The Uncounted Trillions in the Inequality Debate

Wealth isn’t so highly concentrated if you take into account Medicare and Social Security benefits.

By Martin Feldstein

Photo: Getty Images/Ikon Images         

The Federal Reserve recently estimated total household net worth in the U.S. to be about $80 trillion, including real estate and financial assets. And data from the Fed’s Survey of Consumer Finances imply that the top 10% of households by net worth hold about 75%—or $60 trillion—of this total. The bottom 90% of households therefore have a net worth of about $20 trillion.

These data seem to show a country whose wealth is highly concentrated. But the true picture is hardly as stark as critics of inequality claim, because it leaves out the large amount of wealth held in the form of future retirement benefits from Social Security and Medicare. Moreover, the public’s traditional financial wealth is depressed because the current entitlement programs lower people’s real incomes and deny them the higher returns available through investment-based retirement savings like IRAs or 401(k)s.

Wealth is the ability to spend more than one’s income. After a retirement or job loss, a household with financial wealth can maintain its standard of living. Wealth also allows people to make bequests and gifts to help children or grandchildren at early stages in their lives.

Most Americans count on Social Security to finance their consumption in retirement. The Social Security trustees estimate that Social Security “wealth”—the present actuarial value of the future benefits that current workers and retirees are projected to receive—is $59 trillion.

Excluding the top 10% of households reduces the amount to about $50 trillion.

However, to qualify for those benefits, current workers must pay future payroll taxes with a present actuarial value of about $25 trillion. So you have to subtract these taxes from the $50 trillion, leaving a net Social Security “wealth” of $25 trillion for the bottom 90% of households.

Adding this to the $20 trillion of their conventionally measured net worth, and these households have total wealth of $45 trillion.

Yet this figure leaves out the very large transfers that retirees receive from Medicare and Medicaid.

Government actuaries don’t estimate the amount of “wealth” implied by these two programs.

But we can get an indication of how much is at stake by looking at the benefits paid out under them.

The Congressional Budget Office estimates that over the next decade total Social Security retiree benefits will be $10.2 trillion, while the benefits for Medicare will be $9.0 trillion and those for Medicaid will be $4.6 trillion (about half of Medicaid benefits are for retirees in nursing homes).

In short, the benefits for these two government health programs exceed the amount Social Security will pay out to retirees in cash.

But unlike Social Security, receiving government health benefits does not depend on current workers continuing to pay taxes. This suggests that the net “Medicare and Medicaid wealth” implied by current law is probably about as large as these households’ “gross Social Security wealth” of $50 trillion.

So what is the grand total? Add the $50 trillion for Medicare and Medicaid wealth to the $25 trillion for net Social Security wealth and the $20 trillion in conventionally measured net worth, and the lower 90% of households have more than $95 trillion that should be reckoned as wealth.

This is substantially more than the $60 trillion in conventional net worth of the top 10%. And this $95 trillion doesn’t count the value of unemployment benefits, veterans benefits, and other government programs that substitute for conventional financial wealth.

Critics of inequality fail to recognize this wealth and that it represents a poor return.

Individuals pay high payroll taxes—directly and through foregone wages—to finance the current system of pay-as-you-go retiree benefits. By my calculations, the implicit real rate of return on those payroll taxes will be less than 3%. That is substantially less than the 5.5% real return earned historically by contributions over a working life to an individual IRA or 401(k) plan invested in a balanced combination of stocks and high-quality bonds.

A wise approach would be to slim down today’s Social Security pay-as-you-go system and supplement it with universal investment-based personal retirement accounts. This would reduce the tax burden on workers and raise the national savings rate, thus increasing the rate of economic growth and the future levels of real wages. Those individual accounts would also provide funds that could be bequeathed to the next generation or transferred for special purposes like education.

The apparent inequality of wealth in the U.S. in reality reflects the government’s out-of-date way of financing retirement. Politicians worried about inequality should start by fixing the inefficient programs they directly control.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, is a professor at Harvard and a member of the Journal’s board of contributors.

Watch the presses roll as Europe scrambles to fix its banks

This is how the crisis may be resolved — not with a bailout or debt resolution but by printing money
There is a story playing out in Italy that teaches us much about the practical and political limits of how you resolve a debt crisis. The European strategy of resolving bank crises through orderly legal resolution processes will ultimately have to be superseded by the crudest form of debt resolution in existence — old-fashioned money-printing by the central bank.
The story is about the suicide of an Italian pensioner last week after he realised that he had been “bailed-in” during a bank resolution procedure .

He had bought savings certificates from his bank, which, like so many financially inexperienced savers, he mistook for a deposit.

In Italy, in particular, many ordinary savers bought these certificates. Legally, however, these certificates constitute junior debt, one of the least secure asset classes of all. Under a new European law when a bank fails, first the shareholders pay, then the junior bondholders, and only then do national and European resolution funds pay up.

The pensioner’s bank was one of four small regional banks that recently went through resolution. Not only did the shareholders and junior bondholders lose out. The cost also swallowed about four years of future contributions into the Italian national bank resolution fund.

Since these are not the only imperilled Italian banks , this case raises some troubling issues about the whole process of dealing with ailing financial institutions. The EU now has the legislation to deal with bank rescues — the so-called bank recovery and resolution directive.
But the system is totally underfunded. In particular, it lacks a fiscal backstop.
This raises important questions about macroeconomic policy in the eurozone, and for the European Central Bank in particular. In an ideal world — the world of finance professors — you would end any private-sector debt crisis through a resolution process. This would include bankruptcy, bank resolution procedures, or the creation of bad banks where the government takes on the bad assets of floundering institutions.

We Europeans are notoriously bad at resolution — special interests usually stand in the way.

We are in the extend-and-pretend camp. We extend non-performing loans, and pretend they are still good. Italy’s statistics tell us that the volume of these loans is €200bn. Believe that if you will.
When pensioners start killing themselves, the political support for this process is hitting a limit.

This is now happening in Italy. The country has no fiscal capacity for big bank bailouts.

The government has exhausted the room for fiscal manoeuvre allowed under European rules.

So in terms of private sector debt resolution, Italy — and other highly indebted countries — have run out of all the legal options.
Resolving a public or private sector debt overhang through money printing is called debt monetisation — and it is strictly illegal under European law.

The central bank is allowed to buy debt instruments but only for the purpose of conducting its monetary policies — not to alleviate anyone of their burden. This opens a large grey area.

The official purpose of the ECB’s private and public sector asset purchase programmes — quantitative easing — is to achieve a higher level of inflation. If this goes on for a very long time — as I believe it will — it may end up as an ersatz debt resolution instrument.

The German policy establishment now openly accuses the ECB of debt monetisation. You will not get many members of the governing council to admit that debt monetisation is the reason for QE. But whatever the ulterior motive, the effect may be different from what they intended.

So, this is how the crisis may ultimately get resolved: not through debt resolution, not through a fiscal bailout, but through old-fashioned money-printing done under some legally sound disguise. The reason the eurozone will end up monetising debt is not because it is the intrinsically best way to do it, but because rules and political limits leave them with no choice.

Expect this process to take a very long time.

Fear, Anger and Hatred

The Rise of Germany's New Right

Photo Gallery: Growing Radicalism in Germany
For years, a sense of disillusionment has been growing on the right. Now, the refugee crisis has magnified that frustration. Increasingly, people from the very center of society are identifying with the movement -- even as political debate coarsens and violence increases. By SPIEGEL Staff

Martin Bahrmann, a local politician in the Saxon town of Meissen, was just preparing to speak in a council debate on refugee shelters when a ball-point pen ricoched off the back of his head.

