The Chinese economy is stabilising

But significant doubts linger about President Xi Jinping’s commitment to private Enterprise

Martin Wolf

Is the Chinese economy recovering from its slowdown at the end of last year? “Yes”, say Gavyn Davies, Goldman Sachs and many others. During my recent visit to Shanghai and Beijing, a number of economists and private businessmen also indicated growing optimism about China’s economic prospects. Why do they think this and are they likely to be right?

China has long been the fastest-growing of the world’s three largest economies — the US, the eurozone and China itself. This is so whether one believes in the official numbers for China’s growth, or is somewhat sceptical about them. Given its economic dynamism and size, when China sneezes, the world economy catches a cold.

That was happening at the end of last year. According to Fulcrum’s “nowcasts”, cited by Mr Davies, growth fell to an annualised rate of 4 per cent in December 2018. This, he adds, “triggered much of the slowdown in global growth, especially in the trade and manufacturing sectors”. Behind this slowdown, it is argued, were the tightening of domestic credit, in an effort to halt the leveraging of the economy during the previous 10 years, and the impact on confidence of the trade war with the US.

Now, things look better. Indeed, I was surprised by how cheerful people I met were, especially in Shanghai, China’s financial capital. This greater optimism seems to be in line with the evidence for early 2019. Fulcrum “nowcasts” show recent growth rates in line with the government’s target of 6-6.5 per cent for the year. Similarly, Goldman Sachs has economic growth up to 5.8 per cent in February.

One reason for renewed optimism is the belief that a trade deal with the US is imminent. Another is the loosening of macroeconomic policy. This includes a reform of the value added tax expected to reduce the tax burden by Rmb2tn (nearly $300bn) annually. In a report on the work of the government, delivered in March 2019 at the National People’s Congress, premier Li Keqiang stated: “We will reform and refine monetary and credit supply mechanisms, and employ . . . a combination of quantitative and pricing approaches . . . to guide financial institutions in increasing credit supply and bringing down the cost of borrowing”. This could be important.

Of even greater importance, insisted some of those I met, is renewed official enthusiasm for the private sector. In a speech given in December 2018, President Xi Jinping not only paid tribute to Deng Xiaoping, author of China’s policy of “reform and opening up”, but promised to support the private sector. In his report, Mr Li referred to the private activities 20 times. He stressed the need to “ease funding shortages faced by private enterprises”, “encourage private actors to engage in innovation” and “attract more private capital into projects in key areas”.

Above all, the premier said: “We will follow the principle of competitive neutrality, so that when it comes to access to factors of production, market access and licenses, business operations, government procurement, public bidding and so on, enterprises under all forms of ownership will be treated on an equal footing.” In principle, this should include foreign owners.

The private sector has been the engine of China’s growth. If the authorities are determined to support it, this matters. Quite surprisingly to me, some Chinese people I met were even pleased that the US was pressuring China to liberalise the economy: the better the government had to treat foreign private business, the better it would also have to treat domestic private business. I wonder whether US negotiators understand the implications of letting private entrepreneurs off the state’s leash.

Yet we do also need to challenge this optimistic perspective on the present and future prospects of the Chinese economy.

First, it is unclear whether a deal on trade will be reached with the US. Even if such a deal is reached, the US seems determined to monitor Chinese behaviour, with the intention of imposing penalties (that is, tariffs) whenever China is judged to be backsliding. China seems unlikely to accept this demand. However, if such a deal were actually reached, the trade war would not be resolved, but rather institutionalised. Meanwhile, the EU is getting more hawkish on China’s trade and investment practices. A return to the relations of a few years ago is unlikely.

Second, controlling the growth of credit and debt, relative to the economy, while also promoting demand, is likely to remain a tricky, possibly impossible, balancing act. It would not be surprising if policymakers decided they had to tighten credit once again, with damaging effects on the economy. The obvious alternative would be active fiscal policy by central government. But the latter remains remarkably unwilling to do this.

Third, the attitude of Mr Xi to the private sector remains rather unclear, to put it mildly. He is surrounded by people who do believe in the essential role of the private sector. But does he? Most of the time, he seems to put rather greater faith in state-owned enterprises. So long as that is the case, it may be difficult to reignite, let alone sustain, confidence within the private sector.

