Why Donald Trump is great news for Xi Jinping

The US president has disarmed America in the battle of ideas

Gideon Rachman




Donald Trump has been in office long enough for certain patterns to emerge in his behaviour. The US president likes to create a crisis, let it run a while and then announce that he has solved it. He will frighten friend and foe alike with dire threats, before striking an agreement that he self-certifies as “tremendous”. In reality, the new deal will often be superficial and the underlying issues will remain largely unaddressed.

This is the model that the Trump administration has followed with North Korea, as well as with Mexico and Canada. And it is the model that is pretty clearly going to emerge in Mr Trump’s “trade war” with China.

In a few weeks time, the US president will declare a great victory. His loyal aides will play along. But the underlying reality will be that not much has actually changed in the economic relationship between the US and China — in the same way that not much changed in the trade relationship between the US, Canada and Mexico after Mr Trump’s team renegotiated the North American Free Trade Agreement.

Just as North Korea has not actually scrapped its nuclear weapons, so China will not actually scrap its system of state subsidies for industry, the most fundamental way in which Beijing disadvantages foreign competitors.

Instead, the Chinese are likely to buy off Mr Trump with pledges to purchase lots more American goods. They will also open up more sectors of their economy to US investment and tighten laws on intellectual property. This will probably not affect America’s trade deficit with China. And it will certainly not impair China’s drive for dominance in the technologies of the future.

But calling off the trade war will not be the only gift from Mr Trump to Chinese president Xi Jinping. For Mr Trump has already disarmed America in an even more important battle — the battle of ideas.

That matters because America’s most potent weapon in its emerging contest for supremacy with China is not its economy, nor its aircraft carriers, but its ideas. The notion that abstract principles like “freedom” and “democracy” are powerful American assets is sometimes dismissed as liberal wishful-thinking. But Chinese actions suggest otherwise. The government of Mr Xi does its utmost to suppress the circulation of liberal and western ideas, censoring the internet and cracking down on dissidents, students and human rights lawyers.

The fact that previous US presidents spoke up for human rights was more than an irritant to the Chinese one-party state — it was a threat. There was no better symbol of this than the “Goddess of Democracy”, built by pro-democracy demonstrators in Tiananmen Square in 1989, which bore an uncanny resemblance to America’s Statue of Liberty.

The Tiananmen uprising was bloodily repressed and the “Goddess” was torn down. But Chinese liberals have continued to look to America for inspiration and support. Human rights were only one item on the US agenda when dealing with China. But they were a crucial part of what America stood for in the world.

Sadly, that has now changed. As a candidate, Mr Trump gave a very ambiguous reply when asked about the Tiananmen massacre of 1989, stating: “they were vicious, they were horrible, but they put it down with strength.” As president, he has made it clear that he is an admirer of authoritarian strongmen around the world.

The US state department continues to issue an annual report on human rights worldwide, which has strong things to say about China. But the message coming from the Oval Office is rather different. On various occasions, Mr Trump has praised Mr Xi as “a great leader” and a “very good man”.

This matters because Mr Xi is actually the most authoritarian leader of China since the death of Mao Zedong in 1976. Mr Trump’s over-the-top praise for him risks giving the American stamp of approval for repression in China. When Mr Xi abolished presidential term limits, making it possible for him to rule for life, Mr Trump’s response was to joke that America should consider that model of government.

But repression in Mr Xi’s China is no laughing matter. Controls on the media, the internet and universities have all been tightened significantly since he came to power in 2012. And there has been an unprecedented crackdown in the province of Xinjiang, with up to 1m Uighurs confined to “re-education camps”.

Compared to China, America still provides an inspiring example of a free society in action. But the fact that the US president regularly trashes the “fake news” media, and that his administration has separated thousands of illegal migrants from their children at the US border, blurs what should be a bright line between the practices of a democracy and those of an authoritarian state.

The resolution to the trade dispute may do further damage. Mr Trump shows every sign of wanting to move on from his battle with China, and to declare a new trade war on the EU and Japan. In doing so, the president will drive a wedge through the middle of the western alliance, making it all but impossible to take a co-ordinated approach to China.

