Theresa May’s new Brexit strategy: jump first, argue later

The UK government has no clear vision of Britain’s future relationship with Europe

Philip Stephens

Tell us what you want, Britain’s European partners ask ever more plaintively. We need clarity, chorus the businesses at the sharp end of Brexit. Downing Street is silent. For good reason. Theresa May’s approach to Britain’s departure from the EU has become a strategy to avoid a strategy. The prime minister’s chosen road to Brexit is paved with fudge. Hard choices can wait. The only thing that counts is getting over the line by March 2019.

Not so long ago, cabinet Brexiters were boasting that a comprehensive trade deal with the 27 EU nations would be wrapped up by the day before yesterday. Boris Johnson, the foreign secretary, scoffed at the notion that it would take two years to disentangle Britain’s affairs from those of its near neighbours. As reality began to impose itself there were what seemed reasonable hopes the government would raise its game. It might even develop a plan. Not a bit of it.

Mrs May, it is obvious, has no organising vision of the shape of Britain’s post-Brexit relationship with its own continent. Yet she does have one overarching ambition. As things stand, history will remember her as an accidental prime minister who foolishly squandered a parliamentary majority in an election she had no need to call — the worst prime minister of modern times with the exception, of course, of her immediate predecessor, David Cameron.

By her own lights, the way to change this narrative is to make sure Britain leaves the union next March; to demonstrate that she has honoured the decision of the 2016 referendum. Everything else — the nation’s prosperity and security or its standing in the world — is a second order question.

The scope of a trade deal, arguments about a customs union and access to the single market, the role of the European Court of Justice, co-operation against terrorism — all these can be settled once Britain has cut its bonds with Brussels.

Hitherto, there has been an assumption that negotiations with the EU27 about the future relationship would concentrate minds in Downing Street. The government would make the difficult choices — between continued economic integration with Europe and supposed freedom to strike out elsewhere, between regulatory convergence and divergence, between a customs union with the EU and third country trade deals. Subject to an agreement with the EU27, these choices would be embedded in a deal to be finalised by October. The arrangements would be put in place during a two-year transition period.

Instead, Downing Street has brought down a curtain of secrecy. Insiders find it is easier to divine the thinking deep inside Vladimir Putin’s Kremlin than get straight answers from No 10. What was promised as a firm framework for the future now has the consistency of a bowl of blancmange. Brexit in this mindset resembles nothing so much as an empty box. As long as the word is emblazoned on the lid, no one asks what is inside.

In the parlance of trade negotiators the best that can now be hoped for in the autumn is a “heads of agreement” — a non-binding expression of intent and aspirations. Even that might be beyond reach. Mrs May would probably settle for a vague political declaration.

Extraordinary though it may seem, Britain will then be forced to argue about the terms of a new relationship from outside rather than inside the EU. The transition will become a de facto negotiating phase, with Britain’s hand weakened by its status as a “third country”. This approach, best described as one of “close your eyes and jump”, draws scorn from those versed in international negotiations. Mrs May, though, is not about to measure the national interest against the desperate effort to rewrite her political epitaph.

A kinder interpretation might say that a comprehensive economic and political deal was never going to be possible within the two years allowed by Article 50. That Mr Johnson and his chums thought otherwise was simply testimony to their ignorance.

Maybe. But what was within reach — and with intelligent and courageous leadership from Downing Street still might be — was an accord that sustained the essential fabric of Britain’s ties to Europe, even if from outside the formal structures of the EU.

Instead, the only calculations that have mattered have been party political. Could the prime minister satisfy the Little Englanders in her cabinet while retaining the votes of pro-European Tory MPs in parliament? The perceived risk on one side, underlined by Mr Johnson’s latest public display of disloyalty, was of a cabinet coup; on the other that an agreement that satisfied the foreign secretary and his cabinet fellow traveller Michael Gove would be voted down in the House of Commons.

Hardline Brexiters are ready to conspire in the strategy of prevarication. Having won the referendum they are suffering a loss of nerve. Mr Johnson’s claim that Brexit would yield a multibillion-pound “dividend” for the health service has been exposed in all its mendacity. Calls from business for Britain to remain in an EU customs union are growing louder. Voters are watching their living standards fall.

How soon, these zealots fret, before someone suggests an extension of the Article 50 process?

