Are America’s Best Years of Innovation Over?

According to economist Robert Gordon, today’s innovations might dazzle, but they don’t transform everyday lives in the way that the internal combustion engine, the refrigerator, air conditioning and the elevator transformed the fabric of America from 1870 to 1970. This article reviews Gordon’s new book The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War, which explores a time period that he says included unprecedented advances in productivity and quality of life that are unlikely to be repeated.

In 1970 Alvin Toffler published Future Shock, a book about a “fire storm of change” sweeping Western industrialized society with “waves of ever accelerating speed and unprecedented impact.” In this and subsequent books, he writes breathlessly about the “quantum leaps” of innovation and transformation we should all brace ourselves for; and a substantial cottage industry of futurist writers continues that tradition. Prominent among them is the MIT-trained author and scientist Ray Kurzweil, who posits a “law of accelerating returns” in information-related technology and has most recently written about a union of human and machine he calls The Singularity.

Economist Robert Gordon proposes we view 1970 as a time when change in fact began to slow down, to decelerate. He has for years expressed skepticism at the speculations of those he calls “techno-optimists.” It’s not that he dismisses today’s technological innovations as unimpressive or unimportant. But however much they might dazzle, they don’t transform everyday lives in the way that, say, the internal combustion engine, the refrigerator, and the elevator transformed the fabric of post-Civil War America. His new book, The Rise and Fall of American Growth, is a deep dive into the past with an eye to the future. His central questions are: How and when did American productivity and standard of life experience such profound gains in the last century and a half? And what does that tell us about prospects for the future?

The Bad Old Days: Daily Life in 1870

Gordon’s central thesis is that the hundred-year period from 1870 to 1970 is a “special century” that is unprecedented and unlikely to be repeated in its breadth and depth of change.

To make that case, he devotes the book’s opening chapters to a close examination of his baseline: not just the numbers cataloguing the production and consumption of American society in the wake of the Civil War, but “the small details of everyday life and work.”

One of the things that inspired him to try to capture the tedium, drudgery and danger of nineteenth century life in the United States was a book he stumbled on called The Bad Old Days: They Really Were Terrible. In 1869, a ceremonial golden spike was driven in Utah to create the first transcontinental railroad, symbolically ushering in a new era of modernity.

Many of the inventions and innovations that would transform daily life were only a decade or two away. Yet that was no comfort to the men, women and children who endured a standard of living primitive by contemporary standards.

Louis Pasteur was only just beginning to develop his germ theory of disease, and a staggering number of children died during their first year. Industrial accidents were common, life expectancy was a mere 45 years, and (for reasons not entirely understood) the average height of native-born American males actually declined almost two inches from 1830 to 1890. Edison didn’t demonstrate his first electric light bulb until 1879, so homes were lit with candles and kerosene lamps, creating indoor pollution and considerable hazard — thousands died every year from lamp accidents. In the absence of plumbing, toting water for washing and cooking was a time-consuming and laborious task.

The Great Leap Forward

The closing decades of the nineteenth century produced a series of innovations that would completely transform American life. Foremost amongst these was electricity, and the refinement of the internal combustion engine. It took a while for both to become economically viable and widespread, and Gordon points to the years from 1910 to 1940 as the most intensive period of change.

Cities experienced the most rapid and striking change, propelled by a very particular synergy of electricity and the automobile. “In the seven decades between 1870 and 1940, the urban dwelling was utterly transformed from a primitive state hard to imagine to a level, in 1940, surprisingly similar to the way we live today.”

Some might wax nostalgic about the horse and buggy days, but the use of horses for urban transportation created serious health problems — generating five to ten tons of manure per square mile. Cars and electric street cars changed all that, and allowed for a different type of urban development. Electricity remade the urban household, powered industry, and, through the elevator, enabled buildings to extend vertically, changing the very nature of land use and creating the urban density we take for granted today.

In 1900, 35% of the population still lived on farms, and the transformation of rural America was slower in some ways, but no less fundamental. Life in the farmhouse may not have been radically altered, but the nature of work was. Over a period of just 15 years, U.S. farms were equipped with 370,000 trucks, 450,000 tractors, and over 4 million automobiles. In Iowa, 93% of farmers owned cars by 1926, a higher rate than in cities.

Home life in America was “revolutionized” and productivity in the workplace “exploded.” Yet the most profound progress made during this period may have been in the form of reduced mortality rates, especially among infants. In the first half of the twentieth century, life expectancy improved at an annual rate twice as high as in the last half. Although medical care did witness important improvements, this startling progress was due more to environmental changes brought about by electricity, indoor plumbing and running water.

“No other era in human history, either before or since,” Gordon sums up, “combined so many elements in which the standard of living increased as quickly and in which the human condition was transformed so completely.”

One of the book’s ongoing projects is the challenge of quantifying the progress of The Great Leap Forward in fresh ways, and of capturing that which can’t be quantified. A key measure in Gordon’s argument is Total Factor Productivity (TFP) — a tricky one in that it is not so much measured as inferred. It is the X-factor or residual that remains when total economic output is divided by a weighted combination of labor and capital inputs. (It is credited to economist Robert Solow, and thus sometimes referred to as “Solow’s residual.”) It is in essence a kind of catch-all for intangibles driving economic growth — including technology, innovation and knowledge. Because TFP comprises factors that cannot be quantified individually, it has been the subject of some criticism and debate.

By this measure and others, the second half of the “special century” (the years from 1920 to 1970) is when American productivity really took off. In the decades before 1920, output per hour increased at a mere 1.5%, then nearly doubled over the course of the next half-century — only to fall back to 1.62% in the years after 1970. This surge is almost entirely due to a growth in TFP is almost triple that of the decades preceding or following this pivotal 50-year interval.

Some dimensions of progress are even more difficult to quantify. The growth to which the title refers is really two separate things: increases in productivity and in the standard of living. GDP per capita is the standard measure of progress in the latter, and tripled in the years from 1870 to 1940—but Gordon contends it fails to capture the full scope of gains in people’s everyday lives. Here, he draws on the insights of Gary Becker and others in the school of New Home Economics, which seeks to complement objective measures of consumption with other more subjective measures in order to paint a more complete picture of overall household welfare.

Becker pays particular attention to time allocated to non-work activity, an area in which women’s lives were radically transformed during this period. “The life of a working-class housewife in the last nineteenth century was little different than that of a hired domestic servant,” Gordon writes. The time saved and burden eased by running water alone was substantial. Electric sewing machines and the availability of ready-made clothing at affordable prices freed women from another time-consuming task.

Other quality of life gains during this period include a decline in the unpleasantness of work (what economists call work “disutility”), the freedom of youth to go to school and recreate instead of working, and the modern invention of the notion of retirement. Last, but certainly not least, are the individual and societal benefits of improved life expectancy, in the first half of the twentieth century due largely to a steep drop in infant mortality rates. The rate in 1880 (215 per 1000 births) had held steady for hundreds of years—but then fell to 27 by 1950. This “historic decline,” Gordon asserts, “is one of the most important single facts in the history of American economic growth.” Because this progress is not reflected in GDP per capita, the economist William Nordhaus calculated a modified GDP growth rate incorporating this additional “health capital.” His “health-augmented” growth rate for the first half of the twentieth century is 4.2%, more than double the conventional measure of 2.05%.

