The Trump bear market for bonds is fast arriving

Republican tax package will definitively put an end to 36-year upswing for Treasuries

John Plender

With Donald Trump set to sign off on the Republican tax package by Christmas, it seems almost certain that the president will be definitively putting an end to the 36-year bull market in US government bonds. With hindsight, we can identify the inflection point as July 5 last year when 10-year Treasuries closed at a rock-bottom yield of 1.37 per cent. The economist Paul Schmelzing, in a paper for the Bank of England that charts the risk-free rate back to the 13th century, points out that this is without historical precedent.

The immediate question is how much damage a bear market might inflict on investors. The most relevant pointer is the bond bear market of the second half of the 1960s. The parallels with today are striking. For a start, the US labour market was tight. Unemployment fell from 5.5 per cent at the end of 1963 to 3.6 per cent at the end of 1966. There was little or no slack in the economy and considerable complacency about inflation which was around 1.5 per cent in the middle of the decade.

There was fiscal activism: tax cuts under President John F. Kennedy in 1964 followed by increased public spending under his successor Lyndon Johnson for the Great Society programmes and the Vietnam war.

The US Federal Reserve started tightening under William McChesney Martin with a half per cent increase in the discount rate in late 1964 and the same again in late 1965 — notably similar timing to the Fed’s behaviour in the current cycle. Another interesting parallel is that no one was entirely sure how accommodative monetary policy was in the mid-1960s.

While Martin had famously remarked that the task of central bankers was to take away the punchbowl just as the party gets going, monetary policy was reactive rather than pre-emptive and conspicuously slow. Both Congress and the White House were strongly opposed to interest rate rises.

By the end of the decade, workers’ calls for increased pay were vociferous and inflation had taken off, surging to a peak of 6.4 per cent in February 1970. Mr Schmelzing estimates that bond investors lost 36 per cent in real terms between 1965 and 1970.

Happily for today’s investors, there have been significant changes in the way monetary policy and markets work. Much of the stock of government IOUs is now in the hands of price-insensitive investors, such as pension funds, that hold the paper to maturity to match pension liabilities. For them, mark-to-market losses are neither here nor there. Workers have lost much of their bargaining power as a result of globalisation and new technology. Despite resort to quantitative easing, central banks around the world are finding it difficult to raise inflation to targeted levels.

Fiscal policy is more transparent. The Johnson administration doubled spending on the war without informing Congress, which would be unthinkable today. Meantime, monetary policy now involves inflation targeting and explicitly aims to be pre-emptive. Since the so-called taper tantrum in 2013 when the then-Fed chairman Ben Bernanke rattled the markets by proposing to reduce the central bank’s asset purchases, the Fed has communicated with extreme care and looks less likely to puncture the bond market.

Future Fed chair Jay Powell in his comments to the senate joint economic committee last week indicated that he would continue along the path adopted under the outgoing Janet Yellen.

Whether Mr Trump will bully Mr Powell as ferociously as Johnson bullied Martin remains to be seen.

Above all, as Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, has recently emphasised, the disastrous inflationary experience of the 1970s has made it clear how costly it can be to lose control of inflation and allow inflation expectations to become unhinged.

Today, the problem is less one of complacency about inflation than the difficulty of understanding how the economy works in the post-crisis environment, securing a safe exit from unconventional central bank measures and handling the political fallout from rising inequality that has been exacerbated by central bank market rigging — all this against a background of bigger deficits and debt.

The new tax package, as well as being an unnecessary fiscal stimulus in an economy growing at an annualised rate of 3.3 per cent, will further increase inequality. The impending Trump bear market in bonds will not want for excitement.

The Madness of King Donald


President Donald Trump

WASHINGTON, DC – Much of America’s capital has entered a state of near-panic. In recent days, President Donald Trump has been acting more bizarrely than ever, and the question raised in the mind of politicians and civilians alike, though rarely spoken aloud, has been: What can be done with this man? Can the United States really afford to wait for Special Counsel Robert Mueller to wrap up his investigation (on the assumption that he’ll find the president guilty of something)? That could still take quite a while.

The question of timing has become increasingly urgent, given the heightened danger that the US will deliberately or accidentally end up in a war with North Korea. That risk, coupled with Trump’s increasingly peculiar behavior, has made Washington more tense than I’ve ever known it to be, and that includes the dark days of Watergate. To put it bluntly: the worry is that a mentally deranged president might lead the US into a nuclear war.

In just the past week, evidence of Trump’s instability has piled up. During an Oval Office ceremony to honor Native-American heroes of World War II, he offended them by issuing a racist comment. He picked an unprecedented and unnecessary fight with the prime minister of the United Kingdom, supposedly America’s closest ally, by retweeting a British neo-fascist group’s anti-Muslim posts. In an effort to win a Democratic senator’s vote for his pending tax-cut bill, he traveled to her state and told lies about her record (though the tax bill was so tilted to the richest 1% of Americans that no Democratic senator voted for it). And he continued to bait North Korean leader Kim Jong-un, who seems equally unstable.

At the same time, both the Washington Post and The New York Times ran articles containing disturbing stories about the president’s private behavior. Trump, it was reported, told people close to him that he considers the infamous “Access Hollywood”recording of him joking, off-camera, about grabbing women’s genitals to be a fraud, even though he admitted its authenticity and apologized after the Post released it in the final weeks of the presidential campaign.

Trump has also been revisiting his mendacious claim about Barack Obama having not been born in the US – the bogus allegation that launched his political career, which, under pressure from advisers, he’d renounced prior to the election. He said in a tweet that he had turned down Time magazine’s suggestion that it would name him “Person of the Year,” because it wasn’t definite. (Trump sets great store by such appearances on Time’s cover). But a Time official said that no such thing had occurred.

The fact that Trump appears to have some mental disorder, or disorders, has created a dilemma for psychiatrists, politicians, and journalists alike. The American Psychiatric Association has a rule that its members may not offer diagnoses of people they have not examined. But, given what some psychiatrists see as a national emergency, many have broken the rule and spoken or written publicly about their professional assessments of Trump’s mental state.

The most widely accepted view is that he suffers from a narcissistic personality disorder, which is far more serious than simply being a narcissist. According to the Mayo Clinic, such a disorder “is a mental condition in which people have an inflated sense of their own importance, a deep need for excessive attention and admiration, troubled relationships, and a lack of empathy for others.” Moreover, “behind this mask of extreme confidence lies a fragile self-esteem that’s vulnerable to the slightest criticism.”

This definition is all too reflective of traits that Trump regularly exhibits. Another view held by a number of medical professionals, based on how Trump spoke in interviews in the late 1980s and how he speaks now – with a far more limited vocabulary and much less fluency – is that the president is suffering from the onset of dementia. According to the highly respected medical reference UpToDate, a subscription-financed service used by professionals, the symptoms of dementia include agitation, aggression, delusions, hallucinations, apathy, and disinhibition.

Numerous Republican members of Congress are deeply worried about Trump’s capacity to handle the presidency – an incredibly demanding job. Secretary of State Rex Tillerson, rumored to be replaced soon, is said to have called Trump a “moron.”

Trump’s heightened erratic behavior in recent days has been attributed to his growing anxiety about Mueller’s investigation into his and his campaign’s possible collusion with Russia in the Kremlin’s effort to tilt the 2016 election in his direction – an investigation that could end in a charge of conspiracy. (Trump appears to be the only significant figure in Washington who won’t accept that Russia interfered.) And that increasingly bizarre behavior came even before the news broke, on December 1, that Trump’s first national security adviser and close campaign aide, retired General Michael Flynn, had agreed to plead guilty to one count of lying to the FBI in exchange for his cooperation with the investigation.

What made this highly significant was that Flynn is far and away the highest former official whom Mueller has “flipped.” Indeed, the generous plea deal makes it clear that Flynn is prepared to name figures higher than he was in the campaign and the White House.