If that happens, Mr Trump will look less like China’s toughest adversary and more like the answer to Mr Xi’s prayers.

Buttonwood

Beneath the dull surface, Europe’s stockmarket is a place of extremes

The gap between value and quality stocks has widened into a chasm



I
T WOULD BE hard to tell a story about America’s stockmarket without mention of at least one company that listed this century—Google or Facebook, say. Europe is rather different. Its bourses are heavy with giants from the age of industry but light on the digital champions of tomorrow. It is telling, perhaps, that its character can be captured in the contrasting fortunes of two companies, Nestlé and Daimler, with roots not even in the 20th century, but in the 19th.

Nestlé began in 1867 when Henri Nestlé, a German pharmacist, developed a powdered milk for babies. The firm, based in Switzerland, is now the world’s largest food company. It owns a broad stable of well-known brands, including Nescafé and KitKat. Its coffee, cereals and stock cubes are sold everywhere, from air-conditioned supermarkets in rich countries to sun-scorched stalls in poor ones. Daimler was founded a bit later, in 1890. Its Mercedes-Benz brand of saloon cars and SUVs is favoured by the rich world’s professionals and the developing world’s politicians.




Though the two companies have lots in common, their stockmarket fortunes could scarcely be more different. Nestlé is the sort of “quality” stock that is increasingly prized in Europe for its steadiness. It is expensive: its price-to-earnings, or PE, ratio is 29. In contrast Daimler is a “value” stock, with a PE of eight. The disparity has steadily grown in recent years (see chart). Indeed the gap between the dearest stocks and the cheapest across the continent is at its widest in almost two decades, says Graham Secker of Morgan Stanley.

The valuation gap in Europe is related to a similar divide in America. For much of stockmarket history, buying value stocks—with a low price relative to earnings or to the book value of tangible assets, such as equipment and buildings—has been a winning strategy for stockpickers. But the past decade has been miserable for value stocks in America. The rapid rise of a handful of tech firms—the Googles and Facebooks—and other “growth” stocks has left them in the shade.

Value stocks are, by definition, cheap. In the past they might have been cyclical stocks, those that do well when the world economy is picking up steam, but which suffer in downturns. These days the cheap stocks are in industries, such as carmaking and branch-based banking, that are ripe for disruption. But in Europe, they are especially cheap.

It is hard for banks to make money when yields on the safest of government bonds, the benchmark for lending rates, are negative, as they are in Europe. Banks face an additional threat from financial-technology firms, which do not share their burden of costly branches or surplus staff. Carmakers need pots of capital to equip them to make electric and self-driving cars. The returns are far from certain. It is easy to imagine a future in which status is less entwined with car ownership. People may not care whether the robo-taxi they fleetingly occupy is a luxury car or a bog-standard saloon. Before then, the prospect of punitive American tariffs on European-made cars is looming.

The value-growth axis is different in Europe, because there are no home-grown tech giants. The big stockmarket winners have been quality stocks. This is a category that combines stable profits and high return on capital with sensible debts and low staff turnover. Many are consumer firms with strong brands, such as Nestlé, Diageo (a British drinks giant) and LVMH (a French luxury-goods firm).

Value investors, however chastened, believe there is an opportunity here. For them, the Daimler-type stock is the one to buy. True, carmakers (and banks) have their troubles. But value stocks usually do. The trick is to buy them when everyone shuns them, because that is when they are cheap. The Nestlé-type stock is the sort of fad that the giddier sort of investor piles into, only to rue overpaying as it falls back to earth. Well, perhaps. But why be a hero? An investor in a low-cost index fund can own both types of stock without worrying too much about relative value.

A lot of stockpicking Americans stay away altogether. The cheap stocks look hopeless; the dear stocks look expensive. So they don’t buy at all, says Robert Buckland of Citigroup. The Nestlé-Daimler breach mirrors the divide within property markets in cities such as London. You could try to make a killing on a fixer-upper in a down-at-heel suburb. That bet requires patience and luck. Or you could buy a nice house in a ritzy neighbourhood. It will not be cheap. But it may never get much cheaper.

