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Place of the Week: Baltimore, Maryland
Econ Weekly (Nov. 22, 2021)
Issue 45: November 22, 2021
(this week’s issue also available for free at econweekly.biz)
Inside this Issue:
Merry, Merry Merchandising: Holiday Cheer for Big Box Retail
Infrastructure Bill, Done: Next, Biden Bids to Build Back Better
To Raise or Not to Raise: That is the Fed’s Question
Strength or Froth? Is there a Stock Market Bubble?
Bond Market Mending: Experts Look to Fortify the Treasury Market
Millennial Malaise: Remembering the Mild Recession of 2001
Flight Might: Alaska Airlines and the Boom in Seattle
Shale of Tears: Growing Gloom in North Dakota’s Oil Patch
Blockchain Borrowing: The Emerging Crypto-Lending Market
Destroyed by an Asteroid? It’s a Risk to Consider
And this Week’s Featured Place: Baltimore, Maryland, Downtown Doldrums
Quote of the Week
“Our data validates that in markets where we have a physical presence, our online business is stronger.”
– Macy’s CEO Jeff Gennette
Turkeys first. But then comes holiday shopping, the time of the year most important to retailers, manufacturers and distributors. This year, shoppers will face higher prices and emptier shelves. But they don’t seem deterred. In October, according to the latest Census Bureau update on retail and food service sales, American shoppers spent $638b, up nearly 2% from September and up 16% from October 2020.
To be clear, some of that increase in spending reflects sharply higher gas prices. Year over year, outlays at gas stations were up 47%. But no less importantly, spending at restaurants and bars was up 29%. The increase was 26% for clothing stores, 18% for electronics and appliance stores, and so on. Two key things are happening here: 1) Americans are spending more on certain items like gas and dining out as they return to pre-pandemic practices. And 2) they’re undeterred by higher prices, busting out their wallets all the same.
All of this is good news for gargantuan retailers like Walmart, Target and Home Depot, all of which delivered cheerful third quarter earnings presentations. All feel good about the holiday shopping season too. And for these goliaths of the industry anyway, supply chain bottlenecks are somewhat less of a problem. (The worst hit retailers from a supply chain perspective, remember, are those selling autos). Concerns still loom for many general merchandise retailers though. Macy’s, for one, spoke of “strong momentum entering the fourth quarter,” but also “supply chain concerns, the tight labor market, elevated levels of holiday shipping surcharges and potential unforeseen impacts of COVID variants.” The New York City-based retailer, by the way, will institute a $15 minimum wage in May, bringing average hourly pay to $20.
With America’s GDP so dependent on consumer spending, the upbeat tone from retail land bodes well for economic health in 2022. Inflation remains a worry though, severe enough for the Fed to consider a faster winddown of its bond buying. Some are strongly urging Mr. Powell and his colleagues to raise short-term interest rates as well. Skeptics, conversely, say that wouldn’t do much to relieve supply chain bottlenecks. All it would do, the doves argue, is murder the recovery. The transitory camp still maintains that price pain will ease as Covid disruptions dissipate and more people return to the workforce—and as longterm forces like globalization, age demographics and technology reassert their influence. They also point to looming demand depressants like the fiscal drag expected next year as stimulus spending wanes. Tighter monetary policy could stifle inflation as well. So might a slowdown in consumer spending next year, as stimulus savings dwindle (or if the stock, housing or crypto markets cool). The bond market, meanwhile, historically a good predictor of persistent inflation, still suggests otherwise—the 10-year Treasury yield fell to 1.54% last week.
There’s been some discussion on what exactly inflation means. Prices might well rise to a permanently higher level, driven by supply side factors (i.e., clogged ports, insufficient energy investment, a drop in immigrant labor, re-shoring production, de-globalization, etc.). But that’s different from a steady and destabilizing upward spiral of prices associated with too much money chasing too few goods. Perhaps that’s indeed what the U.S. economy is experiencing now. But be aware of the difference.
The Fed meets next in mid-December, by which time Congress may have already passed the Biden Administration’s Build Back Better (BBB) Plan, a nearly $2 trillion dollar package proponents hope will address economic inequalities and market failures in areas like childcare and housing. Opponents don’t like its higher taxes, nor its expected impact on federal deficits. Economists also differ on the bill’s longterm impact on labor productivity, GDP growth and inflation. To be clear, only the House has passed the BBB plan so far. It now has a tougher battle in the evenly divided Senate. A new infrastructure bill, by contrast, is now law, allocating more than $1 trillion for roads, bridges, railroads, public transit, airports, power grids, broadband, water and climate change resilience. As with the BBB proposal, state and local governments will handle most of the decisions on exactly how the money is spent.
