Guest Contribution: “What the GameStop Bubble Says about Financial Markets”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy  School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.

Whether one thinks that the overall equity market is currently valued properly or not, something very unusual happened in the last week of January to assets such as stock in the company GameStop.  Its price rose 323 percent for the week, and 1,700 per cent for the month (that is, an 18-fold increase). This is a speculative bubble. That is, the price departed from fundamentals.

Some investors who got in early and got out early have made a lot of money. Just as many people, who get in too late or have stayed in too long, are losing a lot of money, as valuations come back to earth.

We focus on GameStop, an ailing bricks-and-mortar retailer of video games and consoles, for concreteness.  But a similar phenomenon has affected prices of a number of other assets.

It will be dollar loss per dollar gain, or slightly worse.  In this respect, participating in a speculative bubble is like playing roulette in a casino.  The role of “the house” in this casino is played by brokers like retail-investment platform Robinhood or financial-services company Charles Schwab.

So far, not so unusual. Speculative bubbles happen from time to time.

What does this bubble say about finance?

The GameStop episode is interesting in that it cuts against both of the two common interpretations of financial markets.  On one side, the “establishment” view, in favor of financial-markets, is that they competitively and efficiently allocate capital, via the signal of the stock price.  The claim is that they direct capital to enterprises that have a bright future in terms of their economic fundamentals, and directing capital away from those firms that don’t.  On the other side, the “populist” view is that big Wall Street traders speculate in ways that destabilize the markets, in order to make unseemly profits at the expense of the little guy.  In the most sinister view, they are even suspected of conspiring with each other to destabilize the market.

Let me say right away that I think there is some truth to both views.  This column is not going to identify a hero or a villain.

With GameStop, you have on one side the little guys (mostly amateur traders, mostly young, stuck at home), who in this case are the ones conspiring to create the speculative bubble, by coordinating on message boards such as Reddit’s forum WallStreetBets.  On the other side you have hedge funds who are doing what they are supposed to do:  identify a stock that they figure is priced out of line with fundamentals (in this case, priced too high), and place bets against it — “going short” — which works to drive the price down.

Remarkably, the little guys dominated, at least for awhile.  Perhaps, at the beginning, they evaluated GameStop as genuinely worth a bit more than the price it was trading at.  But then they kept going. They succeeded in creating a speculative bubble, even with the hedge funds pushing the other direction.

More often, it is the latter that prevail.  In this case, the hedge funds appear to have swallowed their losses and to have refrained from further short sales.

Analogous run-ups in the stock prices of American Airlines and AMC Entertainment have encouraged these two companies to issue more stock.  One would have thought that their business prospects have been adversely hit by the pandemic. One could argue that the price signal coming out of the stock market is guiding the allocation of capital in wrong directions.


One need not understand the fine details of options or other derivatives to understand the basic bets that the players made.  In this case, options were used both by the hedge funds, who bought put options to bet against GameStop, and the small traders, who bought call options to bet that the stock price would rise.  There is nothing inherently nefarious in such contracts.

In the classic film, East of Eden, Cal – played by James Dean – “goes long” in beans, reasoning that the US will enter World War I and the army will need beans.  He is right, and the price of beans goes sky-high. But his moralistic father, to whom Cal tries to give his winnings, disapproves of making money out of misfortune.  He doesn’t realize that when Cal’s bet on beans helped raise the futures price, it sent the socially desirable signal to incentivize farmers to plant more beans for when they would be needed.

Traders who sell short (buying put options) tend to generate more anger and moral disapproval than those who go long (buying call options).  It is understandable if an entrepreneur like Elon Musk hates short-sellers (the way Captain Hook hates the crocodile who took his hand in Peter Pan):  Musk takes it personally that they tried to take down his beloved company.

But short-sellers often fulfill a useful social function.  In the film The Big Short, the heroes are iconoclasts who realized that the US housing market in 2005-06 was in a speculative bubble and that mortgage-backed securities were too highly priced. By selling short they slowed down the market, helping to reduce the magnitude of the bubble. In other words, the 2008 market crash would have been even worse without them.

Short-sellers also, for example, brought attention to dubious sales schemes in the nutritional supplements industry in 2015 and dishonest accounting practices in the German company Wirecard in 2020.

Who should be more tightly regulated?

So, who are the good guys and who the bad guys, in the GameStop bubble?  There is no need to feel sorry for the hedge funds. Their business is risk. They are aware of the wisdom in the dictum, often attributed to Keynes, “The market can stay irrational longer than you can stay solvent.” Even after taking their losses, these institutional investors remain plenty wealthy.

