The new world disorder

If America pulls back from global institutions, other powers must step forward




SEVENTY-FIVE years ago in San Francisco 50 countries signed the charter that created the United Nations—they left a blank space for Poland, which became the 51st founding member a few months later. In some ways the UN has exceeded expectations.

Unlike the League of Nations, set up after the first world war, it has survived. Thanks largely to decolonisation, its membership has grown to 193. There has been no third world war.

And yet the UN is struggling, as are many of the structures, like the World Trade Organisation (WTO) and the Nuclear Non-Proliferation Treaty (NPT), designed to help create order out of chaos. This system, with the UN at its apex, is beset by internal problems, by the global struggle to cope with the rise of China, and most of all by the neglect—antipathy even—of the country that was its chief architect and sponsor, the United States. 
The threat to the global order weighs on everyone, including America. But if the United States pulls back, then everyone must step forward, and none more so than the middling powers like Japan and Germany, and the rising ones like India and Indonesia, which have all become accustomed to America doing the heavy lifting. If they hesitate, they will risk a great unravelling—much like the nightmare in the 1920s and 1930s that first impelled the allies to create the UN and its siblings.
The UN is bureaucratic and infuriating. Its agencies fall prey to showboating and hypocrisy, as when despots on its Human Rights Council censure Israel yet again. The Security Council gives vetoes to Britain and France, much diminished powers since 1945, but no permanent membership to Japan, India, Brazil, Germany or any African country. Alas, it looks virtually unreformable.


Nonetheless, the global order is worth saving. As Dag Hammarskjold, a celebrated secretary-general, said, the UN “was not created to take mankind to heaven, but to save humanity from hell.” Our special report this week explains how the UN does that essential job, as do many other multilateral institutions.

Its peacekeepers protect 125m people on a budget only a bit bigger than New York City Police Department’s. It says it is helping provide life-saving assistance to 103m. For all the Security Council’s flaws, it would be missed.

That is because, left to themselves, countries drift into antagonism. Witness the fatal clash of Indian and Chinese forces this week over a border dispute both sides are too proud to defuse.

Multilateral endeavours like the UN, NATO and the NPT cannot ensure peace, but they do make war less likely and more limited. France and its allies are helping contain the conflict spreading across the Sahel.

Without a multilateral effort, old problems are likely to deepen—even Syria, after nine bloody years, will one day be ready for the UN envoy’s plans for peace. Meanwhile new problems are more likely to go unsolved. The pandemic is an example.

The virus not only calls for global solutions, like treatments and vaccines, but it also aggravates local insecurity. It is the same with climate change and organised crime.

Protecting the system from the forces of disorder is easier said than done. One threat is antagonism between America and China, which could create gridlock in global bodies, exacerbated by competing parallel financial and security arrangements.

Another is that America may continue its careless treatment of multilateral institutions—especially if President Donald Trump behaves as badly in a second term as a devastating new book by John Bolton, his former national security adviser, says he has in his first.

Mr Trump has undermined the World Health Organisation and the WTO, and this month said that he would pull out a third of the American troops stationed in Germany, enfeebling NATO and limiting America’s scope to project power from Europe into Africa.

Happily, the world has not yet reached the point of no return. For decades the middling powers have depended on America for the system’s routine maintenance. Today they need to take on more of the work themselves. France and Germany have created an alliance for multilateralism, an initiative that is open to other countries.

Another idea is for nine democracies, including Japan, Germany, Australia and Canada, which together generate a third of world GDP, to form a “committee to save the world order”.

Although America is dominant, other countries can still get things done—with or without help from the White House. Sometimes the aim is to bind in America. After a chemical-weapons attack on Sergei Skripal, a Russian ex-spy living in Britain, Western countries’ imposition of sanctions on the Kremlin swept up America, too.

The Quad is an emerging coalition between India, Australia, Japan and America, which are all alarmed at Chinese expansion, including in the South China Sea.

Sometimes, however, the world must work without America even if that is second-best. After Mr Trump walked away from the Trans-Pacific Partnership, a huge trade deal, the other members went ahead on their own. Stymied at the WTO, countries are instead forming regional and bilateral trade arrangements, such as one between Japan and the European Union and another between 28 countries in Africa.

