China Credit and Global Inflationary Dynamics

Doug Nolan

February 14 – Bloomberg: “China added more credit last month than the equivalent of Swedish or Polish economic output, revving up growth and supporting prices but also fueling concerns about the sustainability of such a spree. Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545bn) in January… New yuan loans rose to a one-year high of 2.03 trillion yuan, less than the 2.44 trillion yuan estimate. The credit surge highlights the challenges facing Chinese policy makers as they seek to balance ensuring steady growth with curbing excess leverage in the financial system.”
Like so many things in The World of Finance, we’re all numb to Chinese Credit data: Broad Credit growth expanded a record $545 billion in the month of January, about a quarter above estimates. Amazingly, last month’s Chinese Credit bonanza exceeded even January 2016’s epic Credit onslaught by 8%. Moreover, as Bloomberg noted, “The main categories of shadow finance all increased significantly. Bankers acceptances -- a bank-backed guarantee for future payment -- soared to 613.1 billion yuan from 158.9 billion yuan the prior month.”

February 14 – Bloomberg: “China’s shadow banking is back in full swing. Off-balance sheet lending surged by a record 1.2 trillion yuan ($175bn) last month… Efforts by the People’s Bank of China to curb fresh lending may have prompted banks to book some loan transactions as shadow credit, according to Sanford C. Bernstein.”
Yet this was no one-month wonder. China’s aggregate Credit (excluding the government sector) expanded a record $1.05 TN over the past three months, led by a resurgence in “shadow” lending. According to Bloomberg data, China’s shadow finance expanded $350 over the past three months (Nov. through Jan.), up three-fold from the comparable year ago period.

Friday from Bloomberg: “White House Chaos Doesn’t Bother the Stock Market.” Many are confounded by stock market resilience in the face of Washington discord. Perhaps it’s because global liquidity and price dynamics are currently dictated by China, the BOJ and the ECB - rather than Washington and New York. Eurozone and Japanese QE operations continue to add about $150bn of new liquidity each month. Meanwhile, Chinese Credit growth has accelerated from last year’s record $3.0 TN (plus) annual expansion.

February 14 – Bloomberg (Malcolm Scott and Christopher Anstey): “Forget about Donald Trump. The global reflation trade may have another driver that proves to be more durable: China’s rebounding factory prices. The producer price index has staged a 10 percentage-point turnaround in the past 10 months, posting for January a 6.9% jump from a year earlier. Though much of that reflects a rebound in commodity prices including iron ore and oil, China’s economic stabilization and its efforts to shutter surplus capacity are also having an impact.”China’s January PPI index posted a stronger-than-expected 6.9% y-o-y increase. A year ago – back in January 2016 – y-o-y producer price inflation was a negative 5.3%. it’s worth noting that China’s y-o-y PPI bottomed in December 2015 at negative 5.9%, the greatest downward price pressure since 2009. In contrast, last month’s y-o-y PPI jump was the strongest since August 2011 (7.3%). China’s remarkable one-year inflationary turnaround was not isolated in producer prices. Chinese January y-o-y CPI increase of 2.5% was up from the year ago 1.8%, matching the peak in 2014.

There are two contrasting analyses of China’s record January Credit growth. The consensus view holds that Chinese officials basically control Credit growth, and a big January confirms that Beijing will ensure/tolerate the ongoing rapid Credit expansion required to meet its 6.5% 2017 growth target (and hold Bubble collapse at bay). This is viewed as constructive for the global reflation view, constructive for global growth and constructive for global risk markets. Chinese tightening measures remain the timid “lean against the wind” variety, measures that at this point pose minimal overall risk to Chinese financial and economic booms.

An opposing view, one I adhere to, questions whether Chinese officials are really on top of the extraordinary happenings throughout Chinese finance, let alone in control of system Credit expansion. Years of explosive growth in Credit, institutions and myriad types of instruments and financial intermediation have created what I suspect is a regulatory nightmare. I seriously doubt that PBOC officials take comfort from $1.0 TN of non-government Credit growth over just the past three months.

Indeed, I suspect authorities will be compelled to ratchet up tightening measures. Not only is timid ineffective in the face of rampant monetary inflation. It actually works to promote only greater excesses and resulting maladjustment. I would argue that Chinese officials today face a more daunting task of containing mounting financial leverage and imbalances than just a few months ago. The clock continues to tick, with rising odds that Beijing will be forced to take the types of forceful measures that risk an accident.

Inflationary biases evolve significantly over time. For example, QE in one market environment can have profoundly different inflationary effects than in a different backdrop. Liquidity will tend to further inflate the already inflating asset class(s); “hot money” will chase the hottest speculative Bubble. Inflationary surges in Credit growth can, as well, have profoundly different impacts, depending on inflationary expectations, economic structure and the nature of financial flows.

I strongly contend that a more than one-half Trillion ($) one-month Chinese Credit expansion in early 2017 will exert divergent inflationary impacts to those from early 2016. Why? Because of distinct differences in respective inflationary backdrops. This time last year, disinflationary pressures were demonstrating powerful momentum. The Chinese economic slowdown was gathering force, the financial system was under mounting stress, funds were fleeing the country, and fear was overwhelming greed. Compared to this time last year, crude prices are today about a third higher. Importantly, last year’s massive Credit expansion upended disinflationary forces.

Today’s inflationary backdrop offers a notable contrast: the inflationary path of least resistance is now higher. This argues that Credit excesses will exert a more robust impact on inflationary biases throughout the Chinese economy, inflationary forces that have achieved powerful self-reinforcing momentum. Furthermore, official efforts to restrict financial outflows add a further dimension to the analysis. Not only do I expect this year’s Credit to exhibit more potent effects, it is also likely that tighter regulations ensure less finance leaks out of the system through international flows. In short, unprecedented quantities of new “money” and Credit will in 2017 further inflate a Chinese economic system already terribly maladjusted by years of unprecedented monetary excess.

Already this year, Emerging Market equities (EEM) have posted double-digit gains (10.1%). Stocks in Brazil and Argentina are up 12.5% and 16.3%. Indian stocks have risen 6.9%. Too be sure, the incredible Chinese Credit boom is playing a major role in fueling strengthening inflationary biases throughout developing markets and economies.

February 15 – Bloomberg (Sho Chandra): “Forget wondering when U.S. inflation will reach the Federal Reserve’s goal. It may be there already. The biggest monthly jump in almost four years in the Labor Department’s consumer-price index led some analysts to raise their estimates… for the Fed’s preferred inflation gauge, the Commerce Department’s personal consumption expenditures price index. Morgan Stanley’s Ted Wieseman and Michelle Girard of NatWest Markets both said that the PCE measure probably rose 2% in January from a year earlier, up from previous projections of 1.8%. Economists at Goldman Sachs gave an estimate of 1.98%.”
Here at home, January CPI rose 2.5% y-o-y, the strongest gain since early 2012 (core CPI up 2.3% y-o-y). After drifting around zero for much of 2014, y-o-y CPI increased to 1.4% by January 2016. Anyone doubting that global inflationary dynamics have evolved from a year ago should examine a few CPI charts.

Talk from a year ago was of indomitable global deflationary forces. The ECB and BOJ stepped up with major QE expansions, while the Fed put rate normalization on hold after a single little baby step. Central bank buying coupled with already over-liquefied markets spurred a historic collapse in global bond yields. After beginning the year at 62 bps, a melt-up in bund prices saw yields sink to below zero by June (on the way to negative 19bps). Italian yields dropped from 1.59% to 1.04%. Spanish yields fell from 1.77% to 0.88%, while French yields fell from 0.99% to 0.10%. Yields in the UK sank from 1.96% to 0.52%. Japanese yields dropped from 0.26% to negative 0.29%. After beginning 2016 at 2.25%, Ten-year Treasury yields were down to 1.36% near mid-year. Too much “money” (speculative and otherwise) chasing too few bonds.

There are now apparently ample quantities of bonds for global buyers. With inflation dynamics pointing to rising general price levels, “risk free” sovereign bonds are no longer the securities of choice. Importantly, ongoing QE has ensured that markets have become only more over-liquefied. These days, however, it’s much more a case of “too much ‘money’ chasing too few equities and corporate debt instruments”

Highly speculative sovereign debt markets dislocated back in 2016. It was the type of speculative blow-off and derivative-related melt-up that previously would have ended in tears (along with bloody havoc). So far, ongoing QE and near-zero rates have ensured a most orderly of major market reversals. At the same time, the monetary backdrop has guaranteed that speculative melt-up dynamics have turned their sights on equities, corporate debt and EM. Global markets are today being dictated by extraordinary monetary and speculative dynamics. Trump policies proclamations provide convenient market justification and rationalization.