One more matter of importance from Capitol Hill: Legislators face another deadline—Dec. 15th—to raise the debt ceiling. At stake is the $23 trillion Treasury market, upon which all other capital markets rest. At a New York Fed conference last week, participants made clear the globally systemic importance of a well-functioning U.S. Treasury market, used as it is for many purposes. It’s a tool for financing the federal government. It’s a safe investment for households and companies. It’s an instrument for hedging risk. It’s a tool for conducting monetary policy. It’s the risk-free benchmark for other financial instruments.
The stock market doesn’t have quite that multitudinous a role. Nevertheless, its frothiness worries some, including Goldman Sachs CEO David Solomon, who shared his thoughts at a Bloomberg event in Singapore. For a while, it was meme stocks like GameStop that symbolized the apparent excesses. Currently, it’s electric vehicle startups like Rivian, now worth more than Ford or General Motors. That seems to require a Pets.com-style story to justify. Unless that is, its boosters are correct, and EV startups are well placed to dominate the future of mobility.
Speaking of assets with seemingly frothy valuations, cryptocurrency prices dropped sharply last week, without anyone really knowing why. In geopolitical matters of significance, President Biden held a virtual meeting with his Chinese counterpart, amid signs of some modest easing in the tense relationship. The Chinese economy, incidentally, while benefitting from the surge in U.S. export demand, continues to weather headwinds from the property and energy sectors.
Turning to the colossal U.S. health sector, The Atlantic points out that roughly one in five health-care workers has left medicine since the pandemic started. That refers to the Covid pandemic of course, but there’s also the opioid epidemic, which contributed to 100,000 drug overdose deaths in the 12 months to April 2021, according to the CDC. That’s a 29% y/y increase. Since 1999, nearly 841,000 Americans have died from a drug overdose. It’s one manifestation of an all-too-large part of non-college-educated America where communities, families, health care services, schools and job markets are malfunctioning—more on this in next week’s issue.
Far from this world of despair is Silicon Valley, off limits—due to exorbitant housing costs—to all but those qualified for six-figure knowledge jobs. Make no mistake though: Impressive things are happening in the Valley, with potential to improve lives everywhere. Apple’s auto ambitions, for example, appear to be moving forward, Bloomberg reports. Imagine that: Apple versus Tesla! Nvidia, a lesser-known Silicon Valley superstar, saw explosive Q3 revenue growth as its technology powered everything from video games to data centers to, yes, even autos.
There are a few companies reporting Q3 results early this week, including some additional retailers like BestBuy, Nordstrom and Dollar Tree. Another one to watch is Zoom, which faces tougher times as people return to offices. Deere has a new labor agreement to talk about. Stellantis, which owns the automaker Chrysler, will surely have an update on the chip shortage. Thereafter, the earnings parade will slow as Americans eat their turkeys. Planes, trains and automobiles—like bellies—will be full this year.
