Stuck in the past

Overhaul tax for the 21st century

Today’s tax systems are unforgivably cack-handed

IF YOU are a high earner in a rich country and you lack a good accountant, you probably spend about half the year working for the state. If you are an average earner, not even an accountant can spare you taxes on your payroll and spending.

Most of the fuss about taxation is over how much the government takes and how often it is wasted. Too little is about how taxes are raised. Today’s tax systems are not only marred by the bewildering complexity and loopholes that have always afflicted taxation; they are also outdated. That makes them less efficient, more unfair and more likely to conflict with a government’s priorities. The world needs to remake tax systems so that they are fit for the 21st century.

Let me tell you how it will be

Jean-Baptiste Colbert, the finance minister of Louis XIV of France, famously compared the art of raising tax to “plucking the goose so as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. Tax systems vary from one economy to another—Europe imposes value-added taxes, America does not. Yet in most countries three flaws show how the art of plucking has failed.

One is missed opportunities. Expensive housing, often the result of a shortage of land, has yielded windfall gains to homeowners in big, global cities. House prices there are 34% higher, on average, than five years ago, freezing young people out of home ownership. Windfall gains should be an obvious source of revenue, yet property taxes have stayed roughly constant at 6% of government revenues in rich countries, the same as before the boom.

Another flaw is that tax sometimes works against other priorities. Policymakers in the rich world worry about growing inequality, which is at its highest level in half a century. In the OECD, a group of mostly developed countries, the richest 10% of the population earn, on average, nine times more than the poorest 10%. Yet over this period, most economies (though not America’s) have shifted the composition of labour taxation slightly toward regressive payroll and social-security levies and away from progressive income taxes.

Tax systems have also failed to adapt to technological change. The rising importance of intellectual property means that it is almost impossible to pin down where a multinational really makes money. Tech giants like Apple and Amazon stash their intangible capital in havens such as Ireland, and pay too little tax elsewhere. This month it emerged that Amazon’s British subsidiary paid £1.7m ($2.2m) in tax last year, on profits of £72m and revenues of £11.4bn. By one recent estimate, close to 40% of multinational profits are shifted to low-tax countries each year.

The “solutions” to such problems often only exacerbate the daunting complexity of today’s tax code—and, if lobbies have their way, add extra loopholes too. The European Union wants to determine when firms have a “virtual nexus” in a state, and will then allocate profits across countries using a complicated formula. America’s supposedly simplifying recent tax reform included stunningly complex new rules for multinationals. International efforts to co-operate to prevent profit-shifting have made progress. But they are hamstrung by disagreements over how to treat technology firms and competition for investment in a world where capital crosses borders.

Fundamental tax reform can boost growth and make societies fairer—whatever the share of GDP a government takes in tax. Fortunately, the principles according to which rich countries can design a good system are clear: taxes should target rents, preserve incentives and be hard to avoid.

All countries should tax both property and inheritance more. These taxes are unpopular but mostly efficient. In a world where property ownership brings windfalls that persist across generations, such taxes are desirable. A conservative first step would be to roll back recent cuts to inheritance tax. A more radical approach would be to introduce a land-value tax, the most efficient of all property taxes and one with a long liberal heritage.

Economists are sceptical of taxing other forms of capital, for the good reason that it discourages investment. But capital’s share of rich-world GDP has risen by four percentage points since 1975, transferring nearly $2trn of annual global income out of paycheques and into investors’ pockets. Given that competition is declining in many markets, this suggests that businesses are increasingly able to extract rents from the economy. Taxes on capital can target those rents without disturbing incentives so long as they include carve-outs for investment.

To stop companies shifting profits, governments should switch their focus from firms to investors. Profits ultimately flow to shareholders as dividends and buy-backs. But few people are likely to emigrate to avoid taxes on their investment income—Apple can move its intellectual property to Ireland, but it cannot put its shareholders there. Corporate tax should be a backstop, to ensure that investors who do not pay taxes themselves, such as foreigners and universities, still make some contribution. Full investment expensing should be standard; deductions for debt interest, which incentivise risky leverage for no good reason, should be scrapped.