It is a prevailing 2017 theme that global markets are extraordinarily vulnerable to an unexpected change in the monetary backdrop. Count me just as skeptical of the current equities surge as I was of last year’s surging bond markets. In my mind, the 2017 bull story for equities is as dubious as last year’s deflation histrionics - rationalization for a surge in bond prices driven more by a powerful global market dislocation than underlying fundamentals.

I’m not necessarily arguing that we’ve commenced a sustainable surge in consumer price inflation. An accident in China, Europe or Japan (to name only the most obvious), and the world could sink right back into the disinflationary muck. At least in the short-term, the upward momentum in inflationary pressures could be enough to sway central bank decision making. So long as CPI trends were pointing downward, it was easy to rationalize the positive case for QE. CPI pointing upward around the globe just might have central bankers thinking twice about QE infinity. For a number of years now, market operators have slept soundly at night knowing any meaningful “Risk Off” (de-risking/de-leveraging) would be countered with another batch of QE.

Yellen took on a relatively more hawkish tone this week. The March 15 FOMC meeting is now in play for a rate rise, while an increasing number of analysts are now forecasting three increases during 2017. The ECB will clearly face heightened pressure to wind down QE. And even BOJ chief Kuroda this week made uncharacteristically cautious comments with respect to the risks of monetary stimulus. But in the short-term, I’ll look to Beijing for perhaps the most intriguing monetary developments. There is support for the view that recent equity gains have been fueled by market dislocation dynamics, the type of advance that would leave risk assets especially vulnerable to a changing monetary backdrop.

February 16 – Wall Street Journal (Chris Dieterich and Gunjan Banerji): “It is the buzz of Wall Street: a five-day, 15% plunge in a U.S. mutual fund whose bearish bets were undone by the S&P 500’s latest run to fresh records. The decline of Catalyst Hedged Futures Strategy fund, a $3.4 billion fund employing complex derivatives, is topic du jour on trading desks fixated on the surprising resilience of the postelection U.S. stock rally and the long decline of volatility, or price swings. Many investors have been surprised by the S&P 500’s 9.7% run-up following the Nov. 8 election… The Catalyst fund typically uses options positions in a configuration that seeks to maximize gains from stable or gently rising markets, or else shield investors from sudden declines.”

'America First'

Trump and Bannon Pursue a Vision of Autocracy

 Photo Gallery: Trump's 'Clique of Bloggers and Tweeters'

Is Donald Trump in the process of transforming the United States into an autocracy? His first weeks in office make it look as though that is his aim. The president is hewing closely to the ideas of his chief strategist, making Stephen Bannon the most dangerous man in America. By SPIEGEL Staff

Those hoping to understand what the world might currently be up against should know how Stephen Bannon thinks. A corpulent man with a full head of hair at age 62, his gaze is clear and alert and he often pinches his mouth together until his lips become invisible, not unlike a street fighter. Now that he works in the White House, he has begun wearing a suit coat. Previously, though, he was fond of showing his disdain for refined Washington by wearing baggy cargo pants through the streets of the capital, shaggy and unshaven.

In November 2013, the historian Ronald Radosh visited multimillionaire Bannon in his townhouse, located in Capitol Hill. The two stood in front of a photo of Bannon's daughter Maureen, an elite soldier with a machine gun in her lap posing on what had once been Saddam Hussein's gold throne. At the time, Bannon was the head of the right-wing propaganda website Breitbart and the two were discussing his political goals. Then Bannon proudly proclaimed, "I'm a Leninist."

The historian reacted with shock, asking him what he meant. "Lenin," he answered, "wanted to destroy the state, and that's my goal too. I want to bring everything crashing down, and destroy all of today's establishment." By that, he meant the Democratic Party, the media, but also the Republicans.

Radosh wrote about the encounter in a piece for the news website The Daily Beast and soon thereafter, once close confidants to Bannon came out of the woodwork to share what they knew about his world view. "Steve is a strong militarist, he's in love with war -- it's almost poetry to him," his longtime Hollywood writing partner Julia Jones told the website. She said books about war lay all over the place in his home. "He's studied it down through the ages, from Greece, through Rome ... every battle, every war. Never back down, never apologize, never show weakness. He lives in a world where it's always high noon at the O.K. Corral."

Jones says that Bannon's favorite book is Chinese writer Sun Tzu's "The Art of War" (written around 500 B.C.) and that the Hindu "Bhagavad Gita" is another. The latter is an ancient epic about an Armageddon-like battle in which a prince fights to regain his kingdom, which had been wrongly snatched away from him. Krishna, in an incarnation, nudges him along when he grows weak and is tormented by his scruples. Then Krishna leads him into battle in a chariot.

Matters of War and Peace

Last Monday, Donald Trump promoted Bannon once again. The ex-Breitbart editor had started as his campaign manager before becoming Trump's chief political strategist in the White House. Now, though, Bannon has also been named a permanent member of the National Security Council. "That's the worst thing that has ever happened," says one former Bannon confidant. In addition to other aspects of national security, the group, one of the government's most important, also addresses matters pertaining to war and peace.

Just months ago, Bannon predicted: "We're going to war in the South China Sea in five to 10 years. There's no doubt about that." Against China, a nuclear power. Bannon has also claimed that another war will also flare up, this one in the Middle East.

Bannon's appointment to the National Security Council was one of many radical decisions made in recent days that will change America and the rest of the world. And most of the decisions can be traced back to Bannon himself.

Since Jan. 20, Trump and Bannon have together mounted an attack against the institutions of democracy. Surrounding by a tiny circle of confidants, Trump has started a revolution. The aim is to make America great again, as it once was, when there were more borders, women were obedient and the country was strong and feared -- at least as Bannon sees it.

This new old America has taken shape in an alarmingly clear way during the past two weeks. The contours of the presidency are clearer and the methods more visible. Trump is neither seeking to promote his initiatives nor is he trying to persuade people of his political course.

Rather, he is governing by decree and ruling like an autocrat. In doing so, he is driving America further apart. New trenches are being dug and there's more to the battle taking shape than a clash of cultures. It's not fake news, alternative facts or Trumpian lies that are at the center in the next round of the battle -- it's about policy action and stark nationalism.

President Trump is acting exactly as Bannon had hoped. Now that he's in power, he is playing the role of the destroyer. The dignity of the office of president means little to him and he began eroding it from the first day with his petty tweets and boorish behavior. Surrounded by his tiny circle of close advisors, he began hatching one presidential decree after the other, including orders to build a wall along the border to Mexico and an entry ban for citizens of seven predominantly Muslim countries.

The decisions provoked angry protests in the United States and around the world. It has also darkened the world's view of America.

The Resiliance of American Democracy

The president said he "absolutely" feels that torture "works." He threatened to send U.S. troops into Mexico in a telephone call with the country's president if he didn't finally take drastic measures to stop the "bad hombres" there. He fought with the Australian prime minister over refugee policy. It appears he wants to pull out of the Paris climate agreement and he seems to be picking a fight with China. His people have also attacked the European Union in general and Germany in particular. The situation is getting serious -- indeed there's not much room for it to get more serious. Since taking office, Trump has struck global politics like a tornado, much like Bannon must have imagined.

There is a great deal at stake. His presidency raises questions about the resilience of American democracy and its institutions and over how far a man can go who will test the Constitutional limits of the powers of the president. And whether America, the model of democracy, is susceptible to the new authoritarianism of the 21st century.

In this battle, Bannon -- a man so far out on the right-wing fringe that even the Republican establishment thought he was a whacko -- is the decisive puller of strings behind Trump.

Following the election, there were many who sought comfort in the idea that Vice President Mike Pence might lead from behind the scenes and that things might not turn out so badly after all. Now it is clear that those people badly deceived themselves. The chief ideologist within the White House right now is Stephen Bannon and his power far exceeds that of official Chief of Staff Reince Priebus, a traditionalist Republican. "Impeach President Bannon!" read the signs held up by some protestors last week in New York and Washington.