That’s not very many people. It has already been speculated, with reason, that Flynn will point a finger at Trump’s son-in-law and senior adviser, Jared Kushner. But Trump’s several earlier efforts to steer prosecutors away from Flynn were strong signals that Flynn knows something that Trump desperately hopes that prosecutors won’t find out. We may learn what that is fairly soon.

Meanwhile, American and the world nervously await Trump’s reaction to this latest very bad turn of events for him.

Elizabeth Drew is a regular contributor to The New York Review of Books and the author, most recently, of Washington Journal: Reporting Watergate and Richard Nixon's Downfall.


Getting Real About Augmented Reality

By Jon Swartz

Getting Real About Augmented Reality
Getting Real About Augmented Reality Photo: Getty Images

It had all the makings of a long overdue coming-out party for augmented reality.

In June, Apple (AAPL) unfurled a new technology, called ARKit, for its army of developers to create AR apps for hundreds of millions of Apple’s mobile devices. “Simply put, we believe augmented reality is going to change the way we use technology forever,” Cook said during the company’s fourth quarter earnings call last month.

Alphabet (GOOGL), Facebook (FB), Microsoft (MSFT), IBM (IBM), and others have already placed their bets on what they consider one of tech’s Next Big Things. Last week, Amazon (AMZN) joined the fray with Sumerian, a new platform for developers to build AR, VR and 3-D apps.

Gaming isn’t the only industry poised to cash in. Job training, replacement of manuals (Mercedes-Benz), retail shopping (Zugara), parts assembly (Boeing) and other key industries are eyeing AR as a potential jackpot and means to boost their bottom lines. DHL estimates AR-aided order picking improved 25% for customer Ricoh. Coca-Cola, Siemens, and others have boasted significant improvements in productivity, worker efficiency and safety from AR-enhanced assembly, remote-expert assistance and customer service.

A new report on Tuesday suggests an emerging technology whose tentacles could have far-reaching implications for corporations and consumers. ARtillry, an immersive-technology research company, estimates that the enterprise AR market will skyrocket to $47.7 billion in 2021 from $829 million in 2016 and that consumer AR will reach $15.8 billion in 2021 from $975 million in 2016.

By early 2019, as many as 900 million smartphones and tablets could be capable of supporting AR apps fashioned from ARKit, Google’s ARCore and Facebook’s Camera Effects, according to Digi-Capital, an augmented and virtual reality adviser. By 2021, it could grow to 3 billion.

But first, a reality check.

Those breathless words at the Apple event in the spring had all but vanished by September, when the iPhone X was introduced. Nary a word was uttered about ARKit and some developers were openly grumbling about the onerous cost of creating apps.

So don’t start the revolution just yet.

The slow rise of AR is symptomatic of an industry that thrives on ever-changing ideas and concepts – often before its customers are ready. An alphabet soup of technology, from AR and VR to AI (artificial intelligence) and IoT (Internet of Things) is being ruthlessly pursued by companies large and small in a race for supremacy in the trillion-dollar high-tech industry.

“A lot of people got too excited, but you have to hold your breath before it becomes real in a few quarters,” says Shel Israel, co-author of The Fourth Transformation: How Augmented Reality & Artificial Intelligence Will Change Everything.

Breakthrough technology takes time, money and – most important – customers to take hold.

AR, for now, fits neatly in the coda of underwhelming technology like artificial intelligence.

When new, immersive technologies emerge, the experiences of consumers often wildly diverge from what app developers originally expected. Such has been the case with AR-like products for decades. In 1968, Ivan Sutherland, the father of computer graphics, came up with a “head mounted three-dimensional display” that overlaid a 3-D image onto the real world.

A variation of Sutherland’s invention was used by Defense Advanced Research Projects Agency (DARPA) to help fighter pilots navigate jets. But the use had limited commercial appeal because it demanded so much computing power. Boeing eventually deployed AR at its 777 assembly plant near Seattle to track aircraft components.

Fast forward to the 2010s and Google Glass, a bulky AR play left consumers cold, prompting Google to return to the drawing board.

The potential for AR is undoubtable because companies and vendors keep trying despite technological hurdles. “We’re not quite there – hardware, software, not one standard operating system,” says John Cutter, product manager of IBM Watson, AR/VR Labs.

Widespread adoption of AR has lagged because high-definition content is hard to create. The leap from simple 2-D smartphone overlays from Pokemon Go to 3-D high-definition and photorealistic AR graphics is a “huge undertaking,” says Josh McHugh, CEO of Attention Span Media, a digital and social media agency.

It’s also expensive. An AR/VR content developer from a major publishing company told McHugh it costs about $250,000 to create a good AR app or experience, and AR head gear can put developers back $1,000 to $1,500. Great AR hardware simply isn’t available to the public.

Magic Leap is illustrative of the AR echo chamber: Despite years of anticipation and nearly $2 billion in investments, the much-ballyhooed start-up has yet to release a product. When The Information got hold of one of it prototype devices in 2016, it registered its disappointment, prompting a tweetstorm from Magic Leap CEO Rony Abovitz.

Culturally altering technologies takes time to catch on with a mainstream audience. The popularity of the modern cell phone is credited to iPhone, which made its debut in 2007.

The first iPhone was many things: a touchscreen mobile phone with camera and Web-browsing capabilities. It was also slow, lacked storage and sported a small screen. As smartphone chips, hardware design and data networks evolved, so did its popularity.

Like iPhone and other technologies, AR is dependent on advances in chips -- a speedy new Qualcomm cellular chip should help matters -- and advances in hardware design. Microsoft’s HoloLens may be too big, slow and goofy looking, but it will evolve to the satisfaction of a wider audience. Meta AR’s head set has earned raves, but yet to reach a wide audience. Snap’s Spectacles have the right form factor but not the ideal user experience.

Still, there are encouraging signs. Google is developing an API that would let advertisers incorporate AR and VR into their content. Perhaps iPhone X, with its distinct face-recognition feature, could accelerate acceptance of AR if that feature can be used to project images, McHugh and others say.

AR “is not mainstream yet [with consumers] but mainstream among developers,” says Ori Inbar, founder of Super Ventures, a fund for AR start-ups. “Any Fortune 500 company that has some respect has deployed it.”

Apple reportedly is working on an AR headset, and ARKit and ARCore will help drive down the cost of creating AR content for a new generation of developers. And Google is developing an API that would let advertisers incorporate AR and VR.

Only Apple has shown the technical and marketing chops to make augmented reality a reality via ARKit, iOS 11 and the 500 million devices that support both, says Jon Cheney, CEO of start-up Seek, a content platform for AR.

The question is, when?

We’re still waiting for AR’s coming-out party.

How Tax Cuts Will Trigger Recession

By Patrick Watson

According to the more cynical pundits, government programs usually achieve the opposite of their intended goal. And sometimes they do.

For example, Richard Nixon’s “War on Drugs” is still in progress, but the drugs are definitely winning.

Some government programs, however, are more effective. Firefighters are doing a pretty good job extinguishing fires. The US Coast Guard saves lives every day. Public school teachers educate students who would rather be elsewhere.

And then there’s our increasingly dysfunctional Congress. Where to begin?

I’ve written recently how Congress’s new tax plan misses a chance to boost economic growth. Now I think it may be even worse. Instead of merely failing to stimulate growth, the tax changes could actually launch a recession. I’ll tell you why in a moment.

Image: Renegade98 via Flickr

Long and Weak Expansion

I explained two weeks ago why tax cuts won’t stimulate the economy as much as Republican lawmakers think. Most CEOs say they will use any tax savings for stock buybacks or dividends, not new hiring or expansion.

