Financial Prey for the Populists

As the global wave of cross-border banking recedes, foreign banks are becoming easy targets for populist expropriation, especially in Central and Eastern Europe. More fundamentally, an important agent of local financial development and channel for stable capital flows to emerging and developing economies is closing down.

Erik Berglöf  

LONDON – The money-laundering scandals at Danske Bank and Swedbank have already toppled both institutions’ CEOs and caused their share prices to plummet. The scandals, which are mainly related to the Nordic banks’ operations in Estonia, are also likely to speed up the ongoing withdrawal of foreign banks from emerging Europe.

Facing renewed populist attacks in Central and Eastern Europe, and increasingly vigilant regulators and supervisors at home, foreign banks will no doubt reassess their already dwindling ties to the region. True, banks had to cut their exposure to emerging Europe after overextending themselves before the financial crisis. But while withdrawing further might reduce their risks, it would hurt the region’s future growth.

The exodus from emerging Europe is part of a global retreat from cross-border banking in the wake of the financial crisis. In the period leading up to 2008-2009, European banks served as conduits for US peers that were reluctant to become too exposed to emerging economies. With Europeans now pulling back, American banks have taken up some of the slack. In addition, corporate bond markets have expanded. Risks have spread from banks to the rest of the financial system, much of it unregulated.

By channeling relatively stable, growth-enhancing capital flows from advanced to emerging and developing economies, foreign banks played a transformative role, especially in Central and Eastern Europe. After socialism collapsed, a small number of banks based in the European Union invested heavily in retail networks, helping to build these countries’ financial systems from scratch and massively increasing citizens’ financial access. And these strategic retail banks stayed put during the crisis when other capital flows dried up.

They stayed thanks to the Vienna Initiative, an ambitious coordination effort involving home- and host-country regulators and supervisors, finance ministries, international financial institutions, and, most importantly, the strategic banks. On March 27, veterans of the crisis gathered in the Austrian capital to mark the initiative’s ten-year anniversary. There is much to celebrate: it saved Europe from a devastating banking collapse, and helped to manage risks during the eurozone crisis.

But the Western European banks that the initiative saved now face an uncertain future in Central and Eastern Europe. Their investments in the region have become stranded assets ready to be picked off by local populists. And, unsurprisingly, Hungarian Prime Minister Viktor Orbán has led the attack.

Foreign banks in Hungary and elsewhere became objects of hate and loathing during the financial crisis. Urged on by the banks’ over-eager financial advisers, citizens rushed to take out loans in euros, dollars, and even yen, and suddenly found themselves with crushing debts when the crisis caused domestic currencies to tumble. When repayments lagged, banks were quick to foreclose on homes, cars, and companies. Taxing the banks, as Orbán did, seemed only fair.

Furthermore, Orbán’s taxes allowed OTP, Hungary’s own cross-border bank, to rebuild its balance sheet and strengthen its domestic franchise after it had itself become overextended before the crisis. Foreign banks in Hungary had to redefine their strategies radically, and in some cases seek support from international financial institutions. Many simply pulled up stakes and left.

This is part of a broader pattern across emerging markets. Most foreign banks intend to continue withdrawing, and those that stay increasingly fund themselves through local deposits. Although there are fewer foreign banks, some – especially Russian and Chinese banks – have increased their presence through acquisitions and growth, resulting in greater market concentration. (And Russian banks would have had a much greater presence were it not for international sanctions.)

Foreign banks’ ongoing retreat from emerging Europe is all the more remarkable given that the regulatory framework within the EU has improved massively over the past decade. Although the EU’s banking union is certainly not perfect, cross-border banking is now supported by institutions and instruments that those leading the Vienna Initiative could only have dreamed about.

True, countries outside the eurozone have less protection, but now even they have an anchor, and the Vienna experience has reinforced it. As Michel Barnier said when he stepped down as the EU’s commissioner for the internal market and services, the Vienna Initiative “has now become part of the European financial architecture.”

To be sure, increased local funding through deposits, and strong local banks, should be welcomed. But there is still considerable room for economic convergence throughout the emerging and developing world, which requires funds to flow “downhill” from capital-rich to capital-poor countries. Foreign direct investment has provided the most stable fund transfers to emerging Europe, but the strategic banks are right behind. If they leave, local banks may again resort to cross-border funding, which is the most sensitive to animal spirits.