Bannon's surge in power is also disconcerting because his presence in the legendary Situation Room blurs a long-held tradition in U.S. politics separating political strategists, who are mostly watching poll data, from those whose jobs are mostly related to security policy and whose primary concern is the lives and deaths of U.S. soldiers. Trump's predecessor in office sought to avoid the appearance that profound decisions made by the National Security Council could be influenced by domestic policy considerations.

With one signature, Trump did away with this dividing line. And as if that weren't enough, he removed two experts from full membership on the council at the same time: the director of national intelligence and the chairman of the Joint Chiefs of Staff.

'A Week of Crazy'

Susan Rice, the former US ambassador to the United Nations, called the move "stone cold crazy.

After a week of crazy." She then quipped, "Who needs military advice or intell (sic) to make policy on ISIL, Syria, Afghanistan, DPRK (North Korea)?"

In addition to Bannon, Stephen Miller, political adviser to the president, is another member of Trump's unofficial cabinet. The recent turns in the career paths of Bannon and Miller would have been unimaginable prior to the Trump presidency. But as unbelievable as Bannon's rise from right-wing journalist to presidential advisor might be, Miller's is perhaps even more unbelievable.

One day during the primary campaign in Florida, Trump sent Miller onstage in order to warm up the crowd. It was likely just by chance, but Miller, a man with a narrow, long face and high brow, did it so well, so alarmingly well, that he emerged from the shadows and became a key part of the campaign. In the months that followed, Miller went from being one of thousands of campaign helpers to being one of Trump's most loyal and closest aids. Now, at the age of 31, he has one of the most powerful positions in the U.S.

Many observers, though, found the manner in which Miller worked the crowds to be frightening. He could incite them at will, demonizing the country's elite, who he claimed had conspired against the common man. He said they were responsible for open borders, free trade agreements and the shrinking middle class, the three elements that are causally linked in the worldviews of Miller, Bannon and Trump.

Miller comes from a liberal Jewish family from California. He began his career in the Senate as one of many junior staffers to arch-conservative Senator Jeff Sessions, the politician now set to become Trump's Attorney General despite considerable protest from champions of civil liberties.

Miller acted as a messenger boy for Trump, then he became influential in the third tier of the presidential campaign before catapulting himself to Trump's innermost circle with his malicious tirades. Now this 31-year-old, with very little previous political experience, has become one of the most powerful men in the country.

Autocrats value loyalty above all else, of course, and smart autocrats promote those who are most loyal to them without giving them the impression that their input is of vital importance.

Creating division within the inner circle by showing a preference at times for one person and then another is also a classic trait of autocrats. And even during the campaign, the internal divisions within the Trump team became legendary. Each side leaked dirt about their opponents to the allegedly so hated press. And the pattern is repeating itself in the White House.

A Clear Mission

The power centers are fighting against each other, including Bannon and Miller and Trump's son-in-law Jared Kushner, who some consider to be a moderating influence. His previous spokesperson and current special adviser Kellyanne Conway -- the inventor of the term "alternative facts" -- is also part of the cabal. And then there's the former head of the military intelligence service DIA, Trump's security adviser General Michael Flynn, who is pleading for reconciliation with Russia.

Such is the composition of the Trump White House, a chaotic place, but also one with a clear mission: that of radically transforming the United States. These aren't Republicans, they are Trumpists. And they aren't conservatives, they are nationalists. Bannon is their ideologue. He may be the smartest, but he is surely also the most dangerous.

It has been reported that he wrote Trump's inauguration speech together with Miller. The hatred of the establishment, the slogan "America First," the promise of giving the power back to the people and dignity back to the working class: All that was classic Bannon. As was the use of the term "carnage" to describe what criminals are allegedly visiting on America's cities and of the "red blood" that patriots bleed for their mother country.

Bannon comes from a family of Irish immigrants of modest means and his father worked for a telephone company. Bannon, though, was able to work his way to the top. He served as an officer on a destroyer in the Navy before becoming a part of the establishment as an investment banker at Goldman Sachs. He made millions before turning against the very establishment that made him rich in the first place: He acquired the right-wing propaganda site

Starting in 2012, he used sensationalist news to transform the site into a mouthpiece for the right-wing Tea Party movement and the Alt-Right before seeing his own opportunity to rise to power together with Trump. He needed someone like Trump and Trump needed someone like him -- a person who could use new media to manipulate people.

A 'Blunt Instrument'

It's a Faustian bargain, with Bannon in the role of Mephistopheles and Trump as Dr. Faust.

Bannon made Trump big and helped guide him to the White House. Now Trump is fulfilling Bannon's plan. Trump is a "blunt instrument for us," Bannon told Vanity Fair last summer. "I don't know whether he really gets it or not." By "us," Bannon meant America's new right, supporters of a Tea Party movement that is much further to the right than the majority of Republicans.

In November, the news website BuzzFeed published a 50-minute audio clip of an appearance made by Bannon in 2014 that provides a strong glimpse into his world view. The clip comes from a conference at the Vatican of representatives of the religious right in Europe. Bannon, himself a Catholic, gave a talk via Skype.

Exactly 100 years ago tomorrow, Bannon began, the assassination in Sarajevo of Archduke Franz Ferdinand sparked World War I. Until that day, there had been "total peace. There was trade, there was globalization, there was technological transfer … Seven weeks later, I think there were 5 million men in uniform and within 30 days there were over a million casualties."

He went on to say that the world is once again at such a point, "at the very beginning stages of a very brutal and bloody conflict." He blamed it on "a crisis both of our church, a crisis of our faith, a crisis of the West, a crisis of capitalism."

Bannon described a system of "crony capitalism" of the elite that only created wealth for the establishment, allowing that he knew what he was talking about from his own background. He said there's a desperate need for a renaissance of "what I call the 'enlightened capitalism' of the Judeo-Christian West," with companies that create jobs and prosperity for all.

The second threat, he said, comes from the secularization of society. He noted that the "overwhelming drive of popular culture is to absolutely secularize" millennials under 30. He said Breitbart had become the voice of the anti-abortion movement and the traditional marriage movement.

No Need for Goebbels

The third threat, and perhaps the greatest, Bannon preached from the computer screen, is Islam. "We are in an outright war against jihadist Islamic fascism." But this war, he warned, is "metastasizing far quicker than governments can handle it."

He said a "populist revolt" of "working men and women" is now needed to battle Wall Street and Islam at the same time, an international Tea Party movement modelled after Britain's right-wing populist UKIP, which he knows well. The U.S. Republican Party establishment, on the other hand, he described as a "collection of crony capitalists."

An international alliance of populists united in their hatred of the elite, appealing to the workers and brought together by a common enemy -- only with the Muslims replacing the Jews this time. It all makes Bannon, and Trump along with him, sound like a fascist. But are they?

Times are different today, as are the means, paths and goals. There's no longer a need for masses of brown shirts or a screaming Goebbels. The masses are on the internet today and they read Breitbart and follow Trump on Twitter. The manifestations today are modern and the ideology has also been modernized. But the attitudes themselves seem to be enjoying a renaissance.

Conservative writer David Frum, George W. Bush's former speech writer, warned in an essay for The Atlantic that Trump could transform the U.S. into an autocracy but that the model would be more like Viktor Orbán in Hungary than Adolf Hitler. Hungary does still have free elections, but they are "not quite fair." He wrote that "Hungary is ceasing to be a free country" and that the transition "has been nonviolent, often not even very dramatic."

Members of the opposition there aren't murdered, but they are neutralized, he wrote.

Supporters become rich and opponents remain poor. President Trump might also appoint yes-men and yes-women and neutralize critics, especially at the highest levels of government. He could also continue to grow richer as a result of his office, particularly given that he is, as Frum wrote, "poised to mingle business and government with an audacity and on a scale more reminiscent of a leader in a post-Soviet republic than anything ever before seen in the United States." Trump hates the press, he twists the truth, Frum wrote. "Those citizens who fantasize about defying tyranny from within fortified compounds have never understood how liberty is actually threatened in a modern bureaucratic state," he wrote. "Not by diktat and violence, but by the slow, demoralizing process of corruption and deceit."

