Out of left field

Millennial socialists want to shake up the economy and save the climate

Do they make sense?

WHEN THE Berlin Wall fell in November 1989, many consigned socialism to the rubble. The end of the cold war and the collapse of the Soviet Union were interpreted as the triumph not just of liberal democracy but of the robust market-driven capitalism championed by Ronald Reagan in America and Margaret Thatcher in Britain. The West’s left embraced this belief, with leaders like Tony Blair, Bill Clinton and Gerhard Schröder promoting a “third way”. They praised the efficiency of markets, pulling them further into the provision of public services, and set about wisely shepherding and redistributing the market’s gains. Men such as Jeremy Corbyn, a hard-left north London MP as far from Mr Blair in outlook as it was possible to be, and Bernie Sanders, a left-wing mayor in Vermont who became an independent congressman in 1990, seemed as thoroughly on the wrong side of history as it was possible to be.

Alexandria Ocasio-Cortez was not quite four weeks old when the wall fell. Her childhood was watched over by third-way politics; her teenage years were a time of remarkable global economic growth. She entered adulthood at the beginning of the global financial crisis. She is now the youngest woman ever to serve in Congress, the subject of enthusiasm on the left and fascinated fear on the right. And, like Mr Corbyn and Mr Sanders, she explicitly identifies herself as a socialist. Their democratic socialism goes considerably further than the market-friendly redistributionism of the third way. It envisages a level of state intervention in previously private industry—either directly, or through forced co-operativisation—that has few antecedents in modern democracies.

For the American generation which has grown up since the downfall of the USSR, socialism is no longer the boo word it once was. On the left, a lot of Americans are more sceptical than they used to be about capitalism (see chart 1). Indeed, what might be called “millennial socialism” is having something of a cultural moment. Publications like Jacobin and Tribune bedeck the coffee tables of the hip, young and socially conscious. No film has ever made trade unions look cooler than last year’s “Sorry To Bother You”, written and directed by Boots Riley, a rapper and activist. When Piers Morgan, a British television presenter, found it impossible to believe that a young interviewee might come from a left beyond Barack Obama, her response quickly turned up on T-shirts: “I’m literally a communist, you idiot”.

The fight you choose

This currency aside, avowed socialists are still a rarity in America’s political class. But when Ms Ocasio-Cortez or Mr Sanders speak of the need for radical change, the disappointments and damage experienced in the past 30 years give their words resonance across a broad swathe of the less-radical but still disenchanted left. These people saw their third-way leaders support misguided foreign wars and their supposedly robust economy end up in a financial crisis. They feel economic growth has mainly benefited the rich (see chart 2) and that ideologically driven spending cuts have been aimed at the poor. They are angered by a global elite they see flitting from business to politics and back again, unaccountable to anyone, as economic inequality yawns ever wider (though the picture is more complex than that: see chart 3). The presence of Donald Trump in the White House underlines their discontent—as does, indelibly, the unchecked rise of greenhouse-gas emissions alongside global GDP, endangering, in many young eyes, their very future.

In response to this mood on the left, some parties which once embraced the third way have tacked decisively towards policies that seemed inconceivable ten years ago; see, for example, the embrace of Medicare for All by America’s Democratic presidential hopefuls. Other parties are dwindling into insignificance, overshadowed by more radical alternatives. Jean-Luc Mélenchon, a far-left candidate who championed a 100% marginal income-tax rate on high earners in the French presidential election of 2017, comfortably outpolled the country’s mainstream socialists. Indeed, in the first round he got a vote 80% that of Emmanuel Macron’s.

This swing within the left is not necessarily a new path to power. Indeed, many caught up in it fear quite the reverse. Having achieved a better result than many expected in the election of 2017, Labour still sits behind Britain’s chaotic Conservatives in opinion polls. Though some far-left parties may do well in the forthcoming elections for the European Parliament, they are unlikely to make up for the loss of support suffered by the centre left. Primary voters may be enthusiastic about the cornucopian environmentalism of Ms Ocasio-Cortez’s “Green New Deal”; but many senior Democrats fear that it will scare away more voters than it entices.

Many on the right agree, with relish. When President Trump asserted in his State of the Union address on February 5th that “America will never be a socialist country” it was not because he fears a socialist ascendancy. It was because he thinks that the majority of Americans, including many Democrats, will look askance at such a prospect. “America was founded on liberty and independence, and not government coercion, domination, and control,” Mr Trump told Congress. “We are born free, and we will stay free.” Socialism versus capitalism is still an easy call for most Americans; socialism versus freedom is about as done as a deal gets.

Millennial socialists, though, have their own ideas about freedom. They are not satisfied with the protection of existing freedoms; instead, they want to expand and fulfil freedoms yet to be obtained. Spreading economic power more widely, they say, will allow more people to make choices about what they want in their lives, and freedom without such capabilities is at best incomplete. Bhaskar Sunkara, founding editor of Jacobin, makes an analogy to India: what is the point of an ostensibly free press if a huge share of the population is unable to read?

Seizing power

Much of what the centrist left believed in the 1990s and 2000s has since been abandoned, not just by vanguardist millennial socialists, but by a broad swathe of left-wing opinion. The median supporter of left-wing parties is increasingly sceptical about free trade, averse to foreign wars and distrustful of public-private partnerships. What they still like is the income redistribution that came with those policies. They want higher minimum wages and a lot more spending on public services. Mr Sanders and Ms Ocasio-Cortez have energised young Americans by promising free college tuition; Labour promises the same in England and Wales.

