Duck And Cover——-The Lull Is Breaking, The Storm Is Nigh

by David Stockman

December 10, 2014

September 15, 2008 is the day that Lehman died and the moment that the world’s central banks led by the Fed went all-in. As it has turned out, that was an epochal leap into the most dangerous monetary deformation that the world has ever known.

It needn’t have been. What was really happening at this pregnant moment was that the remnants of honest capital markets were begging for a purge and liquidation of the speculative rot that had built up during the Greenspan era. But the phony depression scholar running the Fed, Ben Bernanke, would have none of it. So he falsely whooped-up a warning that Great Depression 2.0 was at hand—-sending Washington, Wall Street and the rest of the world into an all-out panic.

The next day’s AIG crisis quickly became ground zero—the place where the entire fraudulent narrative of systemic “contagion” was confected. Yet that needn’t have been, either. In truth, AIG was not the bearer of a mysterious financial contagion that had purportedly arrived on a comet from deep space.

As subsequent history has now proven, AIG’s $800 billion globe spanning balance sheet at the time was perfectly solvent at the subsidiary level. Not a single life insurance contract, P&C cover or retirement annuity anywhere in the world was in jeopardy on the morning of September 16th.

The only thing gone awry was that the London-based CDS (credit default swap) operation of AIG’s holding company was monumentally illiquid. Joseph Cassano and the other latter-day geniuses who were running it had spent two decades picking up nickels (CDS premium) in front of a steamroller, while booking nearly the entirety of these winnings as profits—all to the greater good of their fabulous bonuses.

But now, as the underlying securitized mortgage market imploded, they needed to meet huge margin calls on insurance contracts they had written against mortgage CDOs. In truth, however, the whole mountain of CDS was bogus insurance because AIG’s holding company did not have a legal call on the hundreds of billions of cash and liquid assets ensconced in dozens of its major subsidiaries.

From a legal and cash flow point of view, Hank Greenberg’s mighty insurance empire was essentially a mutual fund. Cassano and his posse had been implicitly pledging assets (via AIG’s corporate or consolidated AAA rating) that belonged to someone else—-namely, the insurance subsidiaries and the state insurance commissioners who effectively controlled them.

Yet this scandalous fact was not a world crisis, nor really any crisis at all. Yes, the several hundred billions of CDS contracts sold by the Cassano London operation were bogus and could not be paid off—–since the holding company had no available liquid capital. Nevertheless, they had been purchased almost entirely by a dozen or so of the largest banks in the world, including Deutsche Bank, Barclays, Societe Generale, Bank of America/Merrill Lynch and Goldman Sachs, to name a few of the usual suspects. And as I documented in The Great Deformation, these banks could have readily afforded the hit on the underlying CDOs—– and  they deserved it,too.

As to the former point, the combined balance sheet of the impacted big banks was about $20 trillion at the time, and the  potential loss on the CDS contracts that AIG’s holding company could not fund was perhaps $80 billion at the outside. After all, most of the CDO paper which these mega-banks had purchased and then magically transformed into AAA credits (and thereby could hold without posting a dime of capital) consisted of the so-called “super-senior” tranches. The really nasty crud at the bottom of the CDO capital structures—which did generate deep losses—- had been pawned off to institutional investors and trust funds for Norwegian fishing villages and the like.

So the day of reckoning for AIG’s CDS fraud presented no danger to the world’s banking system. The loss might have amounted to 0.5% of their combined footings—–a one-time hit that Wall Street brokers would have counseled to ignore and which might have zapped banker bonuses for the next year or even less.

And those foolish bankers did need to be punished for negligence, stupidity and unseemly greed. In point of fact, Cassano was never indicted for his bulging book of bogus CDS insurance because it amounted to fraud in plain sight. Any one who read AIG’s 10K could have seen that the consolidated balance sheet of AIG was riddled with dividend stoppers and capital conservation limits imposed by the insurance regulators at the subsidiary level. Cassano never, ever had the cash to meet margin calls or pay-off the supposedly remote risk of actual claims; his policies had been purchased all along by the proverbial greater fools.

But this calamity of stupidity and negligence has turned out to be a really big thing in the history of the modern financial era; it was indeed the Rubicon. By falsely transforming a negligible hit to the balance sheet of the world’s mega-banks—-most of which were quasi-socialist institutions in Europe and would have been bailed out by their governments anyway—-into the alleged collapse of the mighty AIG,  Secretary Paulson, Bernanke and their cabal of Wall Street henchman opened the door in one fell swoop to the present global monetary madness.

At that fraught moment in time, AIG was the financial gold standard—–the massive AAA balance sheet that anchored the entire financial market. So when out of the blue—literally without even a few days notice to even the attentive public—–it had apparently descended into a $180 billion black hole, the myth of systemic breakdown and all-consuming financial “contagion” was not only born; it gained instant resonance throughout Wall Street and Washington.

The rest is history, as they say. And what a fantastic, but lamentable history it was. Owing to the cursed recency bias that now animates the mainstream narrative, it has already been forgotten that today’s elephantine central bank balance sheets did not remotely exist just six years ago. Indeed, they could not have been imagined back then—not even by Bernanke himself.

But upon the eruption of the AIG catalyst, the mad money printing dash was on. As shown below, it had taken the first 94 years of the Fed’s existence to grow its balance sheet footings to $900 billion—-something achieved by steadily plucking new credits out of thin air over the years and decades. But within six weeks of the so-called AIG meltdown, Bernanke had replicated what had taken his predecessors nigh on to a century to accomplish.

And then he didn’t stop. Fighting the fabricated enemy of “contagion” and thereby thwarting Wall Street’s desperate need for a cleansing financial enema, he had nearly tripled the Fed’s historic balance sheet by year-end 2008, and on it went from there.

And of course it was not just the Fed running the printing presses red hot. Owing to both Keynesian ideology and defensive necessity, the other major central banks of the world followed suit. At the time of the crisis, the combined balance sheet of the Fed, ECB and BOJ was $3.5 trillion or about 11% of GDP. In short order that number will reach $11 trillion and 30% of the combined GDP of the so-called G-3.

Throw in the BOE, the People’s Printing Press of China, the bloated central banks of the oil exporters and Russia and assorted others like the reserve banks of India and Australia and you have total central banks footings in excess of $16 trillion or roughly triple the pre-crisis level.

 tsunami of central bank credit did little for the real economy in places where the private sector was already at “peak debt” such as the US and Europe; and it did fuel one final blast of the malinvestment boom in places that still had balance sheet runway available like China, Brazil and much of the rest of the EM world.

But what it did do universally and thunderously was to fuel a financial asset inflation the likes of which the world had never before seen.

Prior to their recent stumble, the combined equity markets of the world had reached a capitalization of nearly $75 trillion compared to barely $25 trillion at the dark bottom in March 2009. And, yes, $50 trillion of gain in a comparative historical heartbeat did wonders for the net worth of the global 1%.

But it also did something else; it destroyed the remaining vestiges of financial market stability and honest price discovery. After 6-years of the central bank tsunami, two-way markets were gone; the shorts were dead; skeptics were out of business; greybeard investors had retired; speculators regularly bought downside “protection” (i.e. puts on the S&P 500) for chump change; and the law of “buy the dips” became unassailable.

Even more crucially, capital markets were transformed into rank casinos that were virtually devoid of all economic information……except, except the word clouds, leaks and sound bites of central bank speakers and their tools in the press and monitors in the banks, brokerage houses and hedge funds. At length, this meant that the only reason to buy was that virtually every risk asset class was rising; and it also meant that the only risk worth worrying about in a day-trading market was from the verbal emissions of central bankers and their Wall Street accomplices and stooges.

So as long as the central bank con job lasted, there was no reason not to buy, buy, buy. The financial world’s greatest clown, Jim Cramer of CNBC, became a prophet in his own time.

Indeed, the man’s stupendous insouciance became embedded in the casino itself.

And the VIX is the smoking gun of proof. Over the span of approximately 72 months, the world’s raging central bankers simply drove risk right out of the casino.

^VIX Chart

Except they didn’t actually banish financial risk; they just drove it underground. When every financial asset is rising, the casino creates its own marginable collateral. Yesterday’s gain becomes tomorrow’s repo and re-hypothecated security against the next day’s round of buying.

And as long as asset values are inflating, the inherent risk in these daisy chains is muffled and discounted.

Yet that’s exactly why the present mother of all financial bubbles is so dangerous and palpably unstable. The marginal “bid” is dependent upon wildly inflated collateral which is tucked away in the warp and woof of the entire global financial system. When the Chinese stock market hit a 5.5% air pocket within a few minutes two nights ago, for example, it was because the financial authorities there said icksnay to the repo of bonds issued by essentially bankrupt local development agencies.

Stated differently, there are financial time bombs planted everywhere in the world economy because central bank financial repression has caused drastic mispricing of nearly every class of financial asset, which is to say, every layer of collateral which has ratcheted-up the entire edifice.

As the redoubtable Ambrose Evans-Prichard so cogently noted, central bank ZIRP has radically compressed the debt markets of the world. This means that cap rates—-the basis for valuation of tens of trillions of fixed income securities and real estate around the world—are now so aberrantly low as to be downright stupid:
What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.
Needless to say, this drastic central bank driven financial repression has unleashed a mindless pursuit of “yield” or short-term trading gains that give the concept of “irrational exuberance” an entirely new definition. Consider for example, the hapless mutual fund investors or institutional managers who have been buying energy sector CLOs. What is the collateral for the 5% yields advertised by these fly-by-night funds—–often issued and managed by the same folks who sold housing sector CLOs and CDOs last time around?

Why its the leveraged loans issued by E&P operators in the shale patches. The collateral for these leveraged loans, in turn, is shale rocks 4,000-9,000 feet down under that have been worthless until approximately 2005 and would be worthless today without dramatically over-priced crude oil and drastically underpriced debt capital.

That is to say, the vaunted collateral in the shale patch craps out after about two-years unless new money is poured down the well bore and oil prices are above $75-$80 per barrel on the WTI marker price to cushion the sharp discounts back to the wellhead. But with marker price now plunging into the $50s, the drilling will soon stop, the production will crap-out, the shale rock collateral value will regress toward the zero bound, the E&P borrowers will default, the energy CLO’s will implode and the hapless yield chasers will be left high, dry and panicked.

Cannot the same thing be said of Italian bonds at 2%? As reminded below, the Italian economy has not grown for six years, its debt-to-GDP ratio has gone critical and its political system is disintegrating.

Historical Data Chart
Italy Government Debt to GDP

So from whence did the “bid” arise after Draghi’s “whatever it takes” ukase, which in just 24 months drove the yield on this sovereign junk from 7% to 2%?

Well, it came from its own bootstraps, that’s what. The front-running speculators who backed up their trucks to Draghi’s pronouncement where not sitting on a pile of cash looking for “value”. 

Instead, they bought a pile of Italian bonds and then margined their purchases in the repo market.

Yes, central bank ZIRP means essentially zero cost of carry; its the source of the bid that never asks whether 2% is enough. When bonds are held by the day or even hour, its far more than enough as long as the repo can be rolled and bond prices keep inflating.

Until they don’t. Are the international dollar bonds of Turkish banks—one example of the $9 trillion EM debt market—– issued against their loan books any different? Just consider the daisy chain of collateral there. Istanbul is comprised of miles of empty apartment and commercial buildings which are collateral for the Turkish bank loans. Yet what is the equity of the real estate developer borrowers of these generously leveraged loans—-other than their “investments” in the Erdogan regime?  More often than not its the down-payments on newly built space made by speculators who borrowed the money from the very same banks.

Indeed, in a ZIRP world the collateral chains extend so deep into the netherworld of speculation that no one can possibly trace them. That is, until after they erupt. Then we will learn all about the “risk” that was driven below the surface during the great bubble of the past 6 years just like we did in September 2008.

In short, what is happening now is that risk is coming out of hiding; the collateral chains are buckling; the financial time bombs are beginning to explode.

There is nothing especially new about this development—its the third occurrence this century.

But there is possibly something different  this time around the block.

This time the carnage could be much worse because the most recent tsunami of central bank credit was orders of magnitude larger and more virulent than during the run-up to the Lehman event or the dotcom implosion.

Moreover, the central banks are now out of dry powder—– impaled on the zero-bound. That means any resort to a massive new round of money printing can not be disguised as an effort to “stimulate” the macro-economy by temporarily driving interest rates to “extraordinarily” low levels. They are already there.

Instead, a Bernanke style balance sheet explosion like that which stopped the financial meltdown in the fall and winter of 2008-2009 will be seen for exactly what it is—-an exercise in pure monetary desperation and quackery.

So duck and cover. This storm could be a monster.

Russia, Turkey pivot across Eurasia

By Pepe Escobar

Dec 8, '14

The latest, spectacular "Exit South Stream, Enter Turk Stream" Pipelinistan gambit will be sending big geopolitical shockwaves all across Eurasia for quite some time. This is what the New Great Game in Eurasia is all about.

In a nutshell, a few years ago Russia devised North Stream - fully operational - and South Stream - still a project - to bypass unreliable Ukraine as a gas transit nation. Now Russia devises a new sweet deal with Turkey to bypass the "non-constructive" (Putin’s words) approach of the European Commission (EC) concerning the European "Third Energy Package", which prohibits
one company from controlling the full cycle of extraction, transportation and sale of energy resources.

Background is essential to understand the current game. Already five years ago I was following in detail Pipelineistan’s ultimate
opera - the war between rival pipelines South Stream and Nabucco. Nabucco eventually became road kill. South Stream may eventually be resurrected, but only if the EC comes to its senses (don’t bet on it.)

The 3,600 kilometer South Stream should be in place by 2016, branching out to Austria and the Balkans/Italy. Gazprom owns it with a 50% stake - along with Italy’s ENI (20%), French EDF (15%) and German Wintershall, a subsidiary of BASF (15%). As it stands, these European energy majors are not exactly beaming - to say the least. For months, Gazprom and the EC were haggling about a solution, but in the end Brussels predictably succumbed to its own mediocrity - and relentless US pressure over weak-link and European Union member Bulgaria.

Russia still gets to build a pipeline under the Black Sea, but one now redirected to Turkey and, crucially, pumping the same amount of gas South Stream would. Not to mention Russia gets to build a new LNG (liquefied natural gas) central hub in the Mediterranean. Thus Gazprom has not spent US$5 billion in vain (finance, engineering costs). The redirection makes total business sense. Turkey is Gazprom’s second-biggest customer after Germany; much bigger than Bulgaria, Hungary and Austria combined.

Russia also advances a unified gas distribution network capable of delivering natural gas from anywhere in Russia to any hub alongside Russia’s borders.

And as if it was needed, Russia gets yet another graphic proof that its real growth market in the future is Asia, especially China - not a fearful, stagnated, austerity-devastated, politically paralyzed EU. The evolving Russia-China strategic partnership implies Russia as complementary to China, excelling in major infrastructure projects from building of dams to laying out pipelines. This is trans-Eurasia business with a sharp geopolitical reach and not subjected to ideology-drenched politics.

Russian "defeat"? Really?

Turkey also made a killing. It’s not only the deal with Gazprom; Moscow will build no less than Turkey’s entire nuclear industry, and there will be increased soft power interaction (more trade and tourism). Most of all, Turkey is now increasingly on the verge of becoming a full member of the Shanghai Cooperation Organization (SCO); Moscow is actively lobbying for it.

This means Turkey acceding to a privileged position as a major hub simultaneously in the Eurasian Economic Belt and of course the Chinese New Silk Road(s). The EU blocks Turkey? Turkey looks East. That’s Eurasian integration on the move.

Washington has tried very hard to create a New Berlin Wall from the Baltics to the Black Sea to "isolate" Russia. And yet Team "Don’t Do Stupid Stuff" in Washington never saw it coming - yet another Putin judo/chess/go counterpunch applied exactly across the Black Sea.

Asia Times Online has been reporting for years how Turkey’s key strategic imperative is to configure itself as the indispensable energy crossroads from East to West - transiting everything from Iraqi oil to Caspian Sea gas. Oil from Azerbaijan already transits Turkey via the Bill Clinton/Zbig Brzezinski-propelled BTC (Baku-Tblisi-Ceyhan) pipeline. Turkey would also be the crossroads if a Trans-Caspian pipeline is ever built (slim chances as it stands), pumping natural gas from Turkmenistan to Azerbaijan, then transported to Turkey and finally Europe.

So what Putin’s judo/chess/go counterpunch accomplished with a single move is to have stupid EU sanctions once again hurt the EU. The German economy is already hurting badly because of lost Russia business.

The EC brilliant "strategy" revolves around the EU’s Third Energy Package, which requires that pipelines and the natural gas flowing inside them must be owned by separate companies. The target of this package has always been Gazprom - which owns pipelines in many Central and Eastern European nations. The target within the target has always been South Stream.

Now it’s up to Bulgaria and Hungary, which have always fought the EC "strategy", to explain the fiasco to their own populations, and to keep pressing Brussels; after all they are bound to lose a fortune, not to mention get no gas, with South Stream out of the picture. Bulgaria alone reportedly has lost more than 6,000 new jobs and over $3 billion of investment due to the loss of South Stream.

So here’s the bottom line; Russia sells even more gas - to Turkey; Turkey gets much-needed gas with a cool discount; and the EU, pressured by the Empire of Chaos, is reduced to dance, dance, dance like a bunch of headless chickens in dark Brussels corridors wondering what hit them. And while the Atlanticists are back to default mode - cooking up yet more sanctions - Russia is set to keep buying more and more gold.

Watch those spears

This is not the endgame - far from it. In the near future, many variables will intersect.

Ankara’s game may change - but that’s far from a given. President Recep Erdogan - the Sultan of Constantinople - has certainly identified a rival, Caliph Ibrahim of ISIS/ISIL/Daesh fame, trying to steal his mojo. Thus the sultan may flirt with mollifying his neo-Ottoman dreams and contemplate steering Turkey back to its previously ditched "zero problems with our neighbors" foreign policy doctrine.

Not so fast. Erdogan’s game so far was the same as that of the House of Saud and Qatar's House of Thani; get rid of Syrian President Bashar al-Assad to allow an oil pipeline from Saudi Arabia and a gas pipeline from the South Pars/North Dome mega-field in Qatar. This pipeline would be Qatar-Iraq-Syria-Turkey, rivaling the already proposed, $10 billion Iran-Iraq-Syria pipeline. Final customers: the EU, of course, desperate in its "escape from Gazprom" offensive.

So what now? Will Erdogan abandon his "Assad must go" obsession? It’s too early to tell. The Turkish Foreign Ministry is spinning to the media that Washington and Ankara are about to agree on a no-fly zone along the Turkish-Syria border - even as the White House, earlier this week, insisted the idea had been scrapped.

The House of Saud is like a camel lost in the Arctic. The House of Saud’s lethal game in Syria always boiled down to regime change so that the Saudi-sponsored oil pipeline from Syria to Turkey might be built. Now the Saudis see Russia about to supply all of Turkey’s energy needs - and still be positioned to sell more gas to the EU in the near future. And Assad still won’t go.

But it is US neo-cons who are sharpening their poisonous spears with gusto. As soon as early 2015 there may be a Ukrainian Freedom Act in the US House of Representatives. Translation: Ukraine being dubbed a "major US non-NATO ally", which means, in practice, a virtual NATO annexation. Next step: more turbo-charged neo-con provocation of Russia.

A possible scenario is vassal/puppies such as Romania or Bulgaria, pressed by Washington, deciding to allow full access of NATO vessels into the Black Sea. Who cares that this would violate current Black Sea agreements that affect both Russia and Turkey?

And then there’s a dangerous Rumsfeldian "known unknown": how the fragile Balkans will feel subordinated to the whims of Ankara. As much as Brussels keeps Greece, Bulgaria and Serbia in a strait jacket, in energy terms they will start depending on Turkey’s goodwill.

For the moment, let’s appreciate the magnitude of the geopolitical shockwaves after Putin’s latest judo/chess/go combo. And get ready for another chapter of Russia’s "pivoting across Eurasia". Putin hits Delhi next weekend. Expect another geopolitical bombshell.

Pepe Escobar's new book, just out, is Empire of Chaos.

China's stock mania decouples from economic reality

The stock boom comes as Chinese industry battles with massive overcapacity in everything from steel to shipbuilding, coal output, cement and solar panels

By Ambrose Evans-Pritchard

8:52PM GMT 08 Dec 2014

Chinese hostesses jump before the opening session of the Chinese Communist Party's five-yearly Congress at the Great Hall of the People in Beijing

The government itself is partly responsible for letting the genie out by talking up 'cheap stocks' in the official media two months ago, but now appears alarmed by what it has done Photo: AFP

China’s stock market boom has reached outright mania, with equities galloping higher at a parabolic rate, despite threats of a crackdown by regulators and the continued slowdown of the national economy.
The Shanghai Composite Index has risen 32pc in the past six weeks, blowing through 3,000 to a three-and-a-half-year high even though corporate earnings are declining steeply.
The China Securities Regulatory Commission said late last week that it would “increase market supervision, resolutely crack down and earnestly safeguard normal market order”. It warned that stock manipulators had been “raising their head” and would be dealt with.
The cautionary words have been ignored by retail investors as they throng brokerage offices, lured by momentum trades. The government itself is partly responsible for letting the genie out by talking up “cheap stocks” in the official media two months ago, but now appears alarmed by what it has done.
Many families are taking out brokerage loans to buy stocks, increasing leverage and risk. Margin debt has risen to more than $130bn from nothing three years ago. This is now 1.2pc of GDP. “Turnover, leverage and account openings have all soared and there is a sense of mania taking hold,” said Mark Williams, from Capital Economics.