The Example of Hugo Chávez

What people like to call "illiberal democracy" is making a comeback in many parts of the world. The idea represents an authoritarian democracy in which the leader is more or less freely elected, but in which people's basic civil rights are curtailed, transition of power is made more difficult, freedom of expression and the press come under pressure, minorities lose their equal protection and the division of power is either partially or entirely eliminated.

It's a phenomenon that has been seen Russia and Turkey, but also in Latin American nations like Venezuela. There, former President Hugo Chávez using ruling techniques one could also imagine with Trump. On his weekly TV show, he would fire government ministers who didn't meet his demands on live television, provide homes to poor families as gifts and rail against his political opponents with insults.

But is it really possible that the West's liberal democracies could be infected by such forms of rule?

Political scientist Shadi Hamid, who has studied Islamist movements and illiberal democracies in the Middle East, sees parallels between Trump's ethnic-nationalist voters and supporters of the Islamist parties in Tunisia and Egypt. There, too, people of mostly modest means who do not share liberal values, have periodically brought a new type of politician to power through the popular vote.
Keeping His Word to a Fault

The destructive energy of the Trump movement could prove to be a great test for America, a country where liberal powers are so well organized that they won't give up without a fight. Eric Schneiderman, attorney general of the state of New York, is one of many to have sounded the warning bells, saying that Trump "does not have respect for the rule of the law." The country, Schneiderman said, is facing "a crisis … over whether the Constitution is respected or not."

The first victim has been the government apparatus in Washington, D.C. Already, Trump's quartet in the White House has essentially obliterated all traces of predecessor Barack Obama.

The president rapidly fired the acting attorney general because she considered Trump's travel ban to be illegal, while other high-ranking officials have either been let go or have left of their own accord.

Entire hallways in U.S. departments are now empty, with replacements yet to be found. Trump campaigned on a pledge to declare war on the capital and to "drain the swamp." And he has kept his word to a fault. Nowhere has that been more visible than in the State Department at the end of Trump's first week in office. There has always been an unwritten rule in Washington that the new leadership works together with established State Department staff for at least enough time for knowledge to be transferred. But Trump ignored the tradition. In the first week of his presidency, almost the entire leadership of the State Department was forced to resign, including Under Secretary of State Patrick Kennedy and three additional senior officials. They had all worked under both Republican and Democratic administrations in the past.

"Nobody knows what will happen next," says one top official. "It's not about individual fates.

My concern is where the country is heading." Another State Department official spoke of pangs of conscience. With the country heading in the wrong direction, is giving up the right thing to do? Or should one stay and try to minimize the damage?

Ken Gude, an expert for domestic security with the left-leaning Washington think tank Center for American Progress considers Trump's exercise of presidential power to be dangerous. The new government, he says, "is seeking to neutralize the classic areas of the executive, whether in the National Security Council or in other areas. You can see that in the way the first executive orders have been implemented: A small group surrounding Trump and Bannon makes the decisions and excludes all other leading members of the government. They weren't even informed of the content of the new orders before they were issued. We have never before had a president who has actively sought to circumvent the government itself."

Gude believes Bannon is unpredictable for another reason as well: "He has a vision. He sees the world similarly to the way Islamic State does, just from the opposite perspective." For Bannon, Gude says, everything revolves around a fight between the Christian and the Muslim world. "He is preparing himself for this confrontation."

Shock Waves Around the World

It's not just Washington that now has to live with Trump and Bannon. Other countries are also now feeling the shock waves from the transfer of power and are now forced to come to terms with Trump's people.

In far away Britain, Ted Malloch leans back in a green armchair and looks out the window where the Thames flows sedately past the Henley Business School west of London. A steady rain is falling. Malloch takes a sip of his coffee and allows that he perhaps wasn't sufficiently diplomatic in his recent BBC interview.

Malloch is hoping to become the U.S. ambassador to the European Union, but in an interview with the BBC at the end of January, he didn't exactly make himself many friends in Europe. "I had in a previous career a diplomatic post where I helped bring down the Soviet Union," he said. "So maybe there's another union that needs a little taming." It was a clear reference to the European Union and officials in Brussels were not amused. Indeed, the most important parties in European Parliament have demanded that Malloch be denied his diplomatic credentials.

Trump and Malloch, a member of the Roosevelt family and currently a professor, have known each other for 20 years and Malloch advised the candidate on foreign and economic policy issues early on in the campaign. He has also known Stephen Bannon for quite some time, having gotten to know him when the then-head of Breitbart News used to ask him for interviews.

"Many have an inaccurate image of him. He's a smart guy," says Malloch. "Trump has the ideas and Bannon delivers everything else -- the tactics and a whole lot more."

Malloch used to work on Wall Street and also with the United Nations in Geneva. One can surely accuse many of Trump's people of having little idea about how the world works. But the accusation does not apply to Malloch.

'Seismic Shift'

"A seismic shift in US-European relations is taking shape," Malloch says, adding that Washington has become more cautious when it comes to international organizations. It is a formulation reflecting his intention to be more diplomatic. "From the perspective of the U.S., it is often better to work bilaterally with the individual countries of the EU. Frankly, this often gives us the upper hand."

He also predicted in his interview with the BBC that the eurozone could break apart within 18 months, and told SPIEGEL it was a "mistaken experiment. If I were sitting on the trading desk of an investment bank, I would bet against the euro." Like Trump, Malloch also believes that Brexit won't be the last case of a country turning its back on the EU. "When you look around Europe, you can put two letters of your choice before the word exit."

Malloch knows how Trump thinks. In the Trump system, speed and effect are everything: a strong president, few controls and a significant dose of cynicism. Trump is the antithesis of the EU. That is a problem, particularly now at a time when the cracks in the EU are becoming wider. The financial crisis, the refugee crisis, Brexit: All of it has weakened the union. And now Europe has Trump to worry about.

For Donald Tusk, president of the European Council, the U.S. president has become one of the greatest risks to Europe's future, joining China, Russia, radical Islam, war and terrorism. The new administration, he recently wrote, is "seeming to put into question the last 70 years of American foreign policy."

Even worse, Trump is getting support from right-wing populists across the entire continent.

Hungary's autocrat Viktor Orbán and Poland's strongman Jaroslaw Kaczynski were largely fringe figures before Trump's election, but not anymore. Trump's election, says Orbán, is a "great gift," adding after Trump's inaugural address that "we have received permission from, if you like, the highest position in the world so we can now also put ourselves in first place."
Trump is trying to drive targeted wedges into the European Union. His top trade adviser recently accused Germany of "exploiting" both the U.S. and other eurozone member states by way of a significantly undervalued euro. Meanwhile, Trump, who is a huge fan of Brexit, was holding hands with British Prime Minister Theresa May as the two walked out of the White House together recently.

It was "the best first date of all time," says Malloch.

Forget Paris?

Trump's people have nothing but disdain for international organizations, they hate multilateral agreements -- and they are likely to destroy the deal that could be the most fateful for the future of humanity. Until recently, that destruction was the responsibility of Myron Ebell, 64, who was in charge of environmental issues on Trump's transition team. During the weeks between Trump's election and the inauguration, Ebell sought to minimize and sideline the Environmental Protection Agency. He believes that climate change is fictitious and said in January that the environmental movement is "the greatest threat to freedom and prosperity in the modern world." He says that climate scientists, who "benefit from advancement in their careers and larger government grants," have joined together to form a "climate-industrial complex."

Ebell has battled the EPA in court for years and now wants to see the agency downsized from its current 15,000 employees to just 5,000. Trump has nominated Scott Pruitt to run the rump agency.

He too is a pronounced skeptic of global warming.

Will the U.S. now pull out of the Paris climate agreement as Trump promised on the campaign trail?

At the end of January, Republicans introduced a bill that would ban all U.S. contributions to the Intergovernmental Panel on Climate Change, the United Nations Framework Convention on Climate Change and the Green Climate Fund. With the GOP enjoying a majority in both the Senate and the House of Representatives, the bill could soon land on Trump's desk.

Withdrawing from the Paris climate agreement could take longer, but it's not impossible. Many can't imagine that the U.S. government under Trump's leadership will honor the country's commitments to limiting climate change. But without the U.S., the Paris deal is unlikely to work. With that Trump would make good on a threat he made on Twitter in early 2014: "This very expensive GLOBAL WARMING bullshit has got to stop."

Nobody is currently in a position to stop the president. The Democrats lost the White House in the November elections and the Republicans control both houses of Congress.

