Unsettling precedents for today’s world

Events evoke not the 1930s but the period before the first world war

Martin Wolf

Trump Kaiser
© James Ferguson

History does not repeat itself, but it often rhymes. This remark is often incorrectly attributed to Mark Twain. But it is a good one.

History is the most powerful guide to the present, because it speaks to what is permanent in our humanity, especially the forces that drive us towards conflict. Since the biggest current geopolitical event, by far, is the burgeoning friction between the US and China, it is illuminating to look back to similar events in the past. In a thought-provoking book, Destined for War, Harvard’s Graham Allison started with the account of the Peloponnesian war by Thucydides, the great Athenian historian of the 5th century BC.

However, I will focus on the three eras of conflict of the past 120 years. From them much is to be learnt.

The most recent conflict was the cold war (1948-1989) between a liberal democratic west, led by the US, and the communist Soviet Union, a transformed version of the pre-first world war Russian empire. This was a great power conflict between the chief victors of the second world war. But it was also an ideological conflict over the nature of modernity.

The west ultimately won. It did so because the scale of western economies and the speed of western technological advances vastly outmatched those of the Soviet Union. The subjects of the Soviet empire also became disenchanted with their corrupt and despotic rulers and the Soviet leadership itself concluded its system had failed. Despite moments of danger, notably the Cuban missile crisis of 1962, the cold war also ended peacefully.

Going further back, we reach the interwar years. This was an interregnum in which the attempt to restore the pre-first world war order failed, the US withdrew from Europe and a huge financial and economic crisis, emanating originally from the US, ravaged the world economy.

It was a time of civil strife, populism, nationalism, communism, fascism and national socialism.

The 1930s are an abiding lesson in the possibility of democratic collapse once elites fail. They are also a lesson of what happens when great countries fall into the hands of power-hungry lunatics.

2 charts showing that the period before the first world war saw the rise of the US and Germany. Share of global GDP (%) and  the share of global manufacturing output (%)

Going further back still, we reach the decisive period 1870-1914. As Paul Kennedy noted in his classic book, The Rise and the Fall of the Great Powers, in 1880, the UK generated 23 per cent of global manufacturing output. By 1913, this had fallen to 14 per cent.

Over the same period, Germany’s share rose from 9 per cent to 15 per cent. This shift in the European balance led to a catastrophic Thucydidean war between the UK, an anxious status quo power, especially once the Germans started building a modern fleet, and Germany, a resentful rising one.

Meanwhile, US industrial output went from 15 to 32 per cent of the world’s, while China fell into irrelevance. Thereupon, US action (in the 20th century’s big conflicts) and inaction (in the interwar years) determined the outcomes.

Today’s era is a mixture of all three of these.

It is marked by a conflict of political systems and ideology between two superpowers, as in the cold war, by a post-financial crisis decline of confidence in democratic politics and market economics as well as by the rise of populism, nationalism and authoritarianism, as in the 1930s, and, most significantly, by a dramatic shift in relative economic power, with the rise of China, as with the US before 1914.

For the first time since then, the US faces a power with an economic potential exceeding its own.

The pre-1914 period ended in a catastrophic war, as did the interwar period, albeit with a relatively successful post-1945 aftermath.

The cold war ended in peaceful triumph.

Now, the world confronts challenges that easily match those of the earlier periods. So what lessons are we to learn from these eras?

2 charts showing that the last 40 years have been notable for the rise of China. Share of GDP (%) and share of global manufacturing output (%)

Perhaps the most obvious one is that quality of leadership matters. President Xi Jinping’s capacities and intentions are clear enough: he is devoted to party dominance over a resurgent China. But the political system of the western world and especially the US and UK, the two powers that dragged the world through the 1930s, is failing.

US President Donald Trump’s erratic leadership recalls that of Germany under Kaiser Wilhelm. Without better leadership, the west and so the wider world are in deep trouble.

Another lesson is the overriding importance of avoiding war. Prof Allison describes well how mutual suspicion fuelled the journey to war in 1914. It is even more crucial for the US and China to avoid head-on conflict now. That was the great success of the cold war. But nuclear deterrence may not be enough.

Yet perhaps the most important conclusion is that avoiding yet another catastrophe is insufficient. We cannot afford the old games of great power rivalry, however inevitable they must seem. Our fates are too deeply intertwined for that. A positive-sum vision of relations between the west, China and the rest has to become dominant if we are to manage the economic, security and environmental challenges we face.

Humanity has to do far better than it has done before. Today, that must seem a fantasy, given the quality of western leadership, authoritarianism in China and rising tide of mutual suspicion. But we must try. We have to manage this difficult new era strategically. On our ability to do that all our futures now depend.

