Hong Kong in revolt

China’s unruly periphery resents the Communist Party’s heavy hand

The party cannot win lasting assent to its rule by force alone

A few days ago hundreds of young people, some teenagers, turned the redbrick campus of the Hong Kong Polytechnic University into a fortress. Clad in black, their faces masked in black too, most of them remained defiant as they came under siege. Police shot rubber bullets and jets of blue-dyed water at them. Defenders crouched over glass bottles, filling them with fuel and stuffing them with fuses to make bombs.

Many cheered the news that an arrow shot by one of their archers had hit a policeman in the leg. After more than five months of anti-government unrest in Hong Kong, the stakes are turning deadly.

This time, many exhausted protesters surrendered to the police—the youngest of them were given safe passage. Mercifully, massive bloodshed has so far been avoided. But Hong Kong is in peril. As The Economist went to press, some protesters were refusing to leave the campus, and protests continued in other parts of the city. They attract nothing like the numbers who attended rallies at the outset—perhaps 2m on one occasion in June. But they often involve vandalism and Molotov cocktails.

Despite the violence, public support for the protesters—even the bomb-throwing radicals—remains strong. Citizens may turn out in force for local elections on November 24th, which have taken on new significance as a test of the popular will and a chance to give pro-establishment candidates a drubbing.

The government’s one concession—withdrawing a bill that would have allowed suspects to be sent to mainland China for trial—did little to restore calm. Protesters say they want nothing less than democracy. They cannot pick their chief executive, and elections for Hong Kong’s legislature are wildly tilted. So the protests may continue.

The Communist Party in Beijing does not seem eager to get its troops to crush the unrest. Far from it, insiders say. This is a problem that the party does not want to own; the economic and political costs of mass-firing into crowds in a global financial centre would be huge. But own the problem it does.

The heavy-handedness of China’s leader, Xi Jinping, and public resentment of it, is a primary cause of the turmoil. He says he wants a “great rejuvenation” of his country. But his brutal, uncompromising approach to control is feeding anger not just in Hong Kong but all around China’s periphery.

When Mao Zedong’s guerrillas seized power in China in 1949, they did not take over a clearly defined country, much less an entirely willing one. Hong Kong was ruled by the British, nearby Macau by the Portuguese. Taiwan was under the control of the Nationalist government Mao had just overthrown. The mountain terrain of Tibet was under a Buddhist theocracy that chafed at control from Beijing. Communist troops had yet to enter another immense region in the far west, Xinjiang, where Muslim ethnic groups did not want to be ruled from afar.

Seventy years on, the party’s struggle to establish the China it wants is far from over. Taiwan is still independent in all but name. In January its ruling party, which favours a more formal separation, is expected to do well once again in presidential and parliamentary polls. “Today’s Hong Kong, tomorrow’s Taiwan” is a popular slogan in Hong Kong that resonates with its intended audience, Taiwanese voters.

Since Mr Xi took power in 2012 they have watched him chip away at Hong Kong’s freedoms and send warplanes on intimidating forays around Taiwan. Few of them want their rich, democratic island to be swallowed up by the dictatorship next door, even if many of them have thousands of years of shared culture with mainlanders.

Tibet and Xinjiang are quiet, but only because people there have been terrorised into silence. After widespread outbreaks of unrest a decade ago, repression has grown overwhelming. In the past couple of years Xinjiang’s regional government has built a network of prison camps and incarcerated about 1m people, mostly ethnic Uighurs, often simply for being devout Muslims.

Official Chinese documents recently leaked to the New York Times have confirmed the horrors unleashed there. Officials say this “vocational training”, as they chillingly describe it, is necessary to eradicate Islamist extremism. In the long run it is more likely to fuel rage that will one day explode.

The slogan in Hong Kong has another part: “Today’s Xinjiang, tomorrow’s Hong Kong”. Few expect such a grim outcome for the former British colony. But Hong Kongers are right to view the party with fear. Even if Mr Xi decides not to use troops in Hong Kong, his view of challenges to the party’s authority is clear. He thinks they should be crushed.

This week America’s Congress passed a bill, nearly unanimously, requiring the government to apply sanctions to officials guilty of abusing human rights in Hong Kong. Nonetheless, China is likely to lean harder on Hong Kong’s government, to explore whether it can pass a harsh new anti-sedition law, and to require students to submit to “patriotic education” (ie, party propaganda). The party wants to know the names of those who defy it, the better to make their lives miserable later.

Mr Xi says he wants China to achieve its great rejuvenation by 2049, the 100th anniversary of Mao’s victory. By then, he says, the country will be “strong, democratic, culturally advanced, harmonious and beautiful”. More likely, if the party remains in power that long, Mao’s unfinished business will remain a terrible sore. Millions of people living in the outlying regions that Mao claimed for the party will be seething.

Not all the Communist elite agree with Mr Xi’s clenched-fist approach, which is presumably why someone leaked the Xinjiang papers. Trouble in the periphery of an empire can swiftly spread to the centre. This is doubly likely when the peripheries are also where the empire rubs up against suspicious neighbours.

India is wary of China’s militarisation of Tibet. China’s neighbours anxiously watch the country’s military build-up in the Taiwan Strait. A big fear is that an attack on the island could trigger war between China and America. The party cannot win lasting assent to its rule by force alone.

In Hong Kong “one country, two systems” is officially due to expire in 2047. On current form its system is likely to be much like the rest of China’s long before then. That is why Hong Kong’s protesters are so desperate, and why the harmony Mr Xi talks so blithely of creating in China will elude him.

What Next for Unconventional Monetary Policies?

Although interest-rate cuts and central-bank asset purchases were highly effective in resolving the 2008 financial crisis, they have proved utterly disappointing in the years since. At this stage, it should be clear that the sustained weakness of private-sector investment is not a problem central bankers can fix on their own.

Stephen Grenville


SYDNEY – The Bank for International Settlements (BIS), the central bankers’ club in Basel, Switzerland, recently conducted an in-depth evaluation of the unconventional monetary policies that have become the norm in many countries since the 2008 financial crisis.

It should come as no surprise that the resulting report, compiled by a committee of central bankers reviewing their own past performance, finds little to fault.

That is fine; the financial system was saved, after all. But a more important question is whether, and to what extent, unconventional policies remain relevant in the post-crisis world.

Back in 2008, the primary task for policymakers was to prevent the financial sector from collapsing and stabilize the economy. Conventional policies proved insufficient, and it became clear that other measures were needed to address the financial meltdown directly. Chief among these was quantitative easing, in which the central bank buys up assets in order to inject liquidity into the financial system.

In November 2008, at the height of the crisis, the US Federal Reserve started purchasing securities in the then-frozen mortgage market. QE1, as it came to be known, was highly successful: mortgage lending soon resumed, supporting the crippled housing market, and many borrowers were able to refinance their loans at much lower interest rates.

The QE1 purchases might have been unusual, but they were not “unconventional.” Walter Bagehot, the storied editor of The Economist, pointed out over a century ago that it was the duty of central banks to prop up collapsing financial sectors. Central banks have been stepping in and leveraging their balance sheets in times of crisis ever since.

When QE1 began, Lehman Brothers was bankrupt, the insurance giant AIG had been bailed out, and the money market had been given a government guarantee. Against that backdrop, QE1 was just another rescue measure among many throughout Western economic history.

The unanimous view is that QE1 and central banks’ other immediate measures were successful.

But once the financial system had been saved, monetary policymakers started confronting an entirely different challenge. Despite near-zero interest rates, the post-crisis recovery was decidedly lackluster.

So, QE continued, but with a new operational objective: to give monetary policy more traction by lowering the long end of the yield curve. With this objective in mind, several central banks pushed interest rates into negative territory. And through “forward guidance” announcements that interest rates would be kept “low for long” – central bankers assured markets that the era of cheap funding would continue.
For all of the boldness of these initiatives, the results were disappointing. US bank lending fell after QE1 began, and didn’t recover its pre-crisis peak until more than three years later. In Europe and the United Kingdom, bank lending was even less responsive. Japan, the country with the longest experience of QE, remains mired in slow growth and below-target inflation to this day.

Negative interest rates often seemed to be aimed mainly at achieving a more competitive exchange rate, which might well have been criticized as a “beggar thy neighbor” policy.

Forward guidance, meanwhile, just confused things: market participants became more focused on the next round of “guidance” than on the economy’s prospects, and often overreacted to the wording of the central bank’s latest pronouncement, as in the case of the 2013 “taper tantrum.”

Despite the mediocre performance of unconventional monetary policies throughout the recovery phase, the BIS report concludes that the benefits outweighed the adverse side effects. It goes on to argue that such policies should become a standard monetary-policy tool. The unconventional should become routine.

Yet that wouldn’t resolve the central conundrum of the post-crisis period. Why didn’t extremely loose monetary-policy conditions have more of an impact? The BIS report itself offers a clue when it argues that unconventional monetary policies would be more effective if accompanied by other policies, notably fiscal expansion.

During the post-2010 period, fiscal austerity prevailed around the world, which was completely out of balance with the super-expansionary monetary conditions. True, many governments pursued fiscal stimulus immediately following the 2008 crash, and these measures were endorsed by the G20 in London in 2009.

But by 2010, the European periphery was in crisis and fears of rising public debt ushered in broad fiscal retrenchment. In the five years to 2015, the United States reduced its deficit by 5% of GDP. That alone is enough to explain why the recovery was so weak.

But it doesn’t explain why near-zero interest rates have had so little effect on private-sector investment. As the economist Paul Samuelson once reportedly quipped, if real (inflation-adjusted) interest rates were zero and expected to remain so, it would be profitable to flatten the Rocky Mountains just to reduce transportation costs. With borrowing costs so low for so long, why has there not been an explosion of profitable projects and investments?

A number of answers have been suggested, from Lawrence H. Summers’s contention that we are experiencing “secular stagnation,” to the argument that short-termism has short-circuited corporate managers’ decision-making. Perhaps US President Donald Trump’s trade war has contributed confidence-sapping uncertainty. Or maybe all of the best investment projects are in the non-market public sector, where deficit fears have prevented them from being realized.

Whatever the answer, it is doubtful that pushing harder on monetary policy – with lower (perhaps negative) interest rates and the full panoply of unconventional policies – would lead to much additional investment. Moreover, unconventional policies can distort financial prices, resulting in poor assessments, resource misallocations, and arbitrary reallocations of wealth.

In the short term, then, the BIS report’s oblique and subtle message should be heeded: the strenuous efforts of monetary policies over the past decade need to be supplemented by fiscal expansion, especially if the global economy is slowing. But in the longer term, we need a better understanding of why private-sector investment has lost its mojo.

Stephen Grenville, a former deputy governor of the Reserve Bank of Australia, is a non-resident fellow at the Lowy Institute in Sydney.

Why Gold Stocks Are an “Asymmetric Bet”

By Doug Casey, founder, Casey Research

My regular readers know why I believe the gold price is poised to move from its current level of around $1,460 per ounce to $2,000… $3,000, and beyond.

Right now, we are exiting the eye of the giant financial hurricane that we entered in 2007, and we’re going into its trailing edge. It’s going to be much more severe, different, and longer lasting than what we saw in 2008 and 2009.

In a desperate attempt to stave off a day of financial reckoning during the 2008 financial crisis, global central banks began printing trillions of new currency units. The printing continues to this day. And it’s not just the Federal Reserve that’s doing it: it’s just the leader of the pack. The U.S., Japan, Europe, China… all major central banks are participating in the biggest increase in global monetary units in history.

