The first article describes why the richest country on earth can't produce enough face masks:  because we've outsourced the production of them and their primary material to China.  The article doesn't say this, but we have not outsourced critical parts for sophisticated military hardware, as this would jeopardize the nation's defense readiness.  Apparently, jeopardizing the nation's pandemic readiness is okay in the name of cost reduction.

The second is a commentary by famous bond guru James Grant, who explains how the Federal Reserve's low interest rate policy has made the economic crisis worse, because it led companies (and investors and speculators) to rely on cheap debt and become over-leveraged, which has in turn led to the government once again bailing them out.  He's right, but it's an unfair criticism of the Fed, because the root problem is that corporations, the government, and individuals have been living way beyond their means for decades.  The bailouts will be paid by frugal savers for decades to come.  

Your Indentured Servant,

Mencken's Ghost

. . . . .

Why the Richest Country on Earth Can't Get You a Face Mask

The U.S. spends more on health care than any other nation, but missteps and vulnerable global supply chains have left it without the equipment necessary to protect its citizens from the coronavirus

By Nathaniel Taplin

The Wall Street Journal, April 1, 2020 7:40 am ET

In yet another challenge to the wisdom of globalization, the U.S. scramble for surgical masks, N95 respirators and ventilators is highlighting the downsides of relying on today's intricate supply chains for critical medical goods.

On Tuesday, Americans learned that, even with the country nearly shut down, deaths from Covid-19 caused by the new coronavirus could total 100,000 to 240,000. China, the most populous nation in the world and among the most densely populated, has reported a death toll of less than 4,000.

A public-health disaster of this magnitude always has more than one cause. Most obvious are the U.S. executive branch's weekslong refusal to acknowledge the severity of the threat, and the slow ramp up in testing. For many Americans, though, one of the most puzzling aspects is why the wealthiest, most technologically advanced nation in the world can't provide its citizens and health-care workers with lifesaving medical equipment.

Years of underinvestment in pandemic planning is a big part of the answer. But as in the pharmaceutical sector—highly dependent on Chinese and Indian producers—a reliance on global supply chains is also making life difficult for Western hospitals struggling to source gear.

Eighty-five percent of global medical mask-production capacity is in China, according to Morgan Stanley—up from 50% before the new coronavirus struck. It is also a major producer of the polypropylene fibers that filter out dust and pathogens in the N95 respirators medical professionals rely on to protect themselves. In 2018, China was the single largest exporter of nonwoven fabrics, of which polypropylene filament is one, controlling 18% of the global export market, according to United Nations data. The U.S., while also a large manufacturer, is the world's largest importer.

A surge in demand over the past two months—first in China—has set off a world-wide scramble to secure both masks and the materials to make them. Local restrictions on medical-gear exports from Germany, China and elsewhere have added to shortages. In one recent example, Montreal-based mask maker Medicom found its China-based factories unable to source local materials, which had been diverted by officials to produce masks for domestic use. The U.S. Department of Health and Human Services said in early March that the U.S. has only about 1% of the medical masks it would need to combat a year-long epidemic.

Ventilators—needed to help critically ill coronavirus patients breathe—are also produced from parts often sourced all over the world. In an interview with Fortune Magazine published last week, the chief executive of Hamilton Medical Inc. said that Romanian export restrictions on medical supplies had briefly prevented the company from receiving humidifier parts needed for ventilators. Other parts like tubes and masks are often sourced from China or other Asian countries.

At the same time, Chinese companies that make ventilators are struggling to secure parts like turbines and sensors from Europe, according to the South China Morning Post. Factories are finally ramping up in China as the epidemic ebbs there, but airfreight capacity has dried up and Europe's labor force is, as in the U.S., increasingly sheltering at home. U.S. auto makers like General Motors and Ford have expressed interest in helping boost ventilator production, but if they can't secure specialized parts, there may be only so much they can do. The U.S. currently has around 160,000 ventilators, according to the Society of Critical Care Medicine, many of which are already in use. The American Hospital Association estimates that close to a million U.S. patients could need ventilators over the course of the epidemic.

New technologies like 3-D printing may help paper over some of the cracks—and the millions of Americans practicing social distancing right now will, with luck, forestall some of the worst-case scenarios.

But when the pandemic ends, one of the enduring changes it causes could be a major reassessment of complex global supply chains for critical medical goods. The Trump administration's battles over global trade have already highlighted the political risks of low-cost offshoring and lean inventories for consumer products such as automobiles and cellphones. Now weaknesses have shown up in yet another sector, potentially at a much higher human cost.

Many Americans—and presumably Uncle Sam—might be willing to pay a bit more for a more reliable supply chain with some pricey redundancy built in.

The High Cost of Low Interest Rates

Irresponsible policy from the Federal Reserve made the coronavirus crisis worse than it had to be.

By 

James Grant

The Wall Street Journal, April 1, 2020 6:38 pm ET

It took a viral invasion to unmask the weakness of American finance. Distortion in the cost of credit is the not-so-remote cause of the raging fires at which the Federal Reserve continues to train its gushing liquidity hoses.