Finally, there is a question about the true size of the Chinese economy. It may be growing substantially more slowly than official figures suggest. Alternatively, what is growing may not really be gross domestic product as understood elsewhere. Yet these are doubts for another occasion. The question here is whether the economy is recovering and, if so, durably? The answers are: “yes” and “perhaps”. The economy is recovering. But risks, notably over trade, lie ahead. Further periods of weakness are likely.

How Close Are The Markets From Topping?

Now that most of the US Major Indexes have breached new all-time price highs, which we called over 5+ months ago, and many traders are starting to become concerned about how and where the markets may find resistance or begin to top, we are going to try to paint a very clear picture of the upside potential for the markets and why we believe volatility and price rotation may become a very big concern over the next few months.  Our objective is to try to help you stay informed of pending market rotation and to alert you that we may be nearing a period within the US markets where increased volatility is very likely.

Longer term, many years into the future, our predictive modeling systems are suggesting this upside price swing is far from over.  Our models suggest that price rotation will become a major factor over the next 12 to 15+ months – headed into the US Presidential election cycle of November 2020.  Our models are suggesting that the second half of this year could present an incredible opportunity for skilled investors as price volatility/rotation provide bigger price swings.  Additionally, our models suggest that early 2020 will provide even more opportunity for skilled traders who are able to understand the true price structure of the markets.  Get ready, thing are about to get really interesting and if you are not following our research or a member of our services, you might want to think about joining soon.

We are focusing this research post on the NQ, ES and YM futures charts (Daily).  We will include a longer-term YM chart near the end to highlight longer-term expectations.  Let’s start with the NQ Daily chart.

The NQ Daily chart, below, highlights our ongoing research, shows the 2018 deep price rotational low and the incredible rally to new all-time highs recently.  The most important aspect of this chart is the “Upside Target Zone” near the $8040 level and the fact that any rally to near these levels would represent an extended upside price rally near the upper range of the YELLOW price channel lines. 

We believe any immediate price rotation may end near the $7500 level (between the two Fibonacci Target levels near $7400 & $7600) and could represent a pretty big increase in price volatility.

This ES Daily chart highlights the different in capabilities between the NQ and the ES.  While the NQ is already pushing into fairly stronger new price highs, the ES is struggling to get above the Sept/Oct 2018 highs and this is because very strong resistance is found between $2,872 and $2,928.  It is very likely that the price volatility will increase near these highs as price becomes more active in an attempt to break through this resistance.  It is also very likely that a downside price rotation may happen where price attempts to retest the $2,835 level (or lower) before finally pushing into a bigger upside price trend.  The Upside Target Zone highs are just below $3,000.  Therefore, we believe any move above $2,960 could represent an exhaustion top type of price formation.

This YM chart is set up very similarly to the ES chart.  Historical price highs are acting as a very strong price ceiling.  While the NQ is already pushing into fairly stronger new price highs, the YM continues to struggle to get above the Sept/Oct 2018 highs and this is because very strong resistance is found between 25,750 and 27,000.  Please take notice of the very narrow resistance channel (BOX) on this chart that highlights where we believe true price support/resistance is located.  We believe it is likely that a downside price rotation may happen where price attempts to retest the $26,000 level (or lower) before finally pushing into a bigger upside price trend.

As you can tell from our recent posts and this research, we believe price volatility is about to skyrocket higher as price rotates downward.  Our predictive modeling systems are suggesting that we are nearing the end of this current upside move where a downward price move will establish a new price base and allow price to, eventually, push much higher – well above current all-time high levels.

We’ve issued research posts regarding Presidential election cycles and how, generally, stock market prices decline 6 to 24 months before any US Presidential election.  We believe this pattern will continue this year and we are warning our followers to be prepared at this stage of the game.  No, it will not be a massive market crash like 2008-09.  It will be a downside price rotation that will present incredible opportunities for skilled traders.  If you want more of our specialized insight and analysis, then please visit to learn how we help our members find success.

Lastly, we’ve included this Weekly YM chart to show you just how volatile the markets are right now.  Pay very close attention to the Fibonacci Target Levels that are being drawn on this chart.  The downside target levels range from $16,000 to $21,060.  The upside target levels range from $30,000 to $32,435.  Top to bottom, The Fibonacci price modeling system is suggesting a total volatility range of over $16,000 for the YM Weekly chart and this usually suggests we are about to enter a period of bigger price rotation and much higher price volatility.