As the global wave of cross-border banking recedes, foreign banks are becoming easy targets for populist expropriation. More fundamentally, an important agent of local financial development and channel for stable capital flows to emerging and developing economies is ceasing to operate. Foreign banks remain critical to these countries’ long-term growth. Let us hope that scandals and populist attacks do not stop them from playing that role.

Erik Berglöf, a former chief economist at the European Bank for Reconstruction and Development, is Director of the Institute of Global Affairs at the London School of Economics and Political Science.

Maybe Politics Matters After All

by John Rubino

Looking strictly at the numbers it’s hard to work up much interest in whether Republicans or Democrats are in charge after 2020. Either way, trillion-dollar deficits and extremely easy money are guaranteed, which means the US – along with most of the rest of the world – will fall off a financial cliff shortly. After that, the only non-financial issue that will matter is war – and both parties seem about equally bloodthirsty these days.
However, after the November congressional elections — in which Democrats with, ahem, assertive ideas and attitudes did extremely well — proposing big, potentially transformative change now looks like the best way to cut through the media clutter and gain a following.

So the Democrat base has lost its fear of the “S” word and is now embracing a list of policies that are designed to lock in their dominance for a generation, but which carry myriad unintended consequences. If the Dems were in charge today, there’s a good chance that they would:

Make Washington D.C. a state

This is a no-brainer for Democrats. Since DC voters skew liberal (no surprise for people who by and large work for the government), making it a state adds two guaranteed votes in the Senate and several solid votes in the House. That alone might be enough to tip the balance on many votes.

Lower the voting age to 16

This is another no-brainer for Democrats. Younger people tend to be more idealistic and less experienced, which means they, like D.C. residents, tend to skew liberal. Adding a bunch of young voters to the rolls means adding a disproportionate share of those votes to Democrat candidates.

Pack the Supreme Court

Republican presidents have been able to add more judges to the Court in the past couple of decades than have Democrats. The result is a solid conservative majority that might become even more so if President Trump gets to add another Justice in the next two years. Let Trump win a second term and the Court will be untouchably conservative for a generation.

This is intolerable for Democrats, a growing number of whom are proposing to simply increase the size of the Court and add a bunch of liberal justices for balance.

FDR tried this in the 1930s and failed, but his successors are looking at various ways to get away with it.

Eliminate the Electoral College

According to Wikipedia, “The United States Electoral College is a body of electors established by the United States Constitution, constituted every four years for the sole purpose of electing the president and vice president of the United States. The Electoral College consists of 538 electors, and an absolute majority of 270 electoral votes is required to win an election. Each state’s number of electors is equal to the combined total of the state’s membership in the Senate and House of Representatives; currently there are 100 senators and 435 representatives.”

The math of elector apportionment gives more per-capita clout to small states as a way of protecting them from the whims of the large. Without this advantage, according to fans of the Electoral College, candidates would ignore Wyoming and Rhode Island and spend all their time in population centers like Los Angeles and Dallas. Subsequent governments would favor big states over small; good luck to Nevada if it has a water dispute with California.

In short, without the Electoral College, flyover country is toast. But with the Electoral College it’s possible to win the most votes and still lose the election, as has happened a couple of times recently to the Dems. As the following chart shows, a majority of Democrats would abolish the College while Republicans would keep it.

electoral college maybe politics matters

Several 2020 Democratic presidential hopefuls have recently gotten behind proposals to eliminate the Electoral College, including Elizabeth Warren and Beto O’Rourke.

Impose a wealth tax

Keynesian economics, which dominates the thinking of today’s political class, really doesn’t get savings. For Keynesians, the only good wealth is circulating wealth that buys stuff, preferably with leverage. So 1000 shares of Amazon stock do no one any good while they’re just sitting on some rich guy’s balance sheet. Only when he cashes out and buys something is he contributing to society. Same thing with buildings, paintings, farmland, etc.

Hence the concept of a wealth tax, which takes part of the value of such assets each year and puts it back in circulation. Historically this has been viewed by those with common sense as both dangerous – because it makes investing in productive assets less attractive – and even more dangerous because it sends capital fleeing to more hospitable climes.

