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    Exclusive-China to run budget gap of 3% of GDP in 2024, issue special debt -sources

    While the deficit figure is lower than this year’s revised 3.8% target, suggesting Beijing wants to maintain fiscal discipline and is not considering a big fiscal bazooka next year, the option to issue off-budget sovereign debt gives it flexibility to step up stimulus to maintain stable economic growth. Two of the sources told Reuters special sovereign bonds could be issued to pay for extra expenditures as needed. One of them said they could amount to 1 trillion yuan ($140.16 billion). All three sources spoke on condition of anonymity due to the sensitivity of the discussions.China has issued special treasury bonds before. In 2020, it sold 1 trillion yuan in such debt to fund COVID-related measures. In 2007, it issued 1.55 trillion yuan to capitalise its sovereign wealth fund. In 1998, it issued 270 billion yuan to recapitalise state banks.China does not include special bonds in its annual budget plans, as it sees the instrument as an extraordinary measure to raise proceeds for specific projects or policy goals in times of need.”The 2024 deficit ratio is set to be 3% and the insufficient part can be supplemented by special sovereign debt,” one of the sources said. China’s State Council Information Office, which handles media queries on behalf of the government, the finance ministry, and top state planner the National Development and Reform Commission did not immediately respond to a Reuters’ request for comment.The official targets are usually not announced publicly until China’s annual parliament meeting, usually held in March.Another key part of China’s overall fiscal stance is the bond quota local governments are allowed to issue, which is also outside the government’s budget. One of the sources said it could be close to 4 trillion yuan in 2024, versus 3.8 trillion yuan this year. The other sources did not provide any figure.The annual Central Economic Work Conference, during which President Xi Jinping and other top officials chart the course for the world’s second-largest economy in the coming year, took place behind closed doors on Monday and Tuesday.A readout of the meeting by state news agency Xinhua said the leaders agreed to a proactive fiscal policy for 2024.China plans a new round of fiscal and tax reforms and the government is looking to improve the structure of fiscal spending to support strategic tasks, state media said, without giving details. The Politburo, a top decision-making body of the ruling Communist Party, said last week that fiscal policy would be “flexible, moderate, precise, and effective.”China has historically kept its budget deficit ratio at or below 3%, with recent exceptions being the pandemic-hit years of 2020 and 2021, as well as this year as authorities stepped up efforts to bolster a stuttering economic recovery. STEADY GROWTHChina’s government advisers have told Reuters that they would recommend economic growth targets for 2024 ranging from 4.5% to 5.5%, with the majority favouring a target of around 5% – the same as this year.All three sources who spoke with Reuters after the annual meeting confirmed China was likely to target growth of around 5% in 2024.Investors are scrutinising China’s fiscal position more closely after ratings agency Moody’s (NYSE:MCO) last week slapped it with a downgrade warning, citing costs to bail out debt-laden local governments and state firms and control its property crisis.Local government debt reached 92 trillion yuan, or 76% of China’s economic output in 2022, up from 62.2% in 2019, International Monetary Fund data showed.Analysts expect China to reserve some flexibility around its budget deficit next year, in case the economy underperforms.In October, China unveiled a plan to issue 1 trillion yuan in sovereign bonds by year-end to enhance flood-prevention infrastructure. They were included in the budget, raising the 2023 deficit target to 3.8% of GDP from the original 3%.While economic growth is on track for around 5% this year, it compares with a COVID-weakened 2022, and reaching a similar level in 2024 may need heavier fiscal support, analysts said. ($1 = 7.1348 Chinese yuan renminbi) More

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    China’s fiscal revenue growth gathers pace in Nov

    In the first 11 months, fiscal revenue logged a 7.9% increase from a year earlier, compared with 8.1% growth in the January-October period, finance ministry data showed.Fiscal expenditures grew 4.9% in the first 11 months, compared with a 4.6% gain in the first 10 months, the data showed.For November alone, fiscal spending jumped 8.6%, versus a 11.9% rise in October, according to Reuters calculations.The economy is struggling with rising deflationary pressures, mounting local government debt and an ailing property market amid tepid demand both at home and abroad, raising calls for more policy support.The cities of Beijing and Shanghai further relaxed home purchase restrictions on Dec. 14, adding to a series of measures to shore up the sluggish housing market over recent months.At an agenda-setting meeting earlier in December, top leaders pledged to step up policy adjustments to prop up an economic recovery in 2024.”Fiscal policy will do the heavy lifting of supporting growth next year,” Goldman Sachs said in a note after the meeting.China plans to implement structural tax and fee cuts, and plans a new round of fiscal and tax reforms while optimising the structure of fiscal spending, according to the meeting takeaways. More

