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Kamala Harris breaks deadlock over $1.9tn stimulus bill

Kamala Harris broke a tie in the US Senate on Thursday after the upper chamber of Congress split along party lines over whether to proceed with a debate on Joe Biden’s $1.9tn coronavirus relief package.

All 50 Senate Republicans voted against moving ahead with the sweeping stimulus package, necessitating a tiebreaking vote from Harris, the vice-president, which triggered the starting gun on the upper chamber’s formal consideration of the bill.

The stimulus, the flagship of Biden’s legislative agenda, needs to pass the Senate and the House of Representatives before it is sent to the president’s desk to be signed into law.

Chuck Schumer, the Senate’s top Democrat, earlier on Thursday pledged to pass the relief package in the coming days.

“No matter how long it takes, the Senate is going to stay in session to finish the bill this week,” Schumer said. “The American people deserve nothing less.”

The House, which is controlled by Democrats, last week passed the sweeping economic stimulus package in a party-line vote.

The second-largest stimulus package in US history includes means-tested $1,400 payments for American adults, an extension of federal top-ups for unemployment insurance, and $350bn in funding for state and local governments.

But the bill is now being scrutinised by the Senate, which is split, 50-50, between Democrats and Republicans, and where a handful of moderate Democrats now exert outsized influence on their caucus.

Biden and Democratic leaders reached a compromise on Wednesday to satisfy the demands of moderate Democrats. The deal limits eligibility for stimulus cheques to American adults earning less than $80,000 a year.

Under the agreement, adults earning less than $75,000 and couples making up to $150,000 will receive the full $1,400 cheques, with the size of the payments scaled back for individuals earning up to $80,000 and couples making up to $160,000.

According to a Senate Democratic aide, the Democrats’ amendment to the House bill would also increase the value of the federal Cobra health insurance programme from 85 to 100 per cent to help people who lost their jobs retain health insurance.

The amendment also includes another $510m to support the homeless and low-income people facing eviction, and expands tax credits for start-ups and businesses struggling in the coronavirus pandemic.

Democrats are still on track to pass the legislation before their self-imposed deadline of March 14, when the current federal unemployment benefits run out.

But their plans hit a stumbling block on Wednesday when Ron Johnson, the Republican senator from Wisconsin, slowed down the process by demanding Senate staffers read the more than 600-page bill aloud — an exercise that could take up to 10 hours, on top of the 20 hours already allotted to debate the bill and any proposed amendments.

Johnson formally objected after Thursday’s procedural vote, triggering the lengthy reading.

“I feel bad for the clerks that are going to have to read it, but it’s just important,” Johnson told reporters on Capitol Hill earlier on Thursday.

“So often, we rush these massive bills that are hundreds if not thousands of pages long. You don’t, nobody has time to read them,” he said. “At a minimum, somebody ought to read it.”

Schumer said Johnson was making “himself the face of the Republican opposition to the bill”.

“We all know this will merely delay the inevitable,” he added. “It will accomplish little more than a few sore throats for the Senate clerks.”

Republicans have taken issue with the size and scope of the stimulus package, and slammed Democrats for using budget reconciliation — a process that sidesteps the filibuster and allows legislation to pass via a simple majority, rather than 60 votes in the 100-member chamber — rather than hashing out a bipartisan deal.

“Democrats are trying to exploit the last chapters of the crisis to pass what president Biden’s chief of staff calls ‘the most progressive domestic legislation in a generation’,” Mitch McConnell, Schumer’s Republican counterpart, said on Thursday. “And they have told Republicans: take it or leave it.”

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Powell inflation comments send US stocks and bonds lower

Jay Powell, the Federal Reserve chair, triggered a sudden sell-off in long-term US Treasury debt and equities after he vowed to keep monetary policy loose even as the economy improves and inflation begins to rise.

Speaking on Thursday afternoon, Powell said the central bank expected to be “patient” in withdrawing support for the recovery, given that the labour market remained far from the central bank’s goal of full employment and had made little progress in recent months.

With such a dovish tone, Powell failed to alleviate fears that the central bank is reacting too slowly to the recent rise in inflation expectations and long-term Treasury yields.

The Fed chair suggested that although central bank officials were closely watching the market movements, it would take much more to perturb them.