Sitting Still Will Be Hard for the Fed

The Federal Reserve is expected to stand pat next year after a tumultuous 2019, but it may not be able to do so

By Justin Lahart

The Federal Reserve is expected to leave rates steady after its two-day policy meeting this week. Photo: leah millis/Reuters

Federal Reserve officials would like to spend the next year not doing much of anything. They probably won’t get their wish.

The Fed starts a two-day policy meeting on Tuesday and at its conclusion the central bank will almost certainly leave rates on hold. An active year, during which it reversed course on its planned rate increases and then conducted three “insurance” rate cuts on worries that trade tensions and global weakness would put the economy at risk of recession, is ending on a muted tone.

With recession fears dialed back, investors’ focus will turn to the Fed’s projections for 2020.

These will likely show that most officials expect their target range for overnight rates will remain at the current 1.5% to 1.75%. That would be happy news for the Fed in an election year where it would prefer not to be seen as helping or hindering any candidate—a concern that is likely heightened given President Trump’s frequent criticism.

But while a projection for no change in rates may be the most balanced forecast, given the combination of potential headwinds and tailwinds the economy faces, it may not count as the most likely outcome. It is all too easy to imagine scenarios in which the Fed ends up having to cut rates and it is possible to imagine ones where it ends up raising them.

Trade worries, for example, for now are muted on the expectation that the U.S. and China will soon strike a “phase-one” deal. But given how often trade tensions have eased only to flare up again over the past two years—particularly last spring, when a U.S./China deal seemed imminent, only to fall apart—it is hard to have much confidence.

The presidential election also poses a risk, especially if the Democrats nominate a candidate who spooks employers and investors into believing corporate tax and regulatory costs are about to head substantially higher.

Conversely, if the economy faces few obstacles and grows steadily, pushing the unemployment rate down past its current 50-year low of 3.5%, the Fed may be hard pressed not to take back at least some of this year’s insurance cuts—particularly if inflation readings or wage growth pick up.

The only reliable prediction one could have made about the Fed in recent years has been that it wound up doing something unexpected.

Bolivia’s Crisis of Legitimacy

By: Allison Fedirka     

After the recent wave of unrest in South America that included Ecuador, Chile, Colombia and Bolivia, some are beginning to wonder what will happen next.

Each country will respond to the turmoil in different ways, but they all have one thing in common: They need to maintain or restore the legitimacy of the government and build public confidence in whatever solution the government comes up with to meet the demands of protesters.

Without this, the unrest is likely to continue and will fade out only as protesters grow fatigued or through a crackdown by security forces.

But the legitimacy of the government is a larger problem for some countries than others.

Bolivia will face the biggest challenge because the power vacuum created by the unrest there has undermined the legitimacy of the current and future governments, leaving the population divided.

Establishing Legitimacy

The question of a government’s legitimacy is a particularly sensitive topic for young democracies in South America.

In the not-too-distant past, several countries in the region were ruled by dictatorships, authoritarian leaders and military regimes.

People in these countries over the age of 50 – some of whom hold positions of power in the government and military – can still recall what life was like under these repressive regimes.

Democracy is a relatively new phenomenon in South America, especially when compared to places like the United States or Western Europe.

And while government legitimacy is important in all countries, South American nations are more mindful than most that a government’s claim to authority can’t be taken for granted.      

Elected officials are constantly aware that a social movement can thwart their ability to pass laws or stay in power.

Legitimacy becomes a critical question particularly during transitions of power, especially when the transition does not occur through a scheduled, democratic election.      
Political parties and civil society organizations see transparency and free and fair elections as necessary before elected leaders can be given the mandate to govern.

Therefore, many struggle to see as legitimate any government or official who rose to power without going through the electoral process.

Such value is placed in the democratic process that any government or leader who does not win the approval of the people through an election is seen as a threat to democracy itself.

Take Paraguay and Brazil as examples.

In both countries, recent presidents were removed from office through impeachment: Fernando Lugo in Paraguay and Dilma Rousseff in Brazil.

Both Lugo and Rousseff, along with their supporters, referred to their impeachments as coups and criticized the congressional proceedings under which their removal from office was executed.

By questioning the legitimacy of the impeachment proceedings themselves, they were also questioning the legitimacy of the next leaders who would take over as president.

As these cases show, it’s incredibly difficult to justify the removal of an elected government and to build support for a government that takes over from an ousted leader.

Legitimacy is clearly a necessary component for the success of any government, but it’s also critical to the success of any strategy to deal with social unrest.

Trying to bring order by using excessive force or by introducing reforms that offer no real change and don’t have broad support among the public often don’t work in the long run; these strategies resemble the behavior of dictatorial governments. But doing nothing is not an option.

Ecuador, Chile and Colombia have already started to build support for their strategies.

The governments have called on an array of political players, thought leaders and social groups to participate in a national dialogue geared toward finding solutions.

In Ecuador, President Lenin Moreno has met with indigenous leaders to discuss economic reforms.

