Whatever It Takes to Never Give Up
Doug Nolan
Any central bank head that passes through an eight-year term without once raising rates has some explaining to do. To leave monetary policy extremely loose for such an extended period comes with major consequences (can we at least agree on that?).
So, what went wrong? How did policy measures not operate as expected? With the benefit of hindsight, what could have been done differently?
What will be Draghi’s legacy? How will history view his stewardship over eurozone monetary policy? The years sure pass by. I still ponder how history will judge Alan Greenspan and Ben Bernanke. At this point, with securities prices (equities and bonds) basically at all-time highs, contemporary monetary policy - and its major architects - are held in high regard. I don’t expect this to remain the case following the next crisis.
A reporter question from Draghi’s Thursday news conference: “A recent survey by the Bank of America reveals that impotence and ineffectiveness of central banks, including the ECB, are the second risk perceived by investors. My question is: do you think that these investor concerns are justified? In other words, is there a risk of financial bubbles?”
Mario Draghi: “…You asked whether the expansionary monetary policies of central banks is the second-largest risk. I can answer for the eurozone; in the eurozone, and it’s a question we ask ourselves every day, many times a day, and I’m saying this because we monitor market developments very closely. We see some segments of financial markets where valuations are overstretched. One case is real estate, for example, and especially prime commercial real estate. Now, the causes of these overstretched valuations often don’t lead directly to our monetary policies. For prime commercial real estate, it’s the action of international investors… We may have other segments to watch, but frankly, all in all we don’t see bubbles. When we see some bubbles, they are local bubbles that should be, for example, some segments of the bond market, the high-yield leveraged bond market – which by the way is not a big issue in Europe. It's more of a big issue in another jurisdiction… Certainly the other important issue is that much of this danger, much of this risk, much of this search for yield happens in the non-banking sector and more specifically in the so-called shadow banking sector. Unfortunately there, the perimeter of macro-prudential policies does not include that sector. We have some visibility, pretty good visibility, into what happens in the banking sector… But we don't have much visibility for the rest of the financial sector. I’m talking for the non-banks, so for the shadow banking sector.”
Reminiscent of mortgage finance Bubble era Alan Greenspan, Draghi references “local Bubbles.” Yet Draghi concludes his term staring eye-to-eye with one of history’s most spectacular Bubbles – and it’s anything but “local” and it is not in real estate or high-yield. I’ll assume when ECB officials are monitoring markets “very closely” and pondering risks “many times a day,” perhaps sovereign bond markets garner some occasional attention.
Greek yields were at 22.31% when Mario Draghi began his term on November 1, 2011. Italian yields were at 6.09%, with Portuguese yields at 11.79%, Spanish at 5.54%, French at 3.10% and German yields at 2.03%. At 2011/12 highs, Italian yields reached 7.26%, Spain 7.62%, Portugal 17.39% and Greece 31.68%.
The collapse of eurozone yields has been nothing short of miraculous. Greek 10-year yields ended this week at 1.20%, and Italian yields closed at 0.95%. Portuguese and Spanish yields are down to 0.22% and 0.27% - and those are among the high-/positive-yielding instruments. German and French yields ended the week at negative 0.36% and negative 0.06%. Other negative-yielding eurozone 10-year bonds include Netherlands (-0.24%), Austria (-0.14%), Finland (-0.14%) and Belgium (-0.08%). Latvia’s 10-year yields ended the week at zero, slightly ahead of Slovakia (0.03%), Ireland (0.04%), Slovenia (0.08%) and Cyprus (0.46%). It’s curious that one of history’s greatest bond market inflations didn’t garner so much as a mention during Draghi’s final ECB press conference.
Scant interest in the ECB’s holdings as well. The ECB balance sheet doubled in size over the course of Draghi’s eight-year term. Total ECB Assets ended October 2011 at 2.333 TN euros, having already inflated dramatically from 2005’s one TN (euro). ECB assets are now at 4.687 TN ($5.230TN). There were the Long-Term Refinancing Operations (LTRO), Outright Monetary Transactions (OMT), and Quantitative Easing (QE). ECB assets surged 2.6 TN euros during the 2015 QE program that ran through the end of 2018. After a brief hiatus, the restart of QE (20 billion euro monthly) was announced in September.
Draghi will forever be known for “whatever it takes…” (“...and believe me, it will be enough”). He is hailed as having saved the euro. The dire consequences of a collapsing monetary union certainly afforded him extraordinary leeway. When the euro stabilized, he then leaned on the ECB’s inflation mandate to basically do whatever he wanted. Similar to central bankers around the world, global disinflationary forces associated with globalization, manufacturing over-investment, technological advancement, and changes in the nature of output (i.e. digitization) were used to justify unrelenting unprecedented monetary stimulus and policy experimentation. When these inflation mandates were created, did anyone ever contemplate that they would be justification for creating Trillions of new “money” through the monetization of government bonds and other securities?
Central banking has a long history of prudence and conservatism. After all, risks associated with bold measures and experimentation are too great: inflation, Bubbles, wealth redistribution, loss of trust, wars and so on. The role of central banks should be well contained; the scope of mandates limited in nature. Allow central bankers to drift into the domain of bolstering securities markets and you’re asking for trouble. Any “buyer of last resort” crisis-period operation should be concluded at the earliest available juncture. Never promise a market backstop. Efforts to use inflating securities markets as a mechanism for system reflation – to boost spending, borrowing, investment and incomes – is fraught with great risk. To have a central bank assume the role of savior for an ill-conceived monetary union guarantees precarious runaway monetary inflation.