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    New Mexico’s Spaceport America Is an Economic Dream Deferred

    From his tiny gem store in southern New Mexico, Robert Hanseck spends his days untangling chakra beads and answering questions about the healing properties of amethyst crystals. After four decades behind the register, he has met thousands of wellness-minded tourists eager to explore the hot springs that span the region.But he almost never sees the type of traveler he was promised would transform his small town of Truth or Consequences: space enthusiasts.“It’s been a flop,” he said of Spaceport America, a project that was conceived as the vanguard of commercial space travel — and that has been promoted by state officials for more than two decades as a launchpad for the local economy.Less than a mile up the road, Arthur Burger, who owns an art gallery, recounted the moment in 2021, not long after he moved to town, when he watched in awe as a rocket plane soared into the sky beyond the nearby mountain range. He remembers the resounding boom.After years of delays, Virgin Galactic, the anchor tenant at Spaceport America, had sent its founder, Richard Branson, and a team to the edge of space — evidence at last, many in the area thought, that New Mexico was a front-runner in the commercial space race.“That week, people came in from London, from Taipei,” Mr. Burger said. “It was surreal.”In this stretch of rural New Mexico, there are plenty of opinions about Spaceport, a futuristic structure on a desolate stretch of desert that has cost more than $200 million in state and local funds.Residents in and around Truth or Consequences have waited for Spaceport to produce a payoff in aerospace-related jobs and tourism.Robert Hanseck at his gem store. He says he almost never sees the type of traveler he was promised would transform the town.Residents of Sierra County, which includes Truth or Consequences, and neighboring Doña Ana County have contributed millions from sales taxes to help subsidize the venture.Many say they are tired of waiting for the payoff that was supposed to come from aerospace-related jobs and from tourists drawn like storm chasers to the scene of the action. But others see it as an ambitious bet on the future that has finally begun to produce results.This year, Virgin Galactic has conducted six Spaceport launches, the most in any year so far, blasting researchers and space tourists who can afford the $450,000 ticket toward the edge of space.Virgin Galactic uses a carrier aircraft to take a rocket plane about 45,000 feet above Earth, and from there it disconnects and propels passengers to an altitude of more than 50 miles.Despite the recent momentum, another setback came in November when Virgin Galactic laid off 185 employees — 73 in New Mexico — reducing the company to around 800, and said it would suspend flights in mid-2024. The layoffs, according to the company, are meant to allow Virgin Galactic to focus resources on a new class of suborbital space planes. And this month, Mr. Branson told The Financial Times that he would no longer invest in Virgin Galactic, noting that the company “does not have the deepest pockets.”For Amanda Forrister, the mayor of Truth or Consequences, the idea that Spaceport will one day reshape her community still feels possible, but far from a guarantee.“It is a bit of a question mark,” she said.Getting In on the Ground FloorSpectators watched Virgin Galactic’s sixth and final launch of the year last month.The allure of rockets, space and what exists beyond us has deep roots in New Mexico.After a military balloon crashed near Roswell in 1947, that southeastern New Mexico town became part of the zeitgeist, driving decades of conspiracy theories from people who believe it was the crash site of an unidentified flying object used by aliens. The world’s first atomic bomb, developed at Los Alamos National Laboratory in the northern part of the state, was detonated at what is now the White Sands Missile Range, where the U.S. military still tests rockets.So in late 2005, when Gov. Bill Richardson announced a plan to collaborate with Virgin Galactic on a commercial spaceport in the state, it sounded to many like a natural fit — and a potential boon.“This is a unique opportunity for New Mexico to be on the ground floor of a new industry that will bring new companies, more high-wage jobs and opportunities that will move our state’s economy forward,” Mr. Richardson, who died in September, said when signing enabling legislation three months later.The reality of commercial space travel felt firmly within reach, and almost immediately Mr. Branson’s company began taking spaceflight reservations at $200,000 apiece.In 2006, construction began about 30 miles east of Truth or Consequences and ultimately used $218.5 million in public funds. From a distance, the circular structure, on 18,000 acres of sagebrush and yucca, looks almost like something from a sci-fi film. Cattle guards line the two-lane road that leads to its entrance. More than half the money to build it was allocated by the state, and the rest — $76.4 million — was generated from taxes in the local counties.Virgin Galactic’s rocket-powered plane, left, flew above its mother ship after its release on its way to the edge of space in August.Andres Leighton/Associated PressVoters in Doña Ana County approved a 0.25 percent gross receipts tax to support Spaceport in 2007, and Sierra County voters followed a year later. A state report released in 2005 estimated that by 2020, Spaceport could result in $550 million of additional annual economic activity and bring roughly 4,300 jobs to the area.