Chile has started making arrangements for a referendum on constitutional changes (one of the key demands of the protesters) in the first half of next year.

The government also recently proposed a law that would allow the military to be deployed to protect critical infrastructure without declaring a state of emergency.

In Colombia, the government launched a “national dialogue” over critical social and economic issues and introduced economic reforms to decrease living costs.

In all these cases, getting buy-in from civil society has been critical to establishing the legitimacy of the government approach and avoiding backlash and further disarray.

Bolivia’s Power Vacuum

Bolivia, however, faces a bigger challenge than these other examples when it comes to legitimacy.

The protests in Bolivia resulted in the resignation of President Evo Morales, who held office for 13 years, longer than any other post-independence Bolivian leader.

Bolivia’s history is riddled with political and military strongmen, and Morales’ long tenure in office resembled the hold on power of other “caudillos” in Bolivia’s past.

It enabled him to exert undue influence over certain institutions.

In a decision that was widely criticized, the Supreme Court, for example, ruled that Morales could run for another term in 2019 despite a 2016 referendum in which a majority of Bolivians voted against extending term limits.

In Bolivia’s case, restoring the legitimacy of the government goes beyond finding a new president or passing legislation to meet protesters’ demands; it requires the reconstruction and legitimization of all major government institutions.

That’s because Morales’ ouster has left a power vacuum in Bolivia.

Normally, when a leader is removed from office, the post gets filled by the next in line to the presidency.

But in Bolivia, Morales stepped down from office (at the request of the military) rather than being removed by force.

After his departure, many other high-ranking government officials also resigned, including the vice president, the parliamentary leader and the president of the Senate, gutting the government of all the senior officials who would have been next in line for the presidency according to the country’s constitution.

Senate Vice President Jeanine Anez ultimately took over, even though this post is not included in the line of succession stipulated in the constitution, because the remaining lawmakers (most of whom were members of the opposition party to which Anez belongs) agreed that this was the most logical solution.

Morales’ supporters, however, have attacked Anez’s presidency as illegitimate, though their activities have been limited thanks to the strong police and military presence on the streets.

The power vacuum will make it extremely difficult to legitimize whoever comes to power next in Bolivia.

Anez’s caretaker government has tried to impose a smooth transition.

She has cleared the military of leaders who pushed for Morales’ resignation and worked with other members of the government to arrange elections for early 2020.

Efforts are also underway to sign unity pacts with protesters in the hopes of reducing street violence and the number of security forces needed to keep the peace.

At the same time, however, she has already taken measures to realign Bolivia’s foreign policy toward the U.S. and its regional allies.

Moreover, there are several key questions about the upcoming election that remain unanswered. First, who will be eligible to run for president?

Some Morales supporters still want to see him or his close allies like Vice President Garcia Linera run for office.

Some have also questioned the electoral court authorities who were removed when Anez took power and were replaced with people who were more in line with the opposition.

Voter turnout and public safety will also be a concern given the continued clashes between Morales’ supporters and opponents and the heavy presence of police and military forces.

Elections are necessary to establish the legitimacy of the next Bolivian leader, but whoever comes out on top will still need to work hard to maintain the legitimacy of their administration throughout their tenure.

Legitimacy is a critical question for all South American governments, particularly during times of major unrest.

It is built largely by getting civil society groups on board with government policies and reforms.

But the power vacuum left by Morales’ resignation poses a particularly difficult challenge for Bolivia’s next government.

Lessons learned from Bolivia’s experience may serve as a blueprint for other countries such as Venezuela, Cuba and Nicaragua that could face a similar fate in the future.

Mating strategies

A new theory argues same-sex sexual behaviour is an evolutionary norm

Unless it is essential to know a partner’s sex, why bother?

WHEN IT COMES to sexual behaviour, the animal kingdom is a broad church. Its members indulge in a wide variety of activities, including with creatures of the same sex. Flying foxes gather in all-male clusters to lick each other’s erect penises. Male Humboldt squid have been found with sperm-containing sacs implanted in and around their sexual organs in similar quantities to female squid.

Female snow macaques often pair off to form temporary sexual relationships that includes mounting and pelvic thrusting. Same-sex sexual behaviour has been recorded in some 1,500 animal species.

The mainstream explanations in evolutionary biology for these behaviours are many and varied. Yet they all contain a common assumption: that sexual behaviours involving members of the same sex are a paradox that does indeed need explaining. Reproduction requires mating with a creature of the opposite sex, so why does same-sex mating happen at all?

A paper just published in Nature Ecology and Evolution offers a different approach. Instead of regarding same-sex behaviour as an evolutionary oddity emerging from a normal baseline of different-sex behaviour, the authors suggest that it has been a norm since the first animals came into being.

The common ancestor of all animals alive today, humans included, did not, they posit, have the biological equipment needed to discern the sex of others of its species. Rather, it would have exhibited indiscriminate sexual behaviour—and this would have been good enough to transmit its genes to the next generation.