But the Democrats could seek to block Trump's Supreme Court nominee, the extremely conservative Neil Gorsuch. Supreme Court justices are named for life, meaning that Gorsuch, who is just 49, could exert influence on American political life for decades to come. To take his seat on the court, however, the nominee needs the approval of 60 percent of the Senate. If the Democrats choose to block his nomination, Trump has urged Republicans to deploy the so-called "nuclear option," which foresees GOP Senators using their majority to change the Senate rules governing the confirmation of Supreme Court justices. It would be a blow to democracy, but it would mean that Gorsuch could be confirmed with a simple majority.

Should a further seat on the Supreme Court be vacated during Trump's time in office, it would be a chance for conservatives to put their stamp on the court for years to come and perhaps even reverse important precedents such as the Roe v. Wade ruling on abortion rights.

Can Republicans Tame Trump?

It appears that only the Republicans themselves are in a position to truly tame Trump and many within the party establishment are indeed suspicious of the outsider. Still, the party won a historic victory on the backs of Trump and Bannon -- winning despite demographers having predicted for years that demographic shifts and immigration would hand the Democrats a majority that would be almost impossible to overcome. But Trump and his Mephistopheles Bannon disproved that logic, benefiting from the fact that huge numbers of white, working-class voters defected from the Democrats to support Trump.

It was a development that allowed Trump to hijack the Republican Party. His ideas, and particularly those coming from Bannon, contradict many of the fundamental values conservatives hold dear. But the GOP finds itself between a rock and a hard place. And they hope that Trump will make two of their greatest wishes come true: the deregulation of industry and a conservative Supreme Court for the next several decades.

Furthermore, even as surveys show that Trump is the least popular incoming president in a long, long time, the Republican grassroots are supportive of his policies. The result being that the Republican Party has essentially become Trump's hostage. Many Republicans are hoping for re-election in the 2018 midterms and those who resist Trump now will likely find themselves facing a primary challenge from a candidate hand-picked by Bannon.
Not even Speaker of the House Paul Ryan, who was clear in his critique of Trump during the campaign, has found the courage to criticize Trump's anti-Muslim travel ban.

A 'Danger to the Party and the Nation'

Conservative New York Times columnist David Brooks has branded the Republicans' willingness to fall into line a "Faustian bargain." The first 10 days of Trump's presidency, Brooks wrote on the last day of January, have shown that the price they have paid is too high and "will cost them their soul." In the bitingly critical piece, Brooks wrote that the Trump government was an "ethnic nationalist administration" in which the "Bannonites" have the upper hand. Trump's "incompetence," he wrote, "is a threat to all around him."

Trump's administration, Brooks goes on, "is less a government than a small clique of bloggers and tweeters who are incommunicado with the people who actually help them get things done … and the aroma of bigotry infuses the whole operation, and anybody who aligns too closely will end up sharing in the stench." Trump's government is a "danger to the party and the nation" and, as happened during the administration of Richard Nixon, "Republican leaders will have to either oppose Trump and risk his tweets, or sidle along with him and live with his stain."

Most Republicans, it seems, have chosen the route of holding their noses. Indeed, only two prominent Republicans have shown a willingness to repeatedly stand up to Trump: Senator Lindsey Graham and Senator John McCain. Both have been in office for years and are likely to stick around for some time to come, and both are fearless. But they are largely alone.

On the other side, though, a new liberal citizens' movement is quickly taking shape in the form of demonstrations across the entire country. Society as a whole and the country's youth are becoming politicized again to a degree not seen since the 1960s and '70s. And the question is quickly becoming who will have the greatest endurance -- the defenders of liberal values on the streets or the nationalist revolutionaries in the White House? The battle between these two camps could define America in the coming years, but it is difficult to predict how a narcissistic president such as Donald Trump might ultimately react to lasting demonstrations targeting his leadership. It is even more difficult to predict who will win the battle for the hearts of those who will ultimately determine whether Trump gets a second term in office: those disappointed white voters in the Midwest who in November turned their backs on the Democrats in droves.

Pushback from Silicon Valley

But the ranks of Trump's opponents go well beyond leftist demonstrators and Democratic politicians.

There's also another center of influential adversaries, located far away from Washington in Silicon Valley on the West Coast. Last Monday, engineers and programmers held up protest signs and chanted anti-Trump slogans in front of Google headquarters in Mountain View, California. And they were led by Sergey Brin, the company's co-founder who immigrated to the United States as a six year old. In a speech to the gathered Google employees, Brin emphasized that he was "an immigrant and refugee" himself and was "obviously outraged" by the travel ban targeting Muslims.

The involvement of Brin and several other leading Silicon Valley figures marked a departure.

Even as the shock over Trump's victory was felt deeply in left-leaning California, many of the tech executives, engineers, founders and programmers had been wary of launching attacks against the new president. Their reticence was primarily due to pragmatism: They felt if they remained silent, Trump wouldn't dare go after the vital tech industry.

But the travel ban against Muslims changed everything. Many of the leading personalities in Silicon Valley are either immigrants themselves or children of immigrants, with Apple founder Steve Jobs, who was the son of a Syrian immigrant who fled to the U.S. in 1954, being only the most famous.

The last two weeks have seen the formation of a new movement across Silicon Valley and beyond calling itself "Tech against Trump," and numerous firms publicly criticized Trump's travel ban.

Netflix head Reed Hastings said that Trump's actions "are so un-American it pains us all." Microsoft called it "misguided and a fundamental step backward." The taxi service Lyft announced that it was donating a million dollars to the American Civil Liberties Union (ACLU).

The tech firms' resistance is also fueled by fear that their fundamental business model could be in danger. Digitalization and globalization have always gone hand in hand, while protectionism and a nationalist political agenda are a threat to almost all of them, whether it's Google, Apple or Airbnb.

For years, tech leaders have presented themselves as being a central force behind societal advancement. Trump's closed border policies, wrote Airbnb head Brian Chesky in a memo to his employees last week, represents "a direct obstacle to our mission at Airbnb." The company also offered free lodging to those directly affected by the travel ban.

What, though, will happen to this liberal, progressive worldview under Trump, who is pursuing the exact opposite, namely less freedom? Trump's chief strategist Bannon made clear well before the election what he thought of all the tech-foreigners. While interviewing Donald Trump for Breitbart in 2015, Bannon said critically: "When two-thirds or three-quarters of the CEOs in Silicon Valley are from South Asia or from Asia, I think …" before trailing off. His numbers were way off. But the new government is nonetheless working on possible limitations to the country's visa program for highly skilled foreign workers. The move would force tech giants to focus their hiring efforts on Americans.

Indeed, the speed with which Trump has introduced his agenda has been dizzying. Two weeks ago, a black president, Barack Obama, was still sitting in the White House. He found it vital to avoid making all 1.6 billion Muslims in the world responsible for terrorism. He didn't want America to isolate itself. He helped push through the Paris climate agreement, he respected the European Union and he told Angela Merkel in farewell that she would likely have to take over the role of leading the free world.

Was that really just two weeks ago?

By Markus Becker, Uwe Buse, Clemens Höges, Peter Müller, Gordon Repinski, Mathieu von Rohr and Thomas Schulz