Many entirely non-socialist Europeans will see nothing that remarkable about publicly paid-for health care and education: America starts from an unusual position in such matters. But almost any country would be staggered by a government initiative as all-encompassing as the Green New Deal resolution that Ms Ocasio-Cortez and Ed Markey, a senator from Massachusetts, have introduced into Congress.

As well as promising emissions-reduction efforts on a scale beyond Hercules at a cost beyond Croesus, in framing global warming as a matter of justice, rather than economic externalities, it promises all sorts of ancillary goodies, including robust economic growth (which some hard-line greens will have a problem with) and guaranteed employment. It abandons the economically efficient policies that have been the stamp of America’s previous, failed attempts to bring climate action about through legislation, most notably those in the cap-and-trade bill Mr Markey sponsored in the late 2000s. This is hardly surprising; the most popular text on global warming in left-wing circles, Naomi Klein’s “This Changes Everything: Capitalism vs the Climate”, derides such market-based mechanisms.

Millennial socialists want to do more than boost the incomes of the poor, create better public services and slash emissions. “Keynesianism is not enough,” in the words of James Meadway, an adviser to John McDonnell, Mr Corbyn’s shadow chancellor. It is also necessary to “democratise” the economy by redistributing wealth as well as income.

In part, this is an economic argument. Having a wage but no wealth increasingly means settling for a lower standard of living. In recent decades and in rich countries the share of total income accruing to owners of capital (in the form of profits, rent and interest) has risen, while the share paid to labour (in the form of salaries and benefits) has dropped. This means the incomes of people with lots of capital will diverge from those who have none. If the predictions made by Thomas Piketty, a French economist noted for his studies of wealth inequality, prove correct—something that many economists doubt—the total amount of capital in the economy will continue to rise relative to GDP, further compounding the advantage of wealth-holders.

But the argument for redistribution of wealth goes beyond economics—and its roots spread far beyond the socialist canon. James Harrington, a political theorist of the 17th century, wrote that “Where there is inequality of estates, there must be inequality of power.” He saw a reasonably even distribution of wealth and the freedom of democratic politics as two sides of the same coin. His ideas were a strong influence on America’s founding fathers. John Adams wrote that “Harrington has shewn that Power always follows Property.” Though Thomas Jefferson plumped for “life, liberty and the pursuit of happiness” as the rights to be mentioned in the Declaration of Independence, he was inspired by John Locke’s trinity of life, liberty and property, and his love of the yeoman farmer stemmed from his belief that those who produced their own food never needed to bend to the will of another, and thus were truly free.

Well before Karl Marx started to write about alienation, the idea that people treated only as factors of production would not only lack true freedom, but also other opportunities to reach their full potential, was a mainstay of Enlightenment thought. Adam Smith worried that the factory system, where workers simply turned up and followed the instructions of capitalists, would make its participants “as stupid and ignorant as it is possible for a human creature to become.” John Stuart Mill, who valued political freedom above all else, also predicted that under capitalism people would become passive, dull wage-slaves; he wanted to see many more working in co-operatives. The echoes of Harrington, Smith and Mill are clear in the works that articulate the views of today’s left, from Mark Fisher’s “Capitalist Realism” to David Graeber’s “Bullshit Jobs”. Globalisation, in their eyes, is less an engine for prosperity and more a generator of insecurity, unfreedom and unfairness.

Share-taking democracies

On this reading, today’s task is to redistribute the economy’s stock of wealth—and thus political power, freedom, self-worth and prosperity.

How best to do this is hotly debated. Some are keen on a centralised path. Matt Bruenig of the People’s Policy Project, a crowd-funded think-tank, touts “social wealth funds” through which the state could accumulate stakes in equity, bond and property markets, subsequently disbursing a share of the resulting income as a “universal basic dividend”. Norway and Alaska already have something akin to this, though funded by oil wealth. Others are sceptical of such measures. A policy paper commissioned for the Labour Party argues that such state-planning risks creating “a small private and corporate elite”, resulting in “little democratic scrutiny or debate”. Receiving a monthly cheque from the state social wealth fund would be nice, but would ordinary people feel empowered?

That concern is one reason why the left, generally well disposed to welfare spending, is divided on the question of universal basic income—despite, or perhaps because of, the support such schemes also have from some on the right. Mr Graeber and Andy Stern, an American trade unionist, are among those who have expressed support for the idea. Others worry that under such schemes “we gain ‘free time’, but we lose the historical agency we have as workers...we are seen as passive, alienated, taking as given a world shaped by others,” as John Marlow, an economist, argues in a recent edition of New Socialist, a journal.

A possibility for the centralised redistribution of wealth more compatible with the dignity of labour might be endowing all children with “baby bonds”, a policy Gordon Brown tried in Britain and which Cory Booker, another senator running for president, champions in America. But many see a stronger case for transfers of wealth at a sub-national scale, such as through the expansion of worker-owned co-operatives, which at present form a small proportion of firms in America and Britain.

Die Linke, Germany’s most left-wing party, has promised “to create suitable legal forms to facilitate and promote the joint takeover of enterprises by the employees.” In the Accountable Capitalism Act offered by Elizabeth Warren, another Democratic hopeful—though not, she insists, a socialist—workers would elect 40% of the members of corporate boards. That is not the same as seizing a chunk of the firm’s capital. But Senator Warren has other plans for redistributing wealth. She has proposed an annual tax of 2% on the wealth of Americans with a net worth of more than $50m, 3% on those worth more than$1bn.

Perhaps the most radical detailed plans for the “democratisation” of an economy put forward by a mainstream party are Labour’s. It says that it will double the size of the co-operative sector if elected, and that private firms of over 250 employees will have to transfer 10% of their shares to a fund managed by “workers’ representatives”. Staff would be entitled to dividends from the shares; the representatives would have a say in how the company was run.

