The Capital Letter

The Capital Letter: Week of September 21

President Trump faces a staff member during a tour of a pharmaceutical manufacturing plant in Morrrisville, N.C., July 27, 2020. (Carlos Barria/Reuters)
Election volatility, lockdown lunacies, reining in the Fed, and more.

As I have been writing for several weeks now, it seems as if I can begin this letter the same way every Friday:

“Another week has passed in our strange sort of stasis, with no real movement on another stimulus package.”

And as I also have been writing for some time now — the greater the disruption that will arise out of the failure to pass another stimulus package now, the greater the reckoning that will come later (and don’t get me wrong: I don’t underestimate for a moment the problems that will be caused by all the debt that is being created).

It may be that some of the chickens are now coming home to roost. It has been a choppy week for the stock market on top of a poor month. There are still a few days to go, but it looks as if the Dow Jones, the S&P 500 and the NASDAQ may report a losing month for the first time since the pandemic hit in March. It’s tempting to put this down to the September effect (as I noted in a recent Capital Note, October gets a bum rap: it is September that is historically the weakest monthfor the markets), but, at the moment (I’m writing this at 11.52 a.m.), the S&P seems to be headed for a monthly decline several times greater than the 1 percent fall that it has averaged in Septembers since 1950, but maybe this might be tempered should optimism return in the early days of next week when investors contemplate (checks notes, gives up) . . .

There are clear signs that the (partial) economic bounce back seen since March is beginning to run out of stream. The recovery in industrial production has slowed, although today’s durable goods orders number was somewhat encouraging.

The Wall Street Journal:

Orders for long-lasting factory goods increased for the fourth consecutive month in August, a sign of the manufacturing industry’s continued recovery from coronavirus pandemic-related disruptions.

New orders for durable goods—products designed to last at least three years—rose 0.4% in August compared with July, the Commerce Department said Friday. The August increase was at a slower pace than earlier in the summer, when orders rebounded following a collapse in demand from early in the pandemic.

But that is not going to do much to help on the employment side. As noted in yesterday’s Capital Note, the pace of recovery is slowing.

The Financial Times:

The pace of new applications for US jobless aid ticked higher and hovered at historically elevated levels last week, in a sign of continued weakness in the labour market as it struggles to rebound from damage inflicted by the pandemic.

Initial jobless claims totalled 870,000 on a seasonally adjusted basis, compared with 866,000 a week earlier, according to figures published by the Department of Labor on Thursday. It was the fourth straight week that jobless claims had fallen below 1m, although economists had forecast claims to decline for a second consecutive week, to 840,000 . . .

“The jobless claims data paint a picture of a labor market recovery that’s struggling to maintain momentum,” according to analysts at Oxford Economics.

And when considering that fact, it is worth remembering that the earlier $600 federal Unemployment Insurance supplement has expired, and the (theoretical) $300 stopgap arranged by the president has essentially run out.

The New York Times:

But that program, Lost Wages Assistance, had enough money for only six weeks of payments. Because the program is retroactive to the week that ended Aug. 1, it lasted through the first week of September in most states.

Confusingly, many workers have yet to begin receiving payments — or are just starting to get them — because many states took weeks to get the program running. So workers in some states will receive a lump sum to cover retroactive benefits, and nothing more.

Meanwhile, Pandemic Unemployment Assistance (PUA), the program that covers workers (such as freelancers or those with limited work history) who would not normally benefit from unemployment assistance — a cohort that accounts for over forty percent of those drawing unemployment benefit is set to expire at the end of the year.

There’s a reason that the Fed, which has probably done as much as it can (or should) do to help out for now, is calling for Congress to step in. But with the Supreme Court battle about to start, hopes of an agreement over a package seem doomed to disappointment. Speaker Pelosi’s new package may restart talks, but it seems to owe more to political positioning than a serious attempt to cut a deal.