Right now, we suggest that you review some of our most recent posts to see how we’ve been calling these market moves, visit  It is important for all of our followers to understand the risks of being complacent right now.  The markets are about to enter a period of about 24+ months where incredible opportunities will become evident for skilled traders. If you know what is going to happen, you can find opportunities everywhere.  If not, you are going to be on the wrong side of some very big moves.

The Lesson Of Argentina: You Can’t Stabilize A Bankrupt Economy 

So the U.S. puts Republicans (the party of small government) in charge, and gets… trillion dollar deficits as far as the eye can see AND a revival of socialism among Democrats.

Scary as this may seem, the real (and even scarier) lesson is that it’s all inevitable: Beyond a certain level of indebtedness, even pro-business, sound money, small government leaders are powerless to stop the march to insolvency and currency crisis.

The latest example is Argentina, which a few years ago elected a free-market president, only to see its debt explode and its currency crash. From Friday’s Wall Street Journal:
Argentine President’s Prospects Dim With Those of His Country’s Economy 
Argentina’s assets took a beating Thursday amid President Mauricio Macri’s continuing struggle to tame rising prices and revive a shrinking economy, raising prospects that his left-wing predecessor could make a comeback in this year’s presidential election. 
The peso lost more than 5% of its value against the dollar in early trading Thursday, before regaining some ground in the afternoon. Argentina is now the world’s second-riskiest borrower after crisis-hit Venezuela as indicated by credit default swaps, which are derivatives that pay holders when a borrower defaults on a debt payment. 
Mr. Macri, who was elected in 2015 on promises to undo the interventionist policies of President Cristina Kirchner, announced new price controls last week to try to get Argentina’s inflation under control. Mr. Macri has failed during his administration to contain inflation, which has risen to a 12-month pace of almost 55% in March from 25% at the start of 2018. 
Argentina inflation Argentina bankrupt
The move sparked criticism that the president was abandoning market-friendly policies for short-term electoral considerations as Argentines grow increasingly impatient with rising prices. It also underscored the possibility that Mr. Macri could lose October’s election, even if he faces the polarizing Mrs. Kirchner in the final runoff between the top two finishers of an initial vote. That scenario was considered unlikely just a few months ago. 
“Both the recession and inflation have gotten so bad that not even facing Cristina Kirchner would be enough for [Mr. Macri] to win in the second round,” said Bruno Binetti, a political analyst at the Torcuato Di Tella University in Buenos Aires.  
“People are so displeased with the state of the economy right now that they would be willing to vote for her given their anger to the current government.” 
Mr. Macri has said chronic budget deficits have boosted inflation and caused other economic difficulties. He has defended his government’s actions to balance his administration’s Budget. 
“We’re going to the source of the problem,” he said in a radio interview Wednesday. “It will take time,“ but inflation has to come down, he added. 
The president’s unsuccessful efforts to end a recession that has pushed unemployment up to 9.1% and left about 30% of the country’s population living in poverty have caused a backlash among Argentines. A recent poll by Synopsis Consultores, a local consulting firm, showed Mrs. Kirchner with 45% support versus 44.3% for Mr. Macri in a runoff.  
Other polls show Mrs. Kirchner winning by a bigger margin. 
“If the economy does not improve, the government falls in the polls. If the poll numbers fall for the government, then you have more pressure on the exchange rate, on the financial markets, and then that feeds into the real economy,” said Matías Carugati, head economist at Buenos Aires-based pollster Management & Fit. 
“Macri is a disaster,” said Liliana Mejía, a 28-year-old student in Buenos Aires. “They all have to go.” She said she was upset that rising costs left her unable to buy a gift for her son’s second birthday next week. 
But many Argentines still back the president, arguing that he inherited the problem after more than a decade of misrule by Mrs. Kirchner and her late husband, Néstor Kirchner. 
“Cristina is to blame for all of this,” said Carlos Mayo, a 70-year-old retiree. “You can’t fix in two years the disaster that they did in 12 years.” 
Mrs. Kirchner’s administration nationalized businesses and raised taxes on Argentina’s vital grain exports. She financed the deficit by printing money, imposed price controls on hundreds of consumer products and defaulted on the debt. She is facing trial on several corruption allegations, while denying wrongdoing.