Defending the international order is necessary, too. China’s stature is growing along with its contributions—it now pays 12% of the UN budget compared with 1% in 2000. Its diplomats head four of the UN’s 15 specialised agencies, and America just one.

If other countries do not act, the system will come to reflect China’s expansive views of national sovereignty and resistance to intervention, even in the face of gross human-rights violations.

Some think the job of middling powers is triage, to keep the system going until America returns to the party under a different president. It is more than that. Although polls suggest that most Americans would like to play a bigger global role, there is no going back to the “unipolar moment” after the Soviet collapse, when America ran the show single-handed. Not only did that provoke a backlash abroad, exploited by Russia and China, but it also stirred up resentment at home.

At the time, President Barack Obama responded by asking like-minded countries to help America make the world safe. They shrugged. They must not make the same mistake again.


What trade wars tell us

A new book looks at why global conflicts owe more to divisions within countries than between them

Martin Wolf

An aerial exploration of shipping yards
© Gallerystock/Justin Fantl



“Trade war is often presented as a war between countries. It is not: it is a conflict mainly between bankers and owners of financial assets on one side and ordinary households on the other — between the very rich and everyone else.”

This encapsulates the argument of Trade Wars Are Class Wars. Its authors Matthew Klein and Michael Pettis argue that what has been happening to trade and finance can only be understood in the context of domestic pathologies in leading economies.

The result has been severe global imbalances, unsustainable debt and monstrous financial crises. This story matters for everybody.

The foundation of this excellent book is the theory of “underconsumption”, proposed by the British analyst John Hobson in 1902. It returned in the 1930s in the work of John Maynard Keynes. It is, yet again, relevant.

“For decades,” note the authors, “real borrowing costs have been below long-term forecasts of real economic growth and remain around zero.”

This combination of extraordinarily low real interest rates with weak global demand and low inflation is a prime symptom of underconsumption or, in modern parlance, “a savings glut”.

The explanation given by Klein, economics commentator at Barron’s, and Pettis, professor of finance at Peking University’s Guanghua School of Management, is that income has been shifted to wealthy people who do not spend what they earn. That is the overall perspective.

But the relationship among national economies produces this overall picture. The crucial point is that one cannot analyse what is happening in a single economy, in isolation. Furthermore, the overall balance in goods and services is explained by savings, investment and capital flows, not by bilateral trade balances, as Donald Trump imagines.

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Moreover, as Klein and Pettis argue, “Financial imbalances now determine trade imbalances.”

In adjusting to the resulting structural deficits, domestic supply of tradeable goods and services has to be squeezed in deficit countries like the US, with the cruel effects on the industrial working class illuminated in another important recent book, Deaths of Despair and the Future of Capitalism by Anne Case and Angus Deaton.

Trade Wars Are Class Wars lays out these general ideas in its first three chapters, which discuss the history of world trade, the role of liberalised finance in creating unsustainable capital flows and, above all, how savings, investment and external “imbalances” interact.

Yet the book’s core is the analysis of the history of China, Germany and the US over the past three decades.

The economic success of China was the result of an extreme version of what the authors call the “high savings” model of development, together with exploitation of trade opportunities, which Japan pioneered. Thus, from the early 1990s and particularly after 2000, there was a sharp decline in the share of household consumption in China’s gross domestic product.

“As of 2018, Chinese households still consume less than 40 per cent of Chinese output — a lower ratio than in every other major economy in the world, by far,” the authors write. This is due to a host of mechanisms — high household savings, low interest rates, lack of rights of rural migrants in cities, regressive taxation, weak social safety nets and the failure of state-owned companies to pay dividends — all designed to shift income from workers and retirees to companies and the state.

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Gross national savings reached a peak of close to 50 per cent of GDP. Until the global financial crisis, these savings went into domestic investment and the current account surplus.

After the crisis, the decline in the surplus on the current account — the balance on trade in goods and all services — was offset by a further huge increase in credit-fuelled investment, which reached nearly half of GDP.

