We are hiring a writer on economics, ideally based at first in London. Journalistic experience is not necessary. The ability to write clearly and entertainingly is crucial. So is a thorough understanding of economics and an ability to work with data.

The ideal candidate would have an interest in the economics of innovation and technology, but this is not essential. Regardless of their precise beat, the writer will be expected to produce original and striking journalism that is capable of holding the cover of The Economist, and to contribute to the newspaper’s “Free exchange” column. They will also be expected to appear on podcasts and films.

Applicants should send a CV and a sample article, suitable for publication in The Economist, to: [email protected]. It should be unpublished and no longer than 700 words. Some examples of relevant coverage are listed below. The deadline is May 14th.

Example coverage

Your job is probably safe from artificial intelligence
What would humans do in a world of super-AI?
How to escape scientific stagnation
Is big business really getting too big?
China and the West are in a race to foster innovation

For a brief moment, everyone who owned bitcoin had made money from it. On March 5th the crypto token rose to an all-time high of just above $69,000—a level sure to delight the meme-loving crypto-crowd—before slipping back a little. The record capped a remarkable comeback from the dark days of November 2022, when interest-rate rises were crushing risk appetite and ftx, a crypto exchange, had just gone bust. At the time, buying bitcoin on such exchanges seemed like little more than a fun and novel way to get robbed.

Bitcoin is hardly rallying in isolation: everything is going up. Stockmarkets all over the world are near record highs. So are gold prices. Even bond prices are climbing after a miserable two-year stretch. The catalyst is a combination of artificial-intelligence hype, joy at the state of the global economy and expectations of looser monetary policy to come.

Still, bitcoin is doing better than most assets. On January 10th the Securities and Exchange Commission, an American regulator, approved applications by ten investment firms, including BlackRock and Fidelity, to create bitcoin exchange-traded funds (ETFs). These make it easier for everyday investors to buy the cryptocurrency. Rather than setting up an account with a specialist exchange, creating a crypto wallet, making a bank transfer and then finally buying bitcoin, people can now simply log on to their brokerage accounts and purchase an etf. Assets in the ten largest bitcoin etfs now come to around $50bn. And the activity appears to be self-reinforcing: the more money is poured in, the higher the price goes, the more people chatter about bitcoin etfs, the more money pours in and so on and so on.

Bitcoin has been in existence for 14 years. The elegant mechanism by which it validates itself and supply grows has never been hacked, meaning that the token is not going anywhere. Yet it is now obvious that it is of pretty limited use for payments, as it is restricted by both the high costs and slow speed of transactions. Those trying to build applications on top of blockchains are not doing so using bitcoin either. With the creation of etfs, it is now clear that bitcoin is an investment asset and nothing more. So after this initial surge of interest, what will its returns look like?

It would be foolish to extrapolate from bitcoin’s entire history. Over the past 14 years the cryptocurrency has morphed from a niche cyberpunk idea into something approaching a mainstream financial asset. Its more recent price movements might provide some clues, however. There are two explanations for them. One is that purchases are basically a broad bet on technological progress, with variations that reflect prospects for crypto itself. For instance, even as tech stocks soared in the middle of 2021, bitcoin slumped after Elon Musk posted negative tweets about crypto payments. Prices were depressed in late 2022, too, even as stockmarkets were rallying, owing to ftx’s failure.

The other theory is that bitcoin is a kind of digital gold. After all, supply is inherently limited, just as gold supply is restricted by the amount of the metal in the ground. Neither asset pays a yield or earns profits. This theory fell out of favour in 2021 and 2022, as inflation soared and bitcoin collapsed, but last year the cryptocurrency once again moved in line with gold.

Perhaps both theories contain elements of truth. And a hybrid tech-stock-crypto-vibes-gold-bet asset could be useful in even pedestrian portfolios, especially if it is only somewhat correlated with other assets an investor might hold. Diversification among uncorrelated assets is the foundational principle of portfolio management. Reallocating, say, 1% of a fund to bitcoin would be a low-stakes hedge.

If investors buy this argument, bitcoin’s price is likely to rise for a while yet. What happens, then, when the cryptocurrency’s transition into a standard financial asset is complete? Assume that bitcoin has been added to most investor portfolios. Also assume that crypto tech does not really catch on. In this world, bitcoin’s returns probably do come to resemble those of gold: there is a fixed amount of it, and its price would rise over the long term roughly in line with the stock of money. That implies steady single-digit returns. The creation of a bitcoin etf may have set off a frenzy of eye-popping gains—but the future it portends could be slower and steadier. ■

In the next few weeks, Binyamin Netanyahu, Israel’s prime minister, hopes to gain final parliamentary approval for an emergency war budget. It includes more cash for settlers in the West Bank, as well as for religious schools, where teenagers study the Torah rather than science—part of an attempt to unite his fissiparous political coalition. But it also contains a startling break with the past. Everyday welfare spending (long generous in Israel, owing to its socialist foundations) will be slashed to fund the country’s armed forces. The military budget will almost double from 2023 to 2024. Israel’s unwritten social contract, which has for 70-odd years promised both a generous welfare state and a fearsome military, is under threat.

Despite continuing discussions about a ceasefire, Mr Netanyahu has been clear that any pause will be temporary. And even if a ceasefire ends up being extended or he leaves office, there is broad political support for a mightier military. At the same time, the war is proving more expensive than expected. Between October and December Israel’s economy shrank by a fifth at an annualised rate, compared with the previous three months—more than twice the contraction predicted by the Bank of Israel. In the same period, over 750,000 people, or a sixth of the labour force, were away from work, many of them evacuees or reservists. Last month Moody’s, a rating agency, downgraded the country’s credit rating for the first time ever. All this raises a question. Can Israel afford to wage war?

The core problem is fiscal. On the eve of Hamas’s attack on October 7th, Israel’s debt-to-GDP ratio was 60%, well below the average in the OECD group of mostly rich countries. From October to December, the armed forces burned through 30bn shekels ($8bn) on top of their usual spending, an amount equivalent to 2% of gdp. And it is not just a bigger budget for the armed forces; the government is also splashing out on accommodation for evacuees, several furlough schemes and support for reservists. Israeli policymakers think that a debt ratio of 66% would be manageable. Mr Netanyahu’s budget would target an annual fiscal deficit of 6.6% of GDP—enough to produce a debt ratio of around 75%.

For America or Japan such borrowing would be a breeze. In Israel, however, there is always a chance that more conflict is around the corner. Should the country’s tech industry be wounded, perhaps in a war involving other regional powers, up to a quarter of the country’s income-tax take would be at risk. The last time that Israel went into battle on the present scale, during the Yom Kippur war in 1973, its debt ratio passed 100%, which sparked a financial crisis. As the central bank printed cash, inflation rocketed to 450% by 1985 and the banking sector toppled. To keep bondholders happy, therefore, the government needs room for manoeuvre.

Many now worry that Mr Netanyahu’s budget is too lavish. Although, in times of crisis, governments may borrow to keep things ticking over, they are wise to do so modestly. Given Israel’s desire to lift military spending, outgoings will not fall back to pre-war levels anytime soon. As a result, the government needs a plan to stabilise debt while spending remains high.

Israel’s tax take in 2022 was worth 33% of GDP, just below the OECD average of 34%. Yet Mr Netanyahu’s budget includes only modest increases. Value-added tax will rise by one percentage point to 18%; a health tax on incomes will go up by 0.15 percentage points. Policymakers worry that raising corporate taxes would cause the tech sector, which is highly mobile and already struggling to find workers, to flee the country. Harsher taxes on households would risk depressing consumption and make life harder still for those who are already struggling because of the war.

A tale of one city

In the suburbs of Jerusalem, secular professional families, which have had members called up and seen income from businesses plummet, are suffering. Many in Arab neighbourhoods—those worst-affected by Mr Netanyahu’s budget—report no longer being welcome at work. A few miles away, though, ultra-Orthodox households, which are exempt from military service and rely on hand-outs that Mr Netanyahu wants to make more generous, have barely had to tighten their belts.

The impact on industries is similarly uneven. The tech sector is bearing up reasonably well. Some firms even think they can spin a profit, benefiting from a new round of military contracts. Many have moved operations abroad, which lessens the impact of losing employees to the fight. “Our productivity actually improved,” says Chen Bitan at Cyberark, one of the country’s biggest cyber-security companies. “We told our employees the war would be won by the economy,” he explains. Although local tech investment has fallen, it has done so by about the same amount as in Europe—suggesting the war is not to blame.

But the rest of the economy is in trouble. Construction is at a standstill. Farms have lost more than half their workforce. And companies involved in tourism are suffering. In January 77% fewer tourists visited Jerusalem than a year ago.

The recovery could be glacial, not least because war has exacerbated longstanding problems. One is the economy’s reliance on low-paid Palestinian workers. The West Bank may import as many goods from Israel as before the war, but its 210,000 day labourers—equivalent to 5% of Israel’s workforce—cannot get out. Their permits were cancelled after October 7th, and Israel’s government is refusing to let them back in. Farms, factories and building sites lack workers. Yet many industrialists are in two minds. “We need the Palestinians, but we cannot be dependent on them,” says one.

Israel’s labour market is already uber-tight. Bringing in foreign workers is slow and expensive, and the country’s workforce is less than half the size of its total population. Half of the men in Israel’s Orthodox population, which is the country’s fastest-growing group, refuse to work on religious grounds. Those who do are often woefully undereducated, having attended religious schools. Much the same is true of Arab Israelis, the community with the second-highest fertility rate. And in January new rules extended military service from 32 to 36 months for men, further depleting the labour force.

Should debt continue to spiral, as the economy struggles, things will get difficult. But a repeat of what happened after the Yom Kippur war is unlikely. Israel’s ministries are stuffed with technocrats. The public is aware their security depends on a stable economy, and are liable to depose irresponsible politicians. Markets think that a default is improbable. Although borrowing is now more expensive for the government, it is far short of the eye-watering prices paid by irresponsible leaders elsewhere. Credit-default-swap rates, an indicator of markets’ trust in a government, rose from 0.5% to 1.4% after October 7th, before stabilising.

Markets appear to have almost as much faith that Israel will not unleash inflation in order to reduce debt payments. The country’s annual inflation, at 3%, is lower than in America, and investors expect it to have fallen to 0.4% by the end of the year. Since the Yom Kippur war, Israel has acquired an inflation-targeting central bank, which is of a hawkish bent. After October 7th it spent $30bn in foreign reserves propping up the shekel (and has another $170bn if the currency needs more cushioning). The shekel has barely moved since.

Yet even if a financial crisis is unlikely, that does not mean pain will be avoided. It will just come in a different form: through further spending cuts that are required to guarantee stability. The money that holds Mr Netanyahu’s coalition together will be protected for as long as he remains prime minister. Instead, as indicated by the war budget, Israel’s welfare state will take the hit. Despite having one of the lowest rates of unemployment in the OECD, the country is the fifth-biggest spender on unemployment benefits. Only the governments of Norway and Iceland spend more of their GDP on education. This makes a tempting target for a prime minister who needs to find savings, and has allies to protect.

The welfare ministry, which is also responsible for caring for evacuees and returned hostages, will have to take an 8% cut under Mr Netanyahu’s budget—far above that faced by most other civilian ministries. The ministry has already come under fire for its lacklustre support of 135,000 Israelis evacuated from the country’s north and south. It has done little other than pay their hotel bills; now officials are reportedly pressing families to return. If Israel remains under Mr Netanhayu’s mismanagement, other ministries will experience similar treatment. Even if he steps down, however, Israel will have to make hard choices between the two pillars of its social contract: its armed forces and its welfare state. ■

The Economist is seeking promising journalists and would-be journalists to apply for the 2024 Marjorie Deane internship. The successful candidate will spend six months with us in London writing about finance and economics, and receive payment. No previous experience is required. Applicants are asked to send a cv and an original article of no more than 600 words suitable for publication in the Finance & economics section. This material should be sent to [email protected] by April 15th

In economic terms, an asset has value because an owner might derive future benefits from it. Some assets, like cryptocurrencies, require a collective belief in those benefits. Others, like wine, will undeniably provide future pleasure, such as the ability to savour a 1974 Château Margaux. Still others, like American treasuries, represent a claim on the government of the strongest economy in the world, backed by a formidable legal system.

To derive such benefits, however, an owner must be able to access their assets. And that is where the Central Bank of Russia struggles. Much like every other central bank, the CBR stores reserve assets abroad. After Vladimir Putin’s invasion of Ukraine in 2022, the G7 froze these assets and prohibited financial firms from moving them. Of the €260bn ($282bn) of Russia’s assets immobilised in Japan and the West, some €191bn are held at Euroclear, a clearing-house in Belgium. When coupon payments on Russia’s assets come due or bonds are redeemed, Euroclear puts the cash into a bank account. This account is now home to roughly €132bn. Last year it earned a return of €4.4bn, which conveniently belongs to Euroclear, as per the clearing-house’s terms and conditions.

Western policymakers are now considering whether these assets can be used to help Ukraine. Russia might one day have to compensate the country for war damages, which the World Bank already puts at more than $480bn. Ukraine now needs money and weapons to push back Russian advances, as well as to maintain its state and economy. At the same time, Western governments are increasingly struggling to find room in their budgets to support the war effort, as well as to get approval from legislatures for such spending. On February 26th Dmytro Kuleba, Ukraine’s foreign minister, once again argued that Russia’s assets should be confiscated. A day later Janet Yellen, America’s treasury secretary, called on her colleagues “to unlock the value” of those funds. Ursula von der Leyen, president of the European Commission, wants to use Euroclear’s windfall to buy military kit for Ukraine.

How exactly could this be done? Taking assets from someone usually requires a court order, but in international law things are a little more complicated. The International Court of Justice would only be able to rule on the matter should Ukraine and Russia agree to let it decide upon reparations, which is unlikely at present. The UN Security Council has the ability to pass binding resolutions, over which Russia unfortunately holds a veto.

Some, including Lawrence Summers, a former American treasury secretary, want to make use of states’ right to take so-called countermeasures. These are otherwise unlawful actions that are sometimes allowed in response to unlawful acts. That Ukraine is entitled to deploy countermeasures is undisputed. How broadly the same rules apply to those acting in support of Ukraine is more controversial. Sanctions and asset freezes fall under the category, and have been widely used against Russia. Asset confiscations do not, at least in most interpretations of international law. That is because they are irreversible and would seek to punish Russia, not induce a change in its behaviour.

As Lee Buchheit, a veteran of international law, notes, the problem reflects a geographical mismatch. Ukraine has strong claims on Russia, but no frozen Russian assets it could use to settle them. The West has no claims but plenty of assets. Thus the challenge is to find a way to match these assets and claims.

In a recent paper, Mr Buchheit and co-authors suggest just such a way. They argue that the West could provide a loan to Ukraine, in return for which Ukraine could offer its claims on Russia as collateral. The West would agree to use only this collateral for redemption of the loan. When Russia inevitably refuses to pay up, the West would then be able to foreclose on the collateral.

Would this work? One difficulty is that an international body would still have to determine precisely how much Ukraine is owed. Perhaps the UN General Assembly could enlist the World Bank to crunch the numbers. But this would require careful diplomacy on behalf of the West, as well as the support of France and Germany, which have so far been unimpressed by suggestions involving creative interpretations of international law. Mr Buchheit argues the shift in approach is not quite as big as it might appear at first. The West has already gone quite far by freezing assets and making clear that it will not give them back unless reparations are paid. As he notes: “Russia won’t pay reparations. War reparations are paid by the vanquished to the victor, and this situation does not end with the Ukrainian flag flying over the Kremlin.” In effect, he argues, the West has already taken the assets.

A second difficulty is posed by Belgium, which has access to most frozen Russian assets and would therefore need to receive most of the claims against Russia from Ukraine. It might be reluctant to play such a pivotal role, given the potential for retribution. It would also be unfair to expect a country of its size to be the main provider of the initial loan to Ukraine. In order to overcome this difficulty, Mr Buchheit suggests that the initial loan to Ukraine is set up in a syndicated manner with a sharing clause, which would enable lending countries to group together both when providing the money and receiving collateral. Such an approach was adopted to fund emerging-market governments in the 1970 and 1980s before bond-financing markets took over. Just as is the case now, a mechanism was needed to share risk and access to collateral.

Gold rush

But perhaps, after all the debate, there is no need to seize Russian assets. Indeed, the EU is already planning to implement a windfall tax on any profits they accrue. If returns continue to be siphoned off indefinitely, the difference between confiscating the asset and a windfall tax becomes smaller and smaller. In economic terms, the West is already the owner of Russia’s assets. All that is left now is to fund Ukraine’s fight. ■

Less than two months of 2024 have passed, but the year has already been a pleasing one for stockmarket investors. The S&P 500 index of big American companies is up by 6%, and has passed 5,000 for the first time ever, driven by a surge in enthusiasm for tech giants, such as Meta and Nvidia. Japan’s Nikkei 225 is tantalisingly close to passing its own record, set in 1989. The roaring start to the year has revived an old debate: should investors go all in on equities?

A few bits of research are being discussed in financial circles. One was published in October by Aizhan Anarkulova, Scott Cederburg and Michael O’Doherty, a trio of academics. They make the case for a portfolio of 100% equities, an approach that flies in the face of longstanding mainstream advice, which suggests a mixture of stocks and bonds is best for most investors. A portfolio solely made up of stocks (albeit half American and half global) is likely to beat a diversified approach, the authors argue—a finding based on data going back to 1890.

Why stop there? Although the idea might sound absurd, the notion of ordinary investors levering up to buy assets is considered normal in the housing market. Some advocate a similar approach in the stockmarket. Ian Ayres and Barry Nalebuff, both at Yale University, have previously noted that young people stand to gain the most from the long-run compounding effect of capital growth, but have the least to invest. Thus, the duo has argued, youngsters should borrow in order to buy stocks, before deleveraging and diversifying later on in life.

Leading the other side of the argument is Cliff Asness, founder of AQR Capital Management, a quantitative hedge fund. He agrees that a portfolio of stocks has a higher expected return than one of stocks and bonds. But he argues that it might not have a higher return based on risk taken. For investors able to use leverage, Mr Asness argues it is better to choose a portfolio with the best balance of risk and reward, and then to borrow to invest in more of it. He has previously argued that this strategy can achieve a higher return than a portfolio entirely made up entirely of equities, with the same volatility. Even for those who cannot easily borrow, a 100% equity allocation might not offer the best return based on how much risk investors want to take.

The problem when deciding between a 60%, 100% or even 200% equity allocation is that the history of financial markets is too short. Arguments on both sides rely—either explicitly or otherwise—on a judgment about how stocks and other assets perform over the very long run. And most of the research which finds that stocks outperform other options refers to their track record since the late 19th century (as is the case in the work by Ms Anarkulova and Messrs Cederburg and O’Doherty) or even the early 20th century.

Although that may sound like a long time, it is an unsatisfyingly thin amount of data for a young investor thinking about how to invest for the rest of their working life, a period of perhaps half a century. To address this problem, most investigations use rolling periods that overlap with one another in order to create hundreds or thousands of data points. But because they overlap, the data are not statistically independent, reducing their value if employed for forecasts.

Moreover, when researchers take an even longer-term view, the picture can look different. Analysis published in November by Edward McQuarrie of Santa Clara University looks at data on stocks and bonds dating back to the late 18th century. It finds that stocks did not consistently outperform bonds between 1792 and 1941. Indeed, there were decades where bonds outperformed stocks.

The notion of using data from such a distant era to inform investment decisions today might seem slightly ridiculous. After all, finance has changed immeasurably since 1941, not to mention since 1792. Yet by 2074 finance will almost certainly look wildly different to the recent era of rampant stockmarket outperformance. As well as measurable risk, investors must contend with unknowable uncertainty.

Advocates for diversification find life difficult when stocks are in the middle of a rally, since a cautious approach can appear timid. However financial history—both the lack of recent evidence on relative returns and glimpses at what went on in earlier periods—provides plenty of reason for them to stand firm. At the very least, advocates for a 100% equity allocation cannot rely on appeals to what happens in the long run: it simply is not long enough. ■

In midtown manhattan reminders of commercial property’s difficulties are everywhere. On the west side, near Carnegie Hall, stands 1740 Broadway, a 26-storey building that Blackstone, an investment firm, bought for $605m in 2014—only to default on its mortgage in 2022. Soaring above Grand Central station is the iconic Helmsley building. Its mortgage was recently sent to “special servicing” (it may be restructured or its owner may simply default). As the sun sets, the underlying problem becomes clear: working from home means fewer tenants. Floors bright with lights, where workers potter about, sit sandwiched between swathes of black.

This is not a new development. Many buildings have stood empty for four years, since covid-19 struck. At first, owners hoped to wait out the pandemic. But workers were slow to return, meaning employers ended up downsizing. Vacancy rates, especially in shabbier buildings, rocketed. Then interest rates rose. Most commercial buildings are financed via five- or ten-year loans. And many of these loans will shortly be refinanced, while rates remain uncomfortably high. Some $1trn in American commercial-property loans will roll over within the next two years, an amount that represents a fifth of the total debt owed on commercial buildings.

Recently a number of office buildings in big cities have traded at less than half their pre-pandemic prices. These sorts of losses will wipe out many owners’ equity, leaving banks to swallow hefty losses of their own. Indeed, three institutions have already been hit hard. In recent weeks New York Community Bank (NYCB), a midsized lender; Aozora Bank, a Japanese institution that hoovered up American commercial-property loans; and Deutsche Pfandbrief, a German outfit with exposure to offices, all reported bad news about their loan books and saw their shares plummet.

Meanwhile, China’s property crisis is becoming more acute. With domestic portfolios struggling, some Chinese investors, who have bought property assets all over the globe, may need to raise cash—and could start dumping overseas assets, depressing property values. If consumers start to seriously struggle with rising interest rates on auto loans or credit cards, it is possible that more institutions will end up in a similar situation to that of nycb. Little surprise, then, that people are starting to fret that the move to working from home could end up causing a financial disaster.

It is worth putting these problems into context, however. For a start, the problems at NYCB really do seem unique to the institution. Although the bank has exposure to New York offices, it in fact wrote down the value of its portfolio of loans on rent-stabilised “multi-family” apartment blocks in the city. These plunged in value after legislation in 2019 restricted the ability of owners to raise rents if an apartment was vacated, or if the landlord made capital improvements. The other lender that specialised in these sorts of loans was Signature Bank, which failed last year.

Moreover, there is a limit to how big a problem offices can pose, even if the damage to them is severe. The total value of American property (not including farmland) was $66trn at the end of 2022, according to data from Savills, an estate agency. Most of that is residential. Only a quarter is commercial. And commercial property is much more than just offices. It includes retail spaces, which are struggling, but also warehouses, which are in demand as data-centres and distribution points, and multi-family buildings. Offices are therefore worth perhaps $4trn, or about 6% of the total value of property in America.

Between 2007 and 2009 residential real estate in America lost a third of its value. A similar shock today would wipe $16trn from total property values. Even if every office building in America somehow lost its entire value, the losses would still be just a quarter of that size. On top of this, lenders are better protected against losses in commercial property than they were against those in the residential sort. Whereas loans for the latter were often close to 100% of a building’s value, even the most ambitious commercial-property loans tend to cover just 75% of a building’s value.

Bloodshed

The wound inflicted by commercial property is best likened to that caused by a slip of a kitchen knife—it is nasty, obvious and painful. Stitches might be required. But it is unlikely to grievously injure the victim.

Nor will the wound fester unnoticed. Because property problems are so visible, regulators are all over them. About half of commercial-property debt is loans from banks (and mainly from smaller ones, since rules discourage large institutions from such lending). The rest is securities or loans from insurers. The Office of the Comptroller of the Currency, a regulator, reportedly advised NYCB to write down the value of some of its loans more aggressively, making them obvious when it reported earnings on January 31st. Across the pond, the European Central Bank has asked banks to set aside extra reserves to cover loan losses in commercial property.

America’s economy, which is still growing smartly, offers extra protection. Look up at New York’s empty skyscrapers and it is easy to feel alarmed. But cast your gaze back down to street level and you can calm yourself. The streets are bustling. Shops are packed. Restaurants are full. America is healthy and on the move, even if it could do with a bandage for that nasty cut. ■

Central banks have embarked on austere monetary policy to crush inflation. Worries about the financial system, from bond markets to commercial property to the health of the banks, are ever-present. Some 4bn people will head to the polls this year, with unpredictable consequences. Most concerning of all, the world is on fire, with conflicts from Ukraine to Israel to the Red Sea. Other wars, not least in Taiwan, do not feel far away. Little wonder that analysts speak of “polycrisis”, “hellscapes” and a “new world disorder”.

And yet, for the moment at least, the world economy is laughing in the face of these fears. At the start of 2023 almost all economists reckoned that a global recession was due that year. Instead, global GDP grew by about 3%. The early signs suggest progress is continuing at the same rate this year. Data from Goldman Sachs, a bank, indicate that global economic activity is about as lively as it was in 2019. A measure of weekly GDP produced by the OECD, a club of mostly rich countries, finds similar results. A measure of global activity produced from surveys of purchasing managers (so-called PMI data) points to strongish growth across the world.

Labour markets are even stronger. The unemployment rate across the OECD remains comfortably below 5%. The share of working-age folk actually in a job, a better measure of labour-market strength, is at an all-time high. Healthy job markets are boosting family finances, which have been hit by inflation. Real household disposable incomes across the G7 shrank by 4% in 2022, but are now growing once again.

True, some countries are doing less well. Chinese growth figures continue to disappoint. Some of those coming out of Europe are concerning. Germany, facing fallout from high energy prices and competition in its famed car industry from Chinese electric-vehicle exports, may be in recession. But there are also stronger showings. In January total nonfarm payroll employment in America rose by 353,000—a blow-out figure, surpassing almost all expectations. Although Britain was the butt of economists’ jokes as it teetered on the edge of recession last year, the latest PMI data point to pretty strong growth.

So far there does not seem to be much evidence that problems in the Red Sea are derailing the economy. PMI data suggest that manufacturers are facing longer delivery times. This is consistent with ships rerouting around the Cape of Good Hope, which increases the length of a journey between Shanghai and Rotterdam to 14,000 miles, from 11,000. Yet in almost all economies shipping costs are a tiny fraction of the overall price of a good. Even the most pessimistic wonks are pencilling in a jump in inflation, because of the Red Sea disruption, that amounts to little more than a rounding error.

Why is the global economy so oblivious to the new world disorder? High interest rates have managed to bring down inflation from a peak of more than 10% across the rich world to about 6%. This not only raises households’ purchasing power; it also raises their spirits. Indeed, having hit an all-time low in 2022, rich-world consumer confidence has risen sharply. Higher borrowing costs have been muted by the fact that a lot of household and corporate debt is on fixed interest rates.

There is also a more intriguing possibility: after so many shocking global developments, the world no longer minds chaos as much as it once did. This is consistent with academic evidence, including a recent paper by two researchers at the Federal Reserve, which suggests that the hit to output from a spike in economic uncertainty fades after a few months.

All good economists remain vigilant. Higher interest rates may have a delayed impact on growth. Escalation in the Russia-Ukraine war or the Red Sea could provoke another round of shocks to energy supply, feeding into inflation. All bets are off if Xi Jinping decides to move on Taiwan. Yet on the flipside, falling inflation and a potential boost to productivity from generative AI could prompt GDP to accelerate. And the global economy has already demonstrated its resilience. Polycrisis, what polycrisis? ■

A bank publishes lousy earnings or an “update” on its business. Its share price plunges. Its name is splashed on newspaper front pages. The bank’s bosses hold a conference call urging calm. Its share price slides some more. Anyone who has paid attention to America’s banking industry over the past year will recognise these events. They ended in failure for Silicon Valley Bank (svb) in March and First Republic Bank (frb) in April.

At first glance, the same script seems to be playing out. On January 31st New York Community Bancorp (NYCb) of Hicksville, New York, reported a quarterly loss. Its stock promptly dropped by 46%. During a hastily organised conference call to investors on February 7th, Alessandro DiNello, the bank’s hastily appointed executive chairman, attempted to soothe fears. Shares sagged, dropping another 10% when markets opened on February 7th.

Yet the surface-level similarities in these stories belie two big differences. The first, and most important, is that nycb does not appear to be on the brink of failure, nor is it easy to see how it will fail in the coming weeks. Indeed, its shares later rallied on February 7th. The second is that its problems indicate a different type of trouble has begun. When interest rates rise their impact on things like bond prices is immediate. Their impact on borrowers’ ability to repay debts takes longer to play out. svb and frB were both imperilled by a combination of flighty deposits and their investments in low-interest-rate securities or loans, the value of which collapsed when rates climbed. nycb is struggling, in large part, because a big loan went bad.

Start with the nycb’s balance-sheet. The bank, which holds $116bn in assets, earned around $200m in the third quarter of 2023. But in the final quarter it had to set aside $552m to cover property loans, resulting in a $252m loss. Even before this, it was working to beef up capital levels. In 2023 it acquired assets and deposits from Signature Bank, which failed along with SVB last March. This pushed NYCb’s assets past $100bn, subjecting it to stricter regulation. Compared with its new 12-figure peers, NYCb is no fortress. The bank’s common equity tier-1 ratio, a measure of capital based on the riskiness of its assets, fell to an unimpressive 9.1%, down from 9.6% in September. In a bid to retain more equity, the bank slashed its dividend.

More than half of the bank’s value has now evaporated, leaving it with a market capitalisation of $3bn, less than a third of the book value of its equity. Analysts have slashed their profit forecasts for the bank. On February 6th Moody’s, a rating agency, downgraded NYCB to junk status, citing the bank’s exposure to commercial property and the recent exit of important audit and risk-management personnel.

Grim stuff. But NYCB’s deposits provide reassurance. More than two-thirds of the $83bn deposited at the bank is insured, a much larger share than at SVB and FRB before their collapses, which should mean depositors are less inclined to run. If they do, the bank should be able to weather it. Against an uninsured deposit base of $23bn, nycb holds $17bn in cash, $6bn in securities and collateral that could be used to borrow $14bn from the Federal Home Loan Banks (FHLB) system or the Federal Reserve’s discount window. In addition, it can exchange $10bn of so-called “reciprocal deposits” with other banks, which could in effect reduce the share of nycb‘s deposits that are uninsured.

As a result, the bank has access to almost 3 times as much cash as it needs to pay out all uninsured depositors. And, for now at least, depositors do not appear to be going anywhere. Deposit levels have risen since the end of 2023, according to an unaudited balance-sheet the bank published on February 6th. “We have seen virtually no deposit outflow from our retail branches,” Mr DiNello told investors on February 7th.

Despite this, NYCB’s troubles might provoke broader unease. One reason for this is its reliance on the FHLB system. This inconspicuous part of America’s financial plumbing is comprised of 11 government-sponsored banks, with total assets of $1.3trn. America’s lender of “second-to-last resort” raises money from capital markets, and does so cheaply owing to the assumption that the government would backstop its borrowing. It then lends to FHLB members, which are also its dividend-receiving owners. By the end of March 2023 FHLB advances, a type of loan usually secured against mortgages, had nearly tripled since the year before. SVB alone had increased its borrowing to $15bn by the end of 2022.

Because the nycb holds more loans than deposits it has long relied on FHLB advances as a source of funding, especially before its recent purchases brought in more depositors. At the end of 2023, NYCB had borrowed $20bn of FHLB advances. This borrowing amounts to 17% of NYCB’s assets, up from 12% at the end of September. The bank taps the FHLB system at nine times the rate of similar peers.

Another reason for broader unease is that this could be the first sign that a crisis in commercial property is now harming the banking system. Although total lending to office buildings is small as a share of loan books across small banks—at around 5% of total assets—the slump in office-building values has been steep.

Other losses are already appearing. Aozora, a Japanese lender that tried out American commercial-property lending, reported losses related to its loans on January 31st. On February 7th Deutsche Pfandbriefbank, a German bank, announced it had increased loss provisions for its commercial-property loans. Given the post-pandemic fall in office use, more losses are likely. These are unlikely to imperil the broader banking system—but they might keep individual banks on the front pages. ■

Universities have boomed in recent decades. Higher-education institutions across the world now employ on the order of 15m researchers, up from 4m in 1980. These workers produce five times the number of papers each year. Governments have ramped up spending on the sector. The justification for this rapid expansion has, in part, followed sound economic principles. Universities are supposed to produce intellectual and scientific breakthroughs that can be employed by businesses, the government and regular folk. Such ideas are placed in the public domain, available to all. In theory, therefore, universities should be an excellent source of productivity growth.

In practice, however, the great expansion of higher education has coincided with a productivity slowdown. Whereas in the 1950s and 1960s workers’ output per hour across the rich world rose by 4% a year, in the decade before the covid-19 pandemic 1% a year was the norm. Even with the wave of innovation in artificial intelligence (ai), productivity growth remains weak—less than 1% a year, on a rough estimate—which is bad news for economic growth. A new paper by Ashish Arora, Sharon Belenzon, Larisa C. Cioaca, Lia Sheer and Hansen Zhang, five economists, suggests that universities’ blistering growth and the rich world’s stagnant productivity could be two sides of the same coin.

To see why, turn to history. In the post-war period higher education played a modest role in innovation. Businesses had more responsibility for achieving scientific breakthroughs: in America during the 1950s they spent four times as much on research as universities. Companies like at&t, a telecoms firm, and General Electric, an energy firm, were as scholarly as they were profitable. In the 1960s the research and development (r&d) unit of DuPont, a chemicals company, published more articles in the Journal of the American Chemical Society than the Massachusetts Institute of Technology and Caltech combined. Ten or so people did research at Bell Labs, once part of at&t, which won them Nobel prizes.

Giant corporate labs emerged in part because of tough anti-monopoly laws. These often made it difficult for a firm to acquire another firm’s inventions by buying them. So businesses had little choice but to develop ideas themselves. The golden age of the corporate lab then came to an end when competition policy loosened in the 1970s and 1980s. At the same time, growth in university research convinced many bosses that they no longer needed to spend money on their own. Today only a few firms, in big tech and pharma, offer anything comparable to the DuPonts of the past.

The new paper by Mr Arora and his colleagues, as well as one from 2019 with a slightly different group of authors, makes a subtle but devastating suggestion: that when it came to delivering productivity gains, the old, big-business model of science worked better than the new, university-led one. The authors draw on an immense range of data, covering everything from counts of phds to analysis of citations. In order to identify a causal link between public science and corporate r&d, they employ a complex methodology that involves analysing changes to federal budgets. Broadly, they find that scientific breakthroughs from public institutions “elicit little or no response from established corporations” over a number of years. A boffin in a university lab might publish brilliant paper after brilliant paper, pushing the frontier of a discipline. Often, however, this has no impact on corporations’ own publications, their patents or the number of scientists that they employ, with life sciences being the exception. And this, in turn, points to a small impact on economy-wide productivity.

