Buttonwood

Low interest rates and sluggish growth may lead to currency wars

Declaring trade peace might be the best way to get a cheaper dollar




IN 2010, AS the euro zone’s sovereign-debt crisis escalated, the euro fell sharply, from $1.45 to $1.19. Soon the talk in America was of a second round of quantitative easing by the Federal Reserve. Was this a coincidence? Many in euro land thought not. QE2, as it came to be known, seemed to them to be mostly a means to a weaker dollar. The grumbles went beyond Europe. That September Guido Mantega, Brazil’s finance minister, said his country was under fire in an international currency war.

Now the bellyaching comes from America. On June 18th Mario Draghi, the president of the European Central Bank (ECB), said at a conference in Sintra, Portugal, that the bank stood ready to relax its monetary policy further if the euro-zone economy did not improve. Bond yields fell. So did the euro. President Donald Trump took to Twitter to denounce Mr Draghi for “unfair” currency manipulation. Earlier this month Steven Mnuchin, Mr Trump’s Treasury secretary, had fired a warning shot in the direction of Beijing on currency policy. If China stopped trying to support the yuan, he seemed to suggest, that could be understood as an effort to weaken it.

The guns have been holstered again. The prospect of a pow-wow between Mr Trump and Xi Jinping, China’s president, at a G20 summit in Osaka later this month has raised hopes that, at the very least, the trade war between their two countries does not escalate. A trade truce ought to cool the war of words over exchange rates, too—but not for long. Interest rates are low. The use of fiscal policy is constrained by either politics or debt burdens. A cheaper currency is one of the few ways left to gin up an economy. A world of sluggish GDP growth is one that is primed for a currency war.





Despite Mr Draghi’s best efforts, the exchange rate to watch is dollar-yuan, not euro-dollar.

The yuan increasingly sets the tone for global currencies—and, by extension, for financial markets. China has allowed its currency to respond somewhat to market pressures since August 2015. But it has been kept in a fairly tight trading range against the dollar (see chart).

These small changes matter. The currencies of China’s big trading partners, such as the euro, have got caught up in the yuan’s shifting tides, rising and falling in sympathy. Seven yuan to the dollar has been seen as an important threshold. Should the yuan ever breach that level, it would surely drag other currencies down with it.

Any hints that Beijing may be prepared to let the yuan go beyond seven are thus significant. Simon Derrick of BNY Mellon points to two developments in this regard. The first is the publication in late May of a seemingly well-sourced article in the South China Morning Post on trade negotiations with America. A sticking point, it said, was the yuan. China favours currency “flexibility”—not for an export advantage but to ensure stability. America is unsympathetic. Then, on June 7th, the governor of China’s central bank, Yi Gang, told Bloomberg that a flexible currency was to be desired as it “provides an automatic stabiliser for the economy”. He also hinted that there was no red line at seven.

There is a topsy-turvy logic to currency wars. The winners are the currencies that fall in value. In such a race to the bottom, investors seek to back the losers. In times of trouble they will go for the usual boltholes: the yen, the Swiss franc and gold, all of which have been lifted by trade-war anxiety. The dollar stays strong because America has high interest rates, by rich-world standards, and a strong economy. But when growth slows and interest rates fall, says Kit Juckes of Société Générale, a French bank, other factors come into play. These include trade balances and valuation.

The yen stands out. Japan runs a current-account surplus. And the yen is cheap based on measures of purchasing-power parity, including rough-and-ready gauges, such as The Economist’s Big Mac Index. The Swiss franc is also backed by a hefty current-account surplus, even if it looks expensive. Gold gets a look-in mainly because there are so few good alternatives to holding dollars.

In 2010 the cheap dollar irked everyone outside America. Now the dear dollar bothers America, or at least its president. In the slow-brewing currency war, America is both victim and perpetrator. “If you start a trade war with your biggest trading partners, they get a weak currency and you get a strong one,” says Mr Juckes. If Mr Trump wants a cheaper dollar, declaring trade peace might be the best way to get it. Otherwise, America risks waging a currency war on itself.

Business finds itself left out of the party

Politicians will see few votes in backing corporate America until its priorities change

Andrew Edgecliffe-Johnson



Which tribe of politicians can claim to be the party of business? Back in the tax-cutting, deregulating, privatising days of Ronald Reagan and Margaret Thatcher, the question was simple to answer on each side of the Atlantic. But Donald Trump and Brexit have a way of scrambling well-worn assumptions.

British executives are pondering the prospect, in Boris Johnson, of a Conservative prime minister who dismissed their Brexit concerns with the words “fuck business”. Their US peers are hearing the same message, less explicitly, from Republicans.

President Trump was not the corporate establishment’s candidate in 2016, but business has found much to thank him for as he responded to its complaints about taxes and regulations in familiar Republican fashion. Boardrooms can even put a number on that gratitude: US corporate tax payments fell 31 per cent last year, while profits hit new records, due to Mr Trump’s late 2017 tax cuts.

Chief executives have also cheered the reliably deregulatory rhetoric emanating from the White House after eight years of tighter Democratic regulation in the wake of the financial crisis.

There has been one big break from past partisan certainties: Mr Trump’s trade war with China. In the past week, the Business Roundtable has blamed ratcheting tariffs for a fifth straight quarter of declining CEO confidence; Walmart and Levi Strauss joined 600 companies in saying that they imperil 2m US jobs; and the US Chamber of Commerce warned that they could cost the US $1tn in the next decade.

As executives lose hope that the Trump administration will achieve the immigration and infrastructure reforms they seek, relations are fraying. So, too, is business support for Republicans. “CEOs are abandoning the Republican party in droves,” wrote Alan Murray, CEO of Fortune, after a recent survey by the magazine found that fewer than half the people running the country’s largest companies now identify as Republican. Yet the number calling themselves Democrats remains “minuscule”, he noted, because as Mr Trump’s GOP cedes the “party of business” mantle, Democrats show no sign of looking to seize it.

Democrats have always seen the case for talking tough about business, especially at the early stage of presidential contests when union endorsements can be critical. But there is a difference in degree this time as candidates across the crowded Democratic field vow to rein in corporate power.

Both Joe Biden and Bernie Sanders have berated Amazon for its low tax bill, while Kamala Harris, Pete Buttigieg and other Democrats have joined striking fast-food workers who are campaigning for McDonald’s to raise its minimum wage to $15 an hour.

Mary Kay Henry, president of the Service Employees International Union which told Democrats they must back the “Fight for $15” pickets to win its support, says that candidates are “responding more boldly” to its pressure this election.

“Presidential candidates have to speak to the growing inequality in the economy,” she argues, adding that calling out companies for paying low wages “speaks to the gut feeling that most working Americans have that the rules are rigged against us”.