Since then, the Joint Committee on Taxation, Congress’s nonpartisan scorekeeper, found the Senate tax bill would spur only 0.8% of economic growth, split over 10 years, and add a net $1 trillion to the national debt.

But let’s set aside debt for now. What if, instead of little or no growth, this tax bill sets off an outright contraction?

The current economic expansion is now the third-longest since World War II. It’s also the weakest.

Here’s a chart I showed last summer.

Source: BCA Research

The yellow line is the current recovery that began in 2009. Only the 1960s and 1990s growth periods went on longer—and both had much higher growth.

So, just by length of time, we’re already due or overdue for recession. Yes, the economy could improve further from here… but probably not for long.

Potential Achieved

Last week, the Commerce Department revised its third-quarter inflation-adjusted GDP estimate to a 3.3% annualized pace. While that was good news, it also marked something ominous.

In addition to actual gross domestic product, economists track “Potential GDP.” That’s how fast the economy is capable of growing, considering the number of available workers, productivity, and other factors.

If subsequent data confirms last quarter’s 3.3% growth, it will mark the first time since 2007 the US economy achieved “maximum sustainable output.”

Image: Washington Post

The gap between the gray line (potential GDP) and the red line (actual GDP) represents unused capacity. You can see we had a lot of it at the recession’s 2009 depth. The gap slowly shrank since then. Now it’s closed.

Great news, right? Yes, it is—but don’t celebrate just yet.

The End Is Near

Actual GDP can’t stay above potential GDP for long before bad things start happening. This chart proves it:

Image: Washington Post

We see here how GDP moved above and below its potential since the 1970s. Notice that each time the green line went above zero, a recession (the gray bars) began soon after.

“Soon” can vary, of course. GDP ran above potential for extended periods in the late 1990s and 2006–2007, but in both cases, intense downturns followed. Plus, the Fed wasn’t tightening as it is now—which suggests the current expansion is at least approaching its endpoint.

The Trump administration and congressional Republicans disagree, saying their tax changes will stimulate years of economic growth and more than pay for themselves.

President Trump himself said last month he thought growth could reach 4% and even “quite a bit higher.”

I agree we may get a quarter or two of 4% real annualized growth. But will it continue for years? Probably not, unless potential GDP takes a big leap.

Here is the potential GDP chart above, extrapolating the future as it would look with 3–4% growth over the next decade.

Image: Washington Post

I’m sorry this chart is so tall, but that red triangle is necessary to project as much growth as the president anticipates and that Congress says will pay for the tax cuts. The smaller yellow fan below it is the less thrilling estimate of nonpartisan economists.

In either case, to do what the Republicans predict, GDP must grow above potential for years, unless potential GDP rises in a similarly spectacular fashion.

That’s not impossible: a major technology breakthrough might do it, say, a cure for cancer that frees up more workers, or wearable supercomputers to make workers more productive.

But just as likely, a recession, natural disaster, war, or other shock could sharply reduce GDP.

The projections above don’t account for that possibility.

Booms Going “Boom”

Actual GDP can outpace potential GDP at the end of a cycle, but by definition, such growth is unsustainable. The inputs to higher production—available workers, productivity—can’t grow fast enough, so those booms end up going “boom.”

Now consider what else is happening.

The Federal Reserve is in tightening mode, both raising short-term interest rates and reducing its massive balance sheet assets. Fed officials think the economy is close to full employment, and they want to control inflation pressure before it gets out of hand.

If this tax cut finally passes—and I’m still dubious that it will—I don’t think it will create anything like 3–4% GDP growth. I think it will do the opposite, as the US Treasury borrows hundreds of billions more dollars to cover deficit spending. That will drive rates higher; not good for real estate or consumer spending.

Much like the War on Drugs gave us more drugs, the “War on Slow Growth” might give us even slower growth.

Image: Danlele Pesaresi via Flickr

Recession Triggers

Here’s where we are:

• The current expansion is long in the tooth, suggesting a recession could start anytime

• GDP growth is running above potential, which also points to recession in the near future

• The Fed is tightening, soon to be joined by other central Banks

• Treasury borrowing will likely increase in the next few years as deficits rise

• Bitcoin and other cryptocurrencies look increasingly bubble-like

All that is happening even if we get no surprises. War with North Korea, a NAFTA breakup, Chinese banking crisis, a hard Brexit—any of those could extinguish global growth.
My main fear as we entered 2017 was that the Fed would tighten too much and too fast, pushing the economy into a deflationary recession. I still think that’s the most likely scenario.

If this tax bill passes in its current form, the recession may happen sooner and go deeper. The combined fiscal and monetary tightening could be the triggers.

However, first we might get a sugar-high inflationary rally, which could last a while. GDP ran above potential for four years in the late 1990s, and for over a year in the housing craze.

Those were fun times while they lasted. Then the fun stopped.

One thing I’m positive won’t happen is another 10 years of uninterrupted 3% or 4% real GDP growth, as politicians so glibly promise. That’s pure fantasy.

Gravity still applies, no matter how many people wish it didn’t. We may get a demonstration soon.

See you at the top,

Farewell Uncle Sam, hello Uncle Donald

The Trump administration is undermining some of America’s closest alliances

Gideon Rachman

All over the world there are countries that rely on the protection and leadership of the US. But dependable old Uncle Sam seems to have gone on a long vacation — and his malicious twin, Uncle Donald, has taken up residence in the White House. The result is confusion and soul-searching among some of America’s closest allies.

Three countries — Britain, Australia and Japan — exemplify the problem. All three pride themselves on their close relationships with the US. All three are currently led by centre-right governments that would normally expect good relations with a Republican president.

And yet all three have seen their prime ministers humiliated or put in excruciatingly awkward situations by Mr Trump. The most recent example came with the president’s retweeting of anti-Muslim videos from a far-right group in Britain. The result has been an unseemly, unprecedented and wholly unnecessary row between the US president and the British prime minister. Mr Trump’s much-deferred “state visit” to Britain is now disappearing into the dim-and-distant future.

Theresa May is simply going through the kind of bruising encounter, already experienced by Malcolm Turnbull, the Australian prime minister. His first phone call with Mr Trump degenerated into a row after Mr Turnbull asked the president to uphold a US-Australian agreement on resettling refugees.

Shinzo Abe, the Japanese prime minister, has skilfully avoided embarrassing showdowns with Mr Trump. But no amount of bonhomie on the golf course can disguise the fact that Mr Trump’s election led to a calamity for the Abe government. On his very first day in office, the new US president repudiated the Trans-Pacific Partnership — a multi-nation trade deal that Mr Abe had made the centrepiece of his economic and security policies.

Despite these humiliating rebuffs, the British, Australian and Japanese governments have all gritted their teeth — and attempted to humour Uncle Donald. All three countries face challenges that make them more anxious than ever to cling to the US. The rise of China has made both Japan and Australia determined to bolster the American presence in the Pacific. Britain is struggling with Brexit and dreams of a new trade deal with the US.

Dependence on the US is also deeply embedded in the foreign and security policies of the three nations. So they are all holding on to the hope that Uncle Donald’s advisers will keep America roughly on course, until reliable old Uncle Sam reappears once again.

The pliant attitudes of Britain, Japan and Australia might lead Mr Trump to conclude that dishing out the occasional humiliation to close allies is a cost-free exercise. But that would be excessively complacent. For while official policy remains unaltered, Britain, Japan and Australia are all now having public debates about their relationship with the US that highlight the possibility of radical changes in the future.

The Turnbull government has just issued a white paper which asserts that “Australia will continue strongly to support US global leadership”. But some prominent Australians argue that basing their nation’s foreign policy on an alliance with the US is not a sustainable long-term option. Hugh White, a former senior official who is now an academic, has long argued that China will displace America as the dominant power in the Pacific. Mr White believes that the election of Mr Trump is a “massive additional blow” to Australia’s traditional reliance on the US.