Their priority is to make Brexit a legal reality. Brexit means Brexit, Mrs May once said. She had no idea of what that meant. Britain is still in the dark. The prime minister intends that this is how it should remain.

The Stock Market Rollercoaster: Should Investors Be Worried?

Stock market

With investors straining to see what’s next in U.S. stock markets after three dark days that erased some $4 trillion in value globally — just after many new highs — Wharton finance professor Jeremy Siegel noted midday Tuesday that the recent losses are an overdue correction. Now markets appear fairly valued. “The market went up too far, too fast in January,” Siegel said of the strongest New Year rise in history. There were a “lot of momentum players … trend followers … they have what they call stop orders in for selling [at a certain price] … and they jumped off the train. … ” January’s “crazy ride is over.” The moves in recent days “blew the fluff off” after having so many days of 200-point gains in January, he added, suggesting they did not portend much larger drops ahead.

The Dow Jones Industrial Average plunged the most ever on February 5 — on a point, though not on a percentage, basis — giving the market whiplash following so many days of record-highs in recent months. With the S&P 500 and the Nasdaq both posting losses around 4%, and global markets also taking a big hit, it was a surprise return to volatility despite what appeared to be a calmer day at midday Tuesday. At the low point Monday, however, the Dow had shed close to 1,600 points.

Will the market go down much more? “It might, but I think those buying now are OK for longer-term investments. Sit pat,” Siegel said. For those who are sitting on some cash and have been wondering what to do, “this may be the time to put some in” for those who felt the market “got away” from them.

Siegel added that longer-term trends for the economy look strong, so strong that he believes the Fed may raise interest rates four times in 2018 rather than the three most have forecasted. The reason: Continued strong jobs numbers may already be leading to wage-push inflation, and Siegel said that the Fed will be very sensitive to that. At the current unemployment rate of 4.1%, should current rates of job growth continue — 150,000 to 200,000 per month — unemployment may drop to 3.5% by year end. Almost all analysts would say that would create an inflation rate unacceptable to the Fed. Job growth of around 50,000 per month in the current economy would be closer to an equilibrium level.

Last month, Siegel predicted a possible correction of up to 10% in U.S. equity markets at some point during 2018. He also forecast that the market would end the year somewhere between being flat and up 10%. That made him, for the first time in life, he said, the most bearish person in the studio when he appeared on CNBC recently to discuss his market outlook. He called Monday’s drop in the Dow a “pipsqueak” at 4.5% compared to a one-day drop of more than 22% back in 1987.

Siegel offered his views on the Knowledge@Wharton show, which airs on SiriusXM channel 111. (Listen to the podcast above). An edited transcript of the conversation follows.

Knowledge@Wharton: What is your read on the last three days of trading when we had the market correction?

Jeremy Siegel: The market went up too far, too fast in January. I had said so [before the current decline]. What we had was a lot of momentum players. These are trend followers. [They get in as] the market goes up 100 points, 200 points every day. They said, “Hey, I’m going to ride this train.” And more and more jumped on. And they all said, “I’ll jump off when it stops.”.

So now everyone has. Once it goes down a certain amount — for some people it may be a 1%, 2%, 3% decline in the market — it triggers what they call their stop [loss] orders in for selling. As soon as it breaks through that, they jump off the train and that’s what we had yesterday [Feb. 5]. Everyone said okay, “This crazy ride in January is over. I’m taking my profits and I’m jumping off.” And that’s basically what it is.

Now there’s always a trigger. It’s usually a minor trigger — rising interest rates, the Friday employment report, which reported some pretty strong wage gains and the yield on the 10-year [Treasury note] rising to 2.85%. These are the little things that get people nervous enough to have one foot ready to jump off.

Knowledge@Wharton: Is this a momentary retreat? Will we see a moderate rebound on Wall Street in the next few days?

Siegel: Yes. I think the market was 10% overvalued. Last December I called for [growth in the U.S. stock market] this year to be zero to 10%. And as the market kept going up, they said, “Oh, Dr. Siegel, you’re way to bearish.” Now, you know, for someone to call me too bearish is [unusual].

Knowledge@Wharton: That’s never the case.