Upon taking office almost four years ago, Mr. Macri moved quickly to eliminate most farm export taxes and lift foreign-exchange and capital controls in a bid to restore confidence among businesses, investors and consumers. He cut personal income taxes and invited foreign businesses to invest in Argentina’s energy and transportation sectors.  
Mr. Macri, the scion of a wealthy Buenos Aires family, also provided the legal framework to attract foreign investment, said Juan Pereira, an analyst at Inframation, a global infrastructure and energy news and data service. 
Mr. Macri borrowed heavily in global markets as he tried to slowly restore the government’s finances. He sought in that way to avoid the deep spending cuts and ensuing social unrest that led to the removal of past presidents during previous economic shocks. 
But Mr. Macri found himself mired in a currency crisis after his government eased inflation targets at the end of 2017—an action some market participants saw as threatening the independence of Argentina’s central bank—and interest rates rose in the U.S. early last year. Mr. Macri turned to the International Monetary Fund for a bailout to calm investor concerns about debt payments. 
The peso continued to weaken even after the bailout last June, and Mr. Macri had to return to the IMF in September to ask for more money as he promised to balance his budget by slashing government spending and raising taxes on farm exports.

Argentina peso Argentina bankrupt
Now, some investors are concerned that the government could eventually default on its debt, said Asha Mehta, a portfolio manager of Boston-based Acadian Asset Management. 
“The main risks we see are the potential for a default, the IMF not offering further support, and the currency collapsing,” she said. 
Investors are still willing to back Mr. Macri, according to Dominic Bokor-Ingram, a portfolio manager at London-based fund manager Fiera Capital. 
“The preference in the international community is for Macri,” he said. “He didn’t have the political power to force through enough reforms, but if he were to get another four-year term there’s a very strong chance he’d be able to carry out the reforms he promised.”

Here’s the key sentence: “Mr. Macri borrowed heavily in global markets as he tried to slowly restore the government’s finances. He sought in that way to avoid the deep spending cuts and ensuing social unrest that led to the removal of past presidents during previous economic shocks.”

When a country’s debts reach a certain point, “austerity” — that is, lowering spending to shrink deficits — causes so much pain to a population that has become addicted to easy credit and generous benefits, that the politician implementing it is kicked out and replaced with whoever promises the most free stuff. And the debt binge continues.

Europe found this out after trying to force peripheral EU countries to meet low deficit targets. The result is populists and/or socialists in charge of most of the biggest debtor countries.

Macri seems to have recognized the risk of austerity but discovered that borrowing more money to avoid spending cuts is simply business as usual under a different name.

Meanwhile, here in the US, from a financial standpoint it hardly matters who’s in charge after 2020 because massive spending increases are now the consensus, with the only argument being over which things we buy with all that borrowed money.

Put another way, Argentina is now the future of the developed world.

The price of desperation

Mauricio Macri emulates his rival, Cristina Fernández de Kirchner

A populist is a liberal mugged by inflation

“I JUST WANT an end to the price madness,” says Sonia Valverde, a mother of three, at a supermarket in Buenos Aires. She points to a government sticker advertising new price controls, which have frozen the price of 64 products, including sachets of milk. The only difficulty is that no sachets remain on the shelf.

Ending Argentina’s price madness was Mauricio Macri’s guiding mission when he won the presidency in 2015. He lifted currency controls imposed by his populist predecessor, Cristina Fernández de Kirchner, and began to cut energy subsidies. He gave the central bank a target for inflation and let the statisticians measure it honestly. And he loosened price controls Ms Fernández had imposed on hundreds of items, including soap and chicken.

But Argentina’s maddening prices refuse to be tamed. When inflation fell less quickly than hoped, the government relaxed the central bank’s inflation target in late 2017, undermining its credibility. As American Treasury yields rose months later, the peso dropped and inflation soared. Argentina embraced the IMF and abandoned its inflation target in favour of the more direct goal of constraining the money supply. But even after the central bank promised to freeze the quantity of money until the end of this year, the peso wobbled and annual inflation soared, to almost 55% in March (see chart).

Mr Macri’s popularity is headed in the other direction. An opinion poll last week suggested he would lose October’s election to Ms Fernández, despite corruption charges against her. To defeat her, Mr Macri has chosen to emulate her, demanding that shops refrain from raising “essential prices” for six months. In a meeting with supermarket bosses, he insisted that he would win by 52% to 48%—the kind of thin margin that makes retailers nervous.

“Such agreements over prices will never solve the real problem: never have, never will,” says Miguel Acevedo, the head of the country’s leading employers association. In Buenos Aires, the freeze and other controls affect only about 3% of the consumption basket, according to JPMorgan Chase, a bank. Many of these prices jumped in the few days between the announcement and imposition of the freeze. And if any products are withdrawn from the shelves, they drop out of the inflation figures anyway.

