Central Banks Are the Fall Guys

For decades, the freedom of monetary policymakers to make difficult decisions without having to worry about political blowback has proven indispensable to macroeconomic stability. But now, central bankers must ease monetary policies in response to populist mistakes for which they themselves will be blamed.

Raghuram G. Rajan


CHICAGO – Central-bank independence is back in the news. In the United States, President Donald Trump has been berating the Federal Reserve for keeping interest rates too high, and has reportedly explored the possibility of forcing out Fed Chair Jerome Powell. In Turkey, President Recep Tayyip Erdoğan has fired the central-bank governor. The new governor is now pursuing sharp rate cuts. And these are hardly the only examples of populist governments setting their sights on central banks in recent months.

In theory, central-bank independence means that monetary policymakers have the freedom to make unpopular but necessary decisions, particularly when it comes to combating inflation and financial excesses, because they do not have to stand for election.

When faced with such decisions, elected officials will always be tempted to adopt a softer response, regardless of the longer-term costs. To avoid this, they have handed over the task of intervening directly in monetary and financial matters to central bankers, who have the discretion to meet goals set by the political establishment however they choose.

This arrangement gives investors more confidence in a country’s monetary and financial stability, and they will reward it (and its political establishment) by accepting lower interest rates for its debt. In theory, the country thus will live happily ever after, with low inflation and financial-sector stability.

Having proved effective in many countries starting in the 1980s, central-bank independence became a mantra for policymakers in the 1990s. Central bankers were held in high esteem, and their utterances, though often elliptical or even incomprehensible, were treated with deep reverence. Fearing a recurrence of the high inflation of the early 1980s, politicians gave monetary policymakers wide leeway, and scarcely ever talked about their actions publicly.

But now, three developments seem to have shattered this entente in developed countries. The first development was the 2008 global financial crisis, which suggested that central banks had been asleep at the wheel. Although central bankers managed to create an even more powerful aura around themselves by marshaling a forceful response to the crisis, politicians have since come to resent sharing the stage with these unelected saviors.

Second, since the crisis, central banks have repeatedly fallen short of their inflation targets.

While this may suggest that they could have done more to boost growth, in reality they don’t have the means to pursue much additional monetary easing, even using unconventional tools.

Any hint of further easing seems to encourage financial risk-taking more than real investment.

Central bankers have thus become hostages of the aura they helped to conjure. When the public believes that monetary policymakers have superpowers, politicians will ask why those powers aren’t being used to fulfill their mandates.

Third, in recent years many central banks changed their communication approach, shifting from Delphic utterances to a policy of full transparency. But since the crisis, many of their public forecasts of growth and inflation have missed the mark.

That these might have been the best estimates at the time convinces no one. That they were wrong is all that matters. This has left them triply damned in the eyes of politicians: they failed to prevent the financial crisis and paid no price; they are failing now to meet their mandate; and they seem to know no more than the rest of us about the economy.

It is no surprise that populist leaders would be among the most incensed at central banks.

Populists believe they have a mandate from “the people” to wrest control of institutions from the “elites,” and there is nothing more elite than pointy-headed PhD economists speaking in jargon and meeting periodically behind closed doors in places like Basel, Switzerland. For a populist leader who fears that a recession might derail his agenda and tarnish his own image of infallibility, the central bank is the perfect scapegoat.

Markets seem curiously benign in the face of these attacks. In the past, they would have reacted by pushing up interest rates. But investors seem to have concluded that the deflationary consequences of the policy uncertainty created by the unorthodox and unpredictable actions of populist administrations far outweigh any damage done to central bank independence. So they want central banks to respond as the populist leader desires, not to support their “awesome” policies, but to offset their adverse consequences.

A central bank’s mandate requires it to ease monetary policy when growth is flagging, even when the government’s own policies are the problem. Though the central bank is still autonomous, it effectively becomes a dependent follower.

In such cases, it may even encourage the government to undertake riskier policies on the assumption that the central bank will bail out the economy as needed. Worse, populist leaders may mistakenly believe the central bank can do more to rescue the economy from their policy mistakes than it actually can deliver. Such misunderstandings could be deeply problematic for the economy.

Furthermore, central bankers are not immune to public attack. They know that an adverse image hurts central bank credibility as well as its ability to recruit and act in the future.

Knowing that they are being set up to take the fall in case the economy falters, it would be only human for central bankers to buy extra insurance against that eventuality. In the past, the cost would have been higher inflation over the medium term; today, it is more likely that the cost will be more future financial instability. This possibility, of course, will tend to depress market interest rates further rather than elevating them.

What can central bankers do? Above all, they need to explain their role to the public and why it is about more than simply moving interest rates up or down on a whim. Powell has been transparent in his press conferences and speeches, as well as honest about central bankers’ own uncertainties regarding the economy.

Shattering the mystique surrounding central banking could open it to attack in the short run, but will pay off in the long run. The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy magically to correct elected politicians’ errors. Under current conditions, that may be the best form of independence central bankers can hope for.

Raghuram G. Rajan, Governor of the Reserve Bank of India from 2013 to 2016, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind.

Profoundly low interest rates are here to stay

Investors and policymakers must recalibrate their assumptions on capital and investment

Robin Harding

This will be a discomforting, defining week for the global economy. That is not because the US Federal Reserve is set to cut interest rates. Rather it is because of the strikingly low level of rates from which the Fed will start: a range of just 2.25 to 2.5 per cent.

After more than a decade of economic expansion, and despite everything from tariffs to tax cuts, it seems this is as high as US interest rates go. Meanwhile, the European Central Bank is debating whether to reduce its negative rate still further. Until this month, it was possible to imagine that pre-financial crisis levels of 4 to 5 per cent might eventually return. No longer.

According to their own projections, Fed officials believe rates will settle at 2.5 per cent in the long run. Subtract their 2 per cent inflation target and the real reward for capital is going to be a miserable 0.5 per cent. The equivalent rate in Europe and Japan will almost certainly be much lower. Such low levels of interest rates are a profound change from the past. (The federal funds rate was 6.5 per cent, and the real rate was about 4 per cent as recently as 2000.)

Although interest rates touch almost every aspect of economic life, the developed world remains deep in denial about the consequences. Here are eight themes for investors and policymakers to ponder.

First, there is an intimate link between long-run interest rates and long-run economic growth. Perhaps capital is less relevant to the digital economy, but for interest rates to max out at such low levels sends an alarming signal about the prospects for future expansion.