The crisis over North Korea could bring Australian doubts about Mr Trump to a head. Mr Turnbull has said that Australia would join a war on the Korean peninsula “if there is an attack on the US”. But Australian officials warn that the situation would be very different if a Korean war is initiated by a US pre-emptive strike. In that case, Australia would not fight alongside America — breaking with the precedent established in two world wars, Korea, Vietnam and Iraq.

The Korean crisis and the erratic nature of the Trump administration are also causing soul-searching in Japan. Mr Abe remains determined to hug the Americans close. But only 24 per cent of Japanese say they trust Mr Trump to “do the right thing” in world affairs — compared with 78 per cent who trusted former president Barack Obama. These plummeting levels of faith in US leadership mean that hitherto taboo ideas are entering the public debate in Japan — with the left pushing for a rapprochement with China, and the right advocating much faster rearmament.

Britain’s options seem even narrower than Japan’s, because the UK is locked into longstanding relationships with the US over intelligence and nuclear weapons. But Brexit has demonstrated that the British public is willing to consider policy shifts that seem inconceivable to the establishment. Jeremy Corbyn, the leader of the opposition Labour party, has a long record of anti-Americanism — and may now find the British public much more in tune with his own deep suspicion of Washington.

Given his disdain for US allies, Mr Trump probably does not worry too much about the views of the UK, Japan and Australia. But America’s network of alliances — such as the US-Japan security treaty, Nato and the Anzus treaty — are bedrocks of US power. If those alliances are allowed to crumble, America’s global power would crumble with them.

Ego Trip in Brussels

Juncker Seeks Greater Commission Control over Eurozone

By Peter Müller and Christian Reiermann

French President Emmanuel Macron and European Commission President Jean-Claude Juncker
French President Emmanuel Macron and European Commission President Jean-Claude Juncker

European Commission President Jean-Claude Juncker would like the EU executive to have more control over the Eurozone in the future. But member states aren't eager to give up control.

Jean-Claude Juncker never lets others outshine him if he spots an opportunity to give the European project a boost. And that goes for friends and enemies alike.

Indeed, the European Commission president has now come up with a project that not only transgressions the mandate given him by the leaders of the European Union member states, but also pits him against all the Eurozone finance ministers as well.

Juncker was supposed to reach an agreement with finance ministers from the common currency area on proposals for deepening European integration he will present at the forthcoming EU summit later this month. Plans for greater EU integration are currently in vogue, a trend started by French President Emmanuel Macron, who presented his ideas for a better Europe two days after the German election in late September.

But instead of getting the finance ministers on board, Juncker has embarked on an ego trip. On Wednesday, the Commission is to present its plan without any input from the finance ministers whatsoever. The Eurogroup of 19 Eurozone finance ministers met in Brussels on Monday and on Tuesday it was the turn of Ecofin, which represents the EU finance ministers, but officially neither group was consulted on the Commission's plans.

"The entire approach is a disaster," one participant complained. And because the national experts had no input, it's unlikely that EU heads of state and government will do more than simply take note of Juncker's proposals.

The timing is an expression of rivalry between the Commission and the EU member states when it comes to questions relating to theeconomic and currency union. And the finance ministers aren't likely to be impressed with the content, either. After all, the Commission's proposals are designed to increase its own influence at the expense of the member states.

Turning the ESM into an EU Institution

But there is more at stake than just a few bruised Brussels egos. The clash over competencies between European institutions risks torpedoing the French president's drive for reform.

For the first time in years, the French have seized the opportunity to once again set the tone in the EU. Yet, their call to arms is being met with hardly any response. Germany is preoccupied with forming a new government -- and nothing much happens in Brussels without Chancellor Angela Merkel. Juncker, though, does not want to stand accused of wasting the chance to implement reforms.

His central idea is to turn the EU bailout fund, the European Stability Mechanism, into an EU institution. Up to now, it has remained an intergovernmental body, controlled by the Eurozone countries. As such, it's the national finance ministers who have the final say, not the Economic and Monetary Affairs Commissioner Pierre Moscovici. They are the ones who decide if, when and to what extent a country that gets into financial difficulties should be helped.

By turning the bailout fund into an EU institution, Juncker hopes that the Commission will have access to the ESM's sizeable financial means. The ESM can extend loans worth a total of half a trillion euros. In order to ensure it maintains the highest possible credit rating, member states provide the fund with 700 billion euros in paid-in capital. Juncker, of course, would like to see that capital remain in the ESM, even as his plan calls for the countries that supplied the capital to lose some of their influence over how it is spent.

Turning the ESM into an EU institution should in theory necessitate treaty change, but the Commission has come up with a way around that requirement. Article 352 of the EU Treaty, a kind of emergency clause, allows the Commission to grant itself competencies it might need.

The chances of Juncker's proposal finding success are slim, for the simple reason that all member states must approve it. In Austria, the ESM is anchored in the constitution. And even Macron, the self-appointed EU reformer, is unenthused by the idea. France is the largest contributor to the ESM after Germany, yet according to Juncker's plan, Paris in the future would no longer have a say in how it is used.

There is, though, a rival idea to Juncker's and one that stands a much better chance. ESM head Klaus Regling, along with a handful of Eurozone finance ministers, want to expand the bailout fund into a kind of European Monetary Fund with broad powers for budget supervision and crisis management - an idea first proposed by former German Finance Minister Wolfgang Schäuble. The idea would be for the ESM to have a budget available to aid countries that are not officially in a bailout program but which need help to weather external shocks. One potential candidate, for example, could be Ireland, should its economy suffer drastically as a result of Brexit.

Juncker would also like to create a mechanism to deal with such cases, but with the Commission pulling the strings. He would like to see a so-called stabilization function in the EU budget with funding in the hundreds of billions of euros. It's not clear where that money might come from, but just as in the case of the ESM, the battle lines are drawn: Should it be the Commission or the member states who decide how the money is distributed?

Juncker, though, has yet another idea that could cost a lot of money. He would like to see countries that do carry out reforms be rewarded financially. And his package contains several more elements that might provoke ire, such as the proposal for a common deposit guarantee for EU banks. Germany has long opposed such a thing, and its joined by a number of other member states. These governments don't want to see their banks set aside capital only for it to be used to protect customers of foreign banks from the loss of their deposits.

Raising Hackles

Juncker is also seeking to avail of dozens of billions of euros in the ESM as a kind of nest egg for future bank bailouts. Experts describe this as a backstop, with the money being made available for bailing out struggling financial institutions that have not amassed enough of their own capital. Here, the Commission president is acting upon the wishes of the member states.

However, another of Juncker's plans is raising hackles. He wants to use a Eurozone-wide figure to determine whether the Stability Pact is being adhered to. That would mean that individual countries would no longer have to keep new borrowing below 3 percent of GDP, but the common currency are as a whole, which has long been the case.

The Commission denies that it wants to weaken the Stability and Growth Pact. According to information obtained by DER SPIEGEL, however, Monetary Affairs Commissioner Moscovici has long been pushing for a greater used of aggregate figures for the whole of the Eurozone.

This idea would essentially be a blank check for countries unwilling to keep a handle on their deficits. The more some countries met their own obligations and achieve surpluses, the more debt others would be able to accrue. "That would undermine the Stability Pact," warns Markus Ferber, financial expert with the Bavarian Christian Social Union. "The issue is not that the Eurozone is not keeping to its debt targets, but that individual countries are not." The European Commission is also proposing to no longer use the fiscal compact. Instead the focus should be on countries reducing their public debt.

Juncker's preference would be that the Economic and Monetary Affairs Commissioner would also take over the presidency of the Eurogroup. However, it's highly unlikely that the irritated finance ministers are going to allow an EU commissioner tell them what to do.