Central banks are biased towards loose policy

William White, former chief economist at the Bank for International Settlements (BIS), sees the world in a debt trap. He calls for a global monetary system that disciplines national central Banks.

Peter Rohner


(Photo: Iris C. Ritter/FuW)



Mr. White, in response to the economic slowdown, central banks around the world have left the path of monetary policy normalisation. Are you surprised about this U-turn?

No, not really. The reaction was in a certain sense almost inevitable. During the market wobbles at the end of last year, the Fed realized that the effect of higher rates could be slower growth that nobody wanted. And so they backed off. The U-turn is just another manifestation of that worry what would happen next. Plus, in central banking, there is a bias towards loose policy and lower rates.

Why is that?

With public and private debt at record highs, we are in a debt trap. When you are in a debt trap it means: you know that you want to raise rates to bring the expansion of debt to an end, but you can’t because raising rates will cause all sorts of problems, for example hurt growth and increase debt servicing costs. There are also political-economy-constraints. High government debt and deficits mean that higher rates are going to hit the government.

Are there other reasons for the loosening bias?

The exchange rate is another. When you tighten monetary policy, the currency appreciates. But most countries prefer a weaker currency. That means, everybody is caught in that trap. And then there is the question of blame. When rates go up and a recession follows, central banks will be blamed, not the politicians. Put all these things together, it is clear that delay becomes the default option.

How did we end up in the debt trap?

We were encouraged to do this. Just think what we have been doing since 2007. Monetary easing is an invitation to take on more private sector debt. And fiscal expansion is by definition an increase of government debt. Both instruments carry the risk of higher debt levels that eventually will kill you.

But the actions taken by the central banks during the financial crisis 2008/09 probably avoided a worse outcome.

In the early days of the crisis, central banks were right to do what they did. But post-crisis, the reliance on monetary policy to sort out all problems in the economy was too excessive. Debt problems are insolvency problems. Central banks are in the illiquidity business. Their policies made the problems worse because they have been encouraging more debt. And this started long before 2007. Monetary policy has been very asymmetrical over decades. Easing has been more pronounced than tightening. So we ended up with zero interest rates. At the fiscal side, we have had the same asymmetry so that government debt ratios have ratcheted up.

For politicians, loose fiscal policies can be a strategy to please voters. But where does the decade-long bias towards loose monetary policy come from?

The inflation-targeting regime is in part the problem. Price declines were considered to be a danger.

For the last twenty years, monetary policy has leaned towards inflation being too low. In a downturn, rates were lowered because inflation was under control. But in the upturn, they were not raised back to old levels.

But declining prices can be very harmful as the Great Depression learned us.

In history, there have been long periods where prices have gone down and the economy has been growing quiet vigorously because productivity increased. That was more the rule than the exception. The Great Depression, where prices and output were declining, was the exception. However, that exceptional event left a huge imprint on people’s mind and is now thought to be the norm.

You mean central banks should have allowed prices to decline?

At least prior to 2007. After 1990, the combination of China and India coming back to the global trading system and importing western technology and the increase in global manpower has to be treated as a positive supply shock. It pushed down the price level. And that should have been allowed to happen because it did not harm anybody. People were able to buy more stuff, producers made more profit, everybody was gaining.

One way to deal with too much debt is inflating it away. Is that a viable solution?

A little bit of inflation continuing over a long period of time can work wonders on the debt problem by reducing the real rates of return of the ones who own the debt. It is a rather gentle way of getting out of debt problems. We saw a lot of this in the post-war period. It is known as financial repression.

Will it also work in the modern world?

It’s not impossible, but in a world with open financial and capital markets it won’t be as easy as in the post-war era. If one country decides to take the path of financial repression, people will put their money to some other country and another currency. That is the danger of financial repression in the modern world. Either you have very strict capital controls, or you have a system where everybody does financial repression at the same time.

