The Fed Has Hurt Business Investment

QE is partly to blame for record share buybacks and meager capital spending.

By Michael Spence And Kevin Warsh

The Federal Reserve, Washington, D.C.  The Federal Reserve, Washington, D.C. Photo: Karen Bleier/Agence France-Presse/Getty Images 

On his recent book tour, former Federal Reserve Chairman Ben Bernanke stated that low long-term interest rates are not the Fed’s doing. Low rates result from a shortage of good capital projects. If there were good investment projects, he explained, capital would flow and interest rates would rise.

Mr. Bernanke insists that the absence of compelling investment opportunities in the real economy justifies continued, highly accommodative monetary policy.

That may well be true according to economic textbooks. But textbooks presume the normal conduct of policy and that the prices of financial assets like stocks and bonds are broadly consistent with expectations for the real economy. Nothing could be further from the truth in the current recovery.

During the past five years earnings of the S&P 500 have grown about 6.9% annually. As the table nearby shows the current profit picture pales in comparison to prior economic expansions, in which earnings grew significantly faster. Moreover, only about half of the profit improvement in the current period is from business operations; the balance of earnings-per-share gains arose from record levels of share buybacks. So the quality of earnings is as deficient as its quantity. The current economic expansion is also unusual because the stock market and other financial assets have boomed in spite of relatively muted profit gains.

What explains the apparent divergence between earnings and asset prices? The unusual conduct of monetary policy.

Extremely accommodative monetary policy, including the purchase of about $3 trillion in Treasurys and mortgage-backed securities during three rounds of “quantitative easing” (QE), pushed down long-term yields and boosted the value of risk-assets. Higher stock prices were supposed to drive business confidence and higher capital expenditures, which were supposed to result in higher wages and strong consumption. Would it were so.

Business investment in the real economy is weak. While U.S. gross domestic product rose 8.7% from late 2007 through 2014, gross private investment was a mere 4.3% higher. Growth in nonresidential fixed investment remains substantially lower than the last six postrecession expansions. In 2014, S&P 500 companies spent considerably more of their operating cash flow on financially engineered buybacks than real capital expenditures for the first time since 2007.

During the precrisis period, by contrast, corporate spending on real assets averaged 10 percentage points higher than on financial assets.

Many believe that today’s lack of capital investment stems from a shortfall of global demand.

Output gaps can have a dampening effect on investment. But the demand that drives capital investment is future demand. Efforts by the Fed to fill near-term shortfalls in demand through QE and so-called forward guidance have shown limited and diminishing signs of success. And policy makers refuse to tackle structural, supply-side impediments to investment growth, including fundamental tax reform.

We believe that QE has redirected capital from the real domestic economy to financial assets at home and abroad. In this environment, it is hard to criticize companies that choose “shareholder friendly” share buybacks over investment in a new factory. But public policy shouldn’t bias investments to paper assets over investments in the real economy.

How has monetary policy created such a divergence between real and financial assets?
First, corporate decision-makers can’t be certain about the consequences of QE’s unwinding on the real economy. The resulting risk-aversion translates into a corporate preference for shorter-term commitments—that is, for financial assets.

Second, financial assets are considerably more liquid than real assets. Trade among financial assets like stocks is far easier than buying and selling real assets like capital equipment. The financial crisis taught an important lesson to investors of all sorts: Illiquidity can be fatal.

Financial assets have large liquidity benefits over real assets. In other words, it’s far easier to turn stocks into cash than to liquidate a new factory.

Third, QE reduces volatility in the financial markets, not the real economy. By purchasing long-term securities, the Fed removes significant market volatility from stocks and bonds. Any resulting reduction in macroeconomic volatility—affecting real asset prices—is far more speculative. In fact, much like 2007, actual macroeconomic risk may be highest when market measures of volatility are lowest. Central banks have been quite successful in stoking risk-taking by investors in financial markets, but have found far less success in encouraging risk-taking in the real economy.

Fourth, QE’s efficacy in bolstering asset prices may arise less from the policy’s actual operations than its signaling effect. Mr. Bernanke himself has said that QE “works in practice, just not in theory.” Multiple event studies in the U.S., Europe and Japan show that financial-asset prices move higher when QE programs are announced and implemented, and suffer when QE is thought to be ending. Clearly, market participants believe central bankers use QE, among other reasons, to put a floor under financial asset prices.

For real assets, the benefits of QE are far less obvious—and the results far less impressive.

Weak economic data and mixed messages from the Fed in recent months only heighten our concerns about the trajectory of the economy and the sustainability of U.S. financial-asset prices.

Inadequate capital investment means that labor is also underutilized. The impact of low capital investment is apparent in the weak productivity statistics. Productivity—key to raising wages and living standards—rose less than half of 1% annually in 2011-14, the weakest four-year run in productivity outside of a recession since World War II. That is an important contributing factor to the meager improvements in median wages during the recovery and the lowest labor-force participation rates since the late 1970s.

These trends, if not reversed, threaten to harm the U.S. economy’s growth prospects. We recommend a change in course. Increased investment in real assets is essential to make the economic expansion durable.

Mr. Spence, a 2001 Nobel laureate in economics, of New York University, and Mr. Warsh, a former Fed governor, of Stanford, are two of the authors of “Growing Global: Lessons for the New Enterprise” (out next month by the Center for Global Enterprise), from which this op-ed was adapted.