This surge in investment was funded by a huge credit boom. Today, the share of household consumption is a little higher, but it is still remarkably low by international standards.

China is caught between three options: wasteful credit-fuelled investment, massive external surpluses or huge shifts of income from the hands of the elite and into those of ordinary people.




ChineChinese President Xi Jinping and Greek Prime Minister Kyriakos Mitsotakis visit the container terminal of China Ocean Shipping Company (COSCO), in Piraeus, Greece November 11, 2019. Orestis Panagiotou/Pool via REUTERS - RC249D9ECNG2se president Xi Jinping, centre, and Greek prime minister Kyriakos Mitsotakis, right, visit a shipping facility in Piraeus, Greece last year © Reuters


Now consider Germany. Since the end of the post-reunification boom of the 1990s and the labour market liberalisation of the 2000s, corporate profits have been high and domestic corporate investment weak. Remarkably, “[German] consumption did not grow at all between 2001 and 2005.” Domestic spending fell far behind trade-fuelled income.

The German government has, until Covid-19, also run a very tight budget. As a result, a gigantic and persistent current account surplus — excess savings, in other words — emerged.

Until 2008, the excess savings of Germany and several other smaller European countries (such as the Netherlands) were offset by unsustainable credit and spending booms in countries such as Greece, Ireland and, above all, Spain. The global financial crisis ended that.

Since then the entire eurozone has moved into a globally destabilising current account surplus, in a damaging attempt to turn the second-largest economy in the world into a bigger Germany in the midst of a global savings glut.

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What benefit have Germans obtained from their huge excess savings? Remarkably little.

“Germans, who have been such avid exporters of financial capital over the past two decades, are almost uniquely bad at investing abroad,” write the authors. “Since the start of 1999, the German private sector collectively spent a little over €5.1tn acquiring assets in other countries.

Yet over the same period, the amount of these foreign assets grew by only €4.8tn.” Over almost two decades, unwise purchases of US subprime mortgages and Greek sovereign debt have resulted in a valuation loss of 7 per cent.

This is a fruitless form of frugality. If some countries have excess savings, others must be in the opposite position. Occasionally, capital flows have generated large deficits in emerging or weaker high-income countries, such as Spain.

But the biggest and most persistent deficit country has been the US. Global supply and demand are balanced there, mainly by the Federal Reserve, in effect the world’s central bank.

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This has not been so easy to do, particularly since the US, too, has had a big shift in income towards the high savers.

With the current account deficit largely driven by external demand for safe US assets, the offsetting excess domestic demand has come from two sources: financial bubbles and the federal deficit. The former emerged in the stock market bubble of the 1990s and again in the housing bubble of the 2000s; the latter emerged after both bubbles burst and, more recently, with Trump.

The housing bubble was particularly fascinating not only because of its disastrous end, but because of the way in which Wall Street generated the safe dollar-denominated assets the world wanted by alchemy: the conversion of bad mortgages into triple-A securities.

As Klein and Pettis note, “The rest of the world’s unwillingness to spend — which in turn was attributable to the class wars in the major surplus economies and desire for self-insurance after the Asian crisis — was the underlying cause of both America’s debt bubble and America’s deindustrialisation.”

Notably, “Foreign central banks and other reserve managers spent about $4.1tn buying dollar-denominated assets between the start of 1998 and the middle of 2008.” Effectively, the surplus savings of a number of countries drove a huge net capital inflow into the US, which resulted in a massive trade deficit and so ultimately, the loss of manufacturing jobs in the US heartland.

It was the capital account that mattered. The trade balance was just the byproduct. 
The role of the US as supplier of the world’s safest and most liquid assets is vital. We are trying to run a global economy with a national money.

It has long been known that this is problematic. It has not become any less so, despite the move to floating exchange rates. If foreigners want to hold American liquid assets in vast amounts, the US must run a huge external deficit, unless its private sector wishes to load itself up with riskier foreign assets on a comparable scale.

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The beginning of any sensible policy is clear analysis. The imbalances that caused the eurozone crisis, the debt explosions in the US and peripheral Europe, and again in post-financial-crisis China go back to two fundamental failures: the distribution of income away from the bulk of the population towards wealthy elites and the unique global role of the dollar.

