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.

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.

_____
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.

For the Economy, Climate Risks Are No Longer Theoretical

Climate crises, like financial crises, will be damaging, unpredictable and almost impossible to avoid

Last year Australia’s central bank hoped that several interest-rate cuts would mark a turning point for its slowing economy. That was before the worst bushfires in Australia’s history hit tourism, consumer confidence and growth forecasts for this year. There is now a good chance the bank will cut interest rates again soon.

Welcome to a world in which climate change’s economic impact is no longer distant and imperceptible.

  • Puerto Rico never fully recovered from Hurricane Maria in 2017.
  • Extreme drought in California and poorly maintained utility power lines led to severe wildfires in 2018, the utility’s bankruptcy and blackouts last year.

Climate change can’t be directly blamed for any single extreme weather event, including Hurricane Maria, California’s wildfires or Australia’s bushfires. But it makes such events more likely. “They are starting to be more than tail events, they’re starting to affect economic outcomes,” Robert Kaplan, president of the Federal Reserve Bank of Dallas, told an economic conference earlier this month.

Climate crises in the next 30 years may resemble financial crises in recent decades:

  • potentially quite destructive,
  • largely unpredictable and, given the powerful underlying causes,
  • inevitable.

Climate has muscled to the top of business worries.

Every year, the World Economic Forum asks business, political, academic and nongovernmental leaders to rank the most probable and consequential risks, from cyberattacks to fiscal crises. This year, ahead of its annual meeting next week in Davos, Switzerland, climate-related risks took the five top spots in terms of probability, the first time a single issue had done so in the survey’s 14-year history.

The New NormalAs global temperatures rise, extreme temperatures and environmental disasters become more common.Summer temperatures for local regions in the northern hemisphere
STANDARD DEVIATION FROM 115-YEAR AVERAGETHOUSANDS OF OCCURRENCES1961-19802011-2015-4-3-2-10123450102030405060
World-wide extreme weather eventsSources: McKinsey Global Institute (temperature distribution), JPMorgan (extreme weather events)
.events1980’85’90’952000’05’10’150100200300400500600700800900

Of course, economies have always been vulnerable to natural disasters. Before the modern industrial era, crop failures were a leading cause of recession. The monsoon season remains a key economic variable in India, and the Tohoku earthquake and tsunami in 2011 tipped Japan into recession.

And while estimates of climate’s economic impact are suffused with uncertainty, they don’t suggest any major economy will be pushed into recession, much less depression.

Studies reviewed by David Mackie of JPMorgan Chase suggest climate change could reduce global gross domestic product by 1% to 7% by 2100, assuming “business as usual” (i.e., absent policies to mitigate emissions of carbon dioxide). Given that the impact is spread out over 80 years, in which per capita incomes probably rise 300% to 400%, even larger climate change impacts would appear small, he said.

Aggregate changes in GDP, though, can be misleading. As global temperatures climb, the probability of extreme temperatures and events and the associated economic consequences should rise more.

This relationship is driven home in a study released Thursday by the McKinsey Global Institute. It estimated that “unusually hot summers” affected 15% of the Northern Hemisphere’s land surface in 2015, up from 0.2% before 1980.

McKinsey estimated that climate change made the European heat wave that in 2019 killed 1,500 in France 10 times more likely and the forest fires that devastated northern Alberta in 2016 up to six times more likely.

Satellite Images Show Smoke From Australian Fires Circling the World

Satellite Images Show Smoke From Australian Fires Circling the World
NASA says smoke from Australian fires has made a full circuit of Earth. It has affected New Zealand’s air quality and turned skies in South America hazy. Photo: NASA Earth Observatory handout/Shutterstock

Looking ahead, assuming business as usual, McKinsey projected the probability of a 10% drop in wheat, corn, soybean and rice yields in any given year will rise from 6% now to 18% in 2050. Such a change wouldn’t cause food shortages but could cause prices to spike. The probability that a catastrophic cyclone disrupts semiconductor manufacturing in the western Pacific will double or quadruple by 2040. Such an event “could potentially lead to months of lost production for the directly affected companies,” McKinsey said. The probability of rain heavy enough to halt the mining in southeastern China of rare-earth elements, vital to many electronic devices, will rise from 2.5% now to 6% by 2050.

Such an exercise comes with plenty of caveats. The projections make no allowance for adaptation, though no doubt some outdoor activity will move indoors, some businesses will relocate from flood plains, and insurance will cushion the cost for many.

But adaptation goes only so far. Humans can’t survive prolonged high heat and humidity beyond certain thresholds. Those thresholds are rarely met now, but will be reached regularly in some regions by 2050.

Adaptation and insurance may be deemed too costly. “Underinsurance may grow worse as more extreme events unfold, because fewer people carry insurance for them,” McKinsey predicted.