After more than a month of stalled stimulus negotiations, House Speaker Nancy Pelosi (D-CA) will move to introduce a new $2.4 trillion stimulus package. The package would be narrower than the $3.4 trillion Heroes Act passed by the House in May. While still more costly than Republicans have been willing to accept, the new stimulus proposal would likely restart negotiations with the White House . . .

Pelosi’s abrupt change came as some Democrats were pushing for a narrower deal that could pass. Several weeks ago more than 100 House Democrats signed letters to Pelosi urging her to move forward on various relief proposals . . .

Last week, a bipartisan group of 50 lawmakers released a stimulus package framework calling for $1.5 trillion in relief. President Trump has expressed his support for this framework.

That looks like too wide a gap to me, and the Supreme Court fight will widen it further.

Meanwhile, via Bloomberg:

JPMorgan Chase & Co. joined Goldman Sachs Group Inc. economists in dropping forecasts for U.S. economic growth in coming months thanks to the failure of Republicans and Democrats to seal a fiscal-stimulus deal . . .

JPMorgan now sees 2.5% annualized economic growth in the fourth quarter of 2020, down from 3.5% in an earlier estimate. The bank also trimmed first-quarter growth to 2% from 2.5%.

Goldman researchers led by Jan Hatzius earlier halved their estimate for the fourth quarter of 2020, to 3%.

On the other hand, Bloomberg reports that:

A nascent revival in the dollar, after a summer of predictions about its demise, is highlighting why it’s still the ultimate haven currency for some investors.

After abandoning the greenback due to the Federal Reserve’s accommodative policy, traders are piling back in, leading to a squeeze of short positions. Liquidity, yield advantage and a lack of alternatives have helped to rekindle interest just as the U.S. starts to get a handle on the coronavirus pandemic in some places . . .

Quite what says about the rest of the world, I dread to think.

Then again:

“The dollar is the safe haven of choice until we get new information on the vaccine, earnings, election and stimulus,” said Thomas J. Hayes, chairman of hedge fund Great Hill Capital LLC in New York. “Until then, the dollar is likely to have bottomed in the short term.”

Apart from that Mrs. Lincoln . . .

Opening up for Capital Matters on Saturday last week (yes, it was posted early), Eric Grover argued that it was time to rein in the Fed:

Keeping interest rates artificially low, as the Fed has done for nearly two decades, causes systemic malinvestment, incentivizes excessive risk-taking, and sustains zombie firms, making society poorer, and is sowing the seeds for the next crisis. It punishes savers and creditors.

There are, however, powerful constituencies for easy money. America’s biggest borrower, the federal government, loves it. Real-estate developers and brokers and much of Wall Street also vigorously support cheap debt.

With everyone focused on the COVID-19 pandemic and recession, inflation is low on people’s list of concerns, but it’s brewing. From December 2019 to August 24, 2020, the monetary base (M1) increased 35 percent. The Fed’s real benchmark interest rate is negative. The pandemic has crimped production. As America limps out of the crisis and the velocity of money — the rate at which money turns over — recovers, it’s a recipe for inflation.

Since the Fed’s creation in 1913, its policies have massively debased the dollar and caused or contributed to multiple economic crises, including the Great Depression and the Great Recession, devastating job and wealth creation. While the central bank can affect price levels, easy money can’t increase sustainable long-term employment and wealth. Congress should, therefore, eliminate any doubt about what the Fed can and should do by doing away with its “dual” mandate, narrowly focusing it on maintaining stable prices, something that it is equipped to deliver.

On Monday, Richard Morrison made the modest proposal that some of those campaigning for “social justice” be subjected to the sort of scrutiny now been given to companies by “socially responsible” investors:

Friedman’s argument that corporations should dedicate themselves to their business rather than social activism was, and remains, controversial to people who are uninterested in business but fancy themselves social-justice activists. It only makes sense to such activists that every company should prioritize the things that they themselves care about, and that the firms that selfishly refuse to do so should be shamed and regulated into compliance. But few of them would consider applying the same standards to their own favored organizations.