As such, critical voices are not just to be found in the member states' finance ministries. Guntram Wolff, head of Bruegel, the influential Brussels-based think tank, is also unimpressed by the proposal to merge the Economic and Monetary Affairs portfolio with the Eurogroup presidency.

That would "unduly mix the roles of the Commission and the Council," he wrote in a Bruegel policy brief. And Wolff has major issues with the reform plans. "Juncker's proposal would over-emphasize the Commission when fiscal policy making is national."

Dealing with Asymmetric Shocks

Yet, Schäuble's plans for the expansion of the ESM into a kind of European Monetary Fund with its own budget is also criticized in the brief, which was published last Friday. The former German finance minister "neglects the fact that national fiscal policy matters for the euro area," Wolff writes.

Instead Wolff suggests developing the Eurogroup into a sort of European financial government. He envisions a permanent, full-time Eurogroup president reporting to European Parliament and representing the interests of the entire Eurozone. The Commission would continue to oversee the Eurozone member's fiscal policies, but the Eurogroup president would have the political weight to put pressure on countries to reform.

Member states that ended up in financial difficulties through no fault of their own and which were not eligible for ESM aid could be helped via a so-called stabilization instrument as part of the EU budget, but with far less funding than that envisaged by Juncker. A fund amounting to between 50 and 70 billion euros would enable "significant support" to be provided to countries affected by so-called asymmetric shocks. "It would be insurance to support specific countries," Wolff writes.

Meanwhile, the Eurogroup remains an informal group for now. On Monday, the 19 finance ministers gathered in Brussels to elect a new president to replace the outgoing Dutch Eurogroup head, Jeroen Dijsselbloem, who is giving up the post in January. Portugal's Mário Centeno was elected and in his acceptance speech, he said that he looked forward to working with his peers "to form a consensus" on the Eurozone's future.

The Portuguese finance minister now faces another election in the coming months: that for the chair of the board of governors of the ESM.

Bitcoin Achieved What The Gold Market Never Could & Never Will

By: Sol Palha
There is no absurdity so palpable but that it may be firmly planted in the human head if you only begin to inculcate it before the age of five, by constantly repeating it with an air of great solemnity.
Arthur Schopenhauer
Gold bottomed in 2002, and it took nine years for its trade to a high of roughly $1900 (September 2011). Contrast that to Bitcoin, in less than 1/3rd of the amount of time it is showing gains of more than 11,000%.  It took nine years for Gold to show gains of roughly 700% and Gold has given up a substantial portion of those gains.
We bailed out of Gold in 2011 for two reasons:
  • Gold was trading in the extremely overbought ranges, and the Gold Bug Camp could not contain their glee; they thought the sky was the limit. Instead, they found out that the Ground was a lot closer.
  • The masses were not embracing Gold, and they refused to treat or view it as a currency.

Only those from the hard money camp continued to believe that Gold was a currency,  but sadly their numbers are dwindling with the passage of each day. The masses view Bitcoin as cool and secure; a feat Gold has struggled to achieve and is not likely to achieve in the foreseeable future.  Whether this is true or not, hardly matters for when it comes to investing, perceptions are all that matter.

Does this mean the precious metals sector is dead?

Well, that depends on what one means by dead.   Gold has performed abysmally since (it topped out)  2011.  The money supply soared, and Gold tanked, not exactly a good sign. In doing the opposite of what was expected from it, Gold cemented the view that it was an ancient relic that has no place in today’s monetary system. We are speaking in terms of Mass Perception. What we think, matters not; we follow trends, and we don’t waste time trying to look at things from a personal vantage point.  There are many reasons for Gold’s underperformance after 2011; one of them was the “velocity of the money supply” which all but stalled after 2011. However, the masses don’t waste time on details like this. They look for simple cause and effect answers. Money supply soared, Gold did nothing, and hence Gold is a waste of time.  A bit simplistic but that’s the mass mindset for you.  However, looking forward some factors could limit Gold’s lustre.

Demand for Gold in India continues to drop

India's gold consumption is likely to drop to its lowest in eight years in 2017, hit by government moves to make bullion trading more transparent and by faltering demand from some rural areas, the World Gold Council (WGC) said on Thursday.

Evidence of weaker appetite in a country where gold is used in everything from investment to wedding gifts could drag on global prices that have been hovering near their highest in three weeks. India is the word's No 2 consumer of gold behind China. Full Story

The Dollar appears to be putting in a base

The dollar topped in early 2017 and what did Gold do? Absolutely nothing; take a look at the chart below. Instead of surging to new highs it could not even trade past its July 2016 highs. 

The dollar, in contrast, has been going through a well deserved period of consolidation after mounting a stunning rally that started in 2011.  It tested support and held, and as long as it does not close below 90 on a monthly basis, the outlook will remain bullish.  Consequently, a monthly close above 94.50 will open the possibility for a test of the old highs.

The dollar topped in Jan of 2017 as mentioned above but if one looked at the chart of Gold only, one would think that the dollar hardly pulled back. The reaction was boring, to say the least, and to make matters worse; Gold put in a lower high than it did in July of 2016, even though the dollar traded below its 2016 lows. 

Gold has also been putting a series of lows since 2013, and during this period it has not managed to trade above $1350 for a significant period.   A fortress of strength comes into play in the $1350 ranges, and unless it can trade above this level on a monthly basis, the outlook will remain Neutral to bearish.


The dollar is getting ready to mount a rally, demand for Gold is declining, and Gold has been unable to trade past $1350 even in the face of a weaker dollar.   Then we have the Bitcoin market, which the masses (especially millennia’s) find to be a lot more exciting and rewarding than Gold. All these factors don’t bode well for Gold.  It appears that Gold is likely to test the 1000 ranges unless it decides to diverge and trend upwards in tandem with the dollar.   Bitcoin, on the other hand, is now in the feeding frenzy stage, so this market is ripe for a correction.

However, the upward move is still not over. After a hard correction, Bitcoin is likely to resume its upward trend.

Gold will probably never experience a move akin to that of Bitcoin, but that does not mean it won’t make for a good investment one day. For now, the trend is neutral;  a weekly close below $1100 will darken the outlook for Gold, but a monthly close above $1350 will indicate that Gold is ready to trend higher.

Word to the wise; never fall in love with any investment.  In the end, it’s the trend that you should pay attention to, for no sector can trend upwards forever.  The odds of the Dow trading to 29,000 are far better than of Gold trading to $1900.

Iteration, like friction, is likely to generate heat instead of progress.

George Eliot

The Elusive Benefits of Flexible Exchange Rates


Currency boards

CAMBRIDGE – In 1953, Milton Friedman published an essay called “The Case for Flexible Exchange Rates,” arguing that they cushion an economy from internal and external shocks by bringing about just the right price changes required to keep the economy at full employment.

But after almost half-a-century of floating exchange rates, the reality is more complicated than that.

To understand Friedman’s logic, consider a scenario in which productivity in the United States rises. In an efficient system, this should reduce the price of US goods relative to those of the rest of the world, with US exports becoming cheaper than imports. As America’s terms of trade (the ratio of export prices to import prices) deteriorate, demand is shifted toward US goods, keeping the economy at full employment.

If prices are “sticky” (in the producer’s currency), however, a potential hitch emerges. Say the prices of US imports from Japan are sticky in Japanese yen and the prices of US exports to Japan are sticky in dollars. The terms of trade will thus remain unchanged, as long as the exchange rate does as well.

Here is where a floating exchange rate comes in. By enabling monetary expansion, and thus causing the US dollar to depreciate, the logic goes, a floating exchange rate allows the prices of US exports to decline relative to its imports. The result is the desired deterioration of the producer’s terms of trade and the maintenance of full employment.

But this line of reasoning assumes that a country’s terms of trade move in lockstep with its exchange rate. And that, as history over a quarter-century has shown, does not seem to be the case.