But as the public sector descends into bankruptcy it’s becoming desperate for some of that “idle” capital. And given control of both the executive and legislative branches, the Democrats might try to take it. From today’s Wall Street Journal:

Plan from Sen. Ron Wyden would treat increased value of long-term investments like income 
The top Democrat on the Senate’s tax-writing committee wants to tax long-term investments like other types of income, raising rates and requiring the wealthiest people to pay taxes on their unrealized gains each year. 
The plan from Sen. Ron Wyden of Oregon is the latest proposal from Democrats in Congress and on the presidential-campaign trail to boost taxes on the wealthy in a bid to address what they view as the problems of economic inequality and provide a funding stream to pay for new programs. While the specific proposal has little chance to become law anytime soon, such ideas could carry over into policy if the party makes gains in 2020 elections. 
Unlike plans from Sens. Elizabeth Warren and Bernie Sanders, Mr. Wyden’s tax would go after investment income rather than total accumulated wealth or estates that are passed on from wealthy individuals to their heirs. 
Mr. Wyden’s plan would tax the gains on long-term investments annually, rather than when someone decides to sell the asset, as is the case currently. It would also raise the current taxes on capital gains to match the rates on other types of income, such as salaries.

Okay maybe it does matter who ends up running the government in 2020. They’ll preside over an epic crash in any event, but avoiding the above might make the eventual recovery marginally easier.

Steel Yourself for More Trouble in China

China may not re-enter outright deflation, but it is far from out of the woods

By Nathaniel Taplin

Seasonal steel output restrictions, usually ending in April, will be extended through June in China’s two largest steelmaking cities. Photo: muyu xu/Reuters

Chinese policy makers are worried that recent price gains for steel and other industrial materials aren’t sustainable. That should worry investors, too.

Markets are celebrating the return of Chinese manufacturing to growth in March, based on the most recent purchasing managers index. A surge in both output and prices suggested growth remains strong enough to keep China out of deflation. The last round of falling prices, in 2015, tripped up state-owned steelmakers and nearly upended the country’s financial system, as well as helping tank commodity markets world-wide.

Chinese officials apparently see things differently: Seasonal steel output restrictions, usually ending in April, will be extended through June in China’s two largest steelmaking cities, Reuters reported Monday.

According to the chairman of the China Iron and Steel Association, nearly a quarter of steel firms made losses in the first two months of the year, up 10 percentage points. Pricier iron ore following a Brazilian dam disaster is clearly a factor, but officials obviously doubt buyers in sectors such as housing and infrastructure are really strong enough to bear much higher prices for steel and other industrial goods.

The nitty-gritty of the PMI bears that out. Since mid-2018, Chinese manufacturing output growth has largely outrun new orders—the opposite of the situation from late 2016 to early 2018, when that gap was closing rapidly and global prices were rising. That means downward price pressure. Not coincidentally, Chinese producer price inflation has slowed since then, hovering just above zero in February.

Matters have improved a bit since November, but the gap between the PMI output and orders components is still roughly twice what it was in mid-2018. China may not re-enter outright deflation, but it is far from out of the woods. Markets are celebrating too soon.

Lump-sum Pension Payments: Who Are the Winners and Losers?

Wharton's Olivia Mitchell and Loyola's Elizabeth Kennedy discuss new Treasury department guidance on lump-sum pension payouts.

The U.S. Treasury department’s move last month to allow private companies to pay lump-sum pension payments to retirees and beneficiaries, instead of monthly payments, is good news for companies that do not want to be saddled with long-term pension obligations – particularly for private sector employers who have underfunded pension plans.

However, lump-sum pension payments may not work out well for retirees who opt for them. While a debate has ensued on the merits and risks of lump-sum pension payments for employees, there are also wider concerns about the long-term impacts on the entire economy when retirees do not have sufficient financial resources to support themselves. Those concerns are assuming a new importance because of the rapid growth of the so-called gig economy with temporary workers and freelancers who don’t enjoy employer-sponsored retirement benefits.

The Treasury department’s latest move reverses an Obama-era pledge to bar employers from offering lump-sum payments. The fear was that those receiving a lump-sum payment might be shortchanged and also might be tempted to spend the money sooner. Around 26.2 million Americans receive pensions right now, though that number has been declining as businesses favor 401(k) plans instead.

How Companies Gain

Defined-benefit plans are pensions that provide beneficiaries with a monthly benefit check for as long as they live. Defined contribution plans stipulate only the contributions to an employee’s account each year. “The concern with companies offering defined-benefit plans is that they need to manage carefully around future mortality, around investment fluctuations, and so forth,” said Olivia Mitchell, executive director of the Pension Research Council at Wharton and director of the Boettner Center on Pensions and Retirement Research. Mitchell is also a professor of insurance and business economics at Wharton.

“Many companies have had a hard time making sure their plans remained fully funded, and probably most corporate defined-benefit plans today are not fully funded,” Mitchell continued. “By offering both workers and retirees a lump sum, corporations could take the defined-benefit obligation off their books.” The move could help companies like General Electric, which has an approximately $30 billion shortfall in its defined-benefit pension plan.

Elizabeth Kennedy, professor of law and social responsibility at the Sellinger School of Business at Loyola University in Maryland saw the Treasury’s move hurting wider sections of society over time. “I see this as a shift not only of risk from the employer to the employees, but also to all of us collectively, as the question arises of what happens when folks don’t manage [their lump-sum pension payments] well — certainly not as well as their employers,” she said. “The rest of the social safety net is even further strained when [retirees’] defined-benefit plan runs out.”

Mitchell and Kennedy shared their insights on lump-sum pension payments, underfunded plans and the hidden costs of the Treasury department’s action on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

To Lump Sum or Not?

Lump-sum payments might be the right option in some cases. “What used to be seen as the golden method of caring for people in retirement — namely defined-benefit plans — is long gone,” Mitchell said. “Many financially cogent people might say, “Gee, I work for a company which is only 80% funded. Maybe I should take the lump sum and run, while the getting is good.”
Mitchell said she understands why a lump-sum payment is attractive, “not just for people who make mistakes, but for people who are smart about it.” However, lump-sum payments may not be the best option if an individual uses the money as monthly income. She pointed to what she called the “lump-sum illusion.” Somebody who gets a lump sum of say, $100,000, might think they are suddenly rich, but that money doesn’t go very far, she noted. Based on annuity estimates, a $100,000 payment would provide a monthly income of $560 for a 65-year-old male, and $530 for a female, because women live longer than men, she said. Even $500,000 is not a lot of money, she added.

But a lump-sum payment could help many older people who are entering retirement with far more debt than they did in the past, said Mitchell. “Baby boomers are getting into retirement not having paid off their mortgages, and not having paid off their credit cards,” she added, citing research conducted using the Health and Retirement Study (sponsored by the National Institute of Aging and the Social Security Administration), where she is a co-investigator. “A lump sum in such cases could really help older people pay off their debt and move into retirement less exposed to interest rate fluctuations.”

The Impact of the Gig Economy

Kennedy noted that the composition of the workforce has changed in recent years. She referred to the gig economy, the sharing economy and the rise of independent contractors, who tend to work in temporary jobs throughout their careers.

“While the defined contribution plan from a single employer perspective looks perhaps like a thing of the past, the burden is on us collectively to think about the solution for the future,” she said. “How do you have workers who are going to be making perhaps low wages over a course of their lifetime with a variety of employers in any meaningful way accrue meaningful, defined contribution plans that result in something more than just a few hundred dollars a month later on?”

Kennedy said that if many among the 26.2 million people that currently receive monthly pensions are lured by “the dangling of the shiny lump sum,” the so-called “gold standard” of retirement income is diminished even further. She wondered about how that would affect those dependent on employer-sponsored 401(k) plans and Social Security. Workers who have high incomes or are “incredibly savvy” contribute substantially to their 401(k) plans and get matching employer contributions would of course be better off that those who are not, she noted. 
According to Mitchell, the “defined contribution” 401(k) model has been “exceptionally positive” for those who did not have an opportunity to be in defined-benefit plans that required them “to stay for life and never leave your employer.” Although she found defined contribution plans “much more appealing,” she said they fell short in that they did not have a way to protect against “longevity risk at the point of retirement…. So, I favor putting an annuity back into a defined contribution plan, so that people can, in fact, protect against living too long.”
An Overhang of Underfunding

Retirees may have dwindling options in securing their future incomes as defined-benefit plans have failed to provide the protections they were designed for. Mitchell noted that the 1974 Employee Retirement Income Security Act sought to ensure that defined-benefit plans are fully funded to make good on the promises offered to retirees.

“Unfortunately, in the establishment of the act and some of the institutions surrounding that, they didn’t quite get it right,” Mitchell said. For example, while it established the Pension Benefit Guaranty Corporation (PBGC) to back up corporate defined-benefit plans if the corporations go bankrupt and there’s not enough money in the plans, “the premiums weren’t set right,” both for single employer plans and multiple-employer, unionized plans, she added. “As a consequence, not only are corporate plans troubled financially now, but the backup entity that’s supposed to be insuring the defined-benefit plans also is in dire straits.”