We’re told that corporations must subscribe to a more enlightened standard of conduct because they’re large, influential institutions that have significant impacts on the communities around them — they owe their extended web of stakeholders an implied duty simply by existing, even if no law, regulation, or contract stipulates it explicitly. But corporations are not the only influential institutions in American society. What about the grant-making foundations, advocacy groups, and activist networks that are working every day to change America and the laws and political norms that govern it? Don’t they have at least as much of an obligation to be “socially” responsible?

Despite decades of debate and mountains of evidence that left-leaning activist demands often lead to worse and less equitable social outcomes, few of these organizations seem to have learned their lesson. Can we really afford to let them keep damaging the poor and vulnerable while raking in hundreds of millions of dollars in donations every year? Surely they should have to at least sign on to a statement of principles, in which they promise not to do any more harm. Better yet, they should be actively undoing some of the decades of harm they’ve already caused.

Clearly, all of us should call for a show of ethical, sorrowful, and genuine (ESG) contrition. I just won’t hold my breath waiting for it.

Jimmy Quinn was unimpressed by the presidential intervention in the TikTok saga:

Trump has unnecessarily complicated his handling of TikTok. His administration identified a series of concerns that could only be resolved by a sale to U.S. investors, and ByteDance now says that a total sale of the app, due to Chinese government export regulations, is off the table. By the president’s own standard, the right course of action is simple: Ban TikTok.

It’s entirely possible that Trump eventually rejects the Oracle deal, but the sweeteners written into it — such as the 25,000 U.S.-based jobs that TikTok says it would create — have persuaded him to seriously weigh, and approve “in concept,” a significantly flawed proposal.

The president was correct to identify TikTok as a problem, and his flirtation with the Oracle deal is a huge mistake. But there’s still time to correct it.

On Friday, Jimmy wrote an update on this increasingly bewildering situation:

The talks over TikTok’s future have entered a bizarre limbo, where President Trump has given his blessing to the outlines of a deal but could still decide to ban the Chinese-owned video-sharing app from the United States.

Trump has a deal on his desk that could — if TikTok sticks to its promises — create over 20,000 jobs in the United States. It would require, though, the president’s acquiescence to Beijing, which has prohibited ByteDance, TikTok’s parent company, from selling its algorithm. The Oracle bid “blessed” by the president is a bad deal from the standpoint of U.S. national security: ByteDance would retain majority control over TikTok, and although Oracle could inspect the app’s algorithm, that code would not come under U.S. ownership. It meets none of the criteria that Trump set out during the negotiations, and China hawks in the administration are lobbying him to turn it down.

Should he decide against the deal, the president has a solid way forward in Commerce Department guidelines issued last week that outline a how a ban would work . . .

Steve Hanke made the case for Argentina to abandon its peso:

In addition to facing an acute COVID-19 crisis, Argentina’s deadbeat economy is collapsing, and, as usual, the inflation noose is around Argentines’ necks. Argentina’s official inflation rate for August 2020 is 40.70 percent per year. And, for once, Argentina’s official rate is fairly close to the rate that I calculate each day using high-frequency data and purchasing-power-parity theory, a methodology that has long proved its worth when compared with official statistics. Today, I measure Argentina’s annual inflation rate at 37 percent, but probably not for long — the noose is generally followed by the trapdoor.

With money growing at over 50 percent per year, it’s no surprise that Argentines treat their pesos like hot potatoes — they attempt to exchange them for U.S. dollars as fast as they possibly can. In typical Argentine fashion, the BCRA on September 15 decided to further restrict Argentines’ access to U.S. dollars in the foreign-exchange market by keeping the dollar-purchase limit for savings at $200 per month, while increasing taxes that citizens pay on purchases of dollars to pay off credit-card debt or for saving to a whopping 35 percent.

Instead of limiting the liberty of Argentines to use their preferred currency, namely, the greenback, Argentina should mothball the BCRA and the pathetic peso and put them in a museum. It’s time for Argentina to officially dollarize . . .