“As it relates to the bond market, I’d be concerned by disorderly conditions in markets or by a persistent tightening in financial conditions broadly that threatens the achievement of our goals,” Powell said.

Yields on 10-year Treasuries spiked 0.06 percentage points at one point to 1.54 per cent, reviving a rout in the $21tn market for US government debt. Strains emerged last week as liquidity deteriorated, culminating in a weak auction of 7-year Treasury notes on February 25 that sent yields sharply higher.

US stocks also sold off sharply as Powell spoke, with the S&P 500 down 1.5 per cent in afternoon trading. The tech-heavy Nasdaq Composite dropped over 2 per cent, turning negative for the year.

Trading has been volatile for days as investors grapple with the prospect of a stronger-than-expected recovery and higher inflation later this year. One market measure of inflation expectations, the 5-year break-even rate, hit 2.5 per cent on Wednesday for the first time since 2008. Inflation erodes the value of bonds’ income payments, making them less attractive.

Line chart of Breakeven rate (%) showing US inflation expectations push higher

Powell did say that if the Fed faced an unhealthy spike in prices this year, it would be able to handle it. “We have the tools to assure that longer-run inflation expectations are well-anchored at 2 per cent. Not materially above or below. And we’ll use those tools to achieve that,” he said.

Such statements may not be enough to satisfy investors bracing for stronger than expected growth due to vaccination rollouts and large fiscal stimulus, combined with ultra-easy monetary policies.

“The bond market will feel quite unprotected by what Powell said today from an inflation perspective,” said Padhraic Garvey, global head of debt and rates strategy at ING. “There is plenty of room for yields to move to the upside.”

Given the Fed’s stance and expectations of a robust rebound, Garvey reckoned that 10-year yields could rise to 2 per cent in the third quarter of this year.

“Powell did nothing to suggest he is any more concerned with the recent jump in long-term yields than he was last week when he referred to rising yields as a ‘statement of confidence’ in the US economy,” said Mike Schumacher at Wells Fargo.

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The Fed must avoid a repeat of the March Treasuries mystery

This month, a “whodunnit” — or “what-did-it” — mystery hangs over markets. No, this is not about gyrations in bitcoin prices or GameStop shares.

Instead, the issue is the $21tn US Treasuries sector. In March 2020, as Covid-19 hit the west, Treasury prices went haywire as market liquidity collapsed. That was shocking in a sector that is normally “the largest and most liquid government securities market in the world”, according to the Federal Reserve.

Fed officials eventually unblocked the market with unprecedented interventions, gobbling up Treasuries itself. After peace returned, some investors — and politicians — seemed minded to sweep that horror under the rug. But, a year on, we need to solve the mystery of what happened for three reasons. First, the system came close to disaster. Or, as Randal Quarles, a Fed governor, has observed: “For a while in the spring [of 2020] the outcome was — as the Duke of Wellington said of Waterloo — ‘a damn close-run thing’.” 

Second, the bond market will face new stresses if (or when) US monetary policy tightens. Last week, the markets started to gyrate alarmingly again amid inflation concerns, and jitters intensified on Thursday.

Third, the source of the March turmoil is not widely understood. This is unnerving if you want to devise policy to avoid a repeat. Initially, Fed sleuthing suggested hedge funds were responsible. Soon after the event, Fed officials reported that “leveraged investors that bought Treasuries in the cash market and hedged the interest rate risk with futures contracts started unwinding these positions as futures prices rose, leading to a feedback loop”.

That invoked memories of the 1998 debacle around Long-Term Capital Management fund, and prompted the Financial Stability Board to call for action to “address vulnerabilities from non-bank financial intermediation” — that is, more oversight and controls. That appeal makes sense in a general way. The NBFI sector has exploded since 2008, and remains alarmingly opaque. Few observers even knew that hedge funds were so exposed to Treasuries before March 2020.

But subsequent Fed investigation also suggests it is a mistake to blame hedgies alone. One reason is that foreign institutions also dumped Treasuries in a destabilising way. Second, the behaviour of some of Wall Street’s big banks was odd. In years past, they happily acted as market makers in the Treasuries sector, since they hold vast quantities of such bonds. More specifically, brokers play a crucial role in the repurchase (repo) markets where investors raise finance by swapping bonds for cash, thus lubricating the wheels of finance.