The latest surge follows a shift by the Chinese authorities towards “targeted easing” in October, intended to stop the housing market crumbling after five months of falling prices. This was followed by a surprise cut in interest rates last month.

But aspects of the equity surge are bizarre. Financial stocks have jumped most, yet the rate cut was negative for banks since it reduced their margins. Deflationary pressures are eroding wafer-thin profit margins. Chen Long, from Gavekal in Hong Kong, said the momentum on the Shanghai bourse has become unstoppable but is losing touch with economic fundamentals. “When the tide recedes, the backwash is likely to be vicious,” he said.

In one sense Chinese stocks are cheap after the battering they have taken since the Shanghai index topped 6,000 on the glory days of the pre-Lehman boom. It has lost two-thirds of its value from the peak, one of the worst bear markets in any major country in the past century.

“The equity market has been trading at distressed levels,” said Kenneth Chan, from Jefferies. China’s excess level of savings “needs to find a home” and there is nowhere else to put it, he said. Less understood is that excess liquidity generated by China’s growing trade surplus is also leaking into equities.

Even so, the stock boom comes as Chinese industry battles with massive overcapacity in everything from steel to shipbuilding, coal output, cement and solar panels.

The latest trade data show that export growth fizzled to 4.7pc in November. The details are revealing. They showed that China’s steel industry is flooding the world with excess output after a 45pc collapse in prices at home. Steel exports were up 55pc to 9.72m tonnes from a year earlier, more than the entire production of the US.

Investors are effectively betting that President Xi Jinping will revert to China’s bad old ways of reflexive stimulus rather than sticking to his “tough love” plans to wean the economy off excess credit – now dangerously high for an emerging markets economy at 250pc of GDP.

“People think there are rays of hope and that maybe stimulus is on the way, but we don’t think monetary policy is really changing. There still hasn’t been a cut in the reserve requirement ratio,” said Jonathan Fenby, from Trusted Sources.

Mr Xi is targeting jobs. So long as unemployment stays near 5pc, the Communist Party seems willing to tolerate lower growth. “The labour market is still tight. There is a shortage of skilled workers,” said Mr Fenby.

The Politburo removed all reference to targeted easing after its latest meeting this month, instead talking of a “new normal” focused on the quality of growth rather mass production for its own sake.

China’s primary tool for regulating the economy is the quantity of credit, not the price of credit through interest rates. There is little sign that key lending curbs are being lifted. Large parts of the shadow banking system are being shut down, a net tightening of $250bn since June. New loans fell from $170bn in September to $107bn in October. “We’d be surprised if there was an acceleration of credit,” said Mr Williams.

While last month’s rate cut has lifted animal spirits, it does not add much stimulus, or mark a change of direction. It merely slowed the pace of tightening.

Companies have been asphyxiated by a relentless rise in the real cost of borrowing, which has soared from zero to 5pc since 2011 due to the effects of falling inflation. Tao Wang, from UBS, said the interest burden for non-financial companies has jumped from 7.5pc to 15pc of GDP over the same period.

Any Xie, from Caixin, says it will be impossible for China to deflate its epic bubble painlessly. He says house prices will fall by half from their peak in 2011. Massive bad loans in the banking system will have to be written off. “China must stop the debt-capacity spiral. Continuing it provides no way out,” he said.

“The stimulus talk may be part of the psychological warfare to achieve a soft landing. It may confuse speculators from running for the exit together. The trouble is that it may confuse financial institutions, too,” he said.

Op-Ed Contributor

Driving Ukrainians Into Putin’s Arms


DEC. 8, 2014

                                                                                                                Credit Alex Robbins       

A RECENT United Nations report says that nearly half a million Ukrainians have fled the country since April. The fact that families run from a war zone is heartbreaking but hardly unexpected. The disturbing part lies in the details — of the roughly 454,000 people who had fled Ukraine by the end of October, more than 387,000 went to Russia. Most of those who fled were Russian speakers from the east, but this still raises a sobering question: If this is a conflict between Ukraine and Russia, why did so many Ukrainians choose to cast their lot with the enemy?

Moscow’s denials of involvement in eastern Ukraine are, of course, absurd: It is clear that the separatists in Donetsk and Luhansk are equipped, reinforced and trained by Russians. That said, if Vladimir V. Putin had tried sending unmarked commandos to set up sham republics in western Ukraine, where anti-Russian sentiment runs high, his men would have been returned to the Kremlin in body bags. Yes, Mr. Putin is brewing unrest in the east, but he is brewing with local ingredients.
He is connecting with the population using a language they speak and a symbolism they understand.
The unpalatable reality is that a significant portion of eastern Ukrainians — the very people on the ground living and suffering through this conflict — distrust Kiev and the West and at least tacitly support Russia and the separatists. And frankly, that isn’t surprising.
Last month the Ukrainian president, Petro O. Poroshenko, decided to freeze government pensions and cut off funding for schools and hospitals in the eastern provinces of Donetsk and Luhansk.
Unfortunately, the separatist thugs fighting there don’t rely on food stamps to buy weapons — they get them from Russia. All that Mr. Poroshenko accomplished was giving Mr. Putin the “proof” to tell the starving pensioners of the region: “See — the West doesn’t care if you die.” This is a sentiment that is growing stronger and stronger, according to reports coming out of the región.

Equally awful is Kiev’s decision to maintain a relationship with the Azov battalion, an ultranationalist paramilitary group of around 400 men that uses Nazi salutes and insignia. To anyone familiar with eastern Ukraine’s bloody history during World War II, allowing the Azov battalion to fight in the region is a bit like sponsoring a Timothy McVeigh Appreciation Night in Oklahoma City.
It does nothing but infuriate the local population and provide Mr. Putin with yet another opportunity to shed the mantle of invader and position himself as a protector.
The impact of World War II, or, as most people there call it, The War, on eastern Ukrainian consciousness cannot be understated. My childhood in the northeast city of Kharkov (now called Kharkiv) in the 1980s was surrounded by The War, 40 years after it ended. Every family — Russian, Ukrainian, Roma, Jewish — had ghost relatives who had vanished or perished. One of my earliest memories is of asking my father where the mortar holes pockmarking the outside of our apartment block had come from; one of my father’s earliest memories is of fleeing Kharkov mere hours before the Nazis invaded the city. Eastern Ukrainians today, especially the older generations, respond to swastikas and wolfsangel runes — Nazi symbols now used by Ukrainian ultranationalists — about as well as African-Americans respond to burning crosses.
Mr. Putin and the Russian news media say that western Ukrainians in Mr. Poroshenko’s government are neo-Nazis. The West denies these claims, averring that there are no neo-Nazi elements in the Kiev government. Both are wrong. The Kiev government and the armies fighting in eastern Ukraine contain a small minority of neo-Nazi ultranationalists. To eastern Ukrainians, however, even one is too many. 

Washington and the Western media have largely ignored the negative ramifications of Kiev’s actions. The State Department has said nothing about the pension freeze’s effect on the local population of eastern Ukraine; reports of the Azov battalion’s use of Nazi insignia have not been addressed in any meaningful manner. Mr. Putin’s greatest weapon of all may be the West’s refusal to speak directly to the people of eastern Ukraine. When I talk to family friends still living in Kharkiv, they ask me, “Why does the West label us as enemies?”
It seems the West has forgotten the lessons of its own history. At the end of the Cold War in 1989, Communism collapsed, leaving unrest and uncertainty in its wake. In that moment of chaos, the people of Eastern Europe turned their gazes westward. This happened not by accident, but because of decades of public diplomacy — from “Ich bin ein Berliner” to “Mr. Gorbachev, tear down this wall” to nightly broadcasts by Voice of America and Radio Free Europe, which constantly reassured those behind the Iron Curtain that the West had not forgotten them. That year my family was one of many that fled eastern Ukraine for Vienna, and later the United States.
In 2014, the people of eastern Ukraine find themselves in an exponentially more horrible and deadly situation. They will turn to whoever provides them with bread and security and respect for their language and culture. They are looking, and more and more it seems they’re turning, eastward.

December 8, 2014 2:31 pm

Vanguard turns firepower on shake-up of financial advice market

Stephen Foley in New York

Bill McNabb, Vanguard chief executive©Bloomberg
Bill McNabb, Vanguard chief executive

When Jack Bogle launched a low-fee mutual fund company in 1975, he took inspiration from HMS Vanguard, Admiral Horatio Nelson’s flagship at the battle of the Nile, for its name and logo.

Now, on the eve of its 40th anniversary, Vanguard’s growth has made it the equivalent of a flotilla of modern battleships, sailing into new territory and increasingly willing to flaunt its firepower.
However, it may start to attract some return fire. The company brought in more money in 2014 than any asset management group ever, and its chief executive Bill McNabb is embarking on an even more ambitious goal for 2015: revolutionising the market for giving financial advice, in the same way that Mr Bogle revolutionised the mutual fund industry decades ago.
Executives at Vanguard’s Valley Forge, Pennsylvania headquarters have been quietly working on a way to give simple but effective portfolio advice to US savers. It promises to offer the service at a fraction of the cost of the average financial adviser, 0.3 per cent of assets annually compared with an industry average of more than 1 per cent.
Using mainly online tools, including webcam chats with advisers, it will avoid the expensive infrastructure of existing financial adviser chains.

“Can we provide really super-high quality advice at a very low cost and do that in a very large way, and change that market? I think we can,” says Mr McNabb.

“We continue to think of our primary mission to reduce the complexity and cost of investing across the board.”

The open question is what the US’s 225,000-strong industry of financial advisers is going to think about Vanguard entering its territory.

And it is an important question, since a large part of the company’s recent growth has come from advisers putting their clients into Vanguard funds. The group passed the milestone of $3tn under management this summer, and it has accumulated a record $185bn in net new assets in the US alone since the start of the year. That surpasses the previous industry record of $141bn which it set in 2012.

Of that $185bn, $63.3bn was into exchange traded funds (ETFs) which, like most of Vanguard’s largest mutual funds, simply track stock market indices, and do not try to beat the market by picking individual securities like active fund managers do.

Few companies are so closely associated with the trend towards passive investing and the idea that low fees, more than stockpicking prowess, make the most difference to investment performance over time — a Bogle mantra since the very beginning. Vanguard still runs about $1tn in low-cost active funds, the investment decisions of which are outsourced to other groups such as Wellington Management Company, but this is down to about one-third of its business.

Jack Bogle, founder of the Vanguard Group, testifies before the Senate Banking Committee in Washington, DC, on Thursday, February 26, 2004. Ruder said that Congress should let the U.S. Securities and Exchange Commission take the lead in dealing with abuses in the $7.4 trillion mutual fund industry. Photographer: Jay Mallin / Bloomberg News
Jack Bogle

The record-breaking asset growth comes even though the company has not launched more than a handful of products, says Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ. “The shift to passive disproportionately helps Vanguard, and I believe we are still in the middle of that shift,” he said.

The company is forged in the image of Mr Bogle, pictured, and reflects his passion for naval history. Valley Forge does not have cafeterias, it has galleys; Vanguard staff are called “crew members”; its gym membership programme is called “Shipshape”.

It even has an unofficial fan club of “Bogleheads” who debate investment issues; this year, it claimed a new member, the guru of active managers, Warren Buffett, who said he had told his wife to put most of her money in a Vanguard stock market tracker fund after his death.

Because it is mutually owned by its funds, and does not need to turn a profit, Vanguard can lower fees more easily than rivals.

It also eschewed paying commission to financial advisers, something which initially limited the availability of its products, but which has become less of a problem. In fact, with more advisers switching from commissions to a fee-based model, they have become a significant distribution channel for Vanguard.

According to mutual fund research firm Morningstar, it is this adoption by financial advisers that has put the wind in Vanguard’s sails, even more than the dismal recent performance of active managers and of rival groups such as Pimco, which it overtook last year to become the second-largest asset management company, behind BlackRock.
It has become common for advisers to assemble portfolios for clients using a basket of index-tracker funds, and Vanguard wants a piece of this portfolio construction business for itself. It was an adviser on just $755m of client portfolios at the end of last year but had grown that to $4.2bn at the end of September, even before it plans its big push in 2015.

It is expanding at a time of potential disruption. Brokerages are all pursuing their own technology platforms and entirely new companies, such as Betterment, have built savings apps designed to attract millennials.
Vanguard promises to construct portfolios for its clients using the most appropriate mix of its low-cost, diversified stock and bond funds. It says it expects to open up a new market, giving advice to less wealthy savers who are not lucrative enough for existing advisers.

But already some of the biggest independent financial advisers are chafing at the prospect of its entry into the market and raising the spectre of conflict of interest.

“Don’t be surprised if everything they recommend is a Vanguard product,” Peter Mallouk says he will be warning clients, whose own pitch is that he can tailor exactly the right mix of products for a saver’s needs. Mr Mallouk, based in Kansas City, has $4.3bn of client assets in Vanguard’s exchange-traded index tracker funds at the moment, but he is considering switching some of that now that fund fees are coming down across the board.

“While Vanguard was a pioneer and an early recipient of the benefits of the trend towards index funds,” Mr Mallouk says, “my company is engaging more with other fund managers, and if capitalism works there is going to be greater competition.”

BlackRock’s iShares ETFs are making inroads with retail investors and their advisers, according to Mr Rosenbluth of S&P Capital IQ, while State Street’s SPDR series of exchange traded funds is also competitive.

Yet for now, Vanguard sweeps all before it in terms of gathering assets, adding further benefits of scale it could use in the industry price wars Mr Bogle unleashed in the Seventies. Five of the 10 best performing US mutual funds, in terms of inflows year to date, are Vanguard funds, according to Morningstar, and Mr McNabb is pushing hard to export the business model to other countries. Vanguard’s non-US assets have doubled in six years.
Whether it be new countries or industries, the Vanguard fleet is on offensive manoeuvres.

How We'll Profit from Europe's Secret "Plan B"

By Peter Krauth, Resource Specialist, Money Morning

December 9, 2014

 As the European Union debates yet a third bailout for Greece, revelations about secret plans by some Eurozone members tell an even more intriguing story.

During the depths of the European sovereign crisis, when Greece was inches from exiting the zone, others chose to not sit idly by.

Instead, two member nations were surreptitiously preparing for a possible Eurozone breakup.
Even more fascinating is what came next, as it appears preparations are still in active mode.

Connecting just some of these dots will not only tell a fascinating tale of fiscal intrigue, it will also give you a leg up on most other investors who'll wish they knew as much as you…

The Dutch "Plan B" a Surprise Player

While the world watched Europe at the peak of its crisis, the Dutch and German governments began preparing emergency plans; measures that would allow for a transition back to their pre-euro national currencies, the guilder and Deutsche mark, should it become necessary.

Under the guise of the aptly named "Plan Florijn"(another name for the old Dutch guilder), the Netherlands' finance ministry and government organized for a worst-case scenario.

According to online European news site, current Dutch Finance Minister Jeroen Dijsselbloem confirmed the existence of the plan in a weekly interview with news outlet RTL Z saying, "Government leaders, including the Dutch government, have always said: we want to keep that Eurozone together. But [the Dutch government] also looked at: what if that fails? And it prepared for that."

Dijsselbloem also confirmed that discussions at the time were secretive to avoid causing panic in financial markets.

In the Dutch television documentary "Argos Medialogica," former Dutch Finance Minister Jan Kees de Jager said, "The fact that in Europe multiple scenarios were discussed was something some countries found rather scary. They did not do that at all, strikingly enough."

And as it turns out, the Netherlands wasn't alone.

De Jager told "Argos Medialogica," "We were one of the few countries, together with Germany. We even had a team together that discussed scenarios, Germany-Netherlands."

When EUobserver asked the German finance ministry about the matter, they didn't refute that such plans had been "in the works."

Although this is intriguing enough, the real story is in what happened next…

Where's the Gold?

With the Eurozone barely clawing its way back from its sovereign debt crisis, Germany shocked the gold market in January 2013, saying that it would repatriate gold held at the New York Fed and the Banque de France.

Deutsche Bundesbank officials said the action was "preemptive" in case a "currency crisis" was to strike the monetary union.

These days, despite headlines suggesting Germany's gold repatriation is behind schedule and may not even happen entirely, the Bundesbank confirms that it is moving forward on its repatriation plans as announced.

With a total of 3,384 tonnes, the second-largest gold stash in the world, Germany will be bringing home some 600 tonnes from the United States and France by 2020, with plans to eventually hold 50% of its gold at home.

For its part, De Nederlandsche Bank (DNB) recently had 122 tonnes of its gold shipped to Amsterdam from New York.

According to DNB, 31% of its gold reserves are now held in Amsterdam, and some are held outside of the country with about 31% with the Federal Reserve, 20% with the Bank of Canada and 18% with the Bank of England.

More interesting however, is that this repatriation was done secretly, only being made public after the fact.

According to the websites of the Dutch and German central banks, both their official gold reserves are held fully allocated, meaning none of their gold is leased out or swapped.

As for the Eurozone as a whole, unallocated gold is at very low levels and it's declining, indicating a clear preference for allocated gold.

Could this be another sign that Europe is preparing for an even worse crisis ahead?  Might Europe split up or reconfigure? And are they expecting a fiat currency crisis?

With Germany being the industrial and financial backbone of Europe, it's difficult to imagine the union holding up in any substantive way without it.

It would seem that essentially any other member nation could leave the union, and it could still cling together.

If Germany leaves, Europe's likely to break apart.

It's only a matter of whether that happens slowly or quickly.

That's why Germany's push to repatriate its gold is so fascinating.

If the European Union was to disintegrate, and the Netherlands joined Germany, the Netherlands would of course be the clear winner, given the relative sizes of their economies. 

But at this point, that's just conjecture.

More salient is how these and other Eurozone nations are preparing their own Plan B's ahead of any potential currency crises.

Here's What Our "Plan B" Looks Like

Switzerland has a long history with gold. In fact, from the 1920s until 1997, the Swiss franc was even backed by 40% gold reserves – until legal changes lowered that to 25%.

In 2000 further changes to the Swiss Federal Constitution completely severed the franc's link with gold.  The Federal Assembly even pushed through new currency laws demonetizing gold.

And that set off a series of sales, lowering Switzerland's gold reserves by 1,550 tonnes over the next 8 years.

A group intent on repairing these shortcomings organized and managed to obtain a referendum asking citizens if they agreed that the central bank should:
  • be made to hold a minimum 20% of its assets in gold;
  • be prohibited from selling it off; and
  • be made to store it all at home.
Despite a strong initial outlook, the initiative failed as the finance minister, political leaders, and even the president of the Swiss National Bank (who rarely appears in public) all came out, regularly maligning the proposal in an unprecedented multimedia blitz.

But the debate is now in the minds of the Swiss and numerous others who've been made aware of these crucial issues.

Just recently, leading French politician Marine Le Pen wrote an open letter to the French central bank, asking it to repatriate and audit France's gold.  Most of her demands echoed those of the Swiss initiative.

In her letter she took it a step further:

"The monetary institution that you lead has historically served as the reserve central bank for France's monetary and gold reserves. In our strategic and sovereign vision, these do not belong to the state, nor the Bank of France, but to the French people, which serve as the ultimate guarantee of public debt and our money," she wrote.

Wow. How's that for a breath of fresh air, rather than hot air, from a politician?

These are clear indications that despite the headwinds from central planners, there's increased momentum for the role of gold in nations' reserves and their currencies.

Don't forget, the Netherlands guilder, from the 17th century until 2002, gets its name from the word "golden" because the coins were originally made from gold.

Right now, all the signs are pointing to the future of money regaining some link with gold.

If you haven't done so already, there's still time to prepare our backup plan like those gold-repatriating central banks: Get gold, and keep it.

It's your crisis insurance.

Seeking the Future of Europe in the Ancient Hanseatic League

By Mark Fleming-Williams

Tuesday, December 9, 2014 - 03:04

A bargain, forged in the fires of 2012's economic emergency, has defined the European Union for the past two years. It was an agreement made between two sides that can be defined in several terms — the center and the periphery, the north and the south, the producers and the consumers — but essentially one side, led by Germany, provided finance, while the other, fronted by Spain, Portugal, Ireland and Greece, promised change. In order to gauge this arrangement's chances of ultimately succeeding, it is important to understand what Germany was hoping to achieve with its conditional financing. The answer to that question lies in Germany's own history. 

Last week, the Governing Council of the European Central Bank's monthly meeting left financial markets feeling frustrated. Instead of announcing the beginning of a highly anticipated bond-buying program known as quantitative easing, the European Central Bank, or ECB, only slightly changed the vocabulary it used to describe its plans: "We expect" became "we intend." Pulses did not race with excitement.

In fact, the most interesting news of the day was that seven of the 22 members of the council apparently voted against the change in vocabulary. Those opposed included four governors of national central banks and three of the EU executive board's six members, who, in theory, are responsible for shaping ECB policy. This ongoing debate over finances is deeply important to Europe's future because it touches on a key question at the heart of the European project: Is Germany willing to underwrite the whole venture? Germany gave a partial answer to this question in 2012 when it financed the EU rescues of several member states, but the conditions it attached have since created more problems.

The trouble began with 2008's economic crash and peaked four years later with a sovereign bond crisis. Germany reacted by creating various mechanisms and funds to bail out stricken countries, including Outright Monetary Transactions to safeguard sovereign bond prices. In return, the bailed-out nations had to enact painful changes to increase their competitiveness — at a lifestyle cost to their citizens. The rest of the union had to commit to financial reform by signing the European Fiscal Compact. With these conditions, Berlin hoped to bring the rest of Europe through a process Germany had already undergone.

The Makings of an Economic Miracle

After the Second World War, Germany found itself occupied and split in two. It was positioned in the middle of a continent that feared it, and its economy had been wrecked by 30 years of war and turmoil. Militarism had failed repeatedly and spectacularly. Germany needed a new ethos, so it returned to its roots.