In a recent paper, the International Monetary Fund’s Emine Boz, Princeton’s Mikkel Plagborg-Møller, and I construct bilateral export- and import-price indices for 2,500 country pairs, covering 91% of world trade for the period 1989-2015. We exclude the prices of commodities (oil, copper, and other such goods that are traded on an exchange), as these prices are not sticky.

As it turns out, there is no evidence that the terms of trade and the exchange rate move in tandem. On the contrary, a 1% depreciation in the bilateral exchange rate is associated with only a 0.1% depreciation in the bilateral terms of trade in the year of the depreciation. The origin of this disconnect – which Camila Casas, Federico Diez, Pierre-Olivier Gourinchas, and I describe in a 2016 paper – seems to be that, for the vast majority of internationally traded goods, prices are sticky in dollars, not in the producer’s currency, as Friedman’s reasoning required.

Consider the case of the US and Japan. Almost 100% of US exports to Japan are priced in dollars, meaning that they, as in Friedman’s version, are sticky in dollars. But 80% of US imports from Japan are invoiced in dollars, meaning that those prices, too, are sticky in dollars, rather than in Japanese yen. As a result, the terms of trade change very little, even if the exchange rate fluctuates.

This means that, even if the US dollar depreciates, it does not become more expensive for US importers to buy Japanese goods, so there is limited incentive to switch from Japanese to US goods.

A weaker dollar thus has limited impact on US imports. Likewise, a weaker yen does little to spur Japanese exports to the US, because the dollar price of those exports remains roughly constant.

This phenomenon applies even to trade transactions that do not include the US. As I documented in a 2015 paper, the share of world imports invoiced in US dollars is 4.7 times larger than the share of world imports involving the US. For world exports, that figure is 3.1.

This “dominant currency paradigm” lies at the root of the terms-of-trade disconnect.

In fact, we document that global trade prices and volumes are driven by the dollar exchange rate, rather than the exchange rate between the two trading partners’ currencies. So fluctuations in the price and quantity of India’s imports from China, for example, depend on the rupee-dollar exchange rate, rather than the rupee-renminbi exchange rate. The strength of the US dollar is thus a key predictor of aggregate trade volume and consumer/producer price inflation worldwide.

Friedman was right about one thing: flexible exchange rates do provide valuable monetary-policy independence. But, in a dollar-dominated trade environment, their ability to support full employment is severely limited.

Gita Gopinath is Professor of Economics at Harvard University. She is a visiting scholar at the Federal Reserve Bank of Boston, a research associate at the National Bureau of Economic Research, and a World Economic Forum Young Global Leader.

China, the Digital Giant


A man looks at his phone near a giant image of the Chinese national flag

SHANGHAI – China has firmly established itself as a global leader in consumer-oriented digital technologies. It is the world’s largest e-commerce market, accounting for more than 40% of global transactions, and ranks among the top three countries for venture capital investment in autonomous vehicles, 3D printing, robotics, drones, and artificial intelligence (AI). One in three of the world’s unicorns (start-ups valued at more than $1 billion) is Chinese, and the country’s cloud providers hold the world record for computing efficiency. While China runs a trade deficit in services overall, it has lately been running a trade surplus in digital services of up to $15 billion per year.

Powering China’s impressive progress in the digital economy are Internet giants like Alibaba, Baidu, and Tencent, which are commercializing their services on a massive scale, and bringing new business models to the world. Together, these three companies have 500-900 million active monthly users in their respective sectors. Their rise has been facilitated by light – or, perhaps more accurate, late – regulation. For example, regulators put a cap on the value of online money transfers a full 11 years after Alipay introduced the service.

Now, these Internet firms are using their positions to invest in China’s digital ecosystem – and in the emerging cadre of tenacious entrepreneurs that increasingly define it. Alibaba, Baidu, and Tencent together fund 30% of China’s top start-ups, such as Didi Chuxing ($50 billion), Meituan-Dianping ($30 billion), and ($56 billion).

With the world’s largest domestic market and plentiful venture capital, China’s old “copy-cat” entrepreneurs have transformed themselves into innovation powerhouses. They fought like gladiators in the world’s most competitive market, learned to develop sophisticated business models (such as Taobao’s freemium model), and built impregnable moats to protect their businesses (for example, Meituan-Dianping created an end-to-end food app, including delivery).

As a result, the valuation of Chinese innovators is many times higher than that of their Western counterparts. Moreover, China leads the world in some sectors, from livestreaming (one example is, a lip-syncing and video-sharing app) to bicycle sharing (Mobike and Ofo exceed 50 million rides per day in China, and are now expanding abroad).

Most important, China is at the frontier of mobile payments, with more than 600 million Chinese mobile users able to conduct peer-to-peer transactions with nearly no fees. China’s mobile-payment infrastructure – which already handles far more transactions than the third-party mobile-payment market in the United States – will become a platform for many more innovations.

As Chinese firms become increasingly technically capable, the country’s market advantage is turning into a data advantage – critical to support the development of AI. The Chinese firm Face++ recently raised $460 million, the largest amount ever for an AI company. DJI (a $14 billion consumer drone company), iFlyTek (a $14 billion voice recognition company), and Hikvision (a $50 billion video-surveillance company) are the world’s most valuable firms in their respective domains.

Another important developing trend in China is “online merging with offline” (OMO) – a trend that, along with AI, Sinovation Ventures is betting on. The physical world becomes digitized, with companies detecting a person’s location, movements, and identity, and then transmitting the data so that it can help shape online experiences.

For example, OMO stores will be equipped with sensors that can identify customers and discern their likely behavior as seamlessly as e-commerce websites do now. Similarly, OMO language learning will combine native teachers lecturing remotely, local assistants keeping the atmosphere fun, autonomous software correcting pronunciation, and autonomous hardware grading homework and tests. With China in a position to rebuild its offline infrastructure, it can secure a leading position in OMO.

Yet, even as China leads the way in digitizing consumer industries, business adoption of digital technologies has lagged. This may be about to change. New McKinsey Global Institute research finds that three digital forces – disintermediation (cutting out the middle man), disaggregation (separating processes into component parts), and dematerialization (shifting from physical to electronic form) – could account for (or create) 10-45% of the industry revenue pool by 2030.

Those actors that successfully capitalize on this shift are likely to be large enough to influence the global digital landscape, inspiring digital entrepreneurs far beyond China’s borders. Value will shift from slow-moving incumbents to nimble digital attackers, armed with new business models, and from one part of the value chain to another. Large-scale creative destruction will root out inefficiencies and vault China to a new echelon of global competitiveness.

China’s government has grand plans for the country’s future as a digital world power. The State Council-led Mass Entrepreneurship and Innovation Program has resulted in more than 8,000 incubators and accelerators. The government’s Guiding Fund program has provided a total of $27.4 billion to venture capital and private equity investors – a passive investment, but with special redemption incentives. The authorities are now mobilizing resources to invest $180 billion in building China’s 5G mobile network over the next seven years, and are supporting the development of quantum technology.

The State Council has also issued guidelines for developing AI technologies, with the goal of making China a global AI innovation center by 2030. Xiongan, now under construction, may be the first “smart city” designed for autonomous vehicles. In Guangdong Province, the government has set an ambitious target of 80% automation by 2020.

Such aspirations will inevitably disrupt the labor market, beginning with routine white-collar jobs (such as customer service and telemarketing), followed by routine blue-collar jobs (such as assembly line work), and finally affecting some non-routine jobs (such as driving or even radiology). Recent MGI research found that in a rapid-automation scenario, some 82-102 million Chinese workers would need to switch jobs.

Retraining the displaced will be a major challenge for China’s government, as will preventing the major digital players from securing innovation-stifling monopolies. But the government’s readiness to embrace the emerging digital age, pursuing supportive policies and avoiding excessive regulation, has already placed the country at a significant advantage.