Modern times

As far as public services are concerned, shareholders of England’s water utilities would be bought out and “regional water authorities” created in their place, to be run by “councillors, worker representatives and representatives of community, consumer and environmental interests”. Similar steps would encourage local energy provision. Proponents of such reforms speak glowingly of Paris’s municipal government, which a decade ago brought its water companies in-house and has created a mechanism for enabling local people to hold the new operation to account.

Buying up chunks of the economy at the same time as greatly increasing public services would be a costly undertaking. Some on the socialist left try to wave this aside by invoking “modern monetary theory” (MMT), which holds that the primary constraint on government spending is not how much money can be raised through tax or bonds, but how much of an economy’s capital and labour the state can use without sparking rapid inflation. Adherents of MMT note the lack of inflation seen since the financial crisis, despite big deficits and governments printing money to buy bonds through “quantitative easing”. Many on the left have come to see the concerns that the right raises about deficits—which tend to surface only when it is not in power—less as economic prudence than a partisan politics of impoverishment.

Scholars such as Stephanie Kelton of Stony Brook University, who has the ear of various left-wing Democrats, suggest the very notion that spending must at some point be paid for by tax should be scrapped. Only when government spending pushes an economy beyond its capacity to produce goods and services should it be cooled using spending cuts and tax increases.

Let the billionaires bleed

Resistance to millennial socialism comes in various forms. Critics may believe that the socialist goals are bad ones; that, as a matter of fact, their policy ideas will not achieve those goals; that, even if the policies were to work, they would be too illiberal to stomach; or that, whether they work or not, they will cost the critic money. It is possible to hold all four of these positions at once in various degrees.

Take MMT. Most economists strongly resist the idea that governments can spend so freely, and such disagreement can easily be found on the left as well as the right. They also doubt that governments would, in fact, be able to cut spending or raise taxes when called on to do so by the tenets of the theory. And if a government were to do so, its actions could be quite regressive. Jonathan Portes of King’s College, London, points out that under MMT a country facing a combination of weak growth and high inflation, as Britain did in 2011-12, would require spending cuts rather than the increased stimulus called for by Keynes. The Labour Party, which was at that time decrying government austerity, has none of the sympathy for MMT seen in some of its fellow travellers across the Atlantic. “MMT is just plain old bad economics, unfortunately,” says Mr Meadway.

The non-MMT answer to “how to pay for it all” is usually to soak the rich. This is not always as popular a policy as some imagine, but today it does look like quite an easy sell in America. Unfortunately it yields less money than many on the left suppose. The best estimates of the extra revenues Labour might raise through the tax increases it plans for high earners suggest there may be none at all, in part because the rich may simply work less. The party is ignoring more reliable revenue raisers, like taxes on consumption and property. Yet its policies call for lots more government spending.

Ms Ocasio-Cortez has suggested a marginal tax rate of 70% on incomes above $10m; one estimate puts the extra annual revenue at perhaps $12bn, or just 0.3% of the tax take. The original New Deal cost a great deal more than that. Even if ambitious new steps were taken to stop the rich from hiding their lucre in tax shelters, a broader tax base would be required. There would be little help from Ms Warren’s wealth tax, which would discourage those whose wealth was the business that earned them their income and would be immensely hard to administer. Mr Sanders’s policy of increasing the inheritance tax, which introduces much less distortion, is a better one. But it would still be a hard sell for relatively little return.

Higher taxes on the rich can be about more than revenue. Emmanuel Saez and Gabriel Zucman, two economists, argue in favour of Ms Ocasio-Cortez’s tax plan on the grounds that shrinking top incomes is necessary to prevent America from sliding into oligarchy. Such plans can be read simply as punitive populism: billionaires are not very well regarded on the left, and thinning their number has an appeal all its own. The rich are well aware of this. It would be wrong to assume that Michael Bloomberg, a businessman and former mayor who may run for president, was motivated by the threat to his considerable personal wealth when he recently suggested that Ms Warren’s wealth tax threatened to make America a new Venezuela. Though, taken at face value, his hyperbole shows a profound pessimism about the durability of American institutions, his broader point is that once you start saying some people are just too rich, where do you draw the line?

However paid for, efforts to “democratise” the economy have their own problems. It is possible for companies partly controlled by their workers to raise capital. The German principle of “co-determination”, which aims to give shareholders and employees an equal say in the decision making within firms, has not hit the country’s international competitiveness. But some investment will surely either be scared off or rationally choose other destinations, depending on the circumstances and/or your perspective.

There is also a risk of capture. A lot of people may feel they have better things to do of an evening than discuss metering policy down the water company. Trade-union officials and government lackies may feel differently. Experience suggests that firms run by people close to the state may come under pressure to give contracts to political insiders rather than to the best supplier, and that they will often give in. A worry from the left is that workers on boards might, in self-interest, behave as badly as they think capitalists do.

Even if there were not so many legitimate causes for concern, and even setting aside their own interests, many liberals and conservatives would still be against policies explicitly aimed at appropriating private wealth for the common good. They see the confiscation of private property as an infringement of liberty just as sincerely as some socialists see it as the road to a wider popular freedom. That is a powerful argument, all the more so if it is offered alongside its own set of more acceptable approaches to empowering those currently without the capacity to exercise all their freedoms.

The possibility of the Green New Deal being enacted in all its pomp is nugatory. Seeing the full range of Labour’s schemes for worker empowerment established is unlikely. And therein lies a paradox facing millennial socialism. An unremitting pursuit of radicalism could easily contribute to defeat for the broader left. A more incrementalist approach will be too slow to deliver for the impatient young, not to mention their elderly leaders. Unless, that is, precipitating events as head-over-heelsy as the fall of the Berlin Wall intervene. Judge them, then, in decades to come, when Ms Ocasio-Cortez is either forgotten—or the grande dame of a Washington risen again from the waves of sea-level rise through monumental public works.

The audacity of America’s oligarchy

A billionaire running for president would risk a second Trump term

Edward Luce

Former Starbucks chief Howard Schultz says he can tackle the broken system. But when it comes to policy, he is wedded to the status quo © AFP

The Democratic party has been put on notice. If it picks a pro-tax candidate to take on Donald Trump next year, a billionaire will probably enter the US presidential race as a spoiler. Whether that is Howard Schultz, the former chief executive of Starbucks, or someone else, is secondary. Any third-party plutocrat would have the means to split the vote and enable Mr Trump’s re-election. The inference is clear: a large chunk of America’s plutocracy would risk a second Trump term to keep their taxes low.

This is no trivial consideration. Independent candidates have changed the result in three of the past seven US presidential elections. Even a 1 per cent share of the vote, which is what Jill Stein, the Green party candidate, received in 2016, can tip the electoral college. Hillary Clinton won almost 3m more votes than Mr Trump. But she lost Wisconsin, Pennsylvania and Michigan by 77,000 — roughly half of what Ms Stein garnered in those states. She spent just $3.6m in total on the 2016 race. It was enough to change history.

With a net worth of $3.4bn, Mr Schultz could spend a hundred times what Ms Stein did yet it would amount to barely a tenth of his wealth. Should Democrats nominate a candidate who would hit the likes of Mr Schultz with a wealth tax, his ability to neutralise that threat would be considerable. Even if he decided not to run, the mere prospect could intimidate Democrats into choosing a more plutocrat-friendly candidate.

Is this good for American democracy? Mr Schultz argues that US politics is broken by the “extremist” duopoly of the two-party system. Each is addicted to the “politics of revenge” rather than finding commonsense solutions to the country’s problems. It will take someone of Mr Schultz’s calibre to break the mould.

There are three weaknesses in Mr Schultz’s platform. The first is false equivalence. Nobody in the field of Democratic hopefuls compares with Mr Trump. Until the emergence of Mr Trump, neither party came close to choosing someone who was willing to allege a rigged election before it had taken place. But even before he came along, Republicans had moved far further to the right than Democrats had moved to the left. Scholars call this “asymmetric polarisation”. Defining the midpoint between the two as common sense confuses form with content.

Second, Mr Schultz’s boldness is misleading. His big idea is to disrupt a broken system. When it comes to policy, however, he is wedded to the status quo. He described a proposed 2 per cent wealth tax on those with a net worth higher than $50m and 3 per cent on those worth more than $1bn as “ridiculous”. Likewise, the Democratic “Medicare for all” healthcare proposal was “un-American”. Others in his wealth bracket agree. Michael Bloomberg, the former mayor of New York, who is worth about $40bn, said that such wealth redistribution would turn the US into Venezuela. The difference is that Mr Bloomberg is thinking of running as a Democrat.

The third weakness is the idea that people who have run a business are uniquely qualified to lead. It remains to be seen whether Mr Trump’s record will generate scepticism about that claim. He built his name in property development. Mr Schultz ran a coffee store chain. “I have a 30-year plus record of being able to solve complex problems in unique ways,” he told NPR this week. Among Mr Schultz’s prize fixes was ensuring Starbucks paid super-skinny taxes. In the UK, it paid a rate of just 2.8 per cent until it was forced by a campaign of “tax shaming” to pay a little bit more. Either way, Mr Trump seems to have spoken for other billionaires when he claimed that “I alone can fix it”.

Which begs the question, what is it that needs fixing? Mr Schultz’s view is that America’s embittered politics can only be saved by amateurs. People in politics are too compromised.

Another view is that the state of US politics reflects what is happening in its economy. Acute inequality breeds oligarchy. Just as the middle class is being hollowed out, so the political middle ground is retreating. Mr Schultz epitomises that reality. That a billionaire could change the outcome in a democracy of 330m people might, in itself, be a sign of a broken system.

 Fed Tightening Is Over: Markets Now Expect Cuts In 2019 

People who assumed the Fed, along with the rest of the government, would cave the minute the financial markets got a little choppy turned out to be right. A couple of bad months and the “normalization” of both interest rates and the Fed’s balance sheet have stopped cold. Now the markets expect falling rates and (apparently) rising asset purchases.

From today’s Wall Street Journal :
Debt Investors Embrace ‘Upside Down’ World After Fed Shift
Signs that the Federal Reserve may be done with its yearslong campaign to raise interest rates are sending ripples through fixed-income markets.  
yield curve inversion Fed tightening is over
The Fed’s latest policy stance has kept a lid on U.S. Treasury yields, which play a major role in setting borrowing costs across the globe. It has provided a large boost to corporate bonds, particularly those that mature over roughly five to seven years, pulled down mortgage rates and helped spark a shift in demand to fixed-rate debt from floating-rate debt. 
Seizing on the buoyant tone of the market, blue-chip companies AT&T and Boeing sold a combined $6.5 billion of bonds on Wednesday. That followed an $11.5 billion sale from Altria Group Tuesday and a $15.5 billion bond-sale from Anheuser-Busch InBev SAin January. 
Taken together, recent moves show investors are confident that the Fed is done raising rates and that its shift to a more market-friendly posture can propel the economic expansion into a second decade even as concerns persist about slowing global growth and geopolitical tensions. 
While that could stick some investors with losses if inflation picks up and the Fed pivots back toward a more aggressive monetary policy, several analysts said that the balance of risks has clearly shifted for investors, allowing them to more confidently take bets that may previously have seemed imprudent. 
“Take the world that we were in over the past five years and flip it upside down,” said Gennadiy Goldberg, U.S. rates strategist at TD Securities in New York. 
For the Fed, the risk that another rate increase could cause significant economic harm outweighs the risk that not raising rates could lead to slightly higher inflation, Mr. Goldberg said. For investors, there is a growing opportunity cost to not owning bonds—particularly those that are more sensitive to changes in interest rates—since rates seem more likely to fall than to climb higher. 
Central banks raising interest rates pose one of the biggest threats to debt investors, causing prices of existing bonds to fall to adjust for the higher rates on new bonds. 