Slowing Growth: From Revolution to Evolution

The year 1940 is a somewhat arbitrary dividing point for Gordon as he moves on to Part II of the book. Growth in both productivity and standard of living continued apace until 1970. Yet there were early signs of a slowdown, of a shift from revolutionary to evolutionary change.

Progress during these three decades was in large part a continuation and consolidation of earlier gains. For instance, in 1940, 79% of households had electric lights, 74% running water, and 44% an electric refrigerator. By 1970, the figure in all three categories was nearly 100%. (Gordon refers to these and other advances collectively as the modern “networked” house.)

Growth before 1940 was driven by the primary advances of the second industrial revolution, inventions that date back to the end of the nineteenth century. Growth after 1940 featured what Gordon calls the key “subsidiary spinoffs” of that revolution, including air conditioning, the interstate highway system, and commercial air transport. (Air conditioning is an underappreciated contributor to economic growth. In the 1950s, according to one study, it resulted in 25% greater productivity among government typists.)

Another critical engine of progress during this period was the twin impact of the Great Depression (which set the economy back but also triggered essential reform) followed by the economic pressure cooker of World War II. Huge gains in educational attainment, with a big push from the GI Bill, improved the quality of labor. In part due to the growing strength of unions, that labor was rewarded with high wages and lower hours. In response, capital inputs increased not only in quantity, but in quality. Gordon cites the work of John Kendrick, a pioneer in the field of productivity measurement, who found that one measure of the productivity of capital, the ratio of output to capital input, nearly doubled between the 1920s and the 1950s.

Despite this progress, the beginnings of a slowdown, of a shift from revolution to evolution, were in place. Again, progress in the post-War decades reflected a continuation of earlier gains.

In a sense, the economy was in the final stages of extracting what it could from the second industrial revolution; the subsequent third industrial revolution would not be nearly so broad or deep in its impact. Gordon also notes a leveling off of inventions and patents in the 1920s, and a sharp drop in the 1940s and 1950s, as innovation moved from the individual entrepreneur/inventor to the corporate R&D office.

Finally, progress in public health shifted from a focus on curing infectious diseases (and huge consequent reductions in infant mortality) to a focus on managing chronic disease (with more modest gains for older adults).

“Nothing that happened after 1940 for the adult male worker,” Gordon writes in summation, “compared to the reduction in the discomfort of physical labor made possible by shorter hours, more capable machinery and the shift from farm to city. Nothing that happened after 1940 for the adult female housewife compared to the replacement of hauling of water, wood and coal by the networked house…. Nothing that happened after 1940 … compared to the elimination of child labor and its replacement by universal high school education. And nothing that happened after 1940 was as important to the life of the older generation as the establishment in 1935 of Social Security.”

Reasons for Slower Growth after 1970

The drop-off in growth following the “special century” running from 1870 to 1970 is striking by any number of measures. TFP – which rose steadily in the 1920s, 1930s and 1940s, and peaked at nearly 3.5% in the 1950s – fell off in the 1960s and 1970s, and then plummeted in the 1980s. Overall, in the period after 1970, TFP has been a third its rate from 1920 to 1970. Two other measures – output per person and output per hour – also fell back to pre-1920 growth rates.

Manufacturing capacity and net investment have also generally been down.

Finally, Kendrick’s measure of quality of capital, the ratio of output to capital input – which peaked in the late 1940s but still grew at an average annual rate of just under 1% between 1928 and 1972 – thereafter dipped down into negative territory. In short, Gordon writes, “the nation’s output grew much more quickly than its capital input between 1928 and 1972 and then much more slowly from 1972 to 2013.”

Why the sudden drop-off? Simply put, the very real innovations of the post-1970 period – driven by the third industrial revolution, and revolving around the information and communications technology (ICT) sector — were narrower and less transformative than those associated with the second industrial revolution. Part of that narrowness is that the ICT sector, for all its dazzling advances, constitutes only about 7% of GDP. And part of it is that, as Gordon puts it, “Some inventions are more important than others.”

The singular progress of The Great Leap forward was unprecedented and unrepeatable.

Refinements on earlier innovations continued—but were incremental in nature. The heavy lifting was in the past. For example, the construction of the interstate highway system, a huge factor in economic growth in the post-War years, was largely concentrated in the years 1958-1972. By that time, the “great transition of America to a motorized society was essentially over.”

Progress in other areas plateaued. Advances in educational attainment slowed, and medicine witnessed “piecemeal improvements” as compared to the “quantum leaps” of earlier decades.

In both education and health care, rising costs represented a drag on net gains in standard of living, and exacerbated a growing economic inequality that Gordon argues has emerged as a major threat to future growth.

A Temporary Surge

One of the puzzles of the post-1970 slowdown was why the remarkable innovations of the third industrial revolution – even granted their more narrow economic base in the ICT sector – failed to generate measurable gains in productivity. (As Robert Solow quipped, “You can see the computer age everywhere but in the productivity statistics.”) This so-called “modern productivity paradox” was the topic of a 1990 paper by Paul David in which he suggested that a certain gestation period frequently intervenes between an invention and its productivity payoff.

There were several decades of lag time between Edison’s first light bulb in 1879 and the productivity growth of the 1920s due to electric manufacturing. The same lag, he argued, was likely happening with the recent quantum leaps in computing.

Indeed, just a few years after his article, productivity and other measures soared briefly from 1996 to 2004. Productivity doubled over its previous quarter-century slump, manufacturing capacity returned to 7% growth, and net investment enjoyed a brief three-year surge. But all these measures subsequently fell back to earlier levels. This short-lived period of growth, Gordon asserts, “was driven by an unprecedented and never-repeated rate of decline in the price of computer speed and memory and a never-since-matched surge in the share of GDP devoted to … ICT investment.”

Looking forward, Gordon sees a number of reasons for viewing this temporary lift as an exception that proves the rule. The decade that has followed, 2004–2014, has witnessed the slowest productivity growth of any decade in American history. The price to performance ratio in ICT, after a brief and sharp drop, has flattened out. After its brief surge, the ratio of net investment to capital stock has returned to negative territory. Especially troubling, he writes, is the decline of “business dynamism” as measured by rates of new firm entry vs. old firm exit.

“In short,” Gordon concludes, “the changes created by the Internet revolution were sweeping but were largely completed by 2005. Twitter  The major exception, the invention and dissemination of the smartphone, has thus far not had a visible effect on productivity.”

The Future: Techno-optimists and Techno-pessimists

The Rise and Fall of America Growth is part of a fascinating debate about future prospects for the American economy. Interestingly, a prominent voice on the other side of the debate is Joel Mokyr, Gordon’s colleague at Northwestern University, where the two are affectionately known as a kind of “economic odd couple” and are frequently paired in public speaking engagements.

Gordon bases his own somber predictions on the premise that coming decades are more likely to resemble 2004-2014 than 1994-2004. Whatever innovations are in store in ICT, the preponderance of the American economy is unlikely to be significantly affected. Those anticipating revolutionary change in the near future, he contends, confuse the pace of innovation with its impact.

“The wonders achieved by computers and, since the mid-1990s, by the Internet have misled many analysts into believing that the current rate of economy-wide progress is the fastest in human history and will become even more rapid in the future,” writes Gordon. “The basic flaw in this faith in an acceleration of technological change is that… the share of total GDP represented by computers is too small to overcome the great majority of economic activity where the pace of innovation is not accelerating and, indeed, in many aspects is slowing down.”