Populist, Pernicious and Perilous

Germany's Growing Hate Problem

Photo Gallery: Fear and Loathing

Even as Germany has welcomed its refugees, another, uglier side has been festering with the return of the anti-Muslim Pegida movement. The threat posed by the far-right has the potential to spiral out of control. By SPIEGEL Staff

Even as an image of a Germany taking great pains to welcome hundreds of thousands of refugees has bolstered the country's image abroad, it has also been accompanied by a wave of hatred that cannot be played down. At the center of this second, disturbing narrative is Patriots against the Islamization of the West, or Pegida, a xenophobic grassroots movement that has manifested itself with demonstrations each Monday mostly in Dresden in the east, but also in
other parts of Germany. But Pegida is only one part of a much larger problem, as the following feature from the new issue of SPIEGEL illustrates.

Germany has a hate problem -- one that is growing.

"You're as big of an asshole as that idiot Ralf Stegner," a certain Birgit M. recently wrote in a letter to Thomas Kutschaty, justice minister of the state of North Rhine-Westphalia. It was a referrence to the deputy party leader of state chapter of the Social Democratic Party (SPD), who recently said the organizers of the weekly Pegida marches in Dresden and elsewhere should be investigated by intelligence services. "You should all be put in a sack and have a hammer taken to you," Birgit M. wrote in her tirade.

Then there was the man who called Dorothea Moesch, a local SPD politician in Dortmund, late in the evening on June 30. "We're going to get you," he threatened. "We're at your door."

Another local SPD politician in Hesse, district administrator Erich Pipa, has been similarly threatened. "We can have you taken out at any time," he was informed in a letter.

And in Bernau in the eastern state of Brandenburg, graffiti scrawled on the wall of a warehouse namechecking the local mayor reads, "First Henriette Reker (the mayoral candidate stabbed in Cologne last weekend), next André Stahl."

These are but a few examples -- four politicians who have taken a stand, and, if the threats are to be taken seriously, may now need to fear for their lives. Kutschaty fell into the crosshairs for saying, "Pegida is not about protecting the Western world, it's about its demise." Moesch, for her part, attracted ire because she organized a protest against right-wing extremism. Pipa became the target of hatred because he was recently awarded a Federal Cross of Merit, Germany's highest civilian honor, for his longtime lobbying work on behalf of refugees. Finally, Stahl was the subject of denigration because of his public declaration that he wants refugees to feel welcome in his city.

So far, none of them have scaled back their political work. They all still say it's more important than ever. But since the knife attack against Reker last Saturday on the eve of her election as mayor of Cologne, they can no longer feel entirely safe. District administrator Pipa is wondering whether he should take police advice and wear a bullet-proof vest.

Rampant Hatred

Germany these days, it seems, is a place where people feel entirely uninhibited about expressing their hatred and xenophobia. Images from around the country show a level of brutalization that hasn't been witnessed for some time, and attest to primitive instincts long believed to have been relegated to the past in Germany. The examples are as myriad as they are shocking, and include the bloody attack in Cologne as well as the mock gallows for Angela Merkel and her deputy Sigmar Gabriel carried by a demonstrator at a Pegida rally in Dresden on Oct. 12. But they also include the abuse shouted at the German chancellor when she visited a refugee hostel in Heidenau near Dresden in August, where she was called a "slut" and other insults, or the placards held aloft by demonstrators on the first anniversary of the Pegida rallies listing the supposed "enemies of the German state" -- Merkel, Gabriel and their "accomplices." The lack of inhibition when it comes to vicious tirades took on a whole new scale on Monday, when Turkish-born German author and Pegida supporter Akif Pirincci, said there are other alternatives in the refugee crisis, but "the concentration camps are unfortunately out of action at the moment."

There have been more than twice as many attacks on refugee hostels during the first nine months of this year as in the whole of 2014. The rising tide of hatred is now reaching the politicians many hold responsible for the perceived chaos besetting Germany. The national headquarters of Merkel's conservative Christian Democratic Union (CDU) party in Berlin fields thousands of hate mails every week. As the architect of the "we can do it" policy of allowing masses of refugees into the country, Chancellor Merkel is their primary target. Within the SPD, it is General Secretary Yasmin Fahimi, whose father is Iranian. "Open the doors to the showers, fire up the ovens. They're going to be needed," read one recent anonymous mail addressed to her.

The hatred comes in many forms. It's expressed on the streets and on the Internet. Sometimes it's loud. Other times it's unspoken. It eminates from every class and every section of society.

According to studies conducted by Andreas Zick, the respected head of the Institute for Interdisciplinary Research on Conflict and Violence at the University of Bielefeld, who has been researching German prejudices against different groups for many years, almost 50 percent of Germans harbor misanthropic views. Zick warns of a shift in norms that will be difficult to get back under control.

Tougher Response Needed

Politicians need to find a way of dealing with rampant hatred. Dialogue and compromise -- the bedrock of Germany's culture of debate -- no longer appears to be working at the moment. It's hard to get through to people who have been consumed with a hysterical degree of hatred.

The country's security agencies also need to take a decisive stance. Are they once again being too slow in monitoring and clamping down on this new radical scene? In most states, Germany's domestic intelligence agency is not keeping tabs on Pegida. Theoretically, however, police and public prosecutors do have the tools to take action to squash troublemakers.