And on that topic, in the Capital Note we ran this story from Mercopress later on in the week:

For the second day running the Argentine Peso was virtually worthless in neighboring Uruguay foreign exchange houses. On Tuesday the Argentine Peso was worth zero, and on Wednesday there was a modest ten Uruguayan cents offered for the battered Argentine currency.

Uruguay which has a free market for currencies, quotations in money exchange houses include obviously the US dollar, the Euro, and from the two largest South American economies, Argentina and Brazil, Peso and Real. In normal times, the two neighboring countries are Uruguay’s main trade partners behind China, and there is a fluid retail traffic, depending on basket produce prices, along both borders, a cyclical tolerated smuggling both ways, although now suspended because of the pandemic.

On Wednesday Uruguay’s leading bank, which belongs to the State, Banco Republica, was offering ten cents for each Argentine Peso, and selling for 55 cents.

Back in 2001, the volatile Argentine Peso was equivalent to 14 Uruguayan Pesos, but in 2002, it was down to 3 Pesos and in 2003 it climbed to 10 UY pesos. However since then it has been sliding, and with not many prospects of recovery since the gap between the official exchange of the Argentine Peso in Buenos Aires is in the range of 80 pesos, and the 160 in the black market. Most analysts agree that until this gap is brought to a reasonable level, and people can buy dollars, now mostly barred, the situation will persist.

Rick Santorum cast a skeptical eye over efforts to apply the antitrust cudgel to big tech:

The biggest tech companies are in the crosshairs of big government, running a gauntlet of antitrust hearings in which lawmakers criticize their size and success — and the content they allow users to share online. Like all conservatives, I see the bias of Big Tech and want to do something to make it better. But the progressive solutions to the problem being embraced by some conservatives will, like all progressive solutions, give more power to the government and regulate conservatives’ communication with a broad spectrum of American voters.

Antitrust investigations of tech companies are being driven by actors on both sides of our political divide. Conservatives want to punish the companies for their executives’ liberal politics and for the way social-media sites moderate conservative content more strictly than progressive posts. You would think Democrats would be rallying around Big Tech for that reason, but they aren’t. Progressives want to stifle conservative speech on social-media platforms just as they’ve attempted to do on college campuses. They blame Big Tech for allowing President Trump to bypass mainstream-media gatekeepers and speak directly to voters, and thus for helping him get elected. Progressives are determined to crack down on social-media platforms and, out of anger, some conservatives are helping them.

The weapon being proposed to do that is a change to our antitrust laws. For decades, our antitrust system has been based on the consumer-welfare standard, which objectively measures whether consumers are benefiting from a company’s products and services, even if that company has a large market share. It’s obvious that Amazon, Apple, Facebook, and Google are phenomenal at pleasing consumers; they give us a wider selection of goods, free shipping, innovative devices, and free access to amazingly powerful search, video, and social-media technologies.

Since they can’t deny that consumers benefit from the biggest tech companies, congressional Democrats have sought to replace the consumer-welfare standard with a new set of subjective, progressive criteria, under which tech giants would be judged on whether they’re hurting workers, acting “fairly,” or presenting “a danger to democracy.” Senator Orrin Hatch famously tagged this the “hipster antitrust” movement back in 2018, but really, it would be more accurate to call it the “gangster-antitrust movement.” And yet, over the last two years, more and more folks on the right have embraced it . . .

Casey Mulligan took aim at some of the assumptions underpinning the debate on unemployment insurance:

July was the final month of the historically disproportionate unemployment bonus of $600 per week. The termination or reduction of benefits will undoubtably make a difference in the lives of the people who were receiving them, but old-style Keynesians insist that the rest of us will be harmed too. They’re wrong . . .

Two critical elements are missing from the old-style Keynesian approach. The first piece is that employment, which depends on benefits and opportunity costs to employer and employee, is a bigger driver of spending than government benefits are. For every person kept out of work by benefits, that is less aggregate spending that is not made up elsewhere in the economy.