There are still 500 unpredictable days left in the election campaign. But when Democrats argue for a more assertive antitrust policy, rail against share buybacks or promise — in Elizabeth Warren’s words — “economic patriotism”, it is clear they see these talking points as vote winners beyond their party’s base. Polls suggest they are right, and that should wake business leaders up.

Executives may despair of Washington’s attitudes, but they need to remember that voters (who are also consumers and employees) are closer to the politicians than to the CEOs in their beliefs about proper corporate priorities.

According to surveys by Just Capital, a non-profit funded by the investor Paul Tudor Jones, Americans of all stripes rank a company’s treatment of its employees, customers and community far above the returns it makes for shareholders: like Mr Trump and Ms Warren, they believe that US companies should focus above all on creating well-paid jobs in America.

Profound ideological differences remain between the parties, of course, not least on taxes and the environment. If the Democrats choose one of their most leftwing 2020 contenders as their candidate, it would undoubtedly scare many donors back to Mr Trump’s party.

But on offshoring, wages and jobs there is increasing common ground. Any company that has not found an answer to Mr Trump’s America First rhetoric will not find the task any easier if the pressure is rebranded economic patriotism by a Democrat.

With politicians less willing to speak up for them, US business leaders will have to make their case on trade, tax and regulation more directly. But this will ring hollow unless they can show they are sharing the prosperity they believe capitalism brings with the people they employ.

Until then, it will be easier for politicians to say “fuck business” than to be caught in bed with the corporate elite.

Now That’s Just Crazy, Part 1: Junk Bonds With Negative Yields

by John Rubino


A central bank that’s desperately trying to ignite a borrowing/spending frenzy to offset an incipient recession has one wish above all: That the currency it’s creating flows beyond safe-haven assets and into riskier niches. Call it the democratization of credit or Ponzi finance. Either way, the result is a lot of borrowing and spending, which solves the immediate slow-growth problem.

So it must come as a pleasant surprise for monetary authorities that a growing number of “high-yield” bonds are trading with negative yields. You read that right: some junk bonds now yield less than nothing.

So far, this is happening mainly happening in Europe, where the ECB has been soaking up the bonds of junk countries like Italy, producing Italian government bond yields comparable to those of the US and not far from Germany’s. Now some of this torrent of newly-created euros is flowing into the corporate equivalent of Italy, sending the share of one-step-above-junk BBB rated bonds with negative yields to double-digits. Meanwhile, the share of actual junk bonds with negative yields is above zero and rising fast.

junk bonds negative yields


For the entire universe of European BB-rated bonds (to repeat, these are junk), the average yield is now comparable to what the US pays on 10-year Treasury bonds.

junk bonds negative yields



So why is this happening, and is it as bad as it seems?

The short version of “why” is that when a country borrows too much money, its rising debt slows future growth unacceptably, leading politicians to bully central banks into cutting interest rates further and buying up more assets. Eventually, this process reaches its logical conclusion, which is zero-to-negative interest rates and central bank balance sheets stuffed with assets of laughably low quality. Which is where Europe now finds itself.

And still, the politicians demand more. So rates go negative across the high-quality yield curve (German 10-year paper now yields -.30%), forcing everyone who needs income to move into junkier assets. And voila, high-yield starts trading like Treasuries.
 


As for why that’s bad, well, let’s count the ways. First, it funnels cheap capital into companies that by definition don’t deserve it, which results in “malinvestment” on a vast scale. Second, it starves pension funds and retirees that need income, forcing them to take on ever-higher degrees of risk.

Combine massive misallocation of capital with excessive risk-taking by investors who don’t understand risk, and the result is an epic crash when junk borrower cash flows inevitably disappoint.

Why do investors put up with it? Saturday’s Wall Street Journal offers a chilling explanation:
One euro junk bond from U.S. packaging company Ball Corp, for example, trades at a yield of minus 0.2% and matures in December 2020. That compares to a European deposit rate of minus 0.4% or a yield on a German government bond with a similar maturity of about minus 0.7%. 
The choice for investors is about the balance between needing to stay invested and how much risk to take, according to Tim Winstone, a fixed-income portfolio manager at Janus Henderson. A bond like Ball Corp’s is “a safe place to hang out,” Mr. Winstone said. “And just because something is negative-yielding, that doesn’t mean it can’t get more negative-yielding.” Falling yields mean rising bond prices and gains for investors, at least on paper. 
Many expect more bond yields to go negative as central banks in the U.S. and Europe cut interest rates or return to bond-buying to stimulate economies. In Europe especially, investors are realizing that negative interest rates are going to last a long time because the ECB needs to overshoot its inflation target to make up for the long spell when inflation has been far below 2%. Without a period of higher inflation, it won’t meet its target on average over the medium term. 
The number of junk-rated companies with negative-yielding bonds will definitely go up, according to Barnaby Martin, credit strategist at Bank of America Merrill Lynch. “It doesn’t take much for it to go from 14 companies to 30 or 50 or 100,” he said.

In other words, investors are now extrapolating falling interest rates into the future and playing junk bonds for the capital gains they’ll generate when their future borrowing costs go down. This is one of those sentiment shifts that financial historians will single out for special attention when sifting through the rubble of the coming crash.


Hating the Fed Is as American as Apple Pie

The tone of Trump’s attacks is new even if the sentiment isn’t. But try living without a central bank.

By Justin Lahart


The tension between Fed Chairman Jerome Powell and President Trump has ample precedents, starting with differences between Treasury Secretary Alexander Hamilton, who proposed the first U.S. central bank, and then-Congressman James Madison, who disliked the concept. Photo: Photo Illustration by Emil Lendof/The Wall Street Journal; Photos: Getty Images


When President Trump complains about the Federal Reserve, he’s taking part in a tradition of central-bank bashing that stretches back to America’s founding. But for all the missteps the Fed has made over the years, the country is better off with it than it would be without it.

Mr. Trump has made no secret of his disdain for its policies. During his election campaign he said the central bank’s stance was too easy, fueling “a big, fat, ugly bubble.” Now he argues the Fed raised rates by too much last year, and has repeatedly called for it to cut them. On Tuesday he suggested he could consider demoting Fed Chairman Jerome Powell.

Mr. Trump is publicly criticizing the Fed in a way no U.S. president has before. But he is also tapping into a longstanding animus toward central banking in the U.S., the power of which shouldn’t be discounted. Investors who take the Fed and the independence it has achieved for granted may need to brush up on their history.

That history begins in 1790, when Treasury Secretary Alexander Hamilton submitted his proposal for the Bank of the United States. Modeled after the Bank of England, it would provide loans to the public and private sectors, and the notes it issued would provide a uniform paper money for business transactions.

