Germany must take care when throwing around stimulus

Two speed economy means that any spending must be carefully tailored

Mohamed El-Erian
An employee guides a seat into a Volkswagen Tiguan compact crossover vehicle on the assembly line at the Volkswagen AG automobile factory in Wolfsburg, Germany, on Friday, March 1, 2019. German unemployment continued its almost non-stop decline over the past five years, suggesting companies view the recent slowdown in Europevs largest economy as transitory. Photographer: Krisztian Bocsi/BloombergGermany's auto sector is suffering through structural changes amid the shift to electric and self-driving cars © Bloomberg

Now that Germany’s leading economic institutes have slashed their growth forecasts, the pressure is on Berlin to adopt a major fiscal stimulus — not just to avoid a prolonged recession there but to boost regional and global economic growth. But there are also good reasons why many German policymakers are resisting. Finding a way forward is possible, but such budgetary expansion must be carefully tailored to address their legitimate concerns.

At first sight, the arguments for greater stimulus appear straightforward. The economy is already contracting and some indicators suggest that this will worsen. Inflation is low — 1.4 per cent — and more likely to fall than rise. There are obvious, productivity-enhancing opportunities, from infrastructure spending to an even larger package of spending aimed at meeting climate targets. And the country is one of the very few in the world that is not struggling with high debt and debt servicing burdens.

These domestic arguments are amplified by regional and international considerations. Europe can ill-afford to lose Germany as a regional locomotive in the short run. It would be even worse if the country becomes the caboose, pulling down the others, particularly those with high debt such as Italy.

Over the longer term, the sound health of the German economy is critical to Europe’s wellbeing and, with that, the historic project of regional integration. Moreover, Germany continues to run one of the world’s largest current account surpluses. There is a multilateral expectation, if not a moral obligation, for Germany to rebalance, lest it inadvertently contribute to placing excessive adjustment burdens on weaker, deficit economies.

No wonder German fiscal stimulus ranks among the first things, if not the only thing, that many experts suggest when asked how to help the world economy. Yet, as compelling as these arguments seem, they are subject to at least four important qualifications.

First, Germany’s contracting gross domestic product masks two contrasting economies.

On the one hand, the export-oriented segment is suffering from lower global demand growth and uncertainties on account of Brexit and the China-US trade and tech wars. The situation is made worse by the fact that its big auto sector is suffering through structural changes amid the shift to electric and self-driving cars. On the other hand, the domestically oriented segment of the economy, including services, is still booming, resulting in very low unemployment and high utilisation rates.

Second, the lesson from years of ultra-loose monetary policy by the European Central Bank is that stimulus is not sufficient — and, some would argue, not even necessary — to lift the binding constraints on better German and European economic performance.

Negative interest rates and quantitative easing have failed to boost demand materially. Sceptics genuinely fear they could even end up doing more harm than good by encouraging excessive financial risk taking and distorting economy-wide asset allocation, including by propping up “zombie” companies and activities. It is not clear that fiscal stimulus will fare much better.

Third, maintaining fiscal flexibility appears more essential now. Monetary policy has run out of ammunition, so we will need something else to counