Breaking new ground on neutral rates

Lawrence Summers

First, Mr Rachel and Mr Smith document compellingly the near universality of sharply declining real rates and also the length and breadth of the decline. They show the phenomenon is a very broad-based 450 basis point trend decline in real rates occurring over 25 years.

Framing the problem this way is significant because it shows the inadequacy of shorter-term explanations of low neutral real rates such as those of Ken Rogoff that focus on the financial crisis and its aftermath. It also suggests the need to look beyond a single cause.

Federal Reserve Leaves Interest Rates Unchanged
  © Getty Images

Second, the authors do not find that slowing growth is the main explanation for declining real rates.

Rather, they find that other factors that I and others have enumerated account for about 75 per cent of the decline in real rates. They note that since the global saving and investment rate has not changed much even as real rates have fallen sharply, there must have been major changes in both the supply of saving and demand for investment. They present thoughtful calculations assigning roles to rising inequality and growing reserve accumulation on the saving side and lower priced capital goods and slower labour force growth on the investment side. They also note the importance of rising risk premiums associated in part with an increase financial frictions. Their work is not the last word but it is an important step towards understanding which factors are behind the decline in real rates.

Third, messers Rachel and Smith use their analysis of the determinants of neutral real rates to predict their future evolution. Here, they reach the important conclusion that there is little basis for assuming a significant increase in neutral real rates going forward. This conclusion differs sharply from the “headwinds” orthodoxy prevailing in the official community. As the figure below illustrates, in the US at least the Federal Reserve and the forecasting community has been consistently far behind the curve in recognising that the neutral real rates has fallen.

If, as I suspect, the authors are right there will be much less scope to raise rates in the industrial world over the next few years than the world’s central banks suppose.

neutral rate news

Fourth, Mr Rachel and Mr Smith recognise that their findings are highly problematic for the existing central banking order. They imply that the zero lower bound is likely to be a major issue at least intermittently in the future. After all, we will have future recessions and when we do, there will be a need to drop rates by 300 basis points or more. Perhaps quantitative easing or negative rates or forward guidance will work. I am sceptical that they will be efficacious unless the cause of the recession is again a heavily disrupted financial system for which QE can be abnormally helpful in repairing.

Mr Rachel and Mr Smith also share my concern that a world of chronic very low real rates is going to be a world of high volatility, imprudent risk taking, excessive leverage and frequent financial accident. We may be about to get a taste of this in emerging markets and US high yield markets. It is fashionable to invoke the brave new world of macroprudential policy in response. To borrow from Wilde, I fear that enthusiasm for macroprudential policy is the triumph of hope over experience. In the last wave of enthusiasm for such policies the poster-child was Spain’s countercyclical capital requirements. They did not work out so well. As best I can tell, US macroprudential policy as currently practiced has meaningfully impaired liquidity in some key markets and damaged the credit availability for small and medium sized businesses while not touching excessive flows to emerging markets and high yield corporate issuance. To work, macroprudential policy has to reduce financial vulnerabilities without to an equal extent reducing credit flows that stimulate demand. This is logically possible. I doubt that actual regulators who, after all, were proclaiming the health of the banking system in mid 2008 are capable of pulling it off consistently given the pressures they face.

There are no certainties here. It is possible that neutral real rates will rise over the next several years.

But there is a high enough chance that they will not to make contingency planning an urgent priority. That has been and is the main thrust of the secular stagnation argument.

Staying Ahead of the Curve - Revisited

By: Captain Hook

That's what it's all about for technocrats - staying ahead of the curve. It's about managing you and your environment in every respect, from what you think to how you act - and they are winning. Wall Street, Washington, the media, and surveillance state - it's all about getting your information and using against you in exploitive tactics designed to bolster and enrich the status quo - and to hell with everybody else. The public is viewed as a never-ending resource to be exploited, and the objective for the psychopaths is to remain ahead of everybody else in the larger exploitation game.

But nothing less should be expected by you in this increasingly neo-fascist world in which we live, where thought managers wage war on a now confused and vulnerable mob (the public) 24 - 7 - a mob that sold out to the promises of perpetual 'good times' by the technocrats long ago.

All this is nothing new of course. There have been many such episodes throughout history, with Nazi-Germany perhaps the one that comes to mind most easily. Of course the present craze is different in terms of size and scope, making it a real showstopper once the party is over.