Virginia Rep. James Madison and Secretary of State Thomas Jefferson tried to block Mr. Hamilton’s plan, saying it was unconstitutional for the government to set up a bank. Their opposition also arose in part from the prevailing attitude of the agricultural South and of farmers, who tend to be debtors and often detest banks. It was a populist theme that would be repeated.

President George Washington sided with Mr. Hamilton, and the bank was chartered in 1791. But antibank forces continued to pound away, and its charter was allowed to expire in 1811. After five rocky years for the economy, the Second Bank of the United States was chartered with then-President Madison’s support. But two decades later, that charter wasn’t renewed, squelched by President Andrew Jackson.

Starting in 1836, the U.S. stood out as a major country without a central bank. “And then we had a period characterized by financial instability and a much worse track record than any of the European economies,” explains Michael Bordo, an economic historian at Rutgers University. Booms and busts came rapidly, and a series of crippling financial crises culminated in the panic of 1907, the severity of which was a powerful argument for a central bank. Against stiff opposition, the Federal Reserve was set up in 1913.

The years since have, with some notable exceptions, been better. The economy swung far less erratically than before, experiencing far fewer financial crises. And as the Fed has gained more independence, insulating it from politicians’ desire to juice the economy ahead of elections, it has become a more credible steward of the economy.

But when the Fed slips up, or when times get rough, America’s old animus for central banks isn’t far away. The worst it got in recent memory was probably in the early 1980s, when the Fed under Chairman Paul Volcker tightened policy massively to crush inflation, buckling the economy in the process. Now he is widely hailed, but at the time he was getting attacked by both the right and the left. Unhappy home builders sent him two-by-fours pleading for lower rates, even as President Ronald Reagan largely held his tongue.

A board mailed to Fed Chairman Paul Volcker as part of a protest by builders over high interest rates, on display in the 2013 exhibition "The Fed at 100" at the Museum of American Finance in New York. Photo: STAN HONDA/AFP/Getty Images


The 2008 financial crisis also did heavy and justified damage to the Fed’s credibility, since it horribly misjudged the risks that built up during the housing bubble. The unconventional policies it subsequently adopted to combat the recession were also viewed as a massive overreach by critics who were convinced the Fed put the economy at risk of currency debasement and inflation.

Other countries celebrate their central banks: For its 300th anniversary in 1968, Sweden’s Riksbank established the Nobel Prize in economics, and the Bank of England’s tricentennial in 1994 culminated with a service of thanksgiving attended by the Queen. The Fed initially wanted to make an event of its centenary in 2013 but wisely opted for a quiet affair.

Mr. Trump can find sympathy beyond his populist base for threatening the Fed’s independence—after all, it expresses a sentiment that has spanned the political spectrum. Even some financially sophisticated people who should know better wouldn’t mind. They should know better.

Fiscal Money Can Make or Break the Euro

The parallel payment system that Greece's government proposed in 2015 would have bolstered the eurozone. By contrast, the Italian government's planned "mini-Treasury bills" would lead to the single currency's demise.

Yanis Varoufakis

varoufakis55_altmodernGettyImages_eurocoinbreakingintorock

ATHENS – It’s a curious feeling to watch your plan being deployed to do the opposite of what you intended. And that’s the feeling I’ve had since learning that Italy’s government is planning a variant of the fiscal money that I proposed for Greece in 2015.

My idea was to establish a tax-backed digital payment system to create fiscal space in eurozone countries that needed it, like Greece and Italy. The Italian plan, by contrast, would use a parallel payment system to break up the eurozone.

Under my proposal, each tax file number, belonging to individuals or firms, would be automatically provided with a Treasury Account (TA) and a PIN number with which to transfer funds from one TA to another, or back to the state.

One way TAs would be credited was by paying arrears into them. Taxpayers owed money by the state could opt for part or all of those arrears to be paid into their TA immediately, instead of waiting for months to be paid normally. That way, multiple arrears could be eliminated at once, thus liberating liquidity across the economy.

For example, suppose Company A is owed €1 million ($1.1 million) by the state, while owing €30,000 to an employee and another €500,000 to Company B. Suppose also that the employee and Company B owe, respectively, €10,000 and €200,000 in taxes to the state. If the €1 million is credited by the state to Company A’s TA, and Company A pays the employee and Company B via the system, the latter will be able to settle their tax arrears. At least €740,000 in arrears will have been eliminated in one fell swoop.

Individuals or firms could also acquire TA credits by purchasing them directly, via web-banking, from the state. The state would make it worth their while by offering buyers significant tax discounts (a €1 credit purchased today could extinguish taxes of, say, €1.10 a year from now). In essence, a new dis-intermediated (middlemen-free) public debt market would emerge, allowing the state to borrow small, medium, and large sums from the private sector in exchange for tax discounts.

When I first discussed the idea, staunch defenders of the status quo immediately challenged the legality of the proposed system, arguing that it violated the treaties establishing the euro as the sole legal tender. Expert advice that I had received, however, indicated that the system passed legal muster. A eurozone member state’s treasury has the authority to issue debt instruments at will, and to accept them in lieu of taxes. It is also perfectly legal for private entities to trade among themselves in any token they choose (say, frequent flier miles). The line of illegality would be crossed only if the government compelled vendors to accept the digital credits as payment – something I never intended.

An altogether different reaction to my proposal came from those who wanted to end the euro as a single currency, but not necessarily as a common currency. A former chief economist of a major European bank looked at my proposals and recognized in them his own scheme for a parallel currency that Italy, Greece, and other distressed eurozone members would use to pay salaries and pensions. I replied that a parallel currency was both undesirable and pointless, as it would lead to a sharp devaluation of the new national currency, in which most people would be paid, while private and public debts would remain euro-denominated. That would be a recipe for serial, accelerating insolvencies, inevitably leading to the eurozone’s demise.

Then there were those who argued that an announcement of any parallel payment system would trigger a bank run and capital flight, thus pushing the country surreptitiously out of the eurozone, regardless of its intentions. This conjecture contains an important truth: the payment system I proposed would reduce the costs of a euro exit by clearing a rocky but navigable path to a new national currency.

Indeed, if my parallel, euro-denominated system had been operational in June 2015, when the European Central Bank closed down Greece’s banks to blackmail its people and government into accepting the third bailout loan, two outcomes would have been possible. First, transactions would have shifted massively from the banking system to our TA-based public payment system, thus reducing substantially the ECB’s leverage. Second, it would be common knowledge that, at the push of a button, the government could convert the new euro-denominated payment system into a new currency.

Would such a system have triggered a redenomination from the euro to the drachma? Or would it have given pause to the troika of Greece’s lenders (the European Commission, the International Monetary Fund, and the ECB), causing them to think twice before they closed down Greece’s banks and issued their Grexit threats?