When it comes to dealing with radicals, society needs an inner compass. It has to decide how indifferent to politics it can afford to be and how far voter turnout can fall -- it reached a record low in Sunday's mayoral elections in Cologne. In short, it has to decide how much room for manoeuver it is willing to grant far-right firebrands.

But the damage already runs deep, as evidenced not only by the attack on Henriette Reker. Politicians across Germany are reporting a rise in the number of serious threats issued against them.

In Dortmund, Dorothea Moesch is used to being the butt of hostility. Four years ago, she opened a home in the district of Westerfilde for needy locals, immigrants and their children.

Volunteers taught German language classes and helped translate letters from the authorities for the residents. Mainly they simply made themselves available. Moesch promoted a "welcoming culture" long before the term was coined. Protest was inevitable. Until now, abuse along the lines of "Bloody Turks, get them out" and "Piss off, cripple" bounced off her. Wheelchair-bound due to a joint disease, Moesch is all too familiar with discrimination.

'You're Going to Burn, Witch!'

But it's different these days. On June 30, after registering a demonstration against the far-right, she received an anonymous call on her mobile phone. "You're going to burn, witch, just like all the other cunts," said a male voice. He called again that evening. Moesch was frightened. "You can't shrug that sort of thing off," she says.

Sebastian Koch is the Social Democrat mayor of Wenzenbach near Regensburg in Bavaria. He feels the same. He's accused of pandering to asylum-seekers and regularly gets told he should deport himself to Syria. He drew criticism for berating a man who rents out refugee accommodations for leaving furniture and stoves broken and exposed electrical wiring dangling off walls. He also complained about the way refugee children had to take trains and buses from Wenzenbach to get to school, arguing that it was too much to ask of kids their age who couldn't speak German.

A letter subsequently reached the town hall saying that what the refugee children needed wasn't a train to school but to a concentration camp. Germany's domestic intelligence agency, which monitors extremist activity, has launched an investigation to ascertain if this amounts to incitement to hatred, and police regularly patrol the area around the refugee home. "It's not that I'm afraid," says Koch. "But these expressions of hatred got to me and unnerved me."

Exposure to such anger on the part of the people, through letters, Tweets, Facebook postings and physical attacks like the one in Cologne and through the hateful epithets of the type being volleyed against them in Dresden is a new experience for most politicians.

Heinz Bude, a sociology professor at the University of Kassel, describes the Pegida movement as a "communications-free high-pressure chamber." "The people who go to Pegida have the feeling their problems are existential, but they feel there's no one they can turn to. That reinforces the feeling that politicians aren't facing up to reality." Based on his surveys, he says the potential for the number of people who could feel degraded in this way is 25 percent.

From the Margins to the Mainstream

Groups on the far-right spectrum discovered long ago the potential of frustrated people.

For example, the people behind the German blog Politically Incorrect (PI), founded in 2004, the same year the Dutch film director and Islam critic Theo van Gogh was murdered, have long pursued their goal of discrediting people they deem to be "Islam sympathizers" or "do-gooders" using all means conceivable, an internal missive states.

So it makes perfect sense that those behind Politically Incorrect have joined forces in recent years with similar people sharing their views to form a right-wing network that includes groups like the Bürgerbewegung Pax Europa (the Pax Europa Citizens' Movement), the German Defense League and the Bürgerbewegung Pro Deutschland (Pro Germany Citizens' Movement). Together, they have been trying to push their political views from the margins into the mainstream, and this is where Pegida's role comes into play.

Just one example of the extent with which Politically Incorrect's thought leaders and followers are working closely together with Pegida is Michael Stürzenberger. A prominent opinion leader at PI, he's also the chairman of the far-right extremist party Die Freiheit (The Freedom) and appears regularly as a speaker at Pegida events.

In the city of Duisburg in western Germany this summer, he told the crowd how a young woman had almost been raped by three asylum-seekers in Miesbach, a small town in his home state of Bavaria. Stüzenberger said he received news like this every day. "Do you really want for our women to no longer be able to walk on the streets at night without worrying?" he shouted into the microphone. "No," the crowd chanted back. What Stürzenberger didn't tell his audience, however, was that police announced shortly after the alleged incident that the woman had fabricated her story.

Platforms like Politically Incorrect have long cultivated this form of agitation, and Pegida is now bringing it into the town squares of Germany's cities, bringing the virtual and analog worlds together and making the hatred tangible, audible and physical.

"Pegida is a grassroots movement," says Jürgen Elsässer, "It's perhaps the last chance we have left to save our people." Elsässer is a former teacher and member of the now defunct Communist League in West Germany, who may have once written for prominent far-left publications but is now a popular speaker at Pegida events.

Even today, he continues to lash out at the "imperialism" imposed by the Americans and calls for "resistance against the international financial capital and its warmongers in Washington, London and Jerusalem." Writing on his blog in September, Elsässer called on the Bundeswehr, Germany's armed forces, to occupy stations along the German borders in order to stop the flow of refugees. "Fulfill your oath!" he wrote. "Don't wait for orders from above." In his magazine Compact, Elsässer currently features an image of Angela Merkel with the headline, "The Queen of the People-smugglers."

Elsässer is one of the people shaping Pegida's political views. He's also illustrative of how perfidious far-right intellectuals are when it comes to the issue of violence.

A New Culture of Hate

On his blog, Elsässer distanced himself from the attack on the Cologne mayoral candidate. He also rejects the use of the gallows as a symbol. "People, let this absolutely misleading nonsense be," he wrote. At the same time, though, he also posted an interview with the man who carried the gallows at a recent Pegida march in Dresden on his magazine's website, providing the man, who does not reveal his name, with a platform to state that the gallows for Merkel and Gabriel was intended as "satire."

The teaser for the video states that the "courageous man" is now going tell his story, which will give you "goose bumps." The idea of heroification while at the same time feigning distance is one of the hallmarks of the new culture of hate.

Elsässer is expected to give another speech in November, this time at the invitation of the so-called Institute for State Policy, which is housed in a manor in Schnellroda in the eastern state of Saxony-Anhalt. The organization's co-founder was Götz Kubitschek, who studied at university to become a teacher and was forced to leave his position as a first lieutenant in the Bundeswehr in 2001 after participating in "right-wing extremist endeavors."

On Oct. 5, Kubitschek spoke to protesters gathered at Dresden's Neumarkt square, where he called for civil disobedience and propagated the alleged right to resist. "It's good that things are starting to escalate!" he told the audience. The crowd chanted back, "Re-sis-tance."

Kubitschek enjoys moments like that because they show him that theory can also be turned into practice. In small groups of like-minded people, he spent years mulling what could be learned from the leftists when it comes to the battle for minds. He invited people in Internet forums to conceive original and provocative forms of agitation. In one form of "conservative-subversive action," he and other activists gatecrashed left-wing events like a 2008 reading by Günter Grass.

'Increasingly Martial Language'

He discussed which issues would be well suited for making neo-fascistic ideas palatable to the masses. And how normal people could be convinced to accept breaches of the law or misdemeanors in the pursuit of them. How could the right-wing prevail over the "cultural hegemony?" In Pegida, Kubitschek has finally found precisely the type of agitation he had long been searching for.

Experts like political scientist Armin Pfahl-Traughber of the German government's Federal University of Applied Administrative Sciences categorize Kubitschek's movement as right-wing extremist. "With their writings, they are striving for a recasting of the Conservative Movement during the Weimar Republic that had positioned itself clearly against the democratic, constitutional state," says Pfahl-Traughber. In recent weeks, he says he has also observed "increasingly martial language" among its leaders and followers.

Last Sunday, a friend of the right-wing extremist revolutionary appeared on Germany's leading talk show. What was most conspicuous about his appearance on Günther Jauch's show was that, at the very beginning, he hung a German flag from the right armrest of his chair. The guest, Björn Höcke, is a former physical education and history teacher at schools in the western state of Hesse. Now he's the head of the state chapter of the Alternative for Germany (AFD) party in the eastern state of Thuringia. Höcke has maintained an interest in the ideologies of the new right for many years.

Höcke is also leading protest marches against the "stream of refugees," like one that took place on Wednesday in the eastern city of Erfurt. At the event, Höcke sought to portray himself as a victim of the "lying press" -- the term being used by the far-right these days to disparage the media -- the last true patriot standing in a society that has otherwise been blinded. Höcke said he didn't bring the flag from the talk show because someone told him he should take good care of it given that it might wind up exhibited in a history museum someday. It's exactly the kind of thing he likes to hear. In his state of megalomania, he apparently already seems to view himself as the history-making leader of a new movement. It appears that the AFD party's national leader Frauke Petry is wising up to this as well. She cancelled her scheduled appearance at the Erfurt demonstration.

The way in which the party deals with Höcke is proving to be an acid test for leaders of AFD, which has grown increasingly populist in tone since its creation in 2013. AFD's deputy leader Alexander Gauland may view him as a "legitimate voice in the AFD choir," but Petry would prefer to neutralize far-right outsider Höcke. "He doesn't speak for the national party," she recently clarified in a letter to party members that has also created pressure for her. This letter was not agreed to by the executive committee and isn't supported by me," Gauland says. The truth, he says, is that Höcke "is not a Nazi."

Petry's desire to distance the party from the far-right and anchor it firmly in mainstream society will be very difficult to fulfill so long as Höcke, AFD's best-known representative, continues with his bluster about the "thousand-year Reich." Björn Höcke's version of AFD is precariously close to the organized right-wing extremism of the neo-Nazis. He even openly admits to having ties to Thorsten Heise, a leading figure in the National Democratic Party (NPD), which the German government sought to ban in the past because of its xenophobic and anti-Semitic positions. Höcke's friend Kubitschek was keen to join AFD, but the party leadership refused to let him in.

Undeterred, Höcke continues to consolidate his links with the Pegida movement, saying he would like to see his party work with it "much more closely" -- and also with Germany's new far-right intellectuals. Along with Jürgen Elsässer, Höcke will be speaking at the fall conference in Schnellroda hosted by Götz Kubitschek in what is expected to be a summit of the far-right's masterminds.

A Weak Official Response

Even as the organized far-right is exploiting public unease about the refugee crisis and frustrated citizens are venting their anger in hate mails, the authorities' response has been astonishingly weak. Interior Minister Thomas de Maizière might describe Pegida's leaders as "hard-core right-wing extremists" but the domestic intelligence service he oversees states that it isn't even monitoring the movement -- so far, it says, there has been insufficient reason to do so.