There were momentous unintended consequences when Dr. Bernanke in 2008 unleashed his monetary experiment. Mario Draghi was a paramount one. I doubt Draghi would have even been considered for the ECB’s top post if not for Bernanke’s radical stimulus gambit. With the guardian of the world’s reserve currency having flung open the doors to rank inflationism, traditional central bankers in Germany were blown back on their heels. All the uncertainty and confusion created an opening. Articulate, diplomatic and with deep experience (including a stint as Goldman Sachs vice chairman and managing director), the smooth Italian fatefully overcame opposition from the sound money Germans to win the job.
For posterity, I’ll include a few headlines. “Mario Draghi, Hailed as the Euro’s Savior, Leaves With the ECB Divided” (Wall Street Journal). “How Mario Draghi Brought Determination to Calm Market Turmoil” (Financial Times). “Mario Draghi Reaches the End of His Fight to Save the Euro” (Bloomberg). “Mario Draghi Leave Europe Near Recession, in a Deflation Trap – and Out of Ammunition” (UK Telegraph). And my personal favorite from Axios: “ECB Head Mario Draghi Saved by the Bell as the Eurozone’s Mess Escalates.” A more forward-looking headline: “Lagarde Will Seek to Heal ECB Policy Split with Review Plan.”
Question: “What advice are you giving to Christine Lagarde – that you can tell us about anyway?”
Draghi: “…No advice is needed. She knows perfectly well what she has to do. By the way, she has a long period of time ahead during which she will have to form her own view, together with the Governing Council, about what to do.”
Bernanke and Yellen left Chairman Powell in a difficult predicament. It was up to him to move forward with a much delayed “normalization” (brought to a screeching halt in less than a year). Draghi has essentially set a policy course that will run much beyond the end of his term.
There are no expectations for any so-called “normalization.” Negative deposit rates will continue indefinitely, as will QE. No difficult decisions anywhere on the horizon. The Governing Council will surely present a unified front. Christine Lagarde will have an easy time of it – that is, until trouble strikes.
The “ammo” issue will not be going away. The entire world will deeply regret having disregarded the sordid history of inflationism. And that has been the momentous unintended consequence of Bernanke and Draghi’s grand monetary experiment: once you travel down the path of using monetary stimulus to reflate financial and economic systems, there will be no turning back.
I don’t believe Draghi saved the euro – he merely postponed monetary breakdown.
In so many ways, delaying the day of reckoning only makes things (much) worse. The world over the past couple weeks has experienced riots in an expanding number of countries – including Lebanon, Egypt, Iraq, Spain, Chile, Bolivia, Ecuador and Hong Kong. Wait until the global Bubble bursts. Similarly, wait as it expands further, with wealth inequalities mounting and social and geopolitical stress festering.
It’s crazy that central bankers have expended such precious resources to sustain the unsustainable.
What does the ECB have remaining in its arsenal to expend when the next crisis erupts? One thing: Trillions of QE. And markets are perfectly aware of this reality, which explains the historic speculative Bubble that has engulfed eurozone and European bonds. European yields have been a major force pulling international bond markets along for the ride - and why not? The next crisis will be global, with the ECB’s Trillions of QE joined by Trillions from the Fed, ECB, PBOC, BOE and the rest.
It’s fitting that Mario Draghi’s final meeting in charge of the ECB came with the S&P500 trading right at all-time highs, while Italy’s two-year bond issue was oversubscribed with a yield of negative 0.11%. And then there was the announcement of the U.S. fiscal deficit of almost $1 TN, despite decent growth, unemployment at a 60-year low and historically low funding costs.
There is a long list of developments that were only possible because of the superhuman feats of “Helicopter Ben” and “Super Mario.” Paul Krugman has referred to Draghi as “the greatest central banker of modern times.” I’ll assume Dr. Bernanke is a close runner-up.
I’m convinced China’s historic Credit Bubble would not have inflated to such extremes without unprecedented monetary stimulus from the Fed, ECB and BOJ. The Chinese banking system doesn’t inflate to $40 TN without China’s massive holdings of international reserves underpinning its currency. China’s currency doesn’t sustain its international value without devaluations in the world’s reserve currency, along with the euro and the yen. And it was all made possible by Team Bernanke and Draghi, with the resulting Chinese-led investment boom a major factor behind global downward pressure on technology and manufactured goods prices.
Consequences of unprecedented monetary stimulus are now used as justification for only more outrageous monetary stimulus. Sinking “real rates” – “the natural rate” – “r star” – the “neutral rate” – now apparently demand lower for longer. And markets appreciate that global central bankers are trapped – nowhere to go but ongoing aggressive stimulus. With a straight face, investment managers assert on Bloomberg and CNBC that Federal Reserve policy is “too tight.”
Even with the S&P at highs, unemployment at lows, financial conditions loose, and “money” growing crazily, the Fed apparently has no alternative but to cut rates for a third time in three months - to avoid at all cost the Scourge of Disappointing Markets. At the minimum, the Fed should signal it will now pause. Most view this as unlikely, as such a bold maneuver risks upsetting fragile markets (trading at record highs). It’s hard to believe the FOMC is comfortable having highly speculative markets dictate monetary policy, but it’s similarly difficult to see them willing to break this dynamic. Right, no appetite for rattling markets.
I’ll be really curious to see how history views this cast of characters. When asked about his future, Draghi said “ask my wife.” I’ll assume he’ll follow in Dr. Bernanke’s footsteps – rake in millions. It’s an absolutely wonderful time to be an ex head of one of the world’s major experimental central banks. Such powerful incentives to keep the game going – the Bubble inflating. “‘Never Give Up!’ Draghi Tells Lagarde as He Leaves ECB,” read a Reuters headline.