But the hedge funds in this case are not bad guys.  They were doing what they were supposed to do: pushing the price of GameStop toward a level more consistent with economic fundamentals and thereby sending a useful signal for the allocation of capital.

The small investors who pushed the price up are not bad guys either.  True, the boosters are not heard even claiming to believe that GameStop is truly worth $325 a share, its price on January 29.  Their motives for buying appear, instead, to be either to ride the speculative bubble – much as casino habitués gamble for fun – or to inflict pain on the hedge funds, as a sort of populist political message.  But they are within their rights to do either.

The collusion by these Reddit traders, if it had been undertaken by a few big hedge funds, could well have been prosecuted as illegal market manipulation.  After all, some of the traders are on the record as essentially saying “come on, guys; let’s push up the price.”  They seem to meet the criterion of an intent to effectuate a market price that is artificial when judged against the true economic value of the company.

But the Reddit traders are probably not liable to prosecution, because they were small, numerous, and open about what they were trying to do.  Moreover, these traders have the sympathies of populist politicians, ranging from New York Representative Alexandria Ocasio-Cortez, on the left, to Texas Senator Ted Cruz, on the right.  They probably have the sympathies of the typical American bystander as well.

There will be some traders for whom one should feel sorry. Those are novices who jumped on the GameStop bandwagon, buying after the price had already begun rising, and determinedly staying in even as the price goes down. (They call it “holding on with diamond hands.”)  As a consequence of playing the Reddit game, they will probably end up losing most of the money that they invested – losses that some of them will be ill able to afford.  One duty of financial regulation is to protect people who may not know what they are getting into.

The regulator, the Securities and Exchange Commission, rather than investigating either the roulette players who bet on red or those who bet on black, is investigating the casino “house.”  Already in December, the SEC made Robinhood pay a fine for not being honest with its customers about how it makes its money.  (The trades are supposedly free, even for very small transactions, which is what has made it so popular.)

Robinhood’s customers were not very upset about that. They are very upset that the company on Friday, January 29, put restrictions on trading in 50 companies (like limiting purchases to one single share or 10 options contracts).  Besides GameStop, the companies include also American Airlines, AMC Entertainment, and Blackberry.  (The list was subsequently narrowed to eight.)

Why the restrictions?  Robinhood was operating with too thin a margin. It encountered both regulatory constraints (in the form of capital requirements) and demands from its clearing house (that it put up more deposits to back its trading). In the worst case, the casino would have had insufficient funds to pay off punters who had won their gambles.

Robinhood will come through this episode. (It was able to raise more capital.) But it will probably be reined in. A capable regulator like Gary Gensler, if he is confirmed as the new Chair of the SEC, may find a need to tighten, not loosen, the regulations that led the broker to restrict trading in the 50 companies. Capital requirements could be raised, for example.

The customers will probably complain bitterly. They have already angrily concluded that Robinhood stands revealed as a wolf in sheep’s clothing, that is, a member of the financial establishment who had only been masquerading as a bold innovator who would democratize finance.  They still believe in message boards such as Reddit’s WallStreetBets, however.

In this respect, these irate traders remind me a bit of some victims of history’s Ponzi schemes. I am thinking of the victims who, despite suffering devastating losses, retain their faith in the persuasive confidence-man behind the scheme, and instead blame their woes on the law enforcement authorities who shut it down.


This post written by Jeffrey Frankel.

36 thoughts on “Guest Contribution: “What the GameStop Bubble Says about Financial Markets”

  1. Moses Herzog

    I don’t have any serious issues with any of the players, with the possible exception of RobinHood selling off trading information. And even that not very, as long as they make it very obvious in their contracts with customers/clients. I guess it’s the old “agency problem”.

    1. Alan Goldhammer

      It is quite likely that 99.99% of all RH users never read the terms and conditions of using the treading platform. The same number likely had no idea about RH’s need to maintain capital to cover the closing of trades (which necessitated them going out and raising more money while they shut down trading). The old adage, ‘there is no such thing as a free lunch’, is quite apt in this situation. I’ve been an investor for a lot of years now (my investing pre-dates discount brokers and I well remember the extra charges for ‘odd lot’ trading, something that RH makes quite easy) and seldom feel sorry for anyone on the wrong side of trades.

      While it is fun to think of all the RH investors as little guys seeking to sock it to the system, ultimately the short squeeze was accomplished by large funds who took the other side of the trade. It’s nothing more than what we saw happen between Ackman and Icahn over Herbalife. Lots of short sellers go public with their theses trying to get more people enlisted. Nothing wrong with that as long as one realizes the financial peril of being wrong. If one wants to play that game, it’s easy enough to track short interest in various equities.