Kai-Fu Lee is a co-founder and CEO of Sinovation Ventures, a leading venture capital firm investing in China and North America.

Jonathan Woetzel is a McKinsey senior partner, a director of the McKinsey Global Institute, and co-author of No Ordinary Disruption: The Four Global Forces Breaking All the Trends.

Why Central Banks Continue to Put Asset Prices Out of Whack

A protracted exit from easy money will continue to create market puzzles

By Richard Barley

Even as the world’s central banks edge away from the extraordinary policies of the past decade, huge market distortions remain. The unwinding of years of easy money will continue to puzzle investors.

Take the euro, the dollar and U.S. and German government bonds. They are deeply linked: exchange rates often track expectations for monetary policy, which shows up in differences in yields between bond markets.

Difference between U.S. and German yields

How many dollars 1 euro buys

Normally, short-maturity bond yields, closely tied to central-bank actions, would really matter for currencies. But as central banks have sought to influence longer-term interest rates more directly, 10-year yields have gained in importance.

Even this isn’t straightforward, however. Earlier this year, the euro rose and the 10-year yield gap between the U.S. and Germany narrowed, as eurozone economic data proved strong and the European Central Bank signaled it would ease up on the monetary-policy pedal. Both moves could be interpreted as investors rethinking the relative prospects of the eurozone and the U.S.

The euro is still flying, up more than 12.5% against the dollar this year. But the U.S.-German bond spread has widened since September to more than 2 percentage points. The German 10-year yield, at 0.34%, just hasn’t reacted much to the brighter outlook.

Are either bonds or the currency mispriced? Perhaps not. The euro, for instance, might be better able to look at the endgame for monetary policy than current yield differentials. Bonds have still to contend with sizable purchases by the ECB, and forward guidance that rates will stay low for a long time yet.

A measure of future interest rates in the U.S. and Germany—the difference in five-year yields starting in five years’ time—tells a related story. This measure should be less affected by the impact of today’s influential forward guidance, and hence contain more information about where policy might be headed in the longer term. The U.S.-German gap on this measure has a closer fit with what the euro has been doing recently, data from ING shows.

Meanwhile, central-bank policy elsewhere, particularly in Japan, is in the mix. Since the Bank of Japan is holding yields down, Japanese investors need to look elsewhere for returns. But the cost to hedge against moves in the dollar has risen, making U.S. bonds less attractive, notes Lombard Street Research. European bonds may be benefiting from Japanese purchases, holding yields down but supporting the euro.

If markets are all about putting a price on the future, then right now, some markets seem more curious about what lies ahead than others.

Creeping Fascism, Part 5: “the world’s most sophisticated, high-tech systems to keep watch over citizens”

China’s Tech Giants Have a Second Job: Helping Beijing Spy on Its People  
(Wall Street Journal) – HANGZHOU, China—Alibaba Group’s sprawling campus has collegial workspaces, laid-back coffee bars and, on the landscaped grounds, a police outpost. 
Employees use the office to report suspected crimes to the police, according to people familiar with the operation. Police also use it to request data from Alibaba for their own investigations, these people said, tapping into the trove of information the tech giant collects through its e-commerce and financial-payment networks. 
In one case, the police wanted to find out who had posted content related to terrorism, said a former Alibaba employee. “They came to me and asked me for the user ID and information,” he recalled. He turned it over. 
The Chinese government is building one of the world’s most sophisticated, high-tech systems to keep watch over its citizens, including surveillance cameras, facial-recognition technology and vast computers systems that comb through terabytes of data. Central to its efforts are the country’s biggest technology companies, which are openly acting as the government’s eyes and ears in cyberspace. 
Companies including Alibaba Group Holding Ltd. , Tencent HoldingsLtd. and Baidu Inc., are required to help China’s government hunt down criminal suspects and silence political dissent. Their technology is also being used to create cities wired for surveillance. 
This assistance is far more extensive than the help Western companies extend to their governments, and the requests are almost impossible to challenge, a Wall Street Journal examination of Chinese practices shows. 
Going Mobile 
Unlike American companies, which often resist U.S. government requests for information, Chinese ones talk openly about working with authorities. Tencent Chief Executive Ma Huateng, also known as Pony Ma, and Alibaba founder Jack Ma both have voiced support for private companies working with the government on law enforcement and security issues. 
“The political and legal system of the future is inseparable from the internet, inseparable from big data,” Alibaba’s Mr. Ma told a Communist Party commission overseeing law enforcement last year. He said technology will soon make it possible to predict security threats. “Bad guys won’t even be able to walk into the square,” he said. 
In practice, China’s internet giants, which have benefited from trade policies shielding them from foreign competition, have little choice but to cooperate in a country where the Communist Party controls both the legal system and the right to function as a business. 
Tencent, the world’s largest online videogame company, dominates Chinese cyberspace with news, video-streaming operations and its WeChat app, used by nearly one billion people to communicate and for mobile payments.

Beijing activist Hu Jia said he bought a slingshot online after a friend recommended it for relieving stress. He paid with WeChat’s mobile-payment feature. Mr. Hu said he was later interrogated by a state security agent, who asked if he was planning to shoot out surveillance cameras near his apartment. 
A few years earlier, Mr. Hu said, he had messaged a friend headed to Taiwan with the names of activists he might want to see while traveling there. Later, he said, state security agents showed up at the friend’s house and warned him against meeting Mr. Hu’s acquaintances. 
“Experience has proven that WeChat is completely compromised,” especially for people on the government’s watch list, Mr. Hu said. “Everyone has a spy watching them. That spy is their smartphone.” 
This article goes on for another 1500 terrifying words. Read the rest here.

What’s happening in China is a merger of Big Tech and an already-existing police state, to produce a Big Brother right out of George Orwell’s Nineteen Eighty-Four.

The result is obviously chilling for anyone trying to change the status quo, along with anyone who has anything the government might want. Access to one’s online “secrets” gives the authorities leverage that not many can resist.

But that’s China, not the West, right? No chance of that happening here. Let’s hope.

But besides hoping, there are things we can do to keep tomorrow’s public/private surveillance partnership from knowing absolutely everything. First, we can take steps to shrink our online profile. Ex-hacker Kevin Mitnick’s The Art of Invisibility is a good place to start.

Second, we can move some of our finances out of the immediate reach of the NSA/IRS by owning physical precious metals, cryptocurrencies (though transacting with bitcoin et al will soon be visible to governments), and “internationalizing” via offshore real estate, insurance policies, bullion storage and second passports.

None of this is a complete, or even adequate, solution. That would require a return to constitutionally limited government with a Bill of Rights that functions in fact as well as spirit.

But it’s a start.

Pakistan’s Disunion Puts Investment at Risk

By Kamran Bokhari

Jihadism has been radiating out of Pakistan for decades and causing problems for the country’s relationships with other governments. Lately, however, it’s been Pakistan itself that is suffering from its homegrown Islamism. The country was founded on a contradiction between secularism and Islamism, and though it has covered up its incoherence, it has never overcome it. The contradiction is finally catching up to the country, and things in Pakistan will get worse before they get better.

Warning Signs

Evidence that things in Pakistan are reaching their boiling point came, paradoxically, from the outside. A Nov. 22 report by a Pakistani daily said that a Chinese delegation visiting Pakistan had expressed concerns that political instability could adversely affect the tens of billions of dollars that China was investing in the South Asian nation. The report said that on Nov. 21, a joint committee on the China-Pakistan Economic Corridor—part of China's One Belt, One Road initiative—approved the broad parameters of a long-term plan for the CPEC but failed to agree on development projects and financing for special economic zones. Speaking to reporters after the meeting, a Pakistani minister who serves as the country’s point man on the CPEC acknowledged that political unrest since 2014 was undermining the mega-development Project.