Indeed, if there's one thing these characters never learn, its all good things must come to an end, and we are beginning to see such signs regarding our present mania, given because of its degree, this one will like not exhaust itself fully until some very nasty things happen. (i.e. world war, famine, etc.) The ISIS construct is a very good example of this at the core of what happening in that it's being used by Western authorities to further erode our civil liberties and freedoms; again, with the ultimate goal of such tactics being 'total control' and self enrichment.

There's only one insurmountable problem for the psychopath's in charge however, that being the continual need to increase the frequency of interventions, along with the necessity of intensifying thought control and expectations management (via propaganda and surveillance state), all with the goal of keeping the mob(s) placated and contained in their increasingly sordid and depressing lives.

And again, the very sad part of all this is it's working on the unprepared and weak minds, which unfortunately is becoming a major percentage of the population. (i.e. because of continual conditioning.)

Zeroing in on the mania in stocks, which is the mirror on the beast essentially, here we have a somewhat less frothy repeat of tech wreck in 2000, where although stocks are undoubtedly in bubble territory, in theory we should never see the extremes witnessed way back when, in theory. Certainly credit conditions, along with other important factors are nothing like conditions in 1999, however one cannot completely rule out the unexpected. What's more, considering the amount of credit it's taken to maintain the illusion(s) into the present, we are far worse off today, where as pointed out by Charles Hugh - Smith (seen here), only a modest disruption (in credit) would be enough to shatter the status quo.

Because if they lose control of credit, they will lose control of the stock and bond markets, which they have allowed to become the economy (wealth effect, stock options, etc.), meaning it's all over except the crying for just about everybody if that happens. And the traders know this, which is why the Fed is their best friend ever. Therein, if the bond market(s) start to slide (which is happening), increasing the chances the credit markets might actually tighten, the Fed would be all over the situation faster than the wind passes through a goose.

All this rate hike crap it keeps harping on is for the benefit of the idiots, the idea being it keeps them looking credible because they haven't completely destroyed the business cycle - which of course they have. So don't be fooled by these fools, they are going day to day here with the rest of the crazies. Even if they tweak the one or both of the administered rates higher at their next meeting this would not lift the zero bound in market rates (sovereigns), which is what's important. You've got a got a very high short position in Treasuries right now, so market rates are not going up in the States - yet.

Of course if corporate credit keeps deteriorating, the stock market could still dump. Based on true sentiment conditions across the larger US complex, which is seen here in open interest put / call ratios, the consensus is expecting higher prices going into Christmas, which should prove interesting if the ratios can remain low, or worse (for the bulls), trending lower. Add to this short interest on the New York Stock Exchange (NYSE) is way down, and again, this optimism could prove counterintuitive if idiot hedge funds chasing returns into year-end chicken out. (See Figure 1)

Figure 1

As I write, the Dow / XAU Ratio is trading in the proximity of 400, which is significant monthly closing basis Fibonacci resistance, which looks like it will happen this month if a 'Cyber Monday' pop in stocks keeps things buoyant. That being said, we must remember just how desperate the bureaucracy's price managers are to keep stocks buoyant forever, so we cannot be surprise if the markets remain firm if they are willing to step up and be the ball. These guys and gals are crazy (literally), so anything is possible, especially if the Fed gooses stocks in and around Fed rate decision time on the 15th. (See Figure 2)

Figure 2

We can see this possibility in the Dow / CRB Ratio pictured above as well, where just like the Dow / XAU, and as pointed out previously, after reaching significant signature Fibonacci resistance (see here), it may need some time to actually turn lower in a topping process, which in this case means a surge to new highs. (i.e. highs for stocks against lows for commodities.)

And again, this looks like it's going to happen to precious metals (shares) too, although you would never know it looking at the shares on Friday, victims of stubborn bullish idiots. (i.e. with gold and silver way down.)

This will not last however, once the broads turn lower for real and the liquidity dries up. Even a check in every mailbox can't prevent the initial liquidity flush in the broads affecting precious metals shares (especially the small ones), assuming that's all that occurs. (i.e. stocks don't crash like 1929.)

Regular readers know of my long standing target of 400 for the CDNX, and I am still of the opinion the vicinity of 400 (if not the large round number itself) will be vexed once the inflation bulls are rattled. The big question in this regard then is when will the broads roll over.

