Sudden Stop

Monday 23 March 2020

The global economy is experiencing a version of sudden stop, a macroeconomic term used to describe harsh reversals of capital flows that once crashed developing economies, triggering massive demand shocks. In the face of an unfolding global pandemic however our current sudden stop is without discretion, and has no target. The myriad viens of global demand are part of a vast circulatory system. Our world has been rocked by an embolism.

The baseline academic work on sudden stop was done by Guillermo Calvo, starting in the late 1990’s. More recently, other researchers have created a taxonomy of sudden stop and its various permutations—depending on whether capital withdrawals from outside investors were followed by capital outflows from domestic investors. Needless to say, sudden cessations in flows lead to asset devaluations, followed by mass unemployment, and eventually solvency and currency crises. This time around, there is no specific country the rest of the world can attack in this way. Though, if left to run long enough, it’s not hard to envision several outcomes: mostly, a global depression with an increasing scramble for dollars, and capital hoarded up in government bonds—mostly US treasuries.

The near term solution of course is to both print money, and distribute money through the best channel: directly to the people. In this way, the upward flow of capital through debt service and low level demand for sustenance goods can at least function as an ongoing maintenance operation until conditions improve. Those who are certain this would be either inflationary, or stagflationary, have simply not absorbed the scale of capital destruction already in play. A crater is forming in the world economy. Filling it back up to levels below the rim is at best a partial replacement for conditions we enjoyed just two months ago. Countries like Britain are moving correctly now to concentrate on shoring up incomes.

There is no need, moreover, to tie the “cost” of these national rescue operations to debt. Doing so would only perpetuate a misunderstanding: this is not a capital investment event, that produces gains in the future. This is an event in which capital, flows, and economic activity have been (and will be) permanently destroyed. There is zero cost to printing money in such a situation and injecting it to people, small businesses, and large businesses along with hospitals, government services, and states. There is only a cost in not doing so.

The Gregor Letter has published for free over the past year, but that may have to change. The good folks at Substack, publisher of the letter, have encouraged me from the outset to set a subscription rate—but doing so has been of little interest to me. As a practicing journalist, the letter runs well as an advertisement for my work (generating future opportunities) and especially as a promotion platform for the Oil Fall series. Just to remind, the Oil Fall update will be released late next month.

The problem of course is that the practice of journalism, especially freelance journalism, is likely to run into some challenges in the months ahead. Meanwhile, most households, including mine, are likely to experience some disruptive fluctuations in both incoming revenue and outgoing expenses.

Therefore, it’s likely I will turn on subscriptions as soon as two weeks from now, when the next letter publishes. A couple of points to bear in mind:

I’m going to choose the lowest price level that Substack offers, something on the order of $5.00 per month or $50-$60 per year.

If you’ve read the letter for free the past year, you might think of a subscription as a donation, really, that acknowledges the value you’ve received already, with more to come.

I’m inclined to come up with a sweetener I could offer to paying subscribers, and will do my best to find a solution in this regard.

Sometime in the next week, I will clarify the new settings and will send all readers an email with the details. Thanks for your understanding.


Skies are clearing over Los Angeles and other cities as road fuel demand collapses. Gasoline futures in New York are now trading around 50 cents, and crude oil prices are flirting with $20 a barrel. My quick take: the alignment of fuel efficiency, global oil supply, and five years of slowing demand growth had already put crude oil on a course to the $40-$50 price band. But not to current prices levels. The global pandemic will further smash and dislocate crude complex pricing, and everyone should be aware that brief trips to the $10 range, and even the single digit range are now well within possibility. Remember, the physicality of commodity markets means that, in extreme situations, unheard of prices are at times necessary to clear surpluses and send signals to producers to halt additions to already overflowing inventory capacity. Jet fuel inventories are maxed out. If we do see oil trading at single digits, that will not therefore be a sign its value has collapsed to those levels. Rather, it will be a short-term artifact of sudden stop.

A common form of forecasting charlatanism is the claim that the current pandemic confirms one’s previous views about risks to various markets and the global economy. As a black swan event, the coronavirus does not confirm your views about central bank policymaking, valuations in stock markets, age old concerns about the Chinese property sector, or in my case, a bearish view on oil prices.

I was in London last week giving a series of interviews about my book, Oil Fall. And I took great pains to carve out and delineate the intensity of the current crisis from the long-forming sightlines which have pointed to the oil sector’s imminent stagnation. Indeed I previewed the difference between the two in the last letter.

If by chance you instead forecasted that a global pandemic was an ongoing risk for which we were insufficiently prepared, then do take a bow. Understandably, many are pointing to this TED talk from Bill Gates. That was 2015. So yes: take a bow, Bill, your work in global healthcare and disease suppression has served you well, and enhanced the value of your outlook.

For real time economy tracking, you might take a look at a current project from London based Ember.

The way ahead for economies is not really forecastable right now, but I would like to emphasize two areas that deserve your attention: one having to do with finance, and the other, politics.

First, an extended period of low interest rates was very clearly a catalyst for wind and solar in the early part of last decade. Now that we’ve moved far down the cost curve for new wind and solar, another extended period of low rates could prove explosive for the clean energy buildout. Remember, we are still in an era of aging populations. Income investments required to serve their retirement are in short supply. The income stream that’s thrown off by clean energy generation has good visibility. In the next few years, I would expect a great expansion of financing, and financial-instrument packaging, to gather around this market. Coda: rates have already gone negative in the 90 day US T-bill market.

Second, the speed of job losses now seen across the developing world is nothing less than harrowing. Various financial groups from Morgan Stanley to Goldman Sachs have started releasing GDP and unemployment forecasts, and the near term is brutal. The Federal Reserve’s James Bullard speculated unemployment could reach as high as 30%. Anecdotally, I spoke with airline industry workers this past week both at Heathrow in London and at Vancouver, British Columbia. From shuttle and taxi drivers, to flight crew and pilots, the story I was told was of one of near total erasure, total wipeout. Everyone is losing their job. The political implications are simply too big to ignore.

Here in the US, we’ve become accustomed to political faultlines proceeding in fairly predictable directions for decades. However, at 25%-30% unemployment those political lines would not just blur. They would melt. You can see hints of what’s to come when an ultra conservative senator, Josh Hawley from Missouri, is already shouting he won’t vote for any rescue bill that puts corporations ahead of people. We are early in this process; so where will Senator Hawley and other representatives from poor red states be as we move deeper into recession? Without regard to any political affiliation, I would say this: at depression levels of unemployment, the politics of Franklin Delano Roosevelt would quickly become ascendant. It’s only March, and you can already see FDR starting to cast a shadow.

On a positive note, I was quite encouraged by what I saw in London last week. I rode all-electric buses made by BYD, talked to cab drivers who now run on a hybrid platform, took note of the city’s extraordinary rise of cycling and bike infrastructure, and noted all the improvements to the underground. I moved back to the US from London in late 1998, and the city today is remarkably cleaner. A few photographs follow, with remarks.

Electric vehicles, delivery vans, and cabs can now be seen charging up everywhere in the city as charging stations seem to be ubiquitous—far more prevalent than in any US city:

London’s bicycle game is radically transformed, with dedicated lanes everywhere, bike shares, and heavy bike traffic spotted throughout the city. Here’s Waterloo station, which now looks like a scene from the Netherlands:

London has also embraced transit-oriented development. Inside of London Bridge station, there’s a nice glass-cased model showing how The Shard—the striking skyscraper by Renzo Piano—was inserted into the same plaza as the national railway’s terminus:

Gregor Macdonald, editor of The Gregor Letter, and

The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.