Siegel: I was on CNBC and I was the most bearish forecaster there. I said, “I don’t think I’ve ever been in that position my whole life.” I also said, “Listen, the market went up late last year in anticipation of the corporate tax cut.” And that was okay. I was all for it. I think it was a good thing. And then it has kept on going up again because … they kept on using the same rationale to keep doing it. And then of course, it became its own self-fulfilling prophecy. And everyone jumped on and on and on.

There’s an old, old saying in the market, “up a staircase, down the elevator.” And that’s what we had. If you take a look at the graph of high-low daily closes in January — it was up, up, up like a stepladder — then down the elevator.

Knowledge@Wharton: What will be the path of the Fed now, at least this year, and especially with the switch from Janet Yellen to Jerome Powell?

Siegel: It seems like every new chair gets a challenge. Remember two months after Alan Greenspan came in, we had [the Black Monday market crash of] October 1987. This is a pipsqueak challenge in comparison to that — we had a 4.5% decline yesterday [on Feb. 5] compared to a 22% decline [in the 1987 crash]. We also had yields on the 10-year soaring to 10% — a totally different situation … much worse than what we had.

Knowledge@Wharton: Will many people get out of the market or buy on the dip?

Siegel: Once you get these things, you get a lot of volatility. Will it go down more? It might. I think, though, the people buying now are okay for a longer-term investment. I think it was a bit pricey a week or two ago. Now my feeling is sit pat — unless you’re a short-term trader and love trading volatility, which very few people do successfully — so I urge most people not to try that. I say you sit pat at this particular point.

If you’ve got some money that you’ve kind of been waiting to put in the market and felt it ran away from you, maybe this is the time to put some of it in — realizing, certainly, it could go a bit lower before it ultimately gets higher. Right now, I look at a really fairly valued market. I don’t see a real undervalued market. I think we blew off the fluff of that crazy, every day 200-point gain that seemed to be the first four weeks of this year.

Knowledge@Wharton: What does this do to commodities?

Siegel: It’s interesting. Oil is down. [But] you did ask about the Fed and I didn’t get a chance really to answer. Let me go to the Fed first because what we’ve seen so far will have zero impact on the Fed. So the Fed is raising [interest rates] in March. The only way this could have an impact is if it gets much worse and we see a slowdown. Let’s face it, since Trump was elected, we’ve had a 40% gain in the Dow. So we gave back 10%. This is nothing that in a bigger picture would cause the Fed to go, “we have to hold off raising rates.” Now again, if the decline gets worse, if they see a real slowing of economic activity which we have not — then it’s another picture. But from the data that’s coming in now, no way is the Fed going to pause March at this point.

Knowledge@Wharton: All of the economic data and the jobs numbers have continued to be positive.

Siegel: The big problema with the market this year is, I say it’s a clash between the numerator and the denominator. What do I mean by that? The value of stocks is earnings divided by the interest rate, the discount rate. And earnings are going up but the discount rate’s going up too. So the question is, which is going to go up the fastest?

And what happened over the last week when we had that strong job gain and we also had a nine-year high in year-over-year earnings gains? All of a sudden people said, “That interest rate’s going up. That denominator’s going up. I’m going to have to discount these earnings,” even though the earnings are great. Yes, there was a stumble in ExxonMobil, and Apple’s sales are not maybe what some people expected, but overall forecasters are raising their estimates of 2018 earnings.

Knowledge@Wharton: You still have a lot of companies that say that they are either going to be adding jobs or bringing back cash … building factories and continuing to add production.

Siegel: Yes. The danger for stock investors is not a slowing economy, it’s an overheating economy. And you asked about commodities. They’ve been very firm. Now we’ve seen a bit of a selloff in oil but don’t forget, that’s come on the back of huge gains. A lot of us didn’t think oil would get above $60. It almost got to $70 and now it’s in the low $60’s. We’ve had huge gains because the coordinated expansion of worldwide business has increased the demand for oil — and more optimism on that.

Commodity prices are firming. They’re not out of control. We don’t have anything like the 1970s inflation. But firming of those commodity prices is one of the factors the Fed looks at and that is another reason why I believe — certainly at this point unless the market gets much worse — an interest rate increase in March is in the bag.

Knowledge@Wharton: I want to go back to something you mentioned about wage growth which, I believe, was 2.9% in January from the year before. How does that correlate to the concern about interest rates?

Siegel: This is important. Wage growth is good. If it’s caused by productivity growth, then it’s great. We’ve had a little bit of firming of productivity growth but not enough. This wage growth looks in excess and that increases what we call unit labor cost, which puts cost pressures on firms that induces them to pass through these cost pressures into final prices.

Now this could take a long time and I wouldn’t panic yet. We’ve had this one month, you know, year-to-year increases but with the unemployment down to 4.1 % — well below what the Fed thinks is the natural rate of unemployment — it sparks wage increases. With the gains we see in employment — we had 200,000 [in January] — if we get 150,000 to 200,000 new jobs per month through the remainder of this year, we’re going to be not only below 4%, we may be below 3.5% and I don’t know any case in post-World War II history where that has not brought about rapid wage gains that have to move into prices.

Knowledge@Wharton: The fact that you could be even looking at an unemployment rate that is in the 3.5% range —

Siegel: Is amazing.

Knowledge@Wharton: What about the labor participation rate, which is still down below 63%.

Siegel: But stabilized, in the last four years

Knowledge@Wharton: Do you think that rate has the ability to go higher? It used to be like 66%, right?

Siegel: Don’t forget, we have the demographic [effect] — the Boomers’ retiring is a wave of force that’s dragging it down. So the only way it could rise now is if people get so optimistic about [finding a job,] people who are not looking, now will say, “There are such great opportunities there, I’m going to start looking.” And to some extent, that’s what’s been happening. But it has to overcome the steady retirement of the boomers, which is accelerating at this time.

That’s why the participation rate actually peaked in the year 2000 and going down — it went down very rapidly during the economic crisis more than economists expected. Now it’s stabilized and it has hit the trend line of what economists expected.

Knowledge@Wharton: Is the 62% or 63% range in the labor participation rate the new norm now?

Siegel: In fact, I think it’s going to continue to drift downward over the next 10 years.

Knowledge@Wharton: Really?

Siegel: Yes, because of the Baby boomers. We’re an aging population. Don’t forget, it’s not those aged 18 through 65. It’s … actually everyone over 16. I’m not sure what the cutoff is. So as Baby Boomers retire, that rate is in a secular decline.

… Actually, one of the very few areas where the participation rate is rising is among those over 65. They’re coming back because they don’t have enough savings. But they’re still a very small group — they can’t offset the tidal wave of retirement of the Baby Boomers. From immigration and population alone, we’re generating 50,000 to 80,000 jobs. We can’t continue to add 150,000 to 200,000 jobs and not lower that unemployment rate.

Knowledge@Wharton: Do you expect three rate increases this year?

Siegel: You know, I’m beginning to think four. And no one knows until the data evolves. … But again, unless we have a slowdown in job growth that’s significant, I think now the Fed is going to raise it at every quarterly meeting.

Dollar Breakdown Continues

By Tim Taschler

The Swiss National Bank (SNB), Switzerland’s version of the Fed, has been a busy expanding its balance sheet and buying U.S. equities. The SNB now owns over $97 billion of stocks (Figure 1).


Figure 1: Swiss National Bank Holdings (Source: Bloomberg)

The $97 billion sum works out to over $11,000 for every citizen of Switzerland. It would appear that the SNB is as bullish on the U.S. equity market as the majority of Americans (Figure 2).


Figure 2: University of Michigan household survey

Another interesting piece of data, courtesy of Bespoke, is that since 1993, if you bought SPY (S&P 500 ETF) on the open every day, and sold it on the close, the return would be -5.2 percent. However, if you did the opposite and bought on close, then sold on open the next day, the return would be 568 percent. What does this mean? 

All of SPY’s performance since 1993 came in after-hours, overnight trading.

The markets this past week saw the return of volatility with the volatility index (VIX) moving up 100 percent so far in 2018 (Figure 3).

Figure 3: Volatility Index (VIX) (Source: as of February 3, 2018)

The yield on a 10-year Treasury bond (TNX) hit a 4-year high (Figure 4) while TLT, the iShares 20+ Year Treasury Bond ETF is now down almost 5.5 percent for the year (Figure 5).

Figure 4: CBOE 10-Year US Treasury Yield (Source: as of February3, 2018)

Figure 5: iShares 20+ Year Treasury Bond ETF (Source: as of February3, 2018)

The US Dollar Index (USD or DXY) is also back to levels not seen since late 2014 (Figure 6).

Figure 6: US Dollar Index (Source: as of February3, 2018)

So what does this mean from an investment standpoint? The future is, of course, unknowable. Everyone has great insight when looking at the left side of the chart (hindsight) but looking at the far right (speculation) is more challenging. As much as a fool’s errand it is, I will make a couple of educated guesses as to what might happen.

It is a sign of the times when a two percent down day in the S&P 500 brings out comparisons to the 1987 crash. Historically, however, stocks don’t crash from all-time highs. An initial correction is generally followed by a rally (that falls short of the high) and then by a more serious correction (or bear market). 1987 played out precisely this way as Figure 7 shows.

Figure 7: SPX (Source: as of February3, 2018)

Of importance, I think, is that the Fed sold $22 billion of the $4.4 trillion in assets it bought over the last nine years (Figure 8). This is the largest one-week sale since this experiment began with QE1 (TARP). It will be interesting to see if continued balance sheet reduction by the Fed has a similar impact on stocks.


Figure 8: Federal Reserve Total Assets (Source: St. Louis Fed, as of February3, 2018)

If the stock market is topping out, which is a distinct possibility, it won’t be long before talk of Fed rate hikes turns into talk of Fed rate cuts and more QE. Is this what the dollar is anticipating with the slide that began in early 2017?  If so, then it’s possible that the dollar continues its decline, putting a bid in inflation assets such as gold, miners and food commodities, much as we saw in January through June 2016 (Figure 9).

Figure 9: US Dollar vs. Commodities and Miners (Source: as of February3, 2018)

The future is unknowable, but a quote attributed to Mark Twain often rings true when discussing markets—“History doesn’t repeat itself but it often rhymes.”  

Is Germany Catching Trump’s Tax Disease?

Marcel Fratzscher 

Angela Merkel

BERLIN – After months of negotiations, another grand coalition government – comprising Chancellor Angela Merkel’s Christian Democratic Union (CDU) and a grudging Social Democratic Party (SPD) – is taking shape in Germany. But the new government seems likely to miss the opportunity afforded by Germany’s strong economic and financial situation to pursue much-needed reforms.

In fact, the fiscal policies that Germany’s emerging government is discussing bear a remarkable resemblance to those of US President Donald Trump, whose tax plan, most economists agree, will bring limited short-term benefits to a few, but huge long-term costs to many more. Indeed, the incipient German government is discussing cutting taxes for corporations and the rich, while raising spending on public consumption, especially public pensions.

In the United States, Trump has convinced many of his lower-income supporters that his tax plan will benefit them, not just his wealthy cohorts. A similar feat has been accomplished in Germany, with some powerful lobby groups persuading middle-class voters that they will benefit from a tax cut.

These groups claim, for example, that raising the income threshold for the top marginal tax rate will help middle-income voters, even though the top marginal tax rate is now levied on just 7% of German employees. Similarly, the plan to abolish the tax surcharge on higher incomes (Solidaritätszuschlag), introduced after reunification in the early 1990s, would benefit almost exclusively the top 30% of earners.

This is all the more problematic because the top 30% of earners in Germany are already subject to a lower tax rate than 20 years ago, even though their wealth has increased. The bottom 70% largely pay much more in direct and indirect taxes, despite often having lower incomes.

The arguments for cutting corporate taxes are similarly flawed. Like Trump, German politicians and lobby groups claim that domestic firms need a tax cut in order to stay competitive internationally. Yet Germany’s export companies are undeniably very competitive, and have largely managed to increase their global market share since the 1990s. Moreover, corporate profits have reached record highs in recent years, and while corporate taxes in Germany remain relatively high compared to other countries, they were reduced significantly in the 2000s.

Beyond having only limited economic benefits, the proposed tax cuts in Germany – like Trump’s in the US – represent a huge strain on public finances in the long run. While Germany’s public sector currently boasts a surplus of about 1.3% of GDP, that is largely the result of good luck, not good policy: without low interest rates and a strong labor market, the federal budget would be in deficit.

Yet demographic shifts mean that contingent liabilities for public pensions and health care in Germany will rise sharply over the next decades. Covering these costs will require taxes to be increased substantially and/or for spending to be reduced – precisely the opposite of what the CDU/SPD government is promising.

