Econ Weekly (August 9, 2021)

Photo courtesy of the Port of Los Angeles

Inside this Issue:

  • Joba the Hut: Smiles Not Sobs with ~1m New Jobs   
  • The Delta Danger: Will Covid’s Mutations Cause Complications?
  • Time to Taper? It is Finally Time for the Fed to Unwind?
  • The Time of Paper: Merry Memories of Maine
  • Airlines: Biz Travel Trouble
  • General Motors: Profit Gains Despite Semicon Pains
  • The Dollar Shortage: Causing Depression Since 2007
  • Stable Stakes: Are Crypto-World Stablecoins a Systemic Threat?
  • Missing Males: A Labor Market Mystery  
  • A Trunk for Your Junk: A Look at the High-Margin Self-Storage Business
  • And This Week’s Featured Place: Los Angeles, California, Hollywood Dreams and Home Price Extremes

Quote of the Week

“What does non-transitory inflation actually look like? When does inflation become self-fulfilling? The short answer it is: It needs to be visible and sustainable in wages.”

-BMO Capital Market’s Ian Lyngen

Market QuickLook

The Latest

Good news: The U.S. economy created 943,000 new jobs in July, an important sign of progress in the recovery from Covid. In most respects, the recovery has already happened. GDP is back to where it was and demand for many goods and services are stronger than ever. Not the labor market though. Even with its nearly 1m new jobs last month, 8.7m Americans remain unemployed, up from just 5.7m in February 2020. The unemployment rate, too, is not yet back to its pre-crisis lows (5.4% now, 3.5% then).

But the July job gains are indeed encouraging, representing “substantial further progress” toward conditions the Fed deems necessary before tapering monthly Treasury and MBS purchases (see Government section below). That’s the first step toward post-crisis monetary policy normalization, and it looks like an announcement on that will come before year end (maybe even at the Fed’s Jackson Hole summit later this month).

Note also that revised figures for May and June show more job gains than previously estimated—614,000 in May and 938,000 in June. So that’s nearly 2.5m new jobs created in the past three months, a sign of substantial further progress indeed. Americans, it seems, are getting back to work. But what President Biden calls a pandemic of the unvaccinated continues to threaten a return to economic normality, with many companies now abandoning plans to reopen offices this fall. Events are canceling too, like the New York Auto Show. Schools, however, are opening their doors across the country this month and next. Sure enough, 28% of last month’s job gains came from the education sector. Only leisure and hospitality—responsible for 40% of July’s job gains—made a greater contribution. Much of that was hiring by restaurants and bars.

There’s still the mystery of why labor participation rates—especially among males—remain depressed, continuing a decades-long trend (see the Markets section below for possible explanations). Average hourly earnings are up y/y, and by almost 10% in leisure and hospitality. Even in the context of elevated inflation, that’s good, even more so for anyone not buying or renting a car.

As the labor market heals, the housing market is cooling. It’s still red hot to be sure, with demand greatly exceeding supply in most markets. But according to Bloomberg, citing a survey by John Burns Real Estate Consulting, just 62% of homebuilders raised prices in July, down from 95% in April. No, it’s not a 2008-like bubble—that was a case of widespread reckless lending. But the zeal for home buying does appear to have peaked.

The auto market by contrast, also with demand greatly exceeding supply, sees “nothing fundamentally different about demand… in the near-term.” That’s what General Motors said last week. Carmakers are encouraged by easing commodity prices too. But Covid’s assault on factories in East Asia adds to the supply chain challenges already intense because of semicon shortages. Separately, Expedia, the online travel giant once owned by Microsoft, warned that the “road may still be bumpy for a while as we watch all the variants play out, and various government responses to them.”

In the youthful crypto economy, a sharp drop in asset values from springtime highs isn’t deterring a rush of new money, talent and attention. It’s now a focus for regulators in Washington, particularly those charged with protecting investors. The stablecoin market, resembling a crypto version of bank deposits or money market funds, is attracting particular attention. Before federal deposit insurance, destabilizing bank runs were common. As recently as the 2008-09 financial crisis, the economy was destabilized by a run on money market funds. Should regulators worry about a run on stablecoins?