Gordian Meyer-Plath, president of Saxony branch of the Office for the Protection of the Constitution, also seems reluctant to take on the increasingly radical movement. "We're not watching it," he says, because the argument that it is harmless has so far prevailed. Its organizers distanced themselves from violence, for example. "People held up pictures of Merkel in an SA uniform at the demonstrations," says Meyer-Plath. "Real neo-Nazis would never do that." So far, he maintains, it's a "populist far-right movement rooted in anger but not a threat to German's freedom and democracy."

"We cannot label every anti-asylum-seeker protest as being far-right," he says.

But intelligence services in other states beg to differ. Pegida movements in Duisburg, Düsseldorf and Thuringia are officially being watched, with authorities concluding that the majority of organizers and speakers belong to the far-right scene.

The authorities were even stymied by the blog Politically Incorrect, deciding that although it propagates anti-Islamic and often racist propaganda, "it does not use typical far-right argumentation" -- as the authorities put it in response to an inquiry from the Left Party. The authors of the blog have so far managed to out-manoeuver the authorities by using two simple tricks. Firstly, its stance is overtly pro-American and pro-Israeli, which appears to confuse the German bureaucrats, who assume that to be a neo-Nazi is to be anti-Semitic. Secondly, the most egregious expressions of vitriol appear in the comments, for which the blog's authors cannot be held responsible.

In 2013, the Bavarian intelligence service became the first to start observing PI, a move prompted by the blog's industrious Munich chapter, headed up by the rabidly anti-Islamic Michael Stürzenberger, a frequent speaker at Pegida rallies.

Death Threats, Every Week

The authorities were completely unprepared for the knife attack on Henriette Reker, even though the 44-year-old suspect Frank S., an unemployed painter and decorator from Cologne, had long been a neo-Nazi sympathizer and first become active in the far-right scene in Bonn at the age of 18. In 1993, he was sighted at a memorial march for leading Nazi Rudolf Hess in Fulda; and, in 1994, he was involved in aborted plans for a similar march in Luxembourg to mark the anniversary of Hess' death.

He also appears in domestic intelligence files as one of government informant Norbert W.'s assets. Norbert W. was regional manager of the Free German Workers' Party (FAP), a neo-Nazi political association outlawed by the Constitutional Court in 1995.

In 1995, Frank S. began to attract attention with a series of violent outbreaks. He beat up a man wearing red shoelaces because he thought he was an anti-fascist activist. He threw a beer bottle during a fight in a disco. By 1998, he had twice been convicted of causing bodily harm and once of extortion. He spent several years behind bars.

But in 2000, intelligence services lost track of him. He briefly returned to the radar in North Rhine-Westphalia in 2008 when he appeared to look into joining the NPD. After that, however, he dropped completely out of sight. The intelligence services were unaware that he contemplated suicide three months ago -- as he revealed after his attack on Reker. Nor were they aware of his meticulous planning ahead of it.

The domestic intelligence services' fight to stop spiraling aggression is one thing. Society and politics' answer to the public hatred, anger and frustration is another. Is it still possible to have a conversation with people who send politicians hate mail and death threats? Justice Minister Heiko Maas doesn't think so. His Facebook page regularly overflows with abuse. He was one of the first leading German politicians to deem Pegida a German disgrace. Now trolls -- who even give their names -- leave messages for him on Facebook such as "Heiko, your time's soon up" and "shut your face or I'm coming for you!" The Justice Ministry passes on a handful of death threats to the Federal Criminal Police Office every week.

'A Form of Terrorism'

Maas sees it as his duty to get tough. "We've reached a point where certain things need to be spelled out," he says. He proposes that anyone participating in a demonstration should be made to account for the aims and the organizers of the rally. "It's too easy for people to just go along with it," he says.

SPD General Secretary Yasmin Fahimi has also had enough of the far-right talk of recent months. "It is not the job of politicians to counsel these people," she says. "We're talking about rabble rousers and firebrands who are issuing death threats. They've turned away from the Constitution and towards extremism." She points out that they are also the sort of extremists who accept authority and that it therefore makes sense to show them "the strong arm of the law." This, she argues, requires police, public prosecutors and courts to play their part. She would also like to see associations and employers reacting to rabble rousers and anyone who expresses xenophobic opinions by withdrawing membership, warning them and potentially firing them.

Psychologist Andreas Zick also urges politicians to take a tougher line on far-right populists. "We need to see racist violence in Germany for what it is," he says. "A form of terrorism."

By Melanie Amann, Markus Deggerich, Jörg Diehl, Hubert Gude, Horand Knaup, Martin Knobbe, Conny Neumann, Maximilian Popp, Jörg Schindler, Barbara Schmid, Fidelius Schmid and Andreas Wassermann

The Central Bankers' Death Wish

In fact, Europe is stranded in economic stagnation because statist dirigisme and the massive crush of welfare state taxation and finance have ground enterprise and productivity to a halt. But Draghi says it’s all China’s fault, and that he will fix their dereliction with even more monetary madness:
In a news conference, Mr. Draghi stressed the “downside risks” to both economic growth and inflation arising from slowing growth in China and other large developing economies, as well as weak commodity prices.
These are the words of a slow-witted man who was born yesterday. That is, they evince an economic model that says every single year, month and day of prior history is irrelevant; and that regardless of how we got to the present moment the answer is always more heavy-handed central bank intrusion in the financial system in order to achieve an utterly bogus 2% inflation target.