It was a cheap, plastic writing utensil -- blue with white writing.

As a member of the business friendly Free Democrats (FDP), Bahrmann's seat in the regional council is at the very back and the visitors' gallery is just behind him. The pen must have come from somebody in the audience. When Bahrmann turned around, he found himself looking at a sea of hostile faces. Although there were around 80 visitors in the gallery, nobody admitted to having seen who threw the pen. On the contrary: The FDP representative and his colleagues were later insulted as being "traitors to the German people."

Bahrmann, 28, does not draw a salary for his involvement in local politics. It is merely his contribution to a functioning democracy. He was born and grew up in the region he represents and he has known many of the people there for many years. But even he, Bahrmann says, now must be more careful about when and where he makes political appearances. Ever since the regional council discussed transforming the former Hotel Weinböhla into a refugee hostel, the established political parties have been confronted with the hate of many locals. One Left Party representative was spit on as he was walking down the street while another was threatened with violence. Meanwhile, representatives from the right-wing populist Alternative for Germany (AfD) party and the neo-Nazi NPD were celebrated for having voted against the refugees in the regional council.

The pen thrown in Meissen may not have garnered much media attention, but it says a lot about the public mood in Germany, a country in which increasing numbers of people are united against the state, its institutions and its elected officials. It is a country in which antipathy towards democracy is gradually increasing while xenophobia is growing rapidly. And it is a country where incidents of right-wing violence are on the rise and refugee hostels are set on fire almost daily.

It is still just a radical minority that is responsible for much of the xenophobia and violence.

The tens of thousands of volunteers who offer their assistance in refugee shelters every day still predominate. But at the same time, a new right-wing movement is growing -- and it is much more adroit and, to many, appealing than any of its predecessors.

Reinforcements from the Center of Society

In the past, the right wing was characterized primarily by thugs with shaved heads, bomber jackets and jackboots -- people who had difficulty getting the words "Blood & Honour" tattooed on their arms without a spelling mistake. After the 1990s, the jackboot crowd was replaced by the "Autonomous Nationalists," right-wing extremists who disguised themselves by wearing left-wing clothing, but who were just as violent as their forebears.

These street-extremists are still around, but they have received reinforcements. The New Right comes out of the bourgeois center of society and includes intellectuals with conservative values, devout Christians and those angry at the political class. The new movement also attracts people that might otherwise be described as leftist: Putin admirers, for example, anti-globalization activists and radical pacifists. Movements are growing together that have never before been part of the same camp. Together, they have formed a vocal protest movement that has radicalized the climate in the country by way of public demonstrations and a digital offensive on the Internet.

The state and its organs, such as the government and parliament, have become the object of a kind of derision not seen since the founding of postwar Germany. Once again, political representatives are being denounced as "traitors to their people," the parliament as a "chatter chamber" and mainstream newspapers as "systemically conformist." All are insults that have origins in Germany's dark past.

It's not just the government's refugee policies that are bringing the New Right together. The origins are much deeper, reaching back to the protests against the welfare reforms passed in the early 2000s, the anger at the euro bailouts and demonstrations against massive construction projects such as Stuttgart 21. They were all demonstrations of angry citizens who felt their politicians were failing them. Many of them have since become even angrier and have, at least internally, transformed into radicals.

The 1 million refugees who have arrived in Germany in 2015 are now acting as a catalyst for this new right-wing movement. The fear of foreigners, of being "swamped" by them, is bonding the New Right together and drawing more "concerned citizens" into their ranks every day.

Unsettled Germans

German society seems more unsettled than it has in a long time. In a survey performed by TNS Forschung for SPIEGEL (see left-hand column), 84 percent of respondents said that the large number of refugees currently coming to Germany will result in "lasting changes" to the country. Some 54 percent said they are concerned that the danger of terrorism is higher due to the influx of refugees and 51 percent believe that the crime rate will rise. Forty-three percent are worried that unemployment will increase.

The answers reflect a deep unease in our society. Many people seem to have lost their orientation. They feel that their concerns are not being taken seriously enough by the federal government, which hasn't exactly given the impression that it has the refugee crisis under control. That doesn't mean that these people will succumb to the siren song of the far-right, but it does mean they have become more susceptible to it.

Yet the right-wing populist phenomenon is not one that is typically German. Such parties have been gaining in strength almost everywhere in Europe in recent years and societies appear to be radicalizing across the entire Continent while the political center empties out. Thus far, though, German politics and the German populace have been able to resist the right-wing seduction -- movements like the Front National in France, for example, which celebrated strong results in the first round of regional elections last Sunday.

These days, though, the question as to whether such a thing could happen in Germany has become more pressing. Germany's New Right is following a strategy similar to that of Front National head Marine Le Pen: that of putting a friendly face on radicalism. Her followers are no longer to appear threatening. They should seem friendly, like the nice conservative next door.

There is much that is reminiscent of the Tea Party in the US. That movement came into being as a result of a radical rejection of establishment politics in Washington. Those who joined were united by a sense that they were being cheated by political, business and media elites.

Watching Helplessly

Their radicalism has since changed US society and the Republican Party to such a degree that they are hardly recognizable anymore. Driven in part by Tea Party ideology, the campaign ahead of the Republican primaries has turned into a contest to see who can come up with the most drastic positions. Donald Trump, who is currently leading in the polls, slid to a new low with his demand that all Muslims be prevented from entering the United States.

There are plenty of indications that such a Tea Party movement would fundamentally alter the political landscape in Germany as well. The right-wing populist AfD now has up to 10 percent support according to the most recent surveys -- and this despite an embarrassing power struggle at the top over the summer and an extreme lack of professionalism.

The other parties, though, have been left to helplessly watch the developments on the right wing of the political spectrum. Sigmar Gabriel, who is Chancellor Angela Merkel's vice chancellor and head of the center-right Social Democratic Party, felt in the summer that it was important to keep the lines of communication open to "Pegida," the xenophobic protest movement that stages weekly anti-refugee marches in Dresden. Not long after, though, he abandoned that idea, preferring instead to refer to the demonstrators simply as a "pack."

But it is Merkel's conservatives -- her Christian Democrats combined with the Christian Social Union in Bavaria -- that are the most unsettled. Their members and functionaries are torn between their loyalty to a chancellor who opened Germany's doors to the refugees and their desire to provide a political home to those who are concerned about the migrant influx. Indeed, Merkel's political fate will partly be decided by how she chooses to deal with the New Right.

It is a movement that one can see firsthand every Sunday at 4 p.m. in Plauen, just south of Leipzig in Germany's east, just as the glittering lights of the Christmas market come on in the historic city center. The organizers of the weekly "We Are Germany" demonstration have assembled their flatbed trucks and an audience of a couple thousand people has gathered. The purpose of the event is to provide a stage to everyday citizens, an idea that goes back to the weeks leading up to the collapse of East Germany.

Hilmar Brademann is the first to step up to the microphone. A house painter from Plauen, he is the founder of the local carnival club and is well-liked and respected. Brademann says he doesn't have anything against foreigners in principle. But please not here in Plauen. "I don't want Plauen to turn into another Berlin-Kreuzberg, where one sees women in headscarves or even burkas," he says. The audience applauds his words. They continue cheering when he says that he is opposed to public benefits being given to refugees. He then addresses his concerns about crime. "They should be immediately deported." The crowd is rapturous.