The group of young researchers from institutions across America who wrote the paper, led by Julia Monk, a graduate student at Yale, argue that conventional models of sexual behaviour’s evolution take two things for granted that they should not. The first is that the cost of same-sex behaviour is high because energy and time spent engaged in it do not contribute to reproductive success.

If that were true it would indeed mean that maintenance of same-sex behaviour over the generations requires some exotic explanation whereby such activity confers benefits that outweigh the disadvantage.

The second assumption is that same-sex activity evolved separately in every species that exhibits it, from an ancestral population that engaged exclusively in different-sex behaviour.

Do you come here often?

Ms Monk and her co-authors question the first assumption by pointing out that many animals seem to mate at a frequency far higher than looks necessary merely to reproduce—meaning that the proportional costs of any instance of sexual activity which does not produce offspring must be low. If this is true, it reverses the burden of proof.

The cost of the sensory and neurological mechanisms needed to identify another’s sex, and thus permit sex-discriminating mating behaviour, is high. Sometimes, that will be a price worth paying, especially if a long-term relationship is involved in reproduction, as it is in most birds and some mammals. But it is the evolution of sex-discrimination for which special-case exemptions must be sought, not the evolution of same-sex behaviour.

The second assumption is even easier to challenge. Typically, evolutionary biologists assume that traits shared widely across a related group are likely to have evolved in an ancestral population, not repeatedly and separately in each lineage.

Ms Monk and her colleagues argue that cognitive biases in the subject’s practitioners have pushed them to look for fantastic explanations for the evolution of same-sex behaviours in a range of animals, rather than considering the perhaps more reasonable explanation for its persistence, that it is a low-cost ancestral trait that has little evolutionary reason to disappear.

Although the idea that same-sex behaviour has always been a norm is scientifically intriguing, the paper’s authors are also making a broader point about human beings’ pursuit of knowledge. Ms Monk says that the paper’s authors met through a Twitter account which promotes the work of LGBT scientists.

This was a serendipitous encounter which gave them space to explore an idea that might have been dismissed at first sight in a more conventional setting. The group includes people with a range of sexual orientations, so naturally they had an incentive to ask whether mainstream evolutionary biology’s view of sexual orientation is correct.

Their hypothesis still needs testing. That will mean zoologists gathering more observational data on sexual behaviour of animals in the wild—and doing so with an open mind. The authors themselves are also mulling approaches involving computer modelling, which might show that a group of organisms behaving according to their theory is capable of reaching the distribution of sexual behaviours seen in the wild today.

If their hypothesis is confirmed, it raises the question of which other facets of scientific knowledge might be being obscured because the backgrounds of practitioners in those fields do not lead them to ask unconventional questions.

Ms Monk’s and her colleagues’ theory may yet turn notions of the evolution of animal sexual behaviour on their head. With a broader array of minds focused on other problems, other fields might follow, too.

Doug Casey on the Destruction of the Dollar

by Doug Casey

"Inflation" occurs when the creation of currency outruns the creation of real wealth it can bid for… It isn’t caused by price increases; rather, it causes price increases.

Inflation is not caused by the butcher, the baker, or the auto maker, although they usually get blamed.

On the contrary, by producing real wealth, they fight the effects of inflation.

Inflation is the work of government alone, since government alone controls the creation of currency.

In a true free-market society, the only way a person or organization can legitimately obtain wealth is through production.

"Making money" is no different from "creating wealth," and money is nothing but a certificate of production.

In our world, however, the government can create currency at trivial cost, and spend it at full value in the marketplace.

If taxation is the expropriation of wealth by force, then inflation is its expropriation by fraud.

To inflate, a government needs complete control of a country’s legal money.

This has the widest possible implications, since money is much more than just a medium of exchange. Money is the means by which all other material goods are valued.

It represents, in an objective way, the hours of one’s life spent in acquiring it.

And if enough money allows one to live life as one wishes, it represents freedom as well.

It represents all the good things one hopes to have, do, and provide for others.

Money is life concentrated.

As the state becomes more powerful and is expected to provide more resources to selected groups, its demand for funds escalates.

Government naturally prefers to avoid imposing more taxes as people become less able (or willing) to pay them.

It runs greater budget deficits, choosing to borrow what it needs.

As the market becomes less able (or willing) to lend it money, it turns to inflation, selling ever greater amounts of its debt to its central bank, which pays for the debt by printing more money.

As the supply of currency rises, it loses value relative to other things, and prices rise.

The process is vastly more destructive than taxation, which merely dissipates wealth.

Inflation undermines and destroys the basis for valuing all goods relative to others and the basis for allocating resources intelligently.

It creates the business cycle and causes the resulting misallocations and distortions in the economy.

We know the old saw "The rich get richer, and the poor get poorer."

No one ever said life had to be fair, but usually there is no a priori reason why the rich must get richer.