Why do companies struggle to use ideas produced by universities? The loss of the corporate lab is one part of the answer. Such institutions were home to a lively mixture of thinkers and doers. In the 1940s Bell Labs had the interdisciplinary team of chemists, metallurgists and physicists necessary to solve the overlapping theoretical and practical problems associated with developing the transistor. That cross-cutting expertise is now largely gone. Another part of the answer concerns universities. Free from the demands of corporate overlords, research focuses more on satisfying geeks’ curiosity or boosting citation counts than it does on finding breakthroughs that will change the world or make money. In moderation, research for research’s sake is no bad thing; some breakthrough technologies, such as penicillin, were discovered almost by accident. But if everyone is arguing over how many angels dance on the head of a pin, the economy suffers.

When higher-education institutions do produce work that is more relevant to the real world, the consequences are troubling. As universities produce more freshly minted phd graduates, companies seem to find it easier to invent new stuff, the authors find. Yet universities’ patents have an offsetting effect, provoking corporations to produce fewer patents themselves. It is possible that incumbent businesses, worried about competition from university spinoffs, cut back on r&d in that field. Although no one knows for sure how these opposing effects balance out, the authors point to a net decline in corporate patenting of about 1.5% a year. The vast fiscal resources devoted to public science, in other words, probably make businesses across the rich world less innovative.

If you’re so smart, why aren’t you rich?

Perhaps, with time, universities and the corporate sector will work together more profitably. Tighter competition policy could force businesses to behave a little more like they did in the post-war period, and beef up their internal research. And corporate researchers, rather than universities, are driving the current generative ai innovation boom: in a few cases, the corporate lab has already risen from the ashes. At some point, though, governments will need to ask themselves hard questions. In a world of weak economic growth, lavish public support for universities may come to seem an unjustifiable luxury. ■

“Enough is enough,” declared a Hong Kong judge on January 29th of Evergrande, a failing Chinese property behemoth, and its two-year struggle to avoid repaying its creditors. In a landmark ruling, the court ordered a liquidation of the company, which, with more than $300bn in liabilities, is the world’s most indebted real-estate developer. A provisional liquidator will be appointed, assuming management of the company. Now foreign creditors must attempt to recoup their losses from a firm that holds most of its assets in mainland China. The ruling could pit Hong Kong’s courts against a Chinese government determined to restore public confidence to a struggling market.

No firm has been more central to China’s property crisis, which kicked off when Evergrande first showed signs of weakening in mid-2021. Government rules meant to wean developers from debt eventually pushed the company to default later that year. Since then a majority of China’s listed property developers have either failed to pay their investors back or have been forced into restructuring. Their access to credit has been virtually cut off, causing builders to stop working on projects across the country. Prospective homebuyers have delayed purchases, leading to a 6.5% decline in the value of sales, year on year. This has unnerved a population that stores most of its wealth in property.

Until relatively recently policymakers had hoped that a successful restructuring of Evergrande could pave the way for a slow but steady revitalisation of the market. Instead, Evergrande missed important deadlines for producing a restructuring plan and, when it did offer one, underwhelmed investors. Its proposal, which was panned by bondholders, involved giving creditors a stake in some of Evergrande’s other businesses, such as its electric-vehicle line. Far from restoring confidence, the battle became increasingly ugly. At one point a group of bondholders demanded that Hui Ka Yan, Evergrande’s chairman, put up $2bn of his own money. Mr Hui was later detained by Chinese authorities. His whereabouts are unknown.

The housing crisis has drained global investors of confidence in Chinese policymaking. It is now doing similar damage to Hong Kong’s reputation. For decades, foreign investors have gained access to China through Hong Kong. One of Hong Kong’s distinct features has been a legal system, separate from China’s, that is based on common law. But court rulings in Hong Kong have no guarantee of being upheld in mainland China, where almost all of Evergrande’s assets are based.

The liquidator appointed by a Hong Kong court will be forced to deal with local authorities that may not recognise an order drawn up outside China’s legal system. Although a pilot project to recognise cross-border rulings was set up in 2021, qualification requirements are tough and the scheme is only recognised in a few cities. Hong Kong rulings can easily be shot down by mainland courts if they have the potential to disturb public order.

Indeed, as Tommy Wu of Commerzbank, a German lender, has written, a full liquidation of Evergrande’s Chinese assets would probably send a shock through the Chinese economy. Property developers have sold many properties to ordinary Chinese folk that they have not yet provided. Investors’ claims on Evergrande’s projects, or any cash holdings it still has, could get in the way of their delivery. This would work against Beijing’s best efforts to restore confidence in the market. Any such activity would be viewed by policymakers as unacceptable, almost guaranteeing that the liquidation process will be long and drawn out.

The latest Hong Kong ruling leaves room for restructuring, with the judge noting that Evergrande can still offer this to creditors. The company says that it aims to produce a new plan, possibly by March, and since a liquidator will be taking over negotiations there may now be a better chance of a deal. But it will not be one that includes many Chinese assets. And for a firm that mainly owns Chinese property, that is a problem. Evergrande’s liquidation marks a new low in China’s property crisis—it is far from the end of it. ■

IT TOOK A jury just four hours to deliberate on the seven, complicated charges of financial fraud facing Sam Bankman-Fried, the founder of FTX, a cryptocurrency exchange. They had to parse what would make him guilty of defrauding his customers and his lenders; and of conspiring with others to commit securities fraud, commodities fraud and money-laundering. After 15 days of testimony they had clearly heard enough. They convicted him of each and every count. He faces a maximum sentence of 110 years in jail.

Only a year has elapsed since ftx imploded. In its heyday the exchange was one of the world’s largest, with millions of customers and billions of dollars in customer funds. It was seen as the future of crypto—a high-tech offering from a brilliant wunderkind who wanted to play nice with regulators and usher in an era in which the industry went mainstream. But on November 2nd 2022 CoinDesk, a crypto news outlet, published a leaked balance-sheet. It showed that Alameda, ftx’s sister hedge fund also founded by Mr Bankman-Fried, held few assets apart from a handful of illiquid tokens he had invented. Spooked customers began to pull holdings from the exchange. Within days it had become an all-out run and ftx had stopped meeting withdrawal requests. Customers still had $8bn deposited on the exchange. After frantically trying to raise funds, Mr Bankman-Fried placed ftx into bankruptcy.

Various accounts of what went wrong have emerged since. Many came from Mr Bankman-Fried himself, who spoke with dozens of journalists in the weeks following FTX’s collapse. Michael Lewis, an author who was “embedded” with Mr Bankman-Fried for weeks before and after it failed, has published a book about him. Snippets have come from people tracing the movement of tokens on blockchains. The government revealed its theory of the case in several indictments. But little compares with the reams of evidence that were divulged during the trial by former FTX insiders, some of whom were testifying in co-operation with the government, having pleaded guilty to fraud already.

Some of the story remains the same regardless of the narrator. Mr Bankman-Fried was a gifted mathematician, who graduated from the Massachusetts Institute of Technology (MIT) in 2014 before taking a job as a trader at Jane Street Capital, a prestigious quantitative hedge fund. In 2017 he spied an opportunity to set up a fund that would take advantage of arbitrage opportunities in illiquid and fragmented cryptocurrency markets, which were, per his telling, “a thousand times as large” than those in traditional markets. He enlisted an old friend, Gary Wang, a coder he had met at maths camp, to help set up the fund, which he named Alameda Research. He hired Nishad Singh, another coder and friend, as well as Caroline Ellison, a trader he had met at Jane Street.

The tales begin to diverge from here. Ms Ellison, Mr Singh and Mr Wang all testified for the prosecution in the trial, speaking for hours about their version of the dizzying ascent and devastating collapse of Alameda and FTX.

The way Ms Ellison described it, Mr Bankman-Fried was frustrated by how little capital Alameda had. He was “very ambitious”. In 2019 he described FTX to Ms Ellison as “a good source of capital” for Alameda. Mr Wang testified that he wrote code that allowed Alameda to have a negative balance on FTX—to withdraw more than the value of its assets—as early as 2019. Alameda was given a line of credit, which started small but ultimately increased to $65bn. Mr Wang also said that he overheard a conversation in which a trader asked Mr Bankman-Fried if Alameda could keep withdrawing money from the firm. Fine, as long as withdrawals were less than FTX’s trading revenues, came the reply. But less than a year after FTX was founded, when Mr Wang went to check its balance, Alameda had already withdrawn more than that.

Customer deposits are supposed to be sacred, able to be withdrawn at any time. But even months in, Alameda already seemed to be borrowing that money for its own purposes. Mr Bankman-Fried said that he set up FTX because he thought he could create an excellent futures exchange, rather than to satisfy a desire for capital. He explained away Alameda’s privileges by saying he was only vaguely aware of them and had thought them necessary for FTX to function, especially in the early days when Alameda was by far the largest marketmaker on the exchange and there were sometimes bugs in the code that liquidated accounts. If Alameda was liquidated it would be catastrophic. Mr Bankman-Fried did not want this to happen, and he wanted the fund to be able to make markets.

This might have been an excuse a jury could have swallowed, even though, by last year, Alameda was just one of perhaps 15 major marketmakers on the exchange and the others did not get such benefits. But two lines of argument undermined it. The first is how the privileges were used. The second is how Mr Bankman-Fried described FTX and its relationship with Alameda.

Start with how Alameda used its privileges. Ms Ellison, whom Mr Bankman-Fried made co-chief executive of Alameda in 2021, when he stepped back to focus on his exchange, described the many times Alameda withdrew serious money from FTX. The first was when Mr Bankman-Fried wanted to buy a stake in FTX that Binance, a rival, owned. His relationship with the boss of Binance had soured and he was worried that regulators would not like its involvement. It was going to cost around $1bn to buy the stake, around the same amount of capital FTX was raising from investors. Ms Ellison said she told Mr Bankman-Fried “we don’t really have the money” and that Alameda would need to borrow from FTX to make the purchase. He told her to do it—“that’s okay, I think this is really important.”

Borrowing to cover venture investments that were illiquid made the hole deeper. By late 2021 Mr Bankman-Fried nevertheless wanted to make another $3bn of investments. He asked Ms Ellison what would happen if the value of stocks, cryptocurrencies and venture investments collapsed and, in addition, FTX and Alameda struggled to secure more funds. She calculated that it would be “almost impossible” for Alameda to pay back what they had borrowed. Still, he told her to go ahead with the investment. By the next summer, Ms Ellison had been proved right.

Mr Singh testified at length about “excessive” spending. Around $1bn went on marketing, including Super Bowl adverts and endorsements from the likes of Tom Brady, an American footballer—around the same as FTX’s revenue in 2021. By the end, Alameda had made some $5bn in “related party” loans to Mr Bankman-Fried, Mr Wang and Mr Singh to cover venture investments, property purchases and personal expenses. At one point, under cross examination, Danielle Sassoon, the prosecutor, asked Mr Bankman-Fried to confirm whether he had flown to the Super Bowl on a private jet. When he said he was unsure, she pulled up a picture of him reclining in the plush interior of a small plane. “It was a chartered plane, at least,” he shrugged.

The prosecution often used Mr Bankman-Fried’s own words against him. Ms Sassoon would get Mr Bankman-Fried to say whether he agreed with a statement, such as whether he was walled off from trading decisions at Alameda. Mr Bankman-Fried would obfuscate, but eventually she would pin him down. “I was not generally making trading decisions, but I was not walled off from information from Alameda,” he admitted. Ms Sassoon then played a clip of him claiming he “was totally walled off from trading at Alameda”. Ms Sassoon did this over and over. Like an archer she would string her bow by asking a question, then release the arrow of evidence to prove a lie. At one point his lawyer slowed the pace of evidence by interrupting and asking if a document was being offered for its truth. “Your honour, it’s the defendant’s own statements,” the prosecutor said. “No, it’s not being offered for its truth.”

Perhaps the most convincing moments of the trial were emotional ones. Ms Ellison was in tears as she told how, in the week of FTX’s collapse, “one of the feelings I had was an overwhelming feeling of relief.” Meanwhile, Mr Singh described a cinematic confrontation with Mr Bankman-Fried in September last year, when he realised how big “the hole” was. He described pacing the balcony of the penthouse (cost: $35m) where many FTX employees lived, expressing horror that some $13bn of customer money had been borrowed, much of which could not be paid back. In response, Mr Bankman-Fried, lounging on a deck chair, replied: “Right, that. We are a little short on deliverables.”