  2. joseph

    “But the hedge funds in this case are not bad guys.”

    Maybe. But then again maybe not.

    Shorting is legal. Naked shorting is most definitely illegal.

    There is strong evidence that the hedge funds were engaging in illegal naked shorts in the months leading up to the January run. The SEC instituted Regulation SHO to prevent naked shorts. They also instituted a facility called the SHO Report that watches for evidence of naked shorts. It keeps track of incidences of “Failure to Deliver”. Failure to Deliver is when a brokerage fails to deliver the shares of stock that it sold within the T+2-days settlement deadline.

    Failure to Deliver should never happen. When a stock is traded normally, one brokerage just pushes a couple of buttons and exchanges ownership to another brokerage. But that cannot occur if the selling brokerage doesn’t actually have possession or able to borrow the shares it sold. That is a Failure to Deliver. That is a naked short.

    The threshold for being put on the SHO Report for suspicious activity is a Failure to Deliver at least 10,000 shares on 5 days. In the case of GameStop, brokerages were failing to deliver up to 1 million shares a day for 60 consecutive days. That’s 100 times the threshold for getting on the naked short report. And this all occurred before the reddit folks got in on the action. It is evidence that the hedge funds were trying to illegally push down the price of shares.

    Naked shorting is an extremely high risk activity. Not only is it illegal, but it indicates that there is a very limited supply of shares available to cover their short bets. The reddit folks recognized this illegal activity and the vulnerability of the hedge funds to a squeeze due to their naked shorts.

    Rightfully, someone should go to jail, but I’m not very hopeful giving the record of the SEC for mere hand slaps for blatantly illegal activity.

    1. Ivan

      Congress needs to investigate if and when the SEC put these companies on the SHO report list. Also if and when did those companies become targets of an investigation. Companies that have a “failure to deliver” should become immediate targets of a sliding scale transaction tax on the companies they failed to deliver on. You need “incentives” to stop these illegal activities.

    2. Jeffrey Frankel

      I had thought that the primary way that hedge funds had speculated against GameStop stock was by buying put options.

      1. baffling

        prof frankel, just curious what makes you think the primary hedge bet was with put options? is this a hunch, or have you seen some data to indicate this is the case? i have had a hard time finding accurate data, so any additional resource would be helpful.

    3. joseph

      “I had thought that the primary way that hedge funds had speculated against GameStop stock was by buying put options.”

      No. It was well known that there that shorts were the major hedge fund bet. In fact shorts were 140% of outstanding stock. That’s a lot of shorts. Short holdings are also publicly published. Shorts are preferred over put options by the greedy because they have a higher potential reward and have unlimited time duration but at increased risk. And short sellers can hedge their bets by buying out of the money calls to cover their shorts, but then again, that adds extra expense that subtracts from potential gains. Turns out the hedge funds to a large extent got overly greedy and ironically did not hedge their shorts with call insurance.

      Not to be unkind, but it is kind of embarrassing when academic economists step outside their lane of expertise and proceed to lecture and moralize to the hoi polloi based on misinformation. I’m guessing before today you didn’t even know that published lists of SHO short violations and published lists of short holdings even existed.

      1. Macroduck

        Excellent addition to the comment.

        Harvey Pitt has claimed that the SEC has little power to deal with market manipulation absent evidence of intent to manipulate markets. Regulation SHO is evidence to the contrary. Pitt seems to have offered his own preference in place of fact. Meanwhile, the SEC is operating under an acting Chair and is reportedly more interested in investigating the Reddit group than hedge fund behavior.

  3. ltr

    February 4, 2021

    Pumps and Dumps and Chumps
    Please, stop falling for fake populism.
    By Paul Krugman

    In a more reasonable world, hardly anyone would care about the ups and downs of a smallish retailer’s stock price. Even near the top of its Reddit-fueled roller coaster, GameStop accounted for only about 0.06 percent of the total value of U.S. stocks. Furthermore, the stock market itself is mainly a sideshow to the real economy.

    But we don’t live in a reasonable world, we live in a world where the GameStop story briefly commanded global attention. And the craziness did offer some important lessons — not so much about economics and markets as about psychology and politics.

    For it turns out that despite four years of Donald Trump, our society remains remarkably gullible. And it is not just members of the public who believe what they see on social media; far too many influential people still keep falling for fake populism.