Walmart: It’s one of the great corporate rivalries of our time: Walmart vs. Amazon, America’s largest and second largest companies by revenues. It’s a battle for the throne of retailing, a high-volume, low margin business. But it’s a battle where both participants, for now, are winners. Walmart, once the upstart traumatizing incumbents like Sears, is today the incumbent itself, defending against Amazon, a retailer without a giant network of physical stores—Amazon’s sales are overwhelmingly online. Both companies were net beneficiaries of the pandemic economy, in Walmart’s case because of the big shift to spending on exactly the things it sells: groceries, home furnishings, sporting goods, etc. Other Big Box retailers (Target, Home Depot, Lowes, Costco, etc.) were winners as well, helped by enhancing their online selling and fulfillment capabilities. Walmart now calls itself an omni-channel retailer, with roughly 10,000 stores worldwide (about half of them in the U.S.) but also a major online presence. But how is it handling the great supply chain disruption of 2021? Much better than many companies, in fact. Using its huge scale to charter its own ships and exert leverage on shippers, Walmart stores were well-stocked and well-staffed this back-to-school shopping season. And they’re well-stocked and well-staffed as the big holiday shopping season gets underway. CEO Doug McMillon, addressing analysts during the company’s earnings call last week, said hiring became easier as federal support to households waned (he was likely referring to the end of bonus federal unemployment benefits this fall). As for Walmart’s earnings, they’re no doubt taking some hit from inflation, with costs rising faster than selling prices. But revenues grew 4% y/y last quarter, and operating margin—always thin for mass retailers—still registered at a solid 4%. McMillion said Walmart has lots of experience operating in countries with elevated inflation. It’s also using its significant sway with suppliers to encourage them to disregard the momentary inflation and cut prices to win market share. Incredibly, Walmart added 200,000 new workers just last quarter, most of them in stores but about 25% in supply-chain roles (i.e., drivers and warehouse packers). It said key international markets like Mexico, China and India are all performing well. So is Sam’s Club, its Costco-like membership business. Looking back, Walmart’s mastery of distribution was probably most responsible for its rise. Looking ahead, it sees further distribution improvements as it attempts to replicate Amazon’s key skill: mastery of Big Data. Walmart is in the early days of developing an Amazon Prime-like loyalty program called Walmart Plus. It’s working with third party sellers, just like Amazon. Both companies are rapidly growing their online advertising revenues. Walmart, meanwhile, has grand ambitions in health care and finance, two of the economy’s largest sectors. In summary, America’s largest corporation is performing exceptionally well under current economic conditions, effectively navigating supply chain challenges and comfortable with current rates of inflation, even if it means temporarily lower margins. It did, however, call out one major concern this holiday shopping season: Higher gas prices. The more people spend on gas to fill their cars, the less they’ll spend on stuff at Walmart.
Alaska Airlines: The third quarter was a mixed picture for U.S. airlines, with a few (like Delta and Allegiant) returning to operating profitability. No one did better than Alaska Airlines though. It earned a 14% Q3 operating margin, which is high for airlines even in good times. This was just four percentage points worse, furthermore, than the 18% margin it earned in Q3, 2019. What’s the secret to Alaska’s outstanding performance? One key is its home market, not Alaska as its name suggests but Seattle, where it has its headquarters and largest flight operation. The city, home to companies like Amazon, Microsoft, Starbucks and Costco, was one of America’s fastest growing economies before the pandemic. And it held up better than most during the pandemic. Seattle also happens to be a big tourist attraction during summers, at a time when domestic tourism demand is largely back to where it was in 2019.
Tweet of the Week
Air Travel: A report from the Government Accounting Office (GAO) last month recalled the 96% decline in passenger air traffic during April 2020, when the pandemic first took root. Traffic for the year would fall roughly 60% from 2019’s level, hitting not just airlines but airports, airport shops, ride-hailing services, aircraft repair shops and shippers throughout the economy’s supply chain. By the GAO’s count, the federal government provided $100b to the sector, covering payrolls, rents and other costs. The FAA, meanwhile, offered temporary relief from some regulatory requirements. These measures helped avoid mass bankruptcies and layoffs.
Health care: Columbia professor Adam Tooze, in his Ones & Tooze podcast, tackles the morbid but important topic of how the Covid pandemic affected the economics of the health care sector. “Covid was absolutely terrible for the American health care economy,” he states. This might seem counterintuitive—wouldn’t a health crisis increase demand for health care? In fact, total health care spending in the U.S. declined last year, for the first time since 1960. Many people, quite simply, avoided all but the most urgent non-Covid medical care. In a normal year, Tooze says, 2.8m Americans die. And during the final 12 months of their lives, they spend on average $80,000 on care, which amounts to $224b collectively. Over the final three years of their lives, they spend $150,000 annually. This end-of-life spending is thus a major part of the health care economy, which in turn is a major part (almost 20%) of the American economy.
Venture Capital: Stephen Dubner of Freakonmics.com interviewed Vinod Khosla, one of Silicon Valley’s top venture capitalists, about the importance of VC to the U.S. economy. One quote says it all: “If you look at the 10 biggest companies in the world as measured by market capitalization, seven are American and six of those raised venture capital: Apple, Microsoft, Amazon, Tesla, Facebook and Alphabet (the parent of Google). The seventh is Berkshire Hathaway, Warren Buffett’s holding company, which essentially gobbles up existing firms.” Only later in their lives did the Big Tech giants raise capital by selling stock.