'The Same Could Happen to Us'

The "We Are Germany" demonstrations in Plauen have thus far been seen as a more moderate version of the Pegida marches in Dresden. It is neither a place for waving Bismarck-era war flags nor for wooden gallows bearing Angela Merkel's name -- both of which have been seen in Dresden. Representatives from right-wing parties are unwanted.

But in recent weeks, the mood in Plauen has become more aggressive. Instead of referring to the "Federal Republic," speakers increasing refer to it as the "shit state" or the "gang state." Few speakers refrain from accusing Chancellor Merkel, who was just named Time magazine's "Person of the Year," of being a "traitor to the people." A certain Mr. Dinnebier, a construction supervisor from Plauen, warned recently of new customs that he fears could be brought to Germany by refugees from Africa: "When a local king there dies," he said, "at least seven virgins are buried in his grave with him." A Dr. Rothfuss, formerly a professor at Tübingen University, says that Christians "have almost been exterminated" in the Arab world.

"The same could happen to us here."

Such hateful slogans and sentiments against the state and foreigners are coming from law-abiding citizens from the heart of society. They display a mixture of old prejudices combined with new conspiracy theories that is typical for the movement on the right-wing of Germany's political spectrum.

The Otto Brenner Stiftung, a foundation with ties to German labor unions, published a study of right-wing populism in Germany over the summer. The organization found that supporters of the New Right no longer clearly identify themselves as right-wing. "The division between traditionally leftist and traditionally rightist attitudes is disappearing," the study says. "The actors are increasingly positioning themselves outside the classic right-left schemata." Study author Wolfgang Storz speaks of a "cross-front," a term that goes back to the Weimar Republic, when young conservative thinkers such as Arthur Moeller van den Bruck were trying to understand how nationalist and socialist ideas might fit together. The effort found success not long thereafter.

The new "cross-front" is fond of reading the monthly magazine Compact. Editor-in-Chief Jürgen Elsässer used to be a member of a communist organization and wrote for such left-wing publications as Junge Welt, Neues Deutschland and Freitag. Many of his commentaries, such as those in opposition to the trans-Atlantic free trade deal or the alleged warmongering of the US would still not look out of place in leftist newspapers. Elsässer's admiration for Russian President Vladimir Putin is also widely shared among German left-wingers.

Political scientist Markus Linden, from the University of Trier, believes that the new protest movement is primarily united in its distrust of societal elites. Politicians, business leaders, media professionals: They are all suspected of having formed a conspiracy against everyday people.

Bringing the Movement Together

When Elsässer appeared before a demonstration in Berlin recently, he called for the unification of all the movements he supports. "Antifa, Pegida, Mahnwache, left and right, march together," he called out. "You don't have to love each other. But you do have a civil responsibility: that of showing those at the top where the limits are."

Elsässer is one of many who are trying to bring the new movement together. He studied education, wears a fashionably tailored black suit and invites his readers to events in the Best Western Premier Hotel Moa Berlin. Not unlike a medical conference.

It is a Saturday in October and more than 1,000 people have paid €99 to take part in Elsässer's "Freedom Conference." Some of them are skinheads, but most are from the center of society, married couples and a surprising number of fathers who have brought along their grown-up sons.

Participants were only told of the conference's exact location by email one day earlier. The checks at the entrance are strict, so the event gets started an hour late. Media coverage is not desired.

Elsässer's tirades are well received by the gathered public. In the Germany he describes, supermarket cashiers are threatened by refugees "with machetes." Women are afraid to go out on the street alone because of "young foreign men" who don't have their hormones under control and "grope, leer at and do worse" to women. German schoolchildren, he says, are being disadvantaged by their do-gooder teachers and are being forced to dress in accordance with "Islamic custom." Elsässer doesn't say where his information comes from, but when he shouts "Defend Yourselves!", he is rewarded with loud applause.

Elsässer has adopted a number of revolutionary terms he learned during his time as a radical leftist and remains loyal to the powers that be in Russia. The Institute of Democracy and Cooperation, which has ties to the Kremlin in Moscow, supported the Compact conference as an event partner.

Launched in 2008, one of the institute's co-founders is a lawyer with ties to Vladimir Putin.

The Tolstoi Institut, founded in 2014, is also among Elsässer's circle of friends. Located in Berlin, the institute "for the promotion of the German-Russian friendship" offers language courses, readings and concerts. It seeks to "counter" Anglo-Saxon influence with "something Russo-German," for example with Putin's vision of "Eurasia." According to a study by the Hungarian research institute Political Capital, Russia maintains relations with far-right groups in 13 European Union countries, including the FPÖ in Austria, Vlaams Belang in Belgium, Hungary's Jobbik and the Front National in France.

At the end of 2014, a Russian bank even loaned Front National €9 million. "German right-wing extremists have been trying for years to establish contacts with Russian politicians," one German security official says. "And Moscow takes advantage."


In Hotel Moa Berlin, Elsässer's event has something to offer everybody, from the far left to the far right. The controversial playwright Rolf Hochhuth took the stage, saying "only Germany's exit from NATO can prevent its downfall." He was followed later by Götz Kubitschek, one of the intellectual leaders of the New Right. A former first lieutenant in the reserves, he was forced to leave the German military in 2001 for his participation in "right-wing extremist endeavors." In May 2000, he joined high school teacher Karlheinz Weissmann in founding the Institute for State Politics, a kind of New Right think tank.

Recently, Kubitschek has appeared several times with Elsässer and Björn Höcke, the AfD politician who laid a German flag on his armchair during an appearance on a popular political talk show.

Kubitschek also speaks at Pegida events, such as one in Dresden at the beginning of October. It is good, he said, that a clash is brewing. The crowd answered: "Resistance!"

Ken Jebsen is also among the leaders and idols of the movement, a former moderator with the public broadcaster RBB who refers to the Sept. 11, 2001 attacks in the US as a "terror lie."

Then there is Michael Stürzenberger, formerly a press spokesman for the CSU -- Merkel's Bavarian allies -- in Munich and now head of the anti-Islam party "Freedom." He is also a main contributor to the far-right website Politically Incorrect. Felix Menzel, editor-in-chief of the right-wing publication Blaue Narzisse and a creative muse behind the irredentist "Identity Movement," is also involved. In his blog, Menzel describes the current state of Germany as follows: "A government that no longer obeys the law, and supported by parliament, the press and possibly also the courts, is confronted by a protest movement that is searching for the lowest common denominator to transform itself into a mass movement."

Most New Right leaders don't perpetrate violence themselves. Rather, they exert influence on the mood of the country -- at conferences, on market squares and, most of all, in the Internet.

In doing so, they are creating an atmosphere that encourages violence-prone right-wing extremists to act on the rhetoric. It is hardly surprising that the man who attacked the Cologne mayoral candidate Henriette Reker with a knife only now became violent. He had been well known as a neo-Nazi for 30 years, but had never been accused of violence. Now, though, he suddenly felt emboldened. "I had to do it," he told police after the attack, the motive for which was Reker's permissive stance on refugees. "The foreigners are taking our jobs away." Among right wingers, the attack has been celebrated as an "act of self-defense."

Cases of right-wing violence have increased dramatically in recent months -- and the attacks are getting more brutal. On the night of Dec. 7, two baby carriages were set on fire in the entry hall of an apartment complex housing 70 refugees in the Thuringia town of Altenburg. Ten people, including two babies, suffered smoke inhalation. Just two days prior, right-wing activists from Thügida, the local chapter of Pegida, had marched through Altenburg with signs reading: "Please continue your flight. There's nowhere to live here."