But late last year a report by the New York Fed noted that during the March 2020 turmoil “relative to normal times, dealers did not make their securities as available to other market participants”, even though their stocks of Treasuries had surged. In plain English, this means brokers secretly went on strike. The turmoil was not just a demand problem — that nobody would buy Treasuries — but a supply issue, because brokers had stopped cutting deals, even for repo.

This is alarming, since it points to bigger structural issues. Quarles thinks the March debacle shows that the $21tn Treasuries market “may have outpaced the ability of the private-market infrastructure to support stress of any sort”. This is partly because US debt keeps expanding. But it is also because post-2008 reforms have raised the capital buffers banks need to do market-making activity, causing them to shy away. Either way, the situation is like an ever-swelling elephant balancing on a shrinking ball: if the ground is still, the situation might seem stable; but, if not, it is easy to tumble. 

Can this be fixed? Not easily. The Biden administration is unlikely to implement any rollback of post-2008 reforms. It is even more unlikely to cut the debt. But a recent paper from the Brookings Institution outlines some policy options, such as better monitoring of NBFI and regulatory tweaks making it easier for brokers to be market makers.

More controversially, the paper also calls for “serious consideration of a mandate for wider use of central clearing for Treasury securities” and “a new Federal Reserve standing repo facility that would serve as a backstop for the US financial system by providing funding to regulated dealers based on US Treasury and agency collateral”.

Might this fly? The last idea is already being implemented on a supposedly temporary basis, since the Fed only curbed the March 2020 dramas by introducing “emergency” measures to backstop repo markets. This is a striking extension of the central bank’s role, but it has sparked little protest, probably because few outsiders understand repo.

But relying on ad hoc emergency measures is not a good way to make policy, not least because it creates moral hazard. So, as the March anniversary looms, the Fed should explain to the public in easy-to-understand language what created the problem, and how to avoid a repeat.

In that respect, it would make sense to create a standing repo facility. There are big drawbacks to extending the Fed’s mandate (even) further: no one wants the system to become even more dependent on central banks. But we cannot afford to have the Treasuries market overwhelmed again, least of all as inflation concerns mount.

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EU set to accuse Apple of distorting competition in music streaming

The European Commission is set to formally accuse Apple of distorting competition in music streaming by preventing rival services on its App Store from informing users of other, often cheaper, ways of purchasing their services.

The EU is set to accuse Apple of placing restrictions on other music streaming services but not on its own, forcing rivals into a disadvantageous position, according to people with direct knowledge of the probe.

This will be the first time the EU has brought formal charges against Apple, after opening up a series of antitrust probes into the company’s business practices. 

The charges are set to reignite tensions between Brussels and Silicon Valley at a time when EU regulators are reforming the rules of the internet in Europe for the first time in two decades.

The official charges come roughly a year after music streaming app Spotify lodged an official complaint against Apple in March 2019 alleging that the Silicon Valley company behaved unlawfully and abused its dominance on the App Store to favour its own music streaming services.

The commission stopped asking Spotify questions in recent days, which is usually an indication that officials are ready to move forward with the case. But it could still be months before formal charges are brought against Apple, and the case could still be shelved.

Under current rules, apps that provide paid digital content on the App Store must use the company’s own in-app payment system, leading to charges of 30 per cent on subscription fees.

As a result some Apple rivals have either disabled their in-app payment option on the App Store, hiked prices or passed costs to their customers. Regulators believe that Apple practices may lead to consumer harm by preventing them from accessing greater choice and lower prices.

The European Commission declined to comment. Apple was not immediately available for comment.

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The insurance call that toppled Greensill

As with AIG in 2008, once again it is insurance — the supposedly sober, even sleepy, side of finance — that is key to understanding the Greensill crisis.

In supply chain finance, a large company such as Vodafone would tell its suppliers that, rather than wait weeks for their invoices to be paid by the telecoms group, they could get much faster payment from Greensill Capital, at a small discount.

Greensill would pay the supplier and later accept a slightly larger payment from Vodafone. The supplier was paid more quickly, Vodafone was able to smooth out its payments, Greensill collected a small margin.

This effectively created a loan from Greensill to Vodafone. And to keep the machine running, Greensill would sell off the loan so it had capacity to write more. The major customer of the loans was Credit Suisse, which put them into funds sold to outside investors. Until this week.