The answer depends on the politics of both sides. In this sense, the parallel payment system is neutral: it can be used to bolster the eurozone just as effectively as it can be deployed to break it up.

In our case, the idea was to keep Greece viably within the eurozone by using the additional bargaining power afforded by the parallel payment system to negotiate the deep debt restructuring needed to revive economic growth and ensure long-term fiscal sustainability. As long as our creditors saw that our redenomination costs were lowered, while our demands for debt restructuring were sensible, they would think twice before threatening us with Grexit. Joint action by the ECB and my ministry would allow the parallel system to be portrayed as a new pillar of the euro, thus quashing any financial panic. By ending the popular association of the euro with permanent stagnation, the parallel system would be the single currency’s friend.

This brings us to Italy. There are two technical differences between the system I designed and Italy’s planned mini-Treasury bills (or mini-BOTs). First, mini-BOTs will be printed on paper, something I opposed, to avoid a grey market. Our total supply of digital credits would have been managed by a distributed ledger, to ensure full transparency and prevent the inflationary overproduction of credits. Second, the mini-BOTs will be interest-free, perpetual bonds, without future tax discounts.

But the real difference between the Italian scheme and mine remains political. The parallel payment system I proposed was designed to use the reality of lower eurozone exit costs to create new fiscal space and help civilize the monetary union in the process. Italy’s system is the first step toward a parallel currency by which to bring about the eurozone’s end.


Yanis Varoufakis, a former finance minister of Greece, is Professor of Economics at the University of Athens.

Texas and California

Texafornia dreaming

America’s future will be written in the two mega-states




IN THE CABLE-NEWS version of America, the president sits in the White House issuing commands that transform the nation. Life is not like that. In the real version of America many of the biggest political choices are made not in Washington but by the states—and by two of them in particular.

Texas and California are the biggest, brashest, most important states in the union, each equally convinced that it is the future. For the past few decades they have been heading in opposite directions, creating an experiment that reveals whether America works better as a low-tax, low-regulation place in which government makes little provision for its citizens (Texas), or as a high-tax, highly regulated one in which it is the government’s role to tackle problems, such as climate change, that might ordinarily be considered the job of the federal government (California). Given the long-running political dysfunction in Washington, the results will determine what sort of country America becomes almost as much as the victor of the next presidential election Will.

That is partly a function of size. One in five Americans calls Texas or California home. By 2050 one in four will. Over the past 20 years the two states have created a third of new jobs in America. Their economic heft rivals whole countries’. Were they nations, Texas would be the tenth-largest, ahead of Canada by GDP. California would be fifth, right behind Germany.

Texas and California are also already living America’s demographic future. Hispanics are around 40% of the two states’ populations, double the national average. Both states were early to become majority-minority. In California non-whites have outnumbered whites since 2000, and in Texas since 2005. The rest of the country is not expected to reach this threshold until the middle of the century. California and Texas educate nearly a quarter of American children, many of them poor and non-native English-speakers. Their proximity to Mexico, a country that both used to be a part of, means that as Washington procrastinates on updating America’s immigration laws they must live with the consequences.

At first glance the two states seem as different as a quinoa burger and beef brisket. California is a one-party state in which elected Republicans may soon need the kind of protection afforded to the bighorn sheep. In Texas Republicans dominate the state legislature and all the statewide executive offices: no Democrat has won a statewide race there for more than 20 years. The last Democratic presidential candidate to do so was elected over 40 years ago. Texas has no state income tax. California’s state income tax has a top rate of 13%, the highest in the union. Texas has loose environmental regulations. California is trying to use its economic might to force the rest of the country to adopt more stringent standards on carbon-dioxide emissions. Texas lets its cities sprawl; California has restrictive planning laws.

Take a closer look, though, and Texas looks more like a teenage California. The population of Texas has only recently reached the level California was at in the late 1980s. The Golden State was once a pro-sprawl, low-tax, Republican state, too. Republicans in Austin, who are feeling the first signs of political competition from Democrats in decades, have begun to focus their attention on the state’s shortcomings such as education.

That matters because Texas’s schools, like California’s, perform poorly and its universities are nowhere near as good. In the Texas legislative session which ended last month, politicians focused less on abortion and bathrooms for transgender people, and instead increased funding for public schools. If more Texans managed to vote, they might encourage politicians to do something about the state’s skimpy health-care provision, too.

This might suggest that, as Texas grows up, it will become more Californian. But, ideally, only to a degree—because California has not aged gracefully. It loses Americans each year while Texas gains them. Though the state government has made huge strides—a decade ago it was broke, now it has a healthy surplus and an overflowing rainy-day fund—the state has daunting social problems. Homelessness is just the most visible of them. Unemployment is persistently higher and incomes are more unequal in California than in the land of the ten-gallon hat.

California thinks of itself as a progressive bastion, but it has the highest poverty rate of any state in America. That is partly because regulation makes it so hard to build new homes, pushing housing costs up. It will take more than Google investing $1bn in Bay Area housing to fix that. Texas, meanwhile, lets its cities march outwards as far as they wish. In this limited respect at least, Texas is the more liberal state and California the more conservative one. Americans wanting to move to where housing is cheap, taxes low and work plentiful are voting with their U-Haul trucks and heading to Texas. Just now, Texas has more room than California to innovate and to strike a balance between small government and social support.

In America’s federal system no single state is a national template, and yet each holds lessons for all the others. As America’s largest oil producer, Texas is exceptional. By contrast, despite its faults, California remains a magnet for highly educated migrants and a formidable factory of talent and ideas—which is why it has produced Google, Facebook, Tesla, Uber and Netflix and why, despite grumblings about creeping socialism, the big venture-capital firms and Hollywood studios stay.

America can learn from both of them. That is especially true when the federal government cannot legislate—which today means most of the time—because the ability of states to decide their own fate becomes correspondingly more important.

It is possible to imagine a mash-up of the two mega-states that takes the best of both: a freedom-loving wish to keep government out of people’s private lives, a place that is friendly to business and provides opportunities for people, while also protecting the environment and funding education. California could steal Texas’s expansive approach to housebuilding; Texas could imitate California’s investment in outstanding universities. Americans elsewhere might be less alarmed by demographic change if they visited great cities like Houston, LA and Dallas. Call this imagined place Texafornia.

US-China contest centres on race for 5G domination

A report for the Pentagon warns the US is falling behind China in telecoms

Henny Sender



Less than 10 years ago, all top 10 technology companies by revenue were American. Global telecom standards were set by US companies such as AT&T and Verizon. Today, by contrast, four of the top 10 internet firms are Chinese.