These reckless policies have produced not just billions, but trillions, in malinvestment that will inevitably be liquidated. This will lead us to an economic disaster that will in many ways dwarf the Great Depression of 1929–1946. Paper currencies will fall apart, as they have many times throughout history.

This isn’t some vague prediction about the future. It’s happening right now. The Canadian dollar has lost 26% of its value since 2013. The Australian dollar has lost 36% of its value during the same time.

The Japanese yen and the euro have crashed in value. And the U.S. dollar is currently just the healthiest horse on its way to the glue factory.

These moves show that we’re in the early stages of a currency crisis. But if you make the right moves, you could actually make windfall gains instead of suffering losses. Here’s how to do it…
The huge winner during this crisis will be the only currency that has real value: gold.

Gold has been used as money for thousands of years because it has a unique combination of qualities. Let me spell it out very briefly: It’s durable (almost indestructible – that’s why we don’t use food as money), divisible (each divided piece is valuable – that’s why we don’t use artwork as money), convenient (its unit value is very high – that’s why iron isn’t a good money), consistent (all .999 gold is identical – that’s why we don’t use real estate as money), and has value in and of itself (which is why we shouldn’t use paper as money). Just as important, governments can’t create gold out of thin air. It’s the only financial asset that’s not simultaneously someone else’s liability.

When people wake up and realize that most banks and governments are bankrupt, they’ll flock to gold… just as they’ve done for centuries. Gold will rise multiples of its current value. I expect a 200% rise from current levels, at the minimum. There are many reasons, which we don’t have room to cover here, why gold could see a truly significant gain. And in real terms, not just against paper money.

This should produce a corresponding bull market in gold stocks… of an even greater magnitude. A true mania for gold stocks could develop over the coming years. This could make anyone who buys gold stocks at their current depressed levels very rich.

What History Teaches Us About Great Speculations

Many of the best speculations have a political element to them.

Governments are constantly creating distortions in the market, causing misallocations of capital.

Whenever possible, the speculator tries to find out what these distortions are, because their consequences are predictable.

They result in trends you can bet on. Because you can almost always count on the government to do the wrong thing, you can almost always safely bet against them. It’s as if the government were guaranteeing your success.

The classic example, not just coincidentally, concerns gold.

The U.S. government suppressed its price for decades while creating huge numbers of dollars before it exploded upward in 1971. Speculators who understood some basic economics positioned themselves accordingly. Over the next nine years, gold climbed more than 2,000% and many gold stocks climbed by more than 5,000%.

Governments are constantly manipulating and distorting the monetary situation. Gold in particular, as the market’s alternative to government money, is always affected by that. So gold stocks are really a way to short government – or go long on government stupidity, as it were.

The bad news is that governments act chaotically, spastically.

The beast jerks to the tugs on its strings held by various puppeteers. But while it’s often hard to predict price movements in the short term, the long term is a near certainty. You can bet confidently on the end results of chronic government monetary stupidity.

Mining stocks are extremely volatile for that very same reason. That’s good news, however, because volatility makes it possible, from time to time, to get not just doubles or triples but 10-baggers, 20-baggers, and even 100-to-1 shots.

When gold starts moving higher, it’s going to direct a lot of attention towards gold stocks. When people get gold fever, they are not just driven by greed, they’re usually driven by fear as well, so you get both of the most powerful market motivators working for you at once. It’s a rare class of securities that can benefit from fear and greed at once.

Remember that the Fed’s pumping-up of the money supply ignited a huge bubble in tech stocks in the late ’90s, and then an even more massive global bubble in real estate that burst in 2008. But they’re still creating tons of dollars.

This will inevitably ignite other asset bubbles. Where? I can’t say for certain, but I say the odds are extremely high that as gold goes up, a lot of this funny money is going to pour into these gold stocks, which are not just a microcap area of the market but a nanocap area of the market. The combined market capitalization of the 10 biggest U.S.-listed gold stocks is less than 8% of the size of Facebook alone.

I’ve said it before, and I’ll say it again: When the public gets the bit in its teeth and wants to buy gold stocks, it’s going to be like trying to siphon the contents of the Hoover Dam through a garden hose.

Gold stocks, as a class, are going to be explosive. Now, you’ve got to remember that most of them are junk. Most will never, ever find an economic deposit. But it’s hopes and dreams that drive them, not reality, and even those without merit can still go up 10, 20, or 30 times your entry price.

And companies that actually have the goods can go much higher than that.

You buy gold, the metal, because you’re prudent. It’s for safety, liquidity, insurance. The gold stocks, even though they explore for or mine gold, are at the polar opposite of the investment spectrum; you buy them for their extreme volatility, and the chance they offer for spectacular gains. It’s rather paradoxical, actually.

Why Gold Stocks Are an Ideal “Asymmetric Bet”

Because these stocks have the potential to go 10, 50, or even 100 times your entry price, they offer something called “asymmetry.”

You probably learned about symmetry in grade school. It’s when the parts of something have equal form and size. For example, cut a square in half and the two parts are symmetrical.

Symmetry is attractive in some forms. The more symmetrical someone’s face is, the more physically attractive they are considered to be. Symmetry is often attractive in architecture.

But when it comes to investing and speculating in the financial markets, the expert financial operator eschews symmetry. Symmetry is for suckers.

The expert financial operator hunts for extreme asymmetry.

An asymmetric bet is one where the potential upside of a position greatly exceeds its potential downside. If you risk $1 for the chance of making $20, you’re making an asymmetric bet – especially if the odds are very good you could be right.

Amateur investors too often risk 100% of their money in the pursuit of a 10% return. These are horrible odds. But the financially and statistically illiterate take them. You might do better in a casino or most sports betting. It’s one of the key reasons most people struggle in the market.

