Apr 23, 2020

Axios Capital

By Felix Salmon
Felix Salmon

If you're anything like me, you spent a large chunk of Monday simply staring at the oil price, jaw agape. OK, you're probably not much like me. But I won't soon forget the spectacle of oil dropping more than $50 per barrel in one day, and closing deep into negative territory.

  • Yesterday was Earth Day, which got me thinking about climate change. In this week's newsletter, I'm on the hunt for solutions. What can be done right now? I’ll cover a few of those ideas in this newsletter.
  • Today's word count is 2,029, which means this newsletter should take you about 7½ minutes to read.
1 big thing: Financial ideas for saving the planet

Illustration: Sarah Grillo/Axios

A crisis is a terrible thing to waste. The coronavirus crisis is a dress rehearsal for the climate crisis: It will help show us not only what is possible, but also, crucially, whether or not those actions work.

Why it matters: There has never been a better time for big financial ideas to become reality.

  • The natural conservatism of rich governments has evaporated in the face of the global pandemic. They've already implemented more than $8 trillion in fiscal action, and many more policies are being proposed.
  • The biggest fiscal idea of them all, the Green New Deal, will have to wait at least until after the pandemic has been brought under control. But the main opposition to the GND is centered on its cost, and the potential negative consequences of enormous government borrowing and spending.
  • We're about to find out, in countries around the world, whether massive government deficits prove to be inflationary. If they do, that's bad news for the GND. But if they don't, many of the arguments against it are effectively defanged.

The big picture: "For everything except the financial markets, time has stopped," Nobel economics laureate Joe Stiglitz tells Axios. But capitalism is based on the flow of money. Now that many of those flows have stopped, governments are attempting to magic replacement flows out of thin air.

  • In a normally functioning economy, Stiglitz says, "I’m supposed to be able to pay you because I’ve earned money, not because I've received a gift from the government. We’re suspending the system of accountability, which is money."

The bottom line: Addressing the current economic crisis means finding innovative ways to create new flows of money, fast. The good news is that there are almost no technical obstacles to doing that. Money is invisible and electronic; it can be created at the press of a button.

  • There's still one taboo: Central banks have shied away from simply printing money, as opposed to lending it to banks, governments and others and expecting repayment in the future. They'll do most anything else, however.
2. Improving the Paycheck Protection Program

Illustration: Eniola Odetunde/Axios

Of all the economic stimulus programs, the most controversial and least popular is the Paycheck Protection Program, or PPP. That's a bit weird, since it's basically free money for small businesses, which is something you'd expect to be popular.

  • The program managed to get $342.3 billion to small businesses (including Axios) in the space of just a few weeks. That's pretty impressive. Most of that money will go straight into paychecks, keeping Americans employed. And there's another $322 billion where that came from.

Why the anger? The biggest flaw with the PPP was just that it was underfunded. Almost all small businesses are eligible, as well as some larger ones. That created a two-class system where some businesses got funded and others didn't, which is unfair. Worse, many of the funded businesses seem to be the ones that needed the money least — they were already rich, or had access to capital markets.

  • Businesses had to apply through banks, and many banks, large and small, failed their clients. Technology crashed, phones weren't answered, and a lot of CEOs got very angry and frustrated.
  • The government wanted the banks to act like simple utilities. But banks aren't set up to do that. Instead, they're built to maximize complexity and cross-selling. Simpler and smaller banks seem to have done better at just getting applications in.
  • America's lenders earned $10 billion in fees for this underwhelming display of general incompetence, which turbocharged the anger.

What other ideas are out there? Here are three.

1. Free small-business overdrafts. Mark Cuban emails to suggest that instead of asking for 2.5 months of payroll in advance, small businesses should simply be automatically reimbursed every time they go overdrawn to pay workers. The overdraft is supplied by their bank, which has their payroll information, and then the bank is made whole by the Fed, using funds from Congress.

2. Don't use the banks at all. Instead, use the tax withholding system, whereby employers pay taxes on a pay-as-you-go basis to the government. Those withheld taxes can then be sent straight back to the employer as an employment subsidy.