Lying Press?

Germans Lose Faith in the Fourth Estate

"Mendacious swine journals" reads this sign held by a German protester at a recent PEGIDA demonstration in Dresden, listing various German media outlets.
DPA "Mendacious swine journals" reads this sign held by a German protester at a recent PEGIDA demonstration in Dresden, listing various German media outlets.

Germans are losing faith in their media. Nowhere is this more apparent than in mistrust of refugee crisis media coverage. Where did journalists go wrong? And how much of this skepticism reflects a preference for rumors over facts? By SPIEGEL Staff

You couldn't ask for a better reader than Isolde Beck. She has had subscriptions to the Süddeutsche Zeitung, Badische Neueste Nachrichten and SPIEGEL for many years. And as a retiree, she takes the time to thoroughly read through the newspapers and magazine.

But her relationship with the media has become troubled in recent weeks. She has the feeling that the "news is being suppressed" and that journalists are no longer allowed to "articulate certain things." Beck has stopped believing what the journalists write.

These feelings prompted her to send SPIEGEL an irate letter to the editor in early January regarding a cover story about the sexual violence in Cologne. "We can no longer assume that there is a democracy or even freedom of expression in this country anymore," she wrote, "and the media are complicit, for the most part, perhaps out of reluctance to alienate interviewees, or perhaps because it appears to be gratifying to manipulate readers or to make fun of them, however you want to put it." In retrospect, says Beck, she would not have expressed her thoughts quite as drastically. But, she adds, it was so soon after the Cologne sexual assaults and she was furious with the perpetrators and the press, which she believes took too long to report on the incidents. Several days did indeed pass before the mainstream media in Germany began reporting heavily on the events of New Year's Eve.

Beck felt vindicated in a suspicion she had had for months: that the media had long concealed the extent of crimes committed by refugees and migrants. As early as the end of last year, she says, she was surprised to read reports that refugees were no more criminal than Germans. "How could the media have known this at the time?" Beck asks. As far as she is concerned, it's clear that "the media manipulated their reporting to reassure people."

Getting Out the Pitchforks

In voicing these sentiments, the SPIEGEL reader joined the ranks of a movement that seems to have gained momentum in recent weeks -- one that, to varying degrees, is claiming that journalists are no longer capable of being independent and unbiased.

It is a phenomenon that defies simple description. According to polls, 40 percent of Germans believe the media are not credible. And the loudest of them all, people like Tatjana Festerling, an organizer with the anti-immigrant, Islamophobic PEGIDA movement, have even taken to calling on the public to get out the pitchforks to chase journalists out of newspaper offices.

The criticism is mainly directed at reporting on the refugee crisis. According to a recent survey by the Allensbach Institute, a respected German polling firm, only a quarter of Germans believe that the media paint a correct picture of the level of education and share of women and children among incoming refugees.

Beck is no radical. She opposes the right-wing populist Alternative for Germany (AfD) party.

She taught German to adolescent immigrants in the 1990s. Nevertheless, the days after the incidents in Cologne on New Year's Eve destroyed something for her. She feels that the media have ignored her fears. She also feels a bit helpless, because her doubts feel so vague and uncertain to her. Still, Beck isn't cancelling her subscriptions. "Why?" she asks, sounding horrified. "I couldn't live without Süddeutsche."

Hers is a case of disappointed, but not lost, love. But it is also thought-provoking. How can a woman who has been reading SPIEGEL, Süddeutsche Zeitung and Badische Neueste Nachrichten for years hit upon the idea that the journalists writing for these publications are trying to manipulate her, their reader?

Anger Versus Apprehension

A distinction must be made between those who chant the misnomer "Lügenpresse," or lying press, and attack journalists, both verbally and physically, and those who are critical or suspicious of the media.

Those in the first group pose a threat to journalists and freedom of the press. They don't want dialogue or transparency. They want journalism to disappear.

Those in the second category are questioning journalists' performance. Their criticism may sometimes be harsh, unfair and inarticulate. Still, these are ultimately questions to which journalism must find a response.

The problem is that the boundaries between the two groups are indistinct. Those who verbally abuse journalists no longer seem to be in the minority. A more rancorous and aggressive tone is also spreading in Internet forums and letters to the editor. The problem is that rage is turning into hate, and hate into violence.

Take Uwe Ostertag, for instance, a man who berates journalists on the Internet, calling them "blindly obedient hacks" and "dogs" that should be "beaten," "thrown into a sack" and "drowned in a pond."

He refers to them as "rats," "zombies" and "cockroaches," to be "destroyed by the exterminator."

There are publications like the German nationalist magazine Compact, which asked readers to vote for "Germany's worst lying journalists." Compact calls Anja Reschke, the host of the political news program "Panorama" on public broadcaster ARD a "siren of multiculturalism" and Golineh Atai, a reporter with the same network, a "cold warrior." SPIEGEL columnists Jakob Augstein and Georg Diez are "the anti-German" and "the asylum preacher."

The rage, hatred and hostility are not just being expressed verbally anymore. Journalists are badgered and berated, hit with flagpoles and attacked with pepper spray.

This isn't a matter of people simply misbehaving or things getting a little out of control. It's an attempt to stoke fear and create a mentality that turns journalists into targets, both individually and collectively. It's an attempt to muzzle the democratic media.

And it has not been ineffective.

Unfounded Suspicions

A prominent TV journalist decided not to talk to SPIEGEL about the kinds of people using the term "lying press" after she noticed how colleagues who spoke out on the issue were inundated with hate mail. She said she was unwilling to "become an even bigger target in a prominent position."

That may sound overblown, but anyone who has ever explored the darkest recesses of Internet forums or waded through the kinds of letters to the editor and viewer mail that have flooded editorial offices in recent months can understand why someone who is not otherwise given to anxiety would choose to keep a low profile.

A certain sense of fatigue has also set in among journalists. Is it even worth engaging with readers and viewers who say they don't believe journalists anymore?

Rolf Christoffer also vented his displeasure with the media in a letter to his local paper, the Mindener Tageblatt, writing that he had "valued and enjoying reading it, as a small but decent regional newspaper." But now, he added, he heard that the editor-in-chief was tolerating a "muzzle code, in his rush to show obedience to the government."

"Are you being paid by political parties or by your readers?" Christoffer asked. If it turned out that such arrangements had indeed existed with the state of North Rhine-Westphalia or the federal government, "I will immediately cancel my subscription to the daily newspaper I have respected for so long, the Mindener Tageblatt, and will get my information solely from Internet forums."
The Mindener Tageblatt, founded in 1856, with a circulation of 31,000, confronted the accusation in an unusual way. Editor-in-Chief Christoph Pepper not only responded to the letter in detail, but he also published the correspondence in the paper's blog.

No, Pepper replied, there were no such arrangements, neither between "the press" and "the parties," nor between individual newspapers and parties, "at least none that I am aware of." Most importantly, he wrote, there is no governmental power that could control the media and what it publishes through laws or ordinances.

Pepper continued that the Mindener Tageblatt has been owned by a local publishing family for six generations, a family "whose voting habits are unknown to me, just as mine are unknown to them."
Pepper's response was well received, both on the Web and by Christoffer. He had not expected such an extensive reply from the editor in chief, he says. Nevertheless, the letter could not change the fact that the 70-year-old is dissatisfied with the media, with politicians and with Germany on the whole.