WHATEVER IT TAKES TO NEVER GIVE UP / CREDIT BUBBLE BULLETIN
WARRENWORLD: ELIZABETH WARREN´S MANY PLANS WOULD RESHAPE AMERICAN CAPITALISM / THE ECONOMIST
Warrensworld
Elizabeth Warren’s many plans would reshape American capitalism
For better and for worse
IN 1936 Franklin Delano Roosevelt said of the big businesses lining up against his re-election: “They are unanimous in their hate for me—and I welcome their hatred.” Elizabeth Warren, who is seeking the Democratic nomination in next year’s presidential election, takes a similar approach. After a cable news personality reported that executives of big companies are anxious about the possibility of a Warren presidency, she tweeted: “I’m Elizabeth Warren and I approve this message.”
Ms Warren, a former professor at Harvard who is currently a senator for Massachusetts, is offering Democratic primary voters a menu as ambitious as anything seen since FDR’s New Deal: a fundamental reworking of American capitalism. It is going down well.
In The Economist’s average of public-opinion polls, as of October 23rd, Joe Biden has just a narrow lead over Ms Warren. Her support stands at 24%, the former vice-president’s at 25% (see chart 1). Betting markets rank her the clear favourite, with a nearly 50% chance of grasping the nomination. Polls pitting her against President Donald Trump see her beating him.
Ms Warren has been fishing for primary support in many of the same pools as Bernie Sanders, a senator for Vermont. But there is a sharp ideological distinction between them. Mr Sanders calls himself a “democratic socialist”; he talks of class struggle and wants workers to own 20% of big companies.
This resonates with much of the old left, and has support from new leftists such as Alexandria Ocasio-Cortez, a representative from New York. Ms Warren, in contrast, proclaims herself “a capitalist to my bones”. Mr Sanders would never say, as Ms Warren did last year, “I love what markets can do...They are what make us rich, they are what create opportunity.”
It was a paean with a crucial proviso: “But only fair markets, markets with rules.” Ms Warren believes that the rules under which American markets operate are unfair. She sees a system corrupted by cash turned into political capital. Thus most carbon emissions remain unpriced, tech giants accumulate more power and oligopolies dominate health care. Such market failures—or, in this view, market sabotage—gum up competition and widen income inequality, leaving millions of working families “hanging on by their fingernails”. Setting them right requires a wide range of reforms.
That this assessment thrills Democratic primary voters should perhaps not come as a surprise. Healthy capitalism depends on healthy competition. Yet two-thirds of American industries have seen market concentration rise in the past two decades. Competition should constrain profits as companies fight for customers; in America profits have soared.
In 2016 the incomes of the highest 1% of American earners were 225% higher in real terms than they had been in 1979 (see chart 2). For the middle-class, the growth was 41%. Today’s tight labour market gives American workers more negotiating power than they have had in years.
But that does not make up for the long-term shift towards inequality, both between the top 1% and everyone else, and between college graduates and less-skilled workers. Higher education, good health care and decent housing are unaffordable to many. America has some of the highest levels of poverty of any rich nation, and some of the lowest life expectancies.
To tackle inequality Ms Warren proposes a pincer movement. “Predistribution”, an idea developed by Jacob Hacker, a professor at Yale, would seek to boost pre-tax incomes for working families and limit economic gains perceived to be unjust, thus tempering the engines of inequality.
Hence a variety of actions aimed at breaking up or reining in big firms and better equipping workers. Old-fashioned redistribution would also seek to right the damage already done with taxing and spending. Ms Warren would not just reverse Mr Trump’s tax cuts. She would also impose new taxes on large companies and rich individuals—who would see their taxes rise more steeply than they have for almost a century, reversing a decades-long fall.
Companies would face an extra 7% tax on all profits above $100m—an amount levied on the profits the firms report in their accounts, rather than their taxable profits under current law.
There is often a large discrepancy between the two; tax exemptions created by a well-lobbied Congress result in many profitable companies paying little tax. The highest earners would also face heftier payroll taxes. Blaming the shortfalls that loom for Social Security (public pensions) by 2035 on “inadequate contributions by the rich”, Ms Warren would introduce new levies worth nearly 15% on roughly the top 2% of households.
Rich pickings
Then there is the wealth tax. Targeting the super-rich, Ms Warren promises a 2% annual levy on net worth over $50m, rising to 3% on fortunes above $1bn. Rich people expend a lot of effort avoiding such taxes. Indeed, the complexity of working out what they should cough up is one reason only three rich countries have them, compared with 12 in 1990.
The sense that a Warren presidency would be costly to them personally, as well as forcing change on their companies, doubtless adds to the antipathy felt towards her among most of America’s business elite. But the Social Security benefits for the elderly, free public college for students and universal child care which, among other ideas, these trillions could fund appeal to many voters.
Some of these plans would also show positive effects on economic growth, according to independent analyses by Mark Zandi, chief economist at Moody Analytics. The campaign, which has published some of his reports, has not yet shared the number-crunching Mr Zandi has done on free public college and student-debt cancellation, which may be less positive. (The Warren campaign would not confirm or deny this.) “Broadly speaking, she pays for what she has proposed,” says Mr Zandi. The only exception is Medicare for All. “It’s not clear to me how she is going to pay for it all. She hasn’t asked me to evaluate it.”
Medicare for All is a nationalised health-care plan proposed by Mr Sanders which Ms Warren endorses. The plan illustrates the sheer size of the changes Ms Warren envisages (see chart 3).
It would get rid of private health insurance, an industry with a market value of $530bn. Her more mainstream rivals for the nomination have started to press the senator on whether the $3trn in annual costs that come with that policy would require her to increase taxes on the middle class. She has not come up with a convincing answer—though she says that one is forthcoming.