Are you worried when you follow the current debate in the US about Modern Monetary Theory?

I am a little bit. In a nutshell, what these people seem to be saying is that we need more active fiscal policy and that central banks should keep monetary conditions loose. It makes a lot of sense as long as you carry it not too far. The advocates of MMT think that debt levels don’t matter as long as you can print money in your own currency. But that idea is all wrong. History tells us that this can wind up very badly.

But the idea of more fiscal easing seems very appealing to many.

Yes it is, and I partly agree. I think we should have been using fiscal rather than monetary expansion over the course of the last couples of years. But we should have done it aligned with a mechanism that ensures that the policy tightens as things get better.

Are you advocating a debt break like we have it in Switzerland or in Germany?

I don’t like what you have done in Europe. I just say we should be very clear about the medium time framework and have legislations in place that will ensure that we are going to have much tighter fiscal policy when things get better. That might take the steam out of the upturn but would put us on a more stable fiscal path. But at these debt levels, anticyclical fiscal and monetary policy alone will not solve the problem. You also need to allow writing off the debt and restructure it.

That sounds painful. How could it be achieved?

You must identify which debt is not serviceable and take steps to make sure that it is written off. The supervisors in the banking system have to force the banks to restructure as opposed to provide support to zombie firms. In the next recession, we should have a combination of fiscal stimulus and a credible longer term debt sustainability target and pay much greater attention to debt restructuring. But nobody likes to talk about this.

Critics of fiscal and monetary expansion stress the danger of hyperinflation and refer to countries like Zimbabwe. But is this a fair comparison? The US is much larger and runs the world currency.

I agree, a collapse of the currency and hyperinflation are much less likely in a large economy and even less likely if that large economy provides the world currency. But the underlying processes are the same. The problems of hyperinflation never start with the central bank. They start with the fiscal authority that lets its finances get out of control. At one point creditors get worried and stop funding. Then the government turns to the central bank to get the money. The more it does, the more people are aware of the inflation danger. And they flee the currency.

But the dollar is not in demise. People seem to have confidence in the US and its currency.

Regardless of who you are, if you do not maintain a degree of order over your fiscal and external circumstances, there will be a price to pay. In the case of the US it will take longer, but there is already a murmuring of concerns about the dollar being the world currency because the US has a twin deficit at the top of the business cycle. And the Trump administration is using the dollar as a geopolitical weapon, what the Russians, the Chinese and the Europeans do not like. We are starting to see the beginnings of a backlash.

How could the global monetary system be put on a more stable footing?

The fundamental problem is that we do not have a global monetary system. We have a monetary non-system, in which central banks can do what they want. The manifestation of this is the explosion of their balance sheets.

What do you suggest?

I don t’ want to go back to the gold standard, but at least it was a set of rules that made sure individual countries could not do things that were harmful to themselves and also to others. We need a system that stops countries from letting their central bank’s balance sheet explode. The US has the privilege of running the system, but there is no interest in talking about this.

If not the US, who else could initiate reforms? What about the role of the BIS you used to work for as chief economist?

The BIS has no power, it is just a place where experts get together, talk and agree. Then they use the moral authority of that international agreement, so called «soft law», to convince people at the national levels to pass laws. The only institution to deal with it might be the IMF. There were a number of attempts to get the IMF to try to discipline its members. But that does not work because the creditors who do not need the IMF money are not listening to the fund. And the biggest debtor, the US, is not listening either because it has the dollar.

What does all this mean for smaller countries such as Switzerland or Canada?

We are both totally at the mercy of the monetary non-system. We cannot deviate from the course that the US and the Eurozone go because of the effects on the exchange rate. You in Switzerland ought to tighten monetary policy to prevent a bubble in the property market, but you can’t because of the implication on the franc.

Within the Fed, there are discussions to allow above-target inflation for a period of time. Is this reasonable or a matter of concern?

All of the debate is about finding a new framework that will allow the central bank somehow magically to raise inflation expectations. The idea is that inflation is too low and inflation expectations have to be raised. That comes out of the models they are using. In these models, expectations play a huge role. In my opinion, the approach is doomed to failure. Inflation expectations won’t rise.

