Trump’s fight with drugmakers will not solve healthcare crisis

The US needs a health secretary with the mettle to enact painful industry reforms

David Crow

© Ingram Pinn/FT

When Pfizer reversed price rises on 100 products last month, the drugmaker handed Donald Trump a clear-cut win that vindicated his strategy of using Twitter as a modern bully pulpit.

The US president had said Pfizer should be “ashamed” of the move, prompting the drugmaker to make an unprecedented U-turn.

Since then, other pharma companies have been tripping over themselves to promise restraint on US prices, and Mr Trump has declared victory in his long-running campaign to stop the industry “getting away with murder”. But the president should not be fooled. While Pfizer’s climbdown will hurt sales, most of the pledges from drugmakers are weasel words.

Take Merck, which recently announced a series of rollbacks, including a 60 per cent price cut for Zepatier, a medicine for hepatitis C. The only catch here is that the company does not sell any of the drug in the US, where there are much better alternatives, and actually recorded $10m in negative revenue for the product in the second quarter. The total saving for patients and the healthcare system is going to be zero.

If Merck had enacted meaningful price cuts, it would not have been able to raise forecasts for full-year profits last week. The same is true for Novartis, which said it had cancelled a series of planned increases in a sop to Mr Trump, while leaving its sales guidance unchanged. Other companies have constructed tortured pricing pledges that would make even the most tricksy lawyers blush.

They all go something like this: “We will limit net price increases across our portfolio to [insert a percentage that sounds low]”. Translation: we were going to have to reduce the price of some medicines anyway, because they have lost patent protection and must now compete with cheaper generic rivals. But we have worded our pledges very carefully so that we can keep raising the price of our lucrative blockbuster drugs.

Pharma executives say price gouging is limited to a few bad actors such as Martin Shkreli, the recently convicted fraudster who raised the price of an Aids and cancer medicine by more than 5,000 per cent. In truth, the practice is rife.

Celgene, a US biotech group, is among the drugmakers that recently promised moderation. But the price of its cancer treatment, Revlimid, has gone from $247.28 per pill in 2007 to $695.48 today. Nor is Revlimid a particularly innovative medicine: it is a derivative of another decades-old drug, thalidomide, which was withdrawn from the market in 1962 after it was found to cause birth defects. Robert Hugin, the former Celgene chief executive who signed off most of the Revlimid increases, is now a Republican candidate for the Senate. For some reason, he has escaped Mr Trump’s wrath.

The president might not care if prices really come down, as long as drugmakers keep up their obsequious pretence; he prefers looking like a winner to enacting complex, meaningful reforms. But it would be a shame if he thinks he has won this battle. High drug prices are one reason that the US spends more per capita on healthcare than any other developed nation, but has much worse outcomes.

Mr Trump’s health secretary, Alex Azar, has shown no interest in the types of radical policies that might bring prices down. A former official in the George W Bush administration, he spent the Obama years working as an executive at Eli Lilly, the Midwestern drugmaker, where he was put in charge of the company’s US division. During his tenure there, the price of various Lilly medicines rose substantially.

Mr Azar favours a plan that would squeeze companies known as pharmacy benefit managers. These middlemen are a quirk of the US system and work on behalf of employers and insurers to wring discounts and rebates from drug companies. PBMs like to cast themselves in a Robin Hood-like role, but critics say they use the rebates to boost profits for themselves and their clients rather than lowering costs for patients.

Targeting PBMs while going easy on drugmakers is not the answer. Last year, the two largest PBMs, CVS Caremark and Express Scripts, generated $10bn of combined operating income. Even if Mr Azar’s reforms were to wipe their profits out entirely, the savings would not cover the cost of the US’s top-selling medicine, Abbvie’s anti-inflammatory drug Humira, which generated $12.36bn in sales last year.

Instead, Mr Azar should revive an idea Mr Trump once supported: allowing the government to directly negotiate drug prices. Medicare, the state-funded health programme for retirees, is the world’s largest buyer of prescription medicines but, absurdly, it is forbidden from cutting deals with drugmakers due to a law passed in 2003. Allowing the government to use its immense bargaining power to secure a better deal would deflate prices.

Mr Trump has been right to home in on this issue, where his populist instincts are shared by voters across the political spectrum. But he needs a health secretary with the mettle to implement reforms that will be painful for the pharma industry. Otherwise drugmakers will keep charging whatever the market will bear.

At Heart of New Fed Debate: Bonds or Bills?