As the labour market continues to polarise between high earners and everyone else, income taxes should be low or negative for the lowest earners. That means getting rid of regressive payroll taxes which, in North America, could be replaced with underused taxes on consumption. Though these are also regressive, they are much more efficient.

One for you, nineteen for me

Adam Smith said that taxes should be efficient, certain, convenient and fair. Against that standard, today’s tax policies are unforgivably cack-handed. Politicians rarely consider the purpose and scope of taxation. When they do change tax codes, they clumsily bolt on new levies and snap off old ones, all in a rush for good headlines. Rewriting the codes means winning over sceptical voters and defying rapacious special interests. It is hard work. But the prize is well worth the fight.

Japan begins to embrace the 100-year life

Tokyo is waking up to the huge implications — as well as opportunities — in healthcare, finance, housing and technology of an ageing society

When The 100-Year Life first appeared in mid-2016, the book about longevity and societal change sold only modestly in the west. Some took it as an inspiring road map, some as a warning, some as a niche-interest read for human resource departments or pension specialists.

But when the translated version was published in Japan a few months later, it hit the world’s most aged nation like a jolt of electricity.

To Japan, the book’s central thesis — that individuals, institutions, government, finances and infrastructure need urgent preparation for a time when millions can reasonably expect to live for a century — touched the rawest of nerves. It became a huge bestseller, transforming the public debate and crystallising what had been a murky discussion of demography-themed hopes and fears.

That clarity has spurred the country, where 27 per cent of the population is over 65, half is over 50 and deaths have exceeded births for more than a decade, into a grand show of action. The cover of a manga comic version of 'The 100-Year Life' (published as 'Life Shift' in Japan)

Sceptics maintain that it is no more than that — a show. But like a grandfather finally admitting that he needs bifocals, Japan has embraced the idea of the 100-year life as an overarching policy directive. It has long seen the more terrifying implications of that in surging healthcare costs and the emergence of “dementia towns”, where a fifth of residents are suffering from cognitive decay. But the potential upsides are also now receiving attention. In 2017, consumption expenditure rose most strongly in the over-59 age group. Young Japanese may husband their yen carefully; seniors are spending more on meat, cars, smartphones and package tours.

Brokers have identified three related “buy” calls: companies that run nursing homes or dispatch caregivers, manufacturers of robots to help or replace Japan’s greying workforce, and fitness centres that focus on gym fanatics in their latter decades. Japan’s decision to embrace the 100-year life, joke brokers, is the call of the century: it remains to be seen whether it can ever pay off.

Florian Kohlbacher, an author of extensive research on Japanese demographics, is one of many experts struck by how late this burst has come. Japan is very clearly at the global forefront of ageing, he says, and should be a clear leader in developing the policies and products that demands.

“Most of the future we don’t know, except for demographics . . . so [if] we know what is going to happen, why don’t we act? [Japan’s] population has peaked out, it’s shrinking— you’d assume this is the number one topic that you address. But why do we not see more action taken? One reason is, we still, today, look at ageing as a problem, rather than an opportunity,” said Mr Kohlbacher.

The negative take is compelling. A 2017 book called Future Chronology also sold extremely well and paints Japan’s future as a yawning chasm between “the coming reality and the current state of public and private-sector planning”. Masashi Kawai’s grim vision of millions of crumbling, vacant homes and tower blocks becoming “nursing homes in the sky” suggests the number of annual births falling below 1m in 2016 should have rallied people sooner. He guesses that technology cannot address the shortfall and predicts a time when Japan is not only short of crematorium space, but lacks the monks to administer the last rites.

In terms of the public purse, the risks are clear: by 2025, when the immediate postwar baby boomers turn 75, social security expenditures will surge under a scheme that patients become responsible for a smaller ratio of their medical costs as they get older.

But the purely doomsaying approach to ageing may have shifted slightly as policymakers see the idea of an army of healthy elderly citizens who actively want to work as a blessing.

Wearable technology: a nurse in an exoskeleton lifts an elderly patient © AFP

Business leaders, bureaucrats, educators and swaths of the general public have absorbed the warnings in the The 100-Year Life (which was published under the name LifeShift in Japanese) but also welcomed its conviction that there can be opportunity in longevity, given the right policies.

The book emboldened the Japan Gerontological Society to call for the definition of “elderly” to be revised from “over 65” to “over 75”. The phrase hyakunen jinsei (100-year life) has bustled into corporate vocabulary; big companies in financial services and construction say they are using the idea to drive fundamental shifts in their business models.

In some cases, such as manufacturing, it is driving new technology investment in robotics and exoskeleton suits for older workers. In others, such as regional banking, where 50 per cent of lenders lost money in their core business in the financial year ending March 2017, it is one of the key considerations behind 15 mergers since 2008 and several more now in negotiation.

Lynda Gratton, co-author of 'The 100-Year Life'

Lynda Gratton, the London Business School’s professor of management practice and the book’s co-author, has become an adviser to Japan’s top leadership, informing ministers last year that it was likely that half the children born in Japan today will live beyond 100. This month, in a rare honour shared by the works of Karl Marx and John Maynard Keynes, the book will be released in manga comic format to ensure it reaches an even wider readership.

Not long after it hit Japanese bookshelves, an executive summary of The 100-Year Life landed on the desk of prime minister Shinzo Abe — struggling at the time to reignite public faith in his “Abenomics” reform programme.

Japan already knows better than anyone how quickly 100-year lives can proliferate even as the general population shrinks. Fifty years ago Japan had just 327 centenarians; in 2017 it had 67,824, and the largest per capita ratio of them in the world.

Ageing Japan© AFP 107Age expected to be reached by 50% of Japanese citizens born in 2007 3.36m Japanese men and women aged over 69 who were still working in 2016 ~40% Senior Japanese employees who say they want to work as long as they can

But Mr Abe, say senior officials close to him, knew a galvanising narrative when he saw one. The book’s blueprint, of people working much later into their lives, remaining in better health, continuing to gain skills and investing for a long stay on earth, had a note of optimism he desperately needed.

He saw too that it fitted in with other policies he has pushed — critics say unsuccessfully — such as making more nursery spaces available for the children of working parents, and workplace reform aimed at narrowing the pay and benefits gaps between regular and non-regular workers. It also offered the opportunity to slacken some of the barriers to foreign workers — a segment of the workforce that Mr Abe and others recognise will be critical for securing the necessary army of elderly caregivers that Japan’s demographics demand.

Within a year of the book’s publication, the Cabinet Office had assembled a diverse group of ministers, academics, business leaders and union representatives into the Council for Designing the 100-year Life Society. In a signal that Mr Abe, who chaired and attended all nine of the committee’s meetings, was open to all ideas, its ranks included a former footballer, Masako Wakamiya — an 83-year-old woman who designs iPhone games apps to keep the elderly stimulated, and Haruka Mera — a 30-year-old entrepreneur whose crowdfunding app has helped found a number of childcare businesses.

“I think that the 100-year life phrase made it easier for people to understand all the issues. The idea focuses people on the possibilities — it makes them realise that they could continue living for decades, and it makes it easier to imagine what needs to be done and how they need to plan their lives,” says Ms Mera.

Masako Wakamiya, one of the world's oldest iPhone app designers © AFP

Japan’s burst of activity, say senior government officials, arises in part from the fact that it has now accepted that it cannot, as it has habitually done in other areas of policymaking, reliably look elsewhere for guidance.

“We can ask why was Japan so late to do this, but they are actually the only big country that has formally decided to look at the ‘100-year life’ as a national project,” says Prof Gratton. “[Japan] has actually been fast at making it into a narrative.”

TV executives are already there. Before and After, Japan’s most popular property show, featured a section earlier this year showing how couples in their 70s could refit their homes to live comfortably with their centenarian parents.

The country’s biggest securities houses, Nomura and Daiwa, are also seizing the opportunity. They have attempted to soften their macho images by diverting large blocs of their sales forces into new face-to-face services for their inexorably ageing client base.