What makes you so sure about it?

Why would you expect inflation expectations to rise when the Fed has no credible instruments to make them rise? Rates are already low and QE has already been used and will not have the same effect again. It reminds me of the situation years ago in Jackson Hole when there was a recommendation for the Bank of Japan’s Vice Governor Yutaka Yamaguchi to just raise inflation expectations. His answer was exactly that: How can I raise expectations without having the instruments? Again, I think none of this stuff will work and it is totally misguided. It is driven by the analytical framework the central banks are using. But I think their framework is not working in the real world.

Terrible Tuesday for Department Stores

Kohl’s and J.C. Penney reported disappointing quarterly results, setting off a tumble in the sector

By Elizabeth Winkler


A shopper prepares to pay for items at a Kohl's department store in Peru, Ill. Photo: Daniel Acker/Bloomberg News 


Retailers got a so-so start to earnings season last week when Macy’sreported earnings that narrowly beat expectations. The tone got much worse on Tuesday. Kohl’s KSS -9.31%▲ and J.C. Penney JCP -6.09%▲ both reported earnings that disappointed investors, triggering a drop in their shares and a broader selloff in department store stocks.

Kohl’s reported adjusted earnings of 61 cents a share, compared with analyst expectations for 68 cents a share. Sales at stores open for at least 12 months fell 3.4%—far steeper than the 0.2% drop analysts were expecting. The company has sought to build up its brands, particularly in athletic wear, but as shoppers continue to turn to Amazon.com ,or go directly to brands themselves, that hasn’t been sufficient to get shoppers in stores and merchandise off the shelves.



Meanwhile, J.C. Penney has been struggling quarter after quarter to turn its situation around, shutting stores and cutting costs to improve profitability. There was some hope that it might benefit from the fall of Sears, but J.C. Penney’s sales continue to fall. On Tuesday, the company reported an adjusted loss of 46 cents a share, compared with expectations for a loss of 38 cents a share. Same-store sales fell 5.5%—worse than the 4.2% decline analysts expected.

J.C. Penney attributed the steep drop to the company’s decision to stop selling appliances and limit furniture to e-commerce only. That J.C. Penney appears to be going the way of Sears, rather than benefiting from its downfall, isn’t so surprising. It has failed to invest in e-commerce and store updates. Stuck in old and out-of-the-way malls, it is struggling to bring back foot traffic.

Shares of both retailers were down around 10% in recent trading. Kohl’s slashed its outlook for the fiscal year ending in February 2020, saying it now expects earnings to fall within a range of $5.15 to $5.45 a share. Analysts had been expecting earnings of $6.04 a share, according to FactSet.

The results draw a contrast not only with Macy’s but also Walmart ,which saw its same-store sales grow 3.4% in the first quarter as it continues to grab market share, thanks partly to its ambitious investments in e-commerce.

No doubt Kohl’s and J.C. Penney’s dim start to the year sets a negative tone for other retailers reporting this week, including Nordstrom and Target .Those with superior e-commerce capabilities are faring better, but all retailers have the threat of tariffs hanging over them, too. Investors have been put on notice.

Crude Oil: This Trend Will End

by: QuandaryFX


Summary
 
- Short-term fundamentals suggest that we may be entering a period of bearishness, but I believe we have a few more months before that is felt.

- The economy is a huge driver of demand for petroleum products and crude pricing, and we are likely to see a recession within a year.

- The technical trend is still in force, but investors need to respect stops and have exit plans for getting out of trades.

 
This week, the EIA reported a few potentially bearish short-term fundamental metrics for the oil markets (USO). Despite the immediate short-term fundamentals, crude prices have turned higher and appear to be turning a profit for long traders for the week. In this article, I will take a step back and examine the current fundamental developments of crude oil as well as economic indicators which will likely call the top of the market for oil within the year.