“The economic impact of this new spaceport is potentially quite large, reflecting the strong upscale potential of the nascent space tourism industry,” the report said.The report also forecast 376 suborbital launches in 2019.In reality, it has created only a small fraction of that — $138 million in economic output in 2022 and about 800 jobs generated, according to a recent report from Spaceport. The first human spaceflight was in May 2021.“Looking at the numbers and what has taken place over the years, it’s been a bad investment,” said Shannon Reynolds, a Doña Ana County commissioner.Mr. Reynolds said Mr. Branson’s recent comments were dismaying.“If he will not invest in his own operation at Virgin Galactic, what are others supposed to deduce from this?” he asked. “I believe we bet on the wrong anchor tenant at the Spaceport.”‘This Has Been a Long Road’Allan Turk, director of aerospace operations for Spaceport America, giving a talk. In recent years, Spaceport and Mr. Branson found themselves up against an increasingly crowded field of billionaire competitors.Nine days after Mr. Branson’s 2021 suborbital spaceflight — the one Mr. Burger watched from his art gallery — Jeff Bezos took a similar voyage with his aerospace company, Blue Origin, which launched from rural West Texas. Elon Musk’s SpaceX, which was briefly a tenant at Spaceport, now has launch sites in Florida, Texas and California.For many local residents, their deep frustration has been caused not only by the delays but also by concerns about the use of public funds.In 2020, Dan Hicks, the executive director of Spaceport America, was fired after a whistle-blower came forward with allegations of financial mismanagement and abuse of authority.The state hired a firm to investigate, and the state auditor said it had found “a severe breakdown of internal controls that resulted in possible waste and abuse of taxpayer funds.”In an interview, Scott McLaughlin, who succeeded Mr. Hicks as Spaceport’s executive director, said the recently released economic impact report by his team pointed to encouraging signs on the horizon.“This has been a long road requiring patience by the citizens and policymakers,” Mr. McLaughlin said. He noted that aside from Virgin Galactic, another key tenant is SpinLaunch, a company building technology aimed at providing rapid, low-cost access to space. The company had its first test flight in 2021.“A main priority of mine,” said Scott McLaughlin, the executive director of Spaceport, “is to find new tenants.”“A main priority of mine,” Mr. McLaughlin said, “is to find new tenants.”He said a large part of his job involved talking to companies almost weekly about Spaceport and giving tours to prospective tenants a couple of times a month.“Many of the companies we are talking to, though, are very early stage in their technology development, so our recruitment might go over two or more years,” Mr. McLaughlin said. “With young companies, it is hard to know who will eventually succeed or fail.”Before dawn on a recent morning — days before Virgin Galactic announced its plan to halt launches in the middle of next year — more than a dozen STEM educators and students arrived at Spaceport America for what would be Virgin Galactic’s sixth and final launch of the year.The air was frigid, and the group huddled on a concrete slab a short distance from the runway. At 9 a.m., the Virgin Galactic aircraft, known as V.M.S. Eve, lifted off, carrying two researchers and a space tourist who had paid $450,000.The aircraft circled high above in the sky before the rocket plane, known as V.S.S. Unity, separated and hurled the crew toward the edge of space for several minutes, reaching nearly three times the speed of sound. From liftoff to touchdown back at Spaceport, the mission lasted about an hour. It then takes Virgin officials weeks to prepare Unity for another launch.“It’s quite something to see,” Mr. McLaughlin said in a parking lot where about a dozen onlookers had traveled to watch the flight.“Sometimes this lot is full,” he said. “Sometimes it is not.”Earthbound AttractionsThe game show “Truth or Consequences” pledged to do a broadcast from the first place to rename itself after the program. Hence the town’s name, since 1950.While Spaceport America’s launch site address is given as Truth or Consequences, the heart of the town of 6,000 people is a 40-minute drive away on the Rio Grande.The town, once called Hot Springs, got its name in 1950 after the host of the game show “Truth or Consequences” pledged to air the program on its 10th anniversary from the first place to rename itself after the show.This time of year, as winter transplants arrive to escape the cold, cars with license plates from Minnesota and Montana line the main road. On a recent afternoon, hours after the launch, the Spaceport America visitor center in town, inside an old adobe-style building, was empty.Kathleen Sloan, a local journalist and longtime resident, said she was tired of promises about Spaceport and found the whole situation to be a bit of a farce since Virgin Galactic aircraft could theoretically take off from some airports.Local residents, she said, “have paid enough.”And yet the town’s growth is undeniable.In a little over a year, PreReal Investments, based in New York City, has bought more than 100 properties in Sierra County at a cost of roughly $40 million. The company plans to resell the mixture of homes and commercial spaces.But while the company promotes the property’s proximity to Spaceport America, “our choice was driven by the county’s natural resources,” said James Prendamano, PreReal’s chief executive.The “hot springs, a wide array of world-class outdoor activities” were critical to his investments, he said.“There will always be an interest in space,” said Marianne Blaue, center, of the Truth or Consequences Brewing Company, “and I think that is beneficial for the community.”That type of investment is reassuring, said Marianne Blaue, who moved to town with her husband, John Masterson, in 2016 after they left tech jobs in Seattle.Eager to help build a sense of community in their new home, they soon opened Truth or Consequences Brewing Company, the first brewery in town, and have noticed a steady stream of fellow transplants arriving, especially since the pandemic began.While Ms. Blaue knew a bit about Spaceport before moving, she hadn’t realized just how close it was to her new home. They’ve had Spaceport and Virgin employees and a handful of customers on space missions stop in for a beer, said Ms. Blaue, whose selection includes space-named brews such as Star Eater Black I.P.A. and Cosmic Blonde.“There will always be an interest in space,” she said, “and I think that is beneficial for the community.”On the afternoon of the recent launch, Mr. Hanseck, who owns the gem store, watched as cars trickled past his shop. This time of year, he said, most of his clients are snowbirds in town for the winter.Arthur Burger at his art gallery. He recalls the moment in 2021, soon after his arrival, when he watched a rocket plane soaring into the sky and heard a resounding boom.While Mr. Hanseck unpacked cardboard boxes of merchandise, he considered the longstanding promise of space tourists descending on his community. He chuckled to himself.“I know what people come here for, and it’s not to go to space,” he said. “It is wishful thinking at best.”On the same afternoon, Mr. Burger was at his gallery, working with a local artist to put up a new painting.He has enjoyed escaping the saturated art scene of Santa Fe, he said. These days, he spends much of his time showcasing the work of Sierra County artists, including high school students.“Did you hear the boom?” he said with excitement to a patron who lives in town, referring to the sound when the V.S.S. Unity re-entered the atmosphere. “There are few places in the world where you can see and hear something like that.” More

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    Larry Summers: we haven’t nailed the landing yet

    This article is an on-site version of our Unhedged newsletter. Sign up here to get the newsletter sent straight to your inbox every weekdayGood morning. Yesterday the 10-year Treasury yield fell below 4 per cent for the first time since July, as the market continues to process Wednesday’s pivot by the Federal Reserve. On the equity side, small-cap stocks continue to be the story: while the S&P 500 has shrugged, the Russell 2000 is up 6 per cent since Jay Powell started talking. Send your reading of the post-Fed moves: [email protected] and [email protected] interview: Larry SummersLarry Summers — former Harvard president and Treasury secretary, and new OpenAI board member — is one of the most influential economists of our time. Below, he talks to Unhedged about the state of the US economy; the right approach to monetary policy; the future of the Phillips curve; the productivity impact of AI; and the economic implications of a second Trump presidency (the interview was recorded early in the week, before Wednesday’s Fed press conference).Unhedged: Have we landed softly?Larry Summers: I think it’s premature to judge that we have landed softly, because I think that if you look at underlying inflation rates, depending upon your measures, some of them are still running well above 2 per cent. If inflation is currently at 2 per cent, it’s not clear that it won’t go back up again. And it isn’t clear that the landing has been soft in the sense that there are a variety of problems — declining flows of credit, inverted yield curves, aspects of consumer behaviour, rising evidence of credit strains — that raise the possibility that the landing won’t be soft, if there is one. So at this point, we may soft land on the aircraft carrier, but the landing may be hard, and we may overfly. That said, if by a soft landing one means a period when you have inflation above 4 per cent and unemployment below 4 per cent, and you extricate from that situation without a recession — that’s something that’s never happened before in the United States and for which there’s very little precedent in the industrial world. And it certainly looks in play as a possibility, though I think it’s a long way from assured.Unhedged: What do you think is unique about this period in history, such that it is at least possible that such a thing might happen?Summers: It’s probably a little bit premature to start speculating about what aspect of history makes this happen, when it’s far from clear that it has happened. But if events have been more favourable than what I might have expected a year or