But the controls may still have an indirect impact, through psychology and politics. Argentina’s macroeconomic policies are now consistent with lower inflation: the fiscal deficit is narrowing, interest rates are painfully high and the IMF has boosted the central bank’s foreign-exchange reserves. But inflation has its own momentum: it is high, because it was high, and is expected to remain so. The hope is that freezing some high-profile prices might help curb those expectations, at least until the election. Whereas Ms Fernández’s controls tried, unsuccessfully, to suppress the inflationary effects of loose policies, Mr Macri’s are trying to reinforce the disinflationary impact of tight ones.

That inflationary psychology also depends on the exchange rate, which Argentines watch with grim fascination. Under the country’s agreement with the IMF, the central bank can step in to defend the peso if it weakens beyond a “non-intervention zone”. This has moved slowly over time, so as to allow the peso to cheapen gradually, thus keeping exports competitive despite rising peso prices. But for the rest of the year, the central bank will strive to stop the currency weakening beyond 51.5 pesos to the dollar, whatever the damage to exports.

If the peso holds, inflation should start to fall. And if that happens, Mr Macri could yet win re-election. According to Eduardo D’Alessio, a pollster, 71% of voters approve of the anti-inflation package, which also provides credit for the poor and elderly, as well as cancelling planned increases in electricity and transport prices. But if Mr Macri’s election chances look too bleak, Argentines might resume their flight into dollars, weakening the peso, worsening inflation and thereby guaranteeing his defeat. In this way, Argentina could succumb to a self-fulfilling fear of Ms Fernández. In politics, as in economics, expectations can precipitate the dangers they foresee.

When Taxing the Rich Isn’t Enough

As more rich taxpayers leave New York, Cuomo slams everyone else.

By The Editorial Board

New York Gov. Andrew Cuomo speaks about the $175.5 billion state budget at the state Capitol on March 31. Photo: Hans Pennink/Associated Press

Democrats now control New York’s entire state government, and on Sunday Gov. Andrew Cuomo signed off on a $175.5 billion budget he described as “probably the broadest, most sweeping state plan that we have done.” He certainly spares no taxpayer.

Mr. Cuomo brags about limiting increases in operating-fund spending to a modest 2%. But in February Comptroller Thomas DiNapoli noted that Mr. Cuomo’s numbers are “a less meaningful gauge of spending levels and trends,” given how the Governor has repeatedly shifted spending off-budget, adjusted the timing of disbursements, and used other sleights of hand.

Mr. DiNapoli puts the increase at nearly 4%, double the inflation rate. Spending on Medicaid and health-care will rise 3.6% to a total of $19.6 billion. Florida had 1.75 million more residents than New York last year, but its total budget was $88.7 billion.

Democrats claim they can fund their profligate spending by taxing the rich, but affluent New Yorkers are now fleeing to other states. The state’s income-tax revenue came in $2.3 billion below forecast for December and January. Mr. Cuomo blamed the shortfall on the 2017 federal tax reform’s $10,000 limit on state-and-local tax deductions. But the rest of the country shouldn’t have to subsidize New York’s spending, and Mr. Cuomo won’t cut taxes.

Instead lawmakers approved a new “mansion tax” that is assessed at the point of sale and ranges from 1.65% on $2 million properties to 4.55% on those worth $25 million or more. A new online sales tax will soak online shoppers for $160 million annually for local governments and $320 million annually for New York City’s broken transit system. Plastic shopping bags are now banned, and counties can now impose a 5-cent fee on paper bags. Then there’s a new 20% sales tax on vape products, and the levy on rental cars rises to 12% from 11% in New York City and 6% elsewhere in the state.

Democrats also approved the nation’s first “congestion pricing” for cars that travel into central Manhattan, details to come later. Fees will be set by a six-member panel mostly appointed by the Triborough Bridge and Tunnel Authority—which is a classic example of political dysfunction. Congestion pricing has worked in places like Singapore, but without fixing subway governance and union work rules it will mainly subsidize higher benefits and inefficient spending.

The best news for taxpayers is that Mr. Cuomo managed to make permanent a 2% annual cap on property-tax increases. But New York still ranks fourth worst in the nation for property and wealth taxes, according to the Tax Foundation. New York City is also exempt from the cap, and elsewhere it can be overridden.

The budget didn’t lift the cap on charter schools despite high demand, though lawmakers at least averted some proposed regulatory poison pills targeting the charters. In the new progressive nirvana that is Albany, averting more damage is the best to hope for.

Europe and the New Imperialism

For decades, Europe has served as a steward of the post-war liberal order, ensuring that economic rules are enforced and that national ambitions are subordinated to shared goals within multilateral bodies. But with the United States and China increasingly mixing economics with nationalist foreign-policy agendas, Europe will have to adapt.

Jean Pisani-Ferry

PARIS – Imperialism, Lenin wrote a century ago, is defined by five key features: the concentration of production; the merging of financial and industrial capital; exports of capital; transnational cartels; and the territorial division of the world among capitalist powers. Until recently, only dyed-in-the-wool Bolsheviks still found that definition relevant. Not anymore: Lenin’s characterization seems increasingly accurate.

A few years ago, globalization was assumed to dilute market power and stimulate competition. And it was hoped that greater economic interdependence would prevent international conflict. If there were early-twentieth-century authors to refer to, they were Joseph Schumpeter, the economist who identified “creative destruction” as a driving force of progress, and the British statesman Norman Angell, who argued that economic interdependence had made militarism obsolete. Yet we have entered a world of economic monopolies and geopolitical rivalry.

The first problem is epitomized by the US tech giants, but it is in fact widespread. According to the OECD, market concentration has increased across a range of sectors, in the US as well as in Europe; and China is creating ever-larger state-backed national champions. As for geopolitics, the US seems to have abandoned the hope that China’s integration into the global economy would lead to its political convergence with the established liberal Western order. As US Vice President Mike Pence crudely put it in an October 2018 speech, America now regards China as a strategic rival in a new age of “great-power competition.”

Economic concentration and geopolitical rivalry are in fact inseparable. Whereas the Internet was once seen as an open, universal, and competitive domain, it is being broken up into an archipelago of separate sub-systems, some of which are administered by governments. There are growing fears that the Chinese tech giant Huawei’s dominance in 5G hardware could be used for geopolitical gain. And the German industry association BDI is now warning that China has entered into “systemic competition with liberal market economies,” and is “pooling capacities for political and economic goals with high efficiency.”

But the US, too, is repositioning, particularly in the realm of trade and investment. Recently enacted legislation has authorized the Department of the Treasury to target “strategically motivated” (read: Chinese) foreign investment that could “pose a threat to US technological superiority and national security,” suggesting that the Trump administration intends to use investment screening to protect America’s technological edge.

China is widely accused of mixing economics with politics. Yet this is equally true of the US. Consider the Trump administration’s use of the dollar – which many used to consider a global public good – and its central role in global finance to impose secondary sanctions on foreign companies doing business with Iran. As a result, SWIFT, the EU-based financial messaging service, was forced to deny access to Iranian banks or risk losing its own access to the US financial system. Likewise, under pressure from the US, the Bundesbank last year blocked a large cash transfer to Tehran of an Iranian deposit at an Iranian-owned bank in Hamburg. Clearly, the US no longer feels any need for self-restraint in its use of monetary and financial might.

For Europe, these developments amount to a major shock. Economically, the European Union is a bellwether of the post-war liberal order: as a champion of competitive markets, it has repeatedly forced powerful foreign companies to abide by its laws. But geopolitically, the EU has always tried to keep economics and international relations separate – and thus felt at home in a multilateral, rules-based system, where the sheer exercise of state power is necessarily restrained. Nationalism and imperialism are its worst nightmares.

Europe’s challenge now is to position itself in a new landscape where power matters more than rules and consumer welfare. The EU faces three big questions: whether to reorient its competition policy; how to combine economic and security objectives; and how to avoid becoming an economic hostage of US foreign-policy priorities. Answering these will require a redefinition of economic sovereignty.

Competition policy is a matter of fierce debate. Some want to amend EU antitrust rules to enable the emergence of European “champions.” But such proposals are questionable. True, Europe needs more industrial-policy initiatives in fields like artificial intelligence and electric batteries, where it is at risk of falling behind other global powers. True, regulators issuing judgments on mergers and state aid should consider the increasingly global scope of competition. And true, static assessments of market power should be supplemented with more dynamic approaches that value innovation. But none of this changes the fact that in a world of corporate giants, we will need even stronger competition policies to protect consumers.