Some on Wall Street are starting to treat climate change the way they regard financial crises. “Climate change is almost invariably the top issue that clients around the world raise with BlackRock,” Chairman and CEO Laurence Fink told chief executives this week in explaining why climate would be a key criterion in how BlackRock Inc. invests its $7 trillion of client money. For businesses, mandates—private or government-driven—pose a risk distinct from climate change itself. Car companies are now spending heavily to market electric vehicles with no assurance they will be profitable.

Some central bankers are also talking about climate risk the way they talk about financial crises. Christine Lagarde, the newly installed European Central Bank president, told European parliamentarians last fall, “At a minimum…[the ECB’s] macroeconomic models must incorporate the risk of climate change.”

SHARE YOUR THOUGHTS

How do you adjust an economy for climate change? Join the conversation below.

Yet worrying about it isn’t the same as doing something about it. Unlike financial crises, neither Wall Street nor central bankers have the tools to alter the forces making climate crises more likely: rising carbon dioxide emissions and economic development in vulnerable regions. Only political leaders can—and it isn’t clear they will.

The Madrid climate summit in December “is the most recent example of countries failing to cooperate to create a global emissions trading regime,” Mr. Mackie said. “Most likely, business as usual will be the path that policy makers follow in the years ahead…[which] increases the likelihood that the costs of dealing with climate change will go up as action is delayed.”

A Conversation with Anand Giridharadas

Join Anand Giridharadas author of Winners Take All, in conversation with Belfer Center Executive Director Aditi Kumar on the perils of philanthropy and policy in the hands of the global elite.

  1. Reputation Laundering
    • Do enough to be considered OK to meet with a senator
    • People are busy.  They don’t have time to research connection between “Sackler Art Wing” and Oxycontin
    • Only way Jeffery Epstein could come back was through association with Harvard
    • Gives Bill Gates more votes on Common Core than public
    • Which University will be able to fund an Institute on Wealth Taxation verses Social Philanthropy?

 

32:59
how many people are able to live a
decent life housing cost New York City
is as cruel as Idaho and so you look at
something like the Fair Work Week
ovement right which is trying to go
into communities and say simple thing
but a thing that has transformative
effect on people’s lives you can’t
change people’s hours with like two days
notice now for many people in this room
that may not be an issue that affects
your career you’re gonna be paid on
salary but if you’re paid by the hour
having your hours changed moved around
cut when I was in a restaurant not long
ago and as his waitress crying because
she was sent home early three hours
early for like the third time that week
right which means not getting paid
because there was not enough demand at
the same
shop the company’s risk being put on her
back she’s gonna miss a bill this is
happening to millions of Americans now
the thing about a Fair Work Week law is
you don’t need Mitch McConnell any city
in America can pass this counties can
pass it states can pass it isn’t it
interesting that we keep using a couple
parts of government that are
dysfunctional and absolve ourselves of
the fact that in all these cities where
liberals completely control everything
no one’s doing it
no one’s passing these Fair Work Week

More US troops die during training than in combat operations

Washington (CNN)A vehicle accident that killed one cadet from the US Military Academy and injured 21 others Thursday is refocusing attention on a startling statistic — more American service members are dying during training exercises than in combat operations.

Between 2006 and 2018, 31.9% of active-duty military deaths were the result of accidents, according to a congressional report updated last month. By comparison, 16.3% of service members who died during that time were killed in action.
And a large majority of those accidents occurred in circumstances unrelated to combat deployments.
“Since 2006 … a total of 16,652 active-duty personnel and mobilized reservists have died while serving in the US armed forces. Seventy-three percent of these casualties occurred under circumstances unrelated to war,” the report states.
It is a trend that has only seemed to pick up momentum of late, as noncombat deaths have exceeded the number of military members killed in action every year since 2015.
In 2017, nearly four times as many service members died in training accidents as were killed in combat, according to a House Armed Services Committee report related to the National Defense Authorization Act for fiscal year 2019 — a key point highlighted by many lawmakers and military officials who argued for additional defense spending to help offset readiness issues that have compounded for years.
“In all, 21 servicemembers died in combat that year while 80 died as a result of noncombat training-related accidents,” the report said.
The military endured a high rate of training-related deaths again in 2018 and a spate of deadly noncombat military aircraft crashes prompted then-House Armed Services Chairman Mac Thornberry, R-Texas, to say the “readiness of the military is at a crisis point.”
“This crisis is not limited to military aviation,” Thornberry wrote in a 2018 report. “This past summer, the Navy lost 17 Sailors in separate collisions involving the USS McCain and the USS Fitzgerald. Navy investigators later found that both accidents were related to ongoing Navy readiness problems.”
One of the most recent accidents occurred in March, when two Marine pilots died in a helicopter crash near Yuma, Arizona, during a routine training exercise.
While details on the cause of Thursday’s deadly accident remain unclear, the incident serves as yet another reminder of broader safety issues related to military training.
Lt. Gen. Darryl A. Williams, the superintendent of the US Military Academy at West Point, was unable to immediately provide details about the cause of the rollover vehicle accident, citing the ongoing investigation. He said the name of the deceased cadet would not be released until the family was notified.
“Today was a tragic day for the West Point community and our United States Army,” Williams said.