According to Mitchell, the multiple employer system is within a few years of running insolvent, and the single employer plan will be unable to pay all it should pay by 2025. “So, the whole defined-benefit edifice is in ruins. I don’t see any way to fix it easily.”

To be sure, the offer of lump-sum payouts comes with riders. If a single employer plan is not at least 80% funded, retirees cannot get the full lump-sum payment, and if it is less than 60% funded, they cannot get any lump-sum payment. “Notwithstanding the Treasury department’s willingness to allow more lump sums, it’s going to depend on the funding status of the plan,” Mitchell said. “So, I don’t think people should book the trip to Las Vegas just yet.”

According to Mitchell, a significant number of corporate pension plans are likely to be funded to levels near 60%. Also, over the last 40 years, many corporations have frozen and/or terminated their defined-benefit plans, she said. “The insolvency of the PBGC, I think, is driving many people’s interest in taking that lump sum, and I sympathize with that.”

Data compiled by Bloomberg found that in 2017, 186 of the 200 biggest defined-benefit plans in the S&P 500 based on assets weren’t fully funded to the tune of $382 billion, according to a report by the news agency.

Who Manages Money Better?

Retirees taking lump-sum pension payments instead of annuity payouts could potentially lose between 15% and 20% of what they would have received over a 20- or 30-year period, according to some estimates. They are shortchanged in that way “because of complicated formulas including interest rates and mortality tables,” according to Forbes.
Generally speaking, corporations have opportunities to manage retirement plans more efficiently than individuals can. “Typically, employers manage retirement plans less expensively — they pay fewer fees, fewer commissions, et cetera,” said Mitchell. “They can buy life annuities or pay life annuities for their workers much cheaper than what the workers could get on their own.”

Those who get a lump-sum payment could maintain tax protection if they roll it over into an individual retirement account (IRA), Mitchell continued. “But then you have to be very careful that the money that you’re investing in that IRA is not frittered away in expenses.”

Those who put their lump-sum monies in an IRA could also use it to buy themselves an annuity, said Mitchell. Here again, she had advice for both men and women, drawing from the fact that women live longer. “If you’re female … and if you’re in a pool with men, you’re going to get a higher benefit than you would if you went out and bought [a pension plan] on your own,” she said. “Conversely, if you’re a man, then you should take out [the pension], buy an annuity on your own, and you’ll get a higher benefit.”

Whither Social Security?

Social Security, too, is facing insolvency, Mitchell noted. “Within about 12 years, benefits will probably have to be cut for everyone by maybe 30%, or else taxes will have to go up 60% to 80%,” she said. She pointed out that Social Security benefit payouts are means-tested, where people with assets or other sources of income will get fewer benefits than those who are not as well-off. Given that, “it’s completely rational for many people in the bottom third of the wage distribution not to save at all,” she said. “If we look at the retirement picture, we have to understand the incentives we are putting in peoples’ way — or the disincentives to save.”

According to Kennedy, society at large may end up bearing the costs when corporate pension plans fail to deliver sustainable long-term benefits for their employees. “When we’re replacing a system because [large] institutions are unable to invest in ways that yield real, tangible benefits for their workers long-term, it’s hard for me to imagine that that is not replicated when many, if not most, individuals are now in that same position of managing their retirement,” she said.

“Who is bearing that cost ultimately?” Kennedy asked. “The worker, for sure — but then all the rest of us, for whom, those social benefit programs are means-tested, and taxpayers pay for. Are we just shifting the costs of mismanagement from the individuals who originally held the money to those of us who are taxpayers, who will pay for the health insurance, the care, the housing costs and all of that for folks who can no longer afford it themselves?”

Mitigating Financial Stress

Employers are sensitive to the financial difficulties of their employees, and for good reason, because financially healthy employees are more productive. “Some employers are starting to pay much more attention to what they’re calling ‘financial wellness,’” said Mitchell.

“The reason that they are working to try to help people manage their debt better, save better and budget better is that they find that it reduces employee stress,” Mitchell explained. “For example, if you’re having the credit card company or the debt collector calling you at work several times a day, that’s obviously going to make you a less productive worker.”

Some firms, especially those in the financial services sector, are integrating financial wellness features into their employee benefit packages, such as subsidies for gym memberships or fees for health wellness programs, she added. Added Kennedy: “Employers want to see their workers in many instances either succeed long-term, or at least remain with them, because the cost of turnover is so great. They want to be able to make informed decisions about workplace policy that hopefully are consistent over time.”
In order to facilitate companies and employees in those efforts, she called for the federal government and Congress to weigh the long-term implications of the latest move to allow lump-sum pension payments.