The obvious solution to the first failure is to distribute income to people who will spend it without having to go ever deeper into debt. In the eurozone, this will probably require the creation of a central fiscal authority with capacity to redistribute resources.

In Germany, it will require higher government spending on investment and welfare. In China, it will require the reform of property rights, improved rights for migrants to urban areas, a better social safety net, the ability of workers to organise and a shift of taxes on to the rich.

As for the role of the dollar, we should recall that Keynes himself recommended the creation of a global currency at Bretton Woods in 1944. This may never happen.

But it is clear that running a globally integrated economy with a national money creates insoluble problems. We should not be surprised if these emerge and re-emerge.

Indeed, we should not be surprised if they end up destroying the open world economy.If we do not recognise and respond to these challenges, we may find ourselves persistently mired in the world of imbalances and trade wars.

This is not a good place to be. We should escape.



Martin Wolf is the FT’s chief economics commentator

For Newly Remote Workers, Small Town U.S.A. Will Lose Its Allure Soon Enough

Lower taxes? Cheaper housing? Shorter commute? For some knowledge workers fleeing the big city amid the pandemic, the perks of relocating to a distant burg will soon grow stale.

By Laura Forman


Illustration: Alicia Tatone; Photos: Getty Images (2) 


America’s smaller cities are finally getting their big break. Will it last?

For decades a handful of urban areas have attracted the lion’s share of well-compensated knowledge workers. For nearly as long, the rest have tried mostly in vain to compete. Tax incentives and cheap housing have occasionally convinced big companies to relocate their headquarters, but the hoped-for flood of bright young things rarely seemed to follow.

The Covid-19 pandemic seems to have changed that with the broader adoption of permanent work-from-home policies and a newfound appreciation for cheaper, more-spacious surroundings. Many coveted knowledge workers have already made their move or are considering it. They might soon get homesick for the big city lights, though.

Young people with the most valuable degrees have historically gravitated toward major coastal cities and companies with the most competitive applicant pools hire them disproportionately. More than 11% of Silicon Valley-based Google and Facebookand more than 21% of New York-based Goldman Sachsemployees are Ivy League graduates, for example, according to talent innovation company SHL.



Now many of these professionals want to pack up and take their lucrative jobs with them. Facebook Chief Executive Officer Mark Zuckerberg said recently that 75% of his employees have expressed some degree of interest in leaving the Bay Area. Meanwhile, a 2018 Bloomberg analysis of U.S. Census data showed more people were leaving New York City daily on a population adjusted basis than any other U.S. city.

The pandemic has predictably accelerated this trend. Zillow and Redfin are both reporting spikes in single family home searches in smaller cities, suggesting the exodus could be more than temporary.



Cities have long tried to lure entire companies. In 2018, investment management firm Alliance Bernstein threatened to shake up the finance world when it announced it would move its headquarters to Nashville from New York City, citing benefits like lower cost of living, shorter commute times and no state income tax.

Late last year, JP Morgan was reportedly shrinking its Manhattan presence and even weighing selling its investment banking headquarters there. The Dallas area, also free of state income tax, has seen a recent influx of San Francisco-based companies moving to the area.

Small cities have also attempted to lure individual workers in recent years. In 2017, the city of Lincoln, Kan., was actually offering free land in a “brand new subdivision” on a first come, first served basis. The Remote Worker Grant Program in Vermont last year offered up to $10,000 over two years to select remote workers living full-time in the state.

That trend is picking up steam amid the pandemic. In Kansas, the “Choose Topeka,” program is offering up to $15,000 for professionals to relocate. And as of last week, Savannah, Ga., said it was offering $2,000 to tech workers who moved there.

The key difference in the pandemic-induced wave of relocations could be that the movement is organic, led by employees themselves rather than their bosses. But even that could falter. Smaller towns, away from buzzing business headquarters and bustling city life, might struggle to retain their charm for transplants unless they attract a critical mass of big city refugees. While the promise of more land, more space and less commute may sound compelling, there is the threat of boredom or, a worse fate for many, career marginalization.

Working away from main offices also could be more “work” than employees bargained for. Y. Sekou Bermiss, associate professor of management at the McCombs School of Business at The University of Texas at Austin, says his research has shown remote employees actually end up working more to compensate for lost facetime.

And they might not feel so much wealthier after relocating. Companies like Facebook are planning to offer remote employees “localized” compensation, commensurate with a lower cost of living. Meanwhile, perks like free food, happy hours and on site child care won’t be available.

Along with in-person collaboration, big office settings also offer the ancillary benefits of friendship and even love at work. Mr. Bermiss warns against major corporations trading office space for a remote workforce, noting its employees are going to be “itching to get back together” once the pandemic subsides. Indeed, a survey by Vault.com last year found that 58% of workers had participated in an office romance at some point in their working lives.

Meanwhile, not everyone wants to leave “the city.” Facebook’s Mr. Zuckerberg said 38% of his employees would prefer to move to another big U.S. city rather than a smaller one.

The coronavirus could very well precipitate a temporary dispersion of American’s top talent, but it isn’t likely to stick. The gating factor preventing most smaller cities from growing may be that they are small to begin with. No one wants to “make” a city; ambitious professionals want to be made by them.

The Case for Reparations

By Bill Bonner


Week 14 of the Quarantine


In those days they shall say no more, the fathers have eaten a sour grape and the teeth of their children are set on Edge…

– Jeremiah, 31-29


SAN MARTIN, ARGENTINA – Many years ago, during the anti-war riots of 1970, we attended a student rally at the University of New Mexico. Jane Fonda had come to Albuquerque to support the protestors.

Speaker after speaker got up and railed against the war, and against racism. Each one was careful to include the local victims – “Chicanos” (Hispanics) and “Native Americans” (the American Indians, who were an important minority at the University of New Mexico).

Then, after Ms. Fonda had left the podium, we heard drums… and saw a contingent of Indians headed toward the stage. One, a stout young man, took the microphone:

“Stop using us, man” was all he said.

The crowd was silent. What did he mean? Weren’t they trying to help?

The Indians marched off and the rally went back to its usual windy complaints.

Reparations

And today, here at the Diary, we end this week’s ramble by looking at where bad ideas and bad money come together. That is, we will look at “reparations”… and a group that has been badly used for centuries. In preview: Once you begin handing out free money, it is hard to stop.

For years, “reparations” seemed like just another dumb gripe. But it’s becoming real. Last week, the California Assembly agreed to take the case for “reparations” seriously. Joe Biden says he is not opposed to the idea, as long as American Indians are included.

Settling the debt for centuries of mistreatment involves a substantial amount of money. The numbers we see most often are between $40,000 and $60,000 per Black person. That would tote to about $2.5 trillion in total.

Would that be a good “investment?” Would it right the wrongs committed over so many years?

At first, you will think this is absurd. You did nothing wrong, Dear Reader; your teeth are not on edge. Why should you reach into your pocket to give money to someone you never met and never harmed?

People are not normally required to pay for the wrongs committed by their great-great-great-grandparents. Nor do people normally get a “recompense” for something suffered by their ancestors. 
Besides, many Americans can trace their family tree to an ancestor who died in the War Between the States, fighting (supposedly) to end slavery. And many millions of others arrived long after slavery ended.

On neither side – neither tort nor injury – is there any way to prove the case. At least, not in the traditional, fact-based, objective-reality world of Post-Enlightenment western jurisprudence.

Useful Myth

But wait. The claim may be counterfeit… but so is the money that would settle it. The Trump Administration just distributed about the same amount – nearly $3 trillion – to people with no real claim to the money at all.

And the Federal Reserve gave about an equal amount to the top 10% – $2.8 trillion – boosting their capital asset values by about $10 trillion. Again, the recipients neither deserved, earned, nor even needed the money.

So why not give out reparations to the African Americans who make up 13% of the population?