The Federal Reserve must decide how to manage the mix of long-term versus short-term in its Treasury portfolio

By Nick Timiraos

The Fed has decided it wants to hold primarily Treasury securities rather than mortgage securities, but it hasn’t worked out what the mix of those Treasury securities will look like.
The Fed has decided it wants to hold primarily Treasury securities rather than mortgage securities, but it hasn’t worked out what the mix of those Treasury securities will look like. Photo: leah millis/Reuters 

Federal Reserve officials left many important questions unanswered when they decided last year to begin shrinking the central bank’s $4.5 trillion portfolio of mostly mortgage and Treasury securities.

They are now beginning an internal debate to answer one of the most important of those questions: What exactly will this portfolio look like when they are done shrinking it? 
The Fed has decided it wants to hold primarily Treasury securities rather than mortgage securities once it is done. But it hasn’t worked out what the mix of those Treasury securities will look like. Will it be mostly very short-term bills? Or will it include a hefty share of longer-term bonds?

The difference is critical. Fed policy in the past decade has operated on the theory that holding long-term securities stimulates financial markets and the economy by holding down long-term interest rates. That is thought to drive investors into riskier assets like stocks and corporate bonds and encourage business investment and consumer spending. Holding short-term securities, this theory holds, provides little stimulus.

The idea was at the core of former Fed Chairman Ben Bernanke’sstrategy to move heavily into long-term Treasury bonds during the financial crisis. Fed estimates suggest the strategy pushed down long-term interest rates by a full percentage point, making it less costly for millions of homeowners, car buyers and corporations to borrow. The mix of long-term and short-term bonds also influences the federal government’s borrowing costs.

Fed officials, led by the Federal Reserve Bank of New York and economists at the Fed board in Washington, D.C., are beginning studies and internal debates on how to manage that mix of long-term versus short-term in the Fed’s Treasury portfolio in the years ahead, according to several people familiar with the matter.

It is among several big questions facing Fed ChairmanJerome Powell,including how big the overall portfolio should be in the long run and what tools should be used to manage short-term rates.

Mr. Powell is uniquely situated to lead the discussions. In the early 1990s as a senior U.S. Treasury official, he oversaw debt-management policy, including questions about how many long-term bonds the government would issue.

The review process and internal debate about the portfolio’s composition is in its early stages and could take months to play out, these people said.

“Everyone has been focused on the final size of the balance sheet, but they are going to have to make an important decision about its composition as well,” saidBrian Sack,who ran the New York Fed’s markets desk from 2009 to 2012 and is now the director of economics at hedge-fund manager D.E. Shaw group. “They haven’t said anything about the composition of maturities for their Treasury holdings.”

Officials said they aren’t in a hurry to finalize their approach. “This is certainly something to think about,” said St. Louis Fed PresidentJames Bullardin an interview. “We’re in good shape now. We have to address this more seriously in the next year.”

The Fed’s options are likely to fall somewhere between two strategies. The first would target a “maturity neutral” approach that maintains a portfolio of bills, notes and bonds in a proportion that mirrors Treasury Department issuance of these securities.

Alternately, officials could weight their portfolio mostly toward Treasury bills and other shorter-maturity holdings, the inverse of their crisis-era interventions into long-term bonds and one that would provide less support to the economy.

At some point, after it has shrunk to a size the Fed finds appropriate, the Fed’s portfolio will start growing again, in line with the economy and money supply’s natural growth. That means the Fed will need a strategy for how it should grow. Complicating the planning, it will take years for the mortgage holdings to passively mature and be replaced by Treasury holdings.

The Fed’s share of shorter-duration securities is much lower now than before the crisis. In 2007, around half of its Treasury securities matured within one year or less, compared with 17% today.

Officials are torn about which strategy would be best.

Concentrating holdings in any single maturity range could distort market functioning. That argues for a mix of short-term and long-term securities holdings that mirrors the supply of securities already in the marketplace.

But spreading holdings broadly across many different maturities means some measure of potentially unwanted stimulus to the economy in the form of long-term holdings. Maintaining an appropriate mix could be complicated if the Treasury shifts the mix of securities it issues, altering the mix of securities in the marketplace.

A portfolio heavily concentrated in bills provides the Fed with operational flexibility. Because bills are so liquid, they can easily be replaced in an emergency and moved into other assets, such as loans through the Fed’s discount window to banks in a crisis.

“That flexibility might prove useful in some circumstances,” said Mr. Sack.