The brokerages’ strategy is to break with the past and patiently discuss the customer’s needs rather than badgering them for the hard sell. Nomura has dubbed this sales team its “Heartful Partners”, while Daiwa has gone for “Peace of Mind Planners”. They are jumping into a void that would, in the UK and US, already be teeming with independent financial advisers.

In June, the committee published its recommendations and, two days later, they were adopted by the cabinet. Key ideas from the 100-Year Life committee included significant improvements in long-term care worker pay, a “drastic expansion of recurrent education” to expand mid-career employment and laying the groundwork for raising employment levels of the elderly.

That last part, say analysts, is the key: most Japanese, whether for financial or social reasons, do not want to retire even at 65. In the Cabinet Office’s recent survey on the daily lives of the elderly, it found that roughly 40 per cent who are still working say they would like to continue until they are physically unable to carry on. Another 35 per cent would like to keep going until at least 70.

Companies desperate for staff as the working population shrinks are already finding ways to re-employ the just-retired, using short-term contracts for almost exactly the same role they just vacated but with fewer rights.

Shinzo Abe convenes the Council for Designing the 100-year Life Society last year

Far more of an undertaking will be the scrapping of Japan’s mandatory retirement system, which discriminates against the over-60s by forcing them off the regular payroll, and adjustments to Japan’s pervasive seniority-based pay system, which is evidently ill-suited to an era of super-long working lives.

Naohiro Yashiro, an economist at Showa Women’s University, says wages based on seniority and mandatory retirement ages can only be changed by structural reform and too many people want to maintain the status quo.

“The new phrase doesn’t change [the fact] that the government hasn’t done important reforms on, for example, pensions,” he says, adding that the ruling Liberal Democratic party would always balk at serious pension and medical reform given its voter base and donors. “They do not really feel panicked. They are closing their eyes to the real reforms they need.”

Prof Gratton sees it differently: “When people read our book in the US, the concern was that people will not be able to afford to get old. In Japan, it was never seen as a book about pensions. It was seen as a book about opportunity.”

Additional reporting by Flora Fushii-McIntosh

The EU Spent a Bundle to Unify the Continent. It’s Not Working.

Some of the biggest recipients of aid are hotbeds of the very discontent that’s driving the bloc apart

By Laurence Norman and Drew Hinshaw | Photographs by Piotr Malecki for The Wall Street Journal 

   The closed sugar refinery in Lapy, Poland.

The European Union has spent nearly $1 trillion to unify the continent by delivering highways and trains into places where there were once gravel paths. In current dollars, that is over eight times the Marshall Plan that rebuilt Europe after World War II. The EU has bought airports and bridges, trams and swimming pools. It has repaired castles and medieval churches.

It hasn’t bought love.

To the vexation of European leaders, some of the biggest recipients of funding are now hotbeds of discontent, brimming with voters disquieted by the cultural and political pressures that have accompanied European integration, and threatening the bloc’s cohesion.

A renovated kindergarten in Lapy, Poland, sits near a bright blue billboard reading “Financed by the European Union.” The EU bankrolls one-fifth of Lapy’s budget, improved its sewage system and built an office complex for startups. Locals meanwhile overwhelmingly support Poland’s governing nationalist party, which says the EU overrides Polish sovereignty, condescends to Poles and threatens religious values.

“There must be respect,” said Lapy Mayor Urszula Jablonska, seated in her office between an EU flag and a crucifix. Were Poland to hold a Brexit-like referendum, she said she’s unsure of how she would vote. “I would have to consider our national values.”

Since the 1970s, the EU has shifted wealth across borders on a scale rarely attempted, under programs now called “cohesion funding.” Between 2000 and 2020, the EU is on track to spend around €858 billion ($992 billion) on needy regions or countries, chosen because their economic output per person is below 90% of the EU average.

The operation speaks to an ambition as grand as its price tag: To remake a continent of nations once divided by the traumas of the 20th century into a politically and economically unified Europe. The money has modernized infrastructure, raised living standards in the poorest regions, eased poverty and opened new markets.