I’ve always been more attracted to asymmetric bets… where I stand a good chance of making 10, 50, even 100 times the amount I’m risking. I’m not interested in even bets. I’m only taking the field if my potential upside is much, much greater than my potential downside.

Because of the extreme asymmetry gold stocks offer – because of their extreme upside potential when they’re cheap – you don’t have to take a big position in them to make a huge impact on your net worth. A modest investment of $25,000 right now could turn into $500,000 in five years. It has happened before and it will happen again.

Right now gold stocks are near a historic low. I’m buying them aggressively. At this point, it’s possible that the shares of a quality exploration company or a quality development company (i.e., one that has found a deposit and is advancing it toward production) could still go down 10%, 20%, 30%, or even 50%. But there’s an excellent chance that the same stock will go up by 10, 30, or even 50 times.

I hate to use such hard-to-believe numbers, but that is the way this market works.

When current government policies inflate the coming resource bubble, the odds are excellent we’ll be laughing all the way to the bank. Assuming the bank is still there…

No one, including me, knows that a gold mania is just around the corner. But having operated in this market for over 40 years, I can tell you this is a very reasonable time to be buying these volatile stocks. And it’s absolutely a great time to start educating yourself about them.

There’s an excellent chance a truly massive bubble is going to be ignited in this area. If so, the returns are going to be historic.

The Greatest Swindle in American History... And How They'll Try It Again Soon

by Jeff Thomas

International Man: Before 1913 there was no income tax, and the United States was a much freer country. Initially, the government sold the federal income tax to the American people as something only the rich would have to pay.

Jeff Thomas: Yes, exactly. It always begins this way. The average person is always happy to see the rich taken down a peg, so this makes the introduction of the concept of theft by the government more palatable. Once people have gotten used to the concept and accept it as being perfectly reasonable, then it’s time to begin to drop the bar as to who "the rich" are. Ultimately, the middle class are always the real target.

International Man: The top bracket in 1913 kicked in at $500,000 (equivalent to around $12 million today), and the tax rate for it was only 7%. The government taxed those making up to $20,000 (equivalent to around $475,000 today) at only 1% – that’s one percent.

Jeff Thomas: Any good politician understands that you begin with the thin end of the wedge, then expand upon that as soon as you feel you can get away with it. The speed at which the tax rises is commensurate with the level of tolerance of the people. And in different eras, the same nation may have a different mindset. The more domination a people have come to accept from their government, the faster the pillaging can be expanded.

As an example, the Stamp Tax that King George III placed upon the American colonies in the eighteenth century was very small indeed – less than two percent – but the colonists were very independent people, asking little from the king in the way of assistance, and instead, relying upon themselves for their well-being. Such self-reliant people tend to be very touchy as regards confiscations by governments, and even two percent was more than they would tolerate.

By comparison, if today, say, Texas were to eliminate all state taxation and allow only two percent in federal taxation, Washington would come down on them like a ton of bricks, saying they were attempting to become a "tax haven." They’d be accused of money laundering and aiding terrorism and might well be cut out of the SWIFT system. The federal government would shut down the state government if necessary, but diminished tax would not be tolerated.

International Man: Of course, once the American people conceded the principle of an income tax in 1913, the politicians naturally couldn’t resist ramping it up. Just look at the monstrosity that exists today in the US tax code, which most Americans passively accept as "normal." It’s a typical example of giving an inch and taking a mile.

Jeff Thomas: Yes – the key to it is twofold: First, you have to be sensitive as to how quickly you can ramp up taxation, and second, that rate is directly proportional to the level that the public receive largesse from the government. They have to have become highly dependent upon a nanny state and thereby willing to take their whipping from nanny. The greater the dependency, the greater the whipping.

International Man: Homeowners in the US – and most countries – must regularly pay property taxes, which are taxes on property that you supposedly own. Depending on where you live, they can be quite high and never seem to go down. What are your thoughts on the concept of property taxes?

Jeff Thomas: Well, my view would be biased, as my country of citizenship has never, in its 500-year history, had any direct taxation of any kind. The entire concept of direct taxation is therefore anathema to me. It’s easy for me to see, simply by looking around me, that a society operates best when it’s free of taxation and regulation and people have the opportunity to thrive within a free market.

Years ago, I built my first home from my savings alone, which had been sufficient, because my earnings were not purloined by my government. I never paid a penny on a mortgage and I never paid a penny on property tax. So, following the construction of my home, I was able to advance economically very quickly. And of course, I additionally had the knowledge that, unlike most people in the world, I actually owned my own home – I wasn’t in the process of buying it from my bank and/or government.

So, not surprisingly, I regard property tax as being as immoral and as insidious as any other form of direct taxation.

International Man: Not all countries have a property tax. How do they manage?

Jeff Thomas: I think it’s safe to say that political leaders don’t really have any particular concern over whether a tax is applied to income, property, capital gains, inheritance, or any other trumped-up excuse. Their sole concern is to tax.

Taxation is the lifeblood of any government. Once that’s understood, it becomes easier to understand that government is merely a parasite. It takes from the population but doesn’t give back anything that the population couldn’t have provided for itself, generally more efficiently and cheaply.

So, as to how a government can manage without a property tax, we can go back to your comment that the US actually had no permanent income tax until 1913. That means that they accomplished the entire western expansion and the creation of the industrial revolution without such taxation.

So, how was this possible? Well, the government was much smaller. Without major taxes, it could become only so large and dominant. The rest was left to private enterprise. And private enterprise is always more productive than any government can be.

Smaller government is inherently better for any nation. Governments must be kept anemic.
International Man: The Cayman Islands doesn’t have any form of direct taxation. What does that mean exactly?

Jeff Thomas: It means that the driving force behind the country is the private sector. We tend to be very involved in government decisions and, in fact, generate many of the decisions.