A portfolio concentrated in short-term bills has some other advantages. It would allow Fed officials to argue they are no longer providing the economy with unconventional stimulus, something congressional Republicans criticized during and after the financial crisis.

Some Republicans told Mr. Powell at a hearing last month they were troubled the Fed might maintain a larger portfolio, a sign of the lingering disapproval of the central bank’s crisis-era interventions.

Finally, a portfolio with mostly shorter-maturity holdings would give the Fed another lever to pull should another recession hit. In that situation, it could shift the portfolio back into long-term securities to provide new stimulus, as it did in 2011 with a program called “Operation Twist.”

Competition is not the only problem for bankers at Jackson Hole

Policymakers should take issues of governance and corporate behaviour just as seriously

Robin Harding

Rampant corporate mergers have led to falling competition, higher profits, lower investment and a decline in the share of US national income that goes to workers. This may be the most important hypothesis in economics today. If correct, it explains many of the economic ills plaguing America, and suggests a simple solution. Fire up competition policy, smash some monopolists and make the world a better place.

So popular has the theory become, it is on the agenda for this week’s confab of central bankers in Jackson Hole, Wyoming. There has been a rise in market concentration, the organisers declare, and central bankers should be alarmed by its “important linkages” to lower capital investment, a declining labour share, slow productivity growth, slow wage growth and falling dynamism.

Not so fast. Weak investment and wages are all too real. Whether competition policy caused them, however, is in hot dispute. The assembled central bankers would be wise to keep an open mind. Bashing big companies may be popular, but if the diagnosis is wrong, the cure will not work. Worse, policymakers will miss their chance to prescribe more effective treatments.

The worthies at Jackson Hole should recognise that at least three theories can explain the facts.

One is competition. Second is the rise of intangible assets. Third are issues of governance, short-termism and corporate behaviour. If the latter are most important, then senator Elizabeth Warren, who suggests worker representatives on US corporate boards, or President Donald Trump, who has mooted an end to quarterly reporting, are at least on the right track, whatever the merits of their specific proposals.

A first, crucial question is whether concentration really has made markets uncompetitive.

Many recent studies claim to show just this, but Carl Shapiro — the top US competition economist under Bill Clinton and Barack Obama — is not convinced. He argues they look at overly broad industries and mix up national data with local markets. If local groceries merge into national chains, then it will create a big rise in concentration at the national level. But what matters for competition is how many different stores there are in your town, which may not have changed at all.

Mr Shapiro questions whether the rise in concentration is big enough to have the effects claimed for it and notes it is not the specialists who are complaining: “Are antitrust economists, who have looked most closely on a case-by-case basis at the relationship between concentration and competition, completely off base here? Possibly, but I doubt it.”

A second important strand of evidence for declining competition is companies that sell products with a rising mark-up over costs. A widely-cited 2017 paper by the economists Jan De Loecker of Princeton University and Jan Eeckhout of University College London found that, since 1980, these mark-ups have risen from 18 per cent to 67 per cent. In theory, high mark-ups should attract competitors. If that does not happen, it suggests something has gone wrong.

But again the evidence is hotly disputed. James Traina of the University of Chicago shows it is closely linked to how you define costs. Include overhead expenses such as marketing, as well as the raw cost of goods sold, and the apparent rise in mark-ups disappears.

The most plausible examples of weaker competition are “superstar” firms, where a single winner, often fuelled by the power of online networks, captures most of the profits in a market. Such companies may well have monopoly power, invest modestly and employ relatively little labour. Addressing them will require new competition tools. But they say little about merger policy for established industries such as shops, chemicals, shoes or cement.

Perhaps the most interesting study of the falling labour share, by the economists Loukas Karabarbounis and Brent Neiman, tries to match up all three possible theories with the long-run path of the economy. Declining competition does not fit, and they struggle to reconcile intangible assets with the data.

The answer that works best is a growing gap between the yield on Treasuries and the perceived cost of capital. In other words, rather than behaving like a set of monopolies, corporate America collectively acts like it needs a 10 per cent return on any investment, even though interest rates have barely recovered above zero.

Prof Karabarbounis and Prof Neiman do not explain why this would be so. But such behaviour fits with concerns about cross-ownership by big investment funds or the incentives for corporate managers to minimise long-term investment in favour of buybacks that push up the stock price. Under pressure from activist shareholders, many companies have explicitly adopted high hurdles for new investment.