Private equity would also be at risk.
The “Stop Wall Street Looting Act” she has introduced in the Senate changes the way private-equity firm employees’ income is taxed. Currently they pay capital gains and investment tax of just 23.8% on their earnings.
Under her plan they would pay income tax of up to 37%. But not everything Ms Warren wants to do to the industry is a matter of redistributing its gains. Her predistribution agenda requires the power of such concentrations of capital to be reduced.
Measures on “joint and several liability” in private equity contained in the act would in effect shut down their business, say industry bosses. By making the partners who manage and invest in the funds liable for the debt and pension costs of companies they acquire, they would impose a burden that public companies do not have to shoulder, scaring away institutional investors.
That would affect the ownership of 8,000 companies, more than twice the number of listed firms.
Other companies would also be broken up. She would revive the Glass-Steagall Act, separating banks’ deposit-taking business from their riskier investment activities. Federal regulators have allowed some giants to gain more power by acquiring potential rivals. Ms Warren would unwind those mergers.
Bayer, a huge life-sciences company, would have to sell Monsanto, a seed and chemicals company it acquired in 2018; Facebook would have to spin off Instagram and WhatsApp.
Online marketplaces with global revenues of more than $25bn would be regulated as “platform utilities”, and stopped from offering their own products and services on the regulated platforms. Google would have to sell its online advertising exchange, Amazon would not be able to sell on its marketplace.
Ms Warren also wants companies to be generally more accountable. In big companies, 40% of board seats would be reserved for workers’ representatives. All companies with revenues of more than $1bn would need to obtain a federal charter requiring their directors not just to serve their shareholders but also consider the effects of what they were doing, or not doing, on their workers, their suppliers, their neighbours, the environment and so on. State attorneys-general could petition the commerce department to revoke a company’s charter if they felt those norms were repeatedly being flouted.
In this she can claim to be going with the flow. In August nearly 200 chief executives, including JPMorgan Chase’s Jamie Dimon, Johnson & Johnson’s Alex Gorsky and Walmart’s Doug McMillon pledged “a fundamental commitment to all of our stakeholders”. “I completely agree with her that businesses need to be focused on stakeholders, not just shareholders,” says Marc Benioff, the chief executive of Salesforce, a software giant. But Ms Warren wants to turn these promises into state-monitored action.
Whether Ms Warren’s many plans would have their desired effect is open to question. So are their unintended consequences. A big investment bank might be enmeshed in credit markets in such a way as to need a government bail out in a crisis even if it had no deposit-taking arm. Workers on boards would probably garner higher wages, but that brings other complications.
A multinational company might have its headquarters in America but have more staff outside it, says Luigi Zingales of the University of Chicago. Why should American workers get a bigger say than those overseas? Dissuading corporate takeovers would limit companies’ ability to change with the times. Most disturbing, to Mr Zingales and many others, is the notion of company charters which the federal government could revoke. “Imagine a Trump administration with the power to go after companies in this way,” he says.
Not all of the predistribution agenda is aimed at humbling the mighty. Like most of the Democratic contenders Ms Warren wants paid family leave, a $15 federal minimum wage within five years, government investments in training and reforms that will make it easier for people to unionise. She would also ban forced arbitration and non-compete clauses, giving workers more power to challenge their employers and find new jobs. “Gig economy” companies would be required to treat workers as salaried employees.
Trading places
Ms Warren is not just seeking to change the rules for business. She also sees a big role for government in making America competitive: a role built on industrial policy and protectionism.
A new uber-agency called the Department of Economic Development would be charged with creating American jobs. Products made possible by taxpayer-funded R&D would have to be made in America.
If that sounds like a Warren policy that Mr Trump might support, it is not the only one. Ms Warren promises to run a government “more actively managing our currency value to promote exports and domestic manufacturing” in response to other countries manipulating their exchange rates.
She wants new committees representing consumers, rural areas and each region of the country to be able to delay trade deals that worry them. Since every trade deal will worry someone somewhere that sounds like an end to trade deals.
This brings to the fore a tension at the centre of Ms Warren’s capitalism. Many of her domestic policies are justified in terms of increasing competition. Blocking anti-competitive deals may be troublesome for Facebook but is generally good for everyone else. Yet when it comes to industrial and trade policy her love of competition wanes. She becomes, instead, a conventional protectionist.
Take the example of clean energy. Ms Warren sees environmental policy as an opportunity to play favourites and to protect American manufacturing. She wants an accelerated phase-out for carbon-free nuclear electricity and a ban on fracking, which has not only made America the world’s top oil producer but also provided it with a lot of cheap natural gas. This appeals to the Democrats’ base; but it would also make America’s transition to cleaner energy more expensive and less effective. Ask someone selling coal-fired electricity what they want for Christmas and an end to nuclear power and cheap gas will come high on the list.
Ms Warren abhors lobbying—she proposes an “excessive lobbying tax”, rising up to 75% for companies spending more than $5m annually. Nevertheless, despite this, her approach creates a lot more direct government investment that firms might lobby for. She seems unfazed by the possibility of government’s capture by insiders when those insiders are the right people with the right intentions. It is worth noting that Ms Warren designed her biggest governmental achievement to date, the Consumer Financial Protection Bureau, in a way that gave its director unusual power and autonomy.
Ms Warren has tried to avoid the practice of meeting Wall Street executives and big donors to help shape her agenda. Her solutions are instead informed by consultations with professors and think-tankers. Despite this, within these academic circles, Ms Warren’s ideas spark debate.