As customers rushed to take their money in the week that FTX collapsed, employees resigned en masse. Adam Yedidia, one of Mr Bankman-Fried’s friends and employees, who has not been charged with any crimes and appears to have been in the dark, texted him: “I love you Sam, I am not going anywhere.” Days later, when he had learned the reality of what had gone on, he was gone. Many of those who were close to Mr Bankman-Fried and knew what was going on foresaw how this would end—those who did not were horrified when they found out. So was the jury. ■

The interest-rate market has a dirty secret, which practitioners call “the hairy chart”. Its main body is the Federal Reserve’s policy rate, plotted as a thick line against time on the x-axis. Branching out from this trunk are hairs: fainter lines showing the future path for interest rates that the market, in aggregate, expects at each moment in time. The chart leaves you with two thoughts. The first is that someone has asked a mathematician to draw a sea monster. The second is that the collective wisdom of some of the world’s most sophisticated investors and traders is absolutely dreadful at predicting where interest rates will go.

Since inflation began to surge in 2021, these predictions have mostly been wrong in the same direction. They have either underestimated the Fed’s willingness to raise rates or overestimated how quickly it will start cutting them. So what to make of the fact that, once again, the interest-rate market is pricing in a rapid loosening of monetary policy?

This time is different, and in an important way. A year ago investors betting that rates would soon be cut were fighting the Fed, whose rate-setters envisaged no such thing. Then, in December, the central bank pivoted. Rate cuts were now being discussed, announced Jerome Powell, its chairman, while officials forecast three of them (or 0.75 percentage points’ worth) in 2024. The market has gone further, pricing in five or six before the year is out. It is, though, now moving with the Fed, rather than against it. Mr Powell, in turn, is free to make doveish noises because inflation has fallen a lot. Consumer prices rose by just 3.4% in the year to December, compared with 6.5% in the month before that.

Yet the past few years have shown how eager investors are to believe that cuts are coming, and how frequently they have been wrong. And so it is worth considering whether they are making the same mistake all over again. As it turns out, a world in which rates stay higher for longer is still all too easy to imagine.

Begin with the causes of disinflation to date. There is little doubt that rapidly rising interest rates played a role, but the fading of the supply shocks that pushed up prices in the first place was probably more important. Snarled supply chains were untangled, locked-down workers rejoined the labour force and soaring energy prices fell back to earth. In other words, negative supply shocks gave way to positive ones, cooling inflation even as economic growth rebounded.

Yet these positive shocks are now themselves fading. Supply chains, once untangled, cannot become any more untangled. America’s participation rate—the proportion of people in its labour force—increased from 60% in April 2020 to 63% last August, but has since stopped rising. Energy prices stopped falling in early 2023. Escalating violence in the Middle East, where America and Israel risk being drawn ever further into conflict with proxies and allies of oil-producing Iran, could yet cause prices to start rising again. This all leaves monetary policy with more work to do if inflation is to keep falling.

At the same time as America’s participation rate has stopped rising, wages have continued to climb. According to the Atlanta Fed, in the fourth quarter of 2023 median hourly earnings were 5.2% higher than a year before. After adjusting for inflation, this is well above the long-run annual growth rate for workers’ productivity, which has been a little over 1% since the global financial crisis of 2007-09. A gap between wages and productivity growth will, all else equal, continue to force up prices. For the Fed, this makes rate cuts harder to justify.

The case that rates may stay high is therefore plausible even if you ignore the political backdrop. In an election year, that is a luxury which central bankers do not have. The danger of easing monetary policy too early and allowing inflation to come back, as happened in the 1970s, already looms over the Fed. During a presidential campaign featuring Donald Trump, cutting rates too quickly could have even graver consequences. The cry would inevitably go up that officials had abandoned their mandate in an attempt to juice the economy, please voters and keep Mr Trump out of office.

And Mr Trump may well win, in which case he will probably pursue deficit-funded tax cuts, driving inflationary pressure yet higher and forcing the Fed to raise rates. Such a scenario is still, just about, speculative fiction. It is certainly not what investors expect. But when you look at their predictive record, that is hardly a comfort. ■

Science advances one funeral at a time, to paraphrase Max Planck. The Nobel prize-winning physicist was arguing that new ideas in his field would only catch on once the advocates of older ones died off. With a little adaptation he could have been describing the dismal science, too: economics advances one crisis at a time. The Depression provided fertile soil in which John Maynard Keynes’s theories could grow; the Great Inflation of the 1970s spread Milton Friedman’s monetarist ideas; the global financial crisis of 2007-09 spurred interest in credit and banking.

Sure enough, the recovery from the covid-19 pandemic has given economists another chance to learn from their mistakes. Papers presented at the recent conference of the American Economic Association (AEA) offer clues as to the theories that might eventually become the received wisdom of the next generation.

One such paper takes a harder look at the Phillips curve, which describes a theoretical trade-off between unemployment and inflation. When unemployment is low, the logic goes, inflation should be higher as competition for workers exerts upward pressure on wages. This ought to raise consumer prices. Yet during the 2010s the curve had seemed to vanish. Unemployment kept falling but inflation stayed quiescent. Then, after the pandemic, the relationship suddenly seemed to re-exert itself: inflation rose as swiftly as unemployment fell.

At the AEA conference, Gauti Eggertsson of Brown University suggested that adding a kink to the (previously smooth) Phillips curve might rescue the concept. The idea is that, at a certain point—as the last available worker is employed—the relationship between inflation and unemployment suddenly becomes non-linear. “As you hire all the people you hit the maximum level of employment…there is only one way to go,” he told the conference. Beyond that point, inflation no longer rises smoothly as unemployment falls, but instead shoots up.

Mr Eggertsson’s kink could explain both inflation’s absence in the 2010s and its sudden resurgence in 2021. To understand how inflation has recently faded without a rise in unemployment, he suggests examining how a tight labour market interacts with supply disruptions. A scarcity of materials and components exacerbates labour shortages; a scarcity of workers prevents businesses from both ramping up production and using labour as a substitute for other inputs. As supply shortages eased, this process went into reverse. And so the inflationary effect of a tight labour market abated without leading to a rise in unemployment.

Part of the confusion over the Phillips curve, suggested another paper presented by Stephanie Schmitt-Grohé, of Columbia University, arose because the Great Inflation looms too large in economists’ minds. Friedman’s work emphasised the role of inflation expectations during that episode. Workers and businesses lost faith in central bankers’ willingness to fight rising prices. Then came a vicious cycle in which soaring inflation fuelled expectations of future price rises, which then became self-fulfilling.

But the experience of the 1970s was far from typical, suggests Ms Schmitt-Grohé. Peering further back, she points to frequent instances of American inflation suddenly rising, then falling just as suddenly. One such episode took place amid the Spanish flu pandemic, starting in 1918. That year annual inflation rocketed to 17%. But by 1921 it had turned to deflation, with prices falling by 11%. Consider data from the whole 20th century, and not just its second half, and the fading of the most recent bout of inflation is much less surprising. Ms Schmitt-Grohé suggests that the shocks now hitting the economy—such as climate change, conflicts and a pandemic—mean a return to the greater volatility of earlier ages.

Meanwhile, others are trying to refine models for the overall economy. These have traditionally represented production as taking place in a single sector—employing workers, renting capital and producing output—that is hit by shocks to demand and supply. Iván Werning, of the Massachusetts Institute of Technology, suggests instead considering a set of different sectors, each hit by such shocks in its own way. The challenge for monetary policy is then to control inflation without inhibiting the necessary reallocation of labour between sectors.

Mr Werning’s model is a good fit for the post-pandemic economy. It adjusted not just to a shift in demand from services to goods, but to supply-chain disruption, energy shocks and employees in some sectors working from home. As such, inflation moved through the economy in waves, starting in select goods then spreading out. That is not to say that monetary and fiscal stimulus did not also contribute to rising prices, says Mr Werning. It is more that the rejigging of the economy acted like a supply shock, raising inflation for any given level of aggregate demand.

New ideas in old books

Many of these ideas are not exactly new. Mr Eggertsson, for instance, said that the experience of the past few years led him back to an “old Keynesian fairytale”, and that his version of the Phillips curve is similar to the original. Mr Werning points to a speech by James Tobin, a Keynesian economist, in 1972. Like Mr Werning, Tobin suggested that inflationary pressure can arise from sectors growing and shrinking at different rates. Combine that with a non-linear Phillips curve, Tobin argued, and you can envisage inflation taking off even without a hot labour market.

That crises spur a search through the archives is itself nothing new. To make sense of the Depression, Keynes looked to Thomas Malthus, a 19th-century economist. Friedman’s take on the causes of the Great Inflation owes much to the quantity theory of money, which was first mentioned in ancient Chinese texts and popularised in Europe by Nicholas Copernicus, a 16th-century astronomer. Science may indeed proceed one funeral at a time. Economics, however, has resurrections. ■

WHEN JAMES GORMAN took the helm of Morgan Stanley it was barely afloat. His tenure as the bank’s chief executive began on January 1st 2010, in the teeth of the global financial crisis. After the failure of Lehman Brothers, in 2008, fear had spread that other dominoes would soon topple. Morgan Stanley seemed a likely candidate. Hank Paulson, then treasury secretary, is rumoured to have offered it up to JPMorgan Chase for free (Jamie Dimon, JPMorgan’s boss, apparently declined). The firm then took a government bailout. In 2009 its return on equity, a benchmark measure of profitability, was just 4%.

Fourteen years later Mr Gorman has handed the wheel of a far finer vessel to Ted Pick, the former head of its investment-banking and trading arms. “We had our moment before the abyss,” said Mr Pick on January 16th, during his first earnings call in charge. “We are determined never to face anything like those days again.”

Mr Pick described Morgan Stanley’s progress after 2009 as a “classic ‘self-help’ story”. It started out as a highly leveraged, volatile outfit specialising in trading and investment banking. In the years since it has transformed itself into Wall Street’s pre-eminent wealth manager, through a series of well-chosen deals.

Mr Gorman has often described this strategy as building a “ballast” to balance the “engine room” of the traditional investment-banking business. He started by scooping up Smith Barney, a wealth-management business, from Citigroup for a song during the financial crisis. In 2019 a small stock-plan administration company followed. Then in 2020 Mr Gormon pulled off two mammoth deals in just three months, buying E*TRADE, a brokerage firm, and Eaton Vance, an asset manager.

The result is that Morgan Stanley is sitting on $6.6trn in client assets, the biggest pot of wealth in the world. It now earns almost two-thirds of its profits from that pot, and has posted a juicy return on equity, averaging 16% a year since 2020. Other global banks are now aping its push into wealth management. Analysts making the bull case for UBS’s recent acquisition of Credit Suisse, a firm with a large wealth business that ran into trouble in 2023, point to Morgan Stanley as an example of how such a merger can pay off.

Could the firm become a victim of its own success? On the earnings call on January 16th one analyst asked Mr Pick if he anticipated fiercer competition in wealth management, as other banks attempt to beef up their operations. Margins in Morgan Stanley’s wealth-management business in 2023 were around 25%, a drop from the 30% or so the firm has posted in prior years. The share price fell by some 4.5% in the hours following the earnings call.

Mr Pick himself seems set to stay the course. Those who have worked with him describe a disciplined, straight-talking, no nonsense kind of man—a steady pair of hands who can keep things sailing smoothly. “There may have been a change in leadership,” he told investors, “but there has not been a change in strategy.”

He did not rule out that Morgan Stanley might grow through acquisitions, either. “We have made five different acquisitions. The view inside the house is: that’s good for now.” But if opportunities come up, especially outside America where the firm has lower market share, “we could staple them on,” he said.