In fact, the so-called slowdown in China is the best thing that ever happened to Europe, as is the present spot of unusually low consumer inflation. And there is no mystery as to why these things are happening.

China and the rest of the world have just come through a mind-pending credit binge which took global debt from $40 trillion in 1994 to $225 trillion at present. China was in the forefront of that binge, sporting a 56X gain in outstanding credit during the same two decade period (from $500 billion in 1995 to $28 trillion at present).

The effect of that freakish $185 trillion debt eruption was a worldwide crack-up boom. It was initially manifested in a massive expansion of unsustainable debt financed consumption in the US and other DM economies and runaway fixed investment in China and the other EM economies which supply it.

Accordingly, much of the $40 trillion of global GDP growth shown in the chart reflected purchase money output, not sustainable organic gains in productivity and earned incomes.

Needless to say, purchase money GDP disappeared the instant that DM households could no longer tap their home ATM to spend borrowed money on restaurants and new kitchen countertops; and EM government and enterprises could no longer borrow to build uneconomic steel plants, empty luxury apartments or bridges that no one takes to anywhere.

What this crack-up boom cycle entailed then is a monumental, two-phase global deformation that lies at the heart of what Draghi was babbling about yesterday.

Initially, it led to a surge in global demand for energy, metals and other raw materials in excess of currently installed capacity, thereby fueling drastically higher commodity prices and periodic eruptions of consumer level inflation. Thus, oil went from $20 per barrel to a peak of $150 during the commodity inflation phase; and copper went from $1 to $4 per pound and iron ore from $30 per ton to $200.

Then, in the second phase of the global crack-up boom, drastic financial repression by the world’s central banks after the 2008 crisis led to massive over-investment and malinvestment in production capacity. This unprecedented CapEx boom ranged from the new iron ore mines of western Australia to the shale patches of the North Dakota Bakken to the excess steel and auto plants of China to the containership and bulk carrier capacities of the world’s shipping lines.

In fact, these massive additions of fixed capital and supply capacity throughout the global commodity/industrial complex are still coming on stream just as the leading age of the global credit Ponzi is coming to an abrupt halt in China. Accordingly, throughput volumes are faltering and are actually declining in many sectors, while the swelling availability of high fixed costs production facilities is leading to an unprecedented wave of wholesale price reduction.

The global crack-up boom cycle is evident in the Bloomberg commodity index, which has now plunged to below 2001 levels. Indeed, the area under the graph line tracks its two-phases almost perfectly- with the deflation phase incepting in 2012.

This huge global impulse of commodity inflation at first and now payback time of commodity deflation is being relentlessly transmitted down the supply chain. In the case of US producer prices for all commodities and for manufactured goods, respectively, the global cycle is plainly evident in the graph below.

Between 1995 and the May 2014 peak, US wholesale prices for all commodities rose by 70% or by 3% per annum. Likewise, the PPI for manufactured goods rose by 27% through early 2015.
However, both are now rolling over as the world’s deflationary payback phase gathers momentum and transmits down the price chain. The US wholesale index for all commodities is down by 9% and manufacturing goods by 1% since their respective peaks.

(click to enlarge)

Stated differently, the world has had its quota of consumer inflation and then some over the past two decades. Now it is payback time as the “excess supply” phase of the global crack-up boom supplants the “excess demand” phase.

In that context, eurozone consumers are not being deprived of what central bankers apparently believe to be their God-given right to CPI inflation and the continuous erosion of the purchasing power of their wages. In fact, the eurozone consumer price index at 118.7 in September reflected a 2.1% per annum rate of gain since 1996.

(click to enlarge)

Do the mountebanks who run the ECB, along with the entire central bankers guild of the world, not believe that history has actually happened? Do they hold that NASA didn’t really land on the moon, as it were?

Do they think that there is some crank principle of economics that requires consumer inflation to be metered out in exactly 2.000% annualized rates every year, quarter, month and day?

Folks, Mario Draghi’s central banker view of consumer inflation is just brain dead ritual incantation.

Self-evidently, the rate of change does not need to be smooth as the skin on a baby’s butt for optimum economic performance.

In fact, 2% inflation is a purely religious proposition that is unrelated to the prosperity of main street; it is no more relevant to gains in real wealth than the rite of full immersion baptism.

Indeed, the 2% inflation meme is so threadbare that it needs to be called out for what it is. It’s a convenient cover for the radical usurpation of power undertaken by the world’s central bankers during the last two decades. And it survives only because it serves the interest of Wall Street gamblers and the world’s politicians and fiscal authorities alike.