3. A paycheck guarantee, which would be a bit like the system that Denmark has implemented. Set a cap of around $90,000 or $100,000 per year, and then the government covers 75% or so of workers' earnings up to that cap, by reimbursing employers.

Between the lines: All three of these ideas have the advantage that many small businesses don't trust the government to forgive their loans in seven weeks' time. If loan forgiveness happens overnight, or if there's never a loan at all, then businesses will feel much more comfortable using government money to pay workers.

3. Dealing with debts

Illustration: Sarah Grillo/Axios

What to do about the billions of dollars of non-payroll liabilities that can't or shouldn't be paid? In normal times, companies file for bankruptcy protection when they can't pay their debts — but these aren't normal times.

  • Context: The costs of bankruptcy are enormous. It is a huge burden on the court system, it can last for years, and it tends to destroy institutional capital. Few companies come out of it unscathed, with a motivated and largely intact workforce.

Stiglitz has long been a proponent of what he calls "Super Chapter 11," which would be implemented in times of crisis, when a large number of companies are defaulting on their debts at the same time.

  • His metaphor: If a student fails an exam, that's probably her fault. If 70% of the class fails an exam, that's probably the teacher's fault. In that case, you don't start from the assumption that the student did something wrong and deserves some kind of terrible consequence.

How it works: Under Super Chapter 11, there would be a strong presumption that companies would continue to operate with their existing workforce and their existing management. Then there's a quick-and-dirty formula — "rough justice," Stiglitz calls it.

  • The top claimants are wage earners: Keep paying employees.
  • Then come suppliers, followed by tax obligations. (Normally, tax liens always come first.)
  • Bank lenders and bondholders receive nothing until the company is profitable.
  • Shareholders are mostly wiped out, but receive warrants which allow them to start making some money if the company achieves its pre-crisis valuation.

Of note: Toys R Us would still be going if Super Chapter 11 had been an option.

  • Between the lines: In times of full employment, it might be OK for such companies to go under. But society as a whole can't afford to see thousands of retailers closing permanently because of the crisis.

The bottom line: In times of global crisis, the normal financial architecture needs to be reworked. Some creditor protections are lost, but the gains for workers, citizens and corporate continuity make that a worthwhile bargain.

4. Addressing the sovereign money crunch
Data: Knomad; Chart: Axios Visuals

Bankruptcy is not an option for sovereign borrowers.

  • That's not a big problem for countries like the U.S. that can borrow unlimited amounts in their own currency.
  • But it's a huge problem for most countries that need to fund their coronavirus response while also servicing existing debts. For those countries, one solution is the creation of new obligations issued at a super-sovereign level.

Two big ideas along those lines are the proposals that the IMF should issue $500 billion in new Special Drawing Rights and that the EU should issue perpetual bonds.

Poor countries should also be able to push back their payments to private-sector bondholders for 12 months. A new proposal from a group of authors, including sovereign debt guru Lee Buchheit, suggests a clever way for them to do that.

  • Countries would instead send the payments to the World Bank, which would use them to fund a new credit facility.
  • That facility would then immediately lend the money back to the sovereign, to be used to fight COVID-19.

Here's why it makes sense for countries to send payments to the World Bank, just for those monies to come straight back again.

  • The Bank can certify that the funds will be used to fight the virus.
  • After a year, the countries would repay the Bank, with interest. (Thanks to its preferred creditor status, it nearly always gets repaid.) The Bank, in turn, would pass the money on to bondholders.
  • The bondholders would have very little incentive to sue for their missed coupon payments, because it would be cheaper and easier to just wait a year to get their money from the Bank. (If countries are sued, there's a "doctrine of necessity" they will be able to use to defend themselves.)

By the numbers: According to the World Bank, remittances to poor countries — the most important way they get money from abroad — are expected to fall by an unprecedented $109 billion this year. That also happens to be roughly the amount of money those countries need to spend on servicing foreign bonds.