Laws that I’ve written privately for the Cayman Islands have been adopted by the legislature with no change whatsoever to benefit government. As regards property tax, there are only three countries in the western hemisphere that have no property tax, and not surprisingly, all of them are island nations: The Turks and Caicos Islands, Dominica and the Cayman Islands.

I should mention that the very concept of property ownership without taxation goes beyond the concern for paying an annual fee to a government. Additionally, in times of economic crisis, governments have been known to dramatically increase property taxes. Further, they sometimes announce that your tax was not paid for the year (even if it was) and they confiscate your property as a penalty. This has been done in several countries.

What’s important here is that, with no tax obligation, the government in question is unable to simply raise an existing tax. If you have no reporting obligation, you truly own your property. And you can’t be the victim of a "legal" land-grab.

Instituting a new tax is more difficult than raising an existing one, and instituting any tax in a country where direct taxation has never existed is next to impossible.

International Man: How do Cayman’s tax policies relate to its position as a business-friendly jurisdiction?

Jeff Thomas: Well there are two answers to that. The first is that the Cayman Islands operates under English Common Law, as opposed to Civil Law. That means that as a non-Caymanian, you’re virtually my equal under the law. Your rights of property ownership are equal to mine. Therefore, an overseas investor, even if he never sets foot on Cayman, cannot have his property there taken from him by government, squatters, or any other entity such as can legally do so in many other countries.

The second answer is that, since we’re a small island group, the great majority of business revenue comes from overseas investors. Therefore, our politicians, even if they’re of no better character than politicians in other countries, understand that, if they change a law or create a tax that’s detrimental to foreign investors and depositors, wealth can be removed from Cayman in a keystroke of the computer. Before the ink is dried on the new legislation, billions of dollars can exit, on the knowledge that the legislation is taking place.

Now, our political leaders may not be any more compassionate than those of any other country. Their one concern is that their own bread gets buttered. But should they pass any legislation that’s significantly detrimental to overseas investors, their careers are over. They understand that and recognise that their future depends upon making sure that they understand and cater to investors’ needs.

International Man: Governments everywhere are squeezing their citizens through higher taxes and new taxes. And don’t forget that printing money, which debases the currency, is also a real, but somewhat hidden, tax too.

What do you suggest people do to protect themselves?

Jeff Thomas: Well, the first thing to understand is that many nations of the world grabbed onto the post-war coattails of the United States. The US was going to lead the world, and Europe, the UK, Canada, Australia, Japan, etc., all got on board for the big ride to prosperity. They followed all the moves the US made over the decades.

Unfortunately, once they were on board the train, they couldn’t get off. When the US went from being the largest creditor nation to the largest debtor nation, those same countries also got onto the debt heroin.

That big party is coming to an end, and when it does, all countries that are on the train will go over the cliff. So, what that means is that you, as an individual, do not want to be on that train.

If you’re a resident of an at-risk country, you want to, first and foremost, liquidate your assets in that country and get the proceeds out. You may leave behind some spending money in a bank account – so that you have the convenience of chequing, ATMs, etc. – and that money should be regarded as sacrificial.

You then would want to move the proceeds to a jurisdiction that’s likely to not only survive the train wreck but prosper as a result of it. Once it’s there, you want to keep it outside of banks and in forms that are difficult to take from you – cash, real estate and precious metals.

After that, if you’re able to do so, it would be wise to also get yourself out before a crash, as the day will come when migration controls will be imposed and it will no longer be legal to exit.

It does take some doing, but if faced with a dramatic change in life, I’d want to be proactive in selecting what was best for me and my family, before the changing socio-economic landscape made that choice for me.

Editor's Note: Governments everywhere are squeezing their citizens through increased taxation and money printing–which is a hidden tax. This trend will only gain momentum as governments go broke and need more cash.

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

At the same time, the world is facing a severe crisis on multiple fronts. The good news is it will likely cause a panic into gold and gold mining stocks. Gold tends to do well during periods of turmoil.

Plug and pay

Big Tech takes aim at the low-profit retail-banking industry

Silicon Valley giants are after your data, not your money

The annual Web Summit in Lisbon each year is Woodstock for geeks. Over three days in November, 70,000 tech buffs and investors gather on grounds the size of a small town. Rock stars, like Wikipedia’s boss or Huawei’s chairman, parade on the main stage. Elsewhere people queue for 3d-printed jeans or watch startups pitch from a boxing ring.

Money managers announce dazzling funding rounds. Panellists predict a cashless future while gazing into a huge crystal ball. A credit-card mogul dishes out company-coloured macaroons.

Yet the hype conceals rising nervousness among the fintech participants. After years of timidity Big Tech, with its billions of users and gigantic war chest, at last appears serious about crashing their party. “It’s the one group everyone is most scared about,” says Daniel Webber of fxc Intelligence, a data firm. Each of the so-called gafa quartet is making moves.

Amazon introduced a credit card for underbanked shoppers in June; Apple launched its own credit card in August. Facebook announced a new payments system on November 12th (its mooted cryptocurrency, Libra, however, has lost many of its backers and will face stiff regulatory scrutiny). The next day Google said it would start offering current (checking) accounts in America in 2020.

Individually, each initiative is relatively minor, says Antony Jenkins, a former boss of Barclays, a bank, now at 10x, a fintech firm. But together they mark the acceleration of a trend that could reshape the finance industry.

The gafas have long had an interest in finance. Yet until recently they focused on payments, each in its own way. Apple Pay and Google Pay are digital wallets: they hold a digital version of cards but do not process transactions. Neither charges merchants a fee. They simply store everything in one place and make payments more secure by masking customer details. Google collects transaction data; Apple does not. Otherwise holding a phone over a contactless terminal is the same as tapping a card.