Second, monetary policy is broken. In 2008-09, the Fed cut rates by 5 percentage points and it was not enough. Today it has far less room to respond to a recession. The Bank of Japan, which made no move on Tuesday, has all but given up trying to hit its 2 per cent inflation target. The ECB is in danger of going the same way. The world is dismally unprepared for a downturn: two of the world’s most influential central banks may start the next recession with their policy rate already below zero.

Third, if monetary policy is broken, fiscal policy must step in. That means either governments must approve higher spending and tax cuts in response to a recession or else give the central bank a fiscal tool in the form of “helicopter money”, essentially printing money to spend or distribute to the public. Alternatively, governments could set higher inflation targets and use fiscal policy to reach them now. That would give their central banks more room to cut when they need it.

Fourth, lower interest rates make debt more sustainable. This is particularly true for public debt, because countries actually borrow at these low risk-free rates, and somewhat true for private debt. For many countries, it makes sense to borrow more in order to invest. Predictions of financial crisis based on past levels of debt-to-gross domestic product are likely to be misleading.

Fifth, capital stock should rise relative to output. Investments that were once unprofitable now make sense: road upgrades to save a few minutes of time; expensive, niche drugs to help a few hundred people; or extra years of study to earn a graduate degree. Such projects may feel irrational. They are not.

Sixth, any asset in fixed supply is now more valuable, because its future cash flows can be discounted at a lower rate. A monopoly supplier of water or electricity, land in a city centre or the back catalogue of Disney: the capital value of these assets must rise, so their yield matches the lower interest rates. This trend is related to recent movements in wealth inequality. It also puts investors at risk of identifying financial bubbles that do not actually exist. One vital policy response would be to slash the return on capital allowed to utilities.

Seventh, demand for housing will rise. It is, after all, the main capital asset that most people use. There are two potential outcomes. Where it is possible to build, permanently lower interest rates will trigger an increase in the housing stock. If it is not possible to build, then houses will behave like assets in fixed supply, and soar in price. Thus falling interest rates make planning and zoning rules a crucial economic issue.

Eighth, low interest rates make it harder to save. In particular, they make it harder to save for a pension, and harder to live off whatever capital accumulates. This fact has been obscured by the one-off rise in price for scarce assets, many of which are owned by pension funds. But future returns are likely to fall. The result will force workers to accept some combination of later retirement, higher taxes, bigger pension contributions or lower incomes in old age.

It is possible that this bout of low interest rates will end. Perhaps the Fed is mistaken and it will have to raise rates sharply in the future. Perhaps a burst of technological progress will raise growth and boost demand for capital.

But no one can choose to make that happen: this is not some perverse plot by Fed chair Jay Powell and ECB president Mario Draghi to make life miserable for the world’s savers. The long-run real interest rate balances the desire to save and demand to invest. Central banks are its servants not its masters.

The trend towards lower real interest rates has lasted for decades and is as likely to continue as to reverse. With central banks moving to ease, it is time to stop waiting for rates to recover and face the world as we find it.

Trump Kills the Tea Party

By: Peter Schiff

After claiming to be the greatest at just about everything, Donald Trump has finally found an area where he can stake a credible claim. By negotiating a disastrous budget deal with Democrats, the President could become the greatest creator of government debt in the history of the country. While Trump is selling the two-year deal as a major victory because it increases military spending and removes the possibility of a government shutdown for two years, in reality, the agreement to suspend the debt ceiling and push annual deficits even further above the trillion dollar mark may only succeed in destroying the Republican Party as we know it.

The Tea Party wave of 2009 and 2010, a Republican movement born in reaction to the budget blowouts of the Obama Presidency, is now officially dead. It’s ironic that as Trump hammered the final nail into the Tea Party’s coffin, no one seemed happier than the corpse itself! There was hardly a word of discomfort from all the Republican Senators and Congressmen who had so loudly railed against debt when the other party occupied the White House. There is simply no legitimate way that Republicans will ever be able to argue again that they are the party of fiscal discipline. They may try, but only the most partisan and credulous voters will buy it.

CNBC’s Rick Santelli, the unofficial godfather of the Tea Party, should at least speak a few words at its funeral, and perhaps take the opportunity to reconsider his admiration for the man who murdered it. But don’t hold your breath. Trump has accomplished something Obama never could: convincing Republicans to abandon any remaining conservative principals to support massive increases in the size of government, without any regard for how much money will have to be borrowed to make it possible!

As I laid out in a commentary I wrote just before Trump took office in January of 2017, Republican bona fides on the issue of fiscal responsibility were never that strong to begin with. In fact, deficits have tended to expand faster under Republican presidents. Given the reputation of each party this may strike some as a surprise. But it makes sense when you consider the politics.

In short, here’s how the two parties operate: Democrats promise to raise spending and raise taxes, Republicans promise to cut spending and cut taxes. But, whereas Democrats have generally succeeded in both of their aims when they have power, Republicans have just succeeded in cutting taxes BUT NOT spending. (spending cuts require politically difficult choices that are much harder to vote for than perennially popular tax cuts). This puts a giant thumb on the Republicans’ budgetary scale.

Unlike prior Republicans, Trump never so much as paid a single word of lip service to spending cuts. As the self-proclaimed “King of Debt,” in the private sector Trump never had any problems borrowing more than he could reasonably be expected to pay back, as long as there was an opportunity to renegotiate with his creditors in the long run. Individually, he has been repudiating debt (largely without consequence) for the past 40 years, so why would anyone expect him to stop now?

But deficits under Trump have expanded even faster than I had expected. The really alarming part is that this occurred with GDP growth higher than I anticipated, and without the additional red ink of a $1 trillion plus infrastructure spending plan that I had assumed would pass in the first two years of his presidency. If the economy slows significantly, as I suspect it will in the near term, we may see annual deficits in the multi-trillion dollar range almost immediately. Republicans and Democrats may be inclined to think that deficits of that size won’t matter either, but I suspect that they will.

Donald Trump won the 2016 election in part by casting doubt on the strength of the Obama economy. At the time, most in the media and on Wall Street were united in their belief that prosperity had increased impressively from the depths of the 2008-2010 Recession. They believed that the strength was particularly evident during Obama’s second term when interest rates and unemployment fell to generational lows, and the stock market soared to all-time highs. Given the media’s love affair with Obama, it’s not surprising that the narrative was not heavily scrutinized.

But Trump correctly sensed that the good times were not being felt by the vast majority of working-class Americans. He argued that Obama and the Fed conspired to create a “phony” recovery by keeping interest rates artificially low. The result was a “big, fat, ugly, bubble”, as he declared in the first presidential debate in 2016, that disproportionately benefited the wealthy, and that set the stage for a crash once the bubble burst. To fix the problems, Trump prescribed a regimen of tax cuts, regulatory relief, and tough trade policies.