The Public Pension Fund Mess

Although the Treasury department notice covers only private sector pension funds, the problem of underfunding plagues public sector pension funds as well. According to estimates by The Pew Charitable Trusts, state pension funds would have had a total pension liability of $4.4 trillion in 2017, and a funding gap of $1.7 trillion.

However, favorable investment returns in fiscal 2017 and 2018 are expected to lead to a decline in pension liabilities for the next two fiscal years, according to a report in August 2018 by Moody’s Investor Services.

“Every year that goes by leads to more red ink and more concern because the state and local plans across the country have clearly not done what they should have done to contribute the right amounts, to invest their assets in their pension plans carefully and thoughtfully,” Mitchell told Knowledge@Wharton for a report on that issue.

Even as state and local government pension funds are in trouble, Mitchell did not expect them to move towards lump-sum payments. They have attempted to mitigate that financial stress in other ways. “Over the 20 years, many states have realized their defined-benefit plans are in deep trouble, and so they’ve put in place a hybrid system,” Mitchell said. That hybrid is a mix of a defined-benefit plan and a defined contribution plan, she explained. “That’s a nice mix, so that people do get the benefits of both.”

Policy Challenges

The funding crisis in pension plans will affect not just baby boomers, but also the workers who served baby boomers, such as domestic workers including nannies, housekeepers and elder-care providers, said Kennedy. She noted that home health aides and hospice care workers are part of a fast-growing segment, but independent contractors among them have few options in planning for post-retirement income. “For them, the struggle is how to save when your income is so low, in the absence of any employer contribution,” she said.

“That has impacts going up the chain to these same retirees and baby boomers who now will also have less money themselves, individually, to pay for this kind of care,” said Kennedy. She saw that crisis developing at “the intersection between retirement, savings, solvency, and the ability to meet the basic human needs of the baby boomer generation.”

Kennedy said policy makers have to focus also on workers who are “vulnerable as low-wage workers in nontraditional workplaces” in their calculations on the long-term risks they would face.

Beijing yearns to convey image of strong Chinese state

Lessons of history provide context for Belt and Road summit and May 4 centenary

Lucy Hornby in Beijing

China's president Xi Jinping speaks at a ceremony marking the centenary of the May Fourth Movement, held in Beijing's Great Hall of the People on Tuesday © AFP

Events in China often need to be viewed through the lens of history. But different lenses can refract in distinct ways and generate alternate views — a point made by two big set pieces taking place within days of each other in Beijing.

The Belt and Road forum last weekend evoked the diplomacy of the ancient Silk Road. Images on state television of foreign leaders arriving in the Chinese capital recalled the 1,500-year old frescoes of the Dunhuang grottos, which show kings and dukes making their stately passage to the Chinese imperial court.

In total 37 heads of state or prime ministers travelled to the forum, representing states both large (Russia, Italy) and small (Malta). Some stayed on for the next event: the International Horticultural Exhibition — and while the foreign media considered whether Belt and Road projects create debt traps for participating countries, Chinese state media featured foreign leaders admiring flowers.

Washington refused to send anyone to be a supporting player in Beijing’s show. But were other participants endorsing China’s global leadership, or just conducting smart economic outreach? In ancient times, too, Chinese historians recorded that delegations from smaller states arrived at court to pay homage and offer tribute, but the states themselves did not necessarily view it that way. They simply calculated that successful trading with a rich neighbour required some diplomatic politeness.

For Beijing, having today’s Belt and Road plans hailed by foreign powers was partially directed at a domestic audience. A strong state that is recognised and respected by its neighbours is the imperative of modern Chinese history.

An anniversary next weekend — the centenary of the May Fourth Movement of 1919 — is the Communist party’s chance to demonstrate that it has delivered on that mission.

The May Fourth Movement, too, can be viewed through radically different lenses. Virtually unknown in the west, the movement was a big deal for China. Student demonstrations that day started waves of activism promoting modernisation, westernisation, artistic freedom, feminism, nationalism, Communism and democracy — the “isms” and “isations” of China’s turbulent last century.

No students may demonstrate for their ideals in China today, but the legacy of the movement is alive and well in a different respect: its mandate for a strong state, which ties in with the pageantry and messaging at the Belt and Road forum.

The trigger on May 4 1919 was disillusionment. At the multilateral negotiations that ended the first world war, China expected to regain territory that Japan had won, because tens of thousands of Chinese had laboured for the British and French war effort. The Treaty of Versailles allowed Japan to keep the territory. Chinese students felt the west had broken its promise and were furious that their government was too weak to stand up for itself.

The movement casts a long shadow. The Chinese foreign ministry often comments that China “made an important contribution” to any global gathering. The substance of what it did seems less important than the fact that China was there, recognised and respected.

From Beijing’s point of view, as China has grown and claimed a more central seat in world affairs, the US has only grudgingly given ground. Many Chinese believe the US will never willingly give up its top spot in multilateral organisations, no matter how strong China gets. They have decided they need to build their own structures instead — and the result is the Belt and Road.

The image of the strong state ties the Belt and Road to the well-worn anniversary of student protests that would never be tolerated in China today.

China today is clearly no longer weak. But it still craves recognition and respect.

Monopoly Money

By Joel Bowman, Editorial Director, International Man

BUENOS AIRES, ARGENTINA – Cash is King, as the old saying goes. And that’s generally true… provided you can still use it.

Down here at the fin del mundo, where we look to catch a glimpse of America’s future, we see that the local fiat money is fast losing its value.

A year ago, the largest denomination – the $1,000 peso bill – was worth around US$45, give or take.

Today, after a devaluation and persistently high (55% annualized) inflation, that same tattered note barely fetches US$20.
As you might imagine, paying for anything more than a carton of milk in cash is more than a little cumbersome.

(Over the weekend we shared lunch with a group of eight friends. When it came time to calculate the bill, our table looked like someone had overturned a Monopoly board game.)
And if you want to buy a television or a sofa or a lawnmower… well, you’ll have to buy a wheelbarrow first…

At some point, the cost of printing new notes (not to mention minting new coins) becomes uneconomical, even from a basic manufacturing standpoint.

The face value of the money is literally not worth the ink and the paper it’s printed on.

This is nothing new. All fiat monies arrive at their common, inevitable destination eventually.

One by one, they race to the bottom. Then they become bookmarks… souvenirs… wallpaper.

The tragedy, of course, is that they take so many savers down with them.

Throughout history, this oft-repeated course has been easy enough to see, at least for anyone paying attention.

You can’t help but notice that it takes more and more notes and coins – of increasingly higher denomination – to purchase the same goods and services you bought last week.

But what happens when the erosion of value becomes “invisible”?

Governments around the world are now preaching the virtues of a “cashless society.”

In just such a dystopian realm, their nefarious scheme of currency debasement will no longer be “out in the open.” Rather, they’ll be able to fiddle the money supply with the flick of a switch or the stroke of a key.

And with every exchange monitored, you can forget about transacting “en negro,” as they say down here. That is, away from Big Brother’s prying eyes.

Without the peer-to-peer benefit of cash, economic privacy will go the way of the museum-bound notes and coins before them… together quaint anachronisms from simpler, happier times.

In today’s guest column, Mark Nestmann brings us the latest from the frontline in the War on Cash. Please enjoy his thoughts, below…

The Frontlines in the War on Cash
By Mark Nestmann

Let’s face it, many forces are pushing for the abolition of – or at least serious restrictions on – cash.
Many businesses hate cash, because cash transactions take longer to process, and large quantities of cash pose a security risk. If you travel by air, you’ve experienced this first-hand. “Cashless cabins” are the rule for most airlines. You must purchase every glass of wine, cheese dip, or package of mixed nuts with a credit or debit card.

In Atlanta, you can’t even buy a hot dog at a pro football or soccer game with cash. In March, the operators of Mercedes-Benz Stadium, home of the Atlanta Falcons and Atlanta United, announced it would no longer accept cash at food and beverage concession stands.

Credit card companies hate cash too. And for obvious reasons – they get a cut of every purchase through the fees they charge businesses. So it’s no surprise that in 2017, Visa announced its “Cashless Challenge” and gave $10,000 to 50 small businesses that stopped accepting cash payments.

Big brother hates cash, too. For decades, governments around the globe have engaged in a War on Cash. The original justification for this war was to fight racketeering. The War on Cash then morphed into the War on Drugs, the War on Money Laundering, and subsequently, the War on Terror.

Numerous countries have placed severe limits on how much cash you can spend at one time.