Facebook Pay stores card details for use on the group’s various apps (Facebook, Messenger, Instagram and WhatsApp) so customers need not enter them every time. Amazon Pay does the same, and also saves card details for payments on partner websites. Uniquely, it “processes” payments, a task others leave to specialist firms. When a purchase is made through Amazon Pay, it asks the card issuer if there are sufficient funds. If the answer is yes, the shop releases the goods (the money itself generally moves at the end of the day).

What these systems share is their limited success. After eight years Google Pay has just 12m users in America, a market of 130m households. Only 14% of the country’s households with credit cards use Apple Pay at least twice a month. In October the number of customers who used Amazon Pay was just 5% of the number who used PayPal, says Second Measure, a data firm.

This contrasts with the explosive growth of WeChat Pay and Alipay, China’s “super-apps”.

These allow shoppers to pay for nearly anything, from tea to taxis, by scanning a qr code. Launched in 2013, they have over a billion users each. They process transactions worth a third of China’s consumption spending and are now big lenders in their own right (see chart).

But the comparison is unfair. China was able to leapfrog the world because of permissive regulation and a lack of existing digital-payment methods. The rich world already had a decent credit-card system, points out Aaron Klein of Brookings, a think-tank, limiting the appetite for novel solutions. Financial red tape also binds more tightly in the West. To operate as payment institutions across America, newcomers need a licence in every state.

That makes the gafas’ move into retail banking even more puzzling. Since the financial crisis, credit provision has become one of the world’s most regulated activities. That constrains returns on capital and profits. Western lenders’ valuations are a fraction of tech firms’, notes Sankar Krishnan of Capgemini, a consultancy. Why would Big Tech want to be a bank?

The answer is twofold. The tech giants may not yet know exactly what they want, says Martin Threakall of Modulr, a fintech. Silicon Valley likes to place bets and see what sticks. And they probably do not actually want to be banks—as long as consumers do not notice.

At bottom, a bank is a balance-sheet, a factory that turns capital into financial products (eg, loans and mortgages) and a sales force, says Dave Birch of Consult Hyperion, a consultancy.

The first two are heavily regulated, and Big Tech is uninterested.

That is why the giants have turned to banks to do the tedious bits. Apple’s card is issued by Goldman Sachs, and Amazon’s ones by Chase, Synchrony and American Express. Google’s accounts are backed by Citi and a banking union.

Rather, the tech giants covet distribution. Their smarter systems and lack of branches should enable them to strip costs out, says Tara Reeves of omers Ventures, the venture-capital arm of a Canadian pension fund. More important, selling banking products should lead more people to use their payment systems.

Apple and Google want one more reason for consumers to “keep their phone under the pillow at night”, says Lisa Ellis of MoffettNathanson, a research firm. Amazon wants payments in-house so users never leave its app.

But above all, the gafas want data. They are already good at inferring consumers’ preferences from browsing patterns and location. But spending patterns are more useful. They could be used to assess ads’ performance or promote products. An investor says tech giants could even start dispensing financial advice.

It may take them some time to get there. Current accounts are “sticky”: according to Novantas, a financial consultancy, only 8% of American retail customers switch bank each year. Yet they should enjoy having more choice. Free perks and a great user experience could sway them, especially if they know that a bank is in charge of the sensitive bits.

Lenders will also welcome Big Tech—at least initially. Distribution accounts for half of operating costs at America’s typical retail bank, says Gerard du Toit of Bain, a consultancy. Tying up with a gafa would be a neat way to access new deposits, a cheap source of funding.

Yet as Big Tech starts to own consumer relationships, banks could lose clout. They may be forced to give away more data and fees, says Andrei Brasoveanu of Accel, a venture-capital firm. They could end up akin to utilities, providing low-margin financial plumbing. Squeezed profits could lead to a wave of mergers and closures. Digital upstarts will also feel the heat, especially if Big Tech cross-subsidises its financial offerings.

Regulators have so far seen new entrants in financial services as a welcome catalyst for the innovation banks have failed to foster. That could change if the giants charge in. At the Web Summit Margrethe Vestager, the European Union’s competition commissioner and a gafa sceptic, mused about the risks to democracy if tech firms become too powerful to oversee and regulate.

“We can reach for the potential,” she told the amped-up audience in Lisbon. “But we can also do something to control the dark sides.”

Why Financial Markets’ New Exuberance Is Irrational

Owing to a recent easing of both Sino-American tensions and monetary policies, many investors seem to be betting on another era of expansion for the global economy. But they would do well to remember that the fundamental risks to growth remain, and are actually getting worse.

Nouriel Roubini

roubini134_JOHANNES EISELEAFP via Getty Images_USstockmarkettrader

NEW YORK – This past May and August, escalations in the trade and technology conflict between the United States and China rattled stock markets and pushed bond yields to historic lows.

But that was then: since then, financial markets have once again become giddy.

US and other equities are trending toward new highs, and there is even talk of a potential “melt-up” in equity values.

The financial-market buzz has seized on the possibility of a “reflation trade,” in the hope that the recent global slowdown will be followed in 2020 by accelerating growth and firmer inflation (which helps profits and risky assets).

The sudden shift from risk-off to risk-on reflects four positive developments.

First, the US and China are likely to reach a “phase-one” deal that would at least temporarily halt any further escalation of their trade and technology war.

Second, despite the uncertainty surrounding the United Kingdom’s election on December 12, Prime Minister Boris Johnson has at least managed to secure a tentative “soft Brexit” deal with the EU, and the chances of the UK crashing out of the bloc have been substantially reduced.

Third, the US has demonstrated restraint in the face of Iranian provocations in the Middle East, with President Donald Trump realizing that surgical strikes against that country could result in a full-scale war and severe oil-price spike.

And, lastly, the US Federal Reserve, the European Central Bank, and other major central banks have gotten ahead of geopolitical headwinds by easing monetary policies.