The dissatisfaction stems in part from economic pain that this funding can’t soothe, given that the money is spread across the EU’s 28 members. Mixed in are thornier debates over issues such as sovereignty, cultural identity and respect. It stretches from small towns in Europe’s richest nations, including Britain and France, to struggling regions in fast growing post-Communist economies such as Poland and Hungary.

Many are ambivalent about the construction projects and wary of the accompanying strings.

“Local people had no attachment to all this new Tarmac or bricks and mortar,” said Nick Smith, an opposition Labour Party lawmaker in Wales, whose constituents voted overwhelmingly for Britain in 2016 to leave the EU.

The biggest recipient of EU cohesion funds in mainland France is Nord-Pas-de-Calais, once an industrial powerhouse of coal, steel and textiles. In Parliament, it is represented by Marine Le Pen, the French presidential runner-up who proposed France hold an EU exit referéndum.

Cohesion funds didn’t stop Brexit, where voters bristled at Britain’s EU bill. The EU’s current seven-year budget, which runs through 2020, earmarked €2 billion in cohesion funds for west Wales and Welsh Valleys, a region dotted with once-thriving steel factories and mining towns.

Many locals say EU funding was overshadowed by the disadvantages of membership, including the obligation to accept migrants from other EU nations. Blaenau Gwent voters favored Brexit by 62% to 38% to leave the EU. It was Wales’ highest “leave” vote.

“The money, we got our share, but it’s more important to save Wales,” said Ken Sullivan, a retired coal miner. Britain became “so open to foreigners, it was easy to be overrun with different cultures.”

The future of the EU still hangs in the balance, with divisions over refugees in particular driving wedges between its member states. If copious spending during decades of European optimism couldn’t revive fading communities or unite the continent, EU officials worry about what comes next. Rising nationalism is pitting smaller, eastern countries against larger, western Powers.

That is informing debate over the EU’s next seven-year budget, which starts in 2021. Cohesion cash, which accounts for over one-third of the EU’s 2014-20 €1 trillion budget, is under the knife. Britain’s payments will start to diminish after its planned exit from the EU next year, which would force the EU to cut spending or demand more cash from Europe’s capitals.

Officials are considering shifting tens of billions of euros in aid from Europe’s east to its economically struggling south, including to EU founding-member Italy, where a new antiestablishment government is injecting fresh uncertainty into the bloc’s future.

“This is a highly political exercise and not an accounting one,” Jean-Claude Juncker, president of the EU’s executive commission, said during an April EU conference on cohesion policy, in which he opposed deep cuts. “At its essence cohesion policy is about making sure that the life chances in Europe are not dictated…by accident of birthplaces.”

Cohesion funding has transformed recipients, initially along the Mediterranean and in Ireland, and then in the ex-communist countries that joined in 2004. Europe’s fastest-growing economies depend on the cash flow. In 11 of the EU’s 28 states, EU funding accounted for more than 40 cents of every euro governments spent on infrastructure, land and buildings between 2015 and 2017.

In some places, such as Western Europe, the EU sometimes markets its assistance poorly and voters are often unclear about the EU role in a mix of regional, national and European funding.

EU funding can carry onerous rules and stipulations involving complex paperwork and restrictions on project types, irking recipients. East European nationalists allege that much of the money flows back to German and French construction companies.

Donor countries have soured on cohesion funds, too, partly because of alleged corruption among recipients. In Hungary, where skepticism of the EU runs thick, the bloc’s antifraud agency says $47.8 million spent upgrading street lamps through EU contracts awarded to a company once owned by Prime Minister Viktor Orban’s son-in-law contained “serious irregularities” that may constitute fraud. The son-in-law denies the accusation. Mr. Orban says Hungary no longer needs EU cash.

In April, Mr. Orban won a landslide fourth term, campaigning against the EU, which he said would force refugees on Hungary. “Stop Brussels,” read government-financed pamphlets sent to homes. (The EU is calling his bluff. Hungary, Poland and the Czech Republic all face 20% cohesion fund cuts under current plans.)