Before the German unification of 1871 set the new nation on a course to its own demise, the great behemoth known as the Holy Roman Empire had stretched across Central Europe for over a thousand years, from 800 to 1806. It was a patchwork of states varying in size. Some were ruled by princes while some were independent cities, but all owed ultimate allegiance to the Holy Roman Emperor, whose real power over his vassals was paltry in comparison to that of the French kings or Russian tsars at his flanks. The Holy Roman Empire was a network of Germanic peoples, where no unit was powerful enough to militarily dominate its neighbors or to truly unify the region into a single state.

The result was a competitive market where each princedom, duchy and city's survival was largely based on its own efficiency and resources, along with those of any peers with which alliances were formed. Local resources were leveraged, and skilled craftspeople trained through lengthy apprenticeships, forming guilds that created products recognized for their excellence across the Continent.

In the 13th century, a group of these states came together to create a trading federation centered on the northern cities of Lubeck and Hamburg. This federation, which originated in modern Germany and expanded to cities on the coasts of what is today Latvia, Estonia, Poland, Sweden and the Netherlands, came to be known as the Hanseatic League. The league dominated the North and Baltic seas in a manner reminiscent of the Romans in the Mediterranean a millennium before, but Hanseatic power was very much based on trade rather than force. The league's gigantic ships brought raw materials, including timber and grain, from its eastern members to ports in England and carried shipments of cloth and manufactured wool to Novgorod, Russia, on return voyages.

Meanwhile, German industry grew in the center of the web. Family connections and close relationships were used to create a reliable and efficient network that lowered transaction costs to great effect. "Made in Germany" became a trademark that carried great weight in 16th-century London. But ultimately, the discovery of the New World proved to be the Hanseatic League's death knell because the resulting shift in trade routes made having an Atlantic coast a requirement for success. The final meeting of the league took place in 1669.

Prussia rose in prominence during the industrialization period that followed the end of the Holy Roman Empire. The strong Prussian bureaucracy and its military power combined with the diplomatic genius of Otto von Bismarck to finally bring about a unified German state. But the economic strength of the new country and its precarious position on the North European Plain made war inevitable. The next 70 years saw this play out with great destruction.

When West Germany turned to competitiveness, trade and exports as the solutions to its woes in 1948, it was returning to ancient strengths. That year, future German Chancellor Ludwig Erhard led the drive to introduce a new currency because he felt there were far too many reichsmarks in the system and that this was harming the economy. He proposed the deutsche mark, a new currency that ultimately reduced the money supply by 93 percent. The deutsche mark propelled the economy forward and provided an early boost to exports, but the switch also caused a substantial reduction in the net wealth of many people.

The next thing Germany needed was a stable market, and in 1951, the European Coal and Steel Community — the European Union's predecessor — was formed. For France, Germany's primary partner in this venture, the attraction was obvious. By joining the European project, France, which had been invaded by Germany three times in 70 years, could shield itself from German attacks and position itself to take a leading role in Europe's development. Germany, meanwhile, obtained a tariff-free market for its products, and the close alliance with France allowed it an influential, yet less menacing voice. The new arrangement had immediate results. German exports as a percentage of output rose from 8.5 percent in 1950 to 14.6 percent in 1960 and even higher to 27.6 percent in 1985.

If services are taken into account, exports today make up 50 percent of Germany's gross domestic product, one of the highest such percentages in the world. Moreover, German excellence in mechanical, electrical and chemical engineering, in addition to a strong automotive sector, turned the country into a trade juggernaut. Just as the Hanseatic League did, Germany found a target market in the rest of Europe and proceeded to outcompete it, becoming even more powerful after reunification in 1990.

The Euro Shakes Things Up

For a long time, Germany functioned well in its role, but trouble emerged with the creation of the euro in 2000. A common currency removed the only real defense the other European countries had against the German trade machine: the ability to devalue. Plus, the euro was cheaper than the deutsche mark had been, making German exports even more competitive on the global stage and contributing to further efficiency gains. The extent to which Germany outcompeted its neighbors in this period is reflected by current account balances — by 2008, Germany had a surplus of 5.8 percent of GDP while Ireland, Portugal and Spain had deficits of 9.4 percent, 12.1 percent and 9.6 percent, respectively. When periphery countries were forced to reconcile these current account deficits with the post-2008 economic realities, it led to debt explosions that contributed to the 2012 euro crisis.

Germany found itself in danger of being pulled under by its own market. Its response was simple and predictable: It would put its peers through the same process it had undergone. All of Europe would be reformed and brought into a modern day Hanseatic League, ready to export their products competitively, just as Germany did. It is no coincidence that around this time, talks began on a new trade agreement with the United States known as the Transatlantic Trade and Investment Partnership. A larger league would need a substantial external market with which to trade.

But the power that allowed Germany to impose these reforms was fleeting. Only the countries that had asked for bailout money — Portugal, Spain, Ireland and Greece — could be forced to take the medicine. France and Italy faced less pressure to reform because they had avoided bailouts, and they were harder to bully because of their relative size and importance.

Now, two years after the crisis, the divergent results are beginning to show. The bailout countries have suffered greatly from the austerity measures, but there are signs that wage decreases and spending cuts are increasing their competitiveness and beginning to turn them around. Spain celebrated a record month for employment gains in November (though with unemployment at 24 percent, there is clearly still a long way to go), and Ireland is forecast to grow by 3.6 percent next year, making it the fastest-growing country in Europe. France and Italy, by contrast, have not reformed, and their economies have stagnated as a result.

Furthermore, the European Commission's failed attempts to enforce the Fiscal Compact and change French and Italian behavior have exposed the weaknesses in Europe's institutions.

Germany Cannot Do it Alone

In particular, France's shift from central power to problem case presents a huge issue for Europe. In a continent with a long history of central powers attempting total domination, there is a deep mistrust of allowing a single player too much control over the rest. The Franco-German alliance mitigated this danger, allowing their joint pronouncements to represent the voice of Europe in a non-threatening way. But now that France is diverting from the German course, Berlin finds itself having to make difficult decisions alone. The latent fear across the Continent, however, constrains Germany's ability to enforce its decisions.

The push against domination is particularly evident going into 2015, when elections in Spain and possibly in Greece could empower Podemos and Syriza, two political parties with a close relationship that oppose German austerity policies. In Germany, the postwar shift toward competitive trade tapped into a residual cultural history, but neither Spain nor Greece has a history of supporting itself through exports. Spain's historical wealth was achieved not through competitiveness but by conquest and plunder of the New World. Throughout its history, Greece has invariably been subsidized by a larger patron. In addition, the Germany of 1948 had just lost a war, so its people met the hardship of rebirth with pragmatism. In Spain and Greece, by contrast, it is less clear who is to blame for their plight, so the hardship feels more like an injustice. This feeling has led to the rise of the populist parties.

Managing the leaders of two anti-EU nations would be difficult if France and Germany were united, but for a Germany going it alone and acutely aware of its own international image, the task will surely be impossible.

The majority vote on Dec. 4 by the ECB was its latest rebellion against Germany's attempts to shape the Continent. It represents a push by the periphery side of the 2012 bargain: Quantitative easing would involve more spending from the European center without any additional structural reforms to increase competitiveness in the periphery. With this in mind, it is interesting to note which three central bankers chose to vote with Germany against the proposed change. The representatives who felt that Germany's position was worth upholding were from Estonia, Latvia and the Netherlands — the only other three members of the old Hanseatic League currently in the eurozone. It seems the league has lasted longer than anyone realized.