Because the proceeds of her new taxes are to be spent, they should not suck demand from the economy. More competition could encourage innovation. Subsidised child care could encourage more work; subsidised health care more willingness to chase dreams. That said, a disorderly dismantling of the fracking and private-equity industries, continued trade strife and the possible disincentives to work and invest caused by much higher taxes would cut the other way.
Larry Summers, a professor who led Barack Obama’s National Economic Council, and Natasha Sarin of the University of Pennsylvania argued earlier this year that a wealth tax would be difficult to implement and could depress enterprise. They also think it would raise less money than the Warren campaign claims.
Income inequality would surely fall somewhat, especially by taxing the very top of the income distribution. Emmanuel Saez and Gabriel Zucman, two economists at the University of California, Berkeley, who influenced Ms Warren’s tax policy and who have written a new book on inequality (see article), estimate that her proposals would increase the tax bill of the richest 0.01% of Americans. Currently, they pay 33% of their pre-tax income in tax, which would rise to 61%. But there is a limit to how much inequality can be fought through taxing the very rich. Much depends on Ms Warren’s policies to improve the life of the precarious middle class, for instance through health insurance and subsidised child care.
A roll of the dice
The fact that most of the Democratic field is less radical than Ms Warren suggests that, even if her party were to take the Senate and retain the House in 2020, much of her agenda would be watered down. If Republicans retained control of the Senate there would be a lot less she could do. But she would still have some scope to act.
The Environmental Protection Agency could reverse regulatory rollbacks set by the Trump administration. The federal government could enforce stricter labour standards, such as a $15 minimum wage in the public sector.
Warren appointees to the Federal Trade Commission and the justice department could reverse previously approved mergers and reject new ones, though such actions would probably be challenged in the courts. A National Labour Relations Board in her hands could decide that “misclassification” of workers as independent contractors was a violation of labour law, upending the gig-economy. Her power over trade and tariffs would be comparatively unconstrained.
A good position months before the first primaries and a year before the election is no one’s idea of a guaranteed win. But Democratic voters like what they see. In a recent poll by Quinnipiac University, 40% of respondents said Ms Warren had the best policy ideas, compared with 16% for Mr Biden and 12% for Mr Sanders. This suggests that real change is afoot within the party, even if it is not quite yet a new New Deal. But as well as worrying about what Ms Warren proposes, American bosses need to realise that she is no longer the outlier she may once have appeared to be.
THE EU NEEDS TO BE A POWER PROJECT / THE FINANCIAL TIMES OP EDITORIAL
The EU needs to be a power project
The emerging world order will increasingly be shaped by might, rather than law
Gideon Rachman
© Efi Chalikopoulou
In Britain and the US, the idea that the EU could aspire to be a superpower is usually treated as either ludicrous or sinister.
So when Guy Verhofstadt, a prominent member of the European Parliament, recently made the case for the EU to be part of an emerging “world order that is based on empires”, there was a predictable backlash. At the Conservative party conference a few days ago, his words, taken from a speech to their anti-Brexit enemies the Liberal Democrats, were cited as evidence of the dangerous imperial ambitions of the EU — and proof that leaving the bloc is the UK’s only safe option.
Mr Verhofstadt can be arrogant. But, in this case, he also happens to be right. The rise of China and India, and the America First policies of Donald Trump’s US, makes it more important than ever that European countries defend their interests collectively.
The EU once dreamt that the whole world would move towards a law-based system, similar to the EU method. But a world order, shaped by Xi Jinping’s China and Trump’s America, will be based on power rather than rules. The outbreak of a global trade war underlines that small European countries can no longer rely on international rules to protect them. They need the bulk and heft that the EU provides.
The former Belgian prime minister’s choice of the word “empire” — with its connotations of conquest — was unfortunate. The EU is an empire by invitation. Nobody is forced to join. And, despite the difficulties of Brexit, any member is free to leave. It would be more accurate to say that the EU can and should aspire to be a superpower — one of four or five major global powers, capable of shaping the world order.
That aspiration is eminently achievable. Indeed, in important respects, it has already been achieved. Last week provided an interesting illustration when the European Court of Justice ruled that individual countries can demand that Facebook take down defamatory content, on a global basis.
The ECJ ruling was made in response to a complaint from an Austrian politician — and prompted an immediate and concerned response from Facebook. If this had just been a ruling by an Austrian court, the Californian internet giant would have been able to brush it off.
But the ECJ has sway over a market of more than 500m people — compared with the 9m in Austria. Facebook’s ambitions for Libra, a digital currency, will also be shaped by rulings made in Brussels. The EU’s decisions — good or bad — change the behaviour of the world’s largest firms, from Silicon Valley to southern China.
The EU is most comfortable and powerful when acting on economic issues such as trade or competition policy. But it is also a geopolitical force. Russia’s annexation of Crimea and continued interference in Ukraine has been met with sanctions and travel bans that have slowed the Russian economy and hemmed in the Russian elite. Last August in Moscow, I found myself commiserating with a member of President Vladimir Putin’s inner circle who is now banned from taking his summer holiday in southern France or Italy. Bodrum in Turkey, we agreed, was just as nice.
The collective power of the EU is also evident over Brexit. The British elite is still trying to adjust to the fact that, for the first time in centuries, Ireland is pushing Britain around — rather than vice versa. The EU economy (even without Britain) is more than five times the size of the UK economy. Backed by the rest of Europe, the Irish can stand their ground on Brexit.
Of course, those who scorn the idea that the EU can ever be a superpower have some powerful points. They stress that the EU lacks the military muscle to back up its geopolitical ambitions — a problem that will get worse when Britain leaves. The critics can also point to damaging disagreements within the EU — on issues ranging from migration to the future of the eurozone.
It is also true that EU countries spend less on the military, as a percentage of gross domestic product than the US, Russia or China. Europe’s reliance on US military deterrence continues to anger the White House. But even if the US pulled all its troops out of Europe, which is unlikely, it would still be a huge gamble for Russia (or anyone else) to risk military aggression against a collective with the size and wealth of the EU.
The fact is that, in the nuclear age, advanced industrial nations tend not to go to war with each other. Big power struggles are played out through other means — such as the current trade war. And here, the EU — with its huge internal market and a unified trade and competition policy — is well-equipped to slug it out with China and the US; it comfortably outmatches Russia or India.
It is true that the EU is riven by internal divisions. But all political entities that are large enough to aspire to superpower status are also large enough to be plagued by internal splits. This is true of the US, where political rivalries are so acute that the president is tweeting about civil war. It is also true of China and India — just look at the problems in Hong Kong and Kashmir.
Like all “empires”, the EU could eventually fly apart. But the external pressures on European nations makes it more likely that the EU nations will manage their differences and continue to pull closer together. The EU used to be called a peace project. In the modern world, it is more of a power project — and rightly so.
THE WORLD ECONOMY: INFLATION IS LOSING ITS MEANING AS AN ECONOMIC INDICATOR / THE ECONOMIST
The world economy
Inflation is losing its meaning as an economic indicator
Economic policy must adapt, says Henry Curr
INFLATION USED to be the scourge of the world economy and the bane of American presidents. In 1971 amid an overheating economy Richard Nixon took to television to announce a freeze on “all prices and wages throughout the United States”.
A board of bureaucrats ruled on what this meant for everything from golf club memberships to commodity futures. Gerald Ford, Nixon’s successor, preferred a grassroots approach. He distributed buttons bearing his slogan: WIN, for “whip inflation now”.
Ronald Reagan, running for office four years later amid another surge in prices, declared inflation to be “as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”.
Today the lethal assassin has gone missing.
Most economies no longer struggle with runaway prices. Instead they find inflation is too low, as judged by their inflation targets. A decade of interest rates at or near rock-bottom has not changed that.
Nor has the printing of money by central banks in America, the euro zone, Britain and Japan that has expanded their balance-sheets beyond a combined $15trn (35% of their combined GDP). Nor have unemployment rates that are in many countries the lowest they have been for decades.
The IMF counts among its members 41 countries in which monetary-policy targets inflation.
Add in the euro zone and America (where the Fed has multiple goals), and you get 43.
Of those 28 will either undershoot their inflation targets in 2019 or have inflation in the bottom half of their target range, according to the fund’s most recent round of forecasts. (When those forecasts are updated on October 15th, after this special report goes to press, that number will probably rise.)
By GDP 91% of the inflation-targeting world is an inflation laggard on this measure. That includes nearly all the advanced economies under examination—Iceland is the sole exception—and more than half of the emerging markets.
This shift in the inflation landscape reflects both the successes and the failures of economic policy. The advent of inflation-targeting central banks since the 1990s has gradually immunised economies against runaway prices. But policymakers seem either unwilling or unable to stop inflation falling short of their targets.
This special report will argue that anchored inflation expectations, technological change and the flow of goods and capital across borders have conspired to make inflation a less meaningful—and less malleable—economic indicator.
Central banks are therefore finding their targets harder to hit. At the same time, constraints on monetary policy mean that the risk of inflation shortfalls looms larger than that of excessive price rises.
Central bankers and politicians must find ways to adapt economic policy to this new world.
Disinflation nations
Low inflation is striking over both the long term and the short term. In the long term it is the culmination of a decades-long trend. The rich world conquered runaway prices by the late 1990s as governments made central banks independent and gave them inflation targets. In the 2000s and the early 2010s commodity-price booms kept prices rising at a decent clip. But since the oil price crashed in 2014, inflation above 2% has been rare.
In emerging markets it is higher, but the direction of change is the same (see chart). For nearly two decades economists have talked of an era of “global disinflation”.

In the short term low inflation is especially striking because it seems to defy the “Phillips curve”, the supposed inverse relationship between inflation and unemployment. In two-thirds of countries in the OECD, a club of mostly rich countries, a record proportion of 15- to 64-year-olds have jobs. According to the models taught in economics courses and used by central banks, a jobs boom on this scale should have brought accelerating prices and wages. For the most part, it has not.
Central bankers have been caught out. For years they have promised that jobs growth would soon be over and inflation would rise. They have repeatedly been proved wrong and are conscious of their mistakes.
In February 2016 Mario Draghi, the outgoing head of the European Central Bank (ECB), described whether inflation targets can be met as “the most fundamental question facing all major central banks”.
Mark Carney, governor of the Bank of England, recently warned of an “increasingly untenable” economic-policy consensus. In March this year Jerome Powell, the Fed’s chairman, said low global inflation was “one of the major challenges of our time”.
The Fed’s failure to hit its inflation target has encouraged an assault by President Donald Trump, who is incensed that in 2018 Mr Powell slowed growth by raising interest rates to see off an inflationary threat that has not yet materialised.
The disease of the 1970s and 1980s was simultaneous high inflation and high unemployment. That both are now low might seem like cause for celebration. Certainly inflation below target is a better problem to have than runaway prices. But it poses problems for three reasons. First, it represents a missed opportunity.
Monetary policy could have been looser, and hence growth faster, without price pressures taking off. Second, central banks missing their inflation targets undermines their credibility. In Europe markets’ long-term inflation expectations have sunk to little over 1%, lower than when the ECB started its quantitative-easing programme in early 2015, despite an inflation target of below but close to 2%.
When inflation targets are not credible, the future is more likely to spring a costly surprise.