A 'Disgrace for Germany'

The demonstration and the fire were only reported in a few nationwide outlets. People have become used to such attacks in Germany.

By Dec. 7, the German Interior Ministry had registered 817 "criminal acts on asylum hostels."

At the beginning of October, the total was only 505. Compared to 2014, the number of attacks has at least quadrupled. Arson attacks have increased 11-fold, from six in 2014 to 68 this year.

In October alone, officials registered 1,717 politically motivated infractions committed by the right wing. In September, the total was 1,484. Since the summer, the increase in violence has been steep.

The development is "alarming" and a "disgrace for Germany," says Interior Minister Thomas de Maizière. He says it is not just a problem for the country's security apparatus, but for the entire society at large. "We have to be careful that xenophobia and right-wing extremism don't creep into the center of our society," he says. Officials, he says, are watching "very carefully to see if trans-regional structures are developing and what crime patterns and perpetrator characteristics are identifiable."

An analysis performed by Germany's Federal Criminal Police Office (BKA) has determined that the perpetrators are not always right-wing extremists. Not even a third of the perpetrators identified have had previous encounters with the authorities. The majority had spotless records before they marched off to their local refugee hostel. Kim M., a 39-year-old tax inspector from Escheburg in the northern German state of Schleswig Holstein, is one example. On Feb. 9, he dumped a canister of paint thinner into an empty residence and then tossed in a pack of burning matches. His act was meant to prevent the arrival of new neighbors, six refugees from Iraq. "I thought I was doing a good thing," he told the Lübeck court. It is a common refrain.

The more the New Right is able to present itself as the victim of a hostile political class, the stronger will be the impulse to resort to violence in the fight against that class.

This new form of resistance can be found across the entire country. In Heppenheim, a city of 25,000 in the state of Hesse, unknown arsonists set fire in early September to a baby carriage at the entrance of a hostel housing 50 refugees. It was the middle of the night, and smoke quickly filled the staircase. One resident jumped out of a second floor window and sustained serious injuries while several others suffered from smoke inhalation.

An analysis completed by the BKA found that the refugee issue has the capacity to "generate a substance-ideological consensus" on society's right-wing fringe. A "völkish ideology" is spreading across the country, the study found. Last summer, the BKA warned that those who welcome refugees with open arms could increasingly become objects of right-wing hate. The number of attacks on the offices of political parties or political representatives has spiked dramatically in recent weeks.

Next Wave of Hate

There are Pegida chapters now in several states, and some of them have come under observation by domestic intelligence officials. Right-wing violence was also a central focus of last week's state interior minister conference in Koblenz. State intelligence officials have been asked to develop a "counter-strategy" by spring. That is when the next big wave of refugees is expected -- and the next wave of hate.

But even more important than combating the symptoms is the question of what could have caused this shift to the right. Where does the rage against foreigners and "them up there" come from? What's the reason bestseller lists are full of literary diatribes like Thilo Sarrazin's "Germany Is Doing Away With Itself," Akif Pirinçci's "Germany Loses Its Mind" and "Warning! Civil War!" by Udo Ulfkotte, a former journalist for the Frankfurter Allgemeine Zeitung?

Some of this may be attributable to a kind of globalization that primarily benefits business and political elites, leaving many citizens feeling like they only ever see its downsides. All they see is jobs being outsourced abroad, wage dumping or migrants and refugees, whom they perceive as threats.

It seems as if the refugee crisis is bundling the suppressed fears of German society and stirring them into an explosive mixture. The nationalistically inclined -- the ones who were afraid of being overrun by foreigners well before the first foreigner moved into their neighborhood -- now feel a burning concern for their fatherland. Those critical of Islam have nurtured the illusion of an impending "Islamification of the West" or an outright German Shariah state as hundreds of thousands of mostly Muslim refugees arrive. Low-income earners are afraid the refugees will compete with them for jobs or welfare payments. Then there are the politically jaded, the ones who regard ruling politicians as incompetent and suspect democracy is a weak form of government anyway. They feel validated by the poor management of the refugee crisis.

Social scientists have been warning for a while that a considerable portion of the population has decoupled itself from what is known as democratic consensus. They don't vote, they ignore the established political parties and they hardly read the news anymore. "Our democracy isn't perfect," the political scientist Wolfgang Merkel recently warned. "The de facto exclusion of the lower class is worrying."

But it has long been more than just people of limited means who are susceptible to the anti-democratic leanings of this new right-wing movement. The fact that conservative citizens have drifted further to the right in recent years also has to do with the evolution of the party system.

Many traditional voters of the leading Christian Democratic Union and its sister party in Bavaria, the Christian Social Union, have long felt politically homeless in Germany. They have broken away from the Union because they disapprove of the sudden shift toward modernity by Angela Merkel, who in the course of her now 10-year chancellorship has abandon one traditional conservative position after the next. Near equal rights for homosexuals were received in conservative milieus with about as much incredulity as the vehement expansion of day-care facilities, paternal leave, the abolition of compulsory military service or Germany's shift toward renewable energy. If all that wasn't enough, the last links between Germany's conservatives and the CDU have crumbled since Merkel adopted her open-door policy toward refugees.

No Voice in Parliament

Then there's the fact that members of the ruling grand coalition, pairing the conservatives with the Social Democrats, make up nearly 80 percent of the Bundestag. The sole opposition parties, the Left and the Greens, are to the left. The Alternative for Germany party, or AfD, failed to win enough votes in the last election in the fall of 2013 to get into parliament. So did the FDP, the CDU's former coalition partners. Millions of citizens who identify to the right of the Union have no voice in parliament.

The political scientist Herfried Münkler speaks of a "narrowing of the political horizon." "The resonance axis between the political establishment and broad swathes of the population is broken," says the sociology professor Hartmut Rosa. This is the real reason for the success of this new movement.

No established party is even listened to in the protest milieu of the new right -- with one exception: the AfD. The populists are despised by some rightists for being part of the political establishment, yet they still enjoy a kind of "outsider bonus" in the scene. On the off chance these people do vote, it's for the AfD -- regardless of whether they know the candidates or not.

It's not the people that count, but the signal of protest.

It wasn't that long ago that the AfD, now led by Frauke Petry looked doomed. In the summer, party founder Bernd Lucke was dethroned and he and his followers bowed out, leaving the AfD to lick its wounds. Ten percent of AfD members left the party and its new leaders seemed paralyzed, according to insiders. Popularity of the right-wing party slipped so low that surveys were close to labeling them "other."

At a meeting of the party's new leaders in early August, Petry announced her idea of an "autumn offensive." The topics were the euro and immigration, but talk of the euro evaporated quickly. The AfD functionaries were practically falling over themselves to offer the most extreme demands regarding refugees, from border closures to lifting the right to seek asylum -- even suggesting that German police could fire on refugees with live ammunition, only in an emergency, of course. The party had long wrestled with the question of whether it wanted to be a middle-class party with a focus on fiscal policy or the New Right's representative in Germany.

Now they've decided on the more radical variant.

No one embodies this as ruthlessly as the head of the AfD's branch in the German state of Thuringia, Björn Höcke, a man who openly prognosticates impending "civil war" in his speeches in the marketplaces of eastern Germany. In the past few weeks, Höcke has evolved into a sort of German Tea Party activist. He wants to use the potential of the New Right for his own party and like few others in the AfD, he nurtures the connection to the scene and makes the rounds at local citizens rallies. Höcke wants to make them into front organizations for the AfD, as unions once were for the SPD.