In a free-market society the sayings "Shirtsleeves to shirtsleeves in three generations" and "A fool and his money are soon parted" might be better descriptions of reality.

We do not live in a free-market society, however.

The rich and the poor do have a tendency to draw apart as a society becomes more bureaucratic, but not because of any cosmic law.

It’s a consequence of any highly politicized system.

Government, to paraphrase Willie Sutton, is where the money is.

The bigger government becomes, the more effort the rich, and those who want to get that way, will put into making the government do things their way.

Only the rich can afford the legal counsel it takes to weave and dodge through the laws that restrict the masses.

The rich can afford the accountants to chart a path through loopholes in the tax laws.

The rich have the credit to borrow and thereby profit from inflation.

The rich can pay to influence how the government distorts the economy, so that the distortions are profitable to them.

The point is not that rich people are bad guys (the political hacks who cater to them are a different question). It is just that in a heavily regulated, highly taxed, and inflationary society, there’s a strong tendency for the rich to get richer at the expense of the poor, who are hurt by the same actions of the government.

Always, and without exception, the most socialistic, or centrally planned, economies have the most unequal distribution of wealth. In those societies the unprincipled become rich, and the rich stay that way, through political power.

In free societies, the rich can get richer only by providing goods and services others want at a price they can afford.

As inflation gets worse, there will be a growing public outcry for government to do something, anything, about it.

People will join political action committees, lobbying groups, and political parties in hopes of gaining leverage to impose their will on the country at large, ostensibly for its own good.

Possible government "solutions" will include wage and price controls, credit controls, restrictions on changing jobs, controls on withdrawing money from bank accounts, import and export restrictions, restrictions on the use of cash to prevent tax evasion, nationalization, even martial law—almost anything is possible.

None of these "solutions" addresses the root cause—state intervention in the economy. Each will just make things worse rather than better.

What these solutions all share is their political nature; in order to work they require that some people be forced to obey the orders of others.

Whether you or I or a taxi driver on the street thinks a particular solution is good or not is irrelevant.

All of the problems that are just beginning to crash down around society’s head (e.g., a bankrupt Social Security system, federally protected banks that are bankrupt, a monetary system gone haywire) used to be solutions, and they must have seemed "good" at the time, otherwise they’d never have been adopted.

The real problem is not what is done but rather how it is done: that is, through the political process or through the free market. The difference is that between coercion and voluntarism.

It’s also the difference between getting excited, frustrated, and beating your head against a wall and taking positive action to improve your own standard of living, to live life the way you like it, and, by your own example, to influence society in the direction that you’d like to see it take—but without asking the government to hold a gun to anyone’s head.

Political action can change things.

Russians in the ’20s, Germans in the ’30s, Chinese in the ’40s, Cubans in the ’50s, Congolese in the ’60s, South Vietnamese and Cambodians in the ’70s, then Rhodesians, Bosnians, Rwandans, and Venezuelans today are among those who certainly discovered it can. It’s just that the changes usually aren’t very constructive.

That’s the nature of government; it doesn’t create wealth, it only allocates what others have created.

More typically, it either dissipates wealth or misallocates it, because it acts in ways that are politically productive (i.e., that gratify and enhance the power of politicians) rather than economically productive (i.e., that allow individuals to satisfy their desires in the ways they prefer).

It’s irresponsible to base your own life on what hundreds of millions of other people and their rulers may or may not do.

The essence of being a free person is to be causative over your own actions and destiny, not to be the effect of others.

You can’t control what others will do, but you can control yourself.

If you’re counting on other people, or political solutions of some type, most likely it will make you unwary and complacent, secure in the hope that "they" know what they’re doing and you needn’t get yourself all flustered with worries about the collapse of the economy.

Editor’s Note: Whether it’s groceries, medical care, tuition, or rent, it seems the cost of everything is rising.

It’s an established trend in motion that is accelerating, and now approaching a breaking point.

At the same time, the world is facing a severe crisis on multiple fronts.

Gold is just about the only place to be. Gold tends to do well during periods of turmoil—for both wealth preservation and speculative gains.

Inflationary Angst

By John Mauldin 

According to the dictionary, the word angst refers to “a feeling of deep anxiety or dread, typically an unfocused one about the human condition or the state of the world in general.” It comes from a German word for “fear.”

Two weeks ago I referred back to my 2017 Angst in America series. “Deep anxiety or dread” is exactly what I described then, and it hasn’t improved for most people. For some, yes, life is good and getting better, at least financially. Not so for every American… or even most of us.

Yes, life could be even harder. “Poverty” living standards in the US are better than much of the world knows. But that doesn’t reduce the angst because we compare our conditions to what we see around us, or in the media we consume.

Today I want to bring some focus to this unfocused anxiety. We will see that much of it (though certainly not all) traces back to specific policies of a specific institution that has a specific mission it is failing to achieve.