As it turned out, Trump was right about the underlying economic fragility, and I praised him at the time for having the independence to go against the grain. The ultralow interest rates and quantitative easing that had been in place since the Great Recession had in fact benefited the wealthy more than the working classes. That’s because low interest rates are effective at pushing up asset prices (like those in the stock, bond and real estate markets), but appear to be ineffective at creating lasting benefits in the broader economy. And since the rich are more likely to own stocks, bonds, and real estate, they are more likely to benefit from Fed rate reductions.

In contrast to Trump’s economic populism, Hilary Clinton’s main message was that the best way to keep the Obama economy going would be to stay the course and elect her. Trump won that rhetorical battle in a few swing states and became President.

However, once he took office, the bubbles in stocks and bonds just got larger and larger. But as President, he fully embraced them. Despite the fact that few of the major economic trends have significantly altered course in the transition from Obama to Trump, the President asserts that the economy is currently the “best in our history” and that there are no bubbles in site. This fact-free position has encouraged him to wade into a truly bizarre rhetorical paradox (one that would intimidate mere mortals). While insisting that the economy is in fantastic shape he is simultaneously calling on the Fed to slash interest rates from their historically low levels. If the economy were so strong, why would it need that kind of emergency help?

But the numbers don’t really support Trump’s bluster about a bulletproof economy. If the economy were so strong, why did the June Richmond Fed Manufacturing Index not only miss expectations, but tumble to its lowest level in over six years? Why did the June Chicago Fed National Activity Index just fall for the seventh consecutive month, its worst losing streak since the Great Recession?

Weakness in the housing market has also been well documented, despite the generationally low interest rates that should be greasing the skids. Not only did June existing home sales miss expectations, but annual sales have fallen for 16 consecutive months, according to data from National Association of Realtors. If sales are this weak despite falling mortgage rates and “the strongest economy in history,” imagine how much weaker sales would be if mortgage rates rise and the economy slows. According to 2016 data from the U.S. Census Bureau, the homeownership rate for African Americans has already fallen to generational lows. How much longer before the same may be true for the general population?

As we move into the thick of the 2020 presidential cycle, the roles of booster and critic have reversed. While this is generally true in every election, this time the flip-flops can’t be any more egregious. Elizabeth Warren made news this week by issuing a lengthy warning that America’s economy is built on a dangerous foundation of soaring debt. She drills down into the ugly reality of bubbles in student and corporate debt, and laments the continued decline of our manufacturing sector. She concludes that despite the happy talk from Washington and Wall Street, we are headed for another economic crash.

As it so happens, the Senator is right (something that doesn’t happen often). Working class voters may feel just as left out in 2020 as they did in 2016. If the pitch worked for Trump then, maybe it work for Warren, or any Democratic nominee, now?

However, the two differ substantially on solutions. Whereas Trump favored largely pro-business remedies, Warren believes that only government has the wisdom and ability to save the economy. If she has a chance to implement her socialist policies, the economy may never recover.

The recent budget developments should make it perfectly clear that there is no resistance to the trend of budgetary catastrophe. It doesn’t matter who wins elections. Another debt crisis may just be unavoidable. The dollar should be tanking and bond investors fleeing. But of course, traders and investors can only look at seemingly benign short-term effects of massive deficit spending, and the temporary aversion of a messy fiscal crisis. This willful ignorance will cost us in the long term.

Gold initially sold off a bit on the deal due to the relief that a government shutdowns in the next two years have been averted. But the suspension of the debt ceiling, the repeal of prior efforts to restrain spending, and reckless expenditures on both welfare and warfare may make gold an even better buy post deal than before.

In the coming years, multi-trillion dollar annual deficits could be the norm, until we start measuring the numbers by the tens of trillions. This merry-go-round will keep spinning until the ride crashes. There will be no cavalry to ride to the rescue. The deficit hawks in the Republican Party have all joined the other side. While this may make things easier for the politicians, it will make things much harder for the public.

Global trade was slowing down before the tariff war started

Since the crisis, financing has become much more costly

Gillian Tett

At the start of the previous decade global trade was growing at almost 8% a year, but this year it is expected to rise by just 2.6% © Bloomberg

What the heck is happening to global trade? This is a question G7 finance ministers and central bankers might have asked as they met in Chantilly in France this week.

At the start of the previous decade, global trade was growing at almost 8 per cent a year, twice the pace of growth in gross domestic product. This year, however, the World Trade Organization expects trade to rise by a mere 2.6 per cent — the same as projected global GDP growth.

Unsurprisingly, this turnround has sparked hand-wringing about the cost of the current trade wars. Indeed, G7 ministers have pointed to this as evidence that protectionism could spark a wider global economic downturn.

But amid this entirely understandable concern, there is one crucial detail that is overlooked: the slowdown in trade started well before the recent eruption of protectionism. That suggests we cannot blame our current woes on the trade wars alone — although protectionism is, of course, worth fighting against.

The issue at stake was set out on Tuesday by Hyun Song Shin, chief economist of the Bank for International Settlements, at a meeting of senior finance officials organised by the Banque de France in Paris.

Mr Shin started by noting that there are several ways to track trade. The metric commonly used is absolute real or nominal trade. There is, however, another: the ratio of gross exports to net GDP. And the latter metric is particularly revealing right now, since it indicates the activity of cross-border global supply chains, or “global value chains”, as economists prefer to say. Complex GVCs generate multiple export “sales” — and the more extensive these chains are, the higher is that gross export number relative to GDP.

This gross exports series shows that between 2000 and 2008 there was a frenzy of activity in global supply chains. Indeed, as Mr Shin explained, gross exports relative to GDP exploded by a cumulative 16 per cent, due to intense supply chain activity between China and the west.

However, when the 2008 financial crisis hit, gross exports crumbled. No surprise there, perhaps. But what is more remarkable is that, while gross exports recovered in 2009, they have never returned to anything like the pre-2007 figure. More striking still, since 2011 gross exports have steadily declined relative to GDP — meaning, Mr Shin noted, that “the slowdown in trade predates the retreat into protectionism and trade conflicts in the last couple of years”.

Why? One explanation might be that services are becoming more important in the global economy than manufacturing. Another might be technological innovation: automation has cut the cost of western manufacturing, reducing the need to outsource production to low-wage locations such as China.

However, Mr Shin thinks another crucial — and overlooked — factor is finance. Companies need hefty amounts of working capital to run their supply chains, and about two-thirds of this typically comes from their own resources, with the other third coming from bank and non-bank finance.