5. When the world stops moving
Expand chart
Data: FactSet; Chart: Axios Visuals

The price of oil is at all-time low. Even if you put aside the technical factors that caused the May WTI futures contract to close at negative $37.63 per barrel, oil has never been this cheap, in real terms, since the 1973 oil crisis.

Why it matters: Oil, like cash, is based on flows: the number of barrels produced per day, versus the number of barrels consumed. Oil also literally makes the world move: powering cars, trucks, planes, trains and ships. Now that the world has stopped moving, demand is well below supply, and storage capacity is running out.

  • By the numbers: Global oil demand averaged 99.9 million barrels a day last year. April’s oil demand will be 77.6 million barrels a day, estimates Magnus Nysveen, head of analysis at consultancy Rystad Energy.
  • While demand for oil has stopped suddenly, supply of oil can't stop so easily. Capping wells is expensive, and causes lasting damage. And international cooperation is in short supply these days.

Crude oil is dirty, smelly, flammable, and extremely toxic. It's also the chief contributor to global warming. And as we're now seeing, it's a terrible investment.

The bottom line: Oil is providing an object lesson in why currencies are superior to commodities — and certainly shouldn't be linked to commodity prices.

6. Carbon emissions fall, but not as much as you might think
Data: Carbon Brief, IEA and UNEP; Note: Carbon Brief analysis projects COVID-19 impact, IEA shows current emissions pathway, and UNEP’s “emissions gap” report shows needed path for the Paris Agreement’s goals; Chart: Naema Ahmed/Axios

Global carbon emissions are projected to drop an unprecedented 5.5% this year, according to an analysis by Carbon Brief, a website on climate change and energy.

  • They'll need to fall a lot more than that — not just in total, but even on an annual basis. The 2015 Paris Agreement is designed to keep global temperatures rising no more than 1.5°C over the coming decades. That would require an annual 7.6% drop in emissions.

The bottom line: A global pandemic is the worst possible way to reduce carbon emissions. Even an enormous fall in economic activity doesn't naturally reduce emissions by as much as is needed.

  • If you thought the recent 90% reduction in international travel might do the trick, consider yourself disabused. Any workable solution is going to have to be able to accommodate growth, rather than calling for shrinking the economy.
7. The Axios app

Graphic: Axios Visuals

Some personal news, as they say on Twitter: I’m now an app! I’m very proud to announce that Axios Edge is one of the channels in the new Axios mobile app, available now for your iPhone or Android device.

  • You can sign up for push notifications in any of the channels, including mine and that of the breaking news team.

Please let me know what you think. As ever, I love feedback and requests about the newsletter, the app, or anything else. I’m felix@axios.com.

8. Coming up: The first 2020 GDP report

Illustration: Sarah Grillo/Axios

Axios' Courtenay Brown writes: U.S. first quarter GDP data comes out on Wednesday. Estimates are all over the map for how the economy held up through the end of March — while most of the quarter was fine, the last couple of weeks were terrible.

Why it matters: The economy is undeniably in a recession, though official data is slow to confirm that. The Q1 figures will begin to quantify the damage.

  • Analysts' forecasts range enormously, between +1.9% annualized growth on the high end and -10% on the low end. The median forecast, per FactSet, is for a 3.5% annualized drop. There hasn't been a decline that steep since 2009.
  • Data for the current quarter will certainly be far uglier. That will be released on July 30.
9. Building of the week: Robarts Library
Photo: Roberto Machado Noa/LightRocket via Getty Images

The University of Toronto's Robarts Library is the best example of Brutalism in the city.

  • The 14-story library, almost a million square feet in total, was completed in 1973 — late enough for the backlash against Brutalism to be in full force already. The building has therefore never been much loved.
  • Architects Warner, Burns, Toan & Lunde all but abandoned right angles in the building, which is based on a series of equilateral triangles. Sixty-degree angles abound, and multiple textures create a building that, unusually for Brutalism, is decidedly ornate.
Felix Salmon