Furthermore, that angst is going to rise up and bite us in our political derrière at some point in the future. And that gives me a great deal of personal angst, because I don’t think the results will be pleasant for anyone.

Before we begin, I want to call your attention to an opportunity to get six free months of a newsletter I read every day: Jared Dillian’s The Daily Dirtnap. Jared’s market analysis is almost supernaturally sharp. I’m genuinely not sure how he manages to keep it consistently top quality every single day he publishes, but he does.

And right now, he’ll give you six free months of The Daily Dirtnap if you sign up before December 9 – 18 months for the price of 12. It’s a truly wonderful offer. 

Stable Prices, Sometimes

Contrary to popular opinion, the Federal Reserve System is not independent. Nor does it have to follow the president’s orders, as much as Donald Trump wishes it would. The Fed operates under a legal mandate from Congress. Its monetary policy role is “to promote maximum employment, stable prices and moderate long-term interest rates.”

So how is it doing?

Long-term rates are certainly moderate. Employment is historically high, though wages and job quality aren’t always great.

As for that “stable prices” part… it depends on what you are buying. As you see below, for many goods the price is nowhere near “stable.”

Unfortunately, if you are in the bottom 60–70% of the income brackets, these are some of the things you buy the most.

The Fed believes that 2% annual inflation equals “stable prices.” Yet that small amount adds up over time—to almost 50% in 20 years. Which is about where CPI lands in this 20-year chart, so the Fed is succeeding by that yardstick.

Think about that for a second. The Fed defines “stable prices” as a 2% average. And then another government agency tries to measure those prices, often using “Hedonic Quality Adjustment” to account for changes due to innovation or completely new products. So because the car you are buying has new features, they conclude it’s not more expensive. Does that match your experience? Thought so…

CPI doesn’t reflect real-life spending for most people. Prices have risen dramatically more than average for some of life’s basic necessities. So if you wonder why people are anxious, this might be a clue.

The Fed either doesn’t see this, or doesn’t think it is a problem. Officials have been wringing their hands for years at their inability to make inflation reach that 2% level. The Financial Times reported last week that they may soon change their rules.

The Federal Reserve is considering introducing a rule that would let inflation run above its 2 percent target, a potentially significant shift in its interest rate policy.

The Fed’s year-long review of its monetary policy tools is due to conclude next year and, according to interviews with current and former policymakers, the central bank is considering a promise that when it misses its inflation target, it will then temporarily raise that target, to make up for lost inflation.

The idea would be to avoid entrenching low US price growth which has consistently undershot its goal.

The key here is that 2% average inflation isn’t the same as 2% all the time

Having run below 2% for years, Fed leaders now want to go above it, potentially far above it and for long periods. In other words, give themselves permission not to worry about the inflation a low-rate policy might otherwise cause.

As my friend Samuel Rines noted yesterday:

Bottom Line: Inflation is not going to be an issue for the Fed—too high or too low—for a while. Whether looking at CPI or the Fed favorite PCE, it is difficult to see an impending surge in underlying inflation. This should help keep longer-term yields in check with a pick-up in activity in 2020. Tariffs are already showing up in the data, but do not matter (much) for the indexes.

While Fed officials may think they have tamed inflation, their ZIRP and QE actually drove real-world prices considerably higher than CPI or PCE show. 

It showed up mainly in asset valuations, like stocks and real estate. These, in turn, drove up other prices like housing. Aggregate inflation isn’t higher because technology and globalization reduced manufactured goods costs and the shale revolution kept energy costs low.

Try to look at this like an average worker. Your rent keeps rising, your kids can’t go to college without racking up debt, your health insurance is astronomical, and your wages, while up a bit, aren’t keeping up with your living costs.

Meanwhile, the people who are supposed to be looking out for you keep talking about how the economy is improving thanks to their brilliant policies. Of course you’re angst-ridden. How could you not be?

Deaths of Despair

In Part 2 of Angst in America, I talked about the “deaths of despair” among middle-aged white men. This alarming and uniquely American trend is getting worse.

Last month an American Medical Association study found US average life expectancy, which had been steadily increasing for decades, has now dropped for three consecutive years. It actually goes back a little further; all-cause mortality rates began rising in 2010. For some groups it went back to the 1990s.

AMA zeroes in on the driver:

A major contributor has been an increase in mortality from specific causes (e.g., drug overdoses, suicides, organ system diseases) among young and middle-aged adults of all racial groups, with an onset as early as the 1990s and with the largest relative increases occurring in the Ohio Valley and New England.

The opioid crisis apparently has a lot to do with this, as do the globalization-driven factory closures in the Midwest and New England. Economic changes are literally killing us.

But again, think about this from ground level. Under-employed factory workers don’t read a lot of economic analysis. They just know they can’t pay the bills, they’re in physical pain from a life of hard labor, and no one in power seems to care. 