During the pre-2007 credit boom it was easy for companies to find working capital and trade finance. But, since then, the crisis banks have reined this in. This is partly because post-crisis regulations have made it more costly for western banks to supply such funding, but also because banks’ resources have been hit by the debilitating impact of ultra-low interest rates and the flattening yield curve.

Currency swings also hurt. About 80 per cent of trade finance is supplied in dollars, and trade invoicing tends to be dollar-based, too. This means that dollar strength tends to affect the ability of companies in emerging markets to finance supply chains.

Now, it is highly unlikely that this subtle message about the role of finance will gain much attention from politicians, let alone voters. However, if Mr Shin’s analysis is correct (as I think it is), it has at least three important implications.

First, it underscores the importance of studying financial channels in tandem with “real” economic trends if you want to understand the global economy. Second, the research suggests that the pre-2007 credit bubble not only created a house price boom, but also helped create a trade and GVC bubble, too.

Third, insofar as this bubble has now burst, it seems unrealistic to expect that the world will recreate that global trade surge anytime soon — even if, by some miracle, the US and China suddenly end the trade war. This is not a comforting message. But it is the new reality to which the G7 has to adapt.

4 Reasons Why Gold Will Continue To Shine

by: Andrew Hecht

- A bullish reversal.

- Reason one: Central bank policy and buying. 

- Reason two: Currency devaluation around the world.

- Reason three: The long-term chart.

- Reason four: Uncertainty - UGLD on dips in a bull market will turbocharge returns.

My introduction to working in the commodities market came during the summer of 1977, when I worked delivering telex messages at the leading raw materials trading company in the world. In the days before email and computers, telexes or cables connected the traders and traffic clerks with counterparts all over the planet.
Most of the departments were set up with traders sitting in private offices and the traffic personnel in cubicles nearby. The traders did the buying and selling, while the clerks shipped the materials from points of production to consumption. The precious metals trading department was different. Gold and silver had just started trading on the COMEX futures exchange in the US in the mid-1970s. While the other trading departments were quiet, the precious metals traders stood with a phone in each ear, and the blaring sound of prices coming from squawk boxes from the floor of the exchange. Philipp Brothers traded precious metals around the clock on business days with offices in New York, London, and Hong Kong.
Precious metals trading was the hub of excitement at the firm. Little did I know that a little over a decade later, I would be in charge of that worldwide department. I grew up in the gold market, and over the recent weeks, the yellow metal has become exciting once again.
The VelocityShares 3X Long Gold ETN product (UGLD) turbocharges the price action in gold on the upside. In a runaway bull market, UGLD would be an explosive asset.
A bullish reversal
The week of July 29 was a busy time in markets across all asset classes. After the Fed disappointed markets with a 25-basis point cut, and less than dovish comments by the Chairman of the central bank on July 31, the price of gold dropped to just above the $1400 per ounce level.
Source: CQG
The weekly chart shows that the price of gold fell to a low at $1400.90 on August 1, the day following the Fed meeting. On that day, President Trump decided to slap another 10% tariff on $300 billion of Chinese goods to the United States. Once again, the US President became frustrated with the pace of the trade negotiations when his team was in Shanghai last week. The news on trade lit a bullish fuse under the gold market.
The Fed cited "uncertainty" and "crosscurrents" caused by trade as a reason for the first rate cut in over a decade. The development in trade on August 1 was a sign that more declines in the short-term Fed Funds rate are now more likely. Uncertainty rose just one day after the July FOMC meeting.
Gold put in a bullish reversal on the weekly chart during the week of July 29. The price fell to a
lower level than the previous week and closed above the prior week's peak on the highest level of volume in 2019 and since the beginning of 2018.
The bullish reversal gave way to more buying during the week of August 5, even a higher level of volume on a combination of the technical pattern from the previous week and Chinese retaliation on trade. China devalued its currency and canceled purchases of US agricultural products. The situation that was formerly a trade dispute is now looking like a full-fledged trade and currency war.
Four factors are telling me that gold will continue to shine after the recent series of new highs. I believe that the yellow metal is now heading for a new all-time peak after breaking out to the upside in June.
Reason one: Central bank policy and buying
Global central banks continue to follow an accommodative path when it comes to monetary policy, and the escalation of the trade dispute will only exacerbate the dovish policies.
Last week, the US Fed cut the Fed Funds rate for the first time in over a decade. Moreover, the world's leading central bank ended the program of balance sheet normalization one month early. The end of quantitative tightening takes the upward pressure off US rates further out along the yield curve. The trade war is likely to cause rates to drop before the end of 2019.
Chairman Powell told markets that the move on July 31 was not the start of a prolonged period of rate cuts. The deterioration in relations between the US and China could make him eat those words.
Before we heard from the Fed, the European Central Bank told the world that rates are moving lower and quantitative easing will make a return because of the sluggish economic conditions in the eurozone. The Brexit deadline is on October 29. The new British Prime Minister says that he intends to take the UK out of the EU with or without an agreement. Uncertainty in Europe will rise over the coming weeks.
The second-largest economy in the world belongs to China. The devaluation of the yuan is another accommodative factor facing the world. The bottom line is that the world's central banks continue to provide stimulus, which is rocket fuel for the price of gold.
At the same time, the world's central banks continue to be net buyers of gold. While they rarely talk about the yellow metal, they continue to increase holdings. Gold is the ultimate reserve currency, which is why the IMF includes gold as part of a nation's foreign currency reserves.
Reason two: Currency devaluation around the world
If you have any doubt that currencies are losing value since the early 2000s, look at charts of any foreign exchange instrument versus the price of gold.
Source: CQG
After dropping to a low at $255 per ounce in 2001 as the Bank of England sold half of its gold reserves, the price of the yellow metal has been in a bullish mode. Gold took off to the upside and rose above the $1000 level for the first time in 2008, and it has not traded below that level since 2009. Gold rose to a peak at $1920.70 in 2011 and then consolidated between $1046.20 and $1377.50 from 2014 through 2019. In June, gold broke to the upside in what could be the start of the next leg to the upside on the way to challenge the 2011 peak. At the $1505 level on the continuous futures contract on August 12, gold was around 21.6% below its record high.
Source: CQG
The monthly chart of gold in euro currency terms shows that the price has also been in a bull market since the early 2000s. At 1338 euros per ounce on August 12, the price of gold was 2.8% below its all-time high from 2012 at the 1377 level. In Swiss francs, the price of gold was at the 1454.50 level on August 5, 12.5% below its record high at 1662.50 in 2012. Gold has already risen to a new all-time high at just over 1245 British pounds per ounce.
Source: CQG
The Japanese yen is another leading reserve currency in the world. In yen terms, the price of gold has rallied to the 158,180 level, which is a new record high above the previous high from 2013 at 152,457 yen per ounce. The recent devaluations in the Chinese yuan have put the price of gold in the Chinese currency at a record level. Gold is also at a new high in Australian and Canadian dollars and most other fiat currencies around the globe.
Gold's rise in all currency terms is a comment on the value of fiat foreign exchange instruments. The trend in all currencies is a fundamental validation of the bull market in the yellow metal as the faith and credit of legal tender decline.
Reason three: The long-term chart
The semi-annual chart of gold displays a bullish path of gold in US dollar terms, now that the yellow metal has broken out of its five-year consolidation pattern above the $1377.50 level.
Source: CQG
The long-term chart shows that both price momentum and relative strength indicators are rising at the upper regions of neutral territory, leaving more upside potential for the price of gold. Open interest, the total number of open long and short positions in the COMEX gold futures market, has been rising with the price of the precious metal.
In a futures market, growing open interest and the increasing price are typically a technical validation of a bullish trend. Finally, at 15.18%, semi-annual historical volatility is perfectly positioned for gold, which is a hybrid between a currency and a commodity.
The measure of price variance is higher than most world foreign exchange instruments, but it is lower than most raw material markets. At the 15% level, there is no reason why the rally cannot continue to carry the price of gold to the 2011-high.
Reason four: Uncertainty - UGLD on dips in a bull market will turbocharge returns
Finally, the Fed cited "uncertainty" as a reason for cutting the Fed Funds rate and ending its quantitative tightening program on July 31. Uncertainty in the world is an understatement these days.
The trade war between the US and China has taken the center of the stage this week and threatens to destabilize the global economy. In Asia, North Korea remains a potential problem as President Trump and Chairman Kim have done little but exchange pleasantries and love letters. In Europe, Brexit is coming soon, and Prime Minister Boris Johnson has said he is prepared to leave the EU without any agreement.
A hard Brexit could cause confusion and contagion to ripple across markets around the world.
And, the UK is not the only problem facing Europe these days on the political and economic fronts. In the Middle East, US sanctions on Iran have increased the potential for hostilities in the region that is home to over half the world's oil reserves. In the United States, perhaps the most contentious Presidential election in history will take place in November 2020.
The world has been volatile throughout history. However, the temperature has been climbing over the past months, and all signs point to at least a few crescendos that will increase fear and uncertainty. On August 5, the US stock market fell sharply and we could be at the start of a risk-off period in markets across all asset classes.
Gold is a safe-haven, and if its price is going to begin to climb rapidly in dollar terms, the VelocityShares 3X Long Gold ETN product is likely to act like the yellow metal on steroids. On August 1, the price of gold fell to a low at $1400.90 and on August 7 it rose to a high at $1509.90 on the continuous futures contract, a rise of 7.78%. UGLD has net assets of $153.31 million.
While the ETN trades an average of 145,485 shares each day, UGLD charges an expense ratio of 1.35%.
The product offers leverage, which comes at a price. If the price of gold moves lower or goes sideways, UGLD's value will evaporate rapidly.
Source: Barchart
The price of gold futures rallied by 7.78% from August 1 through August 7. UGLD moved from $117.02 to $145.44 over the same period. The appreciation of 24.29% was just over triple the percentage move in the gold market.
UGLD can be a useful tool if the bull is going to continue to charge higher in the gold market. A look around the world tells us that gold is one asset that will continue to climb.
In high school, I first walked into the precious metals trading room that I would eventually run.

