Germany, Democracy and the World

The End of the End of History

A DER SPIEGEL Editorial by Klaus Brinkbäumer

The Chancellery in Berlin

The collapse of coalition talks in Berlin are far from a national crisis. But it is symptomatic. It is time for German politicians to realize what is at stake for their country and the rest of the Western world.

Sometimes we in the West forget that our view of the world is just one among many that are possible. And that neither our understanding of human rights nor our adherence to liberal democracy are attractive across the globe. Is the Western way of life morally superior? And even if it were, is it the most constructive or effective way of organizing human societies?

We in the West also tend to interpret history to reflect positively on ourselves. Were the many centuries during which Europe or the United States were at the center of global events not inevitable? Were they not based on the Enlightenment and the Renaissance, on our engineering prowess, on our technological preeminence? Was it not based on our overall brilliance? After the collapse of communism in 1989, Francis Fukuyama wrote "The End of History," by which he meant the triumph of Western values. Soon the entire world would be democratized, the victorious political order seemed clear.

How absurd that worldview seems now, in November 2017.

Since September 2001, the West has made a number of missteps. There were the aimless interventions in Iraq, Afghanistan and Libya. There was the self-inflicted economic crisis of 2008, which was actually not a global disaster but a trans-Atlantic one, as China, Indonesia and India all continued to grow. For too many years we have clearly demonstrated to non-democratic states that democracy may no longer be reliable and is far too fragile: It installs incompetent leaders like Donald Trump in power and leads to blunders like Brexit. It has long been clear that democracy is slow, but now it's obvious that it also makes terrible mistakes. What country would look to today's United States as an example?

Which brings us to Germany, that stable center of Europe.

It must first be said that the government crisis, which has arisen out of the failed coalition talks, is not a crisis of state - at least not yet. A caretaker government is in office, the federal president is exhibiting prudence, the country's economy is robust, and the system is working as it should.

Even the chancellor - whose enthusiasm for political communication is limited at best and whose 12 years of leadership have brought the country to where it finds itself today - is proceeding carefully and maturely.

The Social Democrats, meanwhile, twice hastily - indeed, childishly - rejected the idea of joining Merkel in a coalition. There is now no safe way back. Joining a grand coalition would marginalize the party; in four years, it could plunge to just 15 percent. Therefore, rapid new elections are the only thing that makes sense. Hopefully they will result in a clear governing mandate and to a greater sense of urgency and responsibility in the ensuing coalition talks.

Complacent Prosperity

That, in fact, is the most disturbing thing about the way Christian Lindner of the Free Democrats backed out of the talks, about the constant complaining from the Bavarian conservatives, about the weeks of haggling over details without any sense of the bigger picture.

This irreverence. The prioritization of the individual over the common good. This desolate narcissism born of complacent prosperity.

In truth, the domination of the world by Europe and the United States has only lasted two centuries. Before that, China was already an economic leader. And the history of the rise of the West cannot really be attributed to but a single cause. This ascent was helped along by genocide and slavery; colonialism allowed Europe to plunder ideas. It was in China that the technologies for iron and steel production were first invented, as well as paper currency, gun powder and the compass.

In human history, there has hardly ever been such a rapid rise - which really is just a return to form - as that of China over the past 30 years. The country has long since begun financing other states without paying attention to issues like democracy and human rights: The old "Washington Consensus," is being replaced by the "Beijing Consensus." The Chinese model fascinates those that wish to replicate it because the party appears so resolute and closed while the society is so young, vibrant and hungry for start-ups. Western societies on the other hand are aging. Many citizens see their wages stagnating, while education, homes and healthcare are becoming unaffordable. The old maxim that rising GDP translates into prosperity for all is being exposed as a fallacy.

The idea that democracy was somehow the endpoint of development was megalomaniac. As long as there is something to redistribute, every system has it easy. But in the past 11 years, freedom around the world has receded. Of 195 states only 87 are still free, 59 are partially free and 49 are not free at all according to the NGO Freedom House. Turkey and Russia have turned their backs on the group of democracies while Poland and Hungary look to be not far behind. Meanwhile, the United States is foundering. One would hope that should be enough to focus minds in Berlin. There is, after all, a lot at stake.

The Undrained Swamp

Trump's Washington, One Year On

By Christoph Scheuermann

 Photo Gallery: A Year of Trump

It has been one year since Donald Trump was elected to the White House, but the mutual hatred between the president and Washington D.C. has not dissipated. And the city has refused to back down to the Trumpian bluster.

Washington is not a place known for humility or modesty. So really, Donald Trump should fit right in. It's a city of gigantic egos and expense accounts, police escorts and armored limos.

Everything is about status and power, even when socializing at night. The city challenges its residents and promotes the ambitious, which isn't always a good thing. It has produced great deeds and great power, and often violence as well - ever since George Washington planted the heart of democracy in a mosquito-infested swamp more than two centuries ago.

The streets and avenues are too broad, the massive steps to the Capitol are too big, the buildings, statues and monuments too imposing. There's no center, no core. Only expanse, size, symmetry. A chessboard built for giants. For presidents like Abraham Lincoln, good old Lincoln, who sits on a throne of stone in his own temple on the National Mall, four or five times the size of a mere mortal.

No other city is hated quite as much by the rest of the country. Trump swore that he would drain the swamp, the conglomerate of politics, lobbyism, think tanks and business that has settled here. The disdain is mutual: Ninety-one percent of its residents voted for Hillary Clinton.

It's been a year since the election that pushed the liberal West into crisis. The White House is now occupied by a man who is constantly triggering a new uproar, a man who is perennially angry, wayward, erratic, a besieged, unstable king, almost Shakespearian. Under Trump, the capital has turned into the set of a reality TV show. Old Lincoln, sitting on his throne, appears even more worried than usual.

First, Trump gave his family, his daughter Ivanka and her husband Jared Kushner, posts in the administration. Many in the city found that unbearable enough - a real estate clan running the country, the Kardashians of politics. More recently, he threatened North Korea with nuclear war, launched attacks on senators from his own party and voiced understanding for Nazis and racists. His actions haven't just been chaotic, they've been dangerous. Secretary of State Rex Tillerson is alleged to have referred to the president as a "fucking moron" after he supposedly suggested a tenfold increase in the country's nuclear arsenal.

And then there is this administration's original sin: In May, Trump fired FBI Director James Comey because he wouldn't let go of "this Russia thing." For months now, special counsel Robert Mueller has been probing how much influence Vladimir Putin might have had on the U.S. election and whether Trump's team had outside help in defeating Hillary Clinton.

A Lot at Stake

There's a lot at stake, perhaps even the Trump presidency itself. At the very end of October, Mueller filed charges against Trump's former campaign manager Paul Manafort and his business partner Richard Gates, with the indictments including money laundering, tax evasion, failure to register as agents for foreign interests and conspiracy to defraud the U.S. government. Both men had been long-time advisors to the Ukrainian government back when it was pro-Russian.

The case of George Papadopoulos, who was also indicted, is even more severe. He is alleged to have pursued contacts to Russia with the knowledge of the campaign team, and to have lied to investigators. He is now cooperating with the FBI. Mueller's investigation is coming closer and closer to the president, something that has provoked euphoria in liberal Washington.

The White House seems like a besieged fortress these days. "Everyone is freaking out," one Republican told The Washington Post. Trump woke up a week ago Monday at the crack of dawn and followed developments on TV as Manafort turned himself into the authorities at the FBI's Washington headquarters. The president reacted to the news with exasperation and disgust, White House staff said. At 10:28 a.m. he tweeted: "There is NO COLLUSION!"

A few minutes later, the charges against Papadopoulos were announced - and Trump went silent.

On such days, Washington can seem even more tremulous than normal. For 12 months, the city has simmered with anger, conspiracy, disbelief and breathlessness. Every tweet from Trump causes thousands of cellphones to vibrate, every press conference in the White House results in "breaking news." And most U.S. news outlets have had to implement an early shift just to turn Trump's early morning tweets into newsflashes. Many residents feel like they are constantly just seconds away from a major catastrophe. Nothing can be ruled out with Trump: nuclear war, impeachment, or a huge, messy demise.

In the spring, writer David Frum described in The Atlantic how the U.S. could descend into an autocracy under Trump - in a cynical, divided country in which an almost all-powerful president could use aggression and populist decisions to secure a second term. Frum's article resonated widely, a form of dictatorship really seemed possible. So far, the dystopia hasn't arrived and Trump's approval ratings are collapsing. Although he has little respect for the country's institutions, he governs too shortsightedly to pose a real threat to them.

The real question is what sort of damage can this president inflict while in office and what happens now? Can one man endanger democracy?

This drama is playing out in a tiny area, stretching for just three or four kilometers. It's just a 10-minute drive down Pennsylvania Avenue from the White House to the Capitol. On the way, one passes by the FBI headquarters and, across the intersection, the Trump International Hotel, the city's new nerve center of power and money.

Washington was not built for love, like Paris, or money, like London, or adventure like New York. It is a place of discipline, of Prussian-like morality. A triumph of the will. The alarm rings at 5:30 a.m. for a short burst of exercise before the office. Nowhere are there quite as many well-toned bodies sitting behind desks.

Gold Curtains: The White House, 1600 Pennsylvania Avenue

The Oval Office is the nucleus of American democracy, the most famous office in the world, where the threads of a global power come together. Franklin D. Roosevelt worked here during World War II, John F. Kennedy addressed the nation about the Cuban Missile Crisis from here, and Richard Nixon spoke with the Apollo astronauts during their moon landing. Under Trump it has become the epicenter of a destructive fury. The man who campaigned against the system suddenly found himself at its very center.

Trump's first mission was to erase all traces of his predecessor. He wanted to destroy the health care system, with which Barack Obama had delivered health insurance to around 12 million U.S. citizens who previously had none. He wanted to cancel trade deals with Mexico and Canada. And he called alliances and organizations into question, such as NATO. But first, he focused on the office itself.

Every newly inaugurated president decorates the Oval Office to his own taste, but none have been quite so radical as Trump. The man with hardly any sense of the past decided to fill his office with history. He moved the bust of Martin Luther King and hung a portrait of Andrew Jackson, a military hero and man of the people who became president in the early 19th century.

It's how Trump sees himself, a glorious outsider, brought to power by the people.