Pakistan has grown more unstable since the United States invaded neighboring Afghanistan after 9/11. In fact, over the past decade, Pakistan has been the target of a vicious jihadist insurgency that has claimed as many as 80,000 lives. Yet the Chinese still went ahead with the CPEC in 2013. Four years later, China, usually a stalwart ally, is beginning to second guess its investment plans for Pakistan.

Meanwhile, Pakistan's relations with its historical ally, the United States, have also hit an all-time low. The incoherence in Islamabad is preventing the country from working effectively with the US to address common concerns about the insurgency in Afghanistan. The top American commander in Afghanistan said Nov. 28 that he had not seen a change in Pakistani support for Afghan militants even though the administration of President Donald Trump has taken a tougher line against Islamabad. US Defense Secretary James Mattis is currently visiting the Pakistani capital, where he has said he will try “one more time” to work with Islamabad before taking “whatever steps are necessary” to address its alleged support for Afghan militants.

India, Pakistan's archrival, has expressed its own concerns about Islamist militants operating from Pakistan. In 2008, terrorists from Pakistan carried out one of the worst attacks in India’s history, killing 164 people and wounding over 300 more in Mumbai. Under intense pressure from India and the US, Pakistan vowed to crack down on Jamaat-ud-Dawah, the group responsible for the attack.

Almost a decade later, however, Jamaat-ud-Dawah is more entrenched than ever in Pakistan. It recently formed a political party, and its founder and leader, Hafiz Muhammad Saeed, was released from house arrest on Nov. 23. The United Nations Security Council designated Saeed a terrorist in December 2008, but his political movement has only gained ground in Pakistan, and Saeed himself recently announced his intention to run for public office in next year’s elections.

Finally, Pakistani relations with Iran have also been tense. Iran, which shares a border with Pakistan, has been the target of Islamist militancy emanating from sanctuaries in Pakistan’s southwest. Iran has warned Pakistan several times over the past few years that it will conduct raids across the border in Pakistan if Islamabad does not rein in anti-Iran groups on its soil. Already it has shelled groups across the border.

Political Decay

Pakistan has been incoherent since its inception in 1947. It has never settled the debate over whether it ought to be a secular or an Islamist state. Tensions have only gotten worse since the 2011 assassination of Punjab Gov. Salman Taseer at the hands of his own bodyguard. Taseer’s killer said the governor was guilty of blasphemy for criticizing laws prohibiting individuals from speaking out against religion. Many Pakistanis deemed the assassin a hero, and a team of lawyers enthusiastically defended him. It took the state five years to convict and execute him for the murder. The assassination and trial spawned an entire social movement and is now represented by a new political party, Tehreek-e-Labaik Pakistan.

In early November, Tehreek-e-Labaik Pakistan organized a sit-in at the capital to protest a perceived softening of the government’s stance on blasphemy. The army was finally called in on Nov. 26 to broker a deal, and in the end, the protesters got what they wanted. But even the military, which has ruled Pakistan intermittently for close to half of the country’s 70-year history and is still its strongest institution, can’t control what’s happening to the country.

Pakistan, moreover, used to boast a two-party political system that has since devolved into a patchwork of ideologically rigid groups, many of which are Islamist or otherwise right-wing.

One such party is Pakistan Tehrik-e-Insaf, led by cricketer-turned-politician Imran Khan. PTI is itself not an Islamist party, but its allies are Islamists. The party is likely to benefit in next year’s federal election from a major corruption scandal that has weakened the current ruling party, the Pakistan Muslim League, and forced its leader, Nawaz Sharif, to step down as prime minister. But whether Islamists or secularists control the government, the fight for Pakistan’s soul will not go away.

Neither will its economic struggles. Pakistan’s foreign exchange reserves hover around $14 billion, enough to cover only about three months’ worth of imports. Its reserves are falling because its exports are falling. Debt servicing stands at 29% of export earnings. Markets are speculating about a depreciation of the Pakistani rupee. And Pakistan’s population is exploding. It exceeded 200 million people this year, according to a 2017 census, and has increased by 57% since the last census nearly 20 years ago. At the same time, educational standards have been declining, with the literacy rate down to 58%. A third of the population lives in poverty.

For Pakistan to recover, it needs outside investment to fund things like the China-Pakistan Economic Corridor. But to secure such investment, the country must overcome the present situation, where multiple powerful factions have paralyzed the government.

Central banking has never looked more daunting

The line between fiscal and monetary policy is increasingly blurred

 Charles Bean

The Bank of England's Mark Carney, the ECB's Mario Draghi and the Fed's Janet Yellen. Central banks will need to continue to set policy against the background of a low natural rate for some while yet © AFP

The Bank of England’s Monetary Policy Committee has just celebrated its 20th birthday. In its first decade, growth was steady and inflation close to target. We — along with our peers — thought we had this central banking business cracked. Nemesis arrived in the shape of the global financial crisis. Rates have been rock bottom ever since and central banks’ balance sheets have ballooned. Banking regulations are being tightened. And macro-prudential policy is still a work in progress. Central banking has never looked more daunting.

The past couple of decades have witnessed a remorseless fall in the real rate of interest consistent with macroeconomic equilibrium — the “natural” rate. The causes are still a matter of debate. Some point to higher savings, others to the impact of slow productivity growth on investment. Balance-sheet repair has surely been important, too.

While central banks can set any policy rate they want in the short run, if they are to achieve their objectives over the long term it must converge to the sum of the natural rate and their target inflation rate. Criticism from politicians that central banks’ policies are penalising savers and driving up asset prices misses the point: the decline in interest rates ultimately reflects forces that central bankers are powerless to change.

Does the current state of affairs represent a new normal? Some rebound in the natural rate may be in the offing. The global demographics are at a turning point, with a substantial fall in the share of the middle aged relative to the elderly in prospect. And the former are the big savers, while the latter typically run their savings down. Moreover, a pick-up in the demand for funds to invest may materialise as new technologies such as artificial intelligence and nanotechnology come to fruition.

But any resulting rise in the natural rate seems likely to happen gradually. Central banks will need to set policy against the background of a low natural rate for some while yet. That means more episodes when policy rates are near their lower bound. Further large-scale asset purchases may be needed.

Broadly speaking, the monetary arrangements introduced in 1997 have served us well. But two aspects are worthy of note. The distinction between monetary and fiscal policy has become increasingly blurred. And the distributional consequences of monetary policy have become increasingly contentious.

Monetary policy has fiscal consequences even in normal times, but issues are starker when large quantities of government bonds or private sector assets sit on the central bank’s balance sheet. Even small changes in the yield curve have significant consequences for the public finances. Fiscal considerations become more prominent if the central bank buys risky private credits. And purchasing equities is potentially even more contentious since it involves the acquisition of control rights.

For these reasons, the fiscal authorities need to own the fiscal consequences of the central bank’s asset purchase decisions. Happily, the BoE’s Asset Purchase Facility meets that requirement, with the Treasury holding the economic interest, even though the MPC decides the amount of assets to buy. Moreover, whenever the MPC wants to increase the stock of assets there is an exchange of letters with the chancellor.

Adding distributional concerns to the MPC’s objectives would be worrying. It is one thing for the MPC to use its “constrained discretion” to limit output volatility. It is quite another to refrain from cutting interest rates or undertaking asset purchases to protect one segment of society at the expense of another. That goes to the heart of politics; such decisions should not be delegated to technocrats.

If the government of the day is unhappy about the side effects of the monetary policies necessary to maintain macroeconomic stability, then it is better for them to take mitigating fiscal action. And, if a government is really set upon the need for a different monetary policy, it should do so directly and openly by invoking the monetary policy override clause.

The writer was deputy governor of the Bank of England, 2008-14. This article is based on this year’s Wincott Memorial Lecture