Separately in the crypto space, Ethereum—a platform for building blockchain-based businesses and applications—is moving toward a new system of transaction verification that doesn’t use so much dirty energy. Back in the physical world, a top Biden administration priority is building an economy that doesn’t use so much dirty energy. The latest iteration of the infrastructure bill, still weaving its way through Congress, features some clean energy programs. Same with the larger care-economy bill Democrats are pushing.

Expect even more drama on Capitol Hill as Fed chief Powell’s term comes up for renewal. Will President Biden reappoint him? Or will he turn to someone else—Fed governor Lael Brainard is a much-mentioned alternative. Oh, and in case you forgot: The debt ceiling is now back in place. Legislators need to act before the Treasury runs out of cash sometime this fall. If not, the U.S. will default on its bonds, the equivalent of a nuclear bomb dropped on the global financial market.

The market for U.S. Treasuries remains robust for now, with the yield on 10-year notes plummeting to 1.19% mid-week before snapping back to 1.31% following the healthy jobs report—good economic news usually sends money flowing away from low-yield Treasuries. Sure enough, stocks gained last week, albeit modestly as Covid fears thwarted further gains. The oil market, seemingly more concerned about the resurgent Covid threat, dropped sharply.

As for Corporate America, the sentiment remains bullish, underpinned by excellent Q2 results and ongoing demand strength and pricing power that’s outweighing higher input costs, supply chain disruptions and labor shortages. That’s generally true in the giant health care sector too, where non-Covid patient levels are rising, and operating rooms are experiencing backlogs—that according to the staffing agency AMN Healthcare Services. It also sees healthcare organizations struggling with extended unfilled job vacancies, clinician fatigue and extended leaves of absences among nurses.

Another major health care company, CVS, joined Berkshire Hathaway as the largest U.S. firms to report earnings last week. It spoke of a “rapidly changing U.S. healthcare environment” characterized by new medicines, new technologies, new business practices and new forms of primary care, including virtual care. As always with U.S. health care though, the challenge is controlling costs, which for decades have been spiraling out of control.

Here’s just one more earnings call highlight, from the real estate firm Cushman & Wakefield. It sees “some very encouraging green shoots emerging in the office sector.” Office real estate, remember, was one of the big losers during the pandemic as workers toiled from home. But recent Covid variant setbacks notwithstanding, it seems they’re returning. “At the beginning of the year,” the company estimates, “roughly 17% of U.S. office employees were back at the office. At the end of the second quarter, it was closer to a third.”

In this week’s issue, we look at the rise of Los Angeles, a city that barely existed at the time of the Civil War. Today, it’s America’s second largest metro after New York. How did it happen? Can other cities learn from its success? Can its success be sustained amid a housing crisis? Next week, as always, we’ll profile a different American place—Hint: It’s home to one of the country’s largest pharmaceutical companies. Also next week: Ongoing earnings coverage, with Disney and Berkshire Hathaway among the heavy hitters stepping to the plate. (And be sure to sign up for our free newsletter about the North American railroad industry at https://railroadweekly.substack.com/).

 