Many go on disability, which is not even close to minimum wage, and massively discouraging for somebody who wants to work. For some it leads to depression and, tragically, overdoses or suicide. And it’s common enough to bend the curve in national life expectancy stats that had been rising for decades.

Worse, it’s not like we are powerless to treat these conditions. Medical science knows what to do, and does it pretty well for those with the means to pay. For Americans, that means people who (a) are over 65 and on Medicare, or (b) are poor enough to get Medicaid, or (c) get health insurance through their employers.

Everyone else, like self-employed people or “gig” workers? Not so much. 

Here’s a tweet from my friend Luke Gromen.

Source: Luke Gromen

Those prices are pretty typical if you’re trying to buy insurance on the Obamacare exchanges and you’re middle-aged and not subsidy-eligible.

For illustration, let’s apply Luke’s prices to a hypothetical self-employed person making $100,000 a year. The $1,286/month premiums add up to $15,432 annually. But you get no benefits (except a basic wellness exam) until you’ve spent another $12,500. That totals $27,932, or 27.9% of your gross income that will go to healthcare if anyone in your family gets even a minor illness. A lot of angst.

Let’s take that a little further. This self-employed person is paying $12,000+ in Social Security plus another $3,000 in Medicare, plus federal income tax, in addition to state and local taxes. Which means that if someone in that hypothetical family gets sick, the family has to figure out how to make all of their payments on maybe as little as $45,000 net, after taxes and healthcare.

And in that scenario, then what? Spending that much of your income on healthcare means something else must go. Or, it will turn into medical debt and possible bankruptcy, even if you have insurance.

The irony is that much of the country thinks you are rolling in cash, and might be inclined to vote for someone who would raise your taxes.

Source: DQYDJ

The angst isn’t just severe, it is creeping up the income ladder. Double that example worker’s income to $200,000 and they’re still spending 7.7% of it on insurance premiums and potentially another 6.3% to meet the deductible.

Imagine the outcry if we imposed extra income taxes at those rates. That’s effectively what is happening. Remember the “yellow vest” protests in France? They were about a new gasoline tax. Small potatoes really. But at the risk of a really bad pun, it just threw gasoline onto a stretched- too-thin public fire. At some point we may see the same kind of unrest here, and healthcare costs could easily trigger it.

Yes, yes, I know, the US has the best healthcare in the world. That’s debatable, given these latest mortality numbers, but we certainly have the most expensive healthcare.

Source: Forbes

(By the way, this cost difference is roughly the same if you look at it in percent-of-GDP terms. OECD has the data here.)

How do we spend so much and still have people dying from despair? That’s another topic. My point today is that the way we distribute that spending is having seriously negative economic effects. We can and should debate reform ideas, but this can’t go on indefinitely.

Radical Solutions

Healthcare is just one source of angst. 

Here’s another look at inflation which, according to the Fed, is not high enough.

The education part deserves some comment. The narrative goes that today’s young people need more education because work is so much more complicated now. So, we push them to attend college. Higher demand and slow-growing supply raise the cost of college, so they (and/or their families) go into debt to pay for it.

Does it pay off? Sometimes, but far from always. The chart below breaks down the change in college graduate wages since 2000 by percentile. In most cases, after that 2% average inflation the Fed thinks is too low, real wages actually dropped over this period. And note this only looks at those who actually earn degrees. Millions drop out before getting that far (but not before racking up debt).

So not only is college more expensive, the economic benefit you get from it may well be negative. This is inflation on steroids.

Let’s think about that for a moment. You graduated in 2000 at age 22, got married, had kids, and right about now you’re facing college costs. What’s happened to the price of college? Up over 130% in 20 years. A tad more than 2% inflation.

Look, this isn’t complicated for most people. They need housing somewhere in proximity to their jobs. They want their kids to be safe and have opportunities. And they need to take care of their health. None of those are optional and their costs have risen far more than overall inflation.

To be clear, I’m not predicting higher CPI/PCE inflation, even if the Fed gets more dovish. Its present course will more likely produce more of the same: an asset bubble, lower prices for certain goods, and stable/rising prices for others. It won’t solve the problems regular people face.

And in fairness, the Fed is not alone in thinking inflation is no problem.

Trump is correct if he means the broad inflation measures like CPI though, as we have seen, even 2% is not “almost no inflation” over long periods. He’s seriously wrong about the things middle-class Americans—including the millions who voted for him—must buy just to keep their heads above water. Those goods are expensive and getting more so.

What we really need are policies that make middle class life affordable again. Lower interest rates won’t likely do that. Not when, as my friend Peter Boockvar reported last week, the average price of a new car is $34,000 and median household income is $64,000, and it’s that high only because millions need those cars to commute to underpaid jobs far, far away from the distant suburbs where they can afford to live.