A decade ago, Huawei, the leading Chinese telecoms equipment maker, was a little known provider of services largely to south-east Asia, and eastern and central Europe, rather than a rival to the Americans in more developed markets. Its revenues amounted to some $28bn in 2009. Last year they reached $107bn.

Friction between the US and China, which seemed to have its origins in trade disputes, has moved on. Today telecoms and wireless technology are at the forefront of the competitive sparring between the two countries.

In a world where everything is dual-use technology, it is increasingly hard to distinguish what is commercial and civilian and what is strategic and military. And technology, unlike trade, does not easily lend itself to concessions at the negotiating table. To have the technological edge is existential for both countries.

“There is an even bigger long-term risk facing the world economy than the current trade war. That is the very negative implications of the current US stance against Huawei,” notes Chris Wood, equity strategist for Jefferies in Hong Kong. “The origin of America’s ultra-aggressive stance remains a determination that China will not dominate in 5G or other emerging technologies.”

Yet if no less a source than the Defense Innovation Board, launched in 2016 to help bring innovation and independent advice to the Pentagon, is to be believed, the US is behind in developing the latest technology and in setting global standards for 5G. That is according to an assessment of the prospects of the two national giants in a report on the 5G Ecosystem the board released in April.

The report portrays a technological world in which the US, far from dominating, is in danger of becoming ever more marginal. “The country that owns 5G will own many innovations and set the standards for the rest of the world. That country is currently not likely to be the United States,” the report concludes starkly. “Chinese equipment is cheaper (and) in many cases is superior to its western rivals.”

One Chinese venture capitalist says he takes this as an affirmation that “we won”.

The introduction of 5G is a big deal, both in itself and because of its multiplier effect on a range of other technologies including autonomous vehicles, the internet of things, smart cities, virtual reality and, battlefields, whether physical or in cyber space. The companies or countries that are the first movers will set global standards. That in turn brings hundreds of billions of dollars in revenues, substantial job creation and leadership in any other technologies that require ever swifter transmission of data, the board notes.

“In the early 2010s, AT&T and Verizon took the lead in rapidly deploying next generation technology that improved on 3G technology. US companies like Apple, Google, Facebook, Amazon, and Netflix then built new applications and services . . . and helped drive global US dominance in wireless and internet services,” it states.

Today, though, the US has lost its edge when it comes to telecoms technology for reasons that have little to do with any possible predatory behaviour either from Beijing or Huawei, which today has become a national champion of China, in part because of attacks from the White House and Congress.

Part of the problem is lack of investment. China has spent $180bn over the past five years and has 10 times as many base stations as the US. American companies including Verizon and AT&T have too much debt to undertake the huge investment necessary to build out the numbers of base stations required, the report notes, while other western firms, such as Nokia and Ericsson, have also seen their fortunes decline.

Another obstacle is the fact that in the US, the government and the military appropriate most of the spectrum being used by the rest of the world for commercial purposes, leaving the US market isolated. By themselves, the US markets, both civilian and military, are no longer big enough to dictate to others or to prevent Chinese 5G from continuing to increase market share globally.

The larger question of course is whether what is true in telecoms becomes true on a wider scale.

Meanwhile, the effect of any US sanctions against Huawei or others is likely to only accelerate Beijing’s efforts to achieve self-sufficiency.

The World Is Running Out of Time

For decades, most of the major economies have relied on a form of capitalism that delivered considerable benefits. But systems do not work in isolation. Eventually, reality asserts itself: global trade tensions reemerge, populist nationalists win power, and natural disasters grow in frequency and intensity.

Bertrand Badré

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WASHINGTON, DC – In 2015, the international community launched a renewed effort to tackle collective global challenges under the auspices of the United Nations Sustainable Development Agenda and the Framework Convention on Climate Change (COP21). But after an initial flurry of interest, the progress that has been made toward achieving the Sustainable Development Goals and tackling climate change has tapered off. Around the world, many seem to have developed an allergy to increasingly stark warnings from the UN and other bodies about accelerating species extinctions, ecosystem collapse, and global warming.

Now is not the time to debate whether progress toward global goals is a matter of the glass being half-full or half-empty. Soon, there will no longer even be a glass to worry about. Despite global news coverage of civic and political action to address our mounting crises, the underlying trends are extremely frightening. In recent months, the Intergovernmental Panel on Climate Change (IPCC) has marshaled overwhelming evidence to show that the effects of global warming in excess of 1.5oC above preindustrial levels will be devastating for billions of people around the world.

A recent report from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services serves as yet another wake-up call. Human activities, the report concludes, have put an unprecedented one million species at risk of extinction. The oceans that supply food and livelihoods to more than four billion people are under threat. If we do not take immediate action to reverse these trends, the challenges of playing catch-up later will probably be insurmountable.

For decades, most of the major economies have relied on a form of capitalism that delivered considerable benefits. But we are now witnessing the implications of the Nobel laureate economist Milton Friedman’s famous mantra: “the social responsibility of business is to increase its profits.” A corporate-governance model based on maximizing shareholder value has long dominated our economic system, shaping our accounting frameworks, tax regimes, and business-school curricula.

But we have now reached a point where leading economic thinkers are questioning the fundamentals of the prevailing system. Paul Collier’s The Future of Capitalism, Joseph E. Stiglitz’s People, Power, and Profits, and Raghuram G. Rajan’s The Third Pillar all offer comprehensive assessments of the problem. A capitalist system that is disconnected from most people and unmoored from the territories in which it operates is no longer acceptable. Systems do not work in isolation. Eventually, reality asserts itself: global trade tensions reemerge, populist nationalists win power, and natural disasters grow in frequency and intensity.

Simply put, our approach to capitalism has exacerbated previously manageable social and environmental problems and sowed deep social divisions. The explosion in inequality and the laser focus on short-term results (that is, quarterly earnings) are just two symptoms of a broken system.

To maintain a well-functioning market economy that supports all stakeholders’ interests requires us to shift our focus to the long term. In some ways, this is already happening. But we need to channel the positive efforts underway into a concerted campaign to push systemic reforms past the tipping point. Only then will we have achieved a feedback loop that rewards long-term, sustainable approaches to business.

Most important, we must not succumb to complacency. Short-term tensions over trade and other issues will inevitably capture the attention of people and governments. But to permit the latest headlines to distract us from impending environmental and social catastrophes is to miss the forest for the trees.

Having said that, the impetus for driving positive change cannot be based on fear. The looming crises are both real and terrifying, but repeated warnings to that effect have diminishing returns. People have become immune to reality. Long-term change, then, must come from a readjustment of the market and our regulatory frameworks. Although consumers, investors, and other market participants should keep educating themselves and pushing for change, there also needs to be a thorough and rapid re-examination of the rules and norms governing capitalism today.