What Are Trump and Netanyahu Afraid Of?

Barring Representatives Ilhan Omar and Rashida Tlaib shows weakness and intolerance, not strength.

It is difficult to stomach the notion that an American president would put pressure on Israel to deny entry to two members of the United States Congress.

There are not many traditions of decorum that President Trump has not trampled on since entering the White House. But to put at risk, so cynically, America’s special relationship with Israel solely to titillate the bigots in his base, to lean so crassly on a foreign leader to punish his own political adversaries, to demonstrate so foul a lack of respect for the most elemental democratic principles, is new territory even for him.

Though facing a difficult election next month for which he sorely needs the support of his fractured right-wing base, Prime Minister Benjamin Netanyahu was said to be leaning toward allowing Representatives Ilhan Omar of Minnesota and Rashida Tlaib of Michigan to travel through Israelout of respect for the U.S. Congress and the great alliance between Israel and America,” as his ambassador to Washington, Ron Dermer, wisely said last month. But, on Thursday, Mr. Netanyahu cravenly bowed before the pressure from Mr. Trump.

“It would show great weakness if Israel allowed Rep. Omar and Rep. Tlaib to visit,” Mr. Trump tweeted on Thursday morning. “They hate Israel & all Jewish people, & there is nothing that can be said or done to change their minds.”

Sad, to borrow one of Mr. Trump’s favorite words. How sad that two leaders — each desperate to look tough to his own base — are risking a bipartisan relationship built between these two nations over generations. Only weak leaders would risk so much for a reward so negligible. To what end?
  • To win a few political points against two of the newest members of Congress?
  • To capture a few news cycles?
  • To dial up the outrage machine just one more notch?

Confident leaders would never have risked so much for so little.

Though many American presidents have sought to influence Israeli decisions throughout the history of the Arab-Israeli conflict, they usually did so diplomatically — and to advance America’s interests. Mr. Trump, by contrast, leaned on Mr. Netanyahu as he would on one of his own appointees, in broad view, and in direct violation of what the president of the United States should be doing when democratically elected lawmakers are threatened with a blockade by an allied leader.

There can be, and has been, considerable debate over what the two congresswomen, the first two Muslim women elected to Congress and both sharp critics of the Israeli government, have said and done. They have supported the controversial Boycott, Divestment and Sanctions (B.D.S.) movement aimed at pressuring Israel into ending its occupation of the West Bank, a movement that some Jews have deemed to be anti-Semitic.

Yet, from the outset, Mr. Trump has pounced on the religion and background of the two congresswomen to fan racial divisions. Ms. Omar and Ms. Tlaib were two of the four congresswomen of color, along with Alexandria Ocasio-Cortez of New York and Ayanna Pressley of Massachusetts, who Mr. Trump said should “go back” to the countries they came from, giving rise to chants of “send her back” at a subsequent Trump political rally.

The visit Ms. Omar and Ms. Tlaib were contemplating was not to Israel proper, but to the West Bank, where they were to visit Hebron, Ramallah and Bethlehem, as well as Israeli-occupied East Jerusalem, on a trip co-sponsored by a Palestinian organization, Miftah, that promotes “global awareness and knowledge of Palestinian realities.” A visit was planned to the Al Aqsa Mosque, on what Israelis call the Temple Mount, an especially volatile site in the Israeli-Palestinian conflict. There is little question that their visit would have focused on Palestinian grievances over the Israeli occupation.

All that was clearly troublesome for Mr. Netanyahu, especially the support of the congresswomen for the B.D.S. movement. A relatively recent law allows the Israeli government to deny entry to supporters of the movement; it was this law that the government used to deny entry to the representatives.

In April the United States barred Omar Barghouti, one of the co-founders of the B.D.S. movement, from entering the country when he was scheduled to deliver a series of talks and attend his daughter’s wedding. Other American public figures have been detained by Israeli authorities, ostensibly because of their political views, including the

  • IfNotNow founder, Simone Zimmerman, who was held at the border; a B.D.S. advocate,
  •  Ariel Gold, who was denied entry to the country; and the
  • journalist Peter Beinart, who was held at the airport. Mr. Netanyahu later called Mr. Beinart’s detention a “mistake.”

Yet contrary to Mr. Trump’s tweet, it is blocking entry by two American legislators who are critics of Israel that shows great weakness, especially after Israel hosted visits by delegations of 31 Republican and 41 Democratic lawmakers this month.

It has long been Israel’s mantra that critics of its policies should come see for themselves, and the country is certainly strong enough to handle any criticism from two members of Congress. Mr. Trump has done Israel no favor.