    The story so far: GameStop is a chain of stores selling video games and other electronic goods. With the rise of online gaming the company’s underlying business has been in gradual decline. Recently some hedge funds, which believed that this decline wasn’t fully reflected in its stock price, began selling the stock short — that is, borrowing stocks and selling them, expecting to buy the stocks back at lower prices.

    Enter Reddit, an online discussion site….

    1. pgl

      “Pumps and Dumps and Chumps”

      Now that is a title even a doof like Bruce Hall might get. But still – I’m not betting the ranch that Bruce might finally understand something.

  4. ltr

    January 29, 2021

    The GameStop Game and Financial Transactions Taxes

    The Wall Street crew is furious over the masses at Robinhood and Reddit ruining their games with their mass buying of GameStop, which wiped out the short position of a big hedge fund. The Robinhood/Reddit masses are touting this as a victory over Wall Street. The Wall Street insiders are decrying this effort to turn the market into a casino. It’s worth sorting this one out a bit and answering the question everyone is asking (or should be), would a financial transactions tax fix this problem….

    January 31, 2021

    The Robinhood/GameStop “Scandal”

    As I understand it, there are many folks out there who think that we saw some major sleaze by the Wall Street big boys, screwing the little guy, when Robinhood stopped taking buy orders on GameStop, as the stock was soaring to record highs. They resumed taking buy orders after a pause of a day or so.

    The story is that this allowed for Robinhood’s hedge fund friends to get out of their short positions, thereby saving themselves from huge losses. Yet another case of the big money Wall Street crew ripping off ordinary investors….

    1. Barkley Rosser

      Once again a point I have made previously that pgl agrees with is that Dean Baker has long supported a financial transactions tax, and while that might have slowed down the activity in this case, it almost certainly would not have prevented it.

      Also it seems that Robinhood’s shutdown of trading was not due to some effort to save the short sellers but simply due to the volume of trading become so heavy they were not able to manage it.

      1. Ivan

        The 2 big short hedge funds bailed out Wednesday whereas Robinhood stopped buying of those stocks the next day, Thursday. So those hedge funds were not helped (although others may have had smaller short positions). In theory the Wall Street company demanding more collateral from Robinhood could have been conspiring, but its my understanding that they make their money from front-running the trades on Robinhood – so they would not be helped by stopped trading.

      2. baffling

        “Robinhood’s shutdown of trading was not due to some effort to save the short sellers but simply due to the volume of trading become so heavy they were not able to manage it.”
        there is truth to this statement. my feeling, however, is that these brokers (and others in the financial stream) should be able to better anticipate these deficiencies and have appropriate contingencies in place. this should be mandated by the sec. it is not fair that brokers create systems that are not robust, and let the retail investors search for the weaknesses at their own expense. for example, the three days it takes to settle a transaction should not be acceptable. this takes money away from retail investors and benefits the brokers. this may require brokers to have more capital on hand. so be it. they are still quite profitable.

        1. Barkley Rosser

          Maybe, baffs, but things went completely bananas in that market a week ago on Friday. Maybe they “should” have anticipated what was coming, but they had never seen anything remotely like it before.

          1. baffling

            something that is not clear to me. we have high speed traders, who can make millions of trades in very brief periods. theoretically those trades should all be settled as well. and that should rack up enormous amounts of capital to meet that requirement. and yet the trades continue to occur uninterrupted. so there appears to be some solution that does exist when it comes to handling settlements quickly. hopefully somebody can clarify why those high speed traders do not seem to have the same bottleneck as the retail traders?

            “but they had never seen anything remotely like it before.”
            barkley, i beg to differ. this was a very isolated and closed event. it dealt with basically one stock. we have had market turmoil across the market in the past, that involved much larger volume. think of the flash crashes of the past few years. think of the feb-march market decline of the past year. it was ferocious, dramatic and large volume. brokers locked up then as well. so we knew a year ago the system could not handle sudden dramatic trades. it was not unknown. but it seems as though we have not done much to address the problem since then.

  5. pgl

    I love the appeal to some classic movies. Now this reality may have escaped a couple of people:

    “Some investors who got in early and got out early have made a lot of money. Just as many people, who get in too late or have stayed in too long, are losing a lot of money, as valuations come back to earth.”

    For example Bruce Hall declared that there was no problem when people were manipulated the market on both sides. I know Bruce has trouble reading past a headline but maybe he should take the time to read this.

    Of course JohnH’s only real comment was how he did not feel bad for the short sellers. Well yea – but a lot of the little guys lost big time as well.