The answer to this question is becoming more complex with the increasing interventions (etc.), however it will happen at some point in the not too distant future. And now that the lunacy has gone on for so long, it will be a complete wipeout once the selling finally arrives. The US will be seen for the banana republic it's becoming. Once the stock market rolls over process will accelerate in this regard. This is why the status quo crowd must stay ahead of the curve, because if they make one mistake it's all over. This is why the bubbles must remain inflated and growing, but sheer mass and peak complexity have become their biggest enemies.

Because at some point the bubbles will simply become too big to fool with any longer and begin deflating no matter what the technocrats do. The Japanese experience since the peak in their equity bubble in 1989 is the omni-present modern day exemplar of what the rest of the West should expect starting sometime very soon. Demographics are a killer. And no amount of monetary inflation can take the place of organic growth in an economy, although the technocrats will fight it tooth and nail to the end. In terms of measuring this end, if the SPX / VIX Ratio pictured below is able to vex the sinusoidal again, essentially measuring modern man's exhaustion signature, you would have a good sell signal for stocks as well. (See Figure 3)

Figure 3

And we would be amiss in not covering the stocks to gold ratios in putting the pieces of this puzzle together, but this time let's take a look at the SPX / Gold Ratio to see what messages can be gleaned in the technicals. (i.e. take from a long duration monthly plot.) The thing about a long duration monthly plot is if you know how to read it, you get profound messages. In doing just that below then, the first thing that you should notice is the big run-up into 2000, and the subsequent crash, a common trait of all markets to at least some degree in fiat currency based systems over the long run. And again, as you can see, this plot is no exception, where in fact an outright crash occurred last decade, when the status quo lost its grip on the system. (See Figure 4)

Figure 4

Further to this, it should be recognized if it were able to retake the 200-month moving average (MA), one would need to start asking oneself questions about secular trend change. We are of course not there yet, and it would in fact be quite surprising if this were to occur given the degree of the crash. As you can see, worst case in terms of the secular downtrend remaining in tact, what we are expecting at this point is a test of the 200-month MA. That being said, a 38.2% retracement is never out of order in such instances, so who really knows what lies ahead other than once the larger degree retracement is completed, a move towards the lows witnessed in 1980 is expected, below .25.

Looking at Western paper pricing mechanisms they call markets, that amazingly enough still set global prices, it should be noted internals / sentiment conditions have improved sufficiently on COMEX for gold to rally, however open interest (OI) and speculator betting practices in silver remain too bullish to start anything meaningful, so any rallies in coming days should be viewed as temporary. Remember, for COMEX silver, we need to see OI fall below 150,000 (hopefully towards 120,000) before a bottom can take form as long as speculators (big and small) keep betting bullish.

Why do they do this in spite of silver's shellacking these past years? Because of silver's potential upside - they are stupid (playing a rigged market) and greedy. (i.e. they should buy physical in stead of the leveraged futures only to lose everything month after month.)

Because eventually just physical could pay off 35:1 from present levels if the returns witnessed from the end of the 70's mid-term correction (1976) to the peak in 1980 are duplicated in silver.

Isn't this enough leverage without requiring a lobotomy because you lost your life savings in the futures market, only to watch the commodity price rise 35-times five years later. It's not just the stock speculators you should be watching for (think jumpers) if walking the streets of New York in coming years, it's the idiots playing the leveraged paper silver markets as well. And as you should know from our regular sentiment studies of the precious metal ETF universe, this is of course also true of these markets as well, with the open interest put / call ratios (see here) on SLV and AGQ at .32 and .54 respectively. (i.e. no hope for a short squeeze here until they get above unity.)

This is why one cannot be outright bullish on precious metals just yet, in spite of the important ratios in Figures 1 & 2 above being at or close to potentially profound topping metrics. Because as mentioned previously, what happens in the initial stages of secular degree turns back down in these measures is while commodity prices may not be falling as fast as previously high flying stocks, they fall too (creating what is dubbed a 'deflation scare'), meaning nominal values can still decline for up to six-months if history is a good guide. And it's this 'deflation scare' that finally gets the hedge fund knuckleheads to not only stop buying precious metal derivatives so enthusiastically, they also stop buying the derivatives on the derivatives once they realize such behavior will not get them to Elysium.

But what about the rapidly depleting physical bullion supplies in the West, increasing bullion demand in the East, and increasing prospects for war that could increase demand in parabolic fashion at anytime. Are these not things that can make faulty and fraudulent Western market mechanisms redundant in the pricing of precious metals? The answer on all fronts here is a resounding yes, however the pace at which these factors will become germane remains SLOW - and this will remain so until change becomes fast. That's the way these things always work - the bigger the bureaucracy, the slower the change, the greater the surprise when it finally arrives.   

And the way to survive then is to prepare ahead of time (for market closures, currency crashes, capital controls, bail-ins, etc.) using precious metals, crypto-currencies, etc., because again, when it hits the fan for real, there will be little to no warning.

So again, although precious metals might enjoy a bounce in coming days due to seasonality (and opportunistic news letter writers attempting to capitalize on this again), please be wary of the continued risks described above, because they remain very real, and likely to continue playing out once those foolish enough to continue speculating in this space without doing their homework are used up again. The trend change process (secular) discussed above is exactly that, a process, and these are the biggest markets in the history of mankind, so one must be both perseverant and penitent in terms of expectations - continuing to monitor and measure progress with a realistic attitude.

That's how you can stay ahead of the curve - by curbing your expectations to fit the reality of the slow change that is obvious and characteristic of a bloated global bureaucracy - up and down the scale - from the oligarchs to their dogs.

Merry Christmas all.

China’s Workers Are Fighting Back as Economic Dream Fades

For workers like Li Jiang, factory closings represent a failed promise of a better life earned far from home

By Mark Magnier

Li Jiang, 30, lost his factory job after production halted at Fuchang Electronic Technology Co. in Shenzhen, China, 700 miles from the hometown where his 3-year-old daughter lives with her grandparents.

Li Jiang, 30, lost his factory job after production halted at Fuchang Electronic Technology Co. in Shenzhen, China, 700 miles from the hometown where his 3-year-old daughter lives with her grandparents. Photo: Theodore Kaye for The Wall Street Journal

SHENZHEN, China— Li Jiang’s journey from village rice fields to a concrete dorm room of snoring men has played out millions of times as migrant workers have reached for a piece of the China dream.

That dream evaporated in October for Mr. Li. After a decade in this coastal city, he returned to Fuchang Electronic Technology Co. from a weeklong holiday to find the maker of cellphone bodies and set-top boxes had stopped production, leaving him and five family members jobless.

In notices on the factory gate, Fuchang blamed a credit squeeze and its own bad management.

With no word on severance, Mr. Li and some 1,000 of Fuchang’s workers took to the streets.

The next day, 3,000 protested, workers and labor activists say, fueled by worker anger and social media. “I kept calling people to join,” says 30-year-old Mr. Li. “The more the better to build our strength.”

The Fuchang protest was part of a new wave of labor strife hitting China, one that is larger and angrier than previous rounds, labor experts say.

The Hong Kong-based civic group China Labour Bulletin says strikes and labor protests nationwide nearly doubled in the first 11 months of 2015 to 2,354 from 1,207 in the same 2014 period. China’s labor ministry says 1.56 million labor-dispute cases were accepted for arbitration and mediation in 2014, up from 1.5 million in 2013.

Behind the strife is an economy decelerating faster than the government expected, sparking layoffs and factory closings. Economists say China has struggled to reach its 2015 growth target of about 7%, its slowest pace in 25 years, and most project slower growth next year.

China doesn’t release statistics on factory closings. The number of factories owned by Hong Kong companies in southern Guangdong province, where Shenzhen is located, fell by a third to 32,000 in 2013 from a 2006 peak, according to an analysis by Justina Yung of Hong Kong Polytechnic University for the Federation of Hong Kong Industries, a trade group.

For workers like Mr. Li, such closings represent a failed promise, the fraying of a social compact in China under which migrants accepted grueling shift work and spartan living conditions far from home in exchange for prospects of a better future.

“Migrant workers have really helped build China, but our rights aren’t protected,” says Mr. Li. “We’re discriminated against, and wealth in society is not fairly distributed.”

Fuchang eventually offered Mr. Li and his fellow workers a partial settlement, and the protests subsided. But the bitterness isn’t dissipating. Some workers have taken Fuchang to arbitration tribunals. Though Mr. Li and one relative eventually found jobs in the city at comparable pay, they say working hours and conditions are worse. His wife, brother, sister-in-law and cousin remain unemployed.

Liu Zehua, a lawyer representing Fuchang and its majority owner, Chen Jinse, says Mr. Chen “is very honest and diligent…But he has limited management abilities. Fuchang’s management wasted money leading to the company’s eventual decline.”