Companies

  • General Motors: There once was a time when semiconductors were primarily relevant to computers. Today, cars have become computers, a trend that’s becoming even more true with time. And so, a shortage of semiconductors means a shortage of cars, frustrating companies like General Motors. Happily, demand is currently strong, giving carmakers the power to raise prices. And thankfully for GM specifically, the semicon shortage isn’t quite as bad as what rival Ford is experiencing. Still, revenues for the second quarter—though up compared to the depressed conditions last spring—declined from Q1 (and also from Q4, 2020). Higher commodity costs posed an additional challenge (steel, for one). But GM nevertheless remained solidly profitable thanks to its pricing power, earning a Q2 adjusted operating margin of 12%. As usual, the lion’s share of its profits came from North American vehicle sales, along with its financing arm (carmakers have in-house banking units that make car loans to customers). Naturally, GM is allocating whatever scarce semicon chips it gets to the highest-profit vehicles, which means full-sized trucks and sport-utility vehicles. The company again lost money selling vehicles outside the U.S. The chief task going forward, of course, is successfully transitioning to a world of electric vehicles. To be clear, just 3% of vehicles sold today are electric. But the Biden administration, just last week, announced a goal to make that 50% by 2030. With climate change a growing threat, other governments are pushing in the same direction. And so are consumers, evidenced by Tesla’s popularity. GM will thus invest a massive $35b in EVs from now through 2025. This includes new manufacturing facilities, new battery development, efforts to secure key inputs like Lithium and technology to advance autonomous driving. Next month, GM will start taking orders for a new EV called the Cadillac Lyriq. It’s also building a variety of commercial EVs for business customers. Make no mistake: The auto industry is a critical component of the U.S. and world economies, generating lots of high-paying employment and investment spending. But like many industries that are both labor- and capital-intensive, auto profit margins tend to be modest. And U.S. carmakers face tough foreign competition—foreign competition that often manufactures in the U.S. with U.S. workers. As you can read in history books like David Halberstam’s “The Reckoning,” foreign competition—especially from Japan—nearly killed Detroit’s Big Three with smaller, more reliable and more fuel-efficient models introduced in the 1970s and 1980s. But today’s American consumer wants full-sized trucks and sport-utility vehicles. And in this realm, Detroit dominates.
  • McDonald’s CEO Chris Kempczinski, a guest on the David Rubenstein Show, talked about dealing with the Covid crisis, about current staffing challenges and about the firm’s relationship with franchise owners and customers. Most of McDonald’s 40,000 restaurants (93% of them) are not owned by McDonald’s but by franchisees, which can set their own wage policies. Kempczinski said Covid has changed the company’s relationship with customers, from one where almost all interaction occurred in restaurants to one where more interaction occurs through the McDonald’s mobile app. Drive-thru business, meanwhile, now accounts for 70% of U.S. orders, though Kempczinski thinks that will at least partly revert back to dine-in. Fries are the company’s top product by volume. Chicken is more popular in some countries like China. Beef is more popular in others like Brazil (it’s split pretty evenly in the U.S.) McDonald’s is now experimenting with plant-based burgers. And it’s offering home delivery, mostly using third-party partners like Uber Eats and DoorDash.
  • Public Storage, based in the Los Angeles metro, claims to be the largest self-storage company in the U.S., with 7% of the sector’s total square footage—other big players include CubeSmart (based near Philadelphia), Extra Space Storage (Salt Lake City) and Life Storage (Buffalo). All incur costs for real estate, advertising and depreciation. Storage facilities require security and in some cases climate control. But staffing needs are minimal, a key reason for the industry’s extremely high profit margins. For Public Storage, 2020 operating margin was a lofty 76%, on nearly $3b in revenues. Los Angeles, its home city, happens to be its largest market. But it’s also large in fast-growing sunbelt states like Florida and Texas. Some 9% of all Americans, the company says, make use of self-storage facilities. Management speaks of a next-generation business model that features more customers booking their storage lockers online, more use of big data, less reliance on centralized call centers for customer service and an end to always staffing each property with at least one staff member—staffing now varies based on customer demand, as predicted using data. Public Storage also has in-house teams that develop and acquire real estate for its stores. Early in the pandemic, the firm’s revenues declined. But they bounced back by double-digits last quarter, supported by the strong housing market. As people (and companies) move around, they often need space to temporarily store their possessions. Others need space to hold possessions of deceased relatives.