    1. gc

      My comment is only partly a reply to yours, but as it is, ltr seems to have highjacked the thread from here on out to other topics. The part of your comment that draws my attention is in the quote referencing those who “stay in too long are losing a lot of money.” I begin with great respect for Prof. Krugman and also Prof. Frankel. But my respect is usually from perceiving that they use factual grounding in reaching their conclusions. Here, let me propose a hypothetical. A little guy buys 10,000 shares at $5; then buys 2,000 more at $25. At $50, he sells 1,000, and then at $100, he sells 500 more. He holds 10,500 with a basis cost average of $0. Now, the price is $300, and if he says he is going to just hold, the quote about staying in too long says he is going to lose a lot of money. If only he could persuade the IRS that it is so, he could be DJT’s next accountant. My hypothetical small investor could stay in forever without losing his shirt, or socks, or his best suit.
      When the price went from $50 to $350 on the upswing, we can’t say who was making or losing money if we do not know who was buying and in what amount of shares. Of course, if some little guy first got in at $200 per share, he has risk of losing money. Duh. But the parties that had to buy at the higher prices were the people who were in the short positions. So, when I read the analysis of just who was buying at the various price points to show that the high price purchases were dominated by the little guys, then there will be a stronger inference of the little guys taking the big losses. But if the volumes at higher prices are consistent with more buying by the short interests, there could be a significant pull back in price without that many little guys taking a bath. Prof. Frankel defends short selling as part of the market, but the same desire for market actors to enforce honesty appears like it could apply the persons pushing the short squeeze in the GME action.

  6. ltr

    February 6, 2021



    Cases   ( 27,519,636)
    Deaths   ( 473,528)


    Cases   ( 10,827,170)
    Deaths   ( 155,028)


    Cases   ( 3,929,835)
    Deaths   ( 112,092)


    Cases   ( 3,317,333)
    Deaths   ( 78,794)


    Cases   ( 2,284,999)
    Deaths   ( 61,998)


    Cases   ( 1,912,871)
    Deaths   ( 164,290)


    Cases   ( 801,057)
    Deaths   ( 20,702)


    Cases   ( 89,681)
    Deaths   ( 4,636)

  7. ltr

    February 6, 2021

    Coronavirus   (Deaths per million)

    UK   ( 1,646)
    US   ( 1,426)
    Mexico   ( 1,266)
    France   ( 1,203)

    Germany   ( 739)
    Canada   ( 545)
    India   ( 112)
    China   ( 3)

    Notice the ratios of deaths to coronavirus cases are 8.6%, 2.9% and 2.4% for Mexico, the United Kingdom and France respectively.

      1. Moses Herzog

        I actually sympathize with both sides on this (although I wish his posts had less of a propagandist flavor, I have ZERO problem with him bashing elements of America, which I could never get my mainland Chinese friends to buy, but rather I dislike the cheerleading by way of comparison). I have typed stuff up on this blog that I really don’t want to type, other than for the fact I want people to actually read it and I know they won’t click the link. That may sound funny coming from your probably “link happiest” commenter, but that is the truth.

  8. ltr

    February 7, 2021

    Chinese mainland reports 11 new COVID-19 cases

    The Chinese mainland recorded 11 new COVID-19 cases on Saturday – 1 local transmission and 10 from overseas, the National Health Commission said on Sunday.

    No new deaths related to COVID-19 were registered and 70 patients were discharged from hospitals.

    A total of 13 new asymptomatic cases were recorded, while 682 asymptomatic patients remained under medical observation.

    The total number of confirmed COVID-19 cases on the Chinese mainland has reached 89,692, and the death toll stands at 4,636.

    Chinese mainland new locally transmitted cases

    Chinese mainland new imported cases

    Chinese mainland new asymptomatic cases

  9. ltr

    February 6, 2021

    The Chinese ‘Debt Trap’ Is a Myth

    The narrative wrongfully portrays both Beijing and the developing countries it deals with.

    China, we are told, inveigles poorer countries into taking out loan after loan to build expensive infrastructure that they can’t afford and that will yield few benefits, all with the end goal of Beijing eventually taking control of these assets from its struggling borrowers. As states around the world pile on debt to combat the coronavirus pandemic and bolster flagging economies, fears of such possible seizures have only amplified.

    Seen this way, China’s internationalization—as laid out in programs such as the Belt and Road Initiative—is not simply a pursuit of geopolitical influence but also, in some tellings, a weapon. Once a country is weighed down by Chinese loans, like a hapless gambler who borrows from the Mafia, it is Beijing’s puppet and in danger of losing a limb.