Gold has been in my blood for over forty years, and I have never seen the stars line up for the metal as it has in the current environment.

Currency intervention: how would the US do it, and would it work?

Washington’s FX policy has oscillated between heavy interventions and benign neglect

Eva Szalay in London

The Fed's recent dovish turn has made it easier for Donald Trump to push for interventions

The US dollar is near a multi-decade high, on a trade-weighted basis, and President Donald Trump is not happy about it. His increasingly blustery rhetoric, accusing other countries of manipulating their currencies lower to boost exports, could mean that the US Treasury Department intervenes in FX markets for the first time in years.

Since 1995, the US has stepped in three times — but on each occasion acted in concert with other big central banks to smooth excessive exchange rate fluctuations.

Could the US intervene on its own?

The short answer is yes.

America’s exchange-rate policy has oscillated from periods of large and frequent interventions to benign neglect under different administrations. In some cases, the view about exchange rates changed significantly under the same administration, flipping from viewing a strong dollar as a threat to making it an official policy — as in Bill Clinton’s two terms as president.

“What is remarkable about these fashions is how abruptly [policies] changed at times,” said Robin Winkler, a strategist at Deutsche Bank.

Following the breakdown in 1973 of the Bretton Woods exchange-rate system — in which the currencies of 44 countries were pegged to the value of the dollar, which, in turn, was pegged to the price of gold — big central banks regularly intervened to influence their currencies. In the US, President Richard Nixon had hoped that the end of the system would stabilise the dollar’s value but it did not, forcing the Treasury to step in frequently to buy dollars. Jimmy Carter’s administration also deployed significant resources to support the dollar in 1978 before interventionist policies briefly fell out of favour under Ronald Reagan.

The dollar appreciated more than 50 per cent under Reagan, with a 90 per cent rise against the Deutschemark in the five years to 1985. This led to a change of stance during Reagan’s second term, which ultimately led to the Plaza Accord of 1985, under which big central banks co-ordinated to weaken the greenback.

In the lead-up to the 1987 October stock market crash, the dollar gained ground again despite heavy intervention from the US. In late 1988 the currency saw another spurt, against the Japanese yen in particular, as the Federal Reserve raised interest rates. That led to the US intervening on an unprecedented scale in the first half of 1989, which caused clashes between the Treasury and the Fed’s rate-setting committee.

From that point, the Treasury “largely gave up on interventions, conceding that they had failed to have the desired impact”, said Mr Winkler.

How would intervention work this time?

Since 1934, the US Treasury has held responsibility for managing exchange rates, through the official vehicle for currency interventions — the Exchange Stabilisation Fund. The New York Fed acts as the official agent for the Treasury during interventions but the central bank also holds additional firepower to influence prices.

Historically, the Treasury and the Fed have acted together, shouldering intervention amounts equally, even when the central bank had reservations about the Treasury’s goals. If the Fed agreed to participate now, the administration’s war chest to buy other currencies would total about $200bn.