Few cohesion-funding recipients are in such direct conflict with donors as Poland, which is allotted more than €60 billion under the current cohesion budget.

The ruling Law and Justice party is purging a 110-seat Supreme Court on the grounds that about eight of those judges served under Communism. The EU says the purge undercuts judicial independence and so triggered a never-used procedure that could fine Poland and limit its voting rights in the bloc. A decision is pending. Brussels has also sued Poland, Hungary and the Czech Republic for refusing to accept refugees as part of the EU-wide relocation plan.

Donor countries including France and Germany want future spending linked more tightly to upholding EU norms. Some Polish voters and officials call such conditions, which Brussels plans to adopt, attacks on their sovereignty by hostile western elites.

In Lapy, a town of 16,000 surrounded by beet fields, residents had voted 2 to 1 to join the EU in 2003. European assistance, however, struggled to offset the economic upheaval that followed the collapse of communism. In 2008, doors closed at the antiquated, state-owned sugar factory that had converted 370,000 tons of beets into 60,000 tons of sugar annually, leaving 250 people jobless. Farmers who had bought specialized beet reapers watched crops rot. Locals blamed EU sugar quotas. The next year, a train-repair yard cut most of its 700 workers.

Foreign supermarkets opened, hurting local merchants. Consumers bought imported goods with money wired home by young people who had relocated to thriving Polish cities and other countries.

Religious leaders began to question whether the European Community shares the same values as this overwhelmingly Catholic country. They have watched closely as Ireland, another Catholic EU member, voted to allow abortion and same-sex marriage. Most Poles have indicated they want to stay in the EU. Independent polls at home show they also feel wary about giving Brussels, the EU’s unofficial capital, more power.

The EU “would prefer that Poland not have a say, and instead do everything that they want,“ said Tadeusz Brzosko, a beet farmer outside Lapy. “Poles know our own mind and we will do what we see fit.”

In 2002, at a summit in Copenhagen dubbed “One Europe,” European leaders charted a rosy vision of what their money would accomplish. The gathering capped three years of debate over whether Poland and nine other nations should join as full members and receive economic assistance similar to that which had previously poured into Ireland, Greece, Spain and Portugal.

Development funding would help turn Poles into consumers for west European products and services, partly offsetting the cost of assistance, argued advocates such as British Prime Minister Tony Blair. Poland’s then-prime minister, Leszek Miller, said the funds would expunge Western Europe’s failure to save the east from communism. “This was convincing to them,” Mr. Miller said in an interview.

East European leaders returned home touting the money pledged. Some now say this created unrealistic expectations of swift economic change. Among EU enthusiasts, the Copenhagen summit was seen as a step to EU political union—an idea anathema to easterners who had just shed Soviet hegemony.

“This vision was never, never shared in countries like Poland or the Baltic States,” said Günter Verheugen, a German politician who oversaw EU enlargement from 1999 to 2004.

In rural Poland, the proportion of children able to attend preschool has leapt to 84% from 2% in the 1990s, Polish officials say. Thanks in part to EU funds, Poland’s output per capita was forecast to hit 67% of the EU average last year, up from 42% in 1995. The country hasn’t experienced a recession since 1992.

Pro-EU Poles feel the current nationalist government takes credit for an economic turnaround EU money has helped fuel, while blaming the EU for the local businesses that have closed along the way.

Near Lapy’s town square, an EU-funded office complex rents discounted rooms to startups, some given EU grants. Radoslaw Zaremba received $6,500 to launch a photo studio.

When the 30-year-old told his mother about the grant, she told him to be wary because she feared Brussels would want the money paid back, Mr. Zaremba said. For many around Lapy, he said, “the European Union is far away, it’s not familiar, and it’s scary.”

People walk on the bridge over the closed rolling stock repair facility. Recently the facility has started partial operation again.        