With central banks once again coming to the rescue, even minor “green shoots” – such as the stabilization of the US manufacturing sector and the resilience of services and consumption growth – have been taken as a harbinger of renewed global expansion.

Yet there is much to suggest that not all is well with the global economy.

For starters, recent data from China, Germany, and Japan suggest that the slowdown is still ongoing, even if its pace has become less severe.

Second, while the US and China may agree to a truce, the ongoing decoupling of the world’s two largest economies will almost certainly accelerate again after the US election next November.

In the medium to long term, the best one can hope for is that the looming cold war will not turn hot.

Third, while China has shown restraint in confronting the popular uprising in Hong Kong, the situation in the city is worsening, making a forceful crackdown likely in 2020.

Among other things, a militarized Chinese response could derail any trade deal with the US and shock financial markets, as well as push Taiwan in the direction of forces supporting independence – a red line for Beijing.

Fourth, although a “hard Brexit” may be off the table, the eurozone is experiencing a deepening malaise that is not related to the UK’s impending departure. Germany and other countries with fiscal space continue to resist demands for stimulus.

Worse, the ECB’s new president, Christine Lagarde, will most likely be unable to provide much more in the way of monetary-policy stimulus, given that one-third of the ECB Governing Council already opposes the current round of easing.

Beyond challenges stemming from an aging population, weakening Chinese demand, and the costs of meeting new emissions standards, Europe also remains vulnerable to Trump’s oft-repeated threat to impose import tariffs on German and other European cars.

And key European economies – not least Germany, Spain, France, and Italy – are experiencing political ructions that could translate into economic trouble.

Fifth, with crippling US-led sanctions now fueling street riots, the Iranian regime will see no other choice but to continue fomenting instability in the wider region, in order to raise the costs of America’s current approach.

The Middle East is already in turmoil. Massive protests have erupted in Iraq and Lebanon, a country that is effectively bankrupt and at risk of a currency, sovereign-debt, and banking crisis.

In the current political vacuum there, the Iranian-backed Hezbollah could decide to attack Israel.

Turkey’s incursion into Syria has introduced many new risks, including to the supply of oil from Iraqi Kurdistan.

Yemen’s civil war has no end in sight.

And Israel is currently without a government. The region is a powder keg; an explosion could trigger an oil shock and a renewed risk-off episode.

Sixth, central banks are reaching the limits of what they can do to backstop the economy, and fiscal policy remains constrained by politics and high debts.

To be sure, policymakers could turn to even more unconventional policies – namely, monetized fiscal deficits – whenever another downturn occurs, but they will not do so until the next crisis is already severe.

Seventh, the populist backlash against globalization, trade, migration, and technology is worsening in many places. In a race to the bottom, more countries may pursue policies to restrict the movement of goods, capital, labor, technology, and data.

While recent mass protests in Bolivia, Chile, Ecuador, Egypt, France, Spain, Hong Kong, Indonesia, Iraq, Iran, and Lebanon reflect a variety of causes, all are experiencing economic malaise and rising political resentment over inequality and other issues.

Eighth, the US under Trump may become the biggest source of uncertainty.

Trump’s “America First” trade foreign policies risk destroying the international order that the US and its allies created after WWII. Some in Europe – like French President Emmanuel Macron – worry that NATO is now comatose, while the US is provoking rather than supporting its Asian allies, such as Japan and South Korea.

At home, the impeachment process will lead to even more bipartisan gridlock and warfare, and some Democrats running for the party nomination have policy platforms that are making financial markets nervous.

Finally, medium-term trends may cause still more economic damage and disruption: demographic aging in advanced economies and emerging markets will inevitably reduce potential growth, and restrictions on migration will make the problem worse.

Climate change is already causing costly economic damage as extreme weather events become more frequent, virulent, and destructive.

And while technological innovation may expand the size of the economic pie in the long run, artificial intelligence and automation will first disrupt jobs, firms, and entire industries, exacerbating already high levels of inequality.

Whenever the next severe downturn occurs, high and rising private and public debts will prove unsustainable, triggering a wave of disorderly defaults and bankruptcies.

The disconnect between financial markets and the real economy is becoming more pronounced.

Investors are happily focusing on the attenuation of some short-term tail risks, and on central banks’ return to monetary-policy easing.

But the fundamental risks to the global economy remain.

In fact, from a medium-term perspective, they are actually getting worse.

Nouriel Roubini, Professor of Economics at New York University's Stern School of Business and Chairman of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is NourielRoubini.com.

The Winners and Losers in the 2020 EU Budget

By: Allison Fedirka

It’s budget season in the European Union, and that means competing interests among the bloc’s different economies are on full display.

The conversations taking place now over the 2020 budget, which was finalized just this week and is expected to be approved next week, will shape the framework for the bloc’s next seven-year budget, talks over which are currently underway.

The key points of contention will be member contributions and spending priorities.

A final agreement on the 2021-27 budget will be drafted in the not-too-distant future, but the results of the 2020 budget discussions provide some insight over what lies in the EU’s financial future – namely, more fragmentation.

Finding Common Ground

With the global economy slowing down, the EU needs to show it has not only economic value but political value as well.

Its response to the 2008 financial crisis and multiple aftershocks – which resulted in high unemployment rates and high debt levels for many of the bloc’s members – stoked nationalist sentiments that clashed with the pro-EU stances of the parties that were in power at the time.

The main question was whether the EU did more harm than good for its member states.

As a result, the EU now faces a greater sense of urgency than it did in the past to reach consensus on key issues; it needs member states to buy in to agreements even if these agreements don’t address the root causes of the problems the members are facing.

But doing so is becoming increasingly difficult.