We need to impose real costs on market participants who do not change their behavior. That won’t happen through speeches, commentaries, and annual reports. The market economy is a powerful force that needs direction, and regulators and market participants themselves are the ones holding the compass. It is time to get serious about establishing the direct financial incentives and penalties needed to drive systemic change. Only after those are in place can we begin to debate whether the glass is half-empty or half-full.


Bertrand Badré, a former Managing Director of the World Bank, is CEO of Blue like an Orange Sustainable Capital. He is the author of Can Finance Save the World?

In Syria, An Opportunity for US-Russian Cooperation

A political settlement between the U.S., Russia and Israel could address Iran’s presence in Syria.

By Xander Snyder
 

The U.S. and Russia may be at odds from Ukraine to North Korea, but they appear to be much more aligned in Syria, where neither wants to see Iran gain a substantial foothold. As the Syrian civil war winds down, Moscow wants to make sure that it – not Tehran – remains the primary benefactor of President Bashar Assad; that it retains its bases at Tartus and Hmeimim; and that Iran’s presence in the Middle East is curbed. These interests may account for the reports of increasing competition between Russia and Iran in Syria, including skirmishes between groups supported by each.



The U.S., of course, is trying to halt Iran’s advance across the Middle East. It’s unlikely the U.S. can fully displace Iran from Syria, but at minimum it wants to limit the number of Iranian ground forces in Syria to prevent Tehran from having a contiguous overland route to the Mediterranean Sea. And so, as U.S. and Russian interests converge and an opportunity for cooperation arises, Russian, U.S. and Israeli officials will meet next week to discuss what’s next in Syria.
 
Israel: The Linchpin
Israel's participation is crucial because Israel has in its estimation the strongest interest of the three to keep Iran out of Syria – protecting its territorial integrity. And while both Russia and the U.S. need to curb Iran’s influence, neither wants to attack Iran directly. Both are happy to let Israel do the heavy lifting, at least in southern Syria, where Israel has its own direct interest in pushing Iran and its proxies in Syria away from its borders. While Russia did provide Syria with S-300 missile defense systems, nominally to protect itself from airstrikes, it’s done little else to halt Israel’s attacks on Iranian positions in Syria. Instead, the two have maintained backchannel communications so that Moscow can be notified when Israel intends to strike. Russia has, moreover, reportedly refused to sell S-400 missile defense systems to Iran. Moscow would be wary of providing Iran with air defense systems that could frustrate Israeli airstrikes targeting Iran in Syria. (Iran denied ever seeking to purchase S-400s.)

Still, Israel can’t do it alone. While it hammers southern Syria with airstrikes, the U.S. and Russia will have to play their parts in what is, if not an outright alliance, at least a collaborative effort among the three. Russia will continue to support Assad’s ground forces as they reclaim territory and provide ground support through militias like the Tiger Forces, hoping to reduce Assad’s dependence on Iran-backed ground forces. Russia may also play a more political role, trying to lessen Iran’s influence on the Assad regime. In this, it may already be somewhat successful. A recent reshuffle of Syrian security forces weakened the position of Maher Assad, a brother of the president who is believed to be particularly close to Iran. The U.S., meanwhile, will hold onto positions in northeastern Syria, ostensibly in support of its allies like the Syrian Democratic Forces, but also to prevent Iran from seizing the oil fields in that part of the country that could increase Iran’s power in a final political settlement. Iran won’t be willing to directly attack those U.S. forces for fear of retaliation.

And while Russia may complain about the continued U.S. presence in Syria, it at least temporarily serves Russia’s interests by preventing Iran from seizing territory in northern and northeastern Syria and keeping the Islamic State contained to a limited insurgency with no real ability left to threaten the Assad regime. For its part, the U.S. may be willing to exchange cooperation against Iran in Syria for sanctions relief for Russia.
 
Turkey: The Wild Card
The U.S. presence in northern Syria serves another purpose for Russia: It mitigates the threat of a Turkish invasion from the north. A complete U.S. withdrawal – the kind that U.S. President Donald Trump threatened in December 2018 but subsequently backtracked from – would open the path for Turkey to push further into northern Syria. Russia would rather reach a settlement between Damascus and the SDF than have to account for Turkish demands, which would inevitably be far greater if Turkey held more territory – and therefore greater negotiating power – in northern Syria.

    (click to enlarge)

 
But even in a settlement between the U.S., Russia and Israel, Turkey is the wild card. It’s not that its interests are unclear – it would want to trade its current semi-occupation of Idlib province for greater control over its shared border with northern Syria, where the majority of Syria’s Kurds live. The question is what that control looks like, and how much Assad and Russia would be willing to cede to Turkey in the north in exchange for relinquishing its hold on Idlib to Assad.

Turkey’s issue is that it wants substantially greater control over northern Syria east of the Euphrates River, but on its own timeline. Despite Turkish President Recep Tayyip Erdogan’s incessant threats to invade northern Syria, he urged temperance when Trump unexpectedly announced a U.S. pullout back in December. Turkey was not ready for the kind of deployment that would be necessary to move into northern Syria on Washington’s timeline and at a scale necessary to hold the territory and eject the Kurdish forces it wanted gone, all the while preventing a recapture of territory by IS. No, Turkey would much prefer to have its cake and eat it too. If the U.S. stays where it is, providing stability in portions of northern Syria, Turkey can selectively and gradually assert control over small pockets of that region.

In a U.S.-Russia-Israel agreement on Iran, Turkey may have to give up Idlib so that Assad can eliminate the rebel presence there without the support of Iranian ground forces. But Turkey would want something in exchange, and it’s possible that Turkey will not be capable of a full-scale invasion of northern Syria before Assad reaches some sort of agreement with the SDF to surrender its autonomy, or before the U.S. decides to withdraw its own forces. Turkey may talk a big game, but having to confront the Syrian government is a different game entirely from attacking ground militias, which is what Turkey has done on its two incursions into Syria so far.

So, what would Turkey get out of such a settlement? Most likely it would take some form of an updated Adana agreement, the 1998 settlement between Turkey and Syria in which Syria agreed not to harbor members of the Kurdistan Workers’ Party (PKK), and Turkey was allowed limited incursions into Syrian territory (up to 5 kilometers, or 3 miles) to pursue any PKK members that Syria didn’t control. Russia would guarantee the terms of the agreement, Turkey would cede Idlib while retaining some buffer space in northwestern Syria and rights to move into northern and north eastern Syria in order to eliminate specific PKK-related threats when necessary. Turkey may not be thrilled with the result, but it would be enough to meet some of its security needs and wouldn’t necessitate a full-scale occupation of northern Syria, which may be more of a strain on its resources in the long-term than Turkey could handle.