This does not mean that Germany’s government should not contemplate any tax reductions or spending increases. But, in order to ensure that such changes have the maximum positive impact, without hurting younger generations, they must be designed fundamentally differently.

Arguably, Germany’s biggest economic weakness today is low private investment. With the German corporate sector having run up massive profits for more than a decade, the resources are certainly available. Yet overregulation, heavy bureaucratic burdens, policy uncertainty, poor digital and transport infrastructure, and, in some industries, a lack of skilled workers, are currently impeding investment by companies in new and existing capacity.

The government need not address all obstacles to investment and innovation at once. At the very least, it should create tax incentives for research and development, as well as for equity investments. It should also design provisions to support small and medium-size enterprises, while fighting tax evasion among big firms.

Moreover, Germany’s government should use its fiscal space to invest in education, in particular in pre-schools and primary schools. And it should invest in developing an internationally competitive digital infrastructure and a social security system that ensures labor-force participation and lowers long-term unemployment.

In many ways, Germany’s economy is thriving. But that is no reason for the government to waste its sizable fiscal surplus on economically useless tax cuts and spending increases. On the contrary, the surplus creates an important opportunity to tackle the long-run challenges that Germany faces – an opportunity that Merkel’s next government must not waste.

Marcel Fratzscher, a former senior manager at the European Central Bank, is President of the think tank DIW Berlin and Professor of Macroeconomics and Finance at Humboldt University, Berlin.

The Antidote to Optimism

by Bill Bonner

It is always brightest before they turn the lights out.

You can quote us on that, Dear Reader.

Just when you thought things couldn’t get better… guess what?

They don’t. They go dark as a dungeon.

Antidote to Optimism

Our task today is to show that however wonderful things may appear in today’s markets and economy, they may not be all that great.

We put our backs into this grim work neither for love nor for money, but simply out of a sense of stern duty.

If not us, who? If not now, when?

Someone must put forward an antidote to the optimism now raging through markets around the world.

Someone must make the case for cynicism, suspicion, and mockery.

Someone must take the other side of the trade.

And so… the work, like shucking oysters on a cold day, falls to us. We open them up… hoping to find a pearl.

Donald Trump, Davos Man

Instead, we find claptrap.

“The elite gathering at Davos [including Donald Trump],” begins a Financial Times article, “takes place against a backdrop of improving economic activity across the world.”

The IMF says it is the “broadest synchronized global growth upswing since 2010.”

The FT goes on to tell us that the world economy is supposed to grow a healthy 3.9% “this year and next” thanks, at least in part, to the sweeping tax reform measure just implemented in the U.S.

Well, well, well. Gosh, it looks as though we were wrong about everything. You can predict the future after all.

As for the tax cut, we didn’t believe that the tax measure would have any positive consequences other than giving us more money.

What economic benefit could be reaped by taking money from one pocket and putting it in another?

Unless Swamp spending were reduced, we reasoned, there could be no net gain from cutting taxes.

Just goes to show what we know.

Over at The Wall Street Journal, meanwhile, the tax cut has touched off celebrations worthy of VE Day.

Andy Puzder, the former CEO of the Hardee’s and Carl’s Jr. restaurant chains, praises employers for sharing out their extra tax-spared loot with employees.

He also thinks employers should use the opportunity to indoctrinate workers about where the money came from, “otherwise employees may take their pay increase and bonus and not give Republicans the credit they deserve.”

What praise Republicans deserve for switching government funding from above-board tax revenues to surreptitious debt is not clear to us.

But now that we know that it is creating such a powerful, worldwide boom, we wonder why they don’t do more of it.

Perhaps they should cut taxes to zero for everyone and just print the money needed to pay for their boondoggles. What a boom that would set off!

Wealth Redistribution System

Whatever they are doing… it seems to be working.

The U.S. stock market has only been down one single day in all of 2018. And super hedge fund investor Ray Dalio says we’re “going to feel pretty stupid” if we continue to hold cash.

Reporters caught up with Dalio in Davos – where else? – and the great man told them we are in a “Goldilocks period,” where growth is almost guaranteed.

“Things couldn’t be better,” he seemed to say.