Desperate workers
Early in China’s slowdown, its economy was able to absorb many laborers like Mr. Li and his family.

But as the downturn lingers, layoffs are becoming more common and desperate workers are finding few new opportunities—a trend officials and labor experts say is gathering momentum.

Factory employment in China has fallen for 25 months, according to a business-sentiment index released by Caixin, a Chinese magazine. China’s labor ministry says it expects employment to remain stable near term but says the impact of China’s slowdown and restructuring can’t be ignored. China’s Ministry of Public Security didn’t respond to inquiries.

Chinese researchers and business executives say chances are rising that the Communist government may face the kind of social unrest that it has long feared. Chinese authorities recently detained and interrogated over a dozen labor activists, mainly in Guangdong.

“They definitely see protests as threatening social security, and are concerned,” says Anita Chan, a visiting fellow with the Political and Social Change Department of Australian National University.

In another recent case, up the Pearl River Delta from Fuchang, an October strike by some 270 workers at circuit-board maker Accurate Electronic Co. over back pay descended into fights between workers and police, including 40 antiterrorism officers holding shields, say workers and labor activists.

Worker Yang Changsheng says he was videotaping the protest when police started beating his colleagues and he urged them to stop. Officers grabbed and punched him, he says, detaining him and other workers for 15 hours.

Accurate Electronic officials declined to comment, as did police and officials in Dongguan, where the company is based. An official at the Dongguan branch of the government-controlled All China Federation of Trade Unions says the Accurate case was largely settled.

Elsewhere, workers are lashing back by detaining company officials. Executives are being seized after layoff announcements in greater numbers than before, says M. Sean Molloy, Shanghai-based managing director of Control Risks, a London crisis-management consultancy.

One European executive says workers held him after his industrial company, a foreign concern’s Chinese arm, announced a restructuring in February in Tianjin. The workers blocked the factory gate with a forklift and videotaped everything he said, hoping to exhaust him. Police freed him at 3 a.m. after 15 hours, he says.

“We need to help workers find jobs, otherwise they’ll be forced to act illegally,” says Zou Suojun, a former director of a Dongguan-based electronic-parts unit of Hong Kong’s Plainvim International Ltd. Mr. Zou says workers at the Dongguan factory held him seven days in late 2013, beating him and banging a drum to deprive him of sleep.

Strikes and worker protests like this one are on the rise this year in the southern Chinese industrial hub of Guangdong province, as factories close and lay off workers amid the slowing economy. Photo: Imaginechina/Associated Press

“If the economy keeps going this way,” he says, “we’ll have serious social unrest in a couple of years.” Plainvim officials declined to comment. A Plainvim employee confirms the details of Mr. Zou’s detention, saying it was understandable: “They were very emotional.”

Migrants like Mr. Li provided the sweat behind the China miracle, leaving farms in the hundreds of millions to build highways and housing and to assemble everything from shoes to iPhones. For many, the bright economic promise was worth even leaving children far away.

Mr. Li’s journey
Mr. Li and his wife, Guo Ping, 26, who was working at another Shenzhen factory when they met, live in an eighth-floor walk-up apartment off a noisy highway. Newspaper covers the windows. Their 3-year-old daughter lives in their Hubei-province hometown 700 miles north with her grandparents because they can’t afford a nanny or school fees in Shenzhen—one of 61 million offspring growing up in China without one or both parents, or 22% of the country’s children, estimates the government’s All-China Women’s Federation.

They phone her every few days “so she doesn’t forget us,” he says, but see her only once a year.

“When I see parents in Shenzhen able to live with their children,” he says, “I feel sad and helpless.”

After the layoffs, Mr. Li and his wife stayed in Shenzhen to seek jobs while his brother Li Li, 32, with his sister-in-law and cousin returned to Hubei to see their children.

Yaoxing village, where the Li brothers grew up, is typical of rural China, given over to the old and young with few working-age residents. Their leaky earthen house without heat or running water is among a few dozen mostly empty dwellings in a landscape of rice fields and scrawny chickens.

Li Li talks of his options as he plays with his son Li Zihang, 6, and Li Jiang’s daughter, pigtailed Li Zixin. He feels he has outgrown his hometown but is unsure about job prospects in other cities. He’ll likely return to Shenzhen, he says.