A three-way agreement between Russia, Israel and the U.S. to counter Iran wouldn’t immediately end the Syrian civil war, and neither would it guarantee a complete expulsion of Iran from Syria. But it would be a major step toward establishing shared cause to find meaningful political resolutions to problems that have mired the country in an all-consuming war for nearly a decade.


Ray Dalio – John Mauldin Conversation, Part 6

By John Mauldin

 

This is the final letter of the six-part series of my reply to Ray Dalio’s essays.

Here are some links to help you wrap it all together.

As Ray notes, the problems he describes really are existential. He and I agree more than we disagree, but our responses differ.
 
I think that we both agree that the wrong answers will cause much angst and pain for most of our fellow citizens (and that is a severe understatement). And given his reply to me in Forbes, I think Ray would agree with me there are no easy solutions, only very difficult choices vs. disastrous ones. The longer we wait to deal with the problems, the more painful resolving them will be.
 
And make no mistake, the existential problems we are talking about (and neither of us use the word “existential” lightly) will resolve themselves in a highly tumultuous manner if we as a society don’t face them directly and soon.

They are mostly problems of our own making, and since there are no time machines, we must deal with the reality which we created.
 
Today in my final reply to Ray I sum up my previous letters and describe one possible path for dealing with these problems. My idea will be controversial for most people. I am totally open to another, better solution if anybody knows one.
 
Ray started his letter as an invitation to a dialogue/conversation. I hope we can continue our conversation and others will join in. And with that, let’s finish my open letter to Ray…

No Easy Solutions
 
Dear Ray,
 
Let me see if I can summarize my writing so far and what I believe to be your main concerns, which I share. I do welcome a response.
 
Last week I focused primarily on the US deficit and debt situation. Total federal debt is now $22.5 trillion plus another $3 trillion of state and local debt. Annual deficits are running at an average of $1.2 trillion and growing. As I demonstrated, in a recession the annual deficits will likely rise to $2.5 trillion, and certainly no less than $2 trillion, simply using CBO projections and assuming that revenues would drop and then slowly recover similarly to the last recession. I think that is a more-than-reasonable forecast.
 
That means total US government debt will be at $44 trillion plus maybe $6 trillion of state and local debt by the end of the 2020s, just a decade from now.

Not to mention unfunded liabilities, corporate debt, etc. Of course, that assumes no tax increases and no budget cuts. Significant spending cuts are unlikely as the deficits are mostly entitlements, interest, and defense spending.

So-called “non-defense discretionary” spending is actually a small part of the total budget. And while deficit hawks might find $100 billion to cut here and there, that wouldn’t affect the grand scheme of things. There is little political will to cut entitlement spending, and to your point, Ray, we may actually need more spending in order to solve the growing wealth and income disparity problem.
 
That brings us to taxes. Most tax increase proposals would raise rates on “the rich.” Using government data, I showed that a 25% increase on the top 10% of US income earners (roughly those making $120,000+) would produce only $250 billion per year. Ray, I am not certain what you think it will cost to reduce income disparity, but it would certainly eat up a good portion of that $250 billion, leaving little for deficit reduction.
 
Any such tax increase will be even more difficult if we enter recession within the next few years, which the New York Fed’s forecast shows is not far-fetched. Here is their latest data showing a roughly 33% probability of recession within 12 months.
 


The longer the yield curve stays inverted and the more it inverts the more probable a recession is. We have now had an inverted yield curve for three+ months and as I write are still in that situation. The New York Fed’s model has never reached a probability of 100% prior to any recession. But if memory serves, there has always been a recession anywhere from nine to 18 months after the model reaches its current level. The timing isn’t precise, but it’s close enough for our discussion.
 
[Sidebar: To my regular readers, I will further discuss this and other recession indicators next week, plus the political and economic ramifications. Please be patient.]
 
In any case, at some point there will be a recession, the Fed’s rate cut plans notwithstanding. I think they will keep cutting at least back to the zero bound.

You indicate that you believe, and I agree, that it won’t put the economy back on track. Then they will start with quantitative easing.
 
You also feel that QE won’t help and will likely cause even greater income and wealth disparity. I agree. But I have sat in meetings with participants in the Fed thought process. Confronted with the probability that their actions won’t deliver the desired results, they simply reply that we have to “do something.” I’m sure you’ve had that experience more times than I.
 
No matter how ineffective we might believe it to be, they are going to keep rates at or below the zero bound and ratchet up quantitative easing, building the Fed’s balance sheet up to levels that today would seem mind-numbing.
 
I think Japan is the model here. Like the BOJ, the Fed will keep rates ultra-low and buy bonds until there are no more bonds to buy. The government will run massive deficits as long as the market lets them get away with it. And in Japan and apparently Europe, at least, the market seems to have quite a deal of tolerance in that regard. I call it Japanification and it will have roughly the same results here: extremely low growth, if any growth at all, tending towards deflation. Except that the deflation, at least in the price of things government doesn’t affect like healthcare, will likely be worse in the 2020s because of technology.
 
That’s not the end of the world, but it is certainly not a world that compares favorably to the 1950s, 1980s, or 1990s. You argue that we need to engage in a new combination of fiscal and monetary policy, something you called Monetary Policy 3, or MP3. Modern Monetary Theory (MMT) may or may not be part of that, and you caution that MMT has significant negative consequences and that you are not endorsing it. Again, I would totally agree. I want to come back to MP3 a little later…

A Radical Restructuring of the Economy

and Tax Code
 
You’ve laid out what you believe to be the basis for how the economy and markets work. Let me offer a few simple assumptions of my own.
 
1.   There is no political will in either the Republican or Democratic party to reduce entitlement spending, and entitlement spending is on an ever-increasing path.
2.   There is simply no way that we can raise income taxes enough to close the deficit to within striking distance of nominal GDP growth (where debt relative to GDP growth is equal).
3.   As long as debt is expanding as it is now, we will stay in a slow-growth economy at best, if not in recession. Much research shows that increasing debt beyond today’s level will reduce GDP growth.
4.   What we need to do is very difficult: balance the budget, bring deficits and debt under control, so that we can begin to grow our way out of the crisis. But we can’t do that while thinking about revenues as we do now.

So what can we do? The first step toward getting yourself out of a hole is to stop digging.
 
I would suggest that the US adopt a Value Added Tax or VAT, excluding food and certain other basic necessary items. I would make the VAT high enough to completely eliminate Social Security taxes on both the individual and businesses, giving lower income earners a significant tax break. We could also compensate those below the poverty line for their VAT costs.
 
Ironically, you and I will both qualify for Social Security benefits soon. I daresay you need it even less than I do. We aren’t the only ones. I think we should consider means-testing Social Security, and the same for all entitlements.
 
Consumption taxes like the VAT are the least economically damaging of all taxes, at least according to most of the research that I have read. While I personally (or at least the economist in me) would like a VAT high enough to get rid of all other taxes, I just don’t know if it would be politically posible.
 
One attraction should be that, if the VAT is high enough, say in the 17 or 18% range, we could have much lower income taxes. Just for illustration, maybe there could be…
  • No income tax below $50,000,
  • A 10% income tax on incomes from $50,000–$100,000,
  • A 20% tax on all income between $100,000 and $1 million,
  • A 25% tax on incomes between $1 million and $10 million,
  • and a 30% tax on incomes over $10 million.

… all with no personal deductions for anything. Period. That should certainly produce enough total revenue (along with corporate taxes) to fund the government as currently configured. It might even allow a little bit more for important needs we have deferred (like infrastructure) as well as medical and scientific research.
 
I totally understand that conservatives are uncomfortable opening the door to a VAT when a future majority might raise income taxes on top of it. I would be among them. In the spirit of compromise, we could amend the Constitution to require 60% majorities in both House and Senate to pass any tax increases. Of course, that would have to be passed by 37 states in order to become part of the Constitution, but that can be part of the negotiation process. Perhaps the new tax regime’s launch could be contingent on adoption by 37 states, which would encourage a more rapid adoption process.
 
I would also suggest that the tax changes be phased in over three or four years to allow for individuals and businesses to adjust.
 
This plan would eliminate the need for higher debts and quantitative easing, and would let the Fed keep interest rates at a more normal level.

Retirees could once again look for an actual return on their savings, instead of the brutal punishment of financial repression. (We can have a whole separate conversation on allowing the market to set interest rates rather than 12 individuals sitting around a table.)

MP3?
 
I would welcome a further explanation of what you mean by Monetary Policy 3.

I agree we need to do something far different than we are now. If we continue down this same path, at some point a more left-wing government will come to power, raise taxes and increase spending, but not really deal with deficits or the burden of ever-increasing entitlement spending. That will not work as well as they hope. I can totally foresee a movement back to the right, which would want to repeal those same policies. Neither side would actually come close to dealing with the real problems. We would remain in a regime of ever-increasing deficits, accompanied by growing debt and quantitative easing.

The simple fact of the matter: We don’t know how much debt the markets will be willing to give to the United States. As in actually having the cash, not to mention the willingness, to buy government debt. $44 trillion is a lot of money, which is why I think we will be encumbered with quantitative easing and zero interest rates until there is a significant structural change in how we manage revenue and spending.
 
We simply don’t want to know what the limit is on the amount of debt the United States can sustain. If we ever find out, it will be too late. We will be in a crisis.
 
Unfortunately, I think my proposal or any other compromise solution is simply not possible in today’s partisan world. That being said, I think this is an important conversation to have. When that crisis does happen, maybe somebody will pull one of the compromise plans off the shelf and say, “Let’s try this.”
 
What I don’t want to see is a repeat of what happened at the beginning of the Great Recession. When the powers that be finally realized the financial world was collapsing down around our ears, they had no plan.

They were making it up as they went along. While they put out the fire, they also did a great deal of damage. This was not the best way to deal with the problem. But it was probably the best they could do at that moment, given the realities on the ground.
 
That’s why it is important to make this discussion become both public and national. I would hope that others will join us in thinking about how to restructure the US economy into a more self-sustaining and hopefully more equitable system. Having plans available for consideration in the next crisis will help create a willingness to compromiso.
 
I think this may be the most important decision that our nation makes in my lifetime. If we continue down this path, at best we are consigning ourselves to more of the same meager growth. At worst, we will have a crisis that ends with what I call The Great Reset, where the world has to radically restructure its debt in ways that will not be pleasant. (That is an understatement along the lines of calling the Great Depression merely “unpleasant.”)
 
All this will be happening as technology improves our lives but also slowly eliminates higher-paying jobs, causing many people to earn less than they thought their education would justify. We will see more become “underemployed,” creating a great deal of political and social frustration.

I hope we can avoid this type of Blade Runner outcome. There is the potential for a far more abundant and pleasant future for everyone, if we can reconcile these economic conundrums.
 
This has been a conversation well worth having. Ray, I want to sincerely thank you for starting what could be a very, very important national engagement. And politely ask for a little bit more elucidation on what you mean by MP3.

Seriously… I really want to know.

A Brief Commercial
 
I know that many readers are small business owners, especially investment advisor/broker-dealer firms. One of the problems in the investment advisor business (as well as others) is that many of us are getting older and need to transition our businesses to younger successors who need financing. One of the partners in my network of recommended services is a national bank called T-Bank, which specializes in SBA (Small Business Administration) loans. They have done numerous SBA loans for small businesses that are transitioning to the next generation.
 
SBA loans also have other purposes and T-Bank is an excellent source. T-Bank also develops cash balance retirement plans that let owners save more tax deferred income (I have a cash balance plan and it indeed works!).

New York, Maine, and Montana
 
Early August sees me in New York for a few days before the annual economic fishing event, Camp Kotok. Then maybe another day in New York before I meet Shane in Montana to spend a few days with Darrell Cain on Flathead Lake.
 
I met with my partners Olivier Garret and Ed D’Agostino in Boston two weeks ago. We were making longer-term plans for Mauldin Economics, as we do from time to time. They have done a very good job of growing the business and I am happy with it. But they also expressed very clearly that I need to stop talking about writing a book about the future and actually begin writing. I am mentally ready, but structurally I am not always the most organized.
 
Writing a book is simply a massive undertaking, especially when it is as all-encompassing as “the future,” whatever that is. But to underline their insistence, they laid out a plan and offered help. It made sense and I am now actually beginning to write. The goal is to have a book in our hands sometime in the spring.
 
Much of the writing has already been done in one form or another; the problem is pulling it together, not to mention sorting through the thousands of pages of research on my computer and in links that I have saved, and much that has been sent to me by teams of my readers (thank you!). The good news is my travel schedule is not all that demanding over the next five to six months. And if Puerto Rico can avoid another debilitating hurricane, this is a great place to write.
 
Years ago, I took my family to Venice where a reader graciously offered to be our guide for a few days. He took us out to one of the small islands nearby where Ernest Hemingway actually wrote some of his novels. It was quite the idyllic location. I can’t complain in the least about my own location and circumstances, so I simply need to get on with it and crank out a chapter or two a week for the next five months. Plus my regular letters.
 
As my dad would say when we started a big project, “Son, that’s no hill for a stepper.” And with that, it is time to hit the send button. Let me wish you a great week.
 
Your getting ready to step up analyst,


John Mauldin
Chairman, Mauldin Economics