Heck, nobody wants to be stupid. So, everyone’s long now. In the latest tally, there are five bulls for every one bear. How much longer can this poor beast hold out?

The unemployment rate, too, is almost a miracle. At 4.1% nationally, it is at a 17-year low.

In some states, it is at a record low. In Mississippi, for example. And California. And in Hawaii, apparently, not a single person could be found who admitted to being jobless.

These glass-half-full figures don’t jibe with the 102 million American adults of working age who really don’t have jobs.

But perhaps in some future installment, the Bureau of Labor Statistics will fully explain the discrepancy… or simply ignore it along with all the rest of the glass-half-empty figures.

Inflation is still below 2%… but only if you follow the feds’ bogus numbers… and don’t count the rampant inflation in the asset markets.

And the stock market, too, requires a special caveat emptor. It is no longer a place where we find out how much companies are worth.

Instead, it is part of a wealth redistribution system: The feds feed fake money into the markets. Assets go up. And the people who own them find themselves with a greater share of the nation’s wealth.

Congrats to the “One Percent”

By pushing fake money onto the financial class, the feds have increased the share of national income made by the “One Percent” to three times what it was in the 1970s.

The bottom share had to go down.

There are 2.3 million people, for example, who earn more than $1 million a year. And the top 0.1% earn more than $6 million a year.

But the bottom half of the population has an average income of only $16,000. And seven out of 10 Americans, says USA Today, have less than $1,000 in savings.

How is it possible that an economy can be doing so well… when most people in it are worse off?

Casual readers will quickly tag us as bleeding-heart liberals whining about inequality. But we don’t care about “inequality.” What we care about is truth, justice, and the American way.

Which is to say, if a person earns his money honestly, it should be a rough measure of what he deserves. Or at least what other people are willing to pay him.

In a free, win-win world, what you get is related to – if not exactly equal to – what you give.

But in the 1970s, the top 0.1% got 10% of the nation’s income. Now, it gets 20% – twice as much.

What are the rich giving to deserve twice the income share? Are they giving twice as much?

The bottom 90% got 35% of national income as recently as 1980. Now, they only get 25%.

What happened? Do they give so much less? Or is the system rigged against them?

India’s One Belt, One Road-Block

By Jacob L. Shapiro

It’s been a busy week for Indian foreign policy. In the past, that statement would have been an oxymoron. The Himalayas isolate India from developments in the rest of the world. Internal diversity makes it hard for India to govern itself, let alone to influence others (though the irony of an American writing that a few days after the U.S. government shutdown is not lost on me). The scope of India’s poverty makes China look like a uniformly rich society by comparison.

For all these reasons, India has been a minor player on the world stage in modern history. India was the “jewel in the crown” of the British Empire, a vast land of resources for the British to appropriate. The British controlled India not so much by force as by playing its diverse groups against each other. After the British left and an independent India emerged, India was a relatively insignificant actor in the Cold War, engaged in a nuclear arms race with Pakistan and fought a few skirmishes with China. Overall, though, the impact of India’s actions was confined to the Indian subcontinent.

But now India has arrived at an unprecedented moment in its history. At home, the Bharatiya Janata Party, with its clear vision of what a united India’s interests are in the world, is in a strong position. Abroad, fear of China’s heavy-handed attempts to gain influence have many looking to India as, if not a savior, then the only counterweight to China’s demographic, economic and military heft. India is trying to make the most of this chance. Even so, the reason many Asian countries trust India to counter China is because they do not think India is as great a threat to them as China because of its fundamental weaknesses. India is limiting China at the invitation of others.

An Alternative to China

Most foreign media this week focused on Indian Prime Minister Narendra Modi’s rousing introductory speech at the World Economic Forum in Davos and on the renewed competition between China and India around Doklam. These issues aren’t especially important. Davos is a nice conference for world leaders to enjoy themselves while accomplishing nothing that will have much effect on the world. In Doklam, the geography makes the prospects of an India-China war remote at best. If China and India were to fight over a disputed border region, it would be in Nepal or Tibet; Doklam is political grandstanding.