Treasury Bonds: The New York Fed hosted an online conference about making the market for U.S. Treasury debt more resilient to shocks. This follows several unsettling market malfunctions, one in October 2014, one in September 2019 and a third just last March at the onset of the Covid crisis. There were even some milder disruptions this February. One speaker, SEC chair Gary Gensler, said the problem is tied to just how large the Treasury market has grown in the past few decades. Relative to GDP, the market—now worth $23 trillion—is triple the size it was 14 years ago. And quite simply, the market’s primary dealers haven’t kept up with the growth. These dealers—24 companies including units of big banks like JP Morgan and Citi—serve as market makers, always willing to buy or sell Treasuries on demand. Last March, however, everyone seemingly wanted to sell, sell, sell, eager to grab cash. In response, bond prices plummeted, which in turn meant interest rates soared. With urgency, the Fed stepped in as not the lender of last resort but the “dealer of last resort,” a term often used by Boston University’s Perry Mehrling. As Fed chief John Williams explained: “During the worst of the crisis last year, the Federal Reserve was purchasing more than $300b of Treasuries per week, which was more than the Treasury purchases in the entire first round of quantitative easing in response to the global financial crisis.” He continues: “In the three months starting in the middle of March, the Federal Reserve purchased more than $2.3t of Treasury and agency debt [mortgage-backed securities] combined.” It all made regulators question whether the private sector can still manage all the necessary intermediation between buyers and sellers. Does the Fed always need to be there for emergencies to ensure a liquid market? If so, does that create moral hazard, i.e., traders taking riskier bets knowing the Fed will always be there to help in a crunch? One recurrent topic at the conference was the rise (in the early 2000s) of principal trading firms (PTFs) engaged in automated high-speed algorithmic buying and selling of Treasury debt. PTFs are now the largest buyers and sellers of Treasuries by volume. Sandie O’Connor, formerly of JP Morgan, highlighted a big change since the global financial crisis. Prior to the crisis, banks like JP Morgan provided about half of the funds used in the market. Today, following post-crisis regulations, they only provide about 15%, with PTFs taking up a lot of the slack. Earlier this month, a working group of regulators from the Fed, the SEC, the Treasury and the CFTC proposed some reforms, including greater use of central clearinghouses. Today, only 13% of Treasury transactions are centrally cleared, in other words, where a clearinghouse acts a counterparty to all transactions, like a hub with spokes. This reduces the risk from any one party’s failure. A final reminder from the DTTC, which provides market clearing services: “The U.S. Treasury market is the deepest, most liquid market, dwarfing in size every other market in the world.”
Stocks: “A Wealth of Common Sense,” a blog about investing, has a graph that shows that in Q2, the wealthiest 10% of individuals in the U.S. owned 89% of all stocks. The figure, trending up in recent decades, is one signal of growing inequality.
Stocks: The Wall Street Journal says more than 900 companies have gone public this year, raising nearly $300b. Some of taken the traditional IPO route. Others have gone public via SPACs. There are now more than 4,000 publicly listed companies in the U.S., reversing a long decline.
Fiscal Policy: The new Infrastructure Investment and Jobs Act passed by Congress allocates $1.2 trillion to various projects, though only about $500m is new spending (the rest was just reauthorized or reallocated from already-passed pandemic relief funds). A separate “Build Back Better” bill (BBB), which hasn’t yet been passed, would include about $1.85 trillion in new spending for programs like universal preschool, partly paid for with tax increases on corporations and higher income people (the Congressional Budget Office said it would increase Uncle Sam’s annual budget deficit by $367b over ten years). Three prominent economists—Mark Zandi, Douglas Holz-Eakan and Doug Elmendorf (the latter two once ran the CBO)—discussed both bills in a webinar hosted by the National Association for Business Economics (NABE) last week. About half of the $500b in new infrastructure spending will be deficit financed, according to Holz-Eakan. Much of the money will be for transportation (most importantly, roads, bridges, railroads, public transit and airports). The four largest non-transportation beneficiaries are power, broadband, water and climate change resilience. The panel debated the implications for inflation, labor participation, productivity, longterm GDP growth, longterm fiscal health and—more generally—how the new bills would affect aggregate supply and aggregate demand. Zandi highlighted the BBB bill’s $150m over ten years for affordable rental housing, which he said could have a significant impact on labor supply alleviating a situation in which many lower-income people can’t afford to live anywhere near where many of the jobs are. Holz-Eakn, however, expressed concern about provisions like universal childcare, which might mandate that pre-school teachers earn at least as much as elementary school teachers, which is about $60,000 a year on average. Given the current pre-school teacher earns about $30,000, the bill could effectively double the cost of childcare in America. He did on the other hand praise the infrastructure bill’s spending on climate change adaption (for example, upgrading bridges to deal with rising water levels). The BBB bill’s spending will occur over ten years, though a sizeable portion is front-loaded, which could help the economy offset some of next year’s fiscal drag as pandemic stimulus wears off. Elmendorf raised the question of how state and local governments will react, perhaps cutting some planned spending on projects the federal government will now fund. He agrees with Holz-Eakan by the way, but not with Zandi, that the fiscal spending of 2020 and 2021 is a major contributor to the current inflation problem. All three, to be sure, agreed that government borrowing can be a good thing if directed to projects with high returns. And the bar for that isn’t high right now given how cheap it currently is to borrow. The danger is wasteful investments (often influenced by political considerations) or crowding out the supply of available capital for private investments.