In my normal peripatetic research mode, I found a fascinating Time article by Emily Guendelsberger, who wrote a book called On the Clock: What Low-Wage Work Did to Me and How It Drives America Insane. She describes her experiences working in warehouses, call centers, and fast food. I have family members who have worked at the places she names and their stories match. Conditions are more than a little stressful.  

I wasn’t prepared for how exhausting working at Amazon would be. It took my body two weeks to adjust to the agony of walking 15 miles a day and doing hundreds of squats. But as the physical stress got more manageable, the mental stress of being held to the productivity standards of a robot became an even bigger problem.

Technology has enabled employers to enforce a work pace with no room for inefficiency, squeezing every ounce of downtime out of workers’ days. The scan gun I used to do my job was also my own personal digital manager. Every single thing I did was monitored and timed. After I completed a task, the scan gun not only immediately gave me a new one but also started counting down the seconds I had left to do it.

It also alerted a manager if I had too many minutes of “Time Off Task.” At my warehouse, you were expected to be off task for only 18 minutes per shift—mine was 6:30 a.m. to 6 p.m.—which included using the bathroom, getting a drink of water or just walking slower than the algorithm dictated, though we did have a 30-minute unpaid lunch. It created a constant buzz of low-grade panic, and the isolation and monotony of the work left me feeling as if I were losing my mind. Imagine experiencing that month after month.

Vice is starting a series on what it’s like to work at low-paying jobs. The first installment from a young lady describing her experience working at McDonald’s for $9.30 an hour is deeply troubling. You can’t read it and not be emotionally moved.

It’s All Relative…

I mentioned above that even though the poverty level in the US is well above international average incomes, people compare their situation to what they see. 

My friend Philippa Dunne at The Liscio Report showed two charts demonstrating older generations (read Boomers) are doing much better than Gen-Xers and especially Millennials.

I understand the economic theories that GDP growth will eventually spread widely enough to ease the angst. But I am not sure we can wait that long. 

People are hurting now and they are increasingly willing to embrace radical solutions. “Just wait for better times” is not cutting it as technology eats into higher-paying jobs and aggravates the stress of lower-income jobs.

That’s doubly true if the economy weakens. Some of the data improved a bit in recent weeks. The November jobs report showed much stronger growth than we’ve seen in a while. That’s good to see and suggests we might postpone recession past 2020. But merely avoiding recession isn’t enough. 

Another year of sub-2% growth (which is my base case) will be another year of suffering for the millions whom this weak recovery hasn’t helped.

And it’s not clear that we can avoid a recession. One-third of economists surveyed by The Wall Street Journal think we will see a recession next year and almost 2/3s see a recession by 2021.

Source: John Mauldin

Danielle DiMartino Booth, whose Daily Feather is a must-read for me, showed this yesterday:

Source: Quill Intelligence

Danielle explains the above chart:

Non-manufacturing hours worked have slowed appreciably with growth falling below 2% in the seven months ended October; the ADP report confirmed the weakness in hours worked and exhibited broad-based job declines and slowing across the full spectrum of sectors.

Trade deal headlines and Fed liquidity continue to dictate market trading; the widening breadth of economic weakness suggests fundamentals will eventually prevail though it will take a weak nonfarm payrolls print to truly get the market’s attention.

No one should be surprised the lower 80% of the income pyramid is anxious and depressed. You would be, too, in their situation. And there’s a good chance you will be in their situation in a few years, because angst-ridden people can still vote. 

Economic theories aren’t relevant to them. They look at their own situations and want change.

History suggests that President Trump should win reelection unless recession strikes by next November. But even if we avoid a recession in 2020, what happens if there is one in 2021 or 2022? Democrats could gain power by 2024, if not sooner.

The already-growing annual budget deficit will soar to over $2 trillion. How do we finance that without creating more angst? I can easily imagine a populist Democrat winning the White House, followed by higher taxes and an echo recession. Then even higher deficits and the national debt spinning out of control. 

The Fed will give us massive quantitative easing and zero rates, but they may be in fact pushing on a string…

We don’t have much time to get our house in order, either in the US or globally. Everything I’ve said today applies, to various degrees, throughout the developed world. Thinking that 2% inflation or zero interest rates coupled with massive deficits will somehow help is beyond wishful thinking.

We can and should take steps to protect our individual families and lives, but that’s not enough. At the national level,  I’m beginning to fear only an enormously stressful Great Reset will deliver the deep but necessary sacrifices. The partisan divide inhibits compromise, so nothing happens and the problems grow.

Think about the late 1930s… Hopefully with just economic turmoil, not kinetic war. It will be hard but without the kind of motivation, I really question whether we will do what it takes.


Normally I end these letters talking about my travels and some personal story, but this one has me in a far too reflective mood. So I will just hit the send button and wish you a good week.

Your personally angst-ridden analyst,

John Mauldin
Co-Founder, Mauldin Economics