He hung six additional flags behind the massive wooden desk once placed in the office by Jackie Kennedy. He replaced Obama's gray couches with brocade sofas, he replaced blinds with gold curtains and chose a damask print to replace the yellow-stripped wallpaper. It looks as though he wanted to replicate a luxury suite in one of his hotels, a "presidential suite" that can be rented for a few thousand dollars.

Trump spends much of his time in a small antechamber where a flat screen TV hangs on the wall. It's usually tuned to Fox News, Trump's favorite channel, where the commentators are just as obsessed with Hillary Clinton as he is.

Early on, global events landed without any vetting on Trump's desk. Because he didn't trust the intelligence agencies, he believed Fox journalists and friends more than he did officials at the CIA or Pentagon. He read texts recommended to him by those he trusted, such as a Breitbart article about Obama's alleged bugging of Trump Tower in New York. He promptly tweeted about it and unleashed an absurd scandal.

In August, Vice reported that twice a day Trump is handed a folder full of only positive newspaper reports. His former chief of staff, Reince Priebus, tried and failed to stem the flow of information and visitors.

Since then, though Priebus has been fired and his replacement John Kelly has imposed stricter control over access to the president. He oversees who and what the president sees, but he must be careful. Trump hates nothing more than the feeling of being patronized.

Undisputed Access

Kelly is the second most powerful man in the White House and the current victor of this early phase of the presidency, alongside National Security Advisor Herbert Raymond McMaster and Defense Secretary James Mattis. Three military men, all generals, control access to the commander in chief.

Ever since Steve Bannon, Trump's chief ideologue, left the White House, they have had undisputed access to power.

It's impossible to overstate their influence on the president. They are the ones who in April persuaded Trump to launch 59 Tomahawk missiles against a Syrian-government airfield following a nerve gas attack. They were also the ones who advised the president to increase troop numbers in Afghanistan by 4,000 soldiers, against the advice of Bannon. Both decisions lost Trump favor with the isolationists. Even today Bannon supporters speak of a "generals' coup."

Trump has, with few exceptions, enormous respect for those who have served in the military and the generals' influence shows how much fear there is in the White House that the president could spin out of control. Kelly and Mattis have reportedly made a pact that one of them should always be in the country so as to be able to monitor Trump's orders.

There was a phase a few months ago when Trump's daughter Ivanka and her husband Jared seemed to have taken on the role of well-meaning advisors. They were the so-called globalists, the good guys in this story. While their opponents were the isolationists, Bannon and Trump's speechwriter Stephen Miller.

These assigned roles spoke more to the hopes that many in Washington had placed in Ivanka and Jared than to their actual influence. They couldn't tame the old man. All that remains are the strange images of Kushner in shades and an overly-tight bullet-proof vest in Iraq.

Trump combines business and family like a mafia godfather, just as he has done his whole life.

Under his watch, the White House has become a bastion of the patriarchy once again. Old, rich, angry men make up the personnel. Most of those that Trump has invited to serve in his cabinet are political novices like him, alpha males who are used to private jets. In July, Forbes estimated the combined worth of this supposedly populist cabinet to be $4.3 billion.

And like the court of Henry VIII, they do all they can to remain in the president's good graces.

Trump enjoys this, it gives him power over conflicting personalities. It's how he ran his real estate business in New York and it reflects his world view, where brutal social Darwinism rules.

The Swamp Hotel: Trump International Hotel, 1100 Pennsylvania Avenue

Unlike most of his predecessors, Trump is not very familiar with Washington. He mostly catches glimpses of the city from the back seat of the "beast," his armored limo. Trump's favorite place in town is his own hotel, a three-minute drive from the White House.

The first thing one notices in the hotel is the African-American employees who act as valets and porters. The receptionists, meanwhile, are young, female and white. It's as if time has stood still.

The lobby is unobtrusive, airy and expansive, a mix of marble, light carpets and blue silk: a touch of the Ottoman Empire. Crystal chandeliers hang from iron beams beneath the glass dome of the old post office building that now houses the hotel.

Most of the few guests on this particular afternoon are men in suits, drinking white wine. The cheapest cut of meat in the steakhouse costs $55.

This is new center of power in the city. Sean Spicer used to come here when he was still press secretary. In June, the Romanian president ate croissants here with his wife, while Trump's treasury secretary addressed bankers in the ballroom. Trump's advisor Kellyanne Conway often comes by, as does Corey Lewandowski, another of his former campaign managers. The president himself was here with his wife Melania a week ago Saturday.

The hotel has become a luxury extension of the White House, an unofficial office. Many who eat or stay here are hoping to find favor with the president. Trump, the patriarch, sees nothing untoward in this, but in the city's history, it's unheard of - that the president, with his own name in huge golden letters, would promote his own company. Trump and his hotel are inseparable, something his own marketing department has understood. The management admits to primarily targeting conservative clients from the president's circle of supporters.

And, it must be said, the $55 steaks are delicious.

A year ago, just a week after the election, the hotel invited a hundred diplomats from around the world to a champagne reception to hear its sales pitch. Representatives of 180 countries work in Washington and their embassies spend millions every year on hotel rooms and conference halls. Why not avail of the president's firm, if that enables access?

Time magazine called it the "Swamp Hotel," arguing that it showed the degree to which the lines between politics and business had been blurred. Trump is first and foremost a businessman, that is one of the problems with this presidency. It's why he has never really fully divested himself from his company, only handing over day-to-day operations to his sons. If he wanted, he could take over again tomorrow.

There are currently three lawsuits against him pending, all of them to do with emoluments. The first lawsuit was filed by the Citizens for Responsibility and Ethics, a lawyers group. The second case came from the attorneys general of Maryland and the District of Columbia, while the third is backed by almost 200 Democratic lawmakers. Trump has been accused of violating the Constitution by accepting foreign gifts and payments, because foreign diplomats are staying in his hotels. Ultimately, after all, the question must be answered as to whether Trump the businessman influences the decisions of Trump the president.

The Investigator: FBI Headquarters, 935 Pennsylvania Avenue

The J. Edgar Hoover Building, diagonally across from the Trump International Hotel, takes up an entire block, as though it were preordained to be there - a 1970s bunker-like structure that is dark and defiant. Robert Swan Mueller III is a creature of this building: It was from here that, as FBI boss, he hunted down the suspects involved in 9/11. In the Hoover building, he's known as Bob.

Mueller is the quiet eminence in this drama. A lean, ascetic 73-year-old, he has a preference for dark suits paired with a blue or red tie. His gray hair looks like it's been parted with an ax. His alarm is set for 5 a.m.

It would be a grave mistake to underestimate him. For 12 long years, he led the FBI through the War on Terror. After leaving the position, he went to work for WilmerHale, a prominent law firm - until the Justice Department appointed him as special counsel in May.

Mueller rarely gives interviews and doesn't like to appear before cameras or go to parties. He is difficult to find and only a few people know where his office is located. The writer Garrett Graff spoke with him in depth for his book "The Threat Matrix," which described him as a relentless hustler who went through five chiefs of staff right at the start of his tenure as FBI director. It's not that Mueller was unfair or unfriendly, Graff writes, just "relentless and demanding."

There's a certain irony in the fact that Trump's main opponent is a prototype of the Washington bureaucrat, one who has spent his entire professional life in the swamp without getting dirty. Mueller embodies the ideal Washington: upstanding, patriotic and a bit boring. One could hardly wish for a better adversary for Trump.

Mueller's team consists of two dozen lawyers, money laundering and finance experts, tax inspectors and investigators with experience in mafia cases. His mandate has been broad from the very beginning, allowing him to investigate crimes that are only tenuously linked to Russia, such as Paul Manafort's case. There's no better means of applying pressure to suspects than the prospect of a long prison sentence.

Trump can fire Mueller, or he can sabotage him, and many supporters, including Steve Bannon, are pushing him in this direction. Richard Nixon did the same thing back in 1973, when he fired the special prosecutor who was investigating the Watergate break-in. Firing Mueller, though, would be the last resort. It would also be an admittance of guilt, or at least that is how it would be interpreted by the public at large. And it would perhaps be the beginning of the end.
Trump Throws Washington's Natural Order into Chaos

At the moment, the White House's only option is to limit Mueller's room for maneuver, to the extent such a thing is possible. Kelly, Trump's chief of staff, has been saying for several days that Mueller's investigation will end soon. Bannon, meanwhile, has suggested cutting the special counsel's funding.

Nixon quickly lost support after he fired the special prosecutor looking into Watergate, and a year later, he resigned to avoid impeachment. But would the same thing happen now in today's deeply divided Washington? Trump's lawyer Jay Sekulow says that his client is not considering firing Mueller.

Goldrush: A Lobbyist's Office in Georgetown

Robert Stryk came to Washington at the start of the millennium for an internship at the office of a Republican lawmaker. Later, he set himself up as a self-employed lobbyist, just one of many seeking their fortune in the capital, a small fry who no one knew. That all changed last January.

Stryk is sitting on the sofa in his office in Georgetown, on the west side of town, and gushing about how great he finds Donald Trump. A rosy-cheeked 41-year-old, he is wearing jeans and cowboy boots - no sign of a suit or tie. Every now and then he pauses and laughs as if he can't quite believe his luck. "This is my first real office, man."

It all started when he began to work for the election campaign of a Republican in California.

Stryk got to know donors, election campaigners and Trump supporters. He collected phone numbers, which later gave him a competitive advantage. Even the number of Trump's cleaning lady could be valuable.

All the lobbyists were looking for contacts in the White House but none had any. None except for Stryk. He secured a contact to Trump's transition team for the prime minister of New Zealand, allowing the leader of the small country the opportunity to congratulate the incoming president on his victory. Then, in January, he organized a party at the New Zealand Embassy, which ended up being the biggest party in the city on inauguration night. That was how Stryk made his name.

It's only possible to understand his promotion to the big leagues if one looks at what happened to the State Department after the election. Trump's ideologues were convinced that the State Department was a nest of ultra-liberal do-gooders, who would do anything to damage the new government. A home of the "deep state" that had to be eliminated. Rex Tillerson, the new secretary of state, barricaded himself into his office on the seventh floor and only showed his face to fire people. Holes quickly appeared in the U.S. diplomatic corps, and people like Stryk sought to fill them.

Empty Corridors

A visit to the State Department these days is a depressing experience. The corridors in what should be the headquarters of Western diplomacy are empty and many posts are still not filled nine months after the new administration took office. There's no U.S. ambassador to South Korea, nobody responsible for East Asian and Pacific affairs. High-ranking diplomats have resigned in frustration, including David Rank, a former senior diplomat in Beijing.