Spain and France have banned cash transactions over €1,000. If you want to spend more than that, you must use a debit card, credit card, a non-transferrable check, or pay by bank transfer. In Italy, where the cash limit is €3,000, violations are punished by confiscation of up to 40% of the amount paid. In Spain, you lose “only” 25% of your cash if you violate the rules. Similar restrictions are in place in most EU countries. Later this year, Australia will ban cash transactions larger than AU$10,000 (about US$7,500).

The most ambitious effort to restrict the use of cash, though, has been in India. In 2016, the national government made 86% of the country’s cash worthless with the stroke of a pen by withdrawing all 500- and 1000-rupee notes from circulation.

The transition was anything but smooth. Tens of millions of Indian citizens without bank accounts found themselves unable to pay for daily necessities. Dozens of them died.

At the same time, it’s getting harder to get access to cash. In Sweden, hundreds of ATMs have been removed, forcing individuals who need cash to drive for miles to find one.

Some economists want to abolish cash. Harvard Professor Kenneth Rogoff argues that we need to rid the world of cash so the world’s central banks can more easily “go negative” (i.e. impose negative interest rates on savers). This initiative, he argues, would go a long way toward propping up the global economy in the event of a serious recession.

And Citigroup Chief Economist Willem Buiter made headlines in 2015 when he proposed abolishing cash to allow banks to impose negative interest rates. He suggested imposing negative annual interest rates as low as -6% in financial crises, to force banks to lend and consumers to spend.

In a cashless world with negative interest rates, governments would effectively flush out any hidden or saved wealth. You can’t save money, because negative interest rates mean you’re paying the bank. You can’t withdraw it or keep it under a mattress, because that’s impossible when there is no such thing as cash.

And don’t forget that the “bail-in” model applies to bank deposits worldwide. If a bank goes bust, depositors must share in the losses.

Not to mention what might happen if hackers succeed in infiltrating the global payments system and shut it down. Without cash, the global economy would quickly grind to a halt.

But cash isn’t dead yet. A study released in February showed that the volume of $100 bills circulating has actually doubled in the last decade. Nearly 80% of these $100s are held outside the US. While proponents of the War on Cash point to the increase as proof that large-denomination bills are tied to crime, there are equally valid reasons someone outside the US might want to keep a stash of $100s on hand. One is to avoid negative interest rates on bank deposits. Another is as a store of value in countries like Venezuela, where it takes a wheelbarrow full of the official currency to buy a loaf of bread. And many people prefer cash because the databases merchants keep of your card transactions aren’t exactly secure.
There’s also pushback on efforts by merchants to stop taking cash, spurred by the fact that cash bans disproportionately affect the poor and anyone who is “unbanked” (unable or unwilling to open a bank account). That’s more common than you might think; nearly 7% of American households rely exclusively on cash and money orders to pay the bills.
In March, New Jersey banned cashless stores. Philadelphia also passed an ordinance last month which forbids most stores from refusing to accept cash payments. Officials in Chicago, Washington, D.C., New York City, and San Francisco are debating similar measures to require merchants to accept cash payments.

Other countries have also moved to protect the right of consumers to use cash. No less an authority than the Governor of the French Central Bank announced that “The Banque de France will never drop cash.” Sweden, which has perhaps gone further than any other country to discourage the use of cash, is now considering a law which would require banks to process cash transactions. The UK is debating similar measures.

While these initiatives to protect the right of individuals to use cash are noteworthy, they’re not necessarily the last word. I suspect we’ll learn how resilient cash is during the next global economic collapse. When that happens, central banks will almost certainly “go negative.” And if consumers resist these efforts by hoarding cash, additional restrictions or outright bans on cash could quickly follow.

To defend against such measures, here are some actions you’ll want to consider:

Withdraw excess cash from your bank accounts and keep it in a safe place. Document the withdrawals so that you can prove the origin of the cash in the event of an India-style currency recall. Keep in mind that if you withdraw more than $10,000 at a time from a US account, the bank must file a “Currency Transaction Report” with the Treasury Department. It’s also a felony to “structure” your cash withdrawals to avoid hitting the $10,000 limit.

Convert a portion of your assets to gold. Store the gold securely at home or in a non-bank depository. If you have more than $100,000 of gold, consider keeping a portion of it in a private vault in another country.

Keep your bank-held assets in ultra-strong banks. This will help you avoid becoming a victim of the coming bail-ins.

Consider cryptocurrency. Cryptocurrencies could eventually render banks obsolete. It’s worth keeping some of your savings in bitcoin and other cryptos.


Mark Nestmann
Founder of the Nestmann Group