    The prime example of this is the Sri Lankan port of Hambantota. As the story goes, Beijing pushed Sri Lanka into borrowing money from Chinese banks to pay for the project, which had no prospect of commercial success. Onerous terms and feeble revenues eventually pushed Sri Lanka into default, at which point Beijing demanded the port as collateral, forcing the Sri Lankan government to surrender control to a Chinese firm.

    The Trump administration pointed to Hambantota to warn of China’s strategic use of debt: In 2018, former Vice President Mike Pence called it “debt-trap diplomacy”—a phrase he used through the last days of the administration—and evidence of China’s military ambitions. Last year, erstwhile Attorney General William Barr raised the case to argue that Beijing is “loading poor countries up with debt, refusing to renegotiate terms, and then taking control of the infrastructure itself.”

    As Michael Ondaatje, one of Sri Lanka’s greatest chroniclers, once said, “In Sri Lanka a well-told lie is worth a thousand facts.” And the debt-trap narrative is just that: a lie, and a powerful one.

    Our research shows that Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country, much less the port of Hambantota. A Chinese company’s acquisition of a majority stake in the port was a cautionary tale, but it’s not the one we’ve often heard. With a new administration in Washington, the truth about the widely, perhaps willfully, misunderstood case of Hambantota Port is long overdue….

    DEBORAH BRAUTIGAM is Bernard L. Schwartz Professor of International Political Economy at the School of Advanced International Studies at Johns Hopkins University
    MEG RITHMIRE is F. Warren McFarlan Associate Professor at Harvard Business School.

    1. Barkley Rosser


      Your story about the Sri Lankan port is largely correct, although maybe a bit soft soaping things. I have checked and I recommend an article in The Diplomat from a year ago that has its own Wikipedia entry, easily found by just googling the name of the port.

      One aspect you did not mention is that the debt Sri Lanka has is still fully owed and must be paid. The payments amount to about $100 million per year, which is not super onerous while also being non-trivial. The Sri Lankan government remains officially the owner of the port, while the Chinese entity involved owns 70% of the shares and has a 99 year lease, which means it will receive all the profits from the port, along with the interest payments for the still in-place loans.

      The article ultimately blamed the Sri Lankan government of some years ago for entering into the deal as it was not sustainable, with the real problem being macro mismanagement in Sri Lanka that has led to a serious external imbalance problem.

      BTW, I shall note that concern about this potential problem is not completely silly, if indeed China has held back somewhat on what they might have done and have been falsely alleged to have done. In the 19th century this was a way that Great Britain took full control of several nations, most famously Egypt, basically taking control because of them defaulting on loans, although I note in the case discussed here, Sri Lanka did not actually default, although it was on the verge of doing so.

  10. ltr

    December 6, 2019

    A critical look at Chinese ‘debt-trap diplomacy’: the rise of a meme
    By Deborah Brautigam


    In 2017, a meme was born in a think tank in northern India: Chinese ‘debt-trap diplomacy’. This meme quickly spread through the media, intelligence circles and Western governments. Within 12 months it generated nearly 2 million search results on Google in 0.52 seconds and was beginning to solidify into a deep historical truth. Stories can contain truths and falsehoods. Human emotions, including negativity bias, prime us to think in certain ways. This paper retells a series of stories about China’s international involvement, including in Angola, Djibouti, Sri Lanka and Venezuela, that challenge the media’s spin. It concludes with some suggestions about the relationship between academia and the media and policy worlds, and the need for scholars to speak ‘truth’ to ‘power’.

    Deborah Bräutigam is the Bernard L. Schwartz Professor of Political Economy and Director of the China Africa Research Initiative at Johns Hopkins University’s School of Advanced International Studies.

    1. ltr


      December 6, 2019

      A critical look at Chinese ‘debt-trap diplomacy’: the rise of a meme
      By Deborah Brautigam

      Debt-trap diplomacy: the Sri Lankan case

      China has been involved in the construction or operation of 116 overseas ports in 62 countries. Of these projects, that in Hambantota, Sri Lanka, is the only one cited as an actual instance (rather than projected possibility) of debt-trap diplomacy as, following an election upset, the highly indebted Sri Lanka conceded control of a port to a Chinese company on a 99-year lease. The New York Times (2018) characterized this as ‘China got Sri Lanka to cough up a port’. Is there evidence that China planned matters in this way? Did China deliberately set a debt trap? Was this an asset seizure for non-payment?