The second missing piece is that taxpayers and lenders to our government finance these benefits and therefore have less to spend and save on other things. Even a foreign lender who decides to lend that extra $1 million to our government may well be lending less to U.S. households and companies. At best, redistribution from workers to the unemployed reallocates demand rather than increasing its total.

Sean Higgins looked at Ruth Bader Ginsburg’s dissent in Ledbetter v. Goodyear Tire & Rubber, a dissent that may have helped bolster her reputation, but, fortunately, is not part of her legacy:

The late Supreme Court justice Ruth Bader Ginsburg firmly believed that the Constitution is an evolving document that should change to meet the times. Ginsburg’s famous dissent in the 2007 case Ledbetter v. Goodyear Tire & Rubber is a good example of her approach to the law — and of why it is flawed. Ideally, the court’s role within our system of government is to determine whether laws are constitutional, not to correct or overwrite them. Ginsburg thought otherwise and said so in her dissent.

The twist in the story is that Congress subsequently changed the law to address the general point raised in the lawsuit. Legislators fulfilled their role, just as the Court had fulfilled its. This is how the system is meant to work. Ginsburg’s fans, such as the makers of the biographical documentary RBG, argued that it was her fiery dissent that prodded Congress to action. That’s an exaggeration. It was the facts of Lilly Ledbetter’s case that made it a cause célèbre among labor unions and civil-rights activists: She lost her equal-pay suit because she missed an arbitrary 180-day deadline. The ads and op-eds wrote themselves . . .

Brad Polumbo found that Joe Biden’s tax plans would affect rather more people than advertised:

So while it may be true that Joe Biden’s tax plan wouldn’t nominally target the less wealthy for tax for tax hikes, his increases would still impose costs on many Americans dearly. This isn’t speculation: The Tax Foundation analyzedBiden’s tax proposals and concluded that they would reduce the size of the economy by 1.51 percent over the long term. That might sound like a small fractional change, but it translates to trillions of dollars in wealth that never gets created. More specifically, the Tax Foundation finds that Biden’s tax plan would over time lead “to 585,000 fewer full-time equivalent jobs.”

Suggesting that these proposed tax increases would affect only “the rich” looks a lot like malarkey to me.

With COVID-19 on the rise again in certain countries, so is talk of lockdowns. I argued that this is a mistake:

The U.K. may not be alone in its woes. As noted above, CNBC was reporting on Monday about expectations of renewed restrictions in continental Europe. How severe such controls may turn out to be is unclear, but it is not encouraging toread that the Spanish government has requested the army’s help in enforcing a coronavirus lockdown imposed in some parts of Madrid. Johnson too has talked about using the army, albeit in a backup role.

In his Financial Times article, Münchau warned that “the lockdown reflex [is] currently the biggest threat to western capitalist democracies.” He is not wrong about that, and not just because of the possibility of troops on the streets. To believe that the widespread civil disorder on both sides of the Atlantic this summer was not made worse by the lockdowns would take remarkable naïveté.

Not to pile on, but Spain too (like many other continental European countries) had gone through an onerous lockdown in the pandemic’s earlier stages. When Ildefonso Hernández, a professor of public health, argued that Spain “had a very strict lockdown, then relaxed this too quickly in a country with a high propensity to socialize and for family networks to stay very close,” there were echoes of the claim that it cannot be said that communism doesn’t work, because it has never really been tried. It is long past time to face the fact that hard national lockdowns are not the answer . . .

Finally, we produced the Capital Note (our “daily” — well, Monday-Thursday, anyway). Topics covered included sliding stocks, the Nikola saga, the blight of the (Business) Roundtable, the economics of space, 13F reform, the UK’s semi-lockdown, the pandemic power grab, the Treasury market, “socially responsible” eating, election-related currency speculation, market jitters over the election process, Peter Thiel’s SPAC and the Volfefe Index.

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