"The republic is oriented completely to the left," says Christoffer. He cites surveys that conclude that many more journalists sympathize with the center-left Social Democratic Party (SPD) or the Green Party than the center-right Christian Democratic Union (CDU). "No wonder conservatism is being wiped out."

Journalists For Sale?

Christoffer gave himself a present for Christmas, the book "Gekaufte Journalisten" (Bought Journalists), by Udo Ulfkotte, a former editor with the conservative Frankfurter Allgemeine Zeitung (FAZ). The book contains claims such as: Freedom of the press is just an illusion, and top journalists are merely an extension of the NATO press office.

Ulfkotte's book was published by Kopp, a melting pot for conspiracy theorists. Kopp publishes works by ufologists, and by authors who claim the Americans destroyed the Twin Towers of the World Trade Center themselves in 2001. Ulfkotte's book was on the bestseller lists for months.

"Bought Journalists" is the bible of all those who have renounced their faith in the German media. Ulfkotte's critics see the book as a vendetta against the FAZ, which he left on bad terms.

Christoffer even shares the critics' assessment. Nevertheless, like Ulfkotte, he believes that journalists are not maintaining a sufficient amount of distance from politicians, especially in Berlin. He says he heard that at the beginning of the refugee crisis, Chancellor Angela Merkel invited journalists from major publications to the Chancellery, where it was suggested how they should report on the issue -- namely that the negative consequences of Germany's refugee policy were to be concealed. Christoffer imagines that the journalists, flattered by the invitation to the Chancellery, readily agreed.

Meetings like that do not take place. However, there are conversations that take place "on background," to which government ministers and the chancellor invite journalists. This is a normal procedure. For journalists, the purpose of these meetings is not to pick up instructions, but to obtain information. When politicians are guaranteed anonymity, they reveal things they would never say in public either because they are incongruous with their positions or perhaps the party line.

The agreement is that journalists may not quote directly from these confidential meetings. But they are allowed to use the information in their reports. How they treat the subject matter is their business.

Ivory Towers

Siegfried Vollmert, 57, is the purchasing and sales director of a steel company in Essen. He travels a lot, driving 80,000 kilometers (49,710 miles) a year through Europe. He no longer believes what the papers write, he says, adding that he prefers to see things for himself.

While traveling for work last year, he decided to make a stop in Dresden to take a look at the kinds of people who were taking part in PEGIDA rallies. And if he wants to know about crime in refugee hostels, he says, he asks police officers he knows.

Vollmert subscribes to Süddeutsche Zeitung, Iserlohner Kreisanzeiger and the newsweekly Focus. He buys a copy of SPIEGEL at the newsstand every Saturday. "There must be a reason why the media are losing circulation," he says. "The average Joe has a keen sense for when he's being taken for a ride." Vollmert accuses the media of having lost sight of the interests and concerns of its audience. The teacher shortage, poor hygiene in hospitals and a growing number of burglaries -- journalists ignore all of these issues, says Vollmert, because they have blockaded themselves in their ivory towers. "They don't listen to what's happening down below."

Vollmert says that he used to be a member of the CDU. He once handed out flyers for the AfD, he says, but only because he wanted to help a friend who was running for office -- he doesn't identify with the party's agenda. In fact, the AfD's current popularity makes him nervous, he adds, arguing that the media are still partly to blame because they failed to decisively denounce immigrant parallel societies, which right-wing agitators took advantage of. "The press has allowed itself to be misused by politics and its mission of political correctness," Vollmert says.

It doesn't take much digging to discover that Vollmert ran as a candidate for the AfD in the 2014 Iserlohn city council election. He says he can't explain how he ended up on the list. But according to the city's election office, every candidacy is verified. Vollmert confirmed his candidacy in writing, and there were no doubts about the authenticity of his signature.

Vollmert insists this is the first time he has ever heard of his supposed candidacy.

Mistrust Knows No Class

In a poll conducted for North Rhine-Westphalia public broadcaster WDR in late October, more than 40 percent agreed with the statement that the state and the government influence reporting. And one in five respondents felt the term "lying press" was justified.

Data from the Allensbach Institute reflects how much Germans' trust in the media has changed in the last 25 years. The result: surprisingly little. In regular surveys in the two decades after German reunification, a consistent 30 to 40 percent of respondents said they had considerable or a great deal of trust in "the newspapers." That value has remained relatively constant over the years. Since 2012, it has even increased to more than 45 percent.

Nevertheless, it does seem disconcerting that more than half of Germans have little or no trust in the media. But that doesn't mean this group believes journalists are fundamentally manipulative or biased.

"I would guess that the majority of these people tend to have a healthy skepticism toward the media," says Carsten Reinemann, a Munich-based expert in communication studies who has analyzed various statistics. In addition, comparable studies also show that Germans are just as distrustful or even more so vis-à-vis other institutions, such as political parties, churches or the federal government.

In a non-representative preliminary study, Reinemann examined the motives and views of extreme critics of the media. To do so, his students searched relevant Facebook groups for people who didn't believe a word that came from the media. They managed to have conversations with about 1,000 people -- from all kinds of political persuasions.

Regardless of their political views, the respondents tended to reject the country's elites. They also frequently felt unrepresented by the media and even threatened. As a reaction, they often turned to so-called alternative media, and commented in online forums. Reinemann isn't surprised that so many extreme critics of the media have middle-class, as opposed to lower-class, backgrounds. "Low trust in institutions has little to do with educational level."

Let Them Speak

When Dunja Hayali, 41, a host with the ZDF television network, gave her acceptance speech for the Golden Camera award, a German film and television honor, in early February, it seemed as if all the negative things she had absorbed in recent months came pouring out. Hayali had often reported on PEGIDA and had sought direct dialog with the very people who accuse the media of lying. In the process, the journalist sometimes encountered sheer hatred.

Just a few days before she received the award, a man stopped his bicycle in front of her in Berlin's Kreuzberg district and shouted in her face: "Lying press! You liar!" Hayali was shocked and feared the man was about to physically attack her. Instead, he got back on his bike and road away, still shouting the same words.

Hayali talked about the incident during her speech at the award ceremony. And she also said things that seemed self-evident. She condemned hate and racism, and she confessed that journalists are also just people, and that they too make mistakes. Then she asked: "Does anyone really believe that anything is achieved with all this hate?"

The audience gave her a standing ovation, and Hayali received hundreds of emails and Facebook messages, almost all filled with praise.
In January, Hayali visited two viewers who had taken to Facebook to criticize the network's reporting. She filmed a segment about the meeting for a ZDF program.

One of the two viewers, a tourism manager from Bavaria, criticized the media for always getting bogged down on a single issue. First it was Ukraine, then Greece, and now it's the refugees. But no one, he said, pays any attention to unemployment or the problems of the retail industry. The other viewer, a manager of a company in Brandenburg, said ZDF is lying and its strings are being pulled by someone, though he couldn't say by whom. Hayali assured him that no one had ever told her what to say, and that she was free to write her own questions.

Nevertheless, said the man, there were many things he didn't believe, such as the ZDF reports about refugees at the Hungarian border. He said he preferred to watch amateur videos about the issue on YouTube. When Hayali asked why, he said: "Because there are so many different ones."