Monetary Policy: Bill Dudley, a former New York Fed president, thinks the Fed’s policy committee (the FOMC) is in a tough spot right now. It clearly recognizes that inflation is worse than anticipated, even if ultimately transitory, Dudley explained on the Bloomberg Surveillance show. But responding with a tighter monetary policy would be tricky. It wouldn’t want to raise short-term interest rates while it’s still tapering monthly bond purchases, a process now just getting underway. The Fed could quicken the tapering, but that would send confusing signals after carefully orchestrating its communications to avoid another “taper tantrum” like the one that convulsed markets in 2013. Dudley recalls how the Fed—between 2004 and 2006—hiked rates in 17 consecutive meetings, moving the federal funds rate from 1% to 5.25%. Will the Fed have to engage in a similar pace of rapid hikes to quell the current inflation scourge? Former Richmond Fed president Jeffrey Lacker, also appearing on Bloomberg Surveillance, seems to think so, citing an overheated labor market. If so, would that produce another recession? Not long after its hiking spree in the mid-2000s, after all, the economy imploded in the Great Recession of 2008-09. Did the hikes help pop the mid-2000s housing bubble? It’s questions like these that many economists and Fed watchers are asking. There’s one other important thing for the Fed to consider: Higher interest rates would make it more expensive for Washington to finance its extremely large deficits. Recall that in war time (the Civil War, WWI and WWII), Washington made sure to suppress rates to help finance the effort.
Baltimore, Maryland: There’s a familiar story in America’s Northeast Corridor, a stretch of territory that links Boston with Washington, DC. It was the original epicenter of America’s economy when America was still a colony of Britain. Indeed, the Northeast Corridor’s Big Five cities (minus Washington) all date to colonial times. Some three centuries later, in 2021, all have giant economies, highly educated populations and world-class universities and medical facilities. Several have major seaports. Some are global tourist attractions. One (Washington) is the nation’s political capital. Another (New York) is the nation’s financial capital. Still another (Boston) is a global center of bioscience. All five, moreover, have rings of extremely wealthy suburbs surrounding their city centers. Not all five, however, have had the same success reviving their city centers after all experienced de-industrialization and mass exodus of white families to the suburbs. All five cities were at some point on their knees: New York for one, faced an epic fiscal crisis in the 1970s. Washington was once called the murder capital of America. When Massachusetts governor Mike Dukakis ran for President in 1988, one of the big campaign issues was just how filthy Boston Harbor had become. New York, alas, recaptured its economic glory with help from finance, media and tourism. Boston did the same with help from IT, education and biomedicine. Washington thrived as the Federal government (along with defense contractors) greatly expanded. Philadelphia’s city center, on the other hand, even as its suburbs prospered, remained stuck with very high rates of poverty, not unlike city centers of the de-industrialized Midwest (i.e., Detroit and Cleveland). (See Econ Weekly’s Feb. 22 issue for more on Philadelphia). Of the five Northeast Corridor cities, there’s one we haven’t yet mentioned, which speaks to its relative economic weaknees. It’s Baltimore, whose story sadly reads more like Philadelphia than the others. But even worse. The city, the only one in Maryland not part of a county (Baltimore county is a separate political entity), certainly has its wealthy surrounding suburbs. Montgomery county, for example, has an average annual income of nearly $90,000, compared to $60,000 nationally. The wider Baltimore metro area, with almost 3m people, is the country’s 21st largest, similar in population to the Charlotte or St. Louis metros. Its 3% growth during the 2010s was slow, but the suburbs grew more or less on pace with its northeastern peers. Southeast of downtown, on the Chesapeake Bay, is Baltimore’s vibrant seaport, incidentally the busiest nationwide for auto exports and imports. Amazon alone has five warehouses around the port, which is well-positioned for e-commerce. Baltimore sits right along the Amtrak rail corridor and Interstate 95. Airport access is excellent too, with Baltimore-Washington International airport (BWI) one of Southwest’s largest bases. The metro area’s largest employer though, is the Federal Government, and more specifically Fort George Meade, with about 54,000 workers. Another