Robert Stryk wants to step in and do what the State Department can no longer afford to - support governments in modernizing their countries. In his office, he speaks enthusiastically about the "privatization of diplomacy" and he has already signed contracts with Kenya, Afghanistan, New Zealand and the Czech Republic. Saudi Arabia is paying him $5.4 million for his services.

There are 11,000 registered lobbyists in Washington in a market that is worth a total of $3 billion.

Trump promised to run them out of town, but the opposite has happened. In the first six months, his administration hired more than 100 people who had previously worked for companies or associations. A former agricultural adviser now works in the Department of Agriculture, an educational lobbyist now works at the Department of Education.

The gold rush has continued, it's just that different people are profiting now. Young men in cowboy boots. To govern efficiently you need good staff, but Trump has never had that. In Washington talent usually bides its time at think tanks or universities, waiting to switch to government when the right call comes. But even Republicans have little desire to be associated with Trump and many have turned down offers to work for his administration. The result is that the current government lacks professionals.

Refugees: United States Capitol

Imagine, for a moment the U.S. Capitol Building like a giant, stony brain, with the countless corridors, passageways and paths between offices and meeting rooms acting as synapses. Every representative or senator that hurries along these paths is a signal, a flash that is flowing through this gray mass. Information travels quickly here. Everything is connected. Like a labyrinth, seemingly chaotic but one that, ideally, follows a higher order.

Congress has the task of proposing and passing laws while at the same time acting as a check on the president's power, the limbs, if you will. In the best-case scenario, the brain and limbs should be halfway coordinated in order to reach a result acceptable to all sides. What is happening at the moment, however, is that the body is moving uncontrolled while the brain has become overheated and is incapable of making decisions.

One example is health care reform. For years, Republicans have been complaining about Obamacare, having unanimously rejected the plan when Obama tried to force it through Congress. Trump, for his part, pledged to overturn the legislation and replace it with a new, improved version. He didn't really care what this new version looked like. That was his first mistake. His second mistake was not really understanding his own party.

The brain, or the Republican part at least, was stuck in a dilemma. Conservative senators like Rand Paul, who would love nothing more than to reduce the federal budget to zero, wanted to simply dump health insurance and not replace it with anything. Moderate Republicans, like Susan Collins from Maine, preferred to reform and improve Obamacare. Trump didn't care about compromises, he just wanted action. He wanted a victory. He might have had more success if he had read up on the issue, but in the end three of his own senators voted against the legislation.

Rules that No Longer Apply

The conflict over health care reform shows how muddled things have become on Capitol Hill.

Brain and limbs are no longer working in coordination. The old rules that governed how American democracy functions no longer apply.

It's a Wednesday in October and Senator Jeff Flake opens the door to a meeting room on Capitol Hill and walks into the corridor. Behind him, the Senate Judiciary Committee is in session and is questioning Attorney General Jeff Sessions about Russia, something that has improved Flake's mood.

Sessions and Flake couldn't be more different, even though both are Republicans. Flake has criticized Trump since he first announced his candidacy, while Sessions was the first Republican senator to back Trump. Sessions was handed the Justice Department while Flake has been the target of angry tweets.

When asked if the town had changed since the election, Senator Flake pauses briefly and then says: "Read my book."

The 140-page volume, which appeared in August, is titled: "Conscience of a Conservative." It could just as easily be called: Why I hate Trump, by Jeff Flake. In the book, he describes the president as a cynical enemy of democracy. It is an appeal for a return to decency and also a criticism of Trump's style of governing. Is Flake a hero? Or are others just too cowardly?

The next mid-terms take place in 12 months, with 435 seats in the House of Representatives and 33 Senate seats up for grabs. Every Republican who has opposed Trump risks facing competing, pro-Trump candidates in the primaries.

Bob Corker seems cheerful as he crosses the floor. The chairman of the Senate's Foreign Affairs Committee began his anti-Trump offensive in August when he said that Trump had displayed neither the competence nor stability the office required. Since then, he's usually surrounded by the press. In early October, he described the White House as an "adult daycare center." It has been rare up to now to hear a Republican speaking so sarcastically about Trump.

There are not many lawmakers here who feel as unencumbered as Flake and Corker. One might regard them as idealists, but such people rarely survive long on the Hill. Bob Corker knew from opinion polls that he was likely to lose his Senate seat to a Trump loyalist. Better to leave the circus with a roar.

Jeff Flake enters the elevator and says: "I hope that this will remain a short interlude." A week later he also announced that he wouldn't be standing again.

Godzilla's Revenge: BLT Steak, 1625 I Street

Mark Leibovich moved to the Potomac 20 years ago, first as a reporter for The Washington Post and then for The New York Times Magazine. Hardly anyone knows Washington and its establishment better. In his book "This Town," he divides the city up into a catalogue of types: the powerful, the desperate, those on their way up, those on their way down and party animals - and all of them, without exception, are influenced and deformed by power: "The golden, incestuous carnival of Washington at the start of the 21st Century." It is the story of Washington before Trump.

Leibovich enters BLT Steak, located just a short walk from the White House. The waiters carry plates of half raw meat to the tables, where steak knives are brandished like weapons. It's one of those restaurants that frequently appear on expense accounts, a meeting place for predators.

Who is spotted eating with whom is often featured in the morning newsletters of publications like Axios and Politico.

Leibovich calls Trump a "Godzilla," like the monster in the movie. He says Trump has fundamentally changed a lot of things in this town. For one thing, it's a lot easier to know what moves the president to the core of his being, you just have to follow him on social media.

Godzilla pours his heart out on Twitter.

Secondly, access has become more relative. Trump is everywhere, but that doesn't mean you can meet him personally. You can, though, send him a message if you like. You can approach him, Leibovich says, by getting yourself booked onto a television program, ideally onto his favorite show, "Fox & Friends" on Fox News. It's not difficult to do in Washington, you just have to know someone who books guests for the channel.

And thirdly, you have to keep your ears open and eat in the right restaurants, like BLT Steak for example. Just a few tables away, one of Leibovich's colleagues recently heard a conversation between Ty Cobb and John Dowd, two lawyers representing Trump in the Russia affair. The lawyers were discussing how to deal with Robert Mueller and his investigation into the "Russian thing." They didn't spot Leibovich's colleague, and the scoop followed a short time later. That's the way things work in the new Washington.

Leibovich orders a jumbo shrimp cocktail and says he loves this city. It fascinated him from the very beginning, this Hollywood for the unsightly. All these characters who make an appearance every day - he thought it was terrific. When he was doing some reporting at the White House in July, Trump's advisor asked him if he wanted to see "him." A short time later, Leibovich was standing opposite Trump in the TV room next to the Oval Office. As he said, rule two, access is really not very difficult.

Lies: Press Center, West Wing, White House

The "Briefing Room" is a long, narrow cave-like room on the ground floor of the West Wing, the part of the White House that also houses the Oval Office. It has 49 seats, which are reserved for the country's most prominent media organizations. Or at least used to be. Here too, Trump has thrown the old order into chaos. His people opened the door to right-wing provocateurs like the conspiracy theorist Mike Cernovich and propaganda outlets like Breitbart, Gateway Pundit and The Daily Caller.

The press conferences are usually held shortly after noon. Trump's new press secretary, Sarah Huckabee Sanders, likes to start her daily diversionary tactics with a joke. On that recent Monday when the entire world was discussing the latest Russian investigation news, she spoke for 10 minutes about tax reform. The next day, which was Halloween, she said she had been expecting the reporters to arrive in costumes.

Most of her attempts at humor fall flat. She has undergone perhaps the strangest transformation of all those working at the White House, metamorphosizing from being an open, relaxed woman, to being a sarcastic, heavily made-up ball of fury at the lectern. It's not clear what exactly has caused this dramatic change. Perhaps it's the man watching just a few rooms down the corridor, who often takes time out from his presidential calendar at midday to watch Sanders at work.

It is astounding how quickly Sanders learned to make statements that are obviously misleading or false. After last Monday's Mueller indictments, she said: "Today's announcement has nothing to do with the president." It was far more about Hillary Clinton, she claimed.

Half the government has been warped by Trump, even people who had seemed to have integrity.

Everyone who works for this president eventually becomes a liar. It's as if Trump's character rubs off on all his underlings.

Trump has an obsessive relationship with the media. He needs its validation and hardly anything is more important to him than media attention. At the same time, he hates it because in his view, it never treats him fairly. In October, he threatened to withdraw NBC's broadcast license because, he alleged, it reported unfairly.

The consequence is that many Americans have given up believing in facts, and the country has become much more cynical. Sanders' press conference is a perfect example of how difficult it has become to even agree on the basic facts. Is an apple really an apple? Everything is a matter of opinion, of who shouts the loudest.

Even American institutions like CNN and The New York Times have become symbols of bias to Trump's supporters. No wonder, then, that conspiracy theories are experiencing a renaissance.

Only one third of Americans still completely trust the media anymore. Here too Trump's instincts have proven correct.

It's been one year since the election of Donald Trump. Just one year. But so much has happened in that time that it feels like at least twice as long. Yet even Trump's Washington is still Washington.

One man alone cannot destroy a democracy, not if it is still halfway intact. But he can damage it and he can accelerate the divisions in society to the extent that the democracy becomes weak and sick.

His election itself was already a sign that something in the system is not working and this feeling of crisis has only grown stronger since his election.

His administration has so far failed to do almost everything that it set out to achieve, and that's not necessarily bad news. It means that the useless wall at the Mexican border has still not been built, that NATO is still intact, as is the trade agreement with Canada and Mexico, and Obamacare is still around.

It shows that the checks and balances are still functioning, though the safeguards are being strained.

Parts of Trump's party are preventing him from spending too much money, something that is a prerequisite for a successful populist. The special counsel is still in office, the FBI is still working independently, as is the press.

And Trump has allowed himself to make too many mistakes in such a short time, and has made too many enemies, including conservative ones. It looks as if he's simply too much of an amateur to blow up this town. At the same time, the opposition of the Democrats has been weak. Washington seems to consist solely of Trump.

This president has contributed to making politics more vulgar, has demeaned the office of the president and has seen to it that Washington increasingly operates like a reality TV show. He has bolstered the far-right nutjobs and neo-Nazis, perhaps the most dangerous impact of his presidency. He has opened the door to kleptocracy by bringing a family to the White House that is profiting from the Trump brand.