Tweet of the Week

Sectors

  • Shipping: Just how massive is the Port of Los Angeles? Its executive director Gene Seroka gives Bloomberg’s OddLots some numbers. The operation involves an ecosystem of roughly 200,000 importers and exporters, 18,000 truckers, 15,000 dockworkers, 12 marine terminals, 20 vessel operators and 100 train departures per day. Together with neighboring Long Beach, L.A.’s twin port facilities on San Pedro Bay handle about 40% of America’s imports and 30% of its exports. They’re responsible, according to Seroka, for one out of every nine jobs in the five-county-L.A. metro area. Count all the dockworkers, local manufacturers, truckers and warehouse personnel, etc., and you’re talking about 1m paychecks to L.A.-area residents. Right now, the port of L.A. has never been busier. That’s because of all the foreign goods Americans are buying with their stimulus-inflated incomes. But with an average of 15 ships a day arriving—this was more like ten per day before Covid—operations are snarled. Containers are sitting at the port for days, and then in warehouses for additional days. California’s power outages caused by intense heat aren’t helping. Nor is the national trucker shortage. “We just have much more coming at us than ever before,” Seroka said. He did add that delays have eased somewhat since February, when the situation was worst. But as companies across the economy are reporting in their Q2 earnings calls, delays in shipping and obtaining goods and materials remain a big headache. And don’t forget: The peak Christmas season is coming soon.
  • Shipping: Sticking with the discussion on L.A.’s port… who actually runs it? Seroka explains that it’s a non-profit agency of the City of Los Angeles, governed by a board of harbor commissioners and reporting to L.A.’s mayor. It doesn’t take money from taxpayers though. Instead, it generates revenues by leasing facilities (to marine terminal operators, for example) and collecting shipping fees. Any extra money left over after costs gets reinvested in infrastructure, environmental impact mitigation and other community needs. The port wants more federal investment too. And it might get some if the current infrastructure push in Washington succeeds. Seroka separately urged Washington to shun the tariff wars of the Trump era and instead develop a national export policy, noting how export jobs pay 15% more on average than non-export jobs. Many port jobs, in fact, are unionized, which raises an important fact: Next June, the port’s largest labor contract will expire. The last negotiation was tense, requiring eleventh-hour involvement by President Obama’s labor secretary. Always a contentious issue: How much work will the port be allowed to automate?
  • Air Transport: Airlines Confidential, a podcast co-hosted by former Spirit Airlines CEO Ben Baldanza, welcomed John Heimlich to converse about the latest industry trends. Heimlich is chief economist of A4A, the U.S. airline industry’s main lobby group. Heimlich expressed surprise at how rapidly demand is returning, even among the unvaccinated. The recovery began in late January, though, when vaccine distribution began reaching critical mass. TSA airport data show traffic volumes now down around 20% from 2019’s levels, compared to more like 60% to 70% early in the year. What’s still down a lot is corporate and government business travel, but Heimlich is hopeful about a pickup this fall as workers return to the office—the big question mark is how the Delta variant might disrupt this anticipated return to normality. Overseas trips, meanwhile, will recover as governments ease travel restrictions such as quarantines. But for now, all U.S. airlines are heavily reliant on domestic and nearfield international leisure travel. Separately, Heimlich spent some time addressing the industry’s current problem with fuel shortages. One reason is that pipelines are full, especially in the U.S. west, forcing energy firms to ration supplies based on usage rates during the past 12 months. The problem is, airlines were using a lot less fuel than normal during the past 12 months because of the pandemic, meaning their allocations are too small for what they now need. For smaller airports that depend on fuel shipments by truck, the national truck driver shortage is the key problem. As it happens, much of the current leisure surge is taking place at these smaller airports—think Aspen, Colorado, or Myrtle Beach, South Carolina. To be clear, refiners are producing plenty of jet fuel. It’s the distribution that’s a problem. In the meantime, airlines are suffering the same sort of labor shortages reported throughout the economy. Heimlich says things would be a lot worse were it not for federal payroll support preventing mass layoffs of pilots, flight attendants, mechanics and service agents. But airlines rely heavily on contractors that didn’t qualify for support. Airports too, are battling understaffing at restaurants and shops, in some cases causing long lines and terminal congestion. As a result, some airlines have been forced to pare back their fall schedules.

Markets

  • Labor: Bloomberg News reporter Olivia Rockeman asks the important question: Where have all the workers gone? Though jobs are coming back as the economy recovers, the percentage of working-age people in the workforce—the labor participation rate—still stands at a 40-year low. Rockeman highlights several factors, one being that baby boomers are retiring at double the rate they did in 2019. A lower birth rate in recent decades is another reason. There’s the issue of childcare availability, especially problematic for female workers. The opioid crisis got a lot worse during the pandemic, leaving more Americans unable to work. Greater use of automation, meanwhile, is replacing more workers.
  • Labor: According to the Economic Daily blog from the Bureau of Labor Statistics, labor productivity in the retail sector surged in 2020, by nearly 8% y/y. That’s the highest annual growth since measurement began in 1987. The increase came as retailers slashed employment—the number of hours worked declined by 4%. But even with lower staffing, output increased 4%. The strongest gains, unsurprisingly, came from non-store retailers like e-commerce sites. But equally impressive were gains seen at stores selling sports equipment, musical instruments and books. Labor productivity decreased, on the other hand, at garden supply stores, gasoline stations and electronics and appliance stores.

Government

  • Monetary Policy: When Fed chairman Jerome Powell speaks, people listen. Same for the Fed’s vice-chairman, who spoke last week with Adam Posen of the Peterson Institute. In his prepared remarks, Richard Clarida said conditions are currently on track to begin—by year end—the move markets are waiting for: A pullback, or “tapering,” of monthly Treasury and MBS purchases (the MBS stands for mortgage-backed securities, which are pools of home loans packaged by companies like Fannie Mae). These purchases, remember, are designed to exert downward pressure on interest rates to facilitate borrowing. Clarida also said that conditions at this time merit a hike in interest rates sometime in early 2023. But he also stressed the need to be flexible as conditions can quickly change. He separately expressed surprise at the magnitude of bond yield declines, especially when viewed in real terms, i.e., taking inflation into account. In real terms, many bonds including Treasuries are trading at negative rates now—this means lenders are essentially paying borrowers, not the other way around. Why would any lender do that? Well, in some cases because they need risk-free Treasuries on their balance sheets. But bond market peculiarities aside, Clarida has his eyes on the labor market, expecting to learn more about its recovery in the next few months as schools reopen and people return to offices. His best guess is that autumn job gains will be pretty strong (he was speaking before release of the July jobs report). On the other hand, aging demographics will make longterm gains in workforce participation rates challenging. Technology and substitution of capital for labor could help with growth and productivity, and there might be some longterm secular improvements triggered by the pandemic. Note also that San Francisco Fed chief spoke with PBS NewsHour, giving similar views as Clarida on when asset purchase tapering might begin. St. Louis Fed chief James Bullard, by contrast, seems less patient, urging a start to tapering this fall.

Places:

  • Los Angeles, California: In 2019, Los Angeles County alone had an economy worth $727b. That’s larger than the GDPs of Saudi Arabia or Switzerland. And it makes the broader L.A. metro area America’s second largest economy—only New York City’s is larger. How did a town that barely existed in the 19th century rise to such extraordinary heights in the 20th and 21st? It wasn’t the California gold rush—that (in the 1840s) triggered the rise of San Francisco. L.A. experienced a different sort of gold rush in the 1890s, specifically “black gold,” or oil. Before the age of Texas oil a few decades later, California was the country’s largest producer, with L.A. and its surroundings playing a central role. As it happened, the oil discoveries came not long after L.A. was connected to the rest of the country by the transcontinental railroad. Before that, it was mostly a frontier town with some agricultural activity. Even earlier it was part of the Spanish empire and later Mexico, but always home to just a few thousand people at most. Oil, however, was a big catalyst to population growth. Competing railroads, meanwhile, slashed their fares to win westbound customers. Development of seaport facilities followed. Then came the highways and Hollywood. During the Great Migration of slave descendants out of the South, many African Americans from Louisiana migrated to Los Angeles (as personified by Dr. Robert Foster in Isabel Wilkerson’s book “The Warmth of Other Suns”). Many came for the great weather. As a New Deal-era history described, “to many a newcomer, Los Angeles is a modern Promised Land.” Already by then, the Culver City neighborhood was known for its motion picture studios. Long Beach had its oil wells. Pasadena and Beverly Hills were already retreats for the rich. Inglewood was already home to airplane factories. The San Pedro Bay was already a bustling seaport. The San Fernando Valley at the time featured many prosperous farms. By 1940, L.A. had become the fifth largest U.S. city after New York, Chicago, Philadelphia and Detroit. But L.A. hadn’t seen anything yet. World War II, followed by the Cold War, would turn Southern California into a giant center of defense-related manufacturing and research. Between the 1950s and the 1980s, California received roughly a fifth of all federal defense contracts, including money that seeded the rise of Silicon Valley to the north. In southern California, much of the money went to aviation and aerospace, creating a wealth of high-paying jobs. It didn’t hurt that two Southern Californians occupied the White House during the 1970s and 1980s, Richard Nixon and Ronald Reagan, respectively. But dependence on defense contracts proved troublesome during the Cold War cutbacks of the early 1990s, when L.A.’s economy suffered its first severe recession. During this period, the region also lost tens of thousands of clothing factory jobs. Foreign investment, furthermore, tumbled as Japan’s economy turned from boom to bust. Before long though, L.A.’s abundance of engineering, science, professional and creative talent positioned it perfectly for the new information age. Just as importantly, the rise of China and Asia-based manufacturing cemented Los Angeles and Long Beach as America’s largest and most important seaport (see the Sectors section above). In 2019, L.A’s main airport surpassed Chicago O’Hare to become the nation’s second busiest after Atlanta. And that’s despite its coastal geography which makes it impractical as a connecting hub. Air, sea, rail and road transportation are indeed a vital cog in L.A’s economy today. So is tourism, including international tourism which remains depressed amid the pandemic. That—and international trade exposure more generally—is a big reason that L.A.’s metro area unemployment rate remains high at 9.5%, compared to 5.4% nationally (the July figure) and 3.2% in Salt Lake City, for example. On the other hand, southern California’s real estate market is red hot. Maybe too In L.A.’s wealthy Westside housing market (which includes Beverly Hills, Hollywood, Malibu, Marina del Rey, Santa Monica, Venice, West Hollywood and Westwood), the average home sale price in mid-2020 reached $1.8m. Even in less exclusive neighborhoods, affordability is a giant problem, blocking opportunities for Americans to take advantage of L.A.’s many good jobs. The pattern of moving to California for a better life—a staple of national lore—seems to have died. The dominant historical pattern is now reversed: People leaving L.A. for cheaper housing markets, especially given the dispersion of job opportunities thanks to remote working. Some companies are leaving too, lured by lower taxes in states like Austin, Texas (which is now experiencing a housing affordability problem of its own). Another perennial challenge is nature, including L.A.’s vulnerable water supply and exposure to wildfires and earthquakes. Still another is the future of U.S.-China trade relations. On the other hand, L.A.’s Hollywood stars like Disney are still going strong (albeit uncertain about the longterm economics of video streaming). Defense contractors like Northrup Grumman remain big employers. Two giant universities—UCLA and USC—provide jobs to tens of thousands of residents. So do the area’s many health care institutions, led by Kaiser Permanente. The City of Los Angeles is actually the metro area’s second largest employer after UCLA, according to HUD. Silicon Valley’s finest—Google, Apple, Facebook and so on—all have a major presence in the City of Angels. Oddly enough, one institution that doesn’t have a prominent L.A. presence is the Federal Reserve. This reflects how economically unimportant the city was when the Fed was created a century ago. Year after year in ensuing decades, L.A. kept on growing and growing and growing, with people coming from all over America and the world. The city now has neighborhoods with nicknames like Koreatown, Little Armenia and Little Tokyo. Some jokingly call it Tehrangeles for its many Iranian Americans. Whereas east coast cities saw early development with waves of immigrants from Europe, L.A.’s growth was fueled more by immigration from Mexico, Central America, Asia and the Middle East. But again, can people still afford to come? Affordable housing, to be sure, will rank high among the forces shaping L.A.’s future economic growth. It has so many of the other elements of success already in place: its attractive weather, its giant transport facilities, its tourist appeal, its pool of highly educated workers, etc. No need to be jealous of Austin here. But with the days of mass building houses and freeways long gone (see last week’s issue on the “vetocracy” problem), L.A. and California more broadly will need new solutions, perhaps aided by new government policies and new construction technologies. What will L.A. look like seven years from now? The city will reclaim the global spotlight when it hosts the 2028 Olympics, just as it did in 1984, at the height of its golden years. Is there another Golden State golden era coming?