But the firemen are also the arsonists. It was the Fed's suppression of borrowing costs, and its predictable willingness to cut short Wall Street's occasional selling squalls, that compromised the U.S. economy's financial integrity.

The coronavirus pandemic would have called forth a dramatic response from the central bank in any case. Not even the most conservatively financed economy could long endure an official order to cease and desist commercial activity. But frail corporate balance sheets and overextended markets go far to explain the immensity of the interventions.

Perhaps never before has corporate America carried more low-grade debt in relation to its earning power than it does today. And rarely have equity valuations topped the ones quoted only weeks ago.

"John Bull can stand many things, but he can't stand 2%," said Walter Bagehot, the Victorian-era editor of the Economist, concerning the negative side effects of a rock-bottom cost of capital. Needing income, investors will take imprudent risks to get it. And if 2% invites trouble, zero percent almost demands it.

Interest rates are the critical prices that measure investment risk and set the present value of estimated future cash flows. The lower the rates, other things being equal, the higher the prices of stocks, bonds and real estate—and the greater the risk of holding those richly priced assets.

In 2010 the Federal Reserve set out to lift market prices through a rate-suppression program called quantitative easing. Chairman Ben Bernanke was forthright about his intentions. "Easier financial conditions will promote economic growth," he wrote at the time. Lower interest rates would make housing more affordable and business investment more desirable. Higher stock prices would "boost consumer wealth and help increase confidence, which can also spur spending." The Fed commandeered investment values into the government's service. It seeded bull markets in the public interest.

But investment valuations don't exist to serve a public-policy agenda. Their purpose is to allocate capital. Distort those values and you waste not only money but also time—human heartbeats.

Like a shark, credit must keep moving. Loans fall due and must be repaid or rolled over (or, in extremis, defaulted on). When the economy stops, as the world's has effectively done, lenders are likely to demand the cash that not every borrower can produce.

To resolve the devastating panic of 1825, the Bank of England rendered "every assistance in our power," as a director of the bank testified, "and we were not upon some occasions over nice."

In a still more radical vein, the Fed has set about buying (or supporting the purchase of) commercial paper, residential mortgage-backed securities, Treasurys, investment-grade corporate bonds, commercial mortgage-backed securities and asset-backed securities. It has abolished bank reserve requirements. Through a new direct-lending program, the Fed has become a kind of commercial bank.

If not for the buildup of the financial excesses of the past 10 years, fewer such monetary kitchen sinks would likely have had to be deployed. No pandemic explains the central bank's massive infusions into the so-called repo market that followed this past September's unscripted spike in borrowing costs. For still obscure reasons, a banking system that apparently is more than adequately capitalized was unable to meet a sudden demand for funds on behalf of the dealers who warehouse immense portfolios of government debt.

The superabundance of Treasury securities is the spoor of America's trillion-dollar boom-time deficits. Persistently low interest rates have facilitated that borrowing, as they have the growth of private-equity investing (ordinarily with lots of leverage), the rise of profitless startups, the raft of corporate share repurchases, and the unnatural solvency of loss-making companies that have funded themselves in the Fed's most obliging debt markets.

For savers in general, and the managers of public pension funds in particular, lawn-level interest rates confer no similar gains. On the contrary: To earn $50,000 in annual interest at a 5% government bond yield requires $1 million of capital; to earn the same income at a 1% yield demands $5 million of capital. To try to circumvent that forbidding arithmetic, income-famished investors buy stocks, junk bonds, real estate, what have you. It worked as long as the bubble inflated.

In a bubble, performance is the name of the investment game. Over the past 10 years, skeptics of our debt-financed prosperity have had to fall in line. To keep up with the Joneses, fiduciaries have sought an edge in lower-quality assets. Managers of investment-grade bond portfolios dabbled in junk bonds. Junk-bond investors slummed it in lower-rated junk or in the kind of bank debt that is senior in name but structured without the once-standard protective legal fine print.

Investing at positive nominal yields, Americans are still comparatively lucky. The holders of some $10.9 trillion of yen-, euro- and Swiss franc-denominated bonds are paying for the privilege of lending. "Investors seeking safety were prepared to face a guaranteed loss when holding the debt to maturity," was how the Financial Times last summer tried to explain the nearly inexplicable.

Negative nominal bond yields are a 4,000-year first, according to Sidney Homer's "A History of Interest Rates," republished for a fourth edition with co-author Richard Sylla in 2005. Topsy-turvy investment-grade bond markets aren't without precedent, but the extent of the upheaval today is startling. If adversity is the test of the quality of a senior security, as old-time doctrine held, segments of today's corporate bonds and tradable bank loans have already flunked. On March 20, according to S&P Global Market Intelligence, the volume of such loans quoted below 80 cents on the dollar topped the peak distress level of 2008. While the panic subsequently abated, many supposedly senior corporate claims are proving to be fair-weather investments, not so different from common equity.

Deceived by ultralow interest rates, Americans borrow and lend in the kind of false economy that candidate Donald Trump properly condemned in 2016. Covid-19 will sooner or later beat a retreat. For the sake of honest prices and true values, it would be well if the central bankers did the same.

Mr. Grant is the editor of Grant's Interest Rate Observer.