It has been a terrible year for Washington. The election campaign still hasn't come to an end and the city is trying to eject Trump like a foreign body.

Maybe it just has to be patient. After all, it has managed to overcome everyone else.

Death of the death tax

Taxing inheritances is falling out of favour

But the benefits of cutting these levies are overstated

THE marks left by inheritance tax are apparent all around Japan. Bookshops are filled with tomes on how to avoid a hefty bill when a loved one dies. Near the ancient Shimogamo shrine in Kyoto, a lady shows off her old house, which will soon be bulldozed. With her parents getting on, she needs to ready herself to pay an inheritance-tax bill. To reduce it, she is splitting the plot and selling one part, which means destroying the family home and building a smaller one. Back in Tokyo, a barman mixing a whisky and soda gruffly recites a Japanese version of a common saying: “a fortune does not last three generations”.

Inheritance tax is unpopular everywhere but the Japanese have more reason to complain than most. The country’s regime is the toughest of any big, rich country. The top rate of tax is 55%, compared with 40% in Britain and America. After recent reforms, roughly 8% of deaths are subject to tax, the highest proportion since records began in 1958. Data are poor but on a rough estimate up to a tenth of everything left behind by the dead each year goes to the government, compared with perhaps 4% in America. In the past two years budgeted revenues from inheritance tax in Japan have risen by a fifth to some $20bn a year, around 0.5% of GDP.

This trend of swelling receipts marks Japan out. Revenue raised through taxes on inherited wealth was once a big contributor to governments’ coffers. It has since shrunk significantly. In OECD countries the proportion of total government revenues raised by such taxes has fallen by three-fifths since the 1960s, from over 1% to less than 0.5%. Over the same period Australia, Canada, Russia, India and Norway are among countries that have abolished death duties. More than 20 American states binned wealth-transfer taxes between 1976 and 2000; in 2010 the federal estate tax was abolished for a single year.

The final reckoning

President Donald Trump wants America to eliminate it for good. “No family will have to pay the death tax,” he said as a presidential candidate. “It’s a double tax; it’s a tax on death,” according to Steven Mnuchin, the treasury secretary. If House Republicans get their way on reform proposals currently making their way through Congress, the tax-free exemption on the estate tax—currently $5.49m—would double, followed by full elimination in 2025 (see article).
As inheritance taxes have lightened, some people have gained enormously. In 1976 roughly 8% of American estates filed a taxable return; that has since fallen to around 0.2%. But not everyone benefits from cutting inheritance taxes. Indeed, the wider advantages of reducing such taxes have been overestimated. And the costs are evident.

Inheritance tax is levied on the people who get the money after someone dies, estate tax on the money itself. They are some of the world’s oldest taxes. In 6AD the vicesima hereditatium or “20th of inheritance” was imposed by Augustus, the first Roman emperor. An inheritance tax of sorts was introduced in Britain in 1694. Around the same time French peasants were required to cough up lods et ventes, a version of an inheritance tax, to their lords.

Classical liberal thinkers seem to favour taxing inheritances. Adam Smith said that “a power to dispose of estates forever is manifestly absurd.” Political philosophers were guided by arguments appealing to fairness. Mere accident of birth, the thinking went, did not amount to entitlement to acquire wealth. Jeremy Bentham rejected the notion that descendants had an absolute right, based in natural law, to the property of relations: “who is this same Queen, ‘Nature,’ who makes such stuff under the name of laws?” he sniffed. John Stuart Mill wanted to encourage equality of opportunity, rather than the creation of an elite that would endure for generations. He also believed that taxing the rich, who often lived off inherited properties and landed estates, would permit lower taxes on the poor, allowing them to save more.

Reformers turned the early 20th century into the golden age of taxing inheritances (see chart 1). In 1906 Theodore Roosevelt demanded that Congress pass a graduated inheritance tax.
America introduced its estate tax in 1916, and by the 1940s the top rate was 77%. In France until 1956 every single bequest was subject to a tax. Until the second world war Britons were less likely to pay income tax while living than to have their estate taxed after their deaths.

However, in subsequent decades an anti-tax movement gathered steam around the world. The price of housing in rich countries began to rise in the 1970s as population growth ran up against restrictive planning policies. As home-ownership increased and a higher proportion of households accumulated wealth, inheritance tax was seen as more of a burden. Meanwhile, as foreign-exchange controls were dismantled, politicians feared that high taxes on wealth would prompt rich folk to up sticks and move elsewhere.

Dead hand of the state

In their book “Death by a Thousand Cuts”, on the politics of the American estate tax, Michael Graetz and Ian Shapiro describe the emerging consensus that taxing inherited wealth was unfair and unwise. But much as advisers in the administrations of Ronald Reagan and George H.W. Bush wanted to abolish estate tax, they believed doing so was politically impossible.

In 1992 something happened which changed the terms of the debate. Two Democratic congressmen proposed reducing the tax-free exemption from $600,000 to $200,000, thereby increasing the number of people subject to the tax. They did not foresee the unpopularity of the proposal, which was hurriedly withdrawn—but not before, according to Messrs Graetz and Shapiro, “conservatives became alert to the possibility that they might have missed something.”

A highly effective political campaign against the estate tax followed. Adherents insisted that the estate tax was unfair since it amounted to double taxation. After all, bequests are often financed from earnings that have already been subject to income tax. They also devised a devastating nickname—the “death tax”.

Advocates of the tax were unable to counter with anything nearly as powerful. A few pointed out that double taxation occurs on a daily basis in the form of sales taxes (people buy things with taxed income), or that it is what the person leaves behind, rather than the person, which is subject to the estate tax. Calling it a “windfall tax”, as Bentham might have, could have helped, but only so much.

Characters such as Chester Thigpen, an African-American tree farmer in his 80s, were crucial to the campaign. In 1995 Thigpen, a descendant of slaves, settled into the witness chair in front of the House Ways and Means Committee. He had come from Mississippi to Washington, DC, to talk about the damage the estate tax would inflict on his family. On his farm were “beautiful forests and ponds that can live on for many, many years after my wife and I pass on,” he said. Yet when he died “my children might have to break up the tree farm or sell off timber to pay the estate taxes.”

Thigpen’s testimony came to symbolise the idea of government overreach. Jennifer Dunn, a Republican, referred to the Thigpen example as she argued in the House of Representatives that the tax system should “reward savings, investment and hard work”. In 1998 the joint economic committee, a congressional panel, used Thigpen’s farm as an example of “the burdensome nature of the estate tax” to argue for its repeal.

Ordinary people were receptive to these arguments, perhaps because Americans are an optimistic bunch. According to Messrs Graetz and Shapiro, surveys at the time suggested that around 40% believed that they were in the top 1% of the wealthy or would be there “soon”, making them fearful of a hefty tax. The prospect of repeal was popular, even if in reality most of the benefits would go to the richest.

As the pressure built, politicians eventually had to act. Before the presidential election in 2000 George W. Bush proclaimed that he wanted to be “rid of the death tax”, which he saw as something “that taxes people twice” and “penalises the family farmer”. An act passed in 2001 made big reductions to the estate tax, culminating in the one-year repeal in 2010. Even in its current diminished form, however, it is still hated. Over half of Americans agree with the idea of eliminating it; Mr Trump found on the campaign trail that his promise to abolish it was just as popular as it had been for Mr Bush.

Messrs Graetz and Shapiro imply that the circumstances which led to the decline of the estate tax were peculiarly American. In an already highly unequal society, this interpretation goes, rich people hijacked the political system and shaped tax policy to their own ends. Yet countries quite unlike America have also seen big cuts to wealth-transfer taxes.

Sweden, which is usually seen as egalitarian, has gone one step further. In 2004 its inheritance tax was repealed, with the support of a former communist party, among others. What prompted such a radical transformation from the 1960s, when the largest estates could face an effective tax rate of 60%? By the end of the 1970s there was a growing sense that the Swedish state was bloated; a turning-point came when Astrid Lindgren, the creator of Pippi Longstocking and a national hero, revealed that she faced marginal tax rates of more than 100%. A financial crisis in the early 1990s reinforced the sense that the country needed to become more competitive.

Politicians noted the special disgust that Swedes reserved for inheritance tax. According to Swedish Enterprise, a lobby group, entrepreneurs such as Ingvar Kamprad, the founder of IKEA, were leaving the country to avoid high taxes. Stories abounded of family firms broken up to pay the bill. At first, tweaks were introduced to the Swedish system. Yet the resulting complexity met with disapproval. Sweden is a small country with high levels of social trust; people are allergic to bureaucracy, says Janerik Larsson of Timbro, a think-tank. “It was easier to get rid of it entirely.” After abolition Mr Kamprad returned to Sweden. The economy has grown quickly in recent years, and anti-tax advocates claim they have been vindicated.

Heir conditioning

It is clear that antipathy to inheritance taxes is widely shared among politicians and their electorates. Yet the economic benefits of cutting such wealth-transfer taxes may have been overplayed and the drawbacks underappreciated.

Start with migration. Arash Nekoei of the Institute for International Economic Studies in Stockholm is sceptical that abolishing inheritance tax really did encourage many entrepreneurs to move back to Sweden. Although migration from Sweden happened to rise in the second half of the 2000s, after the tax was abolished, other factors were clearly involved.

A paper by Jon Bakija of Williams College and Joel Slemrod of the University of Michigan studies the impact of changes in state inheritance-and-estate taxes on the migration of elderly Americans between states, as approximated by changes in federal estate-tax returns by state. It suggests that reducing these taxes does not do much to attract outsiders. The richest folk seem most likely to move to tax-cutting states, but even here the numbers are small. And tax-cutting states seem to lose out overall: the additional revenue resulting from more people moving to a state may be not enough to offset the impact of the lost revenue from lowering the estate tax.

Second, what of the argument, made by the likes of Dunn, that cutting wealth-transfer taxes encourages work and saving? The logic goes that people are motivated by the prospect of leaving large amounts of wealth to their children. So if they are allowed to pass on more, they may try to accumulate more, benefiting not only their family but the economy as a whole. As an additional benefit, if wealth-transfer taxes are cut, people need not waste time on tax planning.