Economic logic and security concerns are easily conflated. A decision to reject a merger or authorize an investment that benefits a politically motivated foreign competitor might make economic sense, while raising eyebrows in foreign-policy circles. The solution is not to meddle with competition rules, but to give those in charge of security some say in the decision-making process. To that end, in a forthcoming paper that I co-authored with foreign-policy experts and other economists, we propose that the EU High Representative for Foreign Affairs and Security be given the right to object on security grounds to the European Commission’s proposed mergers or investment decisions. EU member states already have such procedures in place, and so should the EU.

Finally, the EU must do more to develop its financial toolkit and promote international use of the euro. There should be no illusion that the euro will displace the dollar. But with the US signaling that it will use Wall Street and the greenback as foreign-policy instruments, Europe can no longer be a passive, neutral bystander. Through swap lines with partner central banks and other mechanisms, it can make the euro more attractive to foreigners while bolstering its own economic sovereignty.

Jean Pisani-Ferry, a professor at the Hertie School of Governance (Berlin) and Sciences Po (Paris), holds the Tommaso Padoa-Schioppa chair at the European University Institute and is a senior fellow at Bruegel, a Brussels-based think tank.

Can the Government Really Print All the Money It Wants?

By Mark Nestmann

In 1914 Maximilian Bern thought he had it made.

After a long career as a successful writer and editor, Maximilian was ready to retire. And he believed he had more than enough savings to support himself.

Unfortunately, Maximilian lived in the wrong country – Germany – to finance a comfortable retirement. Germany paid for its massive military expenditures in World War I (1914-1918) almost entirely by borrowing. The total tab came to about $45 billion – more than $1 trillion in 2019 dollars. After all, Emperor Wilhelm II reasoned, Germany would occupy great swathes of resource-rich territory in France and Belgium once it won the war.

As we know, things didn’t go well for Germany in World War I. By the time Germany capitulated in 1918, Maximilian’s retirement stash was worth considerably less than it had been just four years earlier. In that period, the mark lost nearly 50% of its value. It fell from 4.2 to 7.9 marks per dollar.

But that was only the beginning. By the end of 1919, the mark-dollar exchange rate fell to 48-1. By the first half of 1921, it was 90-1. By the end of 1922, it was 7,400-1.

Germany was now experiencing hyperinflation. In early 1922, Maximilian could buy a loaf of bread for 160 marks. But by the end of 1923, that same loaf cost 200 billion marks. Meanwhile, the USD-mark exchange rate fell to 4.21 trillion-1.

Yet, leading German economists of the day insisted there was no inflation. They argued there was actually a shortage of circulating currency. And to deal with the “shortage,” the printing presses ran 24 hours a day to produce more paper money.

Obviously, the great German hyperinflation didn’t bode well for Maximilian’s retirement. One day in 1923, he withdrew the balance of his savings, 100,000 marks. He purchased the most expensive item he could afford with it: a subway ticket. Maximilian, now nearly 74 years old, took one last tour around Berlin.

When he was finished, he returned home and locked himself in his apartment. Unable to afford food, he died of starvation. 
Economists attribute the cause of the German hyperinflation to the country’s efforts to pay off its war debt, plus the enormous reparations owed the victors of the war. Germany had abandoned the gold standard in 1914; the money its Ministry of Finance ordered to be printed was backed by nothing other than the “German dream.” To pay back its war debt, Germany simply printed more marks and converted them to foreign currency. Of course, that practice only exacerbated inflation.

In large part due to the catastrophic effects of hyperinflation on people like Maximilian, Germany entered a period of political polarization. A decade later, a demagogue named Adolph Hitler seized power.

We all know what happened next. Hitler proceeded to re-arm Germany and in 1939, started World War II. Six years later, more than 70 million people were dead.

This background came to mind when I read the latest initiative from Congresswoman Alexandria Ocasio-Cortez (Democrat-New York) and her proposals for a “Green New Deal.” One estimate for the 10-year cost for the initiative that includes “Medicare for All,” guaranteed federal jobs, and food security for all comes to a staggering $93 trillion. That’s more than four times the already-bloated total federal debt of $22 trillion.

To pay for it, Alexandria thinks the government should simply open the money spigot. In other words, borrow as much as it wants and not worry about deficits or inflation. After all, the US has been running budget deficits of $1 trillion or more annually in recent years…with no significant inflation.