In a sign of how far Morgan Stanley has shifted from its past identity, Mr Pick added that he thinks the “ballast” and “engine room” analogy Mr Gorman favoured might need updating. “At one point we called the wealth and investment management business ‘the ballast’, which was the right word because we wanted to convey stability,” he said. But now he thinks “it is actually the engine for future Morgan Stanley growth.” ■

For financial markets the Holy Grail is a perfect leading indicator—a gauge that is both simple to monitor and consistently accurate in foretelling the future. In reality, such predictive perfection is unattainable. It is often hard enough to grasp what is happening in the present, let alone the future. A perfect real-time indicator would thus be a potent goblet of knowledge, if not quite the Holy Grail, for investors and analysts to drink from. Recently they have turned their attention towards one impressive candidate: the Sahm rule.

Developed by Claudia Sahm, a former economist at the Federal Reserve, in 2019, the rule would have been capable of identifying every recession since 1960 in its early stages, with no false positives. This is no mean feat given that the body which officially declares whether the American economy is in recession sometimes needs a full year of data. The Sahm rule, by contrast, typically needs just a few months.

Like all good rules, it is parsimonious. If the unemployment rate increases by half a percentage point from its trough of the past 12 months, the economy is said to be in a recession. To smooth out the figures, which jump around, both the current unemployment rate and the trough are measured as three-month moving averages. At present the Sahm indicator stands at 0.33 percentage points. It would not take much for it to reach the half-point mark. If the unemployment rate, which hit 3.9% in October, rises to 4.0% this month and 4.1% next month, the economy would, according to the Sahm rule, be in a recession.

What about in reality? As Ms Sahm herself is quick to point out, her rule describes an empirical regularity, not an immutable law. What is more, the post-pandemic economy may have fostered the exact kind of conditions that violate this regularity. During downturns companies fire workers, and the layoffs typically go well beyond the Sahm rule’s half-point line.

This time, though, the increase in the jobless rate appears to have been driven less by a reduction in demand for workers and more by an increase in their supply. The American labour force, including both people in work and looking for jobs, has expanded by nearly 3m, or 1.7%, since the end of last year. During that same time the number of jobs has increased by about 2m, or 1.2%. “If workers come back and the jobs haven’t caught up with them, the unemployment rate can drift up,” says Ms Sahm. “But then as the jobs catch up, the unemployment rate doesn’t spiral upwards.”

For Ms Sahm the sudden fame of her measure has brought with it an additional wrinkle. She has had to grapple with the world taking her rule in a different direction from her initial intent. Ms Sahm was not trying to get into the forecasting business, much less into timing financial markets. Rather, she wanted to come up with a benchmark for triggering automatic payments to individuals in order to insulate them from a recession. “Many people have asked me if we are going into a recession,” she says. “Almost no one has asked me what policymakers can do about it.”

Considering the paralysis in Congress, it is a fair bet that policymakers will not do much of anything if unemployment continues to rise in the coming months. So Ms Sahm is now in the curious position of rooting against her own rule, and hoping that America skirts a recession. ■

As with every skirmish in America’s culture wars, how you view the ousting of Harvard University’s president has much to do with where you are sitting. Claudine Gay resigned on January 2nd. Progressives see her as a competent administrator who, as Harvard’s first black president, was subjected to a smear campaign. Conservatives, meanwhile, spy a plagiarist who failed to quash antisemitism on campus. Naturally, your columnist—perched at a Bloomberg terminal—views the episode in its true light: as a blood-on-the-carpet coup by an experienced activist investor, disposing of an errant chief executive.

The investor in question is Bill Ackman, one of Wall Street’s more outspoken hedge-fund bosses. He is also one of Harvard’s more generous donors, having given it $50m. And he has spent recent months on the warpath, berating the university for failing to protect Jewish students from antisemitic attacks.

Then came a congressional hearing in which Ms Gay and two other university presidents prevaricated over whether calling for a genocide of Jews would violate their institutions’ codes of conduct. “The world will be able to judge the relative quality of the governance” at the three schools, Mr Ackman wrote, “by the comparative speed with which their boards fire their respective presidents.” A month on, two of the three are gone.

Although Mr Ackman’s fund prefers “quiet, constructive engagements” with the companies it owns, he made his name as a fearsome boardroom brawler. Over the years he has picked high-profile fights with America’s Municipal Bond Insurance Association, the Canadian Pacific railway and Target, a retail giant. Unsurprisingly, then, his most recent campaign bore all the hallmarks of a veteran activist heading into battle—and carries lessons for how to win one.

First, and most important, make sure you are in good company. Mr Ackman was just one of many to go after Ms Gay, making the tactics of a successful campaign much easier to deploy. The obvious one is financial pressure: Mr Ackman says he is aware of $1bn-worth of donations being withheld from the university since October 7th. That sort of firepower is a lot easier to muster if you are acting in concert with others. Think of the pack of hedge-fund managers George Soros assembled to short the pound in the 1990s.

Strength in numbers also made the second line of attack—forensic analysis of the opponent—more deadly. Activist short-sellers (a group that once included Mr Ackman) obsessively comb through their targets’ accounts; one of them, Carson Block, talks of reading many years of call transcripts, starting with the oldest. In the Harvard mess it was Mr Ackman’s fellow travellers, such as Christopher Rufo, a conservative activist, who trawled through Ms Gay’s work to find lines apparently copied from others without attribution. It was ultimately these accusations of plagiarism that toppled her. While others reviewed the documents, Mr Ackman was freed up to do his own due diligence, meeting hundreds of Harvard students and faculty members to establish how insiders viewed events.

No amount of allies, though, can help with the third requirement for an activist campaign: bloody-mindedness. Whatever the target, they are unlikely to be broken by the initial salvo—and may fire back. In 2021 Andrew Left, another short-seller, decided to quit the scene after furious meme-stock investors sent threatening messages to his children. Sure enough, Mr Ackman is now embroiled in a much bigger feud. On January 4th Business Insider, a news site, accused his wife, a former professor at the Massachusetts Institute of Technology, of a “similar pattern of plagiarism” to Ms Gay’s. Suspecting the allegation came from MIT, Mr Ackman responded by promising a plagiarism review of everything published by the university’s president, board and faculty.

For all its admirable chutzpah, the escalation points to danger ahead. Mr Ackman began by trying to combat antisemitism at Harvard by unseating a president who seemed soft on it. He now appears to be gearing up for a fight with much of America’s academic establishment over plagiarism, diversity policies and the future path of higher education. This scope may seem plausible to a man who rose to prominence by shorting the American mortgage market. Yet the best activist campaigns have specific aims and endpoints—and tend not to be fought against people with tenure. Even for Mr Ackman, his new venture will prove a tall order. ■

Read more from Buttonwood, our columnist on financial markets:
Why bitcoin is up by almost 150% this year (Dec 18th)
The mystery of Britain’s dirt-cheap stockmarket (Dec 14th)
Why it might be time to buy banks (Dec 7th)

Also: How the Buttonwood column got its name

In late 2021 Jerome Powell, chairman of the Federal Reserve, called for the retirement of “transitory” as a description for the inflation afflicting America. The word had become a bugbear, having been taken by many to mean that the inflation which had bubbled up early in the year would fade away as supply shortages improved. As the months went by, not only were price increases accelerating, they were broadening out—from used cars to air fares, clothing, home furnishing and more. The economists who had warned that excessive stimulus and overheating demand, rather than production snarls, would make inflation a more serious problem seemed prescient. In the shorthand of the day, it looked as if “Team Persistent” had defeated “Team Transitory”.

Fast-forward to the present, and something strange has happened. The Fed, along with most other major central banks, has acted as if Team Persistent was right. It jacked up short-term interest rates from a floor of 0% to more than 5% in the space of 14 months. Sure enough, inflation has slowed sharply. But here is the odd thing: the opposite side of the debate is now celebrating. “We in Team Transitory can rightly claim victory,” declared Joseph Stiglitz, a Nobel laureate, in a recent essay.

What is going on? For starters, the term “transitory” was long misunderstood. The narrowest definition, and the one that investors and politicians latched onto, was a temporal one—namely, that inflation would recede as swiftly as it had emerged. Yet another way of thinking about it was that inflation would come to heel as the post-pandemic economy got back to normal, a process that has played out over the course of years, not months.

Moving beyond semantics, the nub of the debate today is whether recent disinflation is better explained by the tightening of monetary policy or the unsnarling of supply chains. If the former, that would reflect the vigilance of Team Persistent. If the latter, that would be a credit to the judgment of Team Transitory.

There is much to be said for the supply-side narrative. The main economic model for thinking about how interest rates affect inflation is the Phillips curve, which in its simplest form shows that inflation falls as unemployment rises. In recent decades the Phillips curve has been a troubled predictive tool, as there has been little correlation between unemployment and inflation. But given the surge in inflation after covid-19 struck, many economists once again turned again to its insights. Most famously, Larry Summers, a former Treasury secretary, argued in mid-2022 that unemployment might have to reach 10% in order to curb inflation. Instead, inflation has dissipated even while America’s unemployment rate has remained below 4%. No mass unemployment was needed after all—just as Team Transitory predicted.

Some have tried to rescue the Phillips curve by replacing unemployment with job vacancies. In this curve it was a decline in vacancies from record-high levels that delivered the labour-market cooling necessary for disinflation. Yet this explanation also comes up short, argues Mike Konczal of the Roosevelt Institute, a left-leaning think-tank. For inflation to have slowed as much as it has, the modified Phillips curve predicted an ultra-sharp decline in vacancies. But with 1.4 vacancies per unemployed worker, the American jobs market is still pretty tight. Again, this is closer to the immaculate disinflation of Team Transitory’s dreams.

Moreover, Mr Konczal points to evidence of the supply-side response that enabled this. Looking at 123 items that are part of the Fed’s preferred “core” measure of inflation, he finds that nearly three-quarters have experienced both declining prices and increasing real consumption. This suggests that the most potent factor in bringing about disinflation was a resumption of full-throttled production, not a pull-back in demand.

Nevertheless, the notion that Team Transitory was right all along leads to a perverse conclusion: that inflation would have melted away even without the Fed’s actions. That might have seemed credible if the Fed had merely fiddled with rates. It is much harder to believe that the most aggressive tightening of monetary policy in four decades was a sideshow. Many rate-sensitive sectors have been hit hard, even if American growth has been resilient. To give some examples: a decade-long upward march in new housing starts came to a sudden halt in mid-2022; car sales remain well below their pre-covid levels; fundraising by venture-capital firms slumped to a six-year low in 2023.

This leads to a counterfactual. If the Fed had not moved decisively, growth in America would have been even stronger and inflation even higher. One way to get at this is to craft a more elaborate Phillips curve, including the broader state of the economy and inflation expectations, and not just the labour market. This hardly settles the matter, since economists differ on what exactly should be included, but it does make for a more realistic model of the economy. Economists with Allianz, a German insurance giant, have done just this. They conclude that the Fed played a vital role. About 20% of the disinflation, in their analysis, can be chalked up to the power of monetary tightening in restraining demand. They attribute another 25% to anchored inflation expectations, or the belief that the Fed would not let inflation spiral out of control—a belief crucially reinforced by its tough tightening. The final 55%, they find, owes to the healing of supply chains.

Tallying the scores

The result is a draw between the teams when it comes to diagnosis: about half of inflation was indeed transitory. But what matters most is policy prescriptions. In the summer of 2021, believing inflation to be transitory, the Fed projected that interest rates would not need to rise until 2023, and even then to only 0.5-0.75%—a path that would have been disastrous. Boil the debate down to the question of how the Fed should have responded to the inflation outbreak, and Team Transitory lost fair and square. ■

At some point American economic growth will disappoint expectations. For now, though, it appears to have ended 2023 much as it passed the previous few years, with yet another expansion that defied forecasts. Recent data suggest that the economy grew at an annualised pace of 2.5% or so in the final three months of the year, more than twice the median expectation of analysts at the start of the quarter.