Again, there is not much evidence to support these propositions. Akira Kawamoto, an investor who used to work at Japan’s economy ministry, dismisses the idea that increases to the country’s inheritance tax have undermined enterprise. “No one at the start of their career is thinking about such a tax,” he says. Indeed, it is noteworthy that many of the world’s richest self-made people, such as Warren Buffett and Bill Gates, advocate wealth-transfer taxes.

The academic evidence is also revealing. If all bequests were intentional you might expect people with children to be more enterprising and to save more than those without. But this is not supported by the data. You might also expect a child’s earnings to have a big effect on the size of a bequest left by a parent. A poor child, after all, is in greater need of money than a rich one. Observations from Sweden and America, however, find only weak evidence that a child’s earnings affect a parent’s plans for a bequest.

That suggests that a large proportion of inheritances are “accidental”. People save to insure against personal risks, rather than to pass on wealth when they die. (Bentham mulled a 100% tax on the estates of people dying without a will, reasoning that the entire bequest could be considered accidental.) Research also suggests that some bequests are “egoistic”, meaning that a parent derives happiness from the pre-tax amount bequeathed, rather than what a child will receive after the tax is applied.

Cutting wealth-transfer taxes would surely reduce the need for wealthy folk to engage in tax-planning, freeing them up for more productive activities. But there are few estimates of how much time and money this activity actually takes up. A study published in 1999 suggests that the overall cost of estate-tax compliance is 7% of estate-tax revenues. Yet a chunk of those costs, such as selecting executors and drafting documents, would still be paid even in the absence of the tax. So it is hardly clear that the rich would be left with much extra time for more productive undertakings.

The third justification for cutting or abolishing inheritance taxes—that it will prevent the break-up of family firms—is in many countries the most politically important one. The Thigpen story is one of many told by anti-tax campaigners. Sweden may now have the world’s most generous tax system for family firms. Even Japan offers them exemptions from inheritance tax.

But is it sensible for the state to privilege family firms? There is something reassuring about entering a shop that has had three generations of the same family behind the till. Descendants may use an inheritance to expand the family firm, potentially creating more jobs along the way.

Family ties

Yet keeping things in the family has costs. By excluding family firms from inheritance tax, and therefore stopping some from breaking up, means boosting their numbers. A paper by Francisco Pérez-González of the Instituto Tecnológico Autónomo de México finds that “nepotism hurts [firm] performance by limiting the scope of labour-market competition”.

Firms that promote family CEOs see declines of 14% in operating return on assets, a measure of profitability. Research by Nick Bloom of Stanford University and others finds that family firms are the worst-managed of any type. Poor management of firms is one of the main reasons why productivity growth in rich countries has been so depressed in recent years.

The problems associated with family-run firms point to another risk: that people with inheritances work less hard or drop out of the workforce altogether. In an essay in 1891 Andrew Carnegie, an industrialist born in Scotland, argued that the “parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life.” Research suggests that lottery winners work less. And according to a paper published by Douglas Holtz-Eakin, formerly of the Congressional Budget Office, and two colleagues, Carnegie was right. A person coming into an inheritance above $150,000 is four times more likely to leave the labour force than someone who inherits less than $25,000.

Such inefficiencies are set to deepen as payouts increase. After peaking in the 19th century, the stock of wealth in rich countries tumbled during the first half of the 20th. That was in part the result of two world wars, which destroyed factories and shrank savings through high inflation. Yet according to work by Thomas Piketty of the Paris School of Economics, in recent decades the growth in the stock of wealth in advanced economies has outpaced income growth.

The data are patchy. Yet it appears that, as wealth has bounced back, the size of inheritances has, too (see chart 2). The annual flow of inheritances in France has tripled from less than 5% of national income in the 1950s to about 15%, not all that far from the 19th-century peak of 25%. Research suggests that though inheritances can reduce short-run wealth inequality by giving a windfall to poor households, the long-run effect is to increase it. This is in part because richer folk tend to save their windfall, in contrast to poorer folk, who spend it.

If the importance of inheritance continues to grow, and Mr Piketty’s calculations suggest that it will, some worry that it could foreshadow the return of an inheritance society in which marriage ends up being a surer route to riches than starting a company or working hard. The incomes attained by the top 1% of French inheritors are already higher than those attained by the top 1% of workers. Across North America, Europe and East Asia, the number of billionaires who have inherited their wealth seems to be rising, according to research from the Peterson Institute for International Economics, a think-tank (see chart 3).

Such considerations suggest that the shift away from wealth-transfer taxes ought to be the subject of more public debate. Instead, it looks set to continue inexorably. Britain’s budget on November 22nd confirmed that by 2020 a couple will be able to pass on £1m ($1.3m) tax-free, if it includes a house, up from £650,000 today. Just 22,000 estates will be subject to the tax this year, compared with 30,000 in 2016. And in America, estate tax will fall even further if Mr Trump gets his way. After a long life, the death tax is in failing health.

Germany’s Dangerous Obsession



PARIS – As Germany’s Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), seek to form an unprecedented “Jamaica coalition” with the liberal Free Democrats (FDP) and the Greens, the rest of Europe anxiously awaits the government program that will result from their negotiations.

The stakes are high for Europe, because these are not ordinary times. The rise of economic nationalism, growing security threats, and the ongoing refugee crisis have made collective responses more necessary. China is becoming increasingly assertive, and US President Donald Trump’s administration has made clear its disdain for the European Union and its suspicions of Germany’s economic strength.

At home, the EU’s rationale is being tested by Brexit, and by the defiant governments of Poland and Hungary – two countries that, as Constanze Stelzenmüller of the Brookings Institution recently noted, are enjoying the benefits of EU membership and ignoring the corresponding obligations.

In this context, Emmanuel Macron’s election to the French presidency in May was a relief for Germany. Yet Macron has put Germany in the uncomfortable position of having to respond to his proposals for EU-level reforms. By calling for a common EU defense fund, tax harmonization, and a joint eurozone budget, Macron is upending the European status quo.

The question now is whether Europe’s largest and most prosperous country will provide the leadership these trying times demand. Each party in the coalition talks brings a very different perspective to the table. On European matters, Chancellor Angela Merkel’s CDU, which has been in power for 12 consecutive years, will bring continuity. But the more conservative CSU is being pulled to the right by competition from the populist Alternative für Deutschland (AfD).

As for the other two parties, the FDP has adopted a tough line toward Europe. Its leaders have suggested that Greece should leave the euro, and that the EU mechanism for bailing out struggling countries should be dismantled. The Greens, on the other hand, are keen on deepening European integration; but that is not their first priority, and they are the smallest party at the table.

Ultimately, the new government’s program will likely reflect the suspicion that other EU member states want to solve their problems with German money rather than domestic reforms.

German politicians and opinion makers assess virtually every proposal for EU-level reform through this distributional prism. Schemes that are not intended to result in structural transfers are routinely dissected to confirm that they will not become cash dispensers for other EU members.

For example, Germans regard a joint budget not as a way to finance public goods such as research or infrastructure, but as a device to compel Germany to cover other countries’ expenses. Similarly, common unemployment insurance is regarded as a scheme to make Germans pay for unemployed Spanish or French workers. And a deposit-guarantee program for banks is seen as a way to force prudent German depositors to pay for non-performing loans in Italy.

To be sure, each of these concerns may be legitimate. All proposals certainly should be scrutinized to ensure that they will not be abused or introduce moral hazard. European solidarity is not a one-way street.

But, at the same time, German leaders must recognize that their exclusive focus on distributional effects is poisonous. They should recall the moment, in 1979, when British Prime Minister Margaret Thatcher marched into a European summit and said, “I want my money back.” The same logic was on display nearly 40 years later during the Brexit campaign, when “Leave” politicians falsely claimed that withdrawing from the EU would bring “money back” to the National Health Service.

Why has Germany become obsessed with the fear of paying too much? The EU budget contains much to criticize, but it hardly treats Germany unfairly. Germany may be the largest net contributor, but that is because it has the largest economy. As a proportion of national income, countries like Belgium, France, and the Netherlands also contribute a meaningful share of their net income.

German fears that the European Stability Mechanism serves as a channel for hidden transfers are similarly unfounded. Yes, the ESM benefits from low borrowing costs, which are essentially passed on to borrowing countries. If Greece cannot repay its debt, ESM shareholders will suffer a loss; and that risk is not priced into the interest rate Greece pays. But, so far, the ESM has continuously posted profits, and any loss it does suffer will be spread among all shareholders – including, for example, Italy. The ESM is a far cry from a subsidy machine financed by the German taxpayer.

Some in Germany also decry the so-called Target2 balances, which record bilateral surpluses and deficits of national central banks vis-à-vis the European Central Bank. The University of Munich’s Hans-Werner Sinn, for example, argues that the Target system has become a conduit for hidden operations to benefit debtor countries in southern Europe. True, in September, the Bundesbank had a net surplus of €878 billion ($1.2 trillion) vis-à-vis the ECB, whereas Italy and Spain ran deficits of €432 billion and €373 billion, respectively. These positions reflect the degree to which official flows are still substituting for private flows.

But, again, this arrangement has not cost Germany a single euro. On the contrary, the Target system is essentially a collective insurance scheme: if a national central bank were to default, the loss would be shared among all ECB shareholders. The system thus allows German exporters to continue to sell their products in southern Europe, because it guarantees that they will be paid. The claim that Germany loses from this is simply false.

It will always be in a political party’s interest to respond to the electorate’s fears. But politicians also have a duty to let voters know when their fears are excessive or unfounded.

Europe needs a Germany that will veto half-baked proposals. But it also needs a Germany that can overcome its narrow obsessions and provide leadership.

With the current coalition talks, German leaders have an opportunity to assess new global developments that will have far-reaching implications for Europe and Germany alike. They must decide whether it is riskier to do nothing, or to take the initiative. No one is expecting a Damascene conversion. But one hopes for a government that will be more forthcoming in offering solutions.

Jean Pisani-Ferry is a professor at the Hertie School of Governance (Berlin) and Sciences Po (Paris), and former Commissioner-General of France Stratégie, a public policy advisory institution.