But opportunities in industrial cities may be worsening. Zeng Xiangquan, director of the China Institute for Employment Research at Renmin University and a former Communist Party adviser, told a November forum that China faces a new wave of layoffs as companies restructure, according to the government’s Xinhua News Agency. Mr. Zeng declines to comment.

Factory closings create domino effects. Fuchang’s collapse forced supplier Jun Yi Co., which polishes cellphones, to lay off half its 16-employee staff because of money Fuchang owes it, says Jun Yi owner Chen Jun.

“It’s incredibly stressful. Creditors call at all hours,” says Mr. Chen, no relation to Fuchang’s Mr. Chen, hanging up a creditor’s call. His wife worries he might commit suicide, he says tearfully. “It’s like a waterfall. Fuchang tumbles, then we fall.”

Mr. Liu, Fuchang’s lawyer, declines to give details on its debts.

Increasingly heated are labor disputes involving older, less-educated workers with limited job options, says Mr. Molloy, the crisis-management consultant. He advises clients—Western companies and a few Chinese multinationals—to lock factories, evacuate executives and ensure production can continue elsewhere before delivering bad news to workers.

“They’re increasingly desperate,” he says of older workers. “They’re not going to get another job.”

Labor backlash is meeting tough official responses. In the manufacturing hub of Guangdong province, strikes and worker protests over the past year have drawn more police and faster detentions, says Geoffrey Crothall, China Labour Bulletin’s communications director.

“Authorities now feel they have to up the ante as well,” he says. “In many cases, the cops outnumber the workers.” Workers estimate 200 police were involved in the Fuchang demonstrations. Shenzhen police declined to comment.

Mr. Li never expected to be at the center of a protest. By age 6, he was adept at the backbreaking rice-planting in the family’s small plots. Like most village youth, he left after high school, following a brother and a cousin to Shenzhen.

He worked at shoe and electronics factories, initially living in a 12-bed dorm room with migrants who snored and ground their teeth. He joined Fuchang at the suggestion of his brother and cousin, who said it offered more overtime and better labor practices. He worked with molten plastic, which he says was bad for his health but worth it for a steady income.

His older brother, Li Li, says he had seen problems in the company’s storage department: Inventory was piling up, and suppliers seemed to have trouble getting paid. Still, Fuchang’s closure was a jolt.

Mr. Chen, the majority owner, in an October open letter to former workers and suppliers, expressed regret for being an overly cautious manager, which he said contributed to problems. “I can’t hide my shame,” he wrote, “at the company reaching this state.”

Mr. Li called and messaged colleagues, helping to build the protesters’ ranks. As they thronged outside the factory, he advised co-workers to keep moving to reduce the chance of arrest, something he had learned from online videos of other strikes.

“It’s about the only way we can get attention, short of jumping off a building,” says Zhang Zhiru, a labor activist who helped advise Fuchang workers. “When thousands of workers are outside their offices, the government is forced to notice.”

After initially saying it couldn’t pay workers, Fuchang offered severance based on three years’ work: about three months’ salary. The settlement enticed younger workers who were more employable, and it got workers off the streets. But it left older, more experienced workers isolated and having to negotiate on their own, say ex-workers and labor activists like Mr. Zhang.

Mr. Liu, Fuchang’s lawyer, says the company didn’t employ divide-and-conquer tactics and that the initial offer aimed to give workers some money promptly to cover immediate expenses: “No one has said there won’t be more compensation later.”

Mr. Li eventually found a job molding liquid plastic at another company. The work is more grinding than at Fuchang, he says, and he isn’t sure how long he will last. His wife and three other family members remain unemployed, so they need the money.

“We didn’t want to hit the streets. If they give us good benefits, we wouldn’t need to do this,” he says. “I’m doing this for our daughter. I hope she never has to work in a factory.”

Reflecting on Refugees

A Plea for Measured Debate

An Editorial by Klaus Brinkbäumer

  A boat full of refugees on the Aegean Sea between Turkey and Greece. What would we do in their situation?
REUTERS A boat full of refugees on the Aegean Sea between Turkey and Greece. What would we do in their situation?

The debate over refugees in Germany has grown divisive. Those in favor are unwilling to recognize the difficulties ahead while those opposed too often veer toward prejudice and xenophobia. Neither is helpful. What's needed is an atmosphere of critical empathy.