The latter get to run up endless public debt because the central bankers buy it up under QE and drive the carry cost virtually to the zero bound. Likewise, the top 1% of financial gamblers cannot get enough of the 2% inflation hoax because it means free carry trade money as far as the eye can see.
In short, Europe, the US, Japan, China and most of the rest of the world is in thrall to a tiny coterie of power-hungry central bankers. If you do not think they are driving the financial system to the mother of all bubble crashes, just ponder the following justification by a top ECB authority for depriving eurozone consumers of even a brief spot of zero inflation in their cost of living:
At Thursday’s news conference, ECB Vice President Vítor Constâncio ticked off a litany of reasons why prolonged weak inflation, or sustained falls in prices known as deflation, worries central bankers and justifies the massive stimulus many have undertaken. Falling prices may cause consumers to put off purchases if they expect that trend to continue, he noted. It also raises the cost of servicing debt. In addition, he noted that official consumer price measures may overstate the extent of inflation. 
For deflation to take hold, consumers and businesses would have to expect price falls to continue. Central bankers want to persuade households and financial markets that, whatever its current reading, the inflation rate will be around their target over the medium term, in which case they describe inflation expectations as being “anchored.” 
Mr. Draghi warned of a possible “de-anchoring” of expectations if the inflation rate remains low for a long time, and particularly if oil prices fall further. “These risks have gone up and we want to be vigilant,” he said.
This is just plain rubbish. These half-baked propositions would have received a falling grade in even a junior college introductory economics course just 20 years ago.

So there is no alternative except to take cover because the latest stock market rip is based on pure central bank hopium

Indeed, Mario Draghi has confirmed once again that the world’s central bankers have a monetary death wish. Unlike the gamblers who bought Cramer’s top 49 stock picks, the best course of action is to sell, sell, sell- and do it now.

October One Of The Best On Record
October 30, 2015
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It’s hard to know why markets rallied as powerfully as they did this month.

Some felt it oversold—and it was to a point. Others noted the Fed didn’t raise interest rates this month when they had the chance—so it’s party on from that perspective.

And, to help bulls make the case “the bad news is good” mantra continued to keep rising interest rates on hold.
It doesn’t matter that monetary policies remain in “emergency” conditions for 7 years even after the recession ended over 5 years ago. So if economic growth is “solid” according to Bernanke and Yellen these days you have to wonder, why have they kept rates this low?

Well, I said it yesterday and will stay with this tune, “the Fed is a pawn of Wall Street and we’re just shills in the game”.

Economic data continued to be weak. Aside from a burst in the Chicago PMI, Personal Income & Spending only came in at 0.1% for both measures from 0.4% previously; Employment Cost Index rose to 0.6% vs prior 0.2% which is negative meaning costs are heating up; and Consumer Sentiment fell to 90 vs prior 92.1, meaning lower energy prices will only last for so long.

Crude Oil prices rose sharply Friday as they did Thursday due to a large drop in the “rig count” featured below:

10-30-2015 7-17-12 PM

Stocks fell sharply into the close as some large investors hit the sell button banking some October profits. That said, the month featured nearly a 9% return.

10-30-2015 7-17-31 PM

Market sectors moving higher included: Energy (XLE), Retail (XRT), South Korea (EWY), Russia (RSX), Mexico (EWW), Crude Oil (USO) and Bonds (TLT).

Market sectors moving lower included: Just about everything else.

10-30-2015 7-17-59 PM
The top ETF daily market movers by percentage change in volume whether rising or falling is available daily.
Volume was heavy but breadth per the WSJ was mixed.
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10-30-2015 7-18-18 PM dIARY

Charts of the Day


    SPY  5  MINUTE


































    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.


    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.


    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

October’s rally was real and technicians must follow the tape’s judgment in that regard. But for those following the fundamentals, the rally has been a farce.

November will begin and we’ll see if we’re just returning to the unproductive trading range prominent the first six month of 2015.

Let’s see what happens

The Global Depression and Deflation Is Currently Underway!

By: Chris Vermeulen


"The clear and present danger is, instead, that Europe will turn Japanese: that it will slip inexorably into deflation, that by the time the central bankers finally decide to loosen up it will be too late." ~

Paul Krugman, "The Euro: Beware of What you Wish for", Fortune (1998)

Most central bank policy makers, investors, and analysts around the world today are gripped by the worry of declining growth rates, dwindling international commodity prices, high unemployment, and other macroeconomic figures.

However, not many have given much consideration to one economic factor that has the potential to disrupt global economies, shut down economic activities, and become a catalyst for a worldwide depression.

We are talking about 'deflation' that if not tamed, could bring global economies to their knees creating a worldwide chaos never seen before in scale or length.

Paul Krugman, the renowned American economist and distinguished Professor of Economics at the Graduate Center of the City University of New York, had forewarned about the threat of deflation for European economies. He suggested that the European Central Bank policy makers need to look into the situation now before it's too late for them to do anything about the situation.

The Eurozone today has well entered into a deflationary phase with other major economies including the US, UK, and Japan slowly heading into the same direction. In Japan and many European economies such Greece, Spain, Bulgaria, Poland, and Sweden, prices have been decreasing gradually for the past decade. This has created a number of problems for the central bank policy makers as they try to find out ways to diffuse the negative effects of deflation such as a slump in economic activity, drop in corporate incomes, reduced wages, and many other problems.

What the World can Learn from Japan's Lost Decade (1990-2000)

The impact of the ongoing global deflationary trends on economies can be gauged by what Japan had experienced during the period between 1990 - 2000, which is also known as Japan's lost decade. The collapse of the asset bubble in 1991 heralded a new period of low growth and depressed economic activity. The factors that played a part in Japan's lost decade include availability of credit, unsustainable level of speculation, and low rates of interest.