Her editorial office contacted 110 critical viewers to prepare for the story, says Hayali, but many were unwilling to meet with her. Others were disqualified in the preliminary interview for things such as denying the Holocaust. Others were simply incapable of arguing effectively.

Only a handful was left in the end.

Hayali is satisfied with the outcome. At the end of the conversations, both men told her that while they did not share her view, they did appreciate the fact that she had approached them.

"If we want to regain our credibility, we must have a dialogue with our critics. We have to explain to them how we work," says Hayali. "Maybe that's our new task for the year 2016. Part of that is admitting our mistakes. But mistakes are not lies."

After the incidents in Cologne on New Year's Eve, Hayali, whose family is from Iraq, wondered: Have we done something fundamentally wrong? Were we blind when we celebrated Germany's Willkommenskultur, or welcoming culture, in August? Did we overlook things?

 "Clearly there were taboos in the discussion of how refugees are being treated. But for me, there was no such thing," she says. "At ZDF, we were reporting early on about fights in refugee hostels. I was always able to tell it like it is, and I don't think that has anything to do with my immigrant background."

Still, she says, she has noticed how quickly one can become jaded as a journalist. Since September, when the chancellor began allowing refugees from Hungary to enter Germany, Hayali has repeatedly received messages on Facebook telling her how German women had allegedly been raped or how mass robberies were being committed by refugees. "I pursued every lead at first. But none of them were true."

'I'm No Conspiracy Theorist, But...'

Philipp Karger, a 33-year-old engineer, hardly gets any of his news from classic media anymore. "It's obvious that you get your information from above," he says, citing coverage of the New Year's violence in Cologne as evidence. The fact that the media took so long to report on the ethnic background of the presumed perpetrators was the result of instructions from the federal government, or at least an organization affiliated with the government, says Karger. He is so sure of himself that he reacts with genuine surprise when his accusation is rejected. "I thought that had already been officially confirmed," he says. According to Karger, the media had to respond as they did so as not to undermine Merkel's refugee policy.

Until recently, Karger still believed the prime time "Tagesschau" evening news program on public broadcaster ARD was neutral. He changed his mind after New Year's, when some media organizations took a long time to report on the story emerging from Cologne. He gets his information from the Internet and his Facebook timeline. On Facebook, he subscribes to pages such as: "Today we're tolerant -- tomorrow we'll be strangers in our country" and "Schweinfurt TAKES A STAND -- no thank you to asylum abuse." He also follows the Facebook pages of the Germania Würzburg fraternity and the AfD.

He realizes that Facebook pages also spread "a lot of junk," says Karger, and yet he stopped believing the media years ago. He believes media organizations assist individual parties in return for donations or exclusive information after an election win, for example. "I'm no conspiracy theorist, but I do believe we're really being taken for a ride," he said.

An 'Unlimited Echo Chamber'

Rumors are what fuel skeptics' belief in a "lying press." Things that "one" has heard about somewhere but that hasn't turned up anywhere in the media.

It doesn't matter whether a rumor is true or false. It derives its power from the "escalation of the emotions associated with it, when people infect one another," the Russian sociologist L.A. Bysow wrote as long ago as 1928. One look at the comments left below online articles that deal with the subject of refugees is enough to understand this. "Once the tone has gone in a certain direction, there is rarely a change of mood," says Georg Diedenhofen, editorial director of a talk show on broadcaster ARD called "Hart aber Fair," or "tough but fair." The comments section of the show's website was a case in point after Jan. 18. There was talk of "doctored police reports and patronized citizens -- is anything off-limits nowadays?"

The majority of viewers who submit comments to the website do not believe in a free press or critical reporting. Some even suspect the press has a direct phone line to the Chancellery. It's a creepy, languorous community in which one person validates what someone else heard somewhere. It's an echo chamber of hearsay.

Granted, such downward spirals of rumors told and retold have always existed. In war, opposing sides have always availed themselves of rumors. Rival corporations are no stranger to them either.

But the Internet lends a special dynamic to rumors, which creates problems for journalists.

"Readers and users are demanding faster and faster categorization and evaluation of events," says Brigitte Fehrle, editor-in-chief of the Berliner Zeitung newspaper. "They want fast truths, which is absurd. As journalists, we must stick to the facts. A journalist has to call a presumption a presumption and a rumor a rumor. There is no other option." She has noticed that reactions vary depending on the medium. Readers of printed newspapers are also outraged, she says, "but for the same articles, colleagues have received aggressive, insulting posts as well as threats of violence and death threats when their articles were published online."

Fehrle is not hostile to technology. She is grateful for the reach her paper has now, thanks to the Internet. But she also notices that with some people, digital media are conducive to more coarse communication. "Twenty years ago, five people would sit around a table at the bar, discuss all kinds of crazy things and perhaps even make threats. But they left it at that." With the Internet, she says, the same people have an "unlimited echo chamber, which apparently emboldens them to make even more radical statements."

The More People Know, the Less They Believe

This brings us to a question that not only affects journalism, but is also fundamental: How compatible with the Internet is democracy? Or, to put it differently: How is the Internet changing democracy?

Germany currently has a representative democracy. Voters vote and lawmakers decide. The counterpart to that is direct democracy, in which, ideally, everyone decides on everything.

When the Federal Republic of Germany was established in 1949, its founders decided against direct democracy, partly out of fear of what the direct will of the people can bring about.

In a sense, the media in Germany are also representative. Trained journalists have made it their profession to weigh the news and decide what is important and what is not.

Power does not lie in the hands of individual journalists, but in the institutions for which they work, such as newspapers or magazines. They have to prevail in the marketplace and can freely choose their positions. From the conservative FAZ to the left-leaning Die Tageszeitung (taz), this has been a social process practiced for decades in Germany, more or less successfully.

The Internet has confused everything. It encourages an anti-institutional impulse in people, one that is also anti-elitist and autonomous.

This isn't bad in itself. On the contrary, at first the Internet raised hopes that it could decisively democratize the process of informing people and forming opinions. Knowledge was to be set free, and control over knowledge, news and information was to be lifted. The Internet was the promise of a radically different public.

And in many respects, this dream is coming true. Today, we can know, learn and discuss more than ever before. Mankind is potentially smarter than ever before.

At the same time, the oversized freedom brought by the Internet also has its negative side: A person who can know everything at any time eventually loses perspective. The problem is that the Internet suggests constant availability and, ultimately, constant control. If everything can be known, then there are answers to everything.

This has made many people more suspicious. They can no longer cope with the contradictions, to which they were not nearly as exposed in the past. They protest against the complexity of reality, reducing it to black and white, lies and truth.

The more people believe they know, the less they can handle it. On the one hand, they no longer believe anyone. But on the other, they often fanatically believe the wrong things. This is the paradox of the digital age.

'The Media Are Reacting Hysterically'

How do we confront this? How do journalists cope with the accusations, the insinuations and the blatant hatred?

To answer this question, one must look back to last summer. It was a time when Germans, if only fleetingly, looked in the mirror and saw a completely different Germany. It was the infancy of the Willkommenskultur, the welcoming culture that is the object of so much hatred by some people today.

Back then, the country was surprised by itself and its popularity abroad. Sure, some Germans were setting refugee hostels on fire as the new foreigners arrived, but millions more were helping.