What Trump Really Said in South Korea

By Jacob L. Shapiro

The importance of any speech is tricky to gauge. Occasionally, they can have great significance, like when Secretary of State Dean Acheson left South Korea out of the U.S. security umbrella in a speech to the National Press Club in 1950, an omission that, in a way, helped start the Korean War. But mostly they reside in the garbage bin of history. There’s a wide gulf between rhetoric and reality, and what is said for political purposes often has little to do with the impersonal forces that shape action. I remember watching then-Secretary of State John Kerry thunder away at a State Department briefing about Syria’s use of chemical weapons in August 2013, thinking to myself that surely a U.S. military strike on Syria was imminent. (I even went on television and said as much. Thankfully, the internet saves all things, so I can always look back and relive my mistake.) At the time, I couldn’t see how else Kerry’s severe language could be explained. But of course, the U.S. decided not to strike, despite then-President Barack Obama’s red line and despite Kerry’s fiery speech.

On Nov. 8, U.S. President Donald Trump gave us a new speech to consider. Addressed to South Korea’s National Assembly, it had three main objectives. First, to convey to South Korea the gravity of the situation on the Korean Peninsula and the depth of the United States’ commitment to preventing North Korea from acquiring nukes that threaten American soil. Second, to begin building a case to the American people for the U.S. to fight again on the Korean Peninsula. And third, to scare Kim Jong Un, and any country that may support his regime, into capitulating before a war starts. The odds of Trump achieving the third objective are slim at best, which means he will soon face a grave decision. What he decides will define his presidency and shape the balance of power in East Asia for years to come.
Peace Through Strength
Trump’s remarks to the National Assembly were effusive and complimentary, but the content of the message was no different from his prior comments about South Korea. In September, he took to Twitter to criticize Seoul for what he called appeasement of the North Koreans. Many feared at the time that Trump’s comments may poison relations between Seoul and Washington. The tweets, however, were only an expression of frictions that already existed. The problem in the relationship started May 9 with the election of President Moon Jae-in, whose administration opposes a pre-emptive U.S. strike on North Korea.
U.S. President Donald Trump (R) addresses the National Assembly in Seoul on Nov. 8, 2017. JIM WATSON/AFP/Getty Images
This threw a wrench in U.S. plans. From an operational perspective, attacking North Korea without South Korea’s help makes an already difficult operation close to impossible. There had been several signs in the first half of the year that the U.S. was preparing for military action against North Korea. In fact, at one point in May, three U.S. aircraft carriers had converged on the Western Pacific, and the U.S. seemed poised to strike. But Moon’s election forced the U.S. to slow its preparations and devote additional time to diplomacy. From a political perspective, Seoul’s defiance of Washington suggested weakness. Pyongyang intuited that there may be a split in U.S.-South Korean relations that it could exploit to bring about one of its long-cherished goals: the complete withdrawal of U.S. forces from the Korean Peninsula.

Despite Trump’s lofty rhetoric in Seoul, little has changed since the September tweets. South Korea and the U.S. still don’t see eye to eye on what should be done about North Korea. As long as that is the case, the U.S. will find it difficult to convince the North that it should fear American threats. So although Trump was far more gracious speaking to the South Korean National Assembly than he was on Twitter, his message was the same: Peace in our time can be achieved only through strength. Trump’s entire visit to Asia is symbolic, an attempt to shore up U.S. relations with key allies in the Pacific. But no ally is more important and more skeptical right now than South Korea, and no speech is going to allay South Korea’s concerns.
The Other Audiences
Other parts of Trump’s speech focused on the nature of North Korea’s dictatorship. These remarks were directed not at South Korean lawmakers – they are plenty familiar with their neighbor’s woeful economic situation and strict societal controls – but at the American public. That Trump’s speech was delivered at 11 a.m. Seoul time meant that it aired during prime-time hours in the United States. Trump laid out the reasons it is important for the United States to ensure that North Korea does not acquire nuclear capabilities. He made his argument from a security standpoint, an ethical standpoint and even a religious standpoint.

But the two men Trump was speaking to most forcefully were Kim Jong Un and Chinese President Xi Jinping. Trump’s words for Kim have been consistently bellicose, and that trend continued in Seoul. But Trump also went out of his way to criticize China in the speech. At one point, he told a story about a baby born in North Korea whose father was Chinese. The baby, according to Trump, was killed and taken away in a bucket, deemed undeserving of life because of its ethnic impurity. He finished the story with a rhetorical question: “So why would China feel an obligation to help North Korea?”

Trump is now in China, meeting with Xi. Publicly he has said nice things about the Chinese leader – that he has been very helpful on the North Korea issue and that there are many areas where the U.S. and China will be able to cooperate, such as the much-ballyhooed but insignificant business deals that will be signed during the trip. But make no mistake – the main topic of conversation between Trump and Xi is North Korea, and here, Trump has very little to be happy about. The U.S. president will demand to know why China has been selective in its enforcement of sanctions against North Korea, and why China is trading more with North Korea in 2017 than it was in 2016, even if it has abided by restrictions on importing North Korean coal. Xi will continue his charade of looking helpful on North Korea without actually helping.

The obstacles that have blocked an attack so far are still in place. South Korea, the critical ally, remains unconvinced that the U.S. can protect Seoul from North Korea’s artillery. The U.S. electorate favors an attack right now, according to recent polls, but once the fighting starts, support in the U.S. would decline faster than North Korea’s resolve. And U.S. diplomatic efforts to denuclearize the peninsula are being stymied by China and Russia, both of which have an interest in seeing the U.S. bogged down and distracted with what is, from their perspectives, a side issue. It wouldn’t take much to watch Trump’s speech and come away thinking the U.S. is readying for an imminent attack on North Korea. (After 2013, I should know.) But it is more likely that this is a continuation of the U.S. attempt to cow North Korea into submission, not a cry to let slip the dogs of war.

The Bitcoin Bubble: A $6,000 Pokémon Card

by: Macro Ops

The following is an excerpt from our Macro Intelligence Report (MIR).
On May 22nd 2010, computer programmer Laszlo Hanyecz ordered two Papa John's pizzas. They were Hawaiian style. He paid $60,000,000. According to Laszlo, they were your typical Papa John's, and tasted only "okay…"
In 2013, a Brit by the name of James Howells accidentally threw away a laptop worth over $45,000,000. He realized what he'd done a few months later and went down to the landfill to dig through mountains of garbage to no avail. James says he's now "at the point where it's either laugh about it or cry about it… Why aren't I out there with a shovel now? I think I'm just resigned to never being able to find it."
In 2009, a Norwegian named Christopher Koch made a $27 investment on a whim. The investment "annoyed" his then girlfriend who thought it was a waste of money. Today, his $27 investment is worth $30,000,000. Chris now owns property in Toyen, the wealthiest neighborhood in Oslo. He has a new girlfriend.
You're probably wondering what I'm talking about. Who are these guys that would drop millions on a pizza or somehow forget about buku money stored on a laptop?
The common thread here is bitcoin - the first and most popular cryptocurrency.
I was having some fun with the numbers. You see, Laszlo didn't really spend $60M on two Papa John's pizzas. He paid $25 for them, but in bitcoins. 10,000 of them to be exact. It was the first recorded merchant transaction in cryptocurrencies ever.
But the price of bitcoins has gone up a bit since then.
A single bitcoin today is now worth over $6,000. Those 10,000 bitcoins that amounted to only $25 in 2010 are now worth over $60M. So in hindsight, it was an expensive pizza.
Bitcoin has had an annualized rate of return of 715% since then. As far as returns go, that's pretty darn good…
If you would have bought $10,000 worth of bitcoin in 2009, when our lucky Norwegian bought his, your "investment" would now be worth roughly $1,200,000,000. Granted, you would have had to sit through horrendous volatility and numerous drawdowns in the +80% range, but still….

Alright, I'm done pointing at how extremely rich we all could have been if we'd just bought a couple pizzas worth of bitcoins a few years ago. We didn't… we bought actual pizzas instead… so let's wipe our tears and move on.
In this month's MIR, we're going to talk about bitcoin, cryptos, blockchains and all that good stuff.
There's a lot of hype, one could even say a religious zealotry around cryptocurrencies' future. It's not hard to understand why. Bitcoin is up over 500% again this year and many of the other cryptocurrencies are up even more. Returns like that tend to create a fervent following.
Today our Macro Ops team will cut through the crypto zealotry to see what's actually going on in the blockchain market. We'll briefly talk about what Bitcoin is, where it came from, and how the market is likely to evolve going forward.

The Beginning… How Bitcoin Was Born
The Bitcoin origin story is a fascinating one.
It was first developed in 2009 by a group of computer programmers. They built it according to a cryptographic architecture created by a pseudonymous author who goes by the name of Satoshi Nakamoto.
The public still doesn't know who Satoshi is. It's believed that he actually might be a group of people and not an individual.
Either way, he (they?) are the largest holders of bitcoin after mining it in the early days. They possess more than 1 million of the coins. This puts Satoshi at 247 on the Forbes wealthy list.
Fun fact: There's a conspiracy - which is probably true - that the NSA uncovered who the actual Satoshi is. When bitcoin was created, the US intelligence community became concerned that it was the product of a rival state like Russia or North Korea. The government was worried it could be weaponized someday against the US, perhaps by upsetting the dollar as the world's reserve currency.

So the theory goes that the NSA used stylometry, which is the study of written language, in conjunction with their billions upon billions of data points to compare things written by Satoshi to things written by everybody else throughout the world. And the word is… they got a match.

Anyways, here's how the original Satoshi Nakamoto white paper starts (you can read the whole paper here):
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make nonreversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party. 
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.
The problem being solved here is a very important one in computer science. It's called the Byzantine Generals Problem or BGP.
Here's how BGP is explained:
[Imagine] a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors, who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.
Silicon Valley VC Marc Andreessen explains the importance of this here:
More generally, the B.G.P. poses the question of how to establish trust between otherwise unrelated parties over an untrusted network like the Internet. 
The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate. 
Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no pre-existing trust: A string of numbers is sent over email or text message in the simplest case. The sender doesn't need to know or trust the receiver or vice versa. Related, there are no chargebacks - this is the part that is literally like cash - if you have the money or the asset, you can pay with it; if you don't, you can't. This is brand new. This has never existed in digital form before.
Marc Andreessen is a smart guy. He, along with many other tech geeks, are excited about what the mysterious Satoshi created.
We should make a quick and important distinction here.
There's a difference between bitcoin and Bitcoin. Bitcoin, with a capital B, refers to the cryptographic protocol of the network, otherwise known as the blockchain.
Blockchain is the digital ledger that uses the cryptographic protocol proposed by Satoshi to solve the Byzantine Generals Problem - basically, the tech to help with our internet trust issues.