Musical Interlude (just because…)

  • Detroit: The Wall Street Journal notes how metro Detroit, for the first time in two decades, has a lower unemployment rate than the national average. One reason is the strength of the auto sector, the semicon shortage notwithstanding. In addition, the city has a relatively large financial sector, led by the two shadow bank mortgage giants Rocket and United Wholesale. Unfortunately, the city of Detroit itself continues to struggle, with an unemployment rate still above 10%. In addition, the overall metro area has a lower-than-average labor force participation rate, with many people having dropped out of the workforce.

Abroad

  • Global Finance: Jeff Snyder of Alhambra Investments isn’t shy about criticizing central bankers. In his eyes, most of them fail to see what he calls the fundamental problem of the global economy since the financial crisis of 2008: An insufficient supply of safe assets that banks use for lending collateral. From roughly the 1980s to 2008, he says, the problem was reversed: too many dollars, many created outside of the U.S. beyond the Federal Reserve’s reach. This led to debt bubbles everywhere, especially in housing markets. But post-crisis, banks around the world are simply not lending much, avoiding the risks and thus contributing to what Snyder calls depression-like conditions (of which low interest rates are a symptom). He speaks often about the systemic importance of the Eurodollar market, where again, U.S. dollars are created outside the U.S., beyond the Fed’s purview. “The global reserve currency has broken down in the last 14 years,” Snyder told the “Market Champions” podcast. Even now, despite elevated inflation readings, the bond market is signaling just the opposite: disinflation or outright deflation. What about all that quantitative easing by the Fed? Useless, Snyder says. QE merely results in the Fed taking an income-earning treasury from banks in exchange for reserves which they could theoretically lend. But they’re not lending much. They’re merely going out and buying more safe assets. The only way to get meaningful inflation, he insists, is if banks start lending at scale. “Reserves are not money.”
  • El Salvador: Just one more mention of Jeff Snyder, pertaining to El Salvador’s recent adoption of Bitcoin as legal tender. Its motivation, Snyder says, is the opposite of what most people think. It’s not that the country fears a reckless over-issuance of dollars, heralding a collapse in its value. Instead, the Central American nation is trying to address a shortage of dollars by adopting a new form of money potentially useful for international trade.

Foreign Investment Trends

source: Bureau of Economic Analysis

Looking back

  • Paper: New England was the birthplace of America’s industrial revolution, which started with textile mills located along the region’s rivers. The best-known textile hub was Lowell, Massachusetts. But there’s another early New England manufacturing story: Maine’s paper industry. It’s the topic of a book by historian Michael Hillard called “Shredding Paper: The Rise and Fall of Maine’s Mighty Paper Industry.” At an online event hosted by Maine’s Historical Society, Hillard stressed the unique features of Maine, America’s most forested state (with lots of rivers for transport), and the unique nature of paper making, which doesn’t lend itself to factory automation in the same way as say, auto manufacturing. It relies instead on experienced workers with unique skills, some imported from French-speaking Canada. Wisconsin, by the way, emerged as the other big paper making state in the late 19th The industry peaked around 1890 to 1910, Hillard says. And even as late as the mid-20th century, papermaking was America’s 11th largest industry, producing products for newspaper and magazine publishers, commercial packaging and home use (i.e., tissues and toilet paper). Though the industry’s big players tended to be headquartered in cities like New York or Boston, their factories were in Maine, which also benefitted from heavy research and development spending—papermaking machines became increasingly sophisticated over time. What happened to the industry? Maine’s papermaking sector withered, in Hillard’s view, due to globalization, strict environmental regulations and changes to the ownership structure of factories. He’s particularly critical of Wall Street’s involvement and the entrance of corporate raiders and union-busting executives like “Chainsaw Al” Dunlap, famous for his ruthless cost cutting and job cutting (and later law-breaking). Today, China is the largest paper producer. But the U.S. has big producers too, including Kimberly Clark (founded in Wisconsin but based now near Dallas) and International Paper (Memphis). S.D. Warren, one of Maine’s largest mills during the state’s paper-making golden years, still exists but is now owned by a South African company.
  • The Free Banking Era: George Mason University professor Larry White, speaking on the Macro Musings podcast, looks back at U.S. banking during the decades before the Civil War. Until the war, states, not the federal government, regulated banks. In the so-called free banking era, states began issuing charters to banks that simply agreed to meet the requirements of the law—no more having to petition state legislatures for a charter. This resulted in many new banks and ultimately, many bank failures. For White, the problem was not the deregulation per se. In fact, it was the opposite: The specific regulations imposed, which in most states included an obligation to hold the state’s bonds. Put another way, it was an obligation to lend to state governments, which weren’t always good credits. The problem was larger than that however, White explains. Regulations that prevented interstate branching, or even having more than one branch within a state, meant banks were poorly diversified. Their loans, in other words, were concentrated in whatever local businesses and industries were in their immediate area. This is a point stressed by other bank historians including Charles Calomiris and Stephen Haber in their 2014 book “Fragile By Design.” Canada, unlike the U.S., has a long history of stable banking, in part because banks there were allowed to operate branches nationally, across different regions and industries.

Looking ahead

  • Stablecoins: “Should We Fear Stablecoins?” That’s the title of an article penned by Larry White (see above), addressing the emergence of cryptocurrencies whose value is designed to be fixed to the U.S. dollar. Their main purpose, White explains, is to allow cryptocurrency traders to avoid having to take actual dollars when selling a cryptoasset—taking actual dollars via wire payment involves regulatory scrutiny, transaction delays and other burdens. There’s currently some $110b worth of stablecoins in circulation, White estimates, and something like $10b to $20b in daily transactions. They were mostly ignored by legislators and regulators, until Facebook raised fears with their proposal to issue Diem, a stablecoin designed to be used for online commerce. Also emerging are use of stablecoins for decentralized finance (defi) applications. Businesses too, might be able to use stablecoins to conduct overseas online transactions more efficiently. But even as used currently by cryptocurrency traders, they’re starting to resemble money market funds, which people use as substitutes for bank deposits. At one recent hearing on Capitol Hill, Columbia University professor Lev Menand compared stablecoins to “teched-up versions of money market mutual funds,” recalling that a run on money market funds in 2008 was a major cause of the last global financial crisis. Stablecoins are an even less protected form of bank substitute, operating without charters, without access to the Fed’s discount window and without federal deposit insurance. That makes them, arguably, a systemic financial risk. Or maybe not. White downplays the threat, noting the modest size of the stablecoin market relative to money market funds. Issuers of stablecoins, in fact, themselves invest in money market funds and other safe short-term assets to ensure stability—they typically don’t issue risky longterm loans as a bank would do. There’s also the disciplinary mechanism of competition, with insufficiently capitalized or non-transparent stablecoins likely to be shunned for safer alternatives. The world’s largest stablecoin, by the way, is currently Tether, issued by a Hong Kong-based crypto exchange called Bitfinex. As you’re reading this, U.S. regulators led by the SEC are evaluating the impact of the crypto-economy, contemplating rules to protect investors. The SEC, by the way, is a New Deal-era creation whose first chief was President Kennedy’s father. The current chief is Gary Gensler, himself a crypto-expert.

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