      To answer these questions, it is necessary to examine the historical context and to ask first of all why China is interested in financing, constructing and acquiring ports. The debt-trap diplomacy meme is associated with the geopolitical concept of a String of Pearls. First used in a 2005 report on Energy Futures in Asia produced by Booz Allen Hamilton for the US Department of Defence (The Washington Times, 2005), the concept suggests that China plans to develop a chain of military and commercial facilities along maritime routes from the Chinese mainland to Port Sudan in the Horn of Africa, encircling India and threatening its national security.

      Are there other explanations for China’s keen interest in ports? China’s own history provides some insight. Port projects were one of China’s top priorities when its first adopted reform and opening up in 1978. Between 1980 and 2000, China built more than 184 new ports with associated industrial development and urban residence zones (this model is now known as the ‘port–industrial park–city’ model associated with the Chinese city of Shenkou in the bustling commercial region of Shenzhen). As ports are capital intensive with low rates of return on capital due to the long periods over which they are developed and capita is depreciated, China gave preference to joint ventures with foreign investors who were expected to provide capital and operating efficiencies. Since then, Chinese ports have hosted numerous foreign investors (Brautigam, 2019).

      Today the port and shipping industries are globalized with increasing degrees of industrial concentration. Just one example is the Danish shipping company Maersk, which serves 343 ports in 121 countries, and its associated companies that include APM Terminals with infrastructure in 73 ports and 154 inland locations. As the largest exporter and the second largest importer in the world, and as a country with a large port and shipping sector, Chinese port and shipping companies are also seeking to grow by investing abroad, acquiring existing assets and establishing joint ventures….

      1. Moses Herzog

        This site——>>> “” has an exorbitant amount of Chinese authors, who cannot get published ANY place else. That is NOT an indictment of Chinese authored research, but rather a query on what is the financial inducement for “Taylor and Francis Online” giving publication to these individuals??

        I’m not being sarcastic~~~if Menzie, or any of his Hong Kong based friends have any running theories on “Taylor and Francis” “academic journal”, using that last term VERY liberally, I would love to hear it.

        1. Moses Herzog

          I found this in the Taylor and Francis Wiki page. I very much welcome anyone who disputes the facts stated therein , other than commenter “ltr” for obvious reasons, to please state what you view as any misrepresentation in the following copy/paste:
          “In 2016, Critical Reviews in Toxicology was accused by the Center for Public Integrity of being a “broker of junk science”.[37] Monsanto was found to have worked with an outside consulting firm to induce the journal to publish a biased review of the health effects of its product “Roundup”.[38]

          In 2017, Taylor & Francis was strongly criticized for getting rid of the editor-in-chief of International Journal of Occupational and Environmental Health, who accepted articles critical of corporate interests. The company replaced the editor with a corporate consultant without consulting the editorial board.[39]

          The journal Cogent Social Sciences accepted a hoax article, “The conceptual penis as a social construct”, that had been rejected by another Taylor & Francis journal, Norma: International Journal for Masculinity Studies.[40][41] When the authors announced the hoax, the article was retracted.[42]

          In December 2018, the journal Dynamical Systems accepted the paper Saturation of Generalized Partially Hyperbolic Attractors only to have it retracted after publication due to the Iranian nationality of the authors. The European Mathematical Society condemned the retraction and later announced that Taylor & Francis had agreed to reverse the decision.[43] Previous instances of Taylor & Francis journals discriminating against Iranian authors were reported in 2013.[44][45]

          Manipulation of bibliometrics
          According to Goodhart’s law and concerned academics like the signatories of the San Francisco Declaration on Research Assessment, commercial academic publishers benefit from manipulation of bibliometrics and scientometrics like the journal impact factor, which is often used as proxy of prestige and can influence revenues, including public subsidies in the form of subscriptions and free work from academics.[46]

          Six T&F journals, which exhibited unusual levels of self-citation, had their journal impact factor of 2019 suspended from Journal Citation Reports in 2020, a sanction which hit 34 journals in total.”

          1. Barkley Rosser


            I know nothing about this journal that ltr is linking to, but I would be cautious about questioning it because six journals published by Taylor & Francis have had scattered ethical issues, all different from each other’s. I did not make a full count, but T&F published peer-reviewed journals in 30 different disciplines. In econ, finance, and industry it publishes 307 journals. I checked a couple of other disciplines and got numbers of a bit over 100 and a bit over 50. If the average per discipline is 100, we are talking about on the order of 3000 journals, so having six out of those having scattered ethical problems is not exactly evidence of some massive problem at Taylor & Francis.

            I have had a lot of experience with that publisher in various ways and never had a problem with them. They are generally well respected and I am unaware of any problems in any of the econ journals they publish, several of which are quite high quality. They also publish books. Their journals are all peer-reviewed, which matters, this not being the case for the truly scammy journals.