A Gift from the 'Barbarians'

Meanwhile, reputable pollsters such as Allensbach and Infratest dimap put the AfD's support among voters at around 8 to 10 percent. The AfD, for its part, prefers to rely on the studies of its own in-house pollster, Hermann Binkert, a former spokesman for Thuringia's Christian Democratic governor, Dieter Althaus. Binkert believes his party would get 22 percent of the vote if elections were held this Sunday.

"Of course we have first and foremost the refugee crisis to thank for our resurgence," says deputy party chief Alexander Gauland, a long-time CDU politician and publisher of the regional newspaper Märkische Allgemeine Zeitung. Like the other protagonists of the New Right, he puts emphasis on appearing civilized -- at least outwardly. "You could call this crisis a gift for us. It has been very helpful." That hasn't stopped Gauland from calling the people, whose arrival has been such a gift for him, "barbarians."

Ever since the success of France's Front National party, many in the AfD dream of becoming its German counterpart -- a far-right people's party. Officially, Petry distances herself from Marine Le Pen's party. But her political objectives are nearly identical on many points, especially on the issue of asylum, immigration and integration. Even in areas of economic policy, many of their respective positions could easily be mistaken for the other's. Both oppose TTIP, euro bailouts, a banking union and sanctions against Russia. Both the AfD and the Front National also mistrust big banks and corporations.

The AfD's base wouldn't mind seeing a closer relationship with the French. On the party's Facebook page, supporters have left comments asking why there was no praise for Le Pen. Lutz Bachmann, the founder of Pegida, wrote on his Facebook page, "Congratulations, Marine! Congratulations, Front National!"

Armin Paul Hampel would never congratulate Le Pen. He's one of the new heads of the AfD, though many people may already know his face. It's one of the many curiosities about the AfD that among its top leaders sits a member of the much-hated "systemically conformist" media.

Hampel reported on German national politics for the broadcasters MDR and ARD for many years. Now he takes his microphone and shows up alongside Björn Höcke at the marketplaces in Erfurt and tells people that those very same broadcasters "lie and cheat and deceive. Just like in East Germany."


"Lying press!" the crowd chants. A few weeks later, he'll say that he doesn't like those words.

He prefers, "Pinocchio press." He says it sounds nicer. In an elegant three-piece suit, Hampel is sprawled in a chair in a bistro in the Uelzen train station. He's got to leave soon for appearances in Pforzheim and Passau. In the beginning, the AfD didn't trust him, says the former journalist. But now they're grateful that he has explained to them the true state of affairs in the media.

"No, of course not all journalists lie. I always explain to people that I've never experienced an editor who censored reports. That's not how things work." But there are too many "colleagues" -- by that, Hampel means journalists -- that have "scissors in their heads." They simply censor themselves.

In front of the bistro, Hampel lights a cigarette. A group of pensioners walks past and looks at him stealthily, as if to say, "We know that guy from somewhere." At the moment, Hampel is talking about something that the "colleagues" had been particularly quiet about. "I don't mean to play down the problem under any circumstances, but it's obvious that a good number of these alleged arson attacks are coming from the refugees themselves, mostly out of ignorance of technology. Honestly, many of them are probably used to having indoor fires back in their home countries."

Hampel uses the word "honestly" a lot, also to describe the alleged shift to the right in Germany. "Honestly, that seems to me to be pure propaganda. Are you afraid of a far-right mob? I've never seen one. I've never been attacked." Strange.

Hampel is a prototype of the new AfD strategy: an educated man, socialized in the West, who for years could be seen on the evening news. No one can easily label him a right-wing agitator. The ex-journalist goes down well with the AfD grassroots because he considers himself reformed, someone who was a part of the system but got out. In eastern Germany, people "held onto something," he says at a town square in Erfurt. "Thoughtfulness and a sense for when we are being told something that is not true. People are very sensitive to that here in Erfurt."

Verbal Feeding Frenzies

The fact that people on the far-right have their own illusions about the world has much to do with the fact that they deliberately boycott conventional media and prefer to rely on their own sources of information. In communications science jargon, journalists are known as "gatekeepers," because they fulfill a similar role as the watchers of city gates in the Middle Ages. They decide which news are relevant and interesting enough to be passed along to the reader.

More and more Germans are starting to believe that the gatekeepers of traditional media are withholding important news, like that climate change isn't so bad. Or that the euro is doomed, but nuclear power is safe. That the Americans are ruining Germany and Putin is fighting for lasting peace. The New Right therefore prefers to seek out its own gatekeepers -- and places its trust in people who filter and manipulate the messages way more radically.

These include the makers of, a portal run by the husband of one of the AfD's members in the European Parliament, as well as the homophobes from the fundamental Catholic site, There's also the anti-Islam bloggers from Politically Incorrect and the self-proclaimed "ethno-pluralists" of the "Identitarian movement" or the national conservatives on the platform "Sezession."

Not to mention the conspiracy theorists from Kopp-Online, KenFM and the German branch of "Russia Today."

Before, angry citizens had to write letters to the editors of local newspapers. These were typically published days later, if at all, and were often shortened. Today, they can chat with like-minded people for hours and let themselves be dragged into verbal feeding frenzies in the Internet's many fórums.

But the master of disinformation remains Lutz Bachmann. Nearly every day, the trained chef with a criminal record for theft, drug trafficking and various burglaries, bombards his 20,000 Facebook fans with horror stories about refugees. Bachmann's daily routine probably looks something like this: Wake up, make coffee, sift through stories from both the "lying" and allied press, filter out the worst reports and then present them to his followers with somber comments:

  • In Osnabrück, a foreigner without a train ticket got aggressive after being stopped by authorities.
  • In Spenge in North Rhine-Westphalia, an Afghan allegedly molested a schoolchild.
  • Lots of "unfortunate isolated incidents," Bachmann likes to quip.

Wild Rumors

When it comes to negative news, the agitator trusts the "lying press" without reservation. Then he floods his timeline with news that fits his world view, whether they're well-founded reports or wild rumors.

Just how much parts of the population have become radicalized is evident in the increasing number of people who are willing to use their real names, says the Bielefeld-based conflict researcher Andreas Zick. "Radicalization demands distancing oneself from the majority of society."

Plus, he says, that makes identification within groups even stronger. Right-wing leaders have recognized the effect and have begun explicitly calling for people to use their real names.

"We should throw these parasites in the shit head-first. Ingrate shit rabble!" writes a certain Stefan Edling on one of the many anti-refugee Facebook pages. "Doesn't Dachau have a camp?" writes Alex Matzke, and appends two smileys to his message. Karin Wünsch wrote the following comment underneath a video: "First hit them in the mouth a couple of times so the animals stop screeching and then deport them." A man named Burt Bleier even wrote: "They should all be exterminated. They don't contribute anything productive or useful to society anyway."

For much too long, Germany's middle did not pay close enough attention to the radicalization taking place on the right. We looked away and ignored it. We can't do that anymore. We can't look away anymore even if we wanted to. The New Right has become too loud; their influence on the climate in the country has become too great.

Germany's large political parties, though, also bear some responsibility. Bound together in a grand coalition, they are in danger of repeating the mistakes made in the 1960s. Back then, the 1968 movement gained momentum in part because the CDU and the SPD overlooked the need for modernization and societal reform.

'Germany Will Survive'

Today, the New Right is nourished by the refugee policies pursued by the Merkel administration, which has thus far been unable to address the concerns of many Germans, even as the readiness to help remains widespread. "Merkel doesn't have a plan," says former German Chancellor Gerhard Schröder, expressing a sentiment that a majority of parliamentarians from the SPD and conservatives are only willing to discuss behind closed doors.

But Germany's largest parties will only be able to regain their lost credibility if they clearly distance themselves from xenophobia and nationalism on the one hand while addressing societal concerns of vulnerability and of being unable to cope. Otherwise, as German Finance Minister Wolfgang Schäuble noted this week in Brussels, election results like the one seen last Sunday in France will not be the exception.

Neither politicians nor the German populace should harbor any illusions about the ultimate goal of the right-wing thinkers and their growing numbers of followers. It is the same goal pursued by people like Carl Schmitt, a fascist thinker in the Weimar Republic. He wanted to destroy the democratic system so that something new could develop in its place, no matter what that might actually look like.

One of the most popular images in the new right-wing movement is that of a blond woman with a blond child in her lap. It has been shared thousands of times on Facebook. Underneath the image, it reads: "Germany will also survive the federal republic."

By Melanie Amann, Maik Baumgärtner, Markus Feldenkirchen, Martin Knobbe, Ann-Kathrin Müller, Alexander Neubacher and Jörg Schindler

Origins and Strategy of the Islamic State

John Mauldin

Today’s Outside the Box is from my good friend George Friedman of Geopolitical Futures. George, who founded the well-known Stratfor, is one of the world’s top geopolitical forecasters. I’m very excited to welcome him as a Contributing Editor for Mauldin Economics.

Starting today and every Monday, we’ll publish a regular feature from George called This Week in Geopolitics. In this weekly letter written for Mauldin Economics, George will highlight the top international events that investors and those with an interest in geopolitics should monitor. I am amazed by how quickly George slices through the media’s superficial stories to reveal what is really important.

What you read in This Week in Geopolitics will be a small sample of the research George and his team publish. His Geopolitical Futures premium service is off to a great start and I highly recommend you try it. We have a special offer for Mauldin Economics readers. Click here for details.

As a reminder, I interviewed George in last week’s Thoughts from the Frontline. He had some fascinating thoughts on the connection between politics and economics, the European refugee crisis, China’s economic future and more. Click here to read it.

Today he examines the origins of ISIS and looks at why they see their behavior as rational. It is a disturbing viewpoint, and not one that will make us comfortable, but we do need to understand this. And it highlights the almost no-win position that the United States and the rest of the world (specifically the Middle East) is in.

In order to make sure this gets out Monday evening, I need to go ahead and hit the send button without further comment so…. with that, let’s go straight to George’s first weekly contribution.

[Editor’s note: if for some reason you do not want to receive George’s new letter each week, click here and we’ll take you off the distribution list.]

Your watching the world closer with George analyst,

John Mauldin, Editor
Outside the Box

Origins and Strategy of the Islamic State

By George Friedman for Mauldin Economics

Al-Qaida struck the United States on September 11, 2001 in order to pave the way for the caliphate, a multinational Islamic state governed by a caliph. From Osama Bin Laden’s point of view, the Christian world—as he thought of Euro-American civilization—had made a shambles of the Muslim world. Most Muslim lands had been occupied or controlled by Christians. After World War I the British and French, in particular, had reshaped these lands to suit them. They invented new countries that had never existed before like Jordan, Lebanon, and (in their minds) Israel and installed rulers on others, such as the Saudis in the Arabian Peninsula.

After World War II, the United States inherited a world the British had largely created. Where the British were the architects of this world, the Americans became its maintenance men. Since the Americans were caught up in a Cold War with the Soviets, the Soviets sought to create pro-Soviets as well. A new wave of rulers arose under Soviet tutelage. These were secularists, socialists, and militarists imposing military regimes.

Men like Gamal Abdul Nasser in Egypt, Saddam Hussein in Iraq, and Hafez al-Assad in Syria were all Soviet allies. They were despised by Islamists, as were the monarchies allied with the Americans. The secular Arab rulers were simply apostates. The monarchies, like Saudi Arabia, were corrupt hypocrites—formally Muslim but clinging to the Christians (now the Americans) for power and safety.

Al-Qaida did not yet exist, but there were those who dreamed of reclaiming the lands, expelling the apostates and hypocrites, and creating the caliphate. These men had learned the art of war under American tutelage in Pakistani camps after being recruited by the Saudis. They believed they had destroyed the Soviets and, as a result, destroyed the Soviet Union. True or not, this is what they believed.

When the Soviet Union fell, Iraq invaded Kuwait and the Saudis asked the American Christians to save them. Men who had fought in Afghanistan held the Saudis in contempt and were enraged by the Americans. To a great extent, the Americans were unaware of the response. The men they had trained for war in Afghanistan now saw the Americans as an obstacle to the caliphate.

This is the soil that gave rise to al-Qaida. Al-Qaida’s primary goal was to overthrow one of the secular or hypocritical regimes, create a Sharia-based caliphate, and use it as a base for creating a broader, transnational entity. Al-Qaida actually means “the base” in Arabic. It had excellent relations in Afghanistan, given the role it played there, but Afghanistan was too backward and geographically isolated to be the caliphate’s capital. It instead became the base where al-Qaida would begin the war.

In al-Qaida’s analysis, the weak and corrupt Islamic regimes could be overthrown, but the Muslim masses were inert, beaten into submission by Europeans and Americans, and convinced of American invincibility. They had no love for the Americans outside of some of the regimes, but saw their cause to be hopeless.

Al-Qaida needed to convince the masses that America was both vulnerable and hostile to Islam. It sought to strike the United States in a way that the Muslim world would take startled note, and that would compel America to go to war in the Muslim world. Al-Qaida’s experience in Afghanistan convinced it that the United States, caught in a war of attrition regardless of casualties, would eventually withdraw. The September 2001 attacks were meant to draw the Americans into combat but, even more, to convince the Muslim world that Muslims could strike at the heart of America, and then, when the Americans invaded, encourage Muslims to rise up in a long war America couldn’t win.

Part of the strategy worked, part of it didn’t. The attacks did galvanize the Muslim world. The United States showed itself to be Islam’s enemy by invading Afghanistan and later Iraq. The Muslim world saw that Muslims could fight Americans and not suffer defeat like the Jews had defeated the apostate Nasser’s army in 1967.

What did not happen was the essential step. While war raged in Afghanistan and Iraq, there was no uprising elsewhere in the Islamic world. When there were uprisings, as during the Arab Spring, they were put down (Egypt) or left in unending civil war (Syria and Libya). There was no foundation created for the caliphate, and over time American intelligence whittled down al-Qaida.

Others stepped into the vacuum as al-Qaida declined. Their opening occurred in Iraq and Syria. The Arab Spring in 2011 created an uprising against Bashar al-Assad, son of Hafez. Like much of the Arab Spring, the public faces of the protests were secular liberals, but they were unable to overthrow Assad. The resulting chaos and stalemate opened one door to al-Qaida’s heir.

At the same time, the U.S. decision to withdraw from Iraq, first made by George W. Bush and accelerated by Barack Obama, allowed a Shiite government to take power there. This forced their enemies, the Sunnis, back against the wall. Al-Qaida was Sunni and regarded Shiite Iran as an enemy.