Germany’s Dangerous Nuclear Flirtation

Wolfgang Ischinger

BERLIN – As in a game of chess, there are geopolitical moves through which a country can – unwittingly – checkmate itself. Opening a debate on German nuclear weapons would be such a move. Yet this is exactly what some Germans have recently proposed. Supporters of a nuclear-armed Germany contend that NATO’s nuclear umbrella has lost all credibility because of statements made by US President Donald Trump.

There are at least three good reasons why considering a nuclear option would be foolhardy for Germany. For starters, Germany has repeatedly renounced it, first in 1969 by signing (and later ratifying) the Treaty on the Non-Proliferation of Nuclear Weapons (NPT), and then in 1990 by signing the so-called Two Plus Four Treaty, which paved the way for German reunification.

Casting doubt on these commitments would severely damage Germany’s reputation and reliability worldwide. Germany would call into question the credibility of NATO’s nuclear deterrence, and thus the alliance itself, along with the entire nuclear non-proliferation regime.

It is worth noting that since its creation in 1949, NATO has been one of the world’s most successful instruments of proliferation prevention. Not a single NATO member state – apart from the United States, the United Kingdom, and France – has found it necessary to acquire nuclear weapons of its own.

If Germany were now to break out of its non-nuclear power status, what would keep Turkey or Poland, for instance, from following suit? Germany as a gravedigger of the international non-proliferation regime – who could want that?

Second, a German nuclear bomb would damage the strategic environment in Europe – to Germany’s disadvantage. Russia would interpret German steps toward a nuclear arsenal as a direct threat to its own national security and would likely adopt military countermeasures. That, in turn, would make it even harder to pursue the vision of a pan-European order of peace and security, a core foreign-policy goal of all German governments since that of Konrad Adenauer. Moreover, a German nuclear ambition might jeopardize the delicate balance of power in Europe – including between Germany and France, for example – with incalculable consequences for the long-term cohesion of the European Unión.

Finally, it is not hard to predict that the pursuit of nuclear weapons would draw significant public opposition, especially given that such a move would be a complete about-face for German Chancellor Angela Merkel’s government, which, just a few years ago, moved to phase out nuclear energy altogether. It is difficult to imagine a greater fiasco for German foreign and security policy than proposing a nuclear strategy and then failing to obtain parliamentary approval.

There are smarter long-term ways to bolster Europe’s nuclear defense than introducing a German bomb. For example, France might be willing to consider playing an extended nuclear-deterrence role, along with the roles of the US and the United Kingdom within NATO. While this would require a fundamental reorientation and Europeanization of France’s nuclear strategy, Germany and other European partners could offer financial contributions to such an initiative, in the context of a future European defense union with a nuclear component. But these are, at best, long-term options.

In short, no matter what Trump says, Germany will remain dependent on the US nuclear umbrella for the foreseeable future.

The best way to maintain NATO’s credibility and be taken seriously by the US is to work seriously toward the alliance’s 2%-of-GDP target for defense spending and to invest more heavily in conventional military capabilities, not to satisfy US demands, but to protect our own security and defense interests. But this is not simply about spending more; it is about spending more intelligently, particularly by pooling and sharing capabilities, and by systematic joint procurement with France and other European partners, including through the recently established EU Defense Fund.

None of this will work if Germany will not start defining military strategy, security, and defense as top political priorities. Only then will the Bundestag be able to give the Bundeswehr – often referred to as a “parliamentary army” – what it needs to do its job. The alternative – considering the development of nuclear weapons – would be a game-losing move.

Wolfgang Ischinger, former German Ambassador to the United States, is Chairman of the Munich Security Conference and Professor for Security Policy and Diplomatic Practice at the Hertie School of Governance in Berlin.

Is This the Biggest Buy Signal for Gold Since 2001?

By Justin Spittler, editor, Casey Daily Dispatch

The Vanguard Group has thrown in the towel on gold.

And that has massive implications for the gold market. But not in the way most investors think.

As you’re about to see, Vanguard’s decision could be extremely bullish for gold.

I’ll tell you why in a second—and why it’s presenting the perfect kind of opportunity we look for at Casey Research. But let me first give you some background.

• Vanguard is one of the world’s biggest money managers...

It oversees $5 trillion in assets. That makes it too big to ignore.

Last month, it made a major announcement. It said that it will change the name of its Vanguard Precious Metals and Mining Fund (VGPMX) to the Vanguard Global Capital Cycles Fund.

More importantly, Vanguard will change what the fund holds. It will go from having 80% of its assets in mining stocks to just 25%. It will achieve this by adding stocks from industries like telecommunications and utilities to the mix.

In other words, Vanguard is overhauling its precious metals fund…and changing it to a much more diversified fund.

Now, I realize this sounds like terrible news for gold. But it could be one of the biggest buy signals for gold in years.

More on that in a second. But let me first tell you why Vanguard did this.

• Gold is in a major slump…

The chart below says it all.

You can see that the price of gold has fallen 36% since 2011.

That’s a major decline. But many gold mining stocks have fared even worse over the last few years… And that has dragged down major gold funds like the one Vanguard runs.

In fact, VGPMX has lost about two-thirds of its value since 2011. The S&P 500, meanwhile, is up 130% over the same period.

Because of this, I imagine many Vanguard clients were fed up. So, Vanguard is completely overhauling its precious metals fund.

But if history’s any indication, this could be a sign that gold is close to a bottom. Let me explain…

• Vanguard has been down this road before…

In May 2001, it changed the name of its Vanguard Gold & Precious Metals Fund to simply the Vanguard Precious Metals Fund.

It did so because gold had been an awful trade. It had fallen 15% over the previous five years. Sentiment toward the yellow metal was awful, just like it is today.

So, Vanguard dropped “gold” from its fund’s name. And you can see what happened.

Gold went on to enjoy a decade-long bull market. It rallied 615% over the next 10 years.

Now, I can’t guarantee that the same thing will happen this time. But I will say this…

Big funds like Vanguard don’t make moves like this when gold is at record highs. They do this when sentiment is in the toilet.

And that can often be a sign that things can’t get any worse.

In fact, Vanguard changed its fund’s name in 2001 within a month of gold bottoming.

• Put another way, Vanguard’s decision could mean that gold is near “capitulation”…

Capitulation means “surrender.” In the financial markets, this happens when the last sellers sell.

And it’s usually characterized by panic selling, which is exactly what’s been happening with gold.

In fact, gold is down 8% since the start of the year. The average gold stock, on the other hand, is down about 20% on the year.

Vanguard’s decision could prove to be very bullish. But it’s certainly not the only reason to think gold is close to bottoming.

• Speculators have never hated gold more than they do right now…

We know this by looking at the Commitments of Traders (CoT) report.

This is a report issued by the US Commodity Futures Trading Commission (CFTC). It shows the positions major traders have taken in certain securities and commodities.

As of August 14, non-commercial traders—investors speculating on future price—were short (betting against) gold to the tune of 670 metric tonnes. According to market research team ANZ Research, that’s the biggest short position since the CFTC began collecting data in 1993.

Not only that, investors have a net short position for the first time since 2001. This means that the value of total short bets exceeds the total long (bullish) bets.

This tells us sentiment toward gold is extremely bearish.

• This is exactly the kind of situation we like to bet against…

You see, we’re contrarians here at Casey Research.

When trades get extremely crowded, we like to take the opposite position. After all, buying an asset that other investors want nothing to do with is a proven way to make a ton of money.

Take it from Doug Casey:

You want to go where other people don’t go. That’s where you get the bargains.

Everybody knows the old expression “buy low, sell high.” Well, when are the prices absolutely the lowest? When everybody else is afraid of the situation and, as the original Baron Rothschild put it, “blood is running in the streets.”

• To take advantage of this big opportunity, I recommend betting on gold mining stocks...

The easiest way to do this is with a fund like the VanEck Vectors Gold Miners ETF (GDX).

But to make the biggest gains during the next gold bull market, you’ll need own the “best of breed” gold stocks.

Unfortunately, most investors can’t tell the difference between a world-class miner and a crummy one.