Why Trump Can’t Bully China

Kenneth Rogoff

China maintenance base for trains

CAMBRIDGE – As US President Donald Trump proceeds to destabilize the post-war global economic order, much of the world is collectively holding its breath. Commentators search for words to describe his assault on conventional norms of leadership and tolerance in a modern liberal democracy. The mainstream media, faced with a president who might sometimes be badly uninformed and yet really believes what he is saying, hesitate to label conspicuously false statements as lies.
But some would argue that beneath the chaos and bluster, there is an economic rationale to the Trump administration’s disorderly retreat from globalization. According to this view, the US has been duped into enabling China’s ascendency, and one day Americans will come to regret it. We economists tend to view abdication of US world leadership as a historic mistake.
It is important to acknowledge that the roots of the anti-globalization movement in the United States run much deeper than disenfranchised blue-collar workers. For example, some economists opposed the Trans-Pacific Partnership (a 12-country trade deal that would have covered 40% of the global economy) on the questionable grounds that it would have harmed American workers. It fact, the TPP would have opened Japan far more than it would have affected the US. Rejecting it only opens the door to Chinese economic dominance across the Pacific.
US populists, perhaps inspired by the writings of Thomas Piketty, seem unimpressed by the fact that globalization has lifted hundreds of millions of desperately poor people in China and India into the global middle class. The liberal view of Asia’s rise is that it makes the world a fairer and more just place, where a person’s economic fate does not depend quite so much on where they happen to have been born.
But a more cynical view permeates populist logic, namely that in its excessive adherence to globalism, the US has sown the seeds of its own political and economic destruction. Trumpism taps into this sense of national mortality; here is someone who thinks he can do something about it. The aim is not just to “bring home” American jobs, but to create a system that will extend US dominance.
“We should focus on our own” is the mantra of Trump and others. Unfortunately, with this attitude, it is hard to see how America can maintain the world order that has benefited it so much for so many decades. And make no mistake: America has been the big winner. No other large country is nearly as rich, and the US middle class is still very well off by global standards.
Yes, Democratic Presidential candidate Bernie Sanders was right that Denmark is a great place to live and does many things right. He might have mentioned, however, that Denmark is a relatively homogeneous country of 5.6 million people that has very low tolerance for immigration.
For better or for worse, the globalization train has long since left the station, and the idea that one can turn it back is utterly naive. Whatever might have been done differently before US President Richard Nixon visited China in 1972 is no longer possible. The fate of China, and its role in the world, is now in the hands of the Chinese and their leaders. If the Trump administration thinks it can reset the clock by starting a trade war with China, it is as likely to accelerate China’s economic and military development as it is to slow it down.
So far, the Trump administration has only sparred with China, concentrating its early anti-trade rhetoric on Mexico. Although the North American Free Trade Agreement, which Trump reviles, has likely had only modest effects on US trade and jobs, he has attempted to humiliate Mexicans insisting that they pay for his border wall, as if Mexico were a US colony.
The US is ill-advised to destabilize its Latin American neighbors. In the near term, Mexican institutions should prove quite robust; but in the long run, Trumpism, by encouraging anti-American sentiment, will undermine leaders otherwise sympathetic to US interests.
If the Trump administration tries such crude tactics with China, it will be in for a rude surprise. China has financial weapons, including trillions of dollars of US debt. A disruption of trade with China could lead to massive price increases in the low-cost stores – for example, Wal-Mart and Target – on which many Americans rely.
Moreover, huge swaths of Asia, from Taiwan to India, are vulnerable to Chinese aggression.
For the moment, China’s military is relatively weak and would likely lose a conventional war with the US; but this situation is rapidly evolving, and China may soon have its own aircraft carriers and other more advanced military capabilities.
The US cannot “win” a trade war with China, and any victory will be Pyrrhic. The US needs to negotiate hard with China to protect its friends in Asia and deal with the rogue state of North Korea. And the best way to get the good deals Trump says he seeks is to pursue a more open trade policy with China, not a destructive trade war.

The Next American Farm Bust Is Upon Us

Shrinking role in global grain market coupled with a strong dollar and higher costs for seeds drives U.S. farmers out of business; overflowing bunkers

By Jesse Newman and Patrick McGroarty | Photographs by Jesse Newman

RANSOM, Kan.—The Farm Belt is hurtling toward a milestone: Soon there will be fewer than two million farms in America for the first time since pioneers moved westward after the Louisiana Purchase.

Across the heartland, a multiyear slump in prices for corn, wheat and other farm commodities brought on by a glut of grain world-wide is pushing many farmers further into debt. Some are shutting down, raising concerns that the next few years could bring the biggest wave of farm closures since the 1980s.

The U.S. share of the global grain market is less than half what it was in the 1970s. American farmers’ incomes will drop 9% in 2017, the Agriculture Department estimates, extending the steepest slide since the Great Depression into a fourth year.

“You keep pinching and pinching and pretty soon there’s nothing left to pinch,” said Craig Scott, a fifth-generation farmer in this Western Kansas town.

Bill Scott, 82, the father of Craig Scott, holds a photograph of his grandfather, who started the family farm in 1902 in Ransom, Kan.

Bill Scott, 82, the father of Craig Scott, holds a photograph of his grandfather, who started the family farm in 1902 in Ransom, Kan.

From his father’s porch, the 56-year-old can see the windswept spot where his great-grandparents’ sod house stood in 1902 when they planted the first of the 1,200 acres on which his family farms alfalfa, sorghum and wheat today. Even after harvesting one of their best wheat crops ever last year, thanks to plentiful rain and a mild winter, Mr. Scott isn’t sure how long they can afford to keep farming that ground.

Costs for seeds, fertilizer and equipment climbed so high and grain prices dropped so low that he still lost more than $120 an acre. Afraid to come up short again, Mr. Scott decided last fall not to plant 170 acres of winter wheat, close to a third of the usual amount. U.S. farmers sowed the fewest acres of winter wheat this season in more than a century.

“No one just grain farms anymore,” said Deb Stout, whose sons Mason and Spencer farm the family’s 2,000 acres in Sterling, Kan., 120 miles east of Ransom. Spencer also works as a mechanic, and Mason is a substitute mailman. “Having a side job seems like the only way to make it work,” she said.

She and her husband have declared bankruptcy before. Farmers around Sterling lost $6,400 on average in 2015, the latest available data, after profits of $80,800 a year earlier, according to the Kansas Farm Management Association.

Farming has always been a boom-and-bust enterprise. Today, the swings are sharper and less predictable now that the farm economy has become more international, with more countries growing food for export as well as for their own populations.

American farmers’ share of the global grain trade has fallen from 65% in the mid-1970s to 30% today, giving them less sway over prices. More producers and more buyers around the world also mean more potential disruptions from bad weather, famine or political crisis.

Corn prices once varied year-to-year by less than $1 a bushel. Since 2006 they have shot up and dropped more than $4 a bushel.

Some farm towns have suffered as low crop prices pressure farmers. Above, Wilson, in Central Kansas.
Some farm towns have suffered as low crop prices pressure farmers. Above, Wilson, in Central Kansas.

A decade ago, a U.S. biofuel boom and China’s growing middle class lifted prices for crops like corn and soybeans. Many American growers spent the windfall buying land and half-million-dollar equipment.

The boom also encouraged farmers in other countries to ramp up production. Farmers world-wide put nearly 180 million new acres into cultivation over the past decade. Lower production costs, proximity to fast-growing markets and improving infrastructure gave some overseas farmers an edge.

Corn and wheat output has never been higher, and never has so much grain been bunkered away.

From the early 1800s until the Great Depression, the number of U.S. farms grew steadily as pioneers spread west of the Mississippi River. Families typically raised a mix of crops and livestock on a few hundred acres of land at most. After World War II, high-horsepower tractors and combines enabled farmers to cover more ground. Two decades ago, genetically engineered seeds helped farmers grow more.

Farms grew bigger and more specialized. Large-scale operations now account for half of U.S. agricultural production. Most farms, even some of the biggest, are still run by families.

As farm sizes jumped, their numbers fell, from six million in 1945 to just over two million in 2015, nearing a threshold last seen in the mid-1800s. Total acres farmed in the U.S. have dropped 24% to 912 million acres.

Russia, meanwhile, has swung over the past quarter-century from the world’s largest wheat importer to the biggest exporter, said Dan Basse, president of Chicago-based research firm AgResource Co. Farmers there planted even more wheat last year to take advantage of the U.S. dollar’s recent climb against many currencies. That encourages Russian farmers to export as much wheat as possible for dollars, which convert to about twice the number of rubles they did three years ago.

The strong dollar also allows farmers in some countries to undercut U.S. prices.

“As the dollar stays strong, U.S. farmers don’t have a lever to pull,” Mr. Basse said. “It’s a slow bleed, not a cut to the jugular all at once.”

Planting wheat in Chase, Kan.; a soybean harvest in Sterling, Kan.; and a grain elevator in Ransom, Kan.

The Obama administration last year accused China of unfairly subsidizing wheat production and improperly limiting grain imports to the detriment of U.S. farmers. The USDA in October said it would pay more than $7 billion in financial assistance under existing programs to help farmers survive the current downturn.

U.S. wheat exports last season were the lowest in almost a half-century, though government forecasters expect them to improve this year. Mr. Basse said he believes it won’t be economically viable for the U.S. to export wheat within five years.