The Fed’s policy turn has been good for most bonds, helping keep Treasury yields low despite a recent surge in riskier assets—something that often depresses appetite for ultrasafe government debt. The yield on the benchmark 10-year U.S. Treasury note closed Wednesday at 2.706%, up from 2.557% on Jan 3—the day before Fed Chairman Jerome Powell telegraphed the Fed’s shift at a conference—but still well below the multiyear highs around 3.2% it touched in November. 
Low Treasury yields are a boon for stocks because they hold down borrowing costs for companies and push some yield-seeking investors out of government bonds and into other types of assets. They also could provide a lift to the housing market, which hit a rough patch in 2018 partly because of rising mortgage rates. 
Corporate bonds have fared even better than Treasurys, a result both of the diminished threat of interest-rate increases and the improved economic outlook now that the Fed has shifted to a more accommodative monetary policy. 
The average extra yield, or spread, that investors demand to hold investment-grade corporate bonds instead of Treasurys has dropped 0.32 percentage points since its peak on Jan. 3—retracing about 60% of its widening in the last three months of 2018. Speculative-grade bonds have received an extra boost as investors have shifted money out of junk-rated loans, the coupons of which rise and fall with Fed-dictated interest rates. 
The Fed’s shift also has caused some investors to move money from short-term bonds into slightly longer maturities. The five-year U.S. Treasury note now yields less than the one-year Treasury bill—an indication investors think the Fed will start cutting interest rates within the next few years. Since Jan. 3, the average spread on investment-grade corporate bonds maturing in five to seven years has tightened more than the spread on one-to-three-year bonds or bonds maturing in at least 10 years. 
Prices of bonds with longer maturities tend to fall more when their yields rise than shorter-term bonds do, typically making short-term corporate bonds a safer bet when the Fed is raising rates. 
In recent weeks, five-year bonds have outperformed two-year bonds because “people aren’t as fearful of yields rising dramatically,” said Jeff Given, a portfolio manager at Manulife Asset Management, who favors corporate bonds over Treasurys because he doesn’t foresee a “big risk-off trade that is going to make Treasurys attractive.”

This illustrates the box the Fed is in: If caving to the stock market re-energizes the bond market, leading corporations to increase their already record-high debt load, that will boost economic growth while raising both inflation and commodity/real estate prices – thus forcing the Fed to go back to tightening, thus causing chaos in the financial markets, thus forcing the Fed to back off and return to easing. And so on, with each iteration ratcheting up overall leverage in the economy.

Put another way, we’re now recapitulating the booms and busts of the past 40 years on internet time.

Where previous cycles – for example the second half if the 1990s with its myriad bail-outs and ever-expanding tech stock bubble – took five or more years, the new version takes just one year.

The question then becomes, how many of these truncated New Age financial cycles will it take to reach peak capitulation, with never-ending ease and ever-rising inflation. One reasonable prediction:

The coming year of lower rates and renewed QE will combine with promises of aggressive fiscal ease in the 2020 presidential election to send us off that cliff.

Sudden Sentiment Shift: The Mainstream Rediscovers Precious Metals

by John Rubino

It’s amazing what a few weeks of outperformance will do for an asset class.

Gold and silver, after being pretty much ignored for the past few years, are now the shiny new toys of the investment world. From just the past couple of days:

Highest Central Bank Buying in 50 Years Drives Growth in Gold Demand in 2018
(MarketWatch) – Global gold demand reached 4,345.1 tonnes (t) in 2018, up 4% on 2017 and in line with five-year average demand of 4,347.5t, according to the World Gold Council’s latest Gold Demand Trends report. The annual increase was driven by a multi-decade high in central bank buying and accelerated investment in bars and coins during the second half of the year. While annual inflows into exchange-traded funds (ETFs) were down 67% in 2018, demand was boosted in the final quarter by inflows of 112.4t. 
Central banks added 651.5t to official gold reserves in 2018, up 74% on 2017 and the second highest yearly total on record. Net purchases jumped to their highest level since the end of US dollar convertibility into gold in 1971, as a greater pool of central banks turned to gold as a diversifier. 

(Kitco) – On top of being bullish on gold prices this year, Goldman Sachs’ favorite commodity play at the moment is “long gold.” 
Gold has a lot of potential and can hit $1,450, according to Jeffrey Currie, global head of commodities research at Goldman Sachs. 
When asked about his top play on commodities during an interview with Bloomberg this week, Currie replied: “Long gold, we see that one with the most upside.” 
The reason for such an optimistic outlook on the yellow metal this year includes recession fears, gold’s wealth-effect, and central bank buying, according to Goldman.
“We believe the world is A-ok right now, however, recessionary fears remain high and that is increasing the physical demand for gold. Wealth-effect is better for gold, and finally central banks are buying,” Currie said. 
In terms of which banks are buying, Currie highlighted that India bought 70 tonnes last year and China started re-entering the market. 
“One hundred tonnes of central bank buying gets you to $1,425 alone. Our target is $1,450,” he said.
(Kitco News) – As gold prices wrapped up another great session and hit fresh eight-month highs, Mad Money’s Jim Cramer said that he is a gold “believer.” 
“We are big gold believers here. Now gold is at $1,300, we think gold is going to $1,400-$1,500. We suggest that everybody have a little bit of gold in their portfolio,” Cramer said on Wednesday. 
(SRSRocco) – As the demand for precious metals shows some life once again, sales of the U.S. Mint Silver Eagles jumped in January. Not only have Gold, and Silver Eagle sales increased, so have the precious metals prices. In the past two months, gold and silver prices have gained 7% and 11% respectively. Today, gold reached $1,320, while silver topped $16. 