Credit Suisse suddenly announced on Monday it was freezing the funds. The reason? A lapse in the insurance covering the credit, which had allowed investors to treat the fund as almost risk-free — almost as safe as cash in the bank but with a slightly better return.

As Greensill’s lawyer put it this week, the insurance “allows Greensill to access sources and levels of funding which it would not otherwise be able to access and which are critical sources of financing for its business”.

Just as AIG was counterparty to global banks over credit default swaps in 2008 and Berkshire Hathaway was counterparty to Deutsche Bank over leveraged super senior trades in 2009, Greensill’s insurers held a vital role in a complex financial trade.

Without them, the machine was stuck. Greensill could not offload loans and so it could not write new ones. This is inconvenient for blue-chip customers such as Vodafone. It is potentially devastating for lesser companies such as those associated with Sanjeev Gupta, the metals magnate, that are among Greensill’s biggest borrowers. 

For at least four months, Greensill has used a well-known broker, Marsh, to try to find alternative insurers, court papers show. None has been willing to step in.

This week, Greensill took the desperate step of suing its existing insurers — BCC Trade Credit, Tokio Marine and Insurance Australia — in an attempt to force them to restore coverage. 

Greensill told an Australian court on Monday that should the policies not be extended, Greensill’s “economic viability would immediately and seriously be impaired as its primary sources of funding, and revenue, would immediately cease”. 

Moreover, Greensill said it had “been informed by a number of clients” that the loss of insurance “would most likely cause them to become insolvent”. Those clients would default on their Greensill obligations and Greensill’s investors would withdraw their support. 

A judge ruled against Greensill and the insurance was not restored.

Why did the insurers pull coverage? Court documents show that the main original policy was written by The Bond & Credit Company, an Australian insurer acquired in 2019 by Japan-based Tokio Marine. 

The insurance group wrote to Greensill in July last year to say that the underwriter in charge of the account had been dismissed as he had been found to be insuring amounts to Greensill “in excess of his delegated authority”, with the total exceeding A$10bn ($7.7bn). 

The group added that it had begun an investigation “in relation to the dealings between Greensill Capital and [the underwriter]”, including other areas “where he has acted outside the scope of his delegated authority”. As it continued its investigation, it asked Greensill for more documents, including “any guarantee provided by SoftBank”. 

SoftBank’s Vision Fund owns a stake in Greensill. The Vision Fund’s other portfolio companies, such as Indian hotels group Oyo, also use Greensill to pay suppliers. And, finally, as the Financial Times revealed last June, SoftBank had also poured more than $500m into the Credit Suisse funds, essentially using its own finance company to lend to its own portfolio companies and then investing in that debt itself.

Whatever specific development alarmed Tokio Marine last summer, its decision to stop coverage — unknown to the wider world — spelt the end.

In July, the insurance group wrote to Marsh: “Given the current situation, we will not be able to bind any new policies, take on any additional risk nor extend or renew any Greensil [sic] policy past what had previously been agreed. Please take this statement as a blanket answer for any requests from Greensil to look at additional limit coverage, maximum limit capacity or timeframe of a policy period.”

Greensill refused to accept the decision, but its air of finality was unmistakable.

Reporting by Jamie Smyth in Sydney, Robert Smith and Arash Massoudi in London

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Saudi Arabia calls on Opec+ group to ‘keep powder dry’ on output

Saudi Arabia has urged fellow oil producers to “keep our powder dry” in the face of persistent uncertainty linked to the pandemic, as the Opec cartel and its allies discuss whether to unleash a flood of crude on to the market. 

Prince Abdulaziz bin Salman, oil minister and son of King Salman, said on Thursday that while there was “no doubt” the market had improved since January, he wanted to “urge caution and vigilance”.

“Before we take our next step forward, let us be certain that the glimmer we see ahead is not the headlight of an oncoming express train,” he said, as a meeting of oil ministers got under way. 

“The right course of action now is to keep our powder dry, and to have contingencies in reserve to ensure against any unforeseen outcomes.”

Supply curbs by Saudi Arabia-led Opec, Russia and other countries had “accelerated the rebalancing process” in the face of an oil collapse last year as the pandemic raged across the world, said Prince Abdulaziz. 

Record supply curbs of almost 10m barrels a day agreed last April, together with a more careful approach to unwinding these cuts — to about 7m b/d — has kept oil prices in check in recent months. 

The Opec+ group should not “endanger” this progress, he added. 

Talks on Thursday will largely centre on whether producers should go ahead with a 500,000 b/d collective increase in supplies from April. Saudi Arabia is also going to decide how, and whether, to unwind its own voluntary extra cut of 1m b/d. 

Brent crude rose 2 per cent after the comments to $65.30 a barrel. 

Travel bans and government lockdowns to combat the spread of coronavirus hit demand for oil dramatically last year and forced global producers to take collective action to bolster prices. 

Optimism about the rollout of vaccines around the world has helped crude prices recover above $60 a barrel, but some ministers are wary about releasing too much oil on to the market.

Russia, Saudi Arabia’s key partner in the Opec+ oil alliance, has sought to raise production at a faster pace than the kingdom has wanted, concerned about handing over market share to rivals. 

“Certainly the Russians want more oil out there,” said one Opec delegate. “They’ve maintained this position for some time.”

Alexander Novak, Russia’s deputy prime minister, said while the new strains of coronavirus presented a big “uncertainty”, the oil market was “in much better shape” than recent months.

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US suspends tariffs on UK exports in Airbus-Boeing trade dispute

The US will temporarily lift punitive tariffs on £550m worth of UK exports such as Scotch whisky and Stilton cheese, imposed as part of a row with the EU over subsidies to Boeing and Airbus, in an attempt to de-escalate one of the longest trade disputes in modern history.

The move follows the UK’s unilateral decision to suspend tariffs against the US from January 1, which took both Brussels and Airbus by surprise. Brussels has disputed that the UK had the right to act unilaterally in a trade dispute between the EU and the US when it has left the bloc.

Liz Truss, UK international trade secretary, said she was delighted that US president Joe Biden had agreed to suspend tariffs on UK goods for four months. The move would help to improve transatlantic relations, she said.

The US trade representative’s office confirmed that it would temporarily suspend the tariffs, to allow time to negotiate on settling the aircraft dispute.

The Johnson government has come under heavy fire over the tariffs in particular from the Scotch whisky industry, whose exports to the US plunged 30 per cent last year.

“The easier it is for Americans to buy a bottle of Macallan, Talisker or Glenmorangie, the more money those producers will have to invest in their businesses, their staff and futures,” Truss said. “Trade equals jobs.”

The US-EU aircraft subsidies dispute is one of the longest-running cases in the World Trade Organization’s history, reflecting the importance of the industry to each side and the intense competition between Boeing and Airbus.

The battle dates back to 2004, the year after Airbus first overtook its US rival in terms of deliveries. Both sides have been found guilty of providing billions in illegal subsidies to their aircraft makers.

Brussels was last year given the green light by the WTO to impose tariffs of up to 25 per cent on $4bn worth of US products, after Washington announced duties on $7.5bn worth of European imports. 

Both Boeing and Airbus welcomed any move that could help to bring the two sides together. “We welcome USTR’s (US Trade Representative) decision to suspend tariffs for allowing negotiations to take place,” Airbus said in a statement. “Airbus supports all necessary actions to create a level-playing field and continues to support a negotiated settlement of this longstanding dispute to avoid lose-lose tariffs.”

Boeing said: “We commend this action by the US and UK governments creating an opportunity for serious negotiations to resolve the WTO aircraft dispute. A negotiated settlement will allow the industry to move forward with a genuinely global level playing field for aviation.”

However, Britain’s departure from the EU has raised questions about how effective any UK-US suspension can be. With no precedent to follow, trade lawyers have said it is unclear whether the UK still had a right to impose or suspend tariffs that were granted to the EU. 

Whitehall officials insisted the UK had the right to revoke retaliatory tariffs. One individual close to the process said: “This whole issue shows the benefit of being an independent trading nation . . . if we can get this done, it paves the way to a deeper trading relationship with the US and will help free trade deal negotiations.”

Despite this, there appear to be very few signs of progress in the trade talks between the US and UK. In January, White House press secretary Jen Psaki indicated that securing a deal would not be a priority for the Biden administration.