Economists don’t expect the current slump to be as severe as the crisis that hit the Farm Belt in the 1980s. In those days, grain prices plunged following a rally in the previous decade that spurred farmers to expand production, amassing debt as a surplus grew. Farmland values plummeted and interest rates soared, sparking a bust that forced many farmers and lenders out of business.

Farmland values are expected to hold up better this time. Farm incomes hit record highs as recently as 2013, leaving many growers with significant cash reserves. Interest rates, while expected to rise, are still near record lows. Although debt-to-asset ratios among U.S. farmers are projected to increase in 2017 for the fifth straight year, they also remain historically low.

Grain sorghum grows in Central Kansas.
Grain sorghum grows in Central Kansas.

Costs for farm supplies like fertilizer have fallen, and economists foresee increasing pressure on seed prices and land rental rates. The crunch could ease if bad weather curbs harvests, lifting demand for America’s excess grain. Fewer rural communities rely economically on agriculture today, which could help insulate them from the downturn.

For some, the slump is an opportunity. Farmers with low debts and enough scale to profit from last year’s record harvests could be in a position to rent or buy up land from struggling neighbors.

Lee Scheufler, 65, has expanded his farm in Sterling nearly 10-fold over the years, starting with 600 acres four decades ago. Having squirreled away money during profitable years, he recently bought and rented higher-quality land to replace some of his weaker holdings.

“We tried to position ourselves for when the other shoe drops,” said Mr. Scheufler, adding that someday he would like to pass on his land to a younger grower just beginning to farm, like a neighbor did for him.

One chilly afternoon in October, Mr. Scheufler steered his combine across the first field he bought. The machine’s giant claw spun through rows of golden soybeans. A hawk circled the combine’s wake, hunting for exposed field mice. He recalled farmers whose land he has taken over: Ted Hartwick ’s, the Matthews’, the Profits’, his father’s. “Each property has its own history,” he said.

Kansas towns have also been hit by the drop in oil prices since 2014. Above, unused pump jacks and other debris from the oil industry.
Kansas towns have also been hit by the drop in oil prices since 2014. Above, unused pump jacks and other debris from the oil industry.

In the late 1970s, he joined thousands of farmers in Washington for a demonstration urging the government to address low grain prices and farm foreclosures. As some drove their tractors onto the National Mall, his group rang a bell every five minutes to symbolize the rate at which farms were closing. He has been reminded of those days often this year.

“The potential for a big crisis is real,” he said. “If things stay similar to how they are now, you haven’t seen anything yet.”

In Ransom, Mr. Scott has resorted to government assistance to guarantee himself some income. He placed 170 acres in a government conservation program that pays farmers to plant fields with grass rather than crops. That seemed like his only choice after spending about $6.50 a bushel on seed, fertilizer, fuel and pesticides to grow wheat last year only to earn $2.90 a bushel. During planting season last fall, he and his 82-year-old father cut back on fertilizer and coaxed one more crop out of a 20-year-old chemical sprayer with a worn-out engine.

Many of his peers have given up. There were 28 students in Mr. Scott’s graduating class at Ransom’s high school nearly four decades ago. Most were farmers’ children. This year there are nine students in the school’s senior class. “Farms got bigger to be more efficient, but it’s caused these towns to die a slow death,” Mr. Scott said.

Monty Roth ’s Loaves n’ Fishes cafe was barely profitable last year. He said he might close it this month if sales don’t improve. Oil, the other big business in Ransom, has been battered by the drop in crude prices since late 2014. Most oil workers have left town.

David Radenberg, who has farmed for 30 years in Claflin, Kan., said this crop could be his last if prices remain low.
David Radenberg, who has farmed for 30 years in Claflin, Kan., said this crop could be his last if prices remain low.

In Great Bend, 80 miles east of Ransom, Les Hopkins recently sold his John Deere dealership after sales all but stopped. He is owed about $100,000 by farmers who financed machinery purchases they haven’t paid off. He has tried tracking them down by calling from cellphone numbers they won’t recognize. “That money is gone,” he said.

Bankers say many farmers are burning through savings to stay in business. They expect some to retire rather than lose more money. Young farmers without much savings are vulnerable, as are large growers who racked up debt to expand operations. Some locked into multiyear land leases at high rents.

The motor on David Radenberg ’s tractor gave out last fall as he sowed wheat on his family’s 2,400 acre farm in Claflin, 90 miles east of Ransom. He didn’t have the money to fix it.

“You want to cry when you find out how much it costs,” he said. He decided to sell the tractor for $10,500 and rely on an older model. If grain prices remain weak, the farm could be next. After 30 years farming, this crop could be his last: “Do I go work at Wal-Mart as a greeter or as a parts man at the mechanics shop?”

​​Overflow corn is piled at a grain elevator in Central Kansas.
​​Overflow corn is piled at a grain elevator in Central Kansas.

Mexico’s Bad Luck Gets Even Worse

If Trump pushes America’s neighbor into a slump, no wall will be high enough to keep the immigrants out.

By Ruchir Sharma

Mexico is the unlucky country. Time and again its economy has been poised to take off, only to stumble into crisis, sometimes of its own making but often a result of the forces unleashed by its gradual opening to the U.S. The latest shock arrived with Donald Trump and peaked last week when a spat over who will pay for “the wall” compelled Mexico’s president, Enrique Peña Nieto, to cancel his first meeting with the new White House. Economists are already rushing to downgrade Mexico’s growth prospects for 2017.

Mr. Trump’s worldview is built on a gut feeling that bad trade deals allow Mexico to profit at America’s expense. Atop his agenda is renegotiating the North American Free Trade Agreement, the 1994 deal that turned the continent into a free-trade zone. But it is difficult to argue that Nafta unfairly enriched Mexico.

The big mystery, actually, is why Mexico has not done better since Nafta launched. Opening to the U.S. did help to modernize the country, putting it on track to emerge as the most important manufacturing power in Latin America. But it hardly made Mexico rich.

Since 1994, Mexico’s economy has grown at an annual rate of about 2.5%—half the average for emerging countries over the same period. The average Mexican’s income is only a quarter the average American’s, no higher in relative terms than 20 or even 100 years ago.

Mexico’s string of unlucky stumbles dates to at least 1994. As Nafta went into effect, a sharp rise in U.S. interest rates prompted investors to pull money out of Mexico, leading to the peso crash that December. Because Mexico’s government had begun issuing bonds that it promised to pay in dollars, it needed a bailout when the peso collapsed. Bankruptcies spread, and the economy fell into a massive recession.

As often happens after a crisis, Mexico recovered sharply, and in the late 1990s its economy grew in close sync with America’s. But right as its luck started to turn, the next shocks hit. In 2001 the U.S. fell into recession, dragging Mexico along, and China entered the World Trade Organization. Manufacturers began moving to China at an accelerating pace to take advantage of wages that were a fraction of Mexico’s.

Over the next decade, many emerging economies were lifted by surging prices for oil and other commodities, as well as a tide of easy credit from Western banks. Mexico was not among the lucky, its growth stymied by the declining production of its state oil company, Pemex, and by a cultural fear of debt contracted during the peso crisis. While other emerging economies grew rapidly by exporting to booming China, Mexico grew moderately by exporting to the U.S. When the 2008 financial crisis began in America, Mexico became one of the first casualties in the emerging world.

Still, Mexico had not given up on closer ties to the U.S. Its elites remained believers in the Washington consensus of open borders, free markets and budget discipline. In 2012 Mexicans elected Mr. Peña Nieto, a growth-oriented reformer who promised to reduce the influence of monopolists, including Pemex.

By 2014 these reforms looked ready to generate the long-sought boom. The government expected huge revenues from an auction of oil drilling rights, including to big American firms. But later that year oil prices collapsed and dragged the growth rate down to 2%.

Mr. Peña Nieto persisted, and by the middle of last year, the oil shock had faded. Mexico was growing at a healthy 3%, and unemployment was falling sharply. Then came President Trump. Now businesses are putting investment on hold until they see what the White House will do. But shoving Mexico too hard on trade could backfire.

Economists already expect Mexico’s growth this year to dip below 2%, and unemployment could start rising again. This would send more Mexicans northward. The flow of immigrants had slowed significantly in recent years as job opportunities and wages rose in Mexico. More than the wall, the best way to keep immigrants from crossing the border is to give them reasons to stay home.

North American supply chains are so tightly interwoven that 80% of Mexican exports go to the U.S.—and 40% of the parts those exports contain are made in the U.S. Fourteen states now count Mexico as their main trading partner, including anchors of the angry middle class like Michigan, which catapulted Mr. Trump to victory.

Mexicans also have an intense streak of anti-gringo patriotism. This had waned in recent years as the two countries’ economies became intertwined. The feeling I got during a recent visit is that many Mexicans felt they had been moving toward becoming the honorary 51st state before Mr. Trump barged in vowing to expel them.

Delivering on Mr. Trump’s threats could revive latent Mexican nationalism and play into the hands of a populist politician like Andrés Manuel López Obrador, a firebrand who is gaining momentum as Mexico’s 2018 presidential elections approach. Mr. Peña Nieto’s approval rating has fallen to 12%, partly because many Mexicans fault him for failing to stand up to Mr. Trump. Still, nationalism can’t fill an empty stomach. If Washington pushes Mexico into a deeper slump, no wall could be high enough to prevent Mexican immigrants from trying to escape their unlucky land.

Mr. Sharma, the chief global strategist at Morgan Stanley Investment Management, is the author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World” (Norton, 2016).

US Strategies in the Middle East

Washington must choose sides.

By George Friedman

Last week, Iran confirmed that it test-fired a ballistic missile. The United States has responded by imposing new sanctions on Iran and stating that Iran remains both a major source of terrorism and a threat to American national interests. A review is now underway concerning U.S. policy toward Iran. At the same time, President Donald Trump has declared his intention of crushing the Islamic State, which has been U.S. policy since the emergence of IS.

U.S. National Security Adviser Michael Flynn speaks during the daily press briefing as Press Secretary Sean Spicer (L) looks on at the White House in Washington, on Feb. 1, 2017. Flynn signaled a more hardline American stance on Iran, condemning a recent missile test and declaring he was “officially putting Iran on notice.” NICHOLAS KAMM/AFP/Getty Images
U.S. strategy in Iraq prior to the 2007 surge was to oppose both Shiite and Sunni claims to power in Iraq. The United States tried to craft a government in Baghdad that was independent of both major factions, ideally secular and closely aligned with the United States. That government was created, but it was never effective. The Shiites, supported by the Iranians, deeply penetrated the government, and more importantly, the government never had broad support beyond the coalition that backed it. The most dynamic forces in Iraq were deeply embedded in the Shiite and Sunni communities. Both drew strength from outside Iraq – the Sunnis from Saudi Arabia and the Shiites from Iran.

What the United States wanted to create was very different from the reality on the ground. In the surge, the U.S. recognized this, saw the Iranian-supported Shiites as the greater threat and tried to counterbalance them by reaching a financial and political understanding with the Sunni leadership. Apart from providing the U.S. with an opportunity for a graceful exit, the surge didn’t solve the strategic problem the U.S. was dealing with. IS arose as the champion of a substantial part of the Sunni Arab population, and the Iraqi government became, to an imperfect but real extent, captive to Iran. The U.S. remained powerless to craft the Iraq it wanted.

The United States now has three broad strategic options. The first is, after 15 years of ineffective fighting, to accept defeat in the region, withdraw and allow the region to evolve as it will. The advantage of this strategy is that it accepts the reality and consequences of the previous 15 years, and it halts an ineffective approach. The weakness of this strategy is that in accepting the evolution of the region, the U.S. could face an increasingly powerful Sunni world and a powerful Shiite Iran. After the sense of relief may come an unbearable headache.

The second option is to use American force to crush IS and isolate Iran, or failing that, engage Iran in some form of military action, possibly directed at its nuclear program. The United States does not have a military force large enough to simultaneous wage war from the Mediterranean to Iran, and also in Afghanistan. Former Defense Secretary Donald Rumsfeld said at the beginning of the Iraq war that you fight with the army you have. He should have added that if the army you have is insufficient, you will lose, or at most, face an endless stalemate. The goal of this strategy would be to crush not merely the current organizations fighting for Sunni and Shiite causes but to destroy the will of the Arab and Persian worlds to create new organizations out of the ashes of the old. The United States has never fought a major foreign war without a coalition of forces. Its distance from the Eurasian battlefield means that support from other forces for the logistical effort is essential. This is why there is discussion of an alliance with Russia. But Russia does not have the same interests in Iran as the United States, nor is it looking for the same outcome.
The third strategic option is built on two realities. First, the U.S. has limited forces, reluctant or discordant allies, and cannot win a war on this scale. Second, the Islamic world is deeply divided along religious and ethnic lines. There is the religious split between Shiites and Sunnis. There is the split between the Arab and non-Arab world. In other words, Islam is not of a single fabric and these divisions are its point of vulnerability. The third strategy would require allying with one faction to give it the thing it desires the most – the defeat of the other.

From the beginning of American history, the U.S. has used the divisions in the world to achieve its ends. The American Revolution prevailed by using the ongoing tension between Britain and France to convince the French to intervene. In World War II, facing Nazi Germany and the Stalinist Soviet Union, the United States won the war by supplying the Soviets with the wherewithal to bleed the German army dry, opening the door to American invasion and, with Britain, the occupation of Europe.

Unless you have decisive and overwhelming power, your only options are to decline combat, vastly increase your military force at staggering cost and time, or use divergent interests to recruit a coalition that shares your strategic goal. Morally, the third option is always a painful strategy. The United States asking monarchists for help in isolating the British at Yorktown was in a way a deal with the devil. The United States allying with a murderous and oppressive Soviet Union to defeat another murderous and oppressive regime was also a deal with the devil. George Washington and Franklin D. Roosevelt both gladly made these deals, each knowing a truth about strategy: What comes after the war comes after the war. For now, the goal is to reach the end of the war victorious.
In the case of the Middle East, I would argue that the United States lacks the forces or even a conceivable strategy to crush either the Sunni rising or Iran. Iran is a country of about 80 million defended to the west by rugged mountains and to the east by harsh deserts. This is the point where someone inevitably will say that the U.S. should use air power. This is the point where I will say that whenever Americans want to win a war without paying the price, they fantasize about air power because it is low-cost and irresistible. Air power is an adjunct to war on the ground. It has never proven to be an effective alternative.

The idea that the United States will simultaneously wage wars in Syria, Iraq, Iran and Afghanistan and emerge victorious is fantasy. What is not fantasy is the fact that the Islamic world, both strategically and tactically, is profoundly divided. The United States must decide who is the enemy. “Everybody” is an emotionally satisfying answer to some, but it will lead to defeat. The United States cannot fight everyone from the Mediterranean to the Hindu Kush. It can indefinitely carry out raids and other operations, but it can’t win.

To craft an effective strategy, the United States must go back to the strategic foundations of the republic: a willingness to ally with one enemy to defeat another. The goal should be to ally with the weaker enemy, or the enemy with other interests, so that one war does not immediately lead to another. At this moment, the Sunnis are weaker than the Iranians. But there are far more Sunnis, they cover a vast swath of ground and they are far more energized than Iran. Currently, Iran is more powerful, but I would argue the Sunnis are more dangerous. Therefore, I am suggesting an alignment with the Iranians, not because they are any more likable (and neither were Stalin or Louis XVI), but because they are the convenient option.

The Iranians hate and fear the Sunnis. Any opportunity to crush the Sunnis will appeal. The Iranians are also as cynical as George Washington was. But in point of fact, an alliance with the Sunnis against the Shiites could also work. The Sunnis despise the Iranians, and given the hope of crushing them, the Sunnis could be induced to abandon terrorism. There are arguments to be made on either side, as there is in Afghanistan.

In my opinion, what cannot be supported is simultaneous conflicts with Sunnis and Shiites, Arabs and Persians. What we learned in Iraq is that we will not win such a conflict. Attempting what failed in Iraq on a far larger scale makes little sense. Dividing your enemies is a fundamental principle of strategy. Uniting them makes little sense. Therefore, simultaneously waging war on Sunnis and Shiites is irrational. Simply withdrawing from the region carries enormous long-term risks.

In the end, Washington wanted to defeat the British and Roosevelt wanted to defeat Hitler. Without the French or Soviets, these wars would have been lost. In the end, the Bourbons and communists were destroyed. Washington and Roosevelt were in no rush. There is always time for the winner to pursue the end he wants. There is never time for the loser.