Short-Term Fundamentals
 
This week's Petroleum Status Report contained a few data points which all investors in oil should take note of due to the fact that they could potentially be indicating that the underlying supply and demand situation is changing. Over the past year, we have seen the supply and demand situation in crude oil oscillate between lagging supply and unseasonal strength in supply.

 


From January through late April, inventories bucked the seasonal trend of strong builds as crude imports substantially lagged the amount needed to balance the market. This set the case for fundamental bullishness as inventories closed the distance to the 5-year moving average.
 
However, over the last month, we have seen a potentially worrying signal for the bull thesis in that inventories have risen at a time of the year when they typically flatten out and fall. Seen graphically, here is this relationship as expressed by the difference between the 2-month change in inventories and the 5-year average.


The basic idea behind this indicator is that it shows when the market is seasonally strong or seasonally weak. From January through late April, the market was drawing stocks versus the average and flat price rallied during this time period. However, over the last two weeks, we have seen a switch in which inventories are gaining against the average. The following chart shows the predictive nature of this relationship as it relates to WTI futures.

 

The metric is imperfect (as are all such tools) but it does a fairly good job of capturing substantial and sustained trends. For example, crude inventories began drawing in relation to the 5-year average in March of 2017 (green shaded area) and sustained this relationship through June of 2018 and flat price rallied by several dollars per barrel. Likewise, inventories began gaining versus the 5-year average (red shaded area) in late 2018 and flat price fell through most of the time this relationship was in force.
 
The reason I point out these historic calls is this: this short-term fundamental indicator has just switched into "bearish" mode over the last two weeks as we have seen unseasonal builds in crude stocks. For example, the latest inventory reading of a 5.4 million barrel build in stocks comes at a time when inventories typically are falling. This is potentially troubling if this relationship continues and gives a warning sign that something is not as it should be.
The basic catalyst which has been causing the unseasonal behavior in crude oil this year has been a decrease in imports.

 


Imports have been historically low for most of this year, but over the last few weeks, we have seen them return to the 5-year range. Since supply has continued to grow…

 


…and refining utilization has remained weak…

 
 
 
…the lower level of imports has been a life-saver for the bulls in the market. However, since it appears the current import situation has been resolved, all eyes are on refining runs to see if they will be able to soak up the extra demand. My opinion is that we will see a healthy refining yield in the immediate future due to the fact that we are entering driving season with low gasoline stocks, and for that reason, I am bullish the flat price of crude oil.

 
 
 
However, there is a larger issue which may cause the bullish case to end in the coming months: the economy.
As I wrote in a piece yesterday, I believe that we will see a recession within the next year due to a few key fundamental indicators. When it comes to the oil markets, the relationship is incredibly straightforward. Most of what refiners make is used in travel in the form of gasoline, distillate, and jet. When the economy contracts, fewer people are on the road to work, fewer people go on business trips, fewer families go on road trips or distant vacations. This overall means that when recessions hit, oil demand collapses.
 
If we see a recession hit within the next year, we will see a collapse in the price of oil in all likelihood. The reason is simply because the price of oil represents the balance between supply and demand and supply is basically on a constant march upwards through at least 2023 (according to the EIA's projections). If we see the supply side of the equation collapse, we will see inventories build against norms, the market switch into contango to incentivize storage, and prices fall until the supply side comes back into line.
 
The immediate trend remains up, however.
 


As I have mentioned in earlier articles this week, we are in a pullback which is finding a confluence of support which indicates that at least for the next few weeks, we are likely to see continued price upside. This situation leaves me both technically and fundamentally bullish in the short run (0-4 months). However, with an economic slowdown approaching, I believe that bullishness needs to be guarded and stops need to be tight.


The Nature of Nations

By George Friedman


Over the past few weeks, I have discussed the relationship between geography and the evolution of three countries: the United States, Australia and Hungary. A key distinction I drew between them was that the United States and Australia were invented countries while Hungary was an organic country. This week, we’ll examine this idea further.