If it could be achieved, there are signs that Germany's dream just might work. Positive economic signals in the bailout countries suggest the reforms might be effective. In the United States, record job creation figures released Dec. 5 suggest the target market might be ready to begin receiving European exports. All the necessary pieces are clicking into place, but the dream is still doomed. The intransigence of France and Italy and the rising backlashes in the bailout countries betray the underlying truth. Germany is battling millennia of cultural history, and it does not have the power to change Europe on its own.

As a grouping of independent states rather than a nation, the Hanseatic League also found it difficult to make proactive decisions. When the king of Denmark threatened Visby, a strategic island for the league's trade network, 70 Hanseatic cities responded to the emergency by sending ships and men.

The powerful force rampaged through Denmark, sacking Copenhagen and Helsingborg, which was then part of the Danish kingdom. In some ways, modern Europe functions in a similar manner. In a time of crisis, the states are able to gather together and combat the danger effectively, but the network is ill-equipped to cope with a slow decline. No single player has been able to galvanize its peers into action in the absence of a clear danger. Looking forward, Germany's ability to manage its peers is as constrained as Lubeck's was in the Hanseatic League. The force that must be gathered is no longer ships and men, but the underlying commitment and money needed is just as fleeting today.

Editor's Note: Writing in George Friedman's stead this week is Economy Analyst Mark Fleming-Williams.


Of the Right Age, but Can’t Seem to Stay Retired


DEC. 5, 2014

SUZY BOERBOOM, a registered nurse, retired for the first time after a 35-year career in health care and ownership of several Curves exercise locations. She then devoted five years to helping her three daughters raise their children.
“I was very close to both my grandmothers,” Ms. Boerboom said, “and I wanted the same relationship with my grandchildren.” But after several years, she felt too restless to retire, she said. “I just didn’t feel relevant,” Ms. Boerboom, now 66, said. “I was beginning to feel a little bored, and a bit out of the mainstream.”
So in 2009, she started Welcyon, Fitness After 50, a health club business that aims to help older people become fit and stay that way. Ms. Boerboom, working with her husband, Tom, from their Edina, Minn., headquarters, is now busy franchising the centers.
Ms. Boerboom said she “failed” at retirement, joining a group of people who are sometimes labeled workaholics or, more kindly, “driven achievers,” who work simply because they love it. For many, the “ideal retirement includes work in some capacity,” says Ken Dychtwald, founder and chief executive of Age Wave, a group that researches the aging population.
Many retirement dropouts are highfliers who land right back in the executive mix. Of course, many over age 55 work to pay the bills, but others just want to keep busy, so they help a family member’s business.
These workers are swelling the ranks of the work force aged 55 years and older. There are more people in the retirement-age work force than at any time since the 1960s, the federal Bureau of Labor Statistics has found. About 33 million seniors are currently employed, up 49 percent from the 23 million such workers a decade ago, according to the government data.
This is a reversal from the 1950s, when, benefiting from Social Security and company pensions, people began retiring at earlier ages than ever before. In 1960, according to federal statistics, only about 40 percent of workers over 55 were in the labor force compared with nearly twice as many, or 80 percent, in 1900, an era when relatively few people ever left work unless they had to because of illness or physical disability.
By the 1970s, the percentage of the upper-age labor force fell even further, to the 30 percent range. But it began climbing back up again in the late 2000s, spurred by the economic collapse in 2008. This year, the 55-and-older segment returned to 1960s levels of around 40 percent, as many people work to rebuild their retirement savings or supplement their Social Security payments.
But financial need and the desire for new challenges are not the only factors driving how workers approach retirement. People are looking at decades, instead of years, of retirement, and they are rethinking traditional pastimes like travel, golf and bridge.
As a result, a preponderance of the people in their 50s want to work in some capacity. Mr. Dychtwald said that three-fourths of those older than 50 queried in a recent study by Age Wave and Merrill Lynch Global Wealth Management said they wanted to work. The “Work in Retirement: Myths and Motivations” study, which was conducted last March, found that about two years before retirement, more than half of those who plan to work after age 55 are taking “substantial steps” to prepare for their next work experience, which could include updating their skills or looking to expand a hobby, and about 54 percent felt financially prepared for retirement.
Further exploring motivation, an AARP survey, conducted in January 2014, found that about a third of retirement-age people said they worked because they enjoyed it. That is equal to the percentage of those who said they had to work for financial reasons, according to the study called “Staying Ahead of the Curve: The AARP Work and Career Study.”
The AARP research found that 55 percent of retirees are employed voluntarily, including the 25 percent who reported working because they wanted to be physically or mentally active.
The study queried 1,502 people 45 through 74. Such “driven achievers” include Ronald E. Stewart, the chief executive of PRGX Global, a business analytics and information services provider, who segued from a 30-year career at what is now Accenture. He prepared for life without a workplace, but also kept looking for business opportunities.
“I was the oldest guy in the Atlanta office,” he said of his 2007 retirement at 53, and “I was tired of being constantly on the road for work.” After winding down for a brief period, he decided to keep his hand in the working world by starting a private equity investment firm with former colleagues.
“It was a little bit of a toe in the water,” he said of the venture. But then an unexpected opportunity enticed him to pursue a completely new business. In 2008, he opened a hamburger restaurant with a young man he had mentored for years while volunteering for Atlanta’s Big Brothers, Big Sisters program.
Mr. Stewart quickly had to learn day-to-day restaurant operations after helping open FLIP Burger Boutique, which he calls “fine dining between two buns.” “Waking up and doing something you want to do sort of gets in your DNA,” he said. “I never felt comfortable chilling out, and I always had a desire to keep moving.”
Part of that was serving on the PRGX board, and last year his fellow directors asked him to become chief executive of the 1,600-person company. He is once again the “oldster” among his colleagues, but Mr. Stewart said he had no plans to retire soon.
That is not uncommon. Those still working after 65, the Age Wave study found, stay in their second employment for an average of nine years. That is almost the amount of time Jack Butorac, the chief executive of Marco’s Pizza, has spent at that company since he came out of retirement twice, after decades in the food industry.
“I failed miserably at retirement,” said Mr. Butorac, 66, of Louisville, Ky. His plan of traveling, polishing his golf game and spending time at home “was just boring,” he said.
He had been an executive at Hormel Foods, beginning his career by making Spam in the company’s packing plant in Minnesota. He also worked at Chi-Chi’s Mexican restaurant chain and Fuddruckers. During his unsettled second retirement, he learned about Marco’s Pizza, based in Toledo, Ohio.
He went on a road trip with a friend to sample the food at five outlets and loved its taste and consistency. “It was delicious,” he said. “I saw an opportunity to expand the company nationally so, in 2004, I decided to buy the franchise rights.”
In the decade since then, he said he still finds time to pursue golf and traveling with his wife — their latest trip was a Baltic Sea cruise — but, mostly, he spends his time flying, and sometimes driving, the 300-plus miles between his home in Louisville and Marco’s headquarters, overseeing the chain’s expansion.
To some degree, failure is not an option, he said, adding, “I’d go crazy with nothing to do.” So he is immersed in plans to open more than 1,100 stores in coming years, with an eye to rivaling the pizza giants Domino’s and Pizza Hut. “And we are just getting started,” he said.