In those days, this different Germany was the big news story. And like every big news story, it outshone everything else. Perhaps it would have been asking too much of the media to immediately interject the critical question of whether all of this could work. Even journalists do not live outside their own time, nor are they immune to the public mood. Reporters also have their own expectations and fears, political convictions and moral values.

It is important for journalists to keep reminding themselves of this. Only then can they ensure it doesn't distort their view of reality or bias their reports. Only then can they see when too few critical questions have been asked and take action to rectify it.

Most of all, journalists must constantly allow themselves and their work to be questioned -- by themselves, colleagues and their audience. But they should be careful not to allow the enemies of the press to drag them into a battle, one in which these enemies can portray themselves as victims.

'We Do Not Accept Their Declaration of War'

Stefan Raue, the executive editor of MDR, a public broadcaster covering much of the eastern German states, including Saxony, says this about his relationship with all groups that accuse the media of being liars: "We do not accept their declaration of war."

MDR reports critically on AfD and PEGIDA. But Raue has always refused to sponsor anti-PEGIDA events and fundraisers. He speaks with the AfD politicians in the state parliaments.

MDR journalists invite PEGIDA supporters to their editorial offices to observe their work.

Allowing one's work to be questioned without feeling provoked also means not reacting hysterically. And it means not allowing others to compromise your standards of what is and isn't news, for fear of being pilloried as a suppressor of truth.

Raue believes this point has been reached. "The AfD and its issues are overly present in the media.

The media are reacting hysterically." According to Raue, the media have become disproportionate in their reporting on the risks of immigration. "Suddenly someone being groped in the pool becomes one of the most important stories of the day."

And what about the distrust of the press? What about the many people who are no longer quite sure who to believe, or whether they should trust journalists at all?

Austrian TV host Armin Wolf, a journalistic institution in the Alpine country, has a simple answer to these questions: "Explain, explain, explain." How journalists work, how they form their opinions and how they check facts. "Of course journalists make mistakes," he says. "But I don't know a single journalist who makes mistakes on purpose."

Wolf has followed the rise of the right-wing populist Freedom Party of Austria and its former leader, Jörg Haider. Austria, he says, is an admonitory example of what can happen. Nevertheless, Wolf recommends more composure for the German media. "We should not overestimate our clout," he says.

As a host, says Wolf, he often receives the suggestion that he attack the empty content of the right's message. "But it isn't that simple. Most are so well trained that they can even endure a tough interview for 10 minutes." Only research, fact-checking and caution are effective against rumors and rumor-mongers, says Wolf, and they take time.

There is one point, however, on which he at least partly agrees with the criticism of the media from readers and viewers: that journalists hardly even recognize everyday life at many levels of society, and that they no longer directly perceive social conflicts at the lower end of society.

"The academization of our profession is a problem as well," Wolf says. "The fact that journalists are not as present where society needs them most -- there's something to that."

Translated from the German by Christopher Sultan

Industry in China

The march of the zombies

China’s excess industrial capacity harms its economy and riles its trading partners

“OVERSUPPLY is a global problem and a global problem requires collaborative efforts by all countries.” Those defiant words were uttered by Gao Hucheng, China’s minister of commerce, at a press conference held on February 23rd in Beijing. Mr Gao was responding to the worldwide backlash against the rising tide of Chinese industrial exports, by suggesting that everyone is to blame.

Oversupply is indeed a global problem, but not quite in the way Mr Gao implies. China’s huge exports of industrial goods are flooding markets everywhere, contributing to deflationary pressures and threatening producers worldwide. If this oversupply were broadly the result of capacity gluts in many countries, then Mr Gao would be right that China should not be singled out. But this is not the case.

China’s surplus capacity in steelmaking, for example, is bigger than the entire steel production of Japan, America and Germany combined. Rhodium Group, a consulting firm, calculates that global steel production rose by 57% in the decade to 2014, with Chinese mills making up 91% of this increase. In industry after industry, from paper to ships to glass, the picture is the same: China now has far too much supply in the face of shrinking internal demand. Yet still the expansion continues: China’s aluminium-smelting capacity is set to rise by another tenth this year. According to Ying Wang of Fitch, a credit-rating agency, around two billion tonnes of gross new capacity in coal mining will open in China in the next two years.

A detailed report released this week by the European Union Chamber of Commerce in China reveals that industrial overcapacity has surged since 2008 (see charts). China’s central bank recently surveyed 696 industrial firms in Jiangsu, a coastal province full of factories, and found that capacity utilisation had “decreased remarkably”. Louis Kuijs of Oxford Economics, a research outfit, calculates that the “output gap”—between production and capacity—for Chinese industry as a whole was zero in 2007; by 2015, it was 13.1% for industry overall, and much higher for heavy industry.

Scarier than ghosts
Much has been made of China’s property bubble in recent years, with shrill exposés of “ghost cities”.

There has been excessive investment in property in places, but many of the supposedly empty cities do eventually fill up. China’s grotesque overinvestment in industrial goods is a far bigger problem.

Analysis by Janet Hao of the Conference Board, a research group, shows that investment growth in the manufacture of mining equipment and other industrial kit far outpaced that in property from 2000 to 2014. This binge has left many state-owned firms vulnerable to slowdown, turning them into profitless zombies.

Chinese industrial firms last year posted their first annual decline in aggregate profits since 2000.

Deutsche Bank estimates that a third of the companies that are taking on more debt to cover existing loan repayments are in industries with overcapacity. Returns on assets of state firms, which dominate heavy industry, are a third those seen at private firms, and half those of foreign-owned firms in China.

The roots of this mess lie in China’s response to the financial crisis in 2008. Officials shovelled money indiscriminately at state firms in infrastructure and heavy industry. The resulting overcapacity creates even bigger headaches for China than for the rest of the world. The overhang is helping to push producer prices remorselessly downward: January saw their 47th consecutive month of declines. Falling output prices add to the pressure on debt-laden state firms.

The good news is that the Chinese have publicly recognised there is a problem. The ruling State Council recently declared dealing with overcapacity to be a national priority. On February 25th the State-Owned Assets Supervision and Administration Commission, which oversees big firms owned by the central government, and several other official bodies said they would soon push ahead with various trial reforms of state enterprises. The bad news is that three of the tacks they are trying only make things worse.

One option is for China’s zombies to export their overcapacity. But even if the Chinese keep their promises not to devalue the yuan further, the flood of cheap goods onto foreign markets has already exacerbated trade frictions. The American government has imposed countervailing duties and tariffs on a variety of Chinese imports. India is alarmed at its rising trade gap with China. Protesters against Chinese imports clogged the streets of Brussels in February. There is also pressure for the European Union to deny China the status of “market economy”, which its government says it is entitled to after 15 years as a World Trade Organisation member, and which would make it harder to pursue claims of Chinese dumping.

Another approach is to keep stimulating domestic demand with credit. In January the government’s broadest measure of credit grew at its fastest rate in nearly a year: Chinese banks extended $385 billion of new loans, a record. But borrowing more as profits dive will only worsen the eventual reckoning for zombie firms. 

A third policy is to encourage consolidation among state firms. Some mergers have happened—in areas such as shipping and rail equipment. But there is little evidence of capacity being taken out as a result. Chinese leaders are dancing around the obvious solutions—stopping the flow of cheap credit and subsidised water and energy to state firms; making them pay proper dividends rather than using any spare cash to expand further; and, above all, closing down unviable firms.