Reparations would also be a major departure from the “social contract” that holds the nation together. In the Declaration of Independence, the 14th Amendment, and the Civil Rights Act of 1964, is the idea that all people are supposed to be treated equally badly by the government. Martin Luther King described it when he said:


I have a dream that one day, this nation will rise up and live out the true meaning of its creed: “We hold these truths to be self-evident, that all men are created equal.”

Of course, it was always a “myth.” But it was a useful one. Equality is a physical impossibility.

But the idea that we should be treated equally was a guiding principle. Like the North Star, you never get there… but at least it keeps you headed in the right direction.

Open and Shut Case

In practice, some people were treated worse than others. And one group has been used badly – Blacks.

Slavery was common in the ancient world – even in pre-Columbian America. But race-based slavery was an American innovation. The first immigrants from Africa to Virginia were not slaves. They were indentured, just as your editor’s own ancestor was.

But in 1655, a Virginia court was asked to consider the case of Mr. Anthony Johnson of Northampton County. Mr. Johnson was from West Africa. He had worked off his indenture and now had indentured servants of his own, including another African named John Casor.

This top financial expert just returned from a private meeting with members of the Senate Financial Services Committee…

Indentures were generally for seven years, so Casor expected to be released after his indenture expired. Instead, Mr. Johnson kept him in servitude for a further seven years, until the case came to court:

The original court document tells the story:

The deposition of Captain Samuel Goldsmith taken (in open court) 8th of March Sayth, That beinge at the howse of Anthony Johnson Negro (about the beginninge of November last to receive a hogshead of tobacco) a Negro called John Casar came to this Deponent, and told him that hee came into Virginia for seaven or Eight yeares (per Indenture) And that hee had demanded his freedome of his master Anthony Johnson; And further said that Johnson had kept him his servant seaven yeares longer than hee ought, And desired that this deponent would see that hee might have noe wronge, whereupon your Deponent demanded of Anthony Johnson his Indenture, hee answered, hee never sawe any; The said Negro (John Casor) replyed, hee came for a certayne tyme and had an Indenture Anthony Johnson said hee never did see any But that hee had him for his life…and the said Anthony Johnson did not tell the negro goe free.

The case seems simple enough. Open and shut. Mr. Johnson was in the wrong.

But laws are written and popular ideas evolve, sometimes in nasty directions. The court handed down its verdict. Mr. John Casor thus became perhaps the first “legal” slave in America.

(Later, the gods had their revenge on the Johnson family. Mr. Johnson’s children were not allowed to inherit their father’s property – because they were Black.)

Disastrous Consequences

Even after slavery was abolished, the Black man still didn’t get a fair shake. The Ku Klux Klan, the Jim Crow laws, the “Separate but Equal” doctrine… all seemed to keep him in his place.

But they didn’t stop him.

For a hundred years following the Emancipation Proclamation in 1862, Blacks continued to make progress – more or less like every other immigrant group – learning skills, entering the professions, setting up their own businesses, and closing the gap between themselves and Whites.

But then, do-gooders and world-improvers began to use Blacks in a novel way – with disastrous consequences.

In 1964, came the War on Poverty, which gave money to Blacks – but only if they didn’t marry and didn’t work. It also created a new, cronyfied Black elite – who figured out how to game the $21 trillion poverty/racism industry, getting jobs, grants, and special privileges for “minority” enterprises.

Then, in 1971, the War on Drugs brought a whole new level of violence, as gangs fought for market share. Drug laws put millions of Blacks behind bars… nurturing a criminal culture and making it harder than ever for many to get jobs in the normal economy.

And then came the funny money.

Over decades, it shifted manufacturing jobs overseas (it was easier and cheaper to buy things from overseas with fake money than it was to make them here). This, along with minimum wages, kicked the bottom rung out from under the laboring classes – Black and White.

And in 2009, the Federal Reserve kicked its program of money-printing into high gear… with a massive transfer of wealth from the middle and lower classes to the top 10%.

And if that weren’t enough, as mentioned above… the Fed has now gone all out… with huge bailouts to Wall Street, in which very few Blacks participate. Overall, by our estimate, in the last 90 days, the typical Black got only 1/33rd as much fake money as the top 10%.

New Solution

And now… with this sorry history in front of us all… what to do?