two ago, I think primary credit should be given to the Fed for having acted relatively rapidly to correct its earlier errors. Early on I compared the excessive Covid stimulus to the experience of the Vietnam war period, and talked about how inflation had ratcheted up between 1966 and 1969, and then became entrenched. Here, the fiscal expansion was scaled very substantially back between 2021 and 2022. And the Fed in 2022 raised rates very sharply in a way that did not take place during the Vietnam period.So I think that, ironically, if team transitory proves to be vindicated, it will only be because their policy advice was not taken. It will be because the Fed moved strongly enough that [inflation] expectations never became unanchored. And I think that will be the lesson: that strong Fed action that asserts credibility can be surprisingly effective in containing inflation through its impact on inflation expectations, rather than by generating economic slack. If we are successful, it will be a tribute to the fact that the Fed’s actions in the two years after 2021 were a less than 1 per cent probability set of actions relative to what the market expected. Unhedged: If you had the job of setting the economic parameters around easing or normalising policy, how would you do it?Summers: I think the Fed has done itself considerable damage by putting as much emphasis on forward guidance and transparency as it has. I [prefer] the Volcker/Greenspan approach, which is to recognise that the Fed is a little bit like the Delphic oracles. People regarded them as omniscient and omnipotent, but they were in fact neither. So the oracles kept their pronouncements vague and oracular, not concrete and specific, because it was impossible to be concrete and specific without being wrong frequently and undercutting credibility. So I think that the Fed has had a problematic approach to financial communications.The two most successful bits of financial communications in the last generation, I would argue, were both of an entirely non-dot-plot or forward guidance variety. They were Mario Draghi’s statements about “whatever it takes”, and Bob Rubin’s “the strong dollar is in the national interest”, both of which qualified as general and oracular.So I would be endeavouring to not constrain myself substantially with any set of predictions or attempt to lay out my reaction function, because I would recognise that events would come in ways that I wouldn’t anticipate, and that I would run the risk of trouble. Another way to say it is: forward guidance is a bit of a fool’s game. The market doesn’t especially believe it and the Fed feels constrained by it down the road.I think I would be looking for very clear evidence that inflation was durably put down, because I would be very concerned that we would confuse touching 2 per cent with achieving 2 per cent, and even more concerned with touching 2.7 per cent and regarding that as a basis for easing . . . I would be very much aware that if the transmission from monetary policy to inflation when there had been tightening was more direct, and involved output less than one might have expected, there was the risk of something parallel on the loosening side.So I would be in less of a hurry. The current market view that we will have a soft landing and the Fed will be able to cut rates by 100 basis points over the next year strikes me as possible, but it is not at the centre of my expectations. We may have no recession, in which case I rather doubt that the Fed will be able to cut rates by 100bp, or we may have a recession, in which case the Fed will cut rates by somewhat more than 100bp.Unhedged: How do you think the Phillips curve emerges from the experience of the past few years?Summers: First of all, one should always have been aware that a substantial part of the increase in inflation was transitory. So no one should have thought that most of the route from 7 per cent to 2 per cent needed to be achieved in ways that were correlated with increases in unemployment. I think there’s a question as to how much disinflation has been achieved in terms of core-type measures of inflation already. I think it is fair to say that it looks like there’s more susceptibility to the inflation expectation term. And I think it is true that the Phillips curve coefficient is looking small.So it certainly hasn’t been a glorious period for the Phillips curve theory in any of its forms. But I’m not sure we have a satisfactory alternative theory. The theory to which many economists are gravitating to is that the Phillips curve is basically flat, inflation is set by inflation expectations, and inflation expectations are set by the people who form inflation expectations. And that’s a little bit like the theory that the planets go around the universe because of the orbital force. It’s kind of a naming theory rather than an actual theory. So I think inflation theory is in very substantial disarray, both because of the Phillips curve problems and because we don’t have a hugely convincing successor to monetarist-type theory.Monetarist theory had an idea that the price level had to do with the quantity of paper versus the quantity of goods. But now that money pays interest, what the nominal quantity is, that is divided by a real quantity and sets the price level, is unclear. We know from extreme examples, like the monetary history of Argentina, that in some contexts a theory about the price level and nominal quantity of