Unexpectedly low inflation causes lenders to profit and borrowers to suffer, because debts do not shrink as fast in real terms as they were expected to when loans were agreed.
Most important, low inflation can be self-reinforcing. More significant than the nominal interest rate set by central banks is the real interest rate, which adjusts for inflation. As the public comes to expect lower inflation, the real rate rises, weakening demand and pushing inflation down even more. That would not be a problem if central banks could cut the nominal rate further to fight the disinflationary slump, but they have little room to do so.
In Europe and Japan nominal interest rates are already below zero. They are near zero in Britain, and only a little higher in America. Though the exact location of the lower bound on interest rates is uncertain, it exists somewhere because the public always has the option of holding cash at a zero nominal return.
Why has inflation reached this curious—and precarious—point? Some would argue that inflation is falling short because governments have lost the ability to boost prices. This cannot be true. If it were, they could cut taxes to zero, boost spending, print money to finance the resulting deficits and never see an inflationary downside.
Inflation will always respond, eventually, to a determined policymaker who has access to interest rates and the printing presses. Governments can always debase their currencies, as high inflation in Argentina and Turkey shows.
This might suggest that below-target inflation reflects only a failure of ambition. But that is not right either. Inflation has become harder to fine-tune because economies have changed in ways that are not yet fully understood.
Monetary policy must not just become more ambitious but also adapt to rely less on failing models and to take a longer-term view.
And while central banks are hamstrung by low rates, fighting low inflation will increasingly fall to fiscal policy.
The case for reform rests first on an understanding of where economic models have gone wrong.
WHY GOLD HAS STALLED / SEEKING ALPHA
Why Gold Has Stalled
- Once gold’s advance flagged, the momentum-driven gold investment demand withered. Speculators’ collective gold-futures bets can stay extreme for some time, but eventually a catalyst hits forcing them to start normalizing.
- Gold, silver, and the stocks of their miners are going to remain precarious with serious downside risks until that necessary gold-futures selling comes to pass.


A CRASH WILL COME. AND THAT´S OK. / THE WALL STREET JOURNAL
A Crash Will Come. And That’s OK.
Trying to prepare for the next cataclysm could mean missing some of the market’s best days
By Spencer Jakab
Illustration: Giulio Bonasera
A crash is coming.
Relax, it probably isn’t imminent. For something so infrequent, though, the “c” word is awfully good at grabbing investors’ attention. This Tuesday is the 90th anniversary of the granddaddy of them all, Black Tuesday, so it is natural to dwell a bit more than usual on the timing of the next wealth-destroying cataclysm.
There were U.S. stock market collapses before 1929, of course, such as the Panic of 1907, which also reached a crescendo in October. And by far the largest single-day crash of all happened in October 1987. Anyone sense a pattern? Well there isn’t one, but the coincidence has unfairly given October a reputation as a risky month to be in the market.
So what is the secret to profiting from a crash? One tried and true method is boldly predicting that there will be one and charging people for your insight.Roger Babsonpioneered the practice with his 1920s newsletter making predictions that he claimed were based on Newtonian physics.
“Sooner or later a crash is coming, and it may be terrific,” he famously said weeks before the 1929 break. His reputation and fortune were sealed, despite the fact that he had made several gloomy predictions before.
Elaine Garzarelli,who nailed the 1987 crash in a TV interview, became the best-paid strategist on Wall Street and still profits from that call despite a spotty record overall. Her newsletter will set you back $495 annually and “due to the long term nature of some of our recommendations, there are no refunds on the price of the subscription.”
Robert Prechter,who claims he predicted the 1982 bull market using an arcane “wave” theory and has since reaped millions of dollars from subscribers, has made several shocking predictions over the years, such as the Dow falling to between 1,000 and 3,000 back in 2010.
“A grandiose, bearish call had about a one-third chance of being right in the past century,” estimates Mark Spitznagel, the chief investment officer of Universa Investments, which reportedly made $1 billion during the 2010 “flash crash.”
Stuck in the unlucky two-thirds? Fear not: AuthorHarry Dent,who has predicted booms and busts for decades with stunningly poor timing—for example, his forecast of a 17,000-point drop in the Dow in 2016—now predicts “a major financial crash and global upheaval that will dwarf the 2007-09 recession of the 2000s—and maybe even the Great Depression of the 1930s.”
Messrs Prechter and Dent and Ms. Garzarelli didn’t respond to questions about their predictions.
Even those who bet actual money correctly on crashes, such as hedge-fund managers
John Paulson and Kyle Bass in the housing bust, have struggled after their big scores.
Perhaps the starkest example comes from fund managerJohn Hussman, who anticipated the last two bear markets.
His Hussman Strategic Growth Fund has given back all of its gains after prematurely bearish bets. A $10,000 investment in the fund made 19 years ago would be worth around $9,300 compared with $32,000 put in an S&P 500 index fund.
Mr. Hussman, a former finance professor, says “a decade of deranged monetary policy amplified speculation and disabled its limits,” bringing his preferred valuation measures near “1929 extremes.”
He continues to expect a steep market loss as the market cycle is completed.
“I hope readers will time-stamp this story and save it for their children as a cautionary reminder, not of the danger of anticipating market collapses, but of the danger of declaring victory at halftime,” Mr. Hussman said.
If one were at all timely in predicting a decline as big as 1929’s—a gut-wrenching 89%—then the benefit to long-run returns would be tremendous. That is a big “if.”
“It’s fundamentally a fool’s errand” to try to predict a crash, says Mr. Spitznagel, whose fund profits handsomely by betting on such “black swan” events.