The rise of a Shiite government in Baghdad left the Iraqi Sunnis nowhere to go. It was out of this that the Islamic State arose. Syria and especially Iraq were its recruiting office and its battle ground.

Al-Qaida wanted an uprising in an existing country, but IS had a different strategy. Rather than overthrowing an existing government, it decided to create the state in a region that paid no attention to existing borders. Its goal, unlike al-Qaida’s, was to hold territory in which the caliph could rule and from which it could expand and guide the caliphate’s extension into noncontiguous Muslim lands.

The IS goal, therefore, was not to strike at the Americans as al-Qaida did. The 9/11 strikes had done their work. Their job was to create an area ruled under Sharia law with a governmental structure, financial system, welfare system, and the other things a state needs. In addition, and before this, IS had to create a military force that could take and seize land against the weak opposition it would face in Iraq and Syria.

The first step in the Islamic State’s strategy, therefore, was to put the caliphate before everything by taking control of substantial and contiguous territory. IS did this by carrying out a series of extremely competent military operations, seizing Mosul and Ramadi in Iraq as well as Palmyra in Syria. The result was a new state, no less artificial than those countries the British and French created after World War I, and governed from the capital in Raqqa.

In carrying out this operation, IS deliberately created a series of highly publicized atrocities. There were two reasons for this. The first was to intimidate the new Islamic State’s population. This region consisted of a wide variety of groups, many potentially hostile to the new state. The ruthless acts served to make clear to the population that IS was not merely claiming control of the region, but was in sufficient control that it was indifferent to what the outside world thought.

Having fought the Americans, IS knew that apart from special operations teams (the principle threat to IS in both Afghanistan and Iraq) which could not by themselves threaten the existence of IS, the United States took months to deploy forces. IS needed to show not only how ruthless it was, but that it would not be challenged as a result.

The second reason for creating this core was to lure the Americans into attacking it. The United States had grown wary of occupation warfare that required deploying a military force against scattered and persistent guerilla operations.

The Islamic State presented, and was, precisely the type of force the United States should be comfortable attacking. First, it occupied a clearly defined territory. Second, it contained a conventional military force. IS was not a guerilla organization or terrorist group, although it had elements capable of both kinds of operations.

The size of IS’ main military force (a force large enough to seize, occupy, and defend an area as large as some countries in the region) meant it could not be a guerrilla force. It appeared to be a mobile infantry force, moving by foot and truck, armed with infantry weapons as well as some small artillery and anti-tank weapons.

The exact size of IS forces remains a mystery, and that is a testament to its skills at camouflaging its activities from the ground to the electromagnetic sphere. Estimates of the size of its armed and trained force range from 20,000 to 200,000. Based on the extent of its frontiers and the casualties it seems to have taken, I estimate the force at about 100,000.

This, of course, leaves another mystery: where this force was trained—since training even 20,000 is a conspicuous activity. Units must train together to be effective. There are many mysteries about IS for which there is no consensus save educated guesses. We know the extent of its power. We know when this frontier is attacked, the attacker tends to encounter resistance. Beyond that, IS has protected its capabilities professionally.

Given all this, it would appear to be ripe for attack by American forces, which excel at this kind of warfare. That is precisely what IS wants. There has been much talk about IS believing that an apocalyptic battle must take place in order to establish the caliphate. This is a metaphysical concept on which I have no opinion. However, from a political and military point of view, the caliphate must be founded on a decisive battle that forces capitulation from its main enemy. This would convince the US to respect the caliphate and the caliphate’s citizens to respect the power of the state. By this I don’t mean the guerrilla wars in which the conventional force simply withdraws; I mean a battle in which the enemy is defeated in detail.

The Americans prefer conventional attacks with tanks and infantry fighting vehicles. IS engaged and destroyed a Syrian armored brigade with anti-tank weapons. The United States uses air strikes and helicopters. IS may have man-portable surface-to-air missiles (and should have them from whatever source it secured the anti-tank missiles).

IS has a major advantage in one thing: the US is casualty averse. The US has a force operating at a distance for reasons that impact national security but don’t pose a direct threat to the homeland. Therefore, the American appetite for more serious military intervention is extremely limited. IS needs a decisive battle at any cost. Weapons aside, the outcome of this battle matters far more to IS than to the United States, and therefore IS’ threshold for pain is far higher.

The caliphate, having been established, must now be defended. It must be a territory and not a hideout, it must be coherent and not scattered tracts, and it must be defensible regardless of the cost. Having established its frontiers, the Islamic State intends to use minimal force to defend against minor attacks, as the Syrian Kurds carried out recently.

Most impressive about IS is its ability to retreat, regroup, and strike elsewhere. That is the measure of a military force. For example, the Americans proved themselves at the Battle of the Bulge when having been sent reeling, they regrouped, reinforced and struck back. It is in defeat that I judge a military force, and IS has handled defeat well. But we should also remember that IS will not waste force on marginal threats.

For IS, the main threat will come from the Americans and therefore it must preserve the ability to fight U.S. forces. Some point out that IS has been under pressure from all sides. This is because its leaders understand the maxim that he who defends everything defends nothing.  

But the Americans have not come. Nor have other enemies like the Iranians or Israelis. Nor for that matter have the Turks. No one wishes to engage IS while it is on the defensive and at its best. There are many reasons, but the heart of the matter is that the battle, if lost, would be devastating for Americans, and if won by them opens the door to occupation warfare, as did the defeat of the Iraqi army in 2003.

IS must hold to save the caliphate now or, if it loses this battle, wait and fight another. And if the Americans don’t come and IS holds its territory, then IS can choose the time and place for its next strategic offensive.

Assuming that IS has 100,000 troops, the US must bring a force of 300,000 to bear under the old (and perhaps obsolete) rule of 3 to 1 on the offensive. It took six months to prepare for Desert Storm and longer for Iraqi Freedom with far fewer troops than 300,000. The terrain is desert, and supply lines will run from ports that have to be secured, along with roads that could be filled with IEDs. For the Americans, the logistics would be as tough as the battle.

Logically, the best course for the United States is not to engage. IS is beginning to realize this and seemingly prefers to force a battle. That is why we are beginning to see terrorist actions flaring in Western countries.

The lesson al-Qaida taught IS is that the Americans have a threshold and that if you cross it, they will react dramatically. Therefore, it appears to me that IS is searching for that threshold and probing to see responses. Attacks like the ones in Paris last month were not in response to French involvement in the region. These attacks are unconnected to that, but are designed to be as terrifying as possible—both in their suddenness and brutality—and compel a response.

It is odd to argue that someone wants to be attacked by the US. But IS needs the attack and also believes it can at least survive and likely defeat the Americans. It is clear that other countries in the region are steering clear of IS, and it is clear that President Obama is doing everything he can not to engage IS on the ground. And it is clear that IS is doing what it can to drag the Americans deeper into the conflict. If the Americans don’t come, and no one else comes, the psychological demonstration might not take place - but the caliphate will exist.

On the whole, IS has the strategic advantage in multiple ways. It behaves in its territory as if it intends to stay a long time.

The Great Train Wreck of 2016...

By: Clive Maund

Today we are going to review irrefutable evidence that a slow motion train wreck is already well underway across global markets, that will end with the last wagons on the train, the S&P500 index and the Dow Jones Industrials, disappearing into the abyss right after their immediate predecessors.

Train Wreck

There are still a remarkable number of investors out there, and an even more remarkable percentage of mainstream financial journalists, who seem to think that everything is alright just because the flagship indices like the Dow Jones Industrials and the S&P500 haven't caved in yet, but as we will now see they are probably just about to.

We start with the 6-month chart for the S&P500 index, where we see that it has just broken down from a topping Triangle, that formed after the big October recovery. This breakdown was predicted on the site last week. From this position it is vulnerable to a precipitous decline, which could happen next week ahead of the Fed meeting, or after it - or both.
SPX Daily 6-Month Chart
Latest COTs for the S&P500 index are bearish, with the Commercials holding their largest short positions for nearly a year - more bearish than before the August plunge when they were modestly long. This chart certainly allows for a lot more downside.
S&P500 CoT Chart

On the 5-year chart for the S&P500 index we can see exactly why it stalled out where it did, and has now reversed. It had arrived at the boundary of a giant Distribution Dome that started to form way back late in 2011. Some bullish writers have claimed that the market has broken out upside from a smaller Dome of shorter duration, but their Dome is overridden and nullified by our bigger stronger one. As we can see, our Dome has capped the advance and is bearing down on the index, forcing it lower, and it is now clear that the recent advance served to complete the Right Shoulder high of a large Head-and-Shoulders top. Last ditch support is above and at 1800 - once this fails, the market should plummet.

S&P500 Daily 5-Year Chart

How low could the market drop? - before reading on you might want to make sure you are sat down, and perhaps with a stiff drink. We'll see just how far it could fall on the long-term 20-year chart for the Dow Jones Industrials shown below. On this chart we see that after a long bullmarket phase from the 2009 low, the market has risen to the top of a gigantic bullhorn pattern. If it turns lower here, which it certainly appears to be doing, it could conceivably drop all the way across the bullhorn, back to the lower boundary in the 6000 area. I know - it doesn't seem possible, just too far-fetched, right? - WRONG!! - with a brutal depression almost upon us caused by the rapidly accelerating implosion of the bankrupt fiat money system after over 40 years of excess after the abolition of the gold standard by Richard Nixon, culminating in the vertical blowoff move of recent years, as the entrenched beneficiaries of this system played the last cards in their hand, these hyper-leveraged markets could now collapse in one of biggest self-feeding liquidations in history. Whether it will drop back as far as 6000 I don't know, but it is certainly within the realms of possibility - and it will seem a lot more possible to you as you read on and witness the carnage that is already underway elsewhere.

Dow Jones Industrials Daily 20-Year Chart

The Dow Jones Transports have been much weaker than the Dow Jones Industrials and the S&P500 index in the recent past, as we can see on its 3-year chart shown below, on which we can see that a large, downsloping, and thus very bearish, Head-and-Shoulders top is rapidly approaching completion. Once the neckline is breached, this index could plummet. The Transports are providing a classic Dow Theory non-confirmation of the action in the Dow and the S&P500 index, and it means trouble.

Dow Jones Transports Daily 3-Year Chart

There are other markets pointing to Big Trouble dead ahead, like the London FTSE100 index, on whose long-term 20-year we can see that a gigantic Triple Top is completing, with the market now starting to descend from the 3rd protracted peak...

London FTSE Daily 26-Year Chart

Other European market indices look similar, like the French CAC, the German DAX and the pan European STOXX600, as we would expect.

Emerging Markets are in ragged retreat again, and descending from the 2nd protracted peak of a gigantic Double Top. The Emerging Markets indices made a good recovery from their 2008 crash lows, with investors thinking it was back to business as usual but they were unable to make new highs and have limped along sideways for years marking out a very elongated 2nd peak of what is viewed as a giant Double Top. Now they are clearly on the defensive again and if the $30 level on the EEM chart gives way, it could plummet quickly all the way back to its 2008 lows - or lower still. Again, this clearly means Big Trouble, not just for Emerging Markets themselves, but all markets.

iShares MSCI Emerging Markets Daily 10-Year Chart

Commodities markets are in a parlous state, as is made plain by the long-term CRB index chart, which is at multi-decade lows. If you ever needed proof of the gathering forces of depression, this is it...

Commodity Index 1980-2015 Chart

The slump in the oil price is a symptom of the deepening global malaise, and makes nonsense of the claims of an economic recovery...

Light Crude Oil Daily 1982-2015 Chart

Our downside target for oil has for some months been the mid-low $20's. As we can see on the Light Crude chart above, it is now arriving at a support level, which ordinarily might be expected to generate a bounce, or at least a temporary price stabilization, but if markets generally drop heavily or crash then it is likely to continue lower with little or no pause, probably into our target zone.

The slump in world trade has contributed to a decline in shipping rates to very low levels - they are now close to hitting record lows, another sign of depression...

Baltic Dry Index 13-Year Chart

Both the Baltic Dry shipping index and the Commodities markets have been warning of depression for a long time, but stockmarkets have happily ignored them up to now, pumped up as they have been by massive Central Bank slush funds financed by QE, so that ordinary citizens can finance speculators (by later losing their purchasing power via inflation of the price of basic goods), but it's going to be a lot harder for markets to ignore the breakdown and collapse of the Junk Bond market, which really started to get underway just last week...

SPDR Barclays High Yoeld Bond ETF Daily 5-Year Chart

The message of this chart is that interest rates are going up, whether the Fed wants to join in raising them or not. When rates rise significantly markets will crash, because of the impossibly huge debt overhang.

Turning to sectors within the US stockmarkets that look set to implode, we have Biotech, which signaled that it is entering a bearmarket back in September, when it plunged on huge record volume as it broke down from its parabolic slingshot uptrend...

BioTech iShares Daily 10-Year Chart

As we can see, Biotech's bearmarket has only just begun, and it still has an awful long way to fall. On the site we have looked at leveraged inverse ETFs and options to take advantage of the expected drop.

Meanwhile the Tech heavy NASDAQ index still looks relatively strong, but has just double-topped with its highs of last Summer, and is moving in conformity with the broad stockmarket S&P500 index, and so should drop with it. Interestingly the NASDAQ appears to be topping out just a shade above its 2000 bubble highs, and even though the current bubble does not look so serious this time round because it has not risen so steeply as in 2000, the red-hot Bay Area (San Francisco) property market certainly has the attributes of a bubble about to burst.

NASDAQ 20-Year Chart

While the products of Tech companies are certainly alluring, and much additional demand is generated by consumers upgrading their equipment every 6 months or less in order to keep up with their peers and abreast of the latest developments, they will find it a lot harder to do so when they are flat broke, out of a job and maxed out on credit. In this situation demand for even the most attractive products can falter. So the stocks of Tech companies can drop like anything else.

Speaking of the property markets, they are still riding high, but don't expect that to last much longer. The REIT chart below shows that it is still at a high level within an uptrend, but don't expect that to last as rates rise and stockmarkets crash. If you own speculative property you should offload it to the bagholders as soon as possible.

Dow Jones Equity REIT Daily Chart 1998-2015

We will end with an interesting Treasury proxy chart which shows that Treasuries broke out upside from a rather large Triangle on Friday. What this suggests is that, despite the huge careening deficits and the likelihood of a dollar crisis later on, investors are still going to run for safety to Treasuries during a 2008 style meltdown. Why? - because they reason that the US will be the last domino to topple, certainly well after Europe and debt-wracked Japan have gone down the drain.

iShares Barclays 20+ Year T-Bond Daily 6-Month Chart

I could shovel still more of this stuff onto you, but if you haven't got the picture by now you never will.