            There is indeed a serious problem of junk journals out there, with many of these based in either China or India, with probably more of them in the latter than in the former. The sign of these is that they send people invitations to publish in them for a fee, usually a couple of thousand bucks. They might have one or two semi-respectable people on their ed boards, but most members are people from the home nation in question who almost all seem to come from obscure locations I have never heard of. These journals are notorious scams, and there are lists available of them. I have not checked if this journal is on those lists, but I know from looking at it not too long ago that there were no journals published by T&F on it. These super cam journals are rarely published by established publishers, which T&F is.

            As it is, I have had experience behind the scenes I am not at liberty to talk about regarding unethical practices by some authors and at some very serious journals, so this is a matter I am somewhat acquainted with. It may be that this journal is not good, but I would say that one cannot surmise that based on its publisher, which has generally been professional and respectable.

          2. Moses Herzog

            Do you want academic journals to be held to a higher standard than a magazine?? My postulate to you would be, if you want the accompanying respect that comes with calling something an academic journal, that you demand that, rather than making excuses and rationalizations for content that probably wouldn’t make it past Bloomberg Businessweek’s editorial board.

        2. Barkley Rosser


          You have produced zero evidence that there is a single thing questionable about this journal. If it is based in Hong Kong (is it? I have not checked) then I am not surprised that it has a lot of publications by Chinese. And even if it is not based in China if it publishes mostly about Chinese topics, it is not surprising that a lot of the authors are Chinese. You claim that authors there have trouble publishing elsewhere, but have you checked? Do you have any basis for such a claim (no, I am not going to dredging around there to check on the pub records of authors in it)? You certainly have provided zero evidence for such a claim, and making an emboldened statement about this is not evidence at all. If anything, it suggests you are making a baseless claim but trying to convince people otherwise by the internet equivalent of shouting. I have pointed this out to you before.

          You have a rather more serious problem with this comment of yours. This author is not Chinese. Not only that, she holds a chaired professorship in an extremely prestigious department, School of International Studies at Johns Hopkins University. I have checked, and she not only has a Wikipedia entry, but over 12,000 Google Scholar citations and an H-index of 43. In short, whoever else may be publishing in the journal, she is highly respectable and not somebody to be just dismissed because you have some vague suspicions about the journal that seem to have no basis. Her article has every reason to be taken very seriously. I suspect Menzie would agree, as a journal editor like I am.

          A rather major

          1. Barkley Rosser

            Oh dear, Moses, I have now checked on this journal, and you have not got a leg to stand on and have seriously misrepresented things.

            The journal’s name is Area Development and Policy. It is a new journal, having just completed its fifth year. However, first of all it is a society journal, sponsored by the Regional Science Association, a well-respected body. I have attended conferences of this body in places like Japan and other foreign locations.

            More telling is the editorial board. There is not a single person on it from the PRC, although there is one person, George Lin, from the University of Hong Kong. However, there are four people from Russia on it. The board has people from all over the world and from some pretty prestigious academic institutions, including Cambridge University, UCLA, the Higher School of Economics in Moscow, the National University of Korea, UNAM in Mexico, and so on. In its last volume, covering 2019, it had a lot of articles dealing with China, 9 out of 20, with there being 5 about Russia. Several of these had non-Chinese authors, including the one by Brautigam, who, again, is clearly a highly respectable person with an excellent record.

            I might also note that when you found this list of journals published by Taylor & Francis, the six on it, well under 1% of journals published by T%F, this journal was not on this list.

            In short, there is not a shred of evidence that this journal is at all disrespectable or unscholarly, quite the contrary. There is lots of evidence that is completely respectable, and certainly the author of this paper is.

            You have fallen more fully on your face with this nonsense than I have seen you do for some time. I would appreciate you avoiding such rank bs in the future. I resent having to go check up on claims of yours that look suspicious, and indeed turn out to be so wildly baseless you could probably have your behind sued off if somebody were to tell the ed board of the journal about your baseless allegations.

  11. ltr

    February 6, 2021

    The Chinese ‘Debt Trap’ Is a Myth
    The narrative wrongfully portrays both Beijing and the developing countries it deals with.

    December 6, 2019

    A critical look at Chinese ‘debt-trap diplomacy’: the rise of a meme

    DEBORAH BRAUTIGAM is Bernard L. Schwartz Professor of International Political Economy at the School of Advanced International Studies at Johns Hopkins University.

    MEG RITHMIRE is F. Warren McFarlan Associate Professor at Harvard Business School.

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