None of this means competition policy is perfect, or even good. The US Supreme Court’s recent decision in favour of American Express is a blow to competition in credit cards and many other markets. Consolidation has very likely gone too far in markets such as beer and cable television. The UK should reject the planned merger of supermarkets Asda and Sainsbury. Internet groups such as Apple and Google deserve the close attention of competition regulators.

Crack down on monopolists, by all means. But alone it will not end our economic woes.

China’s Summer of Discontent

Minxin Pei

CLAREMONT, CALIFORNIA – Politics has a nasty habit of surprising us – especially in a country like China, where there is little transparency and a lot of intrigue. Five months ago, President Xi Jinping jolted his countrymen by abolishing the presidential term limit and signaling his intention to serve for life. But the real surprise was to come later.

At the time of Xi’s announcement, the conventional wisdom was that his dominance inside the Chinese party-state was virtually absolute, and thus that his authority could not possibly come under attack. Xi is now facing the worst summer since he came to power in November 2012, characterized by a steady stream of bad news that has left many Chinese – and especially Chinese elites – feeling disappointed, anxious, angry, helpless, and dissatisfied with their increasingly powerful leader.

The latest piece of bad news, which broke late last month, was the discovery by government investigators that a pharmaceutical company had been producing substandard vaccines for diphtheria, tetanus, and whooping cough, and had faked data for its rabies vaccine. Hundreds of thousands of Chinese children nationwide have been given the faulty vaccines.

Of course, China has experienced many similar scandals before – from tainted baby formula to the contamination of the blood-thinning drug heparin – with greedy businessmen and corrupt officials held to account. But Xi has staked considerable political capital on rooting out corruption and strengthening control. The fact that a private company with deep political connections is at the center of the vaccine scandal is painful evidence that Xi’s top-down anti-corruption drive has not been as effective as claimed. An unintended consequence of Xi’s consolidation of power is that he is accountable for the scandal, at least in the eyes of the Chinese public.

But the backlash against Xi began even before the vaccine revelations. Concerns were rising over the gradual creation of a personality cult. In recent months, Xi’s loyalists have spared no effort in this regard. The desolate village where Xi spent seven years as a farmer during the Cultural Revolution has been branded as a source of “great knowledge” and become a red-hot tourist destination. For some, this is all too reminiscent of the quasi-divine status attributed to Mao Zedong which, during the “Great Leap Forward” and “Cultural Revolution” resulted in millions of deaths and nearly destroyed the Chinese economy.

And, in fact, today’s economic news in China is grim, beginning with a 14% decline in stock prices this year. Three summers ago, in the face of sharply falling stock prices, Xi ordered state-owned companies to buy shares to prop up the market. But as soon as the forced purchases stopped, another market decline followed, this time against a background of depleted foreign-exchange reserves. Xi has not repeated that bit of economic illiteracy this time around, but what will come next for China’s stock market remains an open question.

And there is more bad economic news. The renminbi has reached a 13-month low, and while GDP growth is ostensibly on track to meet the 6.5% target for 2018, the economy is showing signs of weakness. Investment, real-estate sales, and private consumption are all slowing, prompting the government to halt its deleveraging effort and allocate more funds to propping up growth.

The worst economic development, however, is the unfolding trade war with the United States.

Though its economic impact has yet to be felt, the clash over trade that US President Donald Trump has initiated is likely to be the toughest challenge Xi has faced so far, for reasons that extend far beyond the economy.

For starters, there is Xi’s promotion of the “China Dream,” which entails the country’s revival as a world power. But, as the trade war makes starkly apparent, China remains deeply dependent on US markets and technology. Far from a rejuvenated hegemon poised to reshape the global economy, Xi’s China has been exposed as a giant with feet of clay.

The geostrategic implications are difficult to exaggerate. In the 40 years since Deng Xiaoping began to lead China out of the Maoist dark ages, the country has achieved unprecedented economic growth and development. But that progress would have been impossible – or, at least, much slower – were it not for China’s policy of maintaining a cooperative relationship with the US. Xi has upended that policy during his tenure, not least with his increasingly aggressive actions in the South China Sea.

These developments point to a straightforward conclusion: China is headed in the wrong direction. This is not lost on China’s elites, whose frustration is palpable – and rising.

