life was like before they became affluent. I can’t speak for South Korea, but when I worked with the Japanese, people still remembered the “starving times” right after World War II. Japan was still a poor country in the 1960s.3 South Korea rose as an economic power after Japan. The Asian Tigers were also knocked back on their heels with the 1997 emerging markets crisis. And of course Seoul is in easy nuke range of North Korea. It’s the only country I ever visited, including Israel, where I went through a metal detector to enter and saw lots of soldiers carrying machine guns in the airport. So they likely have a keen appreciation of how bad bad can be.

The Rise and Rise of the Symbol Economy

Let me start with an observation by Peter Drucker that I read back in the 1980s, but will then redefine his take on “symbol economy,” because I believe the phenomenon has become much more pervasive than he envisioned.

A good recap comes in Fragile Finance: Debt, Speculation and Crisis in the Age of Global Credit by A. Nesvetailova:

The most significant transformation for Drucker was the changed relationship between the symbolic economy of capital movements, exchange rates, and credit flows, and the real economy of the flow of goods and services:

…in the world economy of today, the ‘real economy’ of goods and services and the ‘symbol economy’ of money, credit, and capital are no longer bound tightly to each other; they are indeed, moving further and further apart (1986: 783)

The rise of the financial sphere as the flywheel of the world economy, Drucker noted, is both the most visible and the least understood change of modern capitalism.

What Drucker may not have sufficiently appreciated was money and capital flows are speculative and became more so over time. In their study of 800 years of financial crises, Carmen Reinhart and Ken Rogoff found that high levels of international capital flows were strongly correlated with more frequent and more severe financial crises. Claudio Borio and Petit Disyatat of the Banks of International Settlements found that on the eve of the 2008 crisis, international capital flows were 61 times as large as trade flows, meaning they were only trivially settling real economy transactions.

Now those factoids alone may seem to offer significant support to Drucker’s thesis. But I believe he conceived of it too narrowly. I believe that modeling techniques, above all, spreadsheet-based models, have removed decision-makers from the reality of their decisions. If they can make it work on paper, they believe it will work that way.

When I went to business school and started on Wall Street, financiers and business analysts did their analysis by hand, copying information from documents and performing computations with calculators. It was painful to generate financial forecasts, since one error meant that everything to the right was incorrect and had to be redone.

The effect was that when managers investigated major capital investments and acquisitions, they thought hard about the scenarios they wanted to consider since they could look at only a few. And if a model turned out an unfavorable-looking result, that would be hard to rationalize away, since a lot of energy had been devoted to setting it up.

By contrast, when PCs and Visicalc hit the scene, it suddenly became easy to run lots of forecasts. No one had any big investment in any outcome. And spending so much time playing with financial models would lead most participants to a decision to see the model as real, when it was a menu, not a meal.

When reader speak with well-deserved contempt of MBA managers, the too-common belief that it is possible to run an operation, any operation, by numbers, appears to be a root cause. For over five years, we’ve been running articles from the Health Renewal Blog decrying the rise of “generic managers” in hospital systems (who are typically also spectacularly overpaid) who proceed to grossly mismanage their operations yet still rake in the big bucks.

The UK version of this pathology is more extreme, because it marries managerial overconfidence with a predisposition among British elites to look at people who work hard as “must not be sharp.” But the broad outlines apply here. From Clive, on a Brexit post, when Brexit was the poster child of UK elite incompetence:

What’s struck me most about the UK government’s approach to the practical day-to-day aspects of Brexit is that it is exemplifying a typically British form of managerialism which bedevilles both public sector and private sector organisations. It manifests itself in all manner of guises but the main characteristic is that some “leader” issues impractical, unworkable, unachievable or contradictory instructions (or a “strategy”) to the lower ranks. These lower ranks have been encouraged to adopt the demeanour of yes-men (or yes-women). So you’re not allowed to question the merits of the ask. Everyone keeps quiet and takes the paycheck while waiting for the roof to fall in on them. It’s not like you’re on the breadline, so getting another year or so in isn’t a bad survival attitude. If you make a fuss now, you’ll likely be replaced by someone who, in the leadership’s eyes is a lot more can-do (but is in fact just either more naive or a better huckster).

Best illustrated perhaps by an example — I was asked a day or two ago to resolve an issue I’d reported using “imaginative” solutions. Now, I’ve got a a vivid imagination, but even that would not be able to comply with two mutually contradictory aims at the same time (“don’t incur any costs for doing some work” and “do the work” — where because we’ve outsourced the supply of the services in question, we now get real, unhideable invoices which must be paid).

To the big cheeses, the problem is with the underlings not being sufficiently clever or inventive. The real problem is the dynamic they’ve created and their inability to perceive the changes (in the same way as swinging a wrecking ball is a “change”) they’ve wrought on an organisation.

May, Davies, Fox, the whole lousy lot of ’em are like the pilot in the Airplane movie — they’re pulling on the levers of power only to find they’re not actually connected to anything. Wait until they pull a little harder and the whole bloody thing comes off in their hands.

Americans typically do this sort of thing with a better look: the expectations are usually less obviously implausible, particularly if they might be presented to the wider world. One of the cancers of our society is the belief that any problem can be solved with better PR, another manifestation of symbol economy thinking.

I could elaborate further on how these attitudes have become common, such as the ability of companies to hide bad operating results and them come clean every so often as if it were an extraordinary event, short job tenures promoting “IBG/YBG” opportunism, and the use of lawyers as liability shields (for the execs, not the company, natch).

But it’s not hard to see how it was easy to rationalize away the risks of decisions like globalization. Why say no to what amounted to a transfer from direct factory labor to managers and execs? Offshoring and outsourcing were was sophisticated companies did. Wall Street liked them. Them gave senior employees an excuse to fly abroad on the company dime. So what if the economic case was marginal? So what if the downside could be really bad? What Keynes said about banker herd mentality applies:

A sound banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.

It’s not hard to see how a widespread societal disconnect of decision-makers from risk, particularly health-related risks, compounded with management by numbers as opposed to kicking the tires, would combine to produce lax attitude toward operations in general.

I believe a third likely factor is poor governance practices, and those have gotten generally worse as organizations have grown in scale and scope. But there is more country-specific nuance here, and I can discuss only a few well, so adding this to my theory will have to hold for another day. But it isn’t hard to think of some in America. For instance, 40 years ago, there were more midsized companies, with headquarters in secondary cities like Dayton, Ohio. Executives living in and caring about their reputation in their communities served as a check on behavior.

Before you depict me as exaggerating about the change in posture toward risks, I recall reading policy articles in the 1960s where officials wrung their hands about US dependence on strategic materials found only in unstable parts of Africa. That US would never have had China make its soldiers’ uniforms, boots, and serve as the source for 80+ of the active ingredients in its drugs. And America was most decidedly capitalist in the 1960s. So we need to look at how things have changed to explain changes in postures towards risk and notions of what competence amounts to.

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1 One of my early memories was seeing a one-legged man using a crutch, with the trouser of his missing leg pinned up. I pointed to him and said something to my parents and was firmly told never to do anything like that again.

2 The US did not learn much from its 33 cases. But the lack of fatalities may have contributed.

3 Japan has had a pretty lame coronavirus response, but that is the result of Japan’s strong and idiosyncratic culture. While Japanese are capable of taking action individually when they are isolated, in group settings, no one wants to act or even worse take responsibility unless their is an accepted or established protocol.