That outcome is opposed by provincial officials, who control most of the country’s 150,000 or so publicly owned firms. Local governments are funded in part by company taxes, so party officials are reluctant to shut down local firms no matter how inefficient or unprofitable. They are also afraid of the risk of social unrest arising from mass sackings.

China’s 33 province-level administrations are at least as fractious as the European Union’s 28 member states, jokes Jörg Wuttke, head of the EU Chamber: “On this issue, increasingly Beijing feels like it’s Brussels.” So Mr Gao’s claim that the problem is not entirely his government’s fault may be true in a sense. But in the 1990s China’s leaders did manage bold state-enterprise reforms involving bankruptcies and capacity cuts, that overcame such vested interests. To meet today’s concerns, the central government could provide more generous funding to local governments to offset the loss of tax revenues arising from bankruptcies, and also strengthen unemployment benefits for affected workers. 

If China’s current leaders have the courage to implement such policies, there may even be a silver lining. Stephen Shih of Bain, another consulting firm, argues that much quiet modernisation “has been masked in many industries by overcapacity”. For example, little of the fertiliser industry’s capacity used advanced technologies in 2011; most of the new capacity added since then has been the modern sort that is 40% cheaper to operate.

Baosteel Group, a giant state-owned firm, has been forced by Shanghai’s local authorities to shut down dirty old mills in the gleaming city. So its bosses have built a gargantuan new complex in Guangdong province with nearly 9m tonnes of capacity. This highly efficient facility has cutting-edge green technologies that greatly reduce emissions of sulphur dioxide and nitrogen oxides, recycle waste gas from blast furnaces and reuse almost all wastewater. “When the older capacity in China is shut down, we’ll have a much more modern industrial sector,” Mr Shih says. “The question is, how long will this take?”

Up and Down Wall Street

March Madness Takes On New Meaning

In the U.S., GOP debate at times turns into a scrum. Abroad, negative interest rates seem to be minuses, rather than pluses, for economies.

By Randall W. Forsyth                

It’s almost March and the madness is about to begin.
On the political side, it has been beyond mad and all the way to wacky. On the financial front, more fun may lie ahead.
First came the Thursday evening cage match that was advertised as the Republican presidential candidates’ debate, out of which came the priceless screenshot of front-runner Donald Trump flanked by Sens. Marco Rubio and Ted Cruz with the closed caption: “unintelligible yelling.” Pity retired neurosurgeon Ben Carson, who pleaded plaintively, “Somebody please attack me.” No wonder Ohio Gov. John Kasich’s sensible points were buried in the din.
That was followed on Friday by Trump’s endorsement by New Jersey Gov. Chris Christie, a similarly self-effacing fellow who had been part of previous scrums among the GOP contestants. No other big-name Republican had jumped on the Donald’s bandwagon, which seems to have the momentum to carry him to the nomination.
Cynics thought Christie’s endorsement was meant to wangle a cabinet post in a Trump administration, with attorney general bruited most often. Treasury secretary would be the least suitable position, given the nine credit downgrades of the Garden State on Christie’s watch, although that would be in keeping with the multiple bankruptcies of Trump entities.
All of which precedes Super Tuesday, which kicks off the month of key primaries that may well decide the nominees of both parties. Greg Valliere, chief strategist at Horizon Investments, thinks Rubio’s best hope is to arrive at the GOP convention on July 18 without Trump having locked up the nomination. On the Democratic side, he sees Hillary Clinton having the presidential nomination wrapped up by April and reckons she’s “the luckiest politician in America” if her opponent in November is “someone who’s loathed by nearly half of Republican voters.”
For the moment, financial markets are apt to be more concerned with more mundane monetary matters, starting with this weekend’s confab of the Group of 20 major economic powers in Shanghai. U.S. Treasury Secretary Jack Lew said before heading there not to expect a “crisis response,” apparently referring to speculation about some big pact along the lines of the Plaza Accord in early 1985 to bring down the dollar and stabilize exchange rates.
China’s head central banker denies that Beijing will engage in “competitive devaluation” to boost exports.
For the most part, the People’s Bank of China has worked hard to stabilize the yuan, even at the cost of draining domestic liquidity significantly, according to Daniel Tenengauzer, head of foreign-exchange strategy at RBC Capital Markets. That was evident in a one-day spike in Chinese money-market rates last week, which sent stocks down 6% on Thursday.
The PBOC has had to offset capital outflows as wealthy Chinese try to get their money out of the country before the yuan declines further or restrictions on capital movements are tightened. Favored destinations have been property markets abroad, notably on other ends of the Pacific Rim, such as Australia and Vancouver, where housing markets are overheated, in part because of piles of money from China and elsewhere. One can only infer what’s actually happening in China because, as the New York Times reported last week, the Chinese media have been told their job is to serve the Communist Party. No news usually means bad news being covered up.
Next Thursday, March 10, Mario “Whatever It Takes” Draghi is anticipated to unveil additional stimulative measures at the European Central Bank’s regular meeting. That could mean pushing policy interest rates further into negative territory from the minus 0.3% for banks’ deposits at the ECB, plus an increase in its asset-purchase program, from 60 billion euros ($65.6 billion) a month currently.
Beware the Ides of March. Further stimulus from the Bank of Japan is likely when it meets on March 15.
The BOJ’s surprise imposition of negative rates in late January backfired by sending the yen sharply higher, not lower, as would be expected, and pushing stocks lower, especially the banks’.
All of which is prelude to the Federal Open Market Committee’s two-day meeting that winds up on March 16. There’s a 90% chance that the Fed’s policy-setting panel will stand pat, after raising its federal-funds target a quarter- point in December, to 0.25%-0.5%, according to the fed-funds futures market. That market says the probability of another hike doesn’t reach 50% until the December FOMC meeting.
Expectations also will be shaped by Friday’s release of February’s employment data, which should feature a 190,000 rise in nonfarm payrolls, according to MFR chief U.S. economist Josh Shapiro. The headline jobless rate should hold at 4.9% and yearly wage gains probably will chug along at 2.6%.
That might move markets, but will likely be rather less entertaining than the political jousting. For the moment, stocks are watching and waiting for the outcome, with the major averages adding about 1.5% last week. What stands out are the record highs set by such defensive names as Campbell Soup (ticker: CPB), Kimberly-Clark (KMB), General Mills  (GIS), and Reynolds American (RAI). In a mad world, staples provide a bit of comfort, if not excitement.
THIS MAGAZINE regularly conducts Big Money polls that survey the thinking of major money managers about financial markets, economic policy, and the like. A new idea about big money seems to be emerging—that it should be done away with.
This meme is that big money in the form of large-denomination bills should no longer be issued by governments. Specifically, the U.S. $100 bill and Europe’s €500 note should be taken out of circulation, according to a parade of recent opinion pieces, starting with one by former Treasury Secretary Larry Summers in the Washington Post, in addition to editorials in the New York Times, the Financial Times, and Bloomberg (and in this week’s Barron’s ).
Their argument is that these big bills, along with the 1,000 Swiss-franc note, are favored by criminals and terrorists as readily accepted stores of wealth and means of payment that don’t involve the banking system and thus evade the view of governments seeking to fight illegal activities.
The thing about memes is that they become part of the zeitgeist almost spontaneously, as a reflection of new thinking. But the use of large-denomination bills by criminals and terrorists is anything but new. In the current vernacular, “It’s All About the Benjamins”—referring to the image of Benjamin Franklin on the $100 bill, loved by drug dealers large and small. But that song actually came out 20 years ago. And scenes of transfers of suitcases full of cash to depict all manner of nefarious activities have been staples of movies forever.
So why the sudden call to do away with large-denomination bills? To be sure, there has been a steady ascent in the total of $100s outstanding, with a doubling over the past decade, to $1.08 trillion at the end of 2015.
But in the prior decade, the total of Benjamins similarly doubled, meaning the rate of growth hasn’t accelerated.
Outside the U.S., there does seem to be a recent pickup in demand for big bills. Last week, The Wall Street Journal reported a sharp increase in CHF1,000 notes in circulation, each worth roughly 10 U.S. C-notes.
And in Japan, there has been a run on safes to store yen notes, the Journal related. There’s no suggestion of an increase of illegal activities that would utilize big stashes of cash in either country.