When the government realized the situation, it took steps that made credit much more difficult to obtain which in turn led to a halt in the economic expansion activity during the 1990s.

Japan was fortunate to come out of the situation unhurt and without experiencing a depression.

However, the effects of that period are being felt even today as corporations feel threatened of another deflationary spiral that could eat away at their profits. The situation analysts feel is about repeat in the Western economies, and that includes the US.

Deflationary Trend Could Threaten the Fragile US Economy

Inflation rates in the US are hovering near zero percent level for the past year. The Personal Consumption Expenditure Price Index has stayed well below the Fed's 2% target rate since March 2012. Although, the US economy hasn't entered into a deflationary stage at the moment, the continuous low level inflation despite the fed's rate being at near zero levels for about a decade has increased the possibility that the US economy could also plunge into a deflationary stage similar to that of the Euro zone.

The deflationary trend could turn out to be a big concern for policy makers and investors that may well lead to a global depression. The lingering memories of the 2008 financial crises that had literally rocked the world are still fresh in the minds of most people. That is why it's important for central banks to implement policies to fight the debilitating effects of deflation.

But, the question is how can the central banks combat the current or looming deflation trend?
The Japan's lost decade has taught us that trying to contain the possibility of deflation and its negative effects can be difficult for policy makers. Economists have suggested various ways in which the debilitating effects of deflation can be countered.

However, one policy that central banks can use to fight off deflation is what economists call a Negative Interest Rate Policy (NIRP).

NIRP simply refers to refers to a central bank monetary measure where the interest rates are set at a negative value. The policy is implemented to encourage spending, investment, and lending as the savings in the bank incur expenses for the holders. On October 13ths I wrote in detail about NIRP. Then on October 23rd Ron Insana on CNBC talk about it here.

This unconventional policy manipulates the tradeoff between loans and reserves. The end goal of the policy is to prevent banks from leaving the reserves idle and the consumers from hoarding money, which is one of the main causes of deflation, which leads to dampened economic output, decreased demand of goods, increased unemployment, and economic slowdown.

Central banks around the world can use this expansionary policy to combat deflationary trends and boost the economy. Implementing a NIRP policy will force banks to charge their customers for holding the money, instead of paying them for depositing their money into the account. It will also encourage banks to lend money in the accounts to cover up the costs of negative rates.

Has the Negative Rates Policy Been Implemented in the Past?

Despite not being well known or publicized in the media, NIRP has been implemented successfully in the past to combat deflation. The classic example can be given of the Swiss Central Bank that implemented the policy in early 1970s to counter the effects of deflation and also increase currency value.

Most recently, central banks in Denmark and Sweden had also successfully implemented NIRP in their respective countries in 2012 and 2010 respectively. Moreover, the European Central Bank implemented the NIRP last year to curb deflationary trend in the Eurozone.

In theory, manipulating rates through NIRP reduces borrowing costs for the individuals and companies. It results in increased demand for loans that boosts consumer spending and business investment activity. Finance is all about making tradeoffs and decisions. Negative rates will make the decision to leave reserve idle less attractive for investors and financial institutions. Although, the central bank's policy directly affects the private and commercial financial institutions, they are more likely to pass the burden to the consumers.

This cost of hoarding money will be too much for consumers due to which they will invest their money or increase their spending leading to circulation of money in the economy, which leads to increase in corporate profits and individual wages, and boosts employment levels. In essence, the NIRP policy will combat deflation and thereby prevent the potential of global depression knocking at the door once more.

Final Remarks

The possibility of deflation causing another global recession is very real. Central policy makers around the world should realize that deflation has become a global problem that requires instant action. In the past, even the most efficient and robust economies used to struggle in taming inflation rates. In the coming months, most economies around the world, including the US, will have difficulty curbing the effects of deflation.

The fact is that central bank policy makers have largely ignored the possibility of deflation causing havoc in the economy similar to what happened in Japan during its "lost decade". The quantitive easing program that is being used in the US by the Feds to boost economy is not proving effective in raising the inflation rate to its targeted levels. In fact, the inflation level is drifting even lower and is hovering dangerously close to the negative territory.

Blaming the low inflation levels on the low level of oil prices is not justified. Inflation levels were hovering at low levels well before the great plunge in commodity prices. Moreover, low level inflation rates cannot be blamed on muted wage levels. The fact is that unemployment rates have decreased both in the US and the UK in the past few years, but consumer spending has largely remained unmoved.

Taming deflation is necessary if the central banks want to avoid its debilitating effects on the economy. Policies like the Quantitive Easing program used by the Feds may allow easy access to credit, dampen exchange rate, and reduce risks of financial meltdown; but it cannot prevent the possibility of another more severe situation of deflation wreaking havoc on the economy.

The concept of NIRP may seem counter intuitive at first, but it is the only effective way of combating the deflationary trend. The world economy could sink further into a deflationary hole if no action is taken to curb the trend. And the time to start thinking about it is now. Any delay could result in a global economic meltdown that may cause deep financial difficulties for millions of people around the world.

We as employees, business owners, traders and investors are about to embark on a financial journey that couple either cripple your financial future or allow to be more wealthy than you thought possible.

The key is going to that your money is position in the proper assets at the right time. Being long and short various assets like stocks, bonds, precious metals, real estate etc...