That seems like an odd thing for someone who effectively peddles crash insurance to say, but he doesn’t try to predict their timing or recommend dabbling in derivatives. The best way for less-sophisticated investors to prepare—which includes virtually everyone—is to accept that a crash could happen tomorrow.
Trying to sit out a crash often means missing some of the market’s best days—which tend to happen during volatile periods. Putnam Investments calculates that missing just the U.S. market’s 10 best days in the 15 years through 2018 would have cut your ending portfolio in half. Missing the 20 best days would leave you with two-thirds less.
The price of admission to those heady long-run returns is making peace with temporarily losing half of your money.
FED VOTES TO LIGHTEN REGULATIONS FOR ALL BUT THE LARGEST BANKS / THE NEW YORK TIMES
Fed Votes to Lighten Regulations for All but the Largest Banks
Banks including Capital One, U.S. Bancorp, Barclays and Credit Suisse can file ‘living wills,’ which describe how they would wind down in a failure, less often.
By Jeanna Smialek
Lael Brainard, a Fed Board governor, said that while she supported some of the adjustments approved on Thursday, the overall package of changes went too far.CreditCreditEric Baradat/Agence France-Presse — Getty Images
Federal Reserve Board members voted on Thursday to adjust key bank regulations put in place after the financial crisis, enacting a series of changes that one board governor, Lael Brainard, warned could weaken “core safeguards.”
Regulators are tying rules more closely to bank size, reducing the necessary level of cash and government bond stockpiles at all but the largest and most complex institutions. Affected banks will also be allowed to submit “living wills” — documents detailing how a bank would wind itself down in the event of failure — less frequently.
Banks with $250 billion to $700 billion in total assets, including firms like Capital One and PNC Financial, will now have to submit a resolution plan every three years, alternating between full and partial filings. They are currently required to submit a full report annually, though in practice they have usually received extensions because the process is so complex. Foreign banks with operations in the United States, including Deutsche Bank, Barclays and HSBC, will also be allowed to file less often.
Ms. Brainard said that while she supported some of the changes approved on Thursday, the overall package went too far.
“I support some reduction in the frequency of plan submissions to temper the substantial work entailed,” Ms. Brainard said. But, she added, the changes go beyond what is mandated by a regulatory relief law “in ways that may weaken the resolution planning process for very large banking firms and leave the system less safe.”
By contrast, both the Fed chair, Jerome H. Powell, and the vice chair for supervision, Randal Quarles, said the changes maintained critical safeguards while making regulation more efficient.
The framework “more closely ties regulatory requirements to underlying risk, in a way that does not compromise the strong resiliency gains we have made since the financial crisis,” Mr. Quarles said.
Requirements for the largest and most globally important banks went mostly unchanged in the rules the board approved on Thursday, though the package does formalize a longer cycle for living wills for such banks. They are now required to submit every two years, alternating between partial and full plans, bringing actual regulation in line with current practice.
Partial living wills require that banks describe most core activities, but can leave out some aspects of bank operations — corporate governance practices, for example — that have not changed between filings.
Ms. Brainard, the lone dissenter, also objected to the fact that Thursday’s overhaul will reduce some banks’ “liquidity coverage ratios,” which require banks to keep a stock of cash and government bonds on hand to meet financial obligations in case of trouble.
Institutions in the $250 billion to $700 billion range will see their requirements reduced by 15 percent.
“It is premature to reduce core capital and liquidity requirements for large banking institutions, since they have not yet been tested through a full cycle,” she said. “At this point late in the cycle, we should not give the green light to large banking organizations to reduce the buffers they worked so hard to build post-crisis.”
The changes will also allow some bigger banks to omit an accounting measure that takes into account unrealized losses when calculating regulatory capital, slightly reducing their capital requirements.
The rules still need to be approved by the Federal Deposit Insurance Corporation and, in one case, the Office of the Comptroller of the Currency. Many of the adaptations were required by a regulatory relief act that President Trump signed into law in May 2018, though regulators had discretion in shaping them.
Thursday’s tweaks are the latest installment of a broader regulatory fine-tuning that has been underway since last year. Supporters say the changes to post-crisis restrictions placed on America’s banks amount to a right-sizing, since the new regulation was slapped on quickly and often without considering individual characteristics.
Skeptics have argued that the changes together amount to a substantial weakening of post-crisis regulation, and could leave the system vulnerable to future shocks.
This week, the Fed voted to simplify the so-called Volcker Rule, which prohibits banks from making risky bets with customer deposits. The updated rule is easier on banks than the initial version proposed in May 2018, dropping an accounting test that would have exposed a broader swath of trades to regulatory scrutiny. Ms. Brainard also voted against that change.
This is unlikely to be the final chapter in simplifying regulations. Mr. Quarles, who is overseeing the Fed’s regulatory revisions, seems to be turning next to banking supervision — how Fed employees apply regulations to the banks the central bank oversees in real time.
He told lawyers gathered at a Georgetown University conference last month that he “would welcome greater legal scholarship on the due process considerations associated with bank supervision.”
And on Thursday, he said that he was “eager to identify other process improvements to our supervisory framework that would not sacrifice the important strides we have made in resilience since the crisis.”
That focus on supervision seems to be shared by the banking industry. The Bank Policy Institute, which represents banks affected by the rules, said in a statement after the board vote that the Fed has enacted the regulatory relief law “faithfully.”
“The next step is equally important,” Greg Baer, the organization’s president, said in a statement. “To ensure that the examination process is aligned with the new regulatory framework and not allowed to reimpose the same old requirements.”
Jeanna Smialek writes about the Federal Reserve and the economy for The New York Times. She previously covered economics at Bloomberg News, where she also wrote feature stories for Businessweek magazine.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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