Last month, Biden’s nominated top trade adviser Katherine Tai told senators that she would “review the progress” of the talks that had taken place between the two sides over the previous two and a half years.

Both the EU and the US have long argued for a resolution to the dispute, but have remained far apart on the terms of any agreement on how to fund new aircraft development. 

After Biden’s election as US president, there was a feeling in Europe that a deal could be within reach. There has been growing speculation that talks were progressing.

However, in late December, the US further raised tariffs on European goods, specifically targeting French and German products.

Both Brussels and Washington are keenly aware that the rules need to be set before China becomes a significant competitor to Boeing and Airbus.

China is expected to be the fastest-growing market for commercial aircraft over the coming decades and Beijing has made it a strategic priority to break the global duopoly in an attempt to claim some of that market for Chinese industry. Later this year, China’s Comac is expected to have fully certified its first major commercial aircraft, the C919 single aisle.

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Italy blocks shipment of Oxford/AstraZeneca vaccine to Australia

Italy has blocked a shipment of the Oxford/AstraZeneca Covid-19 vaccine that was destined for Australia, in the first such intervention since the EU introduced new rules governing the shipment of vaccines outside the bloc. 

Rome decided to prevent the export of 250,000 doses of the vaccine, officials said, as it moves to keep doses inside the union. 

Italy notified Brussels of its proposed decision at the end of last week under the EU’s vaccine export transparency regime. The commission had the power to object to the Italian decision and did not, officials said.

The move threatens to heighten global tensions over vaccine procurement after EU allies objected to the introduction of its export regime. Under the controversial system announced by the European Commission at the end of January, EU-based vaccine manufacturers must seek authorisation from their national government where their Covid-19 vaccine is produced before exporting it out of the EU.

The scheme was part of Brussels’ response to an admission by AstraZeneca that it would miss targets for vaccine delivery to the EU, stoking EU suspicions that production had been shipped elsewhere.

Mario Draghi, the new Italian prime minister, questioned why the EU was not imposing stricter vaccine export controls at a summit of EU leaders last month.

AstraZeneca declined to comment, as did the commission.

The Italian government declined to comment. One Italian official said that decisions on permitting or blocking exports of vaccines were not made unilaterally and that the commission was involved.

Draghi has said that speeding up Italy’s vaccination drive will be the focal point of the first months of his premiership.

Earlier this week, the Italian government announced new vaccination targets. As of March 2, the country had vaccinated 4.6m people.

As part of this drive, Draghi has also replaced the two top figures in charge of the programme under the country’s previous government.

This week, he appointed Italian army general Francesco Paolo Figliuolo as the country’s new Covid-19 emergency commissioner, replacing Domenico Arcuri. The prime minister also appointed a new head of Italy’s civil protection agency.

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New US jobless claims bump higher to 745,000

New claims for unemployment benefits rose to 745,000 last week as the pandemic continued to weigh on the US labour market even while some coronavirus restrictions were eased.

The number of jobless claims filed for regular state programmes increased by 9,000 in the week ending February 27, from 736,000 the previous week, the US labour department said on Thursday. Economists had expected claims to rise to 750,000.

The small increase came after last week’s jobless claims fell to their lowest level in three months. Economists expected the previous week’s report had overstated the decline, however, since Texas, the second-most populous American state, and much of the central US were hit with a severe winter storm that affected new filings.

The report also showed a rise of 9,246 in claims for federal pandemic unemployment assistance — which includes gig workers and the self-employed — to 436,696 on an unadjusted basis.

The uneven nature of the labour market recovery has provided an impetus for President Joe Biden’s $1.9tn fiscal stimulus package. Biden and Democratic leaders have reached a compromise that would limit eligibility for $1,400 stimulus cheques ahead of a Senate vote on the legislation.

Economists hope that the US economic rebound will speed up as vaccines are distributed more widely. The Biden administration has accelerated its vaccine timeline and now expects there to be enough doses to inoculate every adult in the country by the end of May — two months earlier than previously announced — as it hopes to turn the corner on the fight against the pandemic, which has killed more than 508,000 Americans. 

The vaccine rollout and the recent decline in coronavirus cases and hospitalisations continue to support the gradual reopening of the US economy. Texas and Mississippi this week threw open the doors for businesses, ending all capacity curbs for companies to bolster their economies.