Yet, despite rumors of pushback against his power by retired elderly leaders, Xi is unlikely to be overthrown. He remains solidly in control of the Chinese party-state’s security apparatus and the military. Moreover, he has no rivals with the courage or influence genuinely to challenge his authority, as Deng and other veteran revolutionaries did in 1978, when they pushed out Hua Guofeng, Mao’s hand-picked successor as leader of the Communist Party of China.

Nonetheless, the road ahead for Xi remains treacherous. If he stays his current course, so will China, with each stumble reinforcing negative perceptions of his leadership. Yet changing course could also hurt Xi’s reputation, as it would amount to an admission of flawed judgment – a problem for any leader, but especially for a strongman like Xi. And some of the new policies Xi would have to adopt conflict with his instincts and values.

The risks are real. But Xi probably doesn’t have much choice but to face them. As China’s summer of discontent clearly suggests, he needs a new game plan.

Minxin Pei is Professor of Government at Claremont McKenna College and the author of China's Crony Capitalism.

Investors wait to see if Fed blinks under global stress

Powell’s speech at Jackson Hole could indicate circumspection from the US central bank

Michael Mackenzie

Jay Powell, the Federal Reserve chairman, will discuss 'monetary policy in a changing economy' at the gathering of central bankers on Friday © FT montage; Bloomberg

Turkey, Italy and China. Trouble tends to come in threes and such thinking is animating systemic risk concerns among investors, particularly as August has form when it comes to bouts of financial turmoil, as seen in 1998, 2007, 2011 and 2015.

Not surprisingly, investors will be fixated on Jay Powell when the Federal Reserve chairman discusses “monetary policy in a changing economy” on Friday in the idyllic mountain air of Jackson Hole, Wyoming, at the annual gathering of central bankers.

Also watching is President Trump, who told Reuters late on Monday that he was “not thrilled” about the Fed’s decisions this year to raise interest rates.

But thanks to the Trump administration’s injection of fiscal adrenalin via tax reform, the US economy is generating a nice head of steam. Inflation is picking up and running above the Fed’s target of 2 per cent, employment is tightening and retailers such as Walmart and Nordstrom have just announced gangbuster sales growth. That means higher overnight US interest rates, which in turn foster a firmer dollar, only upping the ante for those countries and companies that have borrowed heavily in recent years via the world’s reserve currency.

Hence why the more indebted and foreign capital-dependent countries within emerging markets led by Turkey are enduring a battering. The risk of weaker global growth outside the US has duly dragged key industrial metals prices to the cusp of a bear market. And as China cracks down on shadow financing, the odds of a full-blown trade war loiter with intent. Meanwhile, Italy’s government is preparing a budget that has financial markets on edge, with the Stoxx index of eurozone banks plumbing its lowest level since late 2016.

Not surprisingly, some investors reckon that a circuit breaker beckons in the form of the US central bank blinking. The marked slide in gold since April reflects the shortage of dollars in the global financial system as the Fed tightens.

And as the dollar has rallied further off the back of EM turmoil since the Fed concluded its last meeting at the start of August, Mr Powell’s speech provides a timely opportunity for investors to detect whether rising global market stress may at some stage prompt circumspection from the central bank.

The missing element here, of course, is the absence of US market stress, with the S&P 500 sitting less than 1 per cent from its record high of January, albeit thanks to a pronounced rotation into defensive sectors over the past three months.

Chris Watling at Longview Economics says that while a switch into defensives is often a precursor to a broader market pullback, the strength in the US economy is keeping the Fed on course to tighten policy into 2019.

“The Fed will only pause if the market gives them a reason to do so,” he adds.

While US policy tightening highlights the weak links in global markets and the economy, a key point for investors to recognise is that a smaller balance sheet and a higher overnight rate will provide the Fed with ammunition to deal with any eventual future downturn.

Greece’s eight-year odyssey shows the flaws of the EU

The island where the euro crisis started has yet to recover from Europe’s help

KASTELLORIZO is “the end of Europe—or perhaps its beginning”. So says Yannis Doulgaroglou, co-owner of the Hotel Kastellorizo, a sunny inn on Greece’s easternmost inhabited island. A tiny rocky outpost just off the Anatolian coast, on maps of Greece Kastellorizo is often relegated to an inset. Yet it was from the island’s picturesque harbour, on April 23rd 2010, that George Papandreou, the prime minister, stared blankly into a camera and acknowledged that his troubled country had lost access to capital markets and needed a financial rescue package from its euro-zone peers. The day is etched in the memory of most Greeks. Chuckling, Mr Doulgaroglou recalls the journalists who scarpered from his hotel once they realised the prime minister was saying something momentous, leaving behind their unpaid bills.