The Fed’s recent dovish turn has made it easier for Mr Trump to push for interventions, as the expected rate-cutting path aligns with the administration’s desire for a weaker dollar. But sensitivities around protecting the central bank’s independence will be more difficult to overcome and the Fed could resist calls to deploy its own firepower to help. If the Treasury decides to go it alone, the move could risk what Deutsche Bank calls an “institutional crisis”.

“Our interpretation is that the Fed would probably defer to the Treasury and go along even if it does not agree,” said Michael Cahill, an FX strategist at Goldman Sachs.

Does the US have broad support?

No, and without it, the results of an intervention could be mixed at best. While central banks have combined in the past to try to stabilise currencies — as in the aftermath of Japan’s biggest ever earthquake in 2011 — there is little evidence that peers such as the European Central Bank or the Bank of Japan would support the Treasury’s efforts.

Citigroup economists highlight that at the time of the Plaza Accord, every member of the G5 bloc was concerned about the strength of the dollar, but today only the US is complaining. “This is a one-sided Plaza at best,” said Citi.

That raises the prospect of tit-for-tat competitive devaluations. A unilateral US move “could harm severely the international monetary system”, said Mark Sobel, ex-Treasury official and US chairman of think-tank OMFIF.

Such a move would also make it hard for the Trump administration to label other countries as “manipulators”. Mr Cahill noted that the US would find it difficult to respond if China aggressively weakened the renminbi, for example.

And whatever shape intervention might take, intervening in the dollar may not be enough to offset factors that are pushing it higher. The US economy, for example, continues to outperform its peers. On that basis, Nomura strategist Craig Chan says the dollar could make gains in the second half — even if intervention causes some “short-term volatility and potentially a sharp fall”.

Who Will Win the Twenty-First Century?

For years, Europeans were lulled into thinking that the peace and prosperity of the immediate post-Cold War period would be self-sustaining. But, two decades into the twenty-first century, it is clear that the Old Continent miscalculated and now must catch up to the digital revolution.

Joschka Fischer


BERLIN – The first two decades of the twenty-first century are beginning to cast a long shadow over the Western world. We have come a long way since the turn of the century, when people everywhere, but particularly in Europe, indulgently embraced the “end of history.”

According to that illusory notion, the West’s victory in the Cold War – the last of the three great wars of the twentieth century – had given rise to a global order for which there could be no alternatives. Thenceforth, it was thought, world history would march steadily toward the universalization of Western-style democracy and the market economy. The new century would merely be a continuation of the previous one, with a triumphant West extending its dominion.

The world is wiser now. The web of alliances and institutions that sustained the West’s dominance is proving to be a product of the twentieth century, its future now in doubt. The global order is undergoing a fundamental change, as its center of gravity shifts from the North Atlantic to the Pacific and East Asia. China is on the threshold – economically, technologically, and politically – of becoming a world power and the sole challenger of the incumbent hegemon, the United States.

At the same time, the US is growing tired of its global leadership role. It began to step back under former President Barack Obama; but under Donald Trump, it has accelerated its withdrawal in a chaotic and dangerous manner. America’s abdication of leadership poses a threat to the very existence of the transatlantic West, which rests on a foundation of shared values and political institutions. In the absence of any reasonable alternatives, the structure is crumbling.

Russia, meanwhile, is confronting the future by looking to its twentieth-century past. Like the Soviet Union, it is placing its bets entirely on nuclear weapons. Yet in the twenty-first century, power will be determined not by one’s nuclear arsenal, but by a wider spectrum of technological capabilities based on digitization.

Those who aren’t at the forefront of artificial intelligence (AI) and Big Data will inexorably become dependent on, and ultimately controlled by, other powers. Data and technological sovereignty, not nuclear warheads, will determine the global distribution of power and wealth in this century. And in open societies, the same factors will also decide the future of democracy.

As for Europe, the Old Continent entered the new century in anything but optimal form. Living under the cozy post-historical illusion of everlasting peace, the European Union failed to complete the project of integration (though it did manage to expand eastward). The implicit withdrawal of the US security guarantee under Trump has struck Europe like a bolt from the blue.

The same could be said for the digital revolution. The first phase of digitization – consumer-facing platforms – has been led almost entirely by the US and China. There are no competitive European platform firms to speak of, nor are there any European cloud-computing companies capable of keeping up with the behemoths in Silicon Valley and China.

The most important issue facing the new European Commission, then, is Europe’s lack of digital sovereignty. Europe’s command of AI, Big Data, and related technologies will determine its overall competitiveness in the twenty-first century. But Europeans must decide who will own the data needed to achieve digital sovereignty, and what conditions should govern its collection and use.

These questions will determine the fate of democracy in Europe, and whether the Old Continent’s future will be one of prosperity or decline. As such, they must be decided at the European level, not by individual nation-states. Equally important, these questions must be answered now. Europe needs to get the digital ball rolling – or be run over by it.

In the years ahead, automotive design and manufacturing, mechanical engineering, medicine, defense, energy, and private households will all be disrupted by digital technologies. The data generated from these sectors will largely be processed through the cloud, which means that control of the cloud will be vital to countries’ long-term economic and strategic fortunes.

To safeguard its digital sovereignty, Europe will need to make massive investments in cloud-computing capacity and the other physical resources underpinning the digital revolution. Europe has been far too slow and indecisive in this respect. Its challenge now is to catch up to the US and China, lest it be left behind permanently.

Europeans should not harbor any illusions that the private sector will take care of things on its own. Europe’s competitive disadvantage calls for a fundamental change in strategy at the highest level. The EU institutions will have to lead on setting regulations and, together with the member states, on providing the necessary financing. But securing Europe’s digital sovereignty will require a much broader effort, involving businesses, researchers, and politicians.

Following the recent 50th anniversary of the first Moon landing, there has been much media discussion about a potential manned flight to Mars. For Europe, though, space travel can wait.

The top priority must be to establish and safeguard digital sovereignty, and to do whatever is necessary to arrest its own decline and protect democracy. For better or worse, the twenty-first century is well underway.

Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005, a term marked by Germany's strong support for NATO's intervention in Kosovo in 1999, followed by its opposition to the war in Iraq. Fischer entered electoral politics after participating in the anti-establishment protests of the 1960s and 1970s, and played a key role in founding Germany's Green Party, which he led for almost two decades.

Going to the Moon and Going to India

By George Friedman


Last weekend marked the 50th anniversary of the Apollo 11 mission, the first manned space flight to the moon. In endless articles, observers are asking why no attempts have been made to land men on the moon since the Apollo program.