Rather, it seems to be a reaction to the imposition of negative interest rates.
In January, the Bank of Japan joined the European Central Bank and the Swiss National Bank in setting rates for banks below zero. So far, negative rates haven’t been fed through to depositors but to government bond markets. The 10-year Japanese bond’s yield has dropped since the BOJ’s move last month, to minus 0.06% on Friday. In Europe, two-year German debt went for minus 0.53%. And for a 10-year Swiss bond, the yield was minus 0.4%.
With central bankers doing a reverse Buzz Lightyear and sending interest rates to zero and beyond, investors supposedly will take more risks, and consumers will be induced to spend, not save, their money. Or so conventional theory says. But rather than pay those effective charges for the privilege of lending money to these governments, it seems logical to stash cash at zero percent.
The real reason some economists don’t like cash is that it “messes with their models,” writes Convergex’s chief market strategist, Nicholas Colas. “Allow a pensioner to hold onto their savings in cash (since they are too old to earn more) and you weaken a policy maker’s ability to alter consumer behavior. Seems more like a feature than a bug to me, but I am not an economist,” he quips.
As noted previously in this space, negative rates mainly drive down currencies’ exchange rates, even though that’s supposed to be taboo among global policy makers. Competitive devaluations attempt to gain share in international markets, which have been shrinking. World trade shrank 13.8%, measured in dollars, last year, the first contraction since the crisis year of 2009, according to a report by the Netherlands Bureau of Economic Policy Analysis’ World Trade Monitor, cited by the Financial Times.
Instead of stimulating the animal spirits to spend and invest, negative interest rates may have the opposite effect—to make one want to sit on one’s cash. By coincidence, money has been flooding into gold mutual and exchange-traded funds, Chris Dieterich writes on’s Focus on Funds blog. Some $2.6 billion arrived during the most recent week, bringing the three-week take to $5.8 billion, according to Bank of America Merrill Lynch.
Criminals don’t need large-denomination bills. They can find alternative stores of value and means to transfer wealth, especially with the advent of Bitcoin and other electronic currencies. The sudden interest in banning big bills seems to have more to do with the imposition of negative rates, which don’t work with stashes of cash.

Oil Rally Wednesday A Fool*s Errand

Logically, oil prices fell early given the massive build in EIA Petroleum Inventories to 10.4 million bbls vs prior 3.5 million bbls. And, by-the-way, there’s no place to put all this oil now. But, oil prices surged thereafter as another short squeeze occurred based on weird logic as noted below: 
Anthony Headrick, energy market analyst at CHS Hedging stated "It seems more likely that $26 is in the rear view mirror at the moment," Headrick said.
"Fundamentals remain bearish but prospects of OPEC freeze and downward cycle in U.S. output will likely limit a retest of the recent lows."
The slide ended weirdly even after OPEC members led by Saudi Arabia, which traditionally cuts output to support prices, started pumping oil at record highs to protect its market share.

So, I guess bulls expect a production freeze at current levels but the Saudis have a different idea. And, again, a freeze if and when it occurs doesn’t diminish production, it’s just a misreading of reality for another short squeeze. Remember, if OPEC and others freeze production, then cheating, as always will begin almost immediately. Iran and Iraq for example will continue to ignore what others do. (“A Fool’s Errand” via Urban Dictionary; “A task which is widely known to be unwise, yet is carried out against a person's better

judgement.”). Noises to the contrary continue to emanate from habitual liars, Venezuela.  

The only other thing I can think of for a rally is there’s something negative only known by a few participants to drive prices higher. The last such news happened in 1990 just before Iraq invade Kuwait driving prices sharply higher.

Will there be 8 more years of this ruinous courtesy of the Fed and incompetent government policies?

3-2-2016 3-16-46 PM

Data today included the always inconsistent ADP Employment Report up to 214K vs 193K. The Fed’s Beige Book didn’t offer anything new but were clearly focused on the stock market even as they say publicly the opposite.

We live in bubble land San Diego where prices for housing is even worse than the previous housing bubble 2007. Nothing seems to change. At its core only Wall Street and CEO’s with lucrative stock options and those supporting presidential candidates Trump, Sanders and Goldman Sachs.

Stocks were able to build modestly on Tuesday’s major short-squeeze rally. The bottom line is HFT and other algorithmic programs are in control of markets while the rest of us are just shills in the game. That sounds pretty negative but we also follow the tape and are long some positions but only tentatively so.

Once again as you view market action short-term overbought conditions remain making fresh long positions rather risky.

Market sectors moving higher included: Financials (XLF), Banks (KBE), Regional Banks (KRE), Biotech (IBB), Energy (XLE), Energy MLPs (AMLP), Small Caps (IWM), Gold (GLD), Gold Stocks (GDX), Crude Oil (USO), EAFE (EFA), China (FXI), Shanghai (ASHR), Hong Kong (EWH), Australia (EWA), Spain (EWP), Brazil (EWZ), India (EPI), Emerging Markets (EEM), EAFE (EFA), Japan (EWJ), Mexico (EWW), Asia ex-Japan (AAXJ) and a host of others especially in EMs.
Market sectors moving lower included: Volatility (VIX), Junk Bonds (HYG), Consumer Discretionary (XLY), Materials (XLB) and not much else.

Below is the heat map from Finviz reflecting those ETF market sectors moving higher (green) and falling (red).

Dependent on the day (green) may mean leveraged inverse or leveraged short (red).

3-2-2016 3-17-19 PM
Volume light on the day allows for a late day push higher and breadth per the WSJ positive. Money Flow was mixed. 
3-2-2016 3-18-09 PM

 12-17-2015 9-04-44 PM Chart of the Day
3-2-2016 3-22-24 PM USO

Charts of the Day

    SPY  5  MINUTE






































    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.


    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.


    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation has changed due to a variety of new factors including HFTs, new VIX linked ETPs and a multitude of new products to leverage trading and change or obscure prior VIX relevance.

As volume lightened bulls seized the tape supporting Tuesday’s large move higher.

Why are markets moving higher isn’t yet clear. If this is based on something solid we’ll know it in the future, and as trend-followers, the “news will follow the trend”.

Clearly, weakening earnings projections along with economic data aren’t supportive yet. It just may be that more stock buybacks are in the cards financed by cheap debt. This activity has supported stock prices by reducing float and increasing earnings over fewer shares. That said, it does little to grow companies in the long run.

Let’s see what happens.