Eight years and three bail-outs later, as Greece prepares to leave its final programme on August 20th, Mr Papandreou’s remarks seem laden with pathos. He directed his ire at the “speculators” who had sent Greek bond yields soaring, more than at the successive governments that had overspent, under-reformed and fiddled the national accounts. Yet, he vowed, with a “common effort” Greece would “reach the port safely, more confident, more righteous and more proud.” He called this the “new Odyssey”.

Odysseus faced great hardships, but his travails culminated in a happy homecoming. After so many years of servitude, it would be nice to think that Greece’s journey will reach a similar conclusion. There are indeed signs of recovery, led by strong tourist numbers on islands like Kastellorizo. Growth has returned, albeit in nugatory form. But the scars are everywhere. It is now not unusual to see a dozen men shooting up in broad daylight in the middle of a central Athens street. As Greeks know only too well, after the emigration of hundreds of thousands and a near-25% drop in GDP since 2008—almost half as much again as war-torn Ukraine—no one can mistake their country for a success story. Mr Papandreou’s predictions were precisely wrong. That is the lesson of Greece’s eight years of pain, and one that offers this columnist, shedding Charlemagne’s robes for a new posting after four years, a chance for some parting thoughts.

A good case to be made for the tedious procedures of the European Union is that they transmute inflammatory political arguments into technical matters to be smoothed away by anonymous, apolitical bureaucrats. Where countries once fought over resources or territory, their membership of a club with a common rulebook channels disputes into lengthy negotiations that result in communiqués nobody reads. Deathly dull, and perhaps a trifle undemocratic. But better than what came before.

Yet there is something self-serving about this narrative. Greece created its own problems, but was largely a bystander while “solutions” were imposed by others. The rules of its bail-outs reflected the installation-by-stealth of austerity as official euro-zone dogma. And it was the victim of bad policy as well as power politics. Other governments regularly promised Greece jam tomorrow in exchange for hardship today. But projections for its recovery consistently proved wildly optimistic, as the austerity visited on the country, wholly predictably, deepened its recession and made its debts ever more unpayable. It was the most ruinous way imaginable to make a point. Now Greece, left with threadbare public services, eye-watering tax rates, weak institutions and appalling demographics, is supposed to run large primary surpluses (ie, before interest payments) for the next four decades.

This is magical thinking masquerading as policy. Too often in today’s Europe, acute problems are not dissolved by silvery diplomats but rather transformed into chronic ailments that remain bearable, until they are not. True, banking reforms and institutional changes have made the euro zone more resilient. That was why Syriza, an amateurish bloc of ex-communists and elbow-patched professors elevated to power by desperate voters in 2015, saw its own brand of anti-austerity magical thinking quickly squashed. (The collateral damage was capital controls that have not yet, as Kastellorizo’s hoteliers and builders grumble, been fully lifted.) Greece turned out to have a simple choice: a devastating Grexit, or capitulation to the punishing terms its creditors required to keep it inside the euro.

But the euro zone’s failure to collapse bred complacency. In the past six months, amid unusually benign political and economic conditions, governments have failed to muster the will to build up the euro zone’s defences against the next shock. Nor have they used the space afforded by smaller numbers of Mediterranean crossings to produce a long-term asylum strategy, indulging instead in pointless squabbles over quotas. The sticking-plaster solutions in Turkey and Libya cannot last for ever.

These issues bubble away for years, corroding trust within, and between, countries. Odd as it may seem, governments are taking the easy way out. It is simpler to squabble and delay than to break taboos, like writing down Greek debt or forging a unified asylum policy. One lesson, then, of Greece’s crisis is that the single currency is harder to fracture than critics predicted. Another is that the EU will go to considerable lengths, including the impoverishment of its own members, to avoid taking hard decisions.

Wobbly but still upright

The EU’s ability to defer hard decisions—the legendary fudge—once testified to its resilience, or at least its ability to manage disagreements. But in a more unpredictable world, where Europe is battling instability from outside its borders and populism within, it risks becoming a liability. Alternative models, from Chinese state capitalism to Russia’s resentful nationalism, are available, and gaining adherents where voters are losing faith in the European model. You feel this especially strongly on Kastellorizo, just 20 minutes from Recep Tayyip Erdogan’s authoritarian Turkey. But the warning should resonate across the continent.