In considering this, I think it’s useful to examine the U.S. and other space programs against a prior, comparable period of exploration – the European journey to the Western Hemisphere. The similarities and differences between the two will help us understand the issues behind that question.
The Race to India
The initial European explorations five centuries ago had similarities to the U.S. and Soviet space programs of the 1960s. First, both were extremely expensive and carefully planned. The two countries most competitive in these explorations, Portugal and Spain, spent a substantial proportion of their national budgets on the expeditions. The Portuguese trained captains and navigators and built ships that could sustain a crew for extended periods of time and survive dangerous conditions. They carried out a systematic program of exploration, with each voyage pushing farther south along the African coast in search of a passage to India. Meanwhile, Christopher Columbus had approached several countries, including France and England, soliciting funding for his own expeditions, but he was repeatedly turned down because of the program’s cost and improbability of success. Only Spain was willing to fund his journey, contributing both state funds and private investment.

Second, both programs were undertaken for reasons of national security and prestige. The Portuguese and Spaniards were bent on finding a route to India, the source of critical products for Europe. The traditional route from India to Europe had been disrupted by the Ottoman conquest of Turkey and the accompanying increases in tariffs. This shifted the economic process in Europe, and any nation that found another path to India would prosper enormously from the trade, with the added benefit of weakening the Ottomans.

Portugal’s program introduced new naval technologies and explored uncharted waters. It was Portugal that finally found the southern tip of Africa, navigating around it and through the Indian Ocean to India itself, landing in 1498. This frightened the Spaniards. They feared that Portugal would threaten them in Iberia and become the dominant power in Europe. The Spanish had only just expelled the last Muslim enclave in Spain in 1492, and the cost had crippled the national budget. But if Spain simply allowed Portugal to control the new route to India, Portugal would eventually control the oceans, and Portuguese power and prestige would dwarf Spain’s.

That’s why they were prepared to invest in Columbus’ risky voyage. The Portuguese navy dominated the southern route, and they had to find a different one. Columbus’ proposal to sail westward into unknown waters was risky. But it was the only practical chance for Spain to compete in the race to India. When Columbus reached what he thought was India, he found very little of value there.

In that sense, his voyages were a failure, and he returned to Spain to great criticism. But the Spanish doubled down, permitting additional journeys that also yielded little economic benefit, prompting Spain to suspend further explorations. The Portuguese, whose route to India had economic value and lent them national power, continued their voyages. The Spaniards slipped behind.

But in due course, with further exploration that was far less risky than Columbus’, the Spanish discovered the Incas in the Andes and the Aztecs in Mexico, both wealthy with gold and silver. The Spaniards conquered them (with disease as well as guns), took their wealth, and defeated Portugal in the race to wealth and power.

The Race to the Moon

The U.S. and Soviet space programs, like the European expeditions, were rooted in political and strategic considerations. Toward strategic ends, each country created and launched spy satellites to monitor the other’s military preparations. It was therefore critical that large sums be devoted to low Earth orbit spy satellites. Toward political ends, each sought prestige. The U.S. and the Soviet Union were making ideological claims concerning the effectiveness of their social and political systems, using demonstrations of technology to persuade other nations to come into their camps. The initial Soviet manned flights brought them political influence. Later, the moon landing lent that influence to the U.S. But there was a fundamental difference between the value of that influence and the cost of the space programs.

Manned flights did not persist, but space as a realm of military power did. And over time, the military power of space yielded economic benefits, from increased communication capabilities to GPS. Still, the economic benefits of manned missions to the moon simply did not compare to those that eventually accrued to Spain and Portugal.

Without clear economic value, Spain put a hold on exploration. Columbus’ journey yielded substantial scientific knowledge, but it could not support the cost of further exploration. Expeditions had to be justified by more immediate benefits. The same can be seen in the hiatus on U.S. manned moon missions. Having achieved its political and military ends, the U.S. continued the scientific dimension with limited unmanned explorations. Further manned trips to the moon were not economically viable.

That is changing now. As I argued in my recent piece on command of the seas, space is now the key to military power. And that means that space is now a potential battleground. Control of space will depend on strategic depth. If space is the key to military dominance, then nations will move beyond extremely vulnerable satellites – a few key satellites for GPS and communications control may not survive a major conflict.

The moon, then, becomes a strategic asset. Its military use is unclear at this point, but it is emerging. On the moon, it is possible to dig in and secure assets in ways that can’t be done in orbit. This means that a manned presence on the moon may well happen again, for the same reason that Spain continued its maritime exploration program: to build national power.

Still, the economic benefit of going to the moon is absent, and thus the cost of the military effort is not underwritten by economic gain, as was the case with the Iberian surge onto the oceans. This is the great weakness in a U.S. return to manned moon flights. I have written in the past that the value of space is unlimited solar power (which can be collected and returned to Earth as microwaves and then transferred into the electrical grid). Some argued that the platforms I envisioned would be vulnerable to attack, but that might be mitigated by lunar-based systems. Space-based solar power is much more efficient than Earth-based systems, which must deal with night and clouds. Beyond solar power, though, it is at present hard to imagine other economic uses of the moon.

One could say that space exploration is an end in itself. But except for limited efforts, this is empirically untrue. The Iberian exploration was driven by economics, military power and politics. The space exploration of the 1960s was driven by military power and political desire. The economic factor existed only where the technology developed could be spun off for commercial uses.

At present, commercial space companies are focused on supporting military and related efforts in space and on space tourism. The former would take place anyway, and the latter is a dubious indulgence. The commercial use of space remains the key for returning to the moon. And if my suggestion for space-based solar power is rejected, then some other must be found. Columbus did not come to America to build knowledge. He came for money, and Spain funded him for wealth and power.

Why Weak Corporate Earnings Don’t Signal a Weak Economy

Tepid results from multinationals don’t necessarily signal trouble at home

By Justin Lahart

The domestic economy is still solid, but the Federal Reserve’s beige book survey showed manufacturers continuing to worry about the uncertainty and costs associated with trade disputes. Photo: tim aeppel/Reuters

American companies are reporting second-quarter results, and the numbers so far have been nothing to write home about. Based on current estimates compiled by FactSet, earnings for companies in the S&P 500 will be down 1.9% from a year earlier. Actual results probably will be somewhat better given companies’ tendency to lower the bar and then clear it, but the final figures are unlikely to fit anyone’s definition of good.

It is tempting to hang earnings weakness on the domestic economy. Even though growth has moderated a bit, it is still solid. Macroeconomic Advisers estimates imply that final sales to domestic purchasers—a measure of underlying economic demand—was up 2.6% from a year earlier in the second quarter. That compares with a 2.9% gain in the second quarter of last year.

Outside the U.S., things aren’t looking so rosy, and that is a problem for many of the companies in the S&P 500, which conduct a substantial share of their business overseas. Paint maker PPG Industries ,for example, which generated more than half of its income outside the U.S. last year, highlighted weakness in the Chinese and European auto markets when it reported a 2.6% decline in second-quarter sales. The strength of the dollar compounds the problem: Industrial-equipment maker Dover said foreign exchange created a 2.6% headwind to sales.

Tariffs and trade tensions are another point of stress, particularly in the manufacturing sector.

The Federal Reserve’s beige book survey released Wednesday—a report of anecdotes drawn anonymously from business contacts around the country—showed manufacturers continuing to worry about the uncertainty and costs associated with the various trade disputes into which the U.S. has entered.

But trade counts as more of an issue for large public companies than for U.S. businesses at large. That isn’t just because of all the business they do overseas but also the kinds of companies they are. Some 190 of the 500 companies in the S&P 500—more than a third—are classified as manufacturers. Yet manufacturing jobs count for only 8% of U.S. employment.

Finally, companies are being confronted by rising labor costs and an inability to pass those costs on. It is part of why profit margins look to have slipped in the second quarter. But for most Americans, the combination of rising wage growth and low inflation probably counts as a good thing.

It is easy—and often makes sense—to view big U.S. companies as a barometer of the U.S. economy, but that is misleading at the moment. A measure of something isn’t the same as the thing itself.

The world economy

Markets are braced for a global downturn

The signals from bonds, currencies and commodities are increasingly alarming

LOOKING FOR meaning in financial markets is like looking for patterns in a violent sea. The information that emerges is the product of buying and selling by people, with all their contradictions. Prices reflect a mix of emotion, biases and cold-eyed calculation. Yet taken together markets express something about both the mood of investors and the temper of the times. The most commonly ascribed signal is complacency. Dangers are often ignored until too late. However, the dominant mood in markets today, as it has been for much of the past decade, is not complacency but anxiety. And it is deepening by the day.

It is most evident in the astounding appetite for the safest of assets: government bonds. In Germany, where figures this week showed that the economy is shrinking, interest rates are negative all the way from overnight deposits to 30-year bonds. Investors who buy and hold bonds to maturity will make a guaranteed cash loss.

In Switzerland negative yields extend all the way to 50-year bonds. Even in indebted and crisis-prone Italy, a ten-year bond gets you only 1.5%. In America, meanwhile, the curve is inverted—interest rates on ten-year bonds are lower than on three-month bills—a peculiar situation that is a harbinger of recession. Angst is evident elsewhere, too. The safe-haven dollar is up against many other currencies. Gold is at a six-year high. Copper prices, a proxy for industrial health, are down sharply. Despite Iran’s seizure of oil tankers in the Gulf, oil prices have sunk to $60 a barrel.

Plenty of people fear that these strange signals portend a global recession. The storm clouds are certainly gathering. This week China said that industrial production is growing at its most sluggish pace since 2002. America’s decade-long expansion is the oldest on record so, whatever economists say, a downturn feels overdue. With interest rates already so low, the capacity to fight one is depleted. Investors fear that the world is turning into Japan, with a torpid economy that struggles to vanquish deflation, and is hence prone to going backwards.

Yet a recession is so far a fear, not a reality. The world economy is still growing, albeit at a less healthy pace than in 2018. Its resilience rests on consumers, not least in America. Jobs are plentiful; wages are picking up; credit is still easy; and cheaper oil means there is more money to spend. What is more, there has been little sign of the heady exuberance that normally precedes a slump.

The boards of public companies and the shareholders they ostensibly serve have played it safe. Businesses in aggregate are net savers. Investors have favoured firms that generate cash without needing to splurge on fixed assets. You see this in the vastly contrasting fortunes of America’s high-flying stockmarket, dominated by capital-light internet and services firms that throw off profits, and Europe’s, groaning under banks and under carmakers with factories that eat up capital. And within Europe’s stockmarkets a defensive stock, such as Nestlé, is trading at a towering premium to an industrial one such as Daimler.

If there has been no boom and the world economy has not yet turned to bust, why then are markets so anxious? The best answer is that firms and markets are struggling to get to grips with uncertainty. This, not tariffs, is the greatest harm from the trade war between America and China. The boundaries of the dispute have stretched from imports of some industrial metals to broader categories of finished goods.

New fronts, including technology supply-chains and, this month, currencies, have opened up.

As Japan and South Korea let their historical differences spill over into trade, it is unclear who or what might be drawn in next. Because big investments are hard to reverse, firms are disinclined to press ahead with them.

A proxy measure from JPMorgan Chase suggests that global capital spending is now falling. Evidence that investment is being curtailed is reflected in surveys of plunging business sentiment, in stalling manufacturing output worldwide and in the stuttering performance of industry-led economies, not least Germany.

Central banks are anxious, too, and easing policy as a result. In July the Federal Reserve lowered interest rates for the first time in a decade as insurance against a downturn. It is likely to follow that with more cuts. Central banks in Brazil, India, New Zealand, Peru, the Philippines and Thailand have all reduced their benchmark interest rates since the Fed acted.

The European Central Bank is likely to resume its bond-buying programme.

Despite these efforts, anxiety could turn to alarm, and sluggish growth descend into recession.

Three warning signals are worth watching. First, the dollar, which is a barometer of risk appetite. The more investors reach for the safety of the greenback, the more they see danger ahead. Second come the trade negotiations between America and China. This week President Donald Trump unexpectedly delayed the tariffs announced on August 1st on some imports, raising hopes of a deal.

That ought to be in his interests, as a strong economy is critical to his prospects of re-election next year. But he may nevertheless be misjudging the odds of a downturn. Mr Trump may also find that China decides to drag its feet, in the hope of scuppering his chances of a second term and of getting a better deal (or one likelier to stick) with his Democratic successor.

The third thing to watch is corporate-bond yields in America. Financing costs remain remarkably low. But the spread—or extra yield—that investors require to hold risker corporate debt has begun to widen. If growing anxiety were to cause spreads to blow out, highly geared firms would find it costlier to roll over their debt. That could lead them to cut back on payrolls as well as investment in order to make their interest payments. The odds of a recession would then shorten.

When people look back, they will find plenty of inconsistencies in the configuration of today’s asset prices. The extreme anxiety in bond markets may come to look like a form of recklessness: how could markets square the rise in populism with a fear of deflation, for instance?

It is a strange thought that a sudden easing of today’s anxiety might lead to violent price changes—a surge in bond yields; a sideways crash in which high-priced defensive stocks slump and beaten-up cyclicals rally. Eventually there might even be too much exuberance. But just now, who worries about that?