Invented Nations, Organic Nations

The American and Australian nations were forged from migrants who crafted a political system that defined them. In both countries, the political system and its moral principles – along with the social principle that each newly arrived citizen must set his own course and take responsibility for his own condition – defined them. This enabled the simultaneous absorption of migrants into the system and the retention of their familial memory. It was possible, and even necessary, for migrants to graft their own psyches onto an overarching commitment to the national regime and the culture it created, while preserving a residual recollection of where they came from. This was not simply something for recent immigrants. The descendants of the first English immigrants became Americans and Australians through the regimes, but centuries later, they still remembered that they were once English and that they owed something to that past.

This complex identity emerged from the need to invent something different than what existed.

The immigrants faced a geography of a vast land occupied by other nations, and they felt a compulsion to create a new reality on that land. The creation of that new reality was in many ways driven by the reality they faced rather than a clear plan. It was a process of ongoing invention and self-invention that bore new nations while embedding in the national psyche the complex tension between the immigrants’ hunger to leave the past and their hunger to retain it.

Hungary, an organic country, is a different case. A Hungarian living in Hungary has a single identity.

His family’s past is Hungarian, his mother tongue is Hungarian, and so on. Most important, he is Hungarian no matter what the regime is. And yet, when we step back and think of the origin of organic nations like Hungary, we see they all came from somewhere and they all displaced someone. They just did so a long time ago. Hungary’s history is blurred by time, but at some point between the 6th and 9th centuries, the Hungarian tribes crossed over the Carpathian Mountains and displaced tribes that were already there.

The difference between the United States or Australia and Hungary is not that the Hungarians did not displace native peoples on occupying the land. It was more radical. The Hungarians existed independent of the land and prior to coming to the place where they finally settled; the Americans and Australians as peoples were invented after coming to the land. The Hungarians had community and identity independent of place; the Americans and Australians built it after coming to the land, partly from the land but mostly from the moral and legal principles of their nations. The Hungarians were bound to their people; the Americans, in particular, were bound to the principles of the regime.

This striking difference is illustrated in two very different pledges. In the 9th century, once settled in the Carpathian Basin, seven Hungarian tribal leaders took a blood oath. Although the Hungarian people preceded it, it was on this oath that Hungary as a nation was founded. In contrast, American armed forces pledge to “support and defend the Constitution of the United States against all enemies, foreign and domestic” – not specifically to defend the land or the people.

Land, People, Regime

When we think of a nation, we think of three components: the land, the people and the regime.

In the American and Australian cases, the identity of the people was always somewhat ambiguous. It was the regime, constitution, laws and moral principles that bound the nation together. The land evolved over time. In the case of Hungary, the land was taken, the people were the absolute, and the blood oath joined the tribes, which were already Magyars, into one.

There is much criticism of modern settler countries displacing native populations. But most nation-states came into existence by displacing someone else. The Hungarian case is simply one in which the conquest took place so long ago, and the destruction of the native peoples – who either were killed or simply scattered – was so total that there is no moral question. The moral question arises with the United States, Australia and other recently founded nations, because the deed is still remembered. The uncomfortable truth is that the creation of one nation requires that another pay some price.

Most people who think about geopolitics think in terms of the interaction of geography and people.

But in this equation, the people are a very complex variable. Geography provides imperatives for survival, but geopolitics does not exclude the origins and nature of community, nor the moral character of the nation. And, therefore, it doesn’t ignore the political regimes that emerge.

The difference between the Hungarian blood oath and the American military oath is striking.

The first was a pledge to the unity of the people; the second was a pledge of loyalty to the Constitution even against the people if necessary. The blood tied the Hungarians together. The regime and its principles tied the Americans together. The Australians define themselves based on place, though their history makes their moral commitment complex. Still, the moral derives from the necessary – and the necessary begins with place.

When Central Banks Try to Fix What They Break

The European Central Bank would only take interest rates more negative with a mechanism to soften the blow on banks

By Jon Sindreu


 European Central Bank headquarters in Frankfurt Photo: kai pfaffenbach/Reuters


Fears of a global economic slowdown have led the European Central Bank to once again ponder the idea of taking interest rates into deeply negative territory and then come up with ways so to cushion any ill effects. That last bit in itself should be a red flag.