How Inflation Destroys Civilization

By Nick Giambruno, editor, The Casey Report

Polls suggest that the majority of millennials (people born between 1982 and 2004) now favor socialism. And a growing number favor outright communism—if it’s implemented “correctly.”

By next year, millennials are expected to surpass baby boomers as the nation’s largest living adult generation. This is one of the reasons Bernie Sanders and other socialist politicians are growing in popularity.

The Chair of the Democratic Party recently declared a young millennial socialist who won a New York City primary “the future of our party.”

On top of that, Sanders and his fellow socialists are offering a dangerous gimmick. It’s something called a “universal basic income.”

It’s where the government gives you money… just because. There’s no requirement to work or even display a willingness to work. You could sit at home all day, watch TV, and still get a check from the government.

Remember: Even people living under communist regimes have to work. But with a universal basic income, the government simply hands out “free” money to everyone for doing absolutely nothing.

All of this points to an increasingly radical political environment that will have serious financial consequences. And I believe I know the cause…

Pure Fiat

Inflation is the primary factor driving this trend. Americans feel squeezed because the cost of rent, medical insurance, and tuition—as well as other basic living expenses—is rising much faster than their wages.

This creates very real problems for ordinary people. In response, more and more people turn to Santa Claus politicians that promise supposed freebies, like a $15 minimum wage or a universal basic income.

This is all a predictable consequence of the U.S. abandoning sound money.

By every measure—including stagnating wages and rising costs—things have been going downhill for the American middle class since the early 1970s.

August 15, 1971, to be exact. This is the date President Nixon killed the last remnants of the gold standard.

Since then, the dollar has been a pure fiat currency. This allows the Fed to print as many dollars as it pleases. And—without the discipline imposed by some form of a gold standard—it does precisely that. The U.S. money supply has exploded 2,106% higher since 1971.

The rejection of sound money is the primary reason why inflation has eaten up wage growth since the early 1970s—and the primary reason why the cost of living has exploded.

The next chart illustrates this dynamic. It measures U.S. hourly wages priced in gold grams (the number of gold grams the average person’s hourly income could buy).

Measured in gold, wages in the U.S. have fallen over 94% since 1971. That’s an astounding drop.

And the following chart measures the federal minimum wage in terms of gold grams. Priced in gold, the minimum wage has fallen 87% since 1968.

Note that the federal minimum hourly wage was $1.60 in 1968. It’s $7.25 today, or 353% higher in dollar terms.

But that $7.25 buys 87% less than $1.60 did back in 1968. That’s the story you won’t hear from the mainstream press.

Vicious Cycle

This is why millennials—and millions of others—are gravitating toward socialism.

They feel the economic pain of inflation every day. They know it’s becoming harder and harder to maintain a middle-class lifestyle. They just don’t understand why. So they succumb to the siren’s call of freebies.

Perverse as it is, the policies demanded by people suffering from inflation create even more inflation.

Inflation has a way of perpetuating itself. The more inflation reduces living standards, the more people push for programs that create even more inflation. These include things like a universal basic income and a higher minimum wage… which, in turn, create a cycle of inflation.

It’s only a matter of time before “fight for $15”—the rallying cry for a $15 minimum wage—becomes “fight for $20.” Then, it’ll be “fight for $50,” “fight for $100,” and so forth.

What people should really fight for is a return to sound money. It’s the only way to end this insidious cycle. But that’s not going to happen.

Inflation follows a clear pattern of corruption:

1. In a fiat currency system, the government will invariably print an ever-increasing amount of currency.

2. This makes prices and the cost of living rise faster than wages.

3. The average person feels the pain but doesn’t understand what’s happening.

4. More people support politicians who promise freebies.

5. In order to pay for the “freebies,” the government prints more money.

6. This creates even more inflation, and the cycle repeats.

Crossing the Rubicon

At this point, we have to ask ourselves whether the political situation in the U.S. will improve.

Unfortunately, the data points to a troubling, but inevitable, answer: No.

The reason is simple: A growing majority of U.S. voters is addicted to the heroin of government welfare.

An estimated 47% or so of Americans already receive some form of government benefit. But I don’t think that accurately reflects the situation—at least, not when you consider all the government employees, along with those in the nominally private sector who feed off the warfare state. This includes defense and other government contractors who win huge, no-bid contracts.

People involved in the military-industrial complex live off government slops as much as, or even more than, those who collect food stamps and other traditional forms of welfare. Yet, they’re not counted in the statistics. An honest account of who depends on the government needs to include them.

When you count everyone who lives off of political dollars, we’re already well north of 50% of the U.S. population.

In other words, the U.S. has already crossed the Rubicon. There’s no going back.

How to Protect Your Wealth

There’s nothing you or I can do to meaningfully reverse this trend. But there are things you can do to protect your own wealth.

Owning some physical gold is step one. This is something everyone should do.

Gold is the ultimate form of wealth insurance. It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

The price of gold tends to be inversely related to the value of the dollar.

So I expect gold to soar in the years ahead as the political inflation cycle plays out.

miércoles, agosto 22, 2018



Here, the results of hundreds of images taken at JFK (previous page) and Heathrow (above). For the JFK shot, Kelley positioned himself for eight hours on runway 31R; for Heathrow, he stood on 09L for three hours. Then he spent days doing painstaking photoshop work. His photos take you back to that first childhood trip to a departures lounge, nose pressed to the glass, gazing at those metal behemoths somehow lifting into the air, like magic. —Austin Merrill Michael Kelley

By Scott McCartney

OF ALL THE JOYS of a bygone era of luxury air travel, Concorde was in a class by itself: supersonic flights that shrank the globe and made the hands of clocks tick backward. Now we’re closer than ever to a return to supersonic flights on commercial airlines, at prices far more affordable than Concorde ever was. 

By the end of this year, a bluntly named aircraft manufacturing startup, Boom Technology, says it will fly a one-third size model of its supersonic airliner. The plane is called Baby Boom and it will test design and performance. The full-scale Boom airplane is scheduled to start three years of testing and certification in 2020. Many hurdles lay ahead, but the jet could be flying passengers in late 2023. Virgin Atlantic has ordered the first 10 of the $200 million jets. Other airlines have signed on, Boom Technology says, and a total of 76 orders are on the books so far. 

Boom Technology Aerodynamics Engineer Marshall Gusman prepares the XB-1 model for a wind tunnel test. Photo: Boom Technology 

Boom Technology says its Mach 2.2 plane will be able to get from New York to London in three hours, 15 minutes with round-trip tickets priced at about $5,000. Day-trips across oceans for business meetings would be possible. San Francisco to Tokyo would be five and a half hours instead of 11 hours today.

The plane will be roughly the length of a 737, only skinnier, and carry up to 55 passengers. Most rows will have a single seat on each side of the aisle with under-seat storage for carry-on bags. Seating will be about the same size as domestic first class today—38-inches for each row. While lie-flat business-class beds may be an option, there’s no need for them when you’re in the air as long as it currently takes to get from New York to Dallas.

The Denver-based company, founded in 2014, is backed by Silicon Valley investors and future airline customers, including Japan Airlines, which has preordered 20 aircraft. Boom Technology says it will use mostly off-the-shelf airplane technology—conventional turbofan engines, three on each plane, and no afterburners, for example. The key enabler, says founder and CEOBlake Scholl,is building airframes out of carbon-fiber composite materials instead of aluminum, as the Boeing 787 and Airbus A350 have done. Composites are lighter, stronger and don’t expand when heated the way aluminum does. “There’s no fundamentally new technology on the plane,” says Scholl.

Traveling faster than the speed of sound creates a window-rattling boom. Today sonic booms are banned over the continental U.S., meaning the company could fly supersonic only over oceans. An effort is under way to reverse restrictions in Congress, but many lawmakers are reluctant to lift the ban without testing.

Its supersonic airliner will travel between New York and London in just over three hours. Photo: Boom Technology 

Scholl says the aircraft’s shape and size means its sonic booms won’t be as loud as Concorde’s. At a cruise altitude of 60,000 feet, or about twice as high as conventional airliners, the booms won’t rattle windows and will be about as noisy as motorcycles or weed-wackers. Even if the U.S. boom ban isn’t modified, the jet will still be financially feasible with over-ocean flights only, he says.

Supersonic travel has become a hot topic again in aviation. NASA and Lockheed Martinare working on a new breed of supersonic aircraft that will greatly minimize sonic booms. Those planes likely won’t get to commercial use until years after Boom Technology starts. Several makers are also developing supersonic private business jets.

High maintenance costs, a fiery crash in 2000, and other factors killed Concorde. Boom Technology thinks it can break the supersonic barrier again for airlines with per-seat costs 75 percent lower than Concorde’s were, in today’s dollars. If it works, it’ll turn back the clocks once again.