And there are other, more consequential areas that India is seeking to make its presence felt than Davos and Doklam. The first is in the vast buffer region between China and Russia. China covets this area, which is made up mostly of Kazakhstan and Mongolia. Beijing’s One Belt, One Road initiative is, at its core, a strategy for China to develop new markets for its excess supply of goods and raw materials and to build the prosperity of China’s vast, impoverished interior. China’s investment, however, often comes with strings attached: Chinese workers, or preferential arrangements for Chinese companies. These are strategic areas of the world that China wants to influence and even control.

India is far less ambitious. Its goals are to make money and thwart Chinese plans, which it can do merely by offering an alternative to China. On Jan. 24, the Mongolian government announced that construction on the country’s first oil refinery would begin in April – funded by India in a deal reached in 2015. Meanwhile, on Jan. 25, Kazakhstan announced plans to implement visa-free 72-hour transit for Indian citizens. Kazakhstan debuted this pilot visa regime with China, and a Kazakh government official noted that the arrangement was so successful at attracting Chinese investment that the country decided to extend it to India as well.

The same dynamic applies to Southeast Asia, where China has also pushed its One Belt, One Road initiative. For China, the most important country in the region is the Philippines because a close relationship with Manila would give Beijing access to the Pacific. India is active there too. A Philippine government official said Jan. 23 that India had pledged over $1.25 billion in investment for 2018, money that is expected to create more than 100,000 jobs in the country. For perspective, in 2016, $1.25 billion would have made India the second-largest foreign investor in the Philippines, behind the Netherlands and immediately ahead of the United States, Australia and China.

In Southeast Asia, though, India has greater ambitions. On Jan. 25, India hosted the leaders of all 10 countries that make up the Association of Southeast Asian Nations to promote “maritime security” in the region. The day before that, India announced that it had agreed with Indonesia to increase bilateral defense cooperation through joint exercises, arms deals and high-level visits of officials. This is in addition to India’s recent support for the resurrection of the Quad, an amorphous alignment of India, Japan, Australia and the U.S. whose chief goal is to limit Chinese expansion, and India’s more liberal deployment of its naval forces for military exercises on the Pacific side of the Indo-Pacific.

Dose of Reality

All this sounds impressive, and on a certain level it is, especially for a country with a history of global involvement like India’s. But these developments should not be oversold. India is hosting ASEAN leaders and throwing investment money around the region, but China’s clout is still overwhelming by comparison. China accounted for 14 percent of total ASEAN trade in 2014 and 15.2 percent in 2015 (the latest year for which stats were available). India, on the other hand, accounted for 2.7 percent in 2014 and 2.4 percent in 2015, meaning that not only is India’s share of ASEAN trade much lower than China’s, but it is decreasing. In the long term, India may well provide a balance for some of these countries, but they need a counterweight to China now, and India’s ability to help is limited.

In the past week, there was also an internal development that underscores India’s geopolitical handicap. Shiv Sena, an important political party in India’s western state of Maharashtra, announced Jan. 23 that it was breaking with the BJP in upcoming general and state elections. Shiv Sena has not indicated that it plans to withdraw from India’s coalition government, and by all accounts the breach is not ideological but political. The party supports the BJP’s vision of a united, Hindu India, even if it did not appreciate the way the BJP took Shiv Sena’s support for granted. But the deeper issue is that Shiv Sena started not as a Hindu nationalist party but as a pro-Marathi party. (Marathis are the dominant ethnic group in Maharashtra.)

Shiv Sena is not returning to its pro-Marathi roots – or at least it’s given no indication that it will. But its break with the BJP underscores just how fleeting the BJP’s level of control is. India is, after all, a democracy, and the BJP government is as susceptible to being voted out of office as any political party is in a democracy. The BJP has consolidated power at home and projected power abroad because of its strong political position, but nothing says that position must be permanent. Beneath the veneer of strength of the BJP’s governing coalition are the divisions that the British used to control India, the same divisions that have long prevented India from harnessing its demographic and economic potential.

In a sense, India’s foreign policy is still passive. The hallmark of power is not that countries will take your money and use it to build refineries, or that foreign leaders will visit and eat your food at interesting summits about maritime security. The real test of power is whether a country can make other countries do what it wants. And for all the activity involving India this past week, none of it suggests that India is amassing that kind of power. Instead, India is thwarting Chinese power. It is doing this because it wants to, but more than that, because other countries want it to. India is playing on the world stage, and that is notable – but it is playing at the invitation and with the blessing of others. It is not master of its fate.