In periods of structural change, books and learned professors tell us, those affected tend to align themselves into three groups. The first group, rarely larger than 25 percent, doesn't shy away from uncertainty and welcomes change with expectant anticipation. The third group, often larger than the first, hates what is happening out of fear for the new. And the second group, in the middle, waits to see how things will develop. They are uneasy, but not aggressive.

They also aren't inflexible, but they are concerned. And it's true: That which happens in times of change is new and therefore risky, diffuse and difficult to interpret. The consequences are unclear.

In the refugee crisis, those in Germany who find themselves part of the first group are in the best of spirits -- some out of a desire to help their fellow humans and others for more calculated reasons, such as their conviction that immigration is vital for the future of the German economy. The third group feels threatened and is afraid of the outsiders pouring into the country. It is this part of the population out of which the German Tea Party is growing, a movement that furiously rejects all that is foreign, spreads rumors, bad-mouths the chancellor and is disdainful of education, the elite and the media. It is, as described by author Volker Zastrow in the Frankfurter Allgemeine Sonntagszeitung, a "new völkisch movement."

The first and third groups are easy to document because they are vocal about where they stand.

Between them, though, is the second group, the center -- and members of this group are quietly unnerved. Who can be trusted? Can we really do it? What is the correct, commensurate approach in times like these?

What Would We Do?

An "either-or" approach is not the way to go, the division between those who growl "We Are the People!" and those who paint "Welcome to Germany!" on their signs -- the split into cynicism and naiveté, head or heart. Linguistic warfare of the kind currently on display in the US is likewise destructive. The correct approach would be one of critical empathy or, vice versa, empathetic critique. That would be an approach consistent with Western democracy.

No migrant leaves his or her home casually, frivolously or even with any kind of pleasure at all.

It is a far-reaching decision and all who pull up roots know it, even those who are still in their formative years. In 2005, the photographer Markus Matzel and I travelled together with refugees from Ghana to Spain via Togo, Benin, Nigeria, Niger, Algeria and Morocco, a trip that became a SPIEGEL cover story and a book. We spoke to hundreds of people on trucks, in camps and in the Sahara Desert, all of whom had heavy hearts at having bid farewell to loved ones and left home -- and all dreamed of finding a life worth living. Many were afraid of what was ahead of them because they knew that the journey, particularly the Mediterranean Sea, could be dangerous -- and only a few of them knew that they wouldn't be welcome in Europe.

These hopes and fears are not something that should make us Europeans feel superior.

Arrogance doesn't become us. The migrants who come to us merit empathy -- and what choice do those people have who come from war-torn Syria? What would we do in their situation?

For SPIEGEL, empathetic critique means months of stories in which we have profiled refugees, described the migrant trafficking mafia and run cover stories such as "Dark Germany, Bright Germany." What we have shunned this year are headlines such as "Dangerously Foreign," a questionable title used by SPIEGEL back in 1997. Media and people in the public spotlight should be cautious. That is always the case, but in times of extreme emotion it is particularly important to find precise formulations and to shy away from inflammatory language.

Creating Mistrust

When Chancellor Angela Merkel was chosen as Time magazine's Person of the Year, the well-known German lawyer Joachim Steinhöfel tweeted, "Isn't that nice? Our FDJ-lassie person of the year. 2016 then Robert Mugabe." (FDJ is a reference to the East German socialist youth group.) Such words, such blustering, adds fuel to the fire. And when an otherwise competent journalist like Michael Hanfeld refers to the journalistically responsible public television stations ARD and ZDF as the "Welcome Broadcasters," he too is playing with fire. Readers remember such disparagements, and they serve to create mistrust.

Nevertheless, we journalists can (indeed, we must) be forthright about what is happening and draw conclusions about possible developments. When Europe errs and the German government makes mistakes because it misjudges its partners in the crisis or reacts too late or too slow, we will tell our readers about it. Many outlets do exactly the same without becoming xenophobic or racist.

It is difficult to achieve objectivity in a crisis as complex as this one. There is proof for everything -- for almost every thesis as well as for its antithesis. There are fewer helpers than there were during the summer, but there are still quite a lot. Regions that have integrated many migrants in the past are prosperous today, but integration only works if the state doesn't lose control, and Germany at present has lost control. Of course there is a basic human right to asylum, but without an upper limit -- enforced, if necessary, with border controls -- it will be almost impossible to find a way out of the crisis.

For the media, that means: We have to describe all aspects of the story, with a carefully measured tone and as balanced as possible. Empathy and critique can exist alongside one another -- because head and heart belong together.