military facility, Aberdeen Proving Ground, employs about 21,000. And both facilities grew a lot after 2005, when various bases elsewhere in the country were shuttered to cut costs. Greater Baltimore is also home to the headquarters of the National Security Agency, the Social Security Administration, the Center for Medicaid & Medicare Services and about 60 other federal agencies and research labs. Notable companies in the region include Northrop Grumman (defense), Under Armour (apparel), Exelon (energy) and Legg Mason (finance). Another giant piece of the area economy: Johns Hopkins University and Hospital, the country’s largest recipients of federal academic research dollars and together responsible for about 50,000 jobs. The University of Maryland has a large Baltimore medical facility as well. Together, education and health account for about 20% of all area jobs. Add government and the trade/transportation/utility sector and you surpass 50%. The next largest sector is leisure and here, Baltimore’s inner core has a good story to tell. The Inner Harbor, specifically, became a celebrated example of post-industrial waterfront development, attracting millions of tourists and convention goers. The aquarium is popular. So are the restaurants (crabcakes!) and sports stadiums. Even before the pandemic, though, the tourism sector was slowing, in part due to rising crime. In 2019, the New York Times and ProPublica jointly ran an article entitled “The Tragedy of Baltimore, Inside the Crackup of an American City.” One sentence captures the gist: “In 2017, it recorded 342 murders—its highest per-capita rate ever, more than double Chicago’s, far higher than any other city of 500,000 or more residents and, astonishingly, a larger absolute number of killings than in New York, a city 14 times as populous.” As HUD data show, Baltimore city was losing more than 4,000 people a year in the late 2010s, following net in-migration of more than 4,000 between 2010 and 2015, when younger, more educated and affluent people began trickling in. As of Jan. 1, 2021, the city’s population was about 586,000, down from a peak of 950,000 in 1950. According to a history published by the city’s government, Baltimore proper was already losing 10,000 people during the 1950s, followed by a 35,000-person loss in the 1960s. Most who could—but not many African Americans who largely couldn’t—left for the suburbs, and with them went companies, jobs, stores and federal investment, most importantly in highways and home loans. Older, multi-story brick factories were vacated, replaced by industrial parks with quick access to new highways. Inner city neighborhoods and shopping districts crumbled. Thousands of homes and shops were demolished to make way for expressways and public housing projects. This familiar pattern contributed to many of the social ills of contemporary urban America. But as mentioned, some cities like New York, Washington and Boston were able to revive their downtowns in recent decades. Baltimore didn’t, beyond the Inner Harbor area anyway. Last week, the Baltimore Sun reported the city’s 300th homicide in 2021, reaching that total for the seventh straight year. The Bureau of Labor Statistics, incidentally, said the Baltimore metro area’s 5.3 unemployment rate in September was the least improved y/y of any large metro in the country. The Baltimore City school district’s budget problems didn’t help—it was forced to lay off 400 workers in late 2020. Locals with longer memories will recall 2005, when General Motors closed a van assembly plant in the city. Enrollment at local colleges and universities, meanwhile, operating in the shadow of Johns Hopkins, has been steadily declining for the past 9 years. But there’s hope. The new Infrastructure Investment and Jobs Act will direct new funds to boost Baltimore’s economy, notably via road and rail projects. Its port is one of the few still operating smoothly at a time of great supply chain disruptions. President Biden, in fact, chose the Port of Baltimore as a venue to tout his new infrastructure bill. His Build Back Better bill, if passed, might help the city too, though the likely impact of its measures is debated. Baltimore is certainly in a good place geographically, with plenty of wealth, talent and resources within its metro area borders. It’s shown the world once how it can revive a part of the inner city. But in 2021, too many of its neighborhoods lack economic opportunity, for reasons that touch difficult issues like race relations and law enforcement. Can Baltimore make a comeback? (Sources: Department of Housing and Urban Development, U.S. Census, Bureau of Economic Analysis, Bureau of Labor Statistics, C-Span, Maryland.gov, Baltimore City and County).