money becomes the right theory for thinking about inflation. But how one thinks about that in the context of relatively low inflation environments, I think economics is embarrassingly short on clear, operational theories. While I have Keynesian policy instincts, I have long been pretty unconvinced by new Keynesian models as an intricate structure.Unhedged: Pivoting to your new role as a board member of OpenAI, is there any disciplined way to think about the potential effect of an innovation like generative AI or large language models on productivity? Are there historical parallels we can turn to?Summers: First of all, I think that there are those who know they don’t know, and those who don’t know they don’t know. I’m one of those who knows that he doesn’t know. But it is a useful generalisation that fundamental technologies often take longer to happen than you think they will, and then happen faster than you thought they could. If you think about electrification, that was the story. And the first time I heard that shale oil was close I was 12-years-old. But in the last 10 years, the fracking revolution and US energy independence has been much larger than anybody would have expected. The first time one heard that computers were going to be transformative I was a graduate student, and the impact in terms of big productivity acceleration took place 15 years later, in the 1990s. It’s important to remember with respect to technology that there’s a kind of productivity J-curve. Think about autonomous vehicles. Tens of thousands of people are working on them. And so far not a single driver has been replaced.I’m struck that most of the discussion of artificial intelligence that I encounter involves thinking about how I can do tasks I recognise, better. And my guess is that when the history of this is written several decades from now, a large part of it will involve tasks of which we currently can’t conceive. It remains to be seen just how transformative artificial intelligence will be for the macroeconomy in the next several years. I do think the ultimate long run impact, whether it’s once a decade, once a generation, once a century, or once a millennium, is going to be very profound.Unhedged: If Donald Trump is our next president, what are the key macroeconomic implications, as against a second Joe Biden term?Summers: If you look at valuation multiples associated with any asset, they have a lot to do with the basic security of property rights and the ability to rely on the rule of law. And that is a fundamental feature of an economy that we tend to take for granted in the United States, the way we take the success of anaesthesia for granted during a surgical operation. But when you have a president who challenges the results of elections and brags about what he could do in one day as a dictator, it is not something that can be completely relied on. That is a profound threat to our long-run prosperity, and therefore short-run asset prices, economic behaviour, hiring, investment and everything else.Paul Samuelson wrote a famous essay after the second world war in which he considered a group of countries marked by strong natural resources and educated population. It had four countries in it: Canada, New Zealand, Australia and Argentina. No one would group those countries together today. And so if one asks: “What did the coming of Peronism do to a potentially successful economy?”, I think that gives a frame for thinking about the risks associated with a Trump presidency. A Peron-ish, Mussolini-ish type leader can have positive impacts on markets and some economic variables for some intervals. Mussolini ultimately was said to have made the trains run on time; Germany had some economic success during the 1930s. So I think it’s a mistake to confidently predict recession or depression in the short run. But I think it’s a mistake not to be extraordinarily alarmed about the medium-term economic prospects of a government of that kind.And I say that as somebody who, unlike many Democrats, had very strong views and did not get my way in the elections of 1980, 1984, 1988, 2000 and 2004. None of those elections went the way I wanted them to, but in none of them did it occur to me to express alarm about the situation of the United States, the basic capacity of the United States as the world’s most successful economy and a linchpin of the international system. I always thought the system was robust and that pendulums swing. I do not feel that way about the prospect of a Trump presidency. I think there is a substantial risk that it would be immensely destructive because it moves the conversation into realms that we don’t usually think about. Its destructiveness won’t take the form of interest rates being 100bp lower or higher than they should have been, or the budget deficit being one-and-a-half percentage points of GDP higher or lower than it should have been. But it will take the form of destruction of the fabric of rule of law, which is the air that successful capitalism breathes.One good readThe shrinking equity risk premium. FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, hosted by Ethan Wu and Katie Martin, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youSwamp Notes — Expert insight on the intersection of money and power in US politics. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here More

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    What’s a good portfolio for an 80-year-old?

    Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Thanks to the Seinfeld comedy show, New Yorkers believe the nexus of the universe is the corner of First Avenue and First Street in the East Village. I once lived a few blocks away, as it happens. Frankly, another Big Bang wouldn’t go amiss.And they’re wrong, anyway. The centre of the cosmos is the members’ bar at the Sydney Cricket Ground. Watching a game from there last week with friends, we were stationary as galaxies whirled around us.Or maybe we were drunk. This was fine by me because I was sad. My parents had recently sold our family home of 47 years — hence the solo trip Down Under to help them move into their new flat. It’s a rite of passage, I suppose.With a few more plastic banknotes in their pockets after the sale (Australia was the first to issue them, in 1988) my father and I also met with his financial adviser. It was sobering — we kids didn’t appear in any of the projections.Fair enough too. My parents are just either side of 80, want to have fun, and new hips or a hunky male carer don’t come cheap. But the meeting had me thinking for the first time about optimal portfolios for “very advanced retirees”.There must be many readers who are VARs themselves. Or soon will be. In developed countries people aged 80 and over account for roughly a fifth of everyone over 65 years old. In England it’s almost a third — more than 3mn people.Yet you never see investment advice for this cohort. Which is odd considering how much money VARs have. Americans 75 years and older still have more than twice the savings of the average person aged between 45 and 54 — even if it drops a bit compared with those decade younger.If you’re blessed with the genes to live to 80, the chances are you’ll see 89 if you’re a woman and 86 if you’re a bloke. But most retirement strategies focus on decades. I also bang on about long-run returns. My dad couldn’t give a hoot.Is the ultra short run simply too morbid to model? Or is it because many rules of thumb go haywire? For example, there is a popular one that says you should only draw down 4 per cent of your portfolio each year if you want it to last a lifetime.That approach was meant for retirements of 30 years and even Bill Bengen, the financial adviser who first articulated it, thought the number was overly conservative. It can be adapted for shorter periods, but the numbers quickly become ridiculous if you’re a VAR.Likewise, adjusting returns for volatility doesn’t seem so vital. Who cares? Nor does the distinction between real and nominal returns. That feels heretical given how important inflation is. Look how we obsess about this week’s US consumer price data.But see it through older eyes. As is the case in many countries around the world at present, my parents understand that the interest income they can earn from cash is roughly the same as the inflation rate.Keeping their money on deposit, therefore, earns them a zero real return. But what a bountiful nought it is — allowing them to eat, travel or buy their only son a thank-you bottle of wine for the 10 bookcases he erected.Sure, purchasing power matters. But more important is actual money appearing in your account every month. And besides, everyone’s exposure to rising prices is different. My dad’s inflation basket contains only tomatoes, red wine and now the rent.The latter is rising in Sydney, like many global cities. But the glut of Shiraz grapes a few years ago provides a nice counterweight. Nor are elderly folks overexposed to the persistently high inflation across many services. Taylor Swift and pilates instructors can charge a thousand dollars as far as mum is concerned.Of course, deteriorating health can change finances quickly. That explains the dip in average wealth as people move into their 80s. But they are rich with property. Indeed in the UK, three-quarters of them still own their home outright — the highest proportion of any age group.Some will have sold earlier than my parents — thus the lack of mortgage. But how should those who have downsized late in life invest the windfall? Rush to Las Vegas or stuff it under the mattresses?Thank goodness a sensible answer is more obvious today given higher interest rates, flat or inverted yield curves, and relatively rich valuations for risk assets such as equities: 80 per cent cash, 20 per cent stocks.It comes from another famous investment rule — that you should allocate 100 minus your age to equities throughout your life, with the rest in bonds.Octogenarians having just a fifth of their portfolio in shares makes sense to me. It leaves most of it in safe assets, and yet if stocks rally like mad, such as recently, they reap some gains. There is nothing worse than reading about the latest hot trend, be it the metaverse or AI, and feeling old and left out.Plus equities have the highest real return of any asset class over longer time periods. That means your children should ultimately thank you for remembering them too. They can raise the allocation later.Meanwhile, thanks to higher interest rates, 80 per cent of your portfolio will be spewing cash. And because yield curves are flat to inverted, you receive as much or more yield in a deposit account as you would buying three, five or 10-year bonds — and the prices of those can fallThat’s what my parents are going to do, anyway. That said, I wish them, and every reader in their ninth decade, such good health as to render this approach wrong.The author is a former portfolio manager. Email: [email protected]; Twitter: @stuartkirk__ More