Only a few months ago, investors expected central banks to keep tightening financial conditions after a decade of unprecedented stimulus. Now they think more easing is at hand. In the U.S., futures markets price in almost a 50% probability that the Federal Reserve will lower interest rates by January.

But the real problem is in the eurozone, where the ECB never lifted rates from their record-low minus-0.4%, and officials need to do something to signal that their arsenal isn’t spent. At their latest policy meeting last Wednesday, they suggested rates could go further below zero, accompanied by a tiered deposit mechanism designed to shield banks from the damage.

Even so, investors seem skeptical that eurozone banks can escape the fallout. Last month, mere speculation about negative rates weighed heavily on their shares.

Negative rates are like a tax on banks because they are charged for the reserves held at the central bank that they, on aggregate, can’t get rid of. It is true that some of their borrowing costs also go negative, but banks don’t dare charge for retail deposits—a big chunk of their liabilities—for fear of losing business. If deposit returns go negative enough, customers could always just ask for their money in bank notes.

A two-tier deposit system would seek to alleviate this by charging the more punitive rate only above a certain level of excess liquidity. This could create a range of new complications, though. For example, since banks in Northern Europe still hoard most of this extra liquidity, some short-term borrowing rates in countries such as Italy and Spain may not follow the ECB’s policy rate all the way down.

Embracing monetary complexity to solve problems is rarely a good thing for policy makers to do. Evidence from the past decade shows that the ability of unconventional policies like negative rates and quantitative easing to boost economic growth and inflation is limited.

When the next downturn comes, ECB policy makers should stop trying to fix what they themselves wreck. It would be better to simply pass the baton to fiscal policy.

Amazon Deal Makes Meal Delivery Even Hotter

Tech giant’s investment in London-based meal-delivery startup Deliveroo is the second slug of cash to hit the sector this month

By Stephen Wilmot


News of a $575 million funding round in Deliveroo, led by Amazon.com, led many investors to think twice about investing in other fledgling food-delivery services. Photo: Frank Augstein/Associated Press


Takeout stocks plunged on Friday after Amazon announced an investment in a fast-growing meal-delivery startup. But investors may need to look elsewhere for the real victims of all the cash flowing into a sector that epitomizes the promise and profligacy of Silicon Valley.

Deliveroo, founded by two Americans in London in 2013, announced on Friday a $575 million funding round led by Amazon. Shares in Just Eat, a pioneering U.K. website for ordering takeout food that now competes with Deliveroo, fell almost 10%. Shares in Delivery Hero DHER -2.26%▲ and Takeaway.com , TKWY -4.58%▲ which offer similar services to Deliveroo in other markets, also cratered.


The Amazon investment marks the second time this month the sector has gained a slug of cash.

One of Deliveroo’s biggest rivals is Uber Eats, whose parent Uber raised $8.1 billion in its initial public offering last week.

Whether these two players use their riches to eat each others’ lunches, or those of other couriers, is hard to predict in a fast-moving industry. Eventually, the market is likely to be reordered by deals. Uber Eats tried to take over Deliveroo last year but couldn’t agree on valuation.

The mergers that do occur in this industry benefit shareholders a lot: When Takeaway.com and Delivery Hero agreed to combine their German businesses last December, the shares jumped 28% and 10% respectively. That is the risk for those looking to bet against players like Just Eat, which still has a strong market position in the U.K.

That said, mergers are less likely while the money to compete is flowing so freely. Instead, the cash will likely subsidize further rapid growth. Delivering restaurant meals to homes spares consumers the chore of cooking even if they want to eat in. This sector is as hot in the U.S.—where Grubhub ,DoorDash and even Amazon Prime Now compete with Uber Eats—as it is in Europe and elsewhere.

The real losers of this trend could be the retailers that sell groceries. Food that would once have been bought in stores and cooked by consumers is being bought and cooked by restaurants.

The growth of meal delivery has the capacity to transform much more than the traditional takeout industry.