That has alarmed some public health officials, however, who are concerned that the decline in new infections is starting to stall. Biden slammed the reopenings as a “big mistake”. 

The new claims figures come ahead of Friday’s non-farm payroll report, which is expected to show the US economy added 182,000 jobs and the unemployment rate held steady at 6.3 per cent in February. 

More than 18m Americans continue to seek jobless benefits almost a year after the pandemic led to widespread lockdowns and a steep economic contraction.

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Financial bubbles also lead to golden ages of productive growth

Sir Alastair Morton had a volcanic temper. I know this because a story I wrote in the early 1990s questioning whether Eurotunnel’s shares were worth anything triggered an eruption from the company’s then boss. Calls were made, voices raised, resignations demanded. 

Thankfully, I kept my job. Eurotunnel’s equity was also soon crushed under a mountain of debt. Nevertheless, the company was refinanced and the project completed. I raised a glass to Morton’s ferocious determination on a Eurostar train to Paris a decade later.

With hindsight, Eurotunnel was a classic example of a productive bubble in miniature. Amid great euphoria about the wonders of sub-Channel travel, capital was sucked into financing a great enterprise of unknown worth.

Sadly, Eurotunnel’s earliest backers were not among its financial beneficiaries. But the infrastructure was built and, pandemics aside, it provides a wonderful service and makes a return. It was a lesson on how markets habitually guess the right direction of travel, even if they misjudge the speed and scale of value creation.

That is worth thinking about as we worry whether our overinflated markets are about to burst. Will something productive emerge from this bubble? Or will it just be a question of apportioning losses? “All productive bubbles generate a lot of waste. The question is what they leave behind,” says Bill Janeway, the veteran investor.

Fuelled by cheap money and fevered imaginations, funds have been pouring into exotic investments typical of a late-stage bull market. Many commentators have drawn comparisons between the tech bubble of 2000 and the environmental, social and governance frenzy of today. Some $347bn flowed into ESG investment funds last year and a record $490bn of ESG bonds were issued. 

Last month, Nicolai Tangen, the head of Norway’s $1.3tn sovereign wealth fund, said that investors had been right to back tech companies in the late 1990s — even if valuations went too high — just as they were right to back ESG stocks today. “What is happening in the green shift is extremely important and real,” Tangen said. “But to what extent stock prices reflect it correctly is another question.”

If the past is any guide to the future, we can hope that this proves to be a productive bubble, whatever short-term financial carnage may ensue.

In her book Technological Revolutions and Financial Capital, the economist Carlota Perez argues that financial excesses and productivity explosions are “interrelated and interdependent”. In fact, past market bubbles were often the mechanisms by which unproven technologies were funded and diffused — even if “brilliant successes and innovations” shared the stage with “great manias and outrageous swindles”.

In Perez’s reckoning, this cycle has occurred five times in the past 250 years: during the Industrial Revolution beginning in the 1770s, the steam and railway revolution in the 1820s, the electricity revolution in the 1870s, the oil, car and mass production revolution in the 1900s and the information technology revolution in the 1970s. 

Each of these revolutions was accompanied by bursts of wild financial speculation and followed by a golden age of productivity increases: the Victorian boom in Britain, the Roaring Twenties in the US, les trente glorieuses in postwar France, for example.

When I spoke with Perez, she guessed we were about halfway through our latest technological revolution, moving from a phase of narrow installation of new technologies such as artificial intelligence, electric vehicles, 3D printing and vertical farms to one of mass deployment.

Whether we will subsequently enter a golden age of productivity, however, will depend on creating new institutions to manage this technological transformation and green transition, and pursuing the right economic policies.

To achieve “smart, green, fair and global” economic growth, Perez argues the top priority should be to transform our taxation system, cutting the burden on labour and long-term investment returns, and further shifting it on to materials, transport and dirty energy.

“We need economic growth but we need to change the nature of economic growth,” she says. “We have to radically change relative cost structures to make it more expensive to do the wrong thing and cheaper to do the right thing.”

Albeit with excessive enthusiasm, financial markets have bet on a greener future and begun funding the technologies needed to bring it to life. But, just as in previous technological revolutions, politicians must now play their part in shaping a productive result.

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