Some economists agree with Alexandria that effectively, deficits don’t matter. Stephanie Kelton, former economic advisor for Bernie Sanders, is a proponent of an old idea once called chartalism that’s been revamped and renamed “modern monetary theory” (MMT). Kelton argues that like Germany in the 1920s, the US can simply print money to pay for its financial obligations.

What’s not to like? After all, since the world abandoned all semblance of the gold standard in 1971, any government can literally create as much money as it wants out of thin air. And any government that issues its own currency can always pay its bills with the money it creates.

If investors don’t line up to buy $93 trillion in newly-created federal debt, the Federal Reserve will buy it and simply add those “assets” to its balance sheet through the process of quantitative easing. That’s what the Fed did a decade ago to ease the effects of the last global financial crisis. And Japan has done it for more than 20 years, with little to no inflation. Indeed, Japan now sports a debt-to-GDP ratio of 236% – the world’s highest, even higher than Venezuela (162%). Compared to Japan, the US debt-to-GDP ratio of “only” 108% seems a model of fiscal conservatism.

MMT advocates point to Japan, observing that if that country can borrow enormous amounts of money for decades without inflation, there’s no reason why the US couldn’t do the same. 
I agree – to a point. But eventually, the laws of supply and demand taught in first-year Economics will reassert themselves. More money chasing the same amount of goods and services in an economy eventually results in an increase in the cost of those goods and services.

The reason MMT might work temporarily is that, notwithstanding isolated examples like Venezuela, the world is about to enter a profoundly deflationary environment. And nowhere are there more deflationary pressures on an economy than in China.

I have previously suggested that an economic slowdown in China could throw the entire world into a recession. And, as we learned in both the Great Depression of the 1930s and the financial crisis of 2007-2008, economic slowdowns are inherently deflationary. For instance, in the Great Depression, stock prices fell by nearly 90%. Consumer prices fell by 25%, and commodity prices fell even more.

The problem is what happens once inflation begins to rebound. Stephanie Kelton says when that happens, Congress should simply raise taxes. But that’s highly unlikely. If you were a member of Congress and voters in your district were complaining about inflation, would you advocate for a tax increase?

Hardly. You’d be more inclined to vote for a decrease in taxes to help your constituents increase their disposable income. At that point, the economy could enter an inflationary spiral with no easy way out.

One thing is certain: As we approach the 2020 presidential race, you’ll hear a lot about MMT and how it can be a painless way to address stagnating incomes and economic inequality.

It may be painless so long as deflation persists. But it won’t be painless forever. Remember Maximilian Bern.

Gold May Give Us One More Chance With New Lows

Our proprietary price cycle tool is showing us that the Daily Gold cycles may dive a bit lower, possibly into the $1250 to $1265 level, over the next 3~7+ days before reaching an ultimate low. 

We’ve been covering the precious metals markets like hawks because of our proprietary price modeling tools that suggested the April 21~24 dates as an ultimate low/momentum base pattern.  This new cycle formation highlights the potential that a deeper price low in Gold may set up over the next 5 to 7 days and it may become an incredible buying opportunity for skilled traders.

Taking a look at this cycle chart, we can see the deep price low that may target the $1270 levels or levels just below the $1270 price area.  It appears that this new price low may form somewhere near the end of this week, May 3rd, or early next week, May 6th or 7th.  Please pay attention to this potential price move as this may be the last low price reversal before a very strong upside price move.

You may remember our analysis from January 2019 regarding the ADL price predictions for Gold (the chart is below).  Pay very close attention to the “April/May 2019” dates as we are targeting that low price level right now and the upside price potential showing predicted price levels well above $1400.

Skilled traders need to try to understand a move like this in Gold will likely be predicated on some external global news events that create a level of fear in the markets.  We don’t know what they may be at the moment, but our suspicions are that they are going to be related to the EU and/or China (or both).

This is it.  This should be the last low price rotation (if it happens) before Gold begins to skyrocket higher.  Pay attention and remember we were very early in making this call – so it will be an incredible run if it happens as we predicted 5 months ago.

With a total of 55 years of technical analysis and trading between Brad Matheny, and myself Chris Vermeulen, our research and trading signals makes analyzing the complex and ever-changing financial markets a natural process. We have a simple and highly effective way to provide our customers with the most convenient, accurate, and timely market forecasts available today. Our stock and ETF trading alerts are readily available through our exclusive membership service via email and SMS text. Our newsletter, Technical Trading Mastery book, and Trading Courses are designed for both traders and investors. Also, some of our strategies have been fully automated for the ultimate trading experience.