While bitcoin, small b, refers to bitcoin the currency. This is the token that's connected to the Bitcoin's blockchain network and which bitcoiners transact in. It's also often used as a blanket term for cryptocurrencies in general.
There are now over 1,000 different cryptocurrencies that are similar, yet different, to bitcoin with a small b. This list is growing every day.

  • Bitcoin was developed from a cryptographic proof that was written by a pseudonymous person or persons who go by the name Satoshi Nakamoto.
  • It was developed to solve the Byzantine Generals Problem of how to establish trust over an untrusted network like the internet, where transacting parties don't know who they're transacting with.
  • Bitcoin does this through the creation of a digital ledger (the Blockchain) where two parties can exchange a digital asset in a safe and secured way to the extent that nobody can challenge the validity of the transfer.
  • Bitcoins have gone up A LOT since they were created 8 years ago.

The Blockchain: A Revolutionary Technology

I suggest you spend five minutes and watch this quick YouTube video explaining Bitcoin (link here).

Here's a quick description of Blockchain via Joseph Pham from Quora.
If you understand the concept of a blockchain, you will have heard people (especially in enterprise) talk about distributed ledger. It describes a technology that uses a write once, read only "database" system that is bound by cryptographic verification, and bound through a series of "blocks" (batches of data / datasets) that are subsequently verified into a "chain" sequence of linked batches over time. This characteristic is what gives the technology the name "blockchain". Systems that spread / make copies of these blockchains available across a network are often referred to as distributed ledgers. 
You can make a blockchain without distributing it, but it might not be as practical and useful for the real world applications you might consider with blockchains. 
Bitcoin is just one configuration of blockchain technology, which integrates certain blockchain technology with innovative monetary incentives, social economics and cryptography. The innovative monetary incentive is to have a self verifying money supply - the bitcoins - which are basically entries in the ledger, that are determined mathematically, through solving a complex cryptographic puzzle (hashing), that must reach consensus (peer validation) and encodes a specific reward schedule (approximately every 10 minutes) and total supply of bitcoins (21 million). 
A bitcoin is basically just a token value on a ledger (like in game gold and coin values in video games), that are created based on a set of system rules. There are a lot of Bitcoin based and bitcoin derived blockchain applications (using the Bitcoin open source data repository). These are usually referred to as Cryptocurrencies, as Bitcoin was designed to operate as an e-currency system.
I hope I'm not losing you. Stay with me, we'll get through this tech talk soon enough.
Just to sum up, a blockchain is a digital ledger that encodes every transaction on its system forever. It uses cryptography to ensure the validity of these ledger entries. It's basically a one-way street where once entries are encoded, it's nearly impossible to hack or alter them.
I've heard the analogy used that each block of transactions in the chain is like a mosquito encased in amber - Jurassic Park style - and every time crypto miners authenticate a transaction and approve the entire blockchain, the amber gets thicker and thicker around the transaction. Meaning, the longer it lives on the blockchain, the more permanent it becomes; and more difficult (or impossible) to alter.

The blockchain can be distributed or not.
In Bitcoins case, and many of the other cryptocurrencies, this digital ledger is distributed across the world. The benefit of this is that no one entity has power over the network and the data is extremely safe and robust since it's copied all across the globe. Many servers can be wiped out but the data (the Blockchain) will survive.


The bitcoins, or the crypto tokens, are used as an incentive system for miners on the network.

These digital miners use lots of computing power to solve the cryptographic puzzles (called hashing) that's needed to encode the bitcoin transactions and maintain the integrity of the blockchain. The network works off a consensus. Once a majority of the miners agree on the answer to a hash, the attached transaction then gets recorded to the blockchain forever.
The Brookings Institute calls the blockchain "a foundational technology, like TCP/IP, which enables the internet. And much like the internet in the late 1990s, we don't know exactly how the Blockchain will evolve, but evolve it will."
That seems to be the broad consensus amongst technologists regarding blockchain's potential - it's revolutionary and will have as sizable impact as the internet itself. But nobody is quite sure exactly how, yet.
The reason is partly because the use cases for blockchain appear to be nearly limitless. Here's an excerpt from a report by BofA on the subject.
To be frank, it's difficult for us to think of a large industry where there is no applicability of a blockchain, given the technology's ability to reduce data storage costs and prevent tampering. After all, blockchain at its core is just a way to store and access data.  
Startups, trials and proof-of-concepts are abundant in a myriad of industries. Blockchain technology could make tracking and managing digital identities more secure and efficient. A distributed ledger could aid online voting, cutting down on voter fraud. In financial services, the technology could ease payments and transfers; smart contracts could improve trade settlements. Smart contracts on the blockchain are being used to shake up prediction markets. In the music industry, the blockchain can be used to solve licensing issues: Artists, including English singer-songwriter Imogen Heap, have released music directly to fans via blockchain platforms.
Companies ranging from Walmart to Maersk are now using the tech to better track and manage their supply chains. A number of banks and brokerages like BNY Mellon are using it to record transactions.
It's a safe assumption to say that blockchain is revolutionary and is here to stay. But like the internet in the early 90's, we don't know exactly how it will revolutionize things. And again, like the internet, it will probably take a decade or two at least for the tech to mature and dramatically add value.
Now that we've got that out of the way, what about the value in cryptocurrencies. Is there any?

What are they worth? Is it a bubble or is this just the beginnings of the largest bull market in history?

  • Blockchains are the cryptographic technology underlying cryptocurrencies.
  • There's a broad consensus that this technology is revolutionary and will have far and wide-ranging impacts on many areas of the economy; similar to the internet.
  • But like the internet in the 90's it's still early days for this technology and nobody is quite sure how it will evolve.
Valuing Cryptos: Zeros Or Heros?
To value something we have to first define what it is and what it isn't. And in the case of cryptocurrencies', this is not exactly easy.
Let's start with the obvious. Bitcoins, ethereum, Litecoins, and the hundreds of other crypto tokens are typically thought of as currencies, as their names imply.
But what makes a currency? And do these crypto tokens check the mark?

A currency is measured by how well it functions as two things:
  1. Medium of Exchange: Currencies exist to make transactional commerce possible. This means that the currency needs to be accessible, transportable, and fungible in that it's accepted by large amounts of buyers and sellers as legal tender.
  2. Store of Value: Currencies have to act as a reasonable store of value. Meaning, buyers and sellers need to feel comfortable keeping a certain amount of their wealth in it, knowing it will retain its purchasing power.
Let's start with cryptos as a medium of exchange. We're going to focus on bitcoin, since with a market cap of $100B, it's the most popular of all the cryptocurrencies.
Here's NYU Professor Aswath Damodaran on bitcoin as a medium of exchange:
The weakest link in crypto currencies has been their failure to make deeper inroads as mediums of exchange or as stores of value. Using Bitcoin, to illustrate, it is disappointing that so few retailers still accept it as payment for goods and services. Even the much hyped successes, such as Overstock and Microsoft accepting Bitcoin is illusory, since they do so on limited items, and only with an intermediary who converts the bitcoin into US dollars for them. I certainly would not embark on a long or short trip away from home today, with just bitcoins in my pocket, nor would I be willing to convert all of my liquid savings into bitcoin or any other cryptocurrency. Would you?
There are a number of reasons why bitcoin has failed to make large inroads as a medium of exchange.

One reason is that as the tech stands now, it's a costly and timely transaction process compared to the available alternatives.
Here's BofA again:
The problem with bitcoin as a peer to peer payment system is that it's expensive, relative to conventional alternatives. This comes from the mining process. Mining isn't a zero sum game. The economics of mining are pretty simple. There is a fixed reward per block mined. At present, each block generates 12.5BTC. So, each block mined produces in Dollars around 12.5*bitcoin/dollar rate. At present, this is around $60k per block. This is a function of the bitcoin price. There are roughly 2000 transactions in a block, give or take. This implies that around $30 of bitcoin are created per transaction at present. Economically, we would regard this as a cost of the transaction, although this is not how people always view it.
Miners need to be paid because the cost of mining (of applying CPU to blockchain hashing) is becoming prohibitively expensive. It requires enormous and increasing amounts of energy. The chart below demonstrates such:

The electricity being used to mine bitcoin is now equivalent to the amount it would take to power over 1 million US homes!
Or to put it another way, the total energy consumption of the world's bitcoin mining activities is more than 40 times that required to power the entire Visa (NYSE:V) network. The annual energy consumption is equivalent to 13,239,916 barrels of oil!
Not only are the costs of transacting and running the network absurd, but the speed at which transactions are processed are extremely slow. BofA lays out the problem:
To illustrate, Visa's payment system processes 2,000 transactions per second, on average, and can handle up to 56,000 per second, if needed. Assuming similar transaction handling capabilities at other large payment schemes such MasterCard, UnionPay, AliPay etc, total digital payment transaction volume in the retail space can be an order of magnitude higher than the aforementioned 2,000 transactions per second. Assuming 20,000 retail transactions are processed every second, it would take about 100 minutes for one second's worth of transactions to be recorded on the bitcoin blockchain.
Lastly, due to the astronomical rise of bitcoin and other cryptos over the last few years, the tokens have drawn quite a bit of attention. This has created a speculative fever where the tokens are not being bought for their value, or as a means to transact, but rather as a gambling vehicle used to bet on further price gains.
It's a momentum driven market where everybody's chasing returns. And that creates an issue because people don't want to be like Laszlo Hanyecz and spend their bitcoins on a stupid Hawaiian pizza when those bitcoins could be worth many multiples of what they are today.
This creates a conundrum for cryptos. As Aswath Damodaran puts it, "It remains an unpleasant reality that what makes crypto currencies so attractive to traders (the wild swings in price, the unpredictability, the excitement) make them unacceptable to transactors."
So bitcoin fails (currently) to meet the requirements of a proper medium of exchange.
What about store of value? Are cryptos a fiat currency similar to the US dollar, as many crypto fans proclaim?
Here's economist Brad deLong's take:
Underpinning the value of gold is that if all else fails you can use it to make pretty things. Underpinning the value of the dollar is a combination of (a) the fact that you can use them to pay your taxes to the U.S. government, and (b) that the Federal Reserve is a potential dollar sink and has promised to buy them back and extinguish them if their real value starts to sink at (much) more than 2% / year (yes, I know). 
Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created.  
Placing a ceiling on the value of the dollar is the Federal Reserve's role as actual dollar source, and its commitment not to allow deflation to happen. 
Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
Bitcoins lack the essential qualities to make it a viable medium of exchange and store of value. Hence they can't and shouldn't be thought of as currencies or valued as such.
The things that make bitcoin a libertarian's dream such as its decentralized nature and the fact that no one has control over the system, also means that it doesn't have any true intrinsic value.