The elite, the insiders, the opinion mongers – Black and White… the same people who created this situation – have a new solution. What else? More fake money!

Crazy?

But when you can buy votes, temporary peace, crony support, and campaign donations by passing out counterfeit money, even the craziest scams seem to make sense.

And it will “stimulate” the economy.

A Better Idea

That’s why the “reparations” argument is not likely to go away. It “ticks the boxes” of many of our fantasies… and excites the grubby self-interest of the elites.

It would make the White elite “feel good” about themselves.

It would give more power and money to the Black elite, allowing them to exploit their own people even more ruthlessly.

It wouldn’t cost anything – the money is free.

It would give the average Black person a temporary buying spree… but leave him more dependent on the elite and more desperate than ever.

It would help destroy the economy, shifting another $2.5 trillion worth of resources from investment to consumption.

It would cause much of White America to resent Blacks… and “gun up,” anticipating a violent confrontation.

Reparations? Yes, another jackass idea.

We have a better one.

How about this… Instead of reparations, why not just stop using Blacks? End the War on Poverty.

End the War on Drugs. De-mob the troops… defund the elites… shut down the Fed and its funny-money scam… and finally take the feds’ knee off their necks?

Stay tuned…


Remember Brexit? Covid-19 Has Just Changed the Stakes

Domestic policy announcements may be more important than trade deals in the post-coronavirus world

By Jon Sindreu


Covid-19 has made investors forget about Brexit, with some justification. But it is worth watching an economy that could provide a test case for a world after peak globalization.

Britain left the bloc in January, but remains in the European Union’s single market and customs union until the end of the year. Earlier this week, British Prime Minister Boris Johnson and EU officials agreed not to extend this transition period, which means that any trade agreement for next year needs to be negotiated before Oct. 31.

This deadline was tight even before the coronavirus pandemic. With little progress in video talks since, the risk of a “no deal” outcome has crept up. The pound, which is down 6% against the euro since the start of the year, may be in for a bumpy few months.



Meanwhile, Covid-19 could reduce U.K. economic output by as much as 14% this year, according to Organization for Economic Cooperation and Development estimates. Whether this makes the search for a deal that preserves existing ties more urgent—or gives the euroskeptic Mr. Johnson cover to pursue a more disruptive course—is debatable. The pandemic has depleted many of the supplies, notably of pharmaceuticals, that British companies had accumulated to cope with a no-deal scenario.

In any case, long-term investors don’t need to base U.K. allocation decisions on the type of deal achieved this year—not least because the best they can hope for is probably a bare-bones trade agreement. They should pay more attention instead to Britain’s domestic policies: Covid-19 has given governments more power to reshape their economies.




Fiscal policy is playing a huge role in containing the damage of the lockdowns. The U.K.’s fiscal package relative to its cyclically-adjusted output already far surpasses all its neighbors’ in size, UBSestimates show. The freedom to use this kind of financial muscle could also take on an outsize importance in the post-pandemic recovery, particularly at a time when more European governments are embracing the idea of supporting industrial champions.

The U.K. Treasury has long been reluctant to get involved in industrial strategy. But the times may be changing. It has drafted plans to save strategic firms, though for now this remains a short-term response.

The pandemic and the political backlash against globalization also may prompt more firms to bring supply chains closer to home. Pharma companies in particular have found themselves too dependent on Chinese ingredients during this crisis. A report by the University of Warwick found that being close to research and development spending—for which the U.K. is a hub—is one of the main reasons why some key industries decide to reshore production.

This trend may end up reducing the relative importance of Britain leaving the EU and increasing the power of U.K. policy to offset the problems caused by Brexit. For example, in the auto sector—often seen as having much to lose from a breakdown in trade relations—the transition to electric vehicles may require a lot more public funds, and the U.K. has the potential to deploy them. Despite Brexit, Japanese car maker Nissanlast month decided to retrench in Europe by closing its Spanish plant, not its British one.

The flip side, of course, is that British officials also have more leeway to fall short by stinting on recovery spending or making the wrong bets. Either way, domestic policy announcements, rather than trade deals, may be the news to watch in the post-coronavirus world.