Although such momentum is welcome, it complicates the outlook as the Federal Reserve contemplates when to start cutting interest rates. America’s strength is broad-based. Investment in manufacturing facilities has soared to record highs, propelled by the Biden administration’s subsidies for electric-vehicle and semiconductor production. Elevated mortgage rates have led to big falls in sales of existing houses, but property developers have responded to the dearth of single-family homes on the market by ramping up building. The government has remained a backstop to growth—albeit a worrying one from the standpoint of long-term fiscal sustainability—with its deficit running at about 7% of GDP, which is virtually unprecedented during peacetime without a recession.

Most important of all, American consumers have remained indomitable, defying expectations of a retrenchment in personal spending. Two factors help explain their resilience. The stash of savings accumulated by households during the covid-19 pandemic, thanks to the government’s fiscal largesse, has continued to offer them a buffer. Economists at the Fed’s branch in San Francisco reckon that households had about $290bn of excess savings, relative to the expected baseline, as of November. Moreover, the tight labour market has led to robust wage growth, especially for lower-income workers, who, in turn, have a higher propensity to spend. As inflation has come under control their real wage gains look even more substantial.

These various sources of strength contributed to America’s barnstorming third quarter in 2023, when it posted annualised growth of 4.9%. Some slowing was only natural after such a rapid expansion. As recently as early October analysts had pencilled in growth of just 0.7% in the final quarter of 2023. But the latest reading from a real-time model by the Atlanta Fed—which has proved to be a reliable guide for recent GDP figures—points instead to annualised growth of 2.5%. Although the reading will fluctuate as more data trickle in, the margin for error shrinks as the date of a gdp release nears; the next one is on January 25th. For 2023 as a whole growth is likely to be about 2.5%, impressive considering that most economists expected America to be flirting with recession.

What makes the growth all the more striking is that it has come at the same time as inflation has receded. The Fed’s preferred measure of inflation—the personal consumption expenditure (PCE) price index—hit 2.6% in November compared with a year earlier, down from 7% in mid-2022. Even more encouragingly, core PCE prices, which strip out volatile food and energy costs, have risen by just 2.2% on an annualised basis over the past three months, in line with the Fed’s target of 2%. The disinflation has been propelled by declines in goods prices as supply chains have recovered from pandemic disruptions.

This has given rise to a best-of-both-worlds scenario: resilient growth and fading inflation. Such a propitious combination might allow the Fed to cut rates in the coming months not because growth is weakening, but because it wants to avoid excessive monetary restraint. Jerome Powell, the Fed’s chairman, seemed to give voice to these hopes after the central bank’s meeting in mid-December, when he said that rate cuts “could just be a sign that the economy is normalising and doesn’t need the tight policy”. His words fuelled a rally in both stocks and bonds.

Yet the strong growth points to a less pleasant scenario: that the fall in inflation is a false signal. Whereas goods prices have declined, those for many services continue to rise at a faster clip than their pre-pandemic trend. Housing prices actually rebounded in 2023, despite mortgage rates climbing to 8%, their highest in two decades. With mortgage rates falling back below 7% in December, the prospect of a bigger re-acceleration in the property market looms large. An easing in financial conditions as a result of rate cuts would support economic growth but would also feed into renewed price pressures.

If inflation rebounds the Fed would have little choice but to keep interest rates elevated, perhaps reviving the fears of a recession that have all but vanished. These risks help explain why John Williams, president of the New York Fed, poured cold water on the most feverish speculation about imminent rate cuts in the wake of Mr Powell’s comments last month. He said it was “just premature to be even thinking about that”. It is probably also premature to celebrate America’s escape from the past few years of brutal inflation with barely a bruise to its economy. ■

By 2050 there will be a new crop of economic powers—if things go to plan. Narendra Modi, India’s prime minister, wants his country’s GDP per person to surpass the World Bank’s high-income threshold three years before then. Indonesia’s leaders reckon that they have until the mid-century mark (when an ageing population will start to drag on growth) to catch up with rich countries. 2050 is also the scheduled finale for Muhammad Bin Salman’s reforms. Saudi Arabia’s crown prince wants to transform his country from an oil producer into a diversified economy. Other smaller countries, including Chile, Ethiopia and Malaysia, have schemes of their own.

These vary widely, but all have something in common: breathtaking ambition. India’s officials think that GDP growth of 8% a year will be required to meet Mr Modi’s goal—1.5 percentage points more than the country has managed on average over the past three decades. Indonesia will need growth of 7% a year, up from an average of 4.6% over the same period. Saudi Arabia’s non-oil economy will have to grow by 9% a year, up from an average of 2.8%. Although 2023 was a good year for all three, none experienced growth at this sort of pace. Very few countries have maintained such growth for five years, let alone for thirty.

Nor is there an obvious recipe for runaway growth. To boost prosperity, economists typically prescribe liberalising reforms of the sort that have been advanced by the IMF and the World Bank since the 1980s under the label of the “Washington Consensus”. Among the most widely adopted are sober fiscal policies and steady exchange rates. Today technocrats urge looser competition rules and the privatisation of state-owned firms. Yet these proposals are ultimately concerned with removing barriers to growth, rather than supercharging it. Indeed, William Easterly of New York University has calculated that, even among the 52 countries which had policies most consistent with the Washington Consensus, GDP growth only averaged 2% a year from 1980 to 1998. Mr Modi and Prince Muhammad are unwilling to wait—they want to develop, fast.

The aim is to achieve the sort of meteoric growth that East Asian countries managed in the 1970s and 1980s. As globalisation spread, they made the most of large, cheap and low-skilled workforces, cornering markets in cars (Japan), electronics (South Korea) and pharmaceuticals (Singapore). Industries were built behind protectionist walls, which restricted imports, then thrived when trade with the rest of the world was encouraged. Foreign firms later brought the know-how and capital required to churn out more complex and profitable goods, increasing productivity.

Little surprise, then, that leaders across the developing world remain enthusiastic about manufacturing. In 2015 Mr Modi announced plans to increase industry’s share of Indian GDP to 25%, from 16%. “Sell anywhere, but make in India,” he urged business leaders. Cambodia hopes to double the exports of its factories, excluding clothing, by 2025. Kenya wants to see its manufacturing sector grow by 15% a year.

There is a snag, however. Industrialisation is even harder to induce than it was 40 or 50 years ago. Technological advances mean that fewer workers than ever are needed to produce, say, a pair of socks. In India five times fewer workers were required to operate a factory in 2007 than in 1980. Across the world, industry now runs on skill and capital, which rich countries have in abundance, and less on labour, meaning that a large, cheap workforce no longer offers much of a route to economic development. Mr Modi and others therefore have a new game plan: they want to leap ahead to cutting-edge manufacturing. Why bother stitching socks when you can etch semiconductors?

This “extraordinary obsession with making stuff right on the technological frontier”, as a former adviser to the Indian government puts it, sometimes leads to old-fashioned protectionism. Indian firms may be welcome to sell anywhere, but Mr Modi wants Indians to buy Indian. Import bans have been announced on everything from laptops to weapons.

But not all the protectionism is old-fashioned. Since the last outbreak in India, in the 1970s, subsidies and tax breaks have mostly replaced import bans and licensing. Back then every investment over a certain threshold had to be cleared by a civil servant. Now senior officials are under orders from Mr Modi to drum up $100bn-worth of investment a year, and the prime minister has declared luring chipmakers to be among his main economic goals. “Production-linked incentives” give tax breaks for each computer or missile made in India, as well as for other high-tech products. In 2023 such subsidies cost $45bn, or 1.2% of GDP, up from $8bn or so when the scheme was launched in 2020. Similarly, Malaysia is offering handouts to firms that establish cloud-computing operations, and helps with the cost of factories set up in the country. Kenya is building five tax-free industrial parks, which will be ready in 2030, and has plans for another 20.

In some places, there has been early success. Cambodia’s manufacturing sector produced three percentage points more of the country’s GDP last year than it did five years ago. Firms that are looking to diversify from China have been lured by low costs, subsidies for high-tech manufacturing and state investment. Elsewhere, though, things are proving harder. In India manufacturing has stayed steady as a share of GDP—Mr Modi is not going to hit his 25% target by next year. Big names like Apple and Tesla have put their brands on a factory or two, but show little desire to make the sort of investments they once lavished on China, which offers superior infrastructure and a better educated workforce.

The danger is that, in seeking to attract high-tech manufacturing, countries end up repeating past disasters. From 1960 to 1991 manufacturing’s share of Indian GDP doubled. But when protective barriers were removed in the 1990s, nothing was cheap enough to export to the rest of the world. The risk is especially great this time around since Mr Modi sees manufacturing as being synonymous with “self-reliance”—or India’s ability to produce everything that it needs, especially the tech that goes into weapons. Along with Indonesia and Turkey, India is one of a group of countries that view getting rich as route to a stronger geopolitical position, increasing the chance of misdirected investment.

These drawbacks to both basic manufacturing and attempts to leap ahead are helping convince some countries to try another approach: attracting industries that use their natural resources, especially the metals and minerals powering the green transition. Governments in Latin America are keen. So are the Democratic Republic of Congo and Zimbabwe. But it is Indonesia that is leading the way, and doing so with striking heavy-handedness. Since 2020 the country has banned exports of bauxite and nickel, of which it produces 7% and 22% of global supply. Officials hope that by keeping a tight grip they can get refiners to move to the country. They then want to repeat the trick, persuading each stage of the supply chain to follow, until Indonesian workers are making everything from battery components to wind turbines.

Officials are also offering carrots, in the form of both cash and facilities. Indonesia is in the midst of an infrastructure boom: spending between 2020 to 2024 ought to reach $400bn, over 50% more a year than in 2014. This includes funding for at least 27 multibillion-dollar industrial parks, including the Kalimantan Park, constructed on 13,000 hectares of former Bornean rainforest at a cost of $129bn. Other countries are also offering sweeteners. Firms that want to install solar panels in Brazil will receive subsidies to also build them there. Bolivia nationalised its lithium industry, but its new state-owned conglomerates will be permitted to enter into joint ventures with Chinese companies.

This approach—of trying to scale the energy supply chain—has little precedent. The world’s oiliest countries mostly ship crude abroad. Indeed, more than 40% of global refining capacity is in America, China, India and Japan. Saudi Arabia refines less than a quarter of what it produces; Saudi Aramco, the state oil giant, refines in northern China. Experiments with export bans have mostly been in simpler commodities, such as timber in Ghana and tea in Tanzania. By contrast, obtaining nickel pure enough to be used in electric vehicles from Indonesia’s supply is ferociously complex, notes Matt Geiger of MJG Capital, a hedge fund. Doing so requires three different types of factory, and the nickel must then pass through several more before it enters a car.

In the black

Fossil fuels have made parts of the Gulf rich, but almost every industry in the world constantly guzzles oil. There is no guarantee that the bonanza from green metals will be as large. Batteries only need replacing every few years. Officials at the International Energy Agency, a global body, reckon that pay-offs from green commodities will peak in the next few years, after which they will taper off. Moreover, technological development could suddenly reduce appetite for certain metals (say, if another type of battery chemistry takes off).

Meanwhile, fossil-fuel beneficiaries are trying another strategy altogether: to reinvent the entrepot. The Gulf wants to be where the world does business, welcoming trade from all corners of the globe and providing shelter from geopolitical tensions, particularly between America and China. By 2050 the world should have reached net-zero emissions. Although the Gulf is rich, its economies are still developing. Local workforces are less skilled than those in Malaysia, yet receive wages comparable to those in Spain. This makes foreign workers essential. In Saudi Arabia they account for three-quarters of the total labour force.