North Dakota: The Financial Times looks at the Bakken oil fields of western North Dakota, a place transformed by the shale revolution of the 2010s (see the March 1 issue of Econ Weekly). Times were tough in 2020, when oil prices crashed. But even as prices recovered in 2021, the area is still struggling. That’s partly because shale companies are drilling more conservatively these days, burned by overzealous expansion and diverting more cash to shareholders. In addition, after a decade of intense activity, “most of the best wells have been drilled.”
2000-01: The latest in our weekly lookbacks at old Fed policy meetings? The meeting from December 19, 2000. The new millennium had arrived, and without any of the Y2K computer disruptions people feared. But other aspects of the new era were less welcoming. Oil prices were rising again. Unemployment claims were trending higher. Corporate earnings were starting to slip. And a long bull run in equities ended with a crash of Dot.com stocks in March (so much for the hopes of startups like Pets.com). The closing years of the 1990s, remember, saw the U.S. economy firing on all cylinders. Productivity was up thanks to the internet-led tech boom. Oil prices tanked. Inflation was subdued. And America was the undisputed champion of a global marketplace increasingly open to cross-border trade and investment. Japan and the USSR were no longer economic and political threats, respectively. China was still in the very early innings of its rise to economic might. Europe was debuting the euro. It was America’s height of global power and influence. At that Fed meeting late in 2000, however, officials could already see signs of an economic slowdown. Why? The higher oil prices didn’t help. Neither did the Dot.com Nasdaq crash that erased a lot of wealth and hurt the financial sector. The Fed’s decision to raise short-term interest rates six times between June 1999 and May 2000 might have been a factor as well. (You can see why the Fed is so reluctant to raise rates today, even as inflation soars). Policymakers led by chairman Alan Greenspan decided to keep rates steady at 6.5% during that Dec. 19th meeting. Just a few weeks later, however, presented with worryingly weak holiday sales data, the Fed held an unscheduled meeting to cut rates by half a percent. It cited high energy prices, weak consumer spending and tight conditions in some financial markets. Other Fed documents and transcripts from January 2001 were even more explicit about just how badly the economy was floundering. Business travel was slowing. So was bank lending. Labor markets were softening. Tech firms were slowing investments. Housing construction slowed. Automakers had excess unsold inventory. The New York Fed even noted that advance ticket sales for Broadway theaters were running 15% below a year earlier. Steel and trucking bankruptcies were in the news. A recession (rather mild in retrospect) would officially begin in March 2001, according to the National Bureau of Economic Research (NBER). It would end just a few months later in November, but by then, the world was an utterly transformed place—don’t forget what happened on September 11 of that year. Next week, we’ll look at the Fed’s proceedings just after the 9/11 terror attacks.
General Electric: GE’s decision to break itself into three parts (aviation, health care and energy) prompted lots of good lookbacks at the company’s illustrious history. One by Bloomberg’s David Fickling recalls the company’s origins as a firm founded by Thomas Edison (a man of engineering brilliance) and J.P. Morgan (a man of financial brilliance). Morgan was in fact rescuing Edison from his ill-fated bet against alternating current (AC) as the future of electricity distribution. The financier was eager to dominate the emerging electricity sector just as John Rockefeller’s Standard Oil had controlled the U.S. petroleum sector. Morgan incidentally tried to dominate the steel industry as well by forming U.S. Steel Corp. after buying Andrew Carnegie’s empire. How did he get all the capital he needed to finance such monopolistic pursuits? There wasn’t much of a bond market for industrial companies in the early 20th So to build GE, Morgan acquired shares in power companies, which could then borrow at low rates thanks to their association with the country’s most powerful bank. Thus did they have the capital to buy GE’s generating equipment. GE, however, also depended on sales of household items like refrigerators. But when the Depression came in the 1930s, people were starved of cash. So the firm established GE Credit to provide loans to customers. “GE had always liked to think of itself as a hotbed of research and development in the model of Edison’s Menlo Park laboratory.” Fickling writes. But its history can also be seen as a “series of credit innovations.” Fast forward to the Jack Welch era (1981 to 2001), and GE had become as much a financial company as an engineering company. On the eve of the global financial crisis in 2008, its debt topped half a trillion dollars. Only with rescue money from Warren Buffett did GE survive the crisis. Welch’s successor Jeff Immelt shrank the financial arm but made an ill-fated purchase in the power sector. He and his successors steadily sold off other businesses, leading up to Larry Culp’s recent decision to split in three. Fickling makes a broader point about GE’s downfall in the financial arena. In 1900, he writes, life expectancy was just 48 years. Now it’s nearly 80, which implies a much larger pool of retired people living off their savings and buying safe bonds. That’s created a world of widely available, ultra-cheap capital, different from the days of scarce credit, when GE’s lending and borrowing abilities were a critical advantage. Some economists, incidentally, think this large pool of retiree money is a key reason why interest rates have steadily declined over the past four decades.