Just two days before the EU reached an agreement on the 2020 budget on Nov. 18, major players like Germany expressed doubt over whether a deal could be reached – a worrying prospect considering that, if a budget was not drafted by Nov. 19, the European Commission would have to go back to the drawing board.

EU budget commissioner Guenther Oettinger acknowledged that not having a budget in place by Jan. 1 would put Europe in a more “difficult economic and geopolitical situation.”

When similar impasses came up in the past, member states’ commitments to EU funding diminished, and that’s precisely the type of thing the EU wants to avoid as it tries to counter the idea that enforcement of EU rules stirs up discord and conflict within member states.

The core issue in the budget discussions is finding common ground on how to address the social and economic problems facing EU member states.

The sensitivity around this issue explains why the EC has struck a cautious tone when reviewing country compliance on fiscal rules.

It has been careful in its approach to Germany, merely suggesting that prosperous countries should invest more to try to stave off a serious downturn. It has also shown caution in dealing with other heavy-hitters like France, Italy and Spain, saying these countries are “at risk of non-compliance” over their public debt levels (France and Spain currently have debt-to-GDP ratios of nearly 100 percent, while Italy’s stands at 136 percent) but stopping short of issuing severe criticism, direct orders for change or threats of punitive measures.

This approach shows that the EC understands the political pressures in each country – the Catalan separatist movement in Spain, the yellow vest protests in France and the recurring political standoffs in Italy – that are behind some of the economic choices these countries have made that put them at risk of non-compliance.

Encouraging these countries to make tough cutbacks that could have consequences for the wider population could lead some to question whether being an EU member is worth it in the first place – which could put the EU’s own future at risk in the long run.

Thus, the EU has been relatively lax in its enforcement of fiscal rules – lest it be accused of forcing problematic policies on members against their will.

The 2021-27 budget talks, however, will force the bloc to address head on many of its core challenges.

The talks will hinge on the size of the EU budget for the next seven years, the contributions from each member state and how funds are spent.

With 27 members at the negotiating table, it’s sure to be a heated debate.

Net contributors (Europe’s larger economies like Germany) want to reduce EU spending for the “new member states” of Eastern Europe and make sure they too see some benefit from their contributions – by, for example, addressing problems related to migration or the stability of the eurozone.

Net beneficiaries (including Eastern European countries) want to maintain the status quo.

Whereas previous seven-year budgets prioritized efficiency and development for the bloc as a whole, the next long-term budget will reflect the divisions that have emerged as the political and economic needs of the member states have diverged.

For clues into what these divisions might be, look no further than the 2020 budget.

Winners and Losers

Before we examine the 2020 budget itself, we need to understand the broader geopolitical context within which it was negotiated. Since the 2008 financial crisis, the future of the European Union has repeatedly been questioned.

The crisis brought to the fore the monumental challenge of running a monetary union without having complete control over the economies of its members.

National interests were at times pitted against the bloc’s interests, and this ultimately sowed the seeds of disunion within the bloc.

Having to bail out Greece and usher Italy through its banking crises sparked doubts about the eurozone’s utility and that of the whole EU.

External issues – like the rise of the Islamic State, civil war in Syria and the influx of hundreds of thousands of migrants – compounded these problems, particularly for countries like Germany and France that have the largest financial burdens within the EU, whose economies are closely integrated with other members, and that were the main EU destinations for many migrants heading to Europe.

Indeed, as these issues arose, border security and free movement within the Schengen zone became another point of contention for member states.

As the 2020 budget, which will total 168.7 billion euros ($186 billion), was being negotiated, these issues came to the fore.

Information on individual members’ contributions isn’t yet available, but the changes in spending by category indirectly reveal who is calling the shots and what their priorities are.

In comparison to the 2019 budget, the 2020 budget provides more funding for youth employment, migration integration and support, security, growth and competitiveness.

This reflects the priorities of the EU’s largest contributors: France, Spain and Italy have struggled to reduce youth unemployment rates (which register at 19 percent, 32 percent and 27 percent respectively), and Germany and Italy have both faced internal political pressures resulting from the growing number of immigrants in their countries.

All of these members want to stimulate their sluggish economies by enhancing tech development and increasing competitiveness of their goods. (Germany narrowly avoided a technical recession, producing 0.1 percent growth in the third quarter after displaying negative growth in the second quarter.)

Areas that will likely see a decline in funding include infrastructure, agriculture (save for research) and social inclusion. Eastern European countries on the whole are less developed than Western European countries and would be particularly hard hit by declines in spending on infrastructure and social inclusion, which includes, among other things, programs for the economically vulnerable, unemployment, basic services, income inequality and education.

While all members have veto power over the budget, Eastern European countries don’t want to perpetually hold up the bill since, as has happened in the past, this would risk a drop in funding commitments and further exacerbate political differences.

Their needs diverge from those of larger, richer European countries that have an upper hand in appropriating funds and are using it to focus spending on their own concerns.

To what degree other spending categories will be affected won’t be known until the final documents are released.  

But as with all budgets, there will be winners and losers, and the EU’s main contributors are more likely to tip the scale in their favor now more than ever, given the current economic climate. 

Between the political shifts evident in the 2020 budget and the bleak economic outlook, tensions in EU budget talks will only intensify.

In addition to the economic uncertainty, other major problems loom on the horizon.

The question over how to fill the void left by the U.K.’s departure will have huge impacts on the next seven-year budget.

(The U.K.’s net contribution to the EU in 2018 totaled roughly $14 billion, or about 8 percent of the budget.)  

In addition, think tank Copenhagen Economics recently released a report warning that European banks might need an infusion of up to 400 billion euros to comply with new financial regulations.  

Not only is Europe entering a new period of economic uncertainty, but it’s doing so from a weaker starting point than it did 10 years ago.

The 2021-27 budget talks will be an indicator of the forces that are likely to drive a wedge in the EU for years to come.