Its value is based completely off of people's beliefs… and more importantly, people's beliefs about other people's beliefs.
Crypto fans call this the network effect - which is a term used to describe companies whose values increase the more people use their products, like Facebook (NASDAQ:FB). But this is a limp comparison.
Network effects when applied to tech companies are important because they lead to greater earnings power and value creation - the more people use a social network, the more others want to join, and the more advertisers will pay for access to the network and so on.
Real network effects actually create more value for the owners of the company and users of the product.
Bitcoin doesn't sell anything and doesn't produce any cash flows. It's a non-currency that doesn't quite work as a medium of exchange or a store of value.
It's "value" is based purely off the beliefs of those who buy it. And this belief is that bitcoin is valuable because other people think it's valuable. "If I buy it now, I'll be able to profit at a later date by selling to somebody else".
In trading parlance, this is called "Greater Fool Theory" or GFT.


Wikipedia explains GFT as:
The price of an object is not determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. In other words, one may pay a price that seems "foolishly" high because one may rationally have the expectation that the item can be resold to a "greater fool later."
The Oracle of Omaha, Warren Buffett, agrees.
He calls bitcoin a bubble, stating "You can't value bitcoin because it's not a value-producing asset".

But "people get excited from big price movements, and Wall Street accommodates" making bitcoin a "real bubble in that sort of thing".
Maybe bitcoin should then be thought of as equity in a pre-revenue biotech startup. A startup with no leadership (it's decentralized), no product yet of intrinsic value, and a growing number of nearly identical competitors entering the market every single day.
But the shares of the 1,000+ various cryptocurrencies have a total market cap of $176B and growing. New shares are being issued every single day. Many, some, or maybe none, will eventually create intrinsic value somehow… but nobody knows exactly how quite yet.


A better comparison of how to think about bitcoin's value might be trading cards (think Magic or Pokemon) or in-game artifacts like a flaming sword in World of Warcraft (I don't know if the flaming sword is a thing but let's pretend it is).
Unlike a pre-revenue startup that may produce actual value someday, trading cards and in-game artifacts only have value because they have devoted fans and there's a false scarcity of these objects injected by their makers.
Neither of these have intrinsic value of any sort, but they have a price that fluctuates according to their popularity. So yeah, that's a better comparison. Bitcoins are like a $6,000 Pikachu card.

Do you want to buy some bitcoin now?

  • Bitcoin is neither a good medium of exchange or a good store of value, making it a terrible currency
  • Bitcoin is "valued" purely through its popularity and Greater Fool Theory - making it more similar to a Pokemon card than a real currency
My Take On Investing In Bitcoin
As a long-term investor, I wouldn't touch any of these with a ten foot pole even if my arch nemesis - you know who you are - was holding.
It's a total crapshoot and gamble. This market is purely speculative at this point.
But since I am speculator, would I trade it?
Hell yeah, why not?
Traders love this type of positive volatility. And bitcoins have all the right ingredients to drive this trend even higher. It's really the perfect "asset" for creating a frenzied mania along the likes of the Tulip and South Sea bubbles.
These ingredients are:
  • It's impossible to value: Anybody who tries is lying to you and themselves. And this is great, because when something has no intrinsic value, it can be either zero or infinity or somewhere in between since there's absolutely nothing reliable to gauge it off of.
  • Greater Fool Theory: It's value relies entirely on what the other fool is willing to pay for it. That's it and that's the only thing you need to analyze in this market when making buy and sell decisions.
  • It's a compelling and complex story and humans love stories: One of the best things that bitcoin has going for it is that nobody really understands the tech and what it's actual use cases will end up being.
  • It's anti-government/anti-establishment attributes make it a perfect tech for the times: Populism is rampant as well as distrust in institutions around the globe. The idea of a speculative instrument outside of institutional control has the perfect appeal.
  • It's a global market: Anybody anywhere can play bitcoin (though in some countries it's harder than others). This means there's a huge pool of potential fools who still haven't bought in.
And to top it all off, we're in the perfect macro environment for a huge speculative bubble.

We're coming off a period of horribly negative global sentiment stemming from the Great Financial Crisis. And long periods of negative sentiment are typically followed by the opposite.
Central banks have kept the world flush with easy money by keeping interest rates low and printing billions in new money. In macro terms, we say that global liquidity is flush.
And this creates the perfect environment for asset bubbles. This was perfectly described by 18th century editor of The Economist Walter Bagehot when he said:
One thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money… At intervals, the money of these people - the blind capital, as we call it, of a country, is particularly large and craving; it seeks for someone to devour it, and there is a 'plethora'; it finds someone, and there is speculation; it is devoured, and there is 'panic'.
This is why we're seeing celebrities like Paris Hilton and Floyd Mayweather advertising their own initial coin offerings (ICO's are alternate coins that typically get split off the ethereum blockchain and become their own separate "currency").
Since anybody can "fork" off a blockchain network (it's all open source), everybody can create their own crypto token. And they are. And people, lots of people, are buying them…
Blockchain "startups" have raised a disclosed $1.85B in just the first half of this year.

This is leading to some outrageous scams that are often unwittingly being promoted by these said celebrities.
Take the example of Centra.
Centra was a recent initial coin offering that raised $30 million and was promoted by Mayweather and rapper DJ Khaled.


Centra made big promises of partnering with Visa and creating the first debit/credit card for the crypto market, amongst other grand visions.
The problem is that these were just empty words.
It was found that the company hadn't even talked to any of the major credit card companies, employed no computer programmers, that the founders previously ran a luxury rental car service in Miami of all places, and their listed CEO was a fictional (as in completely made up) person.
The "founders" of Centra now have $30 million of investors' money. Of which, they can choose to do anything they want… like buy a bunch of Maseratis or life-sized cheese molds of themselves, and investors be damned….
An "investor" in the Centra ICO posted on Reddit defending the company and it's crypto tokens saying "What's important is that Centra is being endorsed and they have a product.

That's what matters to investors".
This is the type of highbrow "investor" who is now driving prices higher in the crypto market.

Again, the vast majority of the players in this market don't care about "trivial" things like made up CEOs and not having a real business model. They just want a higher price to sell into, a greater fool than them.
Centra is not an isolated incident. This is happening more and more.
I find this extremely fascinating from a behavioral investing standpoint.
We're witnessing what may well become one of the largest speculative bubbles in history. And people are becoming full-on punch drinking devotees. The more this zealotry spreads, the more crypto prices will rise, which will reinforce their beliefs and bring in ever more greater fools!
To play this kind of speculative bubble one needs to work off the technicals - which are very good in bitcoin where pure emotion/sentiment dominates price action - and keep a close eye on the liquidity.
Liquidity, which is the availability of money and demand in the global system, always precedes market moves.
A tightening of liquidity means a tightening of credit conditions. This leads to lower future demand and is a sign that investors are discounting greater risks in the market.
When global liquidity starts to drain (the black line moves higher on the chart below), rising volatility (orange line) typically follows.

And when market volatility rises, investors begin to reprice risk. The repricing of risk leads to lower demand and hence fewer fools to sell risky assets to. Fewer fools means less buyers and less buyers in a momo market leads to more sellers. This creates the scenario where you have a bunch of freaked crypto zealots all clambering for a shrinking exit at the exact same time.
This is when a boom leads to bust. And the warning signs will show on the various liquidity indicators beforehand.
The chart below is from Peter Brandt. It shows bitcoin forming a classic parabola. This is a common technical pattern in a speculative bubble.

We should continue to see the channel narrow and compress as the dips get bought more quickly and prices rise. When the price hits the top of the parabolic channel we should expect a retrace of at least 50%. The current price target is $6,800, not far from where bitcoin is currently trading.
Buyers should beware once they see liquidity begin to tighten at the same time bitcoin is trading near the upper range of its channel. That will be a setup for a large pullback.
This setup is aligning perfectly with the launch of bitcoin futures by the CME. This is a huge deal for the bitcoin trading community because it opens the floodgates to institutions and other participants who can only trade on regulated exchanges.
It also allows guys like us to easily short bitcoin when the eventual bubble pops!
  • The Blockchain is groundbreaking technology that, like the internet in the early 90s, will transform industries is ways none of us can fathom.
  • Bitcoins have no intrinsic value and it's unclear how they develop any. Their "worth" is based purely off having a greater fool to sell to. The market is dominated by punch drunk speculators.
  • Bitcoins and other crypto tokens don't meet the requirements of a currency and are closer to trading cards or in-game virtual objects that only have market prices due to a devoted fan base and false scarcity.
  • Bitcoin is the perfect asset for a speculative bubble: it has no intrinsic value so it can't be objectively assessed, it has a complex and compelling story, it's global, and it's the perfect anti-establishment tech for the times. Because of this, bitcoin probably still has a ways to rise.
  • Bitcoins should not be bought as a long-term investment but instead traded on a purely technical basis.
  • Liquidity and technicals are the only forms of useful analysis to use on the crypto market simply because they help identify regimes where there's likely to be increasing or decreasing Fools to sell into.
As for the future of the crypto and blockchain market in general, I think Matt Levine of Bloomberg has the best take. Here it is:
Look, I know I sound like a cryptocurrency/blockchain skeptic. I guess I am one, fine. But Walmart's mangoes are being tracked throughout the supply chain in an auditable distributed database that makes them much easier to follow than previous methods did. A syndicated-loan blockchain probably will work better than the current system of transferring syndicated loans by, like, faxing signature pages. "Tokenization" of some transactions or ownership interests will probably turn out to be useful, and might change how the markets for digital advertising or cloud storage or housing or whatever work.
But the way I like to think about it is that cryptocurrency might be to the 21st century what stock was to the 17th century: an administrative change in the bookkeeping for ownership of certain assets that over time completely transformed the economy and the world, with a power that the early innovators could hardly have dreamed of. But also, the first like 300 years of the history of stocks were filled with hucksters and hype and bubbles and disaster. Cryptocurrencies and blockchain really could be revolutionary technologies that will ultimately pervade every aspect of the economy, even while almost every individual project could be nonsense.