Asteroids: As the once-in-a-century pandemic brutally showed, the economic risk of natural disasters must be taken seriously. Even the risk of an asteroid hitting the earth. Yes, an asteroid. Bloomberg Opinion columnist Adam Minter addresses the matter, warning that “scientists estimate that there’s roughly a 1 in 100 chance an asteroid larger than 460 feet across hitting the Earth every century.” He adds ominously: “Depending on where such a rock landed, it could cause casualties exceeding any known natural disaster.” NASA is on the case, working to devise ways to detect, redirect and destroy incoming threats. Minter recalls an incident in 2013, in which a 65-foot asteroid exploded 20 miles above Chelyabinsk, Russia, knocking people off their feet and blowing out windows in thousands of buildings. “Had the explosion occurred closer to the ground, the damage could’ve been catastrophic.”
Crypto-Economy: Now that you’ve just had the wits scared out of you by asteroids, take a deep breath and muse about the emerging crypto space. As a reminder for the uninitiated, the crypto-economy stems from the invention (to put it simply) of a new and novel way to store and verify information on the internet. The first application was a currency called Bitcoin. Thousands of other currencies have since emerged. And so have many other applications, including those providing financial services, programable contracts and unique tokens that establish ownership of an asset (NFTs). In the meantime, buying and selling cryptocurrencies is now a $2.77 trillion global market (as of Nov. 17, according to Coingecko). Bitcoin alone has a market value of $1.15 trillion. Ethereum, not just a currency but also a platform for building contracts, applications and NFTs, is now worth $505b. Tether, a “stablecoin” (meaning its value is tied to the U.S. Dollar), is used by traders to move in and out of crypto-assets. Its current market value exceeds $75b.
Cryptocurrency Lending: One trending activity in the crypto-world is institutional cryptocurrency trading. BlockFi and Gemini are the names of two big players in the space, where people earn interest on the cryptocurrency they own. BlockFi’s CEO Zac Prince, speaking on the Animal Spirits podcast, explained how it works. Simply put, a growing pool of investors want to borrow your crypto-based money to engage in various crypto-trades. Traditional sources of debt finance like banks and brokerages aren’t yet playing in this market, mostly for regulatory reasons. Hence an opportunity for BlockFi, which sits between cryptocurrency owners and cryptocurrency traders. “You’re basically participating in this market for providing financing to the cryptocurrency ecosystem.” Various young companies, meanwhile, are competing to be the crypto-world’s go-to platform for all sorts of financial services including lending, trading, custody and so on. Some cater to retail investors, others to institutional investors and still others to both. Coinbase is perhaps the best known—it’s primarily a trading platform for retail traders but growing other services and investing in other crypto-companies as well. But the regulatory environment remains murky and even ominous, with more rules and prohibitions probably coming. BlockFi, by the way, now offers a traditional Visa credit card where users can earn cryptocurrency as a reward for their spending, much like other credit cards offer airline miles.
Crypto-Economy: One more important development from the world of crypto: The Bitcoin blockchain just underwent a software update that now allows for smart contracts, an essential for building decentralized finance apps, not to mention nonfungible tokens (NFTs). The so-called Taproot upgrade makes Bitcoin more competitive in this respect with Ethereum, the largest platform for smart contracts (which are really just contracts between two parties written in computer code). Solana, Cardano and Avalanche are some others with blockchains competing to be a smart contract platform.