The United Arab Emirates was one of the first countries in the region to diversify. It has focused on industries, such as shipping and tourism, that may help to facilitate other business, as well as on high-tech industries, such as artificial intelligence (AI) and chemicals. Abu Dhabi is already home to outposts of the Louvre and New York University, and has plans to make money from space travel for tourists. Qatar is building Education City, a campus that will cost $6.5bn and sprawl across 1,500 hectares, working a bit like an industrial park for universities, with the outposts of ten, including Northwestern and University College London.

Others in the Gulf now want to emulate the approach. Saudi Arabia hopes to see flows of foreign investment increase to 5.7% of GDP in 2030, up from 0.7% in 2022, and is spending fabulous amounts of money in pursuit of this ambition. The Public Investment Fund has disbursed $1.3trn in the country over the past decade—more than is forecast to be unleashed by the Inflation Reduction Act, President Joe Biden’s industrial policy in America. The fund is shelling out on everything from football teams and petrochemical plants to entirely new cities. Industrial policy has never been conducted on such a scale. Dani Rodrik of Harvard and Nathaniel Lane of the University of Oxford reckon that China spent 1.5% of GDP on its own efforts in 2019. Last year Saudi Arabia disbursed sums equivalent to 20% of GDP.

The problem with throwing around so much money is that it becomes difficult to see what is working and what is not. Manufacturers in Oman, making products from aluminium to ammonia, can get a factory rent-free at one of the country’s new industrial parks, buy materials with generous grants and pay their workers’ wages by borrowing cheaply from shareholders, which usually include the government. They can even draw on export subsidies to sell abroad more cheaply. How is it possible to tell which firms will outlast all this cash, and which ones would collapse without it?

One thing is already painfully clear. The private sector is yet to take off in the Gulf. Almost 80% of all non-oil economic growth in the last five years in Saudi Arabia has come from government spending. Although an impressive 35% of Saudi Arabian women are now in the labour force, up from 20% in 2018, overall workforce-participation rates across the rest of the Gulf remain low. Researchers at Harvard University have found that legislation introduced in 2011, which stipulated that Saudis should make up a set portion of a firm’s headcount—for instance, 6% of all workers in green tech and 20% in insurance—decreased productivity and did nothing to move the needle on private employment.

The right horse?

A few countries will make it to high-income status. Perhaps the UAE’s spending on AI will pay off. Perhaps new tech will make the world more dependent on nickel, to Indonesia’s advantage. India’s population is too young for growth to stagnate entirely. But the three strategies employed by countries looking to get rich—leaping to high-tech manufacturing, exploiting the green transition and reinventing the entrepot—all represent gambles, and expensive ones at that. Even at this early stage, a few lessons can be drawn.

The first is that the state is now much more active in economic development than at any point in recent decades. Somehow an economy must evolve from agrarian poverty to diversified industries that can compete with rivals in countries which have been rich for centuries. To do so requires infrastructure, research and state expertise. It may also require lending at below market rates. This means that a certain amount of state involvement is inevitable, and that policymakers will have to pick some winners. Even so, governments are now intervening much more than they did previously. Many have lost patience with the Washington Consensus. The benefits of its most straightforward reforms, such as independent central banks and ministries stuffed with professional economists, have already been reaped; the institutions that once enforced the doctrine (namely, the IMF and World Bank) are shadows of their former selves.

Today policymakers in the developing world take cues from China and South Korea. Few recall their own country’s interventionist follies. In the 1960s and 1970s it was not just those in East Asia that were enthusiastically experimenting with industrial policy; many in Africa were as well. For the best part of a decade, the two regions grew at a similar pace. Yet from the mid-1970s it became apparent that policymakers in Africa had made the wrong bets (see chart). A debt crisis kicked off a decade known as the “African tragedy”, in which the continent’s economies shrank by 0.6% a year on average. Later, in the 2000s, Saudi officials unsuccessfully spent big to foster a petrochemical industry, forgetting that shipping oil abroad was cheaper than paying people to work at home.

The second is that the stakes are high. Most countries have sunk enormous sums into their chosen path. For the smaller ones, such as Cambodia or Kenya, the result could be a financial crisis if things go wrong. In Ethiopia, this has already happened, with debt default accompanying civil war. Even bigger countries, such as India and Indonesia, will not be able to afford a second stab at development. The bill from their current efforts, should they fail, and the cost of ageing populations will leave them short of fiscal space. Wealthier countries are constrained, too, albeit by another resource: time. Saudi Arabia needs to develop before demand for its oil drops off, or else there will be few ways to sustain its citizens.

The third is that the way countries grow is changing. According to work by Mr Rodrik, manufacturing has been the only area where poor countries improve their productivity at a faster rate than rich countries, and so catch up. Modern industry may not offer the same benefit. Rather than spending time trying to make factory processes more efficient, workers in countries trying to get rich increasingly mine green metals (working in an industry with notoriously low productivity), serve tourists (another low-productivity sector) and assemble electronics (rather than making more complex components). All this means that the race to get rich in the 21st century will be more gruelling than the one in the 20th century. ■

Could 2024 be a year unlike any in America’s post-war economic history? Never since 1945 has annual inflation, measured by the consumer-price index, fallen from above 5% to below 3% without a recession at the time of the fall or within the subsequent 18 months.

Yet professional forecasters surveyed by the Federal Reserve Bank of Philadelphia say that at the end of 2024 headline annual inflation will be 2.5%, whereas real GDP will grow by 1.7% over the course of the year—roughly in line with its long-term trend. Financial markets are rejoicing at the prospect of such a “soft landing”.

The Fed has been fighting inflation by raising interest rates since March 2022. Monetary tightening usually provokes a recession because disinflating an economy is much like disinflating a balloon: it is hard to do gently. There have been instances where rate rises have not led to a downturn, such as in the mid-1980s and late 1990s (and other times where events, such as the covid-19 pandemic, interjected). But on those occasions inflation had not reached anything like the highs it did in 2022. That the Fed raised interest rates so fast in 2022 and 2023 would make a soft landing all the more exceptional.

When would it become clear that the economy had landed? Inflation data are revised less than other economic data, so the Fed hitting its target would probably happen in plain sight. Given how rare it is for inflation to stand at precisely 2%, it would be fair to declare the goal met should both annual headline and annual core inflation, which excludes volatile food and energy prices, fall beneath 2.5% on the Fed’s preferred price index, which rises a little slower than the CPI.

In the past three months America’s core inflation has risen at an annualised pace of just 2.2%. Should that continue, the annual measure would fall below 2.5% in February. Without, say, an oil-price surge, headline inflation would probably also be at target.

The other criterion for a soft landing—dodging a downturn—is harder to judge. Recessions tend only to be declared long after they have struck. In the past, the most reliable real-time indicator that one is beginning has been the “Sahm rule”. It is triggered when the three-month moving average of the unemployment rate rises by 0.5 percentage points against its low over the preceding year. The rule has identified every American recession since 1960, with no false positives. Today unemployment is up by 0.3 percentage points from its mid-2023 low.

The Sahm rule could break down this time, as labour markets have been exceptionally tight since the pandemic. It would be only natural for the unemployment rate to rise a little. Claudia Sahm, who invented the rule, has warned that it is distorted by the return to the labour force of people who left during the pandemic, something that pushes up the unemployment rate even in the absence of layoffs.

But in that case the rule will deliver an incorrect recession call, rather than missing a downturn. If the Fed hits its inflation target without the Sahm rule being triggered, it would therefore be safe to declare the plane had touched down.

It would not, however, have come to a stop. In the early 1950s and the early 1970s, recessions struck nearly a full year and a half after inflation fell. Nor would policymakers have finished adjusting the controls. At its December meeting the Fed signalled that it expected to cut interest rates by three quarters of a percentage point in 2024.

It wants to loosen monetary policy in part because it believes that the natural resting-point of interest rates is lower than their current level. If the Fed is wrong, interest-rate cuts will act as an undue stimulus and inflation will reaccelerate. Fiscal policy will also still look on a crisis setting, given America’s enormous underlying deficit, which reached 7.5% of GDP during the 2023 fiscal year. Cutting that significantly could hurt.

The other reason for caution is that talk of a soft landing often occurs just before recession strikes (see chart). And that is in normal business cycles. Since the pandemic forecasters have performed poorly, underestimating growth and, until recently, inflation. That they now think a soft landing is arriving is good news. But don’t believe it until you see it. ■

Chopping off their heads does not work: cockroaches can live without one for as long as a week. Whacking them is no guarantee either: their flexible exoskeletons can bend to accommodate as much as 900 times their body weight. Nor is flushing them down the toilet a solution: some breeds can hold their breath for more than half an hour. To most, roaches are an unwelcome pest. Their presence is made all the worse because they are indestructible.

An unwelcome pest is how many financiers and regulators would describe the crypto industry. Criminals use cryptocurrencies to launder money. Terrorists use them to make payments. Hackers demand ransoms in bitcoin. Many crypto coins are created simply so their makers can make off with the money.

The industry also appears to be indestructible. Crypto prices were crushed by higher interest rates in 2022. The industry’s head has been chopped off: Changpeng Zhao and Sam Bankman-Fried, the founders of the world’s biggest and second-biggest crypto exchanges, now both await sentencing for financial crimes (breaking anti-money-laundering laws and fraud, respectively). Regulators are cracking down. Yet not only has crypto survived, it is once again soaring: bitcoin climbed to a two-year high of almost $45,000 on December 11th, up from just $16,600 at the start of the year.

What is going on? For one thing, indestructibility is built into the technology. Bitcoin, ether and other coins are not companies—they cannot go bankrupt and be shut down. They employ blockchains, which maintain a database of transactions. Their lists are verified by a decentralised network of computers that are incentivised to keep maintaining them by the promise of new tokens. Only if the tokens fall to zero does the whole architecture collapse. And there continue to be lots of reasons to believe some crypto tokens are worth more than nothing.

The first is that holding crypto is a bet on a future in which use of the technology is widespread. People in despotic countries already use bitcoin and stablecoins (tokens pegged to a hard currency, like the dollar) to store savings and sometimes to make payments. These could be used more widely. Artists and museums are still creating or collecting non-fungible tokens (nfts). As are those looking to flog an image. Donald Trump is selling his mugshot for $99 a piece. He plans to have the suit he was booked in cut into pieces, made into cards and given to punters who buy at least 47 nfts in a single transaction.

During the boom times, the crypto industry raised a lot of money and hired plenty of smart developers. Those that remain are working on new uses, like social-media applications or play-to-earn games. Perhaps these will never be widely adopted. But even the small chance that they work out is worth something.

The second reason is that, with each boom-and-bust cycle, it becomes clearer crypto is not a bubble like tulip mania in the 1630s or the craze for Beanie Babies in the 1990s. Although bitcoin is a volatile asset, its price history looks more like a mountain range than a single peak, and appears closely correlated with tech stocks. Yet it is only moderately correlated with the broader market. An asset that swings up and down, and not in parallel with other things people might have in a portfolio, can be a useful diversifier.

That bitcoin has established itself as a serious asset seems to be the source of the latest surge. In August an American court ruled that the Securities and Exchange Commission, America’s main markets regulator, had been “arbitrary and capricious” when rejecting an effort by Grayscale, an investment firm, to convert a $17bn trust invested entirely in bitcoin into an exchange-traded fund (etf). Doing so would make investing in bitcoin easier for the average punter.

In October the court upheld its ruling—in effect ordering the sec to give way. The biggest fund managers, including BlackRock and Fidelity, have also applied to launch etfs. Given the returns bitcoin has offered in the past, and its correlations with other assets, the result could be a rush of cash into bitcoin, as even sensible investors consider putting small slices of their pension pots or portfolios into crypto for diversification.

Many feel instinctive revulsion when they spy a roach. But in spite of their flaws, the bugs have uses—they turn decaying matter into nutrients and eat other pests, such as mosquitoes. Crypto has its uses, too, such as portfolio diversification and keeping money safe under despotic regimes. And, as has been shown, it is just about impossible to kill. ■