While January sales of Silver Eagles fell to a low last year at 3.2 million oz (Moz), down from 5.1 Moz in 2017, they picked up this month surpassing 4 Moz. According to the U.S. Mint’s most recent update, Silver Eagle sales totaled 4,017,500 versus 3,235,000 last year: 

(ETF Daily) – Gold was stuck in a rut before it began to move up last fall, and it’s now back at $1,300 per ounce for the first time in eight months. 
Gold futures closed above the key $1,300 per troy ounce this week, and the February contract closed at a high of $1,308.90 Tuesday. Gold had fallen into a slump last summer and had been held back by a soft demand picture. 
The changing demand dynamic, and a flight to safety by skittish investors has changed the prospects for gold and it could perform much better in 2019. 
“This could be gold’s year,” said Suki Cooper, precious metals at Standard Chartered Bank. Since mid-November, when gold was at $1,200, it has gained about 9 percent. 
“You could start see prices trading toward $1,400 by the end of the year,” Cooper said.  
Gold has not been at $1,400 since September 2013. 
(Bloomberg) — Think of it as a potential silver lining for investors. A deepening shortage is promising to help boost prices as haven demand for the precious white metal rebounds in 2019. 
Silver surged 9.1 percent in December, its biggest monthly gain in almost two years. The commodity has benefited as a persistent trade war, weakening dollar and prospects of slower pace of U.S. rate increases drove haven demand for precious metals. The price outlook is improving at a time when demand for gold’s cheaper cousin is poised to top production for a seventh straight year. 
With miners avoiding new projects amid global economic uncertainty, the price could spike as high as $17.50 an ounce from about $15.87 now, according to a Bloomberg survey of 11 traders and analysts. About 26,000 tons of silver is expected to be produced this year, according to estimates by Robin Bhar, a London-based analyst at Societe Generale SA. That would be the least since 2013, and means global physical demand will again top output. 
“Supply growth has started to slow, more than for any other precious metal,” said John LaForge, the head of real assets strategy at Wells Fargo Investment Institute.

What do all the headlines mean for future demand? As technical analyst Michael Oliver told mining analyst Jay Taylor in a recent interview:
Even [financial advisors] who don’t like gold are getting calls from clients asking “how come we don’t have any gold in our accounts? It’s the best performing asset for the last six months.” Once non-gold people realize it’s the best performing asset out there, they’ll be forced into it, which will widen the investor base for gold mining stocks. If just a small part of what’s in the broader stock market flowed into gold that’s a huge rush of money for such a small sector. The gold and silver miners will probably be the best place on the planet.

The Myth of Credibility

Whether two states can cooperate with each other is a consequence of shared interests, not the cause.

By Xander Snyder        

There’s a word we’ve heard a lot about lately, one that enters our political vernacular as quickly as it leaves, coming and going according to how politically expedient it is at any given moment. It was all the rage during the Cold War, when U.S. politicians campaigned hard to prove how much tougher on communism they were than their opponents were. It resurfaced a few years ago, when President Barack Obama failed to honor his pledge to bomb Syria if its government attacked rebels with chemical weapons – which allegedly it did. The word found its way back into the zeitgeist in December, where it has remained ever since President Donald Trump announced without warning that the U.S. would withdraw its forces from Syria. That word, of course, is credibility.

Trump’s sudden policy change rankled security officials in his administration, prompting the resignation of Defense Secretary James Mattis, but more important for our purposes here, it supposedly called into question Washington’s worth as an ally. After all, the Syrian Kurds had put their lives on the line, bearing the bulk of the weight of the fight against the Islamic State. And now that the Islamic State has been dislodged, Washington seems to be saying “thanks for the help, see you later, oh, and whatever retribution you face is your problem.”

In truth, the situation isn’t quite so stark. Since Trump’s announcement, National Security Adviser John Bolton has made the withdrawal conditional, saying the U.S. will not leave until Turkey guarantees the safety of its erstwhile Kurdish allies and that its departure will take longer than Trump made it seem. (Trump himself has since backtracked on the speed of the drawdown and has even said there will be more soldiers in Syria before there are fewer.) But the question of credibility remains. When push comes to shove, can the U.S. be trusted to watch its allies’ backs? Is Washington a reliable security partner? Does it even matter?
Common Goals
Credibility means different things in different contexts. In social relations, a credible partner (of any kind) is someone whose dependability encourages repeated interaction. Economists and game theoreticians have diagrammed the mutual gains to be had from repeated reciprocal cooperation by highlighting the distinction between a single “game” – or interaction – and multiple games. If you know you need to interact with someone over a period of time, rather than only once, you’re less likely to screw them over, since screwing them over would only increase the chances that they screw you back another time – if there is another time.

But this type of credibility can’t be developed if there are no grounds for cooperation in the first place. In this sense, credibility means something simpler: believability, a realistic expectation that someone or something will behave a certain way. In international relations, when faced with a unique circumstance that may not repeat itself in the future, it’s unreasonable to expect a country to act in a way that goes against its interests – even when the ethereal notion of trustworthiness is at stake. Countries just don’t sacrifice their own security willingly.

States will act credibly – that is, predictably – when they share common goals. China and the U.S. famously reconciled in the 1970s, but they didn’t come to terms because they magically started to trust each other. They came to terms because they shared an enemy in the Soviet Union. In the 1850s, Britain allied with France, its longtime adversary, not because it saw the merits of Napoleon III’s revanchist policies but because it feared the intentions of the Russian Empire. Engagements such as these may well lay the groundwork for continued teamwork, but promises of future cooperation are irrelevant if present cooperation isn’t mutually beneficial.

The stakes are no different in northern Syria. The Syrian Kurds were instrumental in helping the U.S. achieve an immediate objective – defeating the Islamic State – but they can’t help with Washington’s longer-term objective – containing Russia. Turkey, with which the Syrian Kurds are diametrically opposed, is essential in that regard. As the incident at the Kerch Strait showed, Russia is once again angling for greater control of the Sea of Azov so that it can build an unobstructed path to the Black Sea and, it hopes, the Mediterranean.
The underlying geopolitical interests that drove Russia’s Sea of Azov campaign during the Great Turkish War of 1683-99, during the Russo-Turkish War of 1735-39, during the Russo-Turkish War of 1768-74, during the Crimean War of 1853-56, during the Russo-Turkish War of 1877-78, during World War I, during the Cold War (at least in terms of Turkey’s participation in the NATO containment line), and during the 2014 annexation of Crimea, are all the same. They inexorably compel Russia to try to control the Black Sea. Turkey and the U.S. have had their fair share of differences of late, but Turkey, the steward of the Bosporus and the Dardanelles, is skeptical of Russia and, therefore, a natural U.S. ally. 


The Kurds may have been able to stop the Islamic State, but they can’t stop Russia, and even if they could, they don’t control the geographic areas necessary to block it. Turkey does. Turkey and Russia are simply higher on Washington’s list of priorities than the Syrian Kurds are. Siding with the Kurds will necessarily cost Washington its relationship with Turkey, its most useful tool against Russia. It’s not going to let that happen.
Consigned to Fight
Credibility, then, may not be as important as it’s made out to be. If it were, you would expect instances of perceived betrayal or policy reversals or failures to honor promises to discourage cooperation. But history suggests that’s not the case.

For the sake of convenience, let’s stick with the Kurds. In the early 1970s, Iraq appeared to be cozying up to the Soviet Union, so the U.S. attempted to supplant the government there by supporting a Kurdish rebellion – a rebellion aided by Iran, an ally of Washington at the time. Iran and Iraq came to terms in 1975, at which point the U.S. ended its support and the government in Baghdad crushed the rebellion, sending more than 100,000 Kurds fleeing to Iran and Turkey.

But then the Iraqi government, led by Saddam Hussein, cracked down on the Soviet-supported communists in the country. Around the same time, the Iranian Revolution was in full swing, eventually resulting in the ouster of Shah Mohammad Reza Pahlavi, who headed Washington’s puppet regime in Tehran. And so, in 1980, when the Iran-Iraq War broke out, the U.S. and the Soviet Union both changed sides, with Washington throwing its weight behind Iraq and Moscow throwing its behind Iran. Worried that Iran would again use Iraqi Kurds as a weapon in the war, Saddam killed thousands of Kurds in a gas attack in Halabja in 1988. The Kurds received no support from the U.S. Three years later, the U.S. again called on the people of Iraq, including the Kurds, to rebel against the government during the first Gulf War.

A day after the war ended, President George H.W. Bush appealed to the people of Iraq to remove Saddam from power, inciting several uprisings throughout the country, including a Kurdish one in the north. But he didn’t support them. Washington wanted to prevent Saddam from overtaking Kuwait. It didn’t want the responsibility of regime change, nor did it want to destabilize the region. The Kurds were on their own, and though they achieved a degree of autonomy in the aftermath, Saddam all but nullified their gains by blockading Iraqi Kurdistan, which would subsequently break out into civil war. At no point did the U.S. intervene in the conflict because it surmised there was nothing to be gained strategically from doing so.

So if they knew the U.S. supported them only when it suited Washington, why would the Syrian Kurds agree decades later to be the vanguard against the Islamic State? Partly because the Islamic State threatened them every bit as much as it threatened the U.S., and they needed all the help they could get against such a formidable enemy. Partly because the fight, and the concurrent Syrian civil war, gave them an opportunity, however remote, to gain more autonomy. So they consigned themselves to bear the brunt of the fight, knowing that abstaining from it would go against their interests. Simply put, U.S.-Kurdish cooperation was a matter of mutual benefit. Anyone who believed the U.S. would remain steadfast, consequences be damned, wasn’t paying attention to history.

This is neither a condemnation of U.S. policy nor a justification for its actions. This is just to say states pursue their security interests, and when those interests change, so too does their behavior.
The Lessons of Vietnam
In fact, a state’s failure to alter its behavior for the sake of credibility can lead to disaster. If you need proof, look no further than the Vietnam War.

Though Vietnam fit into a larger policy of Soviet containment, the U.S. had no real strategy there, and it certainly had no exit strategy. Once it became clear that the North Vietnamese would not simply give up through fear of U.S. presence, the purpose of U.S. involvement was lost. Preventing the spread of communism through the use of force turned into counterinsurgency that escalated into a war that the U.S. wasn’t willing to admit was a war. The metric for success was not a definable strategic objective or a political outcome but a superior kill ratio. What was really a political conflict wrapped up in Vietnamese independence, French colonialism and Cold War policy was treated by the U.S. as a military problem. Militaries tend to be good at winning wars but bad at building viable governments that have the support of the people.

The gradual escalation of U.S. efforts in Vietnam meant the conflict was never really treated as a conventional war. Even by the late 1960s, when the U.S. had more than half a million soldiers in Vietnam, the war effort was basically a counterinsurgency effort. One way to counter insurgent attacks is to deploy a permanent occupying force, stationed indefinitely to control things on the ground as best as possible. But permanent occupation comes at a cost, material and human, that the occupying country must be willing to bear indefinitely if it is to succeed. This isn’t undoable or even novel – the Romans did it, as did the British, sometimes with their own forces, sometimes by co-opting local forces. The U.S. either couldn’t or wouldn’t.

But then that was never the point. The reason the U.S. waged a war in Vietnam was to demonstrate to its allies its commitment to the global fight against communism. If the U.S. wouldn’t come to the aid of a “backwater” like Vietnam, how could it be expected to defend Western Europe? In defense of its own credibility, the U.S. put itself in a position in which no desired outcome could realistically be achieved. A war to demonstrate credibility lacked credible outcomes and was therefore unwinnable.
When the Need for Cooperation Disappears
More than anything, the mistakes of the Vietnam War reveal what can happen when a nation sanctifies the notion of credibility, and in some ways, they validate more pragmatic approaches to foreign policy. At the height of its power, the British Empire pursued a strategy similar to the one the U.S. is currently pursuing. Powerful as it was, especially at sea, the British Empire wasn’t omnipotent, so it was forced to intervene selectively to ensure that no state could dominate Europe or threaten its economic interests. (The morality of imperial foreign policy, mercantilism and captive markets is certainly debatable – insofar as it benefits the few at the expense of many. But the efficacy of the strategy, in its cold execution, isn’t.)

Securing its interests meant constantly changing alliances. Consider Britain’s wars throughout the 19th century and early 20th century. It allied with Russia and Prussia against France during the Napoleonic Wars, save for a period when Russia signed a treaty with France to prevent an invasion. Then it allied with France and the Ottoman Empire against Russia during the Crimean War. In 1877, it seemed as though Britain would hang the Ottomans out to dry as they went to war with Russia again – after all, the Suez Canal had been built, so London didn’t need the land routes through modern Turkey quite so badly – but ended up intervening when Istanbul appeared on the verge of collapse, which would have given too much territory to Russia and perhaps even threatened Britain’s control of India. Britain even invaded Afghanistan in 1878 to ensure that a buffer space remained between Russia and the British Raj. Then, in 1914, Britain flipped sides, allying with Russia to oppose the Ottoman Empire and its erstwhile ally Germany in World War I.

Circumstances dictated alliances. At no time did Britain’s history of shifting alliances prevent other states from cooperating with it, so long as that cooperation benefited both states at that moment in time.

All this is to say that credibility, as it’s popularly conceived in international relations, doesn’t really exist. It’s just a word that’s used to describe relationships that have already been created by necessity. It tends to disappear when the need for cooperation disappears. Whether two states can act “credibly” with each other is a consequence of shared interests, not the cause.

Washington’s credibility among its allies is, therefore, beside the point, regardless of whether it withdraws from Syria as it claims it will. The real question is: Will other states (or non-state actors) find a mutually beneficial reason to seek Washington’s support? Considering the U.S. is the world’s only superpower, we suspect they will. So, too, will the U.S. find an excuse to partner with those it may consider its adversaries now. The U.S. has no shortage of enemies, so it will need the help of local allies to advance its cause. Those allies may remember how Washington abandoned the Kurds, but the more immediate risk to their own security is just as likely to outweigh the pain of their memories.
Even with the knowledge that U.S. support is ephemeral, the alternative – going it alone – is usually worse.

Amazon: A Shiver Runs Through It

Record sales and earnings show signs of deceleration—Amazon investors’ greatest fear

By Dan Gallagher

Amazon.com shares slipped after hours following its quarterly report.
Amazon.com shares slipped after hours following its quarterly report. Photo: pascal rossignol/Reuters

Amazon.com AMZN 2.89%▲ just reported its best quarter ever and its worst quarter in years. That both are true speaks to the dichotomy inherent in evaluating what is—for now anyway—the world’s most valuable company.

As usual, Amazon beat Wall Street’s sales and earnings projections for the fourth quarter. Also as usual, Amazon’s forecast for the current period was highly conservative, with the midpoints of its revenue and operating earnings projections coming in below Wall Street’s targets. The company also says it expects to invest more heavily in its business in the coming year.

The online retailer’s shares, which have jumped more than 14% since just the start of the new year, slipped after hours following the report.

On the bright side, Amazon has never made this much money. Revenue jumped 20% year over year to $72.45 billion for the holiday quarter while operating income surged by 78% to about $3.8 billion. For the full year, Amazon earned more than three times as much as the previous year.

Meanwhile, Amazon’s growth rate remains unmatched for its size, with full-year sales jumping 31% to $232.9 billion. Even though it is losing some steam, Amazon will surpass Apple Inc.in annual revenue this year.

But deceleration has been something Amazon’s investors have long feared. The fourth quarter’s 20% growth rate is the company’s slowest since early 2015. Even the 45% growth pace of the company’s red-hot AWS cloud business is down from 49% just two quarters earlier.

Complaining about figures like those might seem odd at any other company, but Amazon’s superb execution and endless ambitions have resulted in an $840 billion in market value and a forward price/earnings multiple of 72 times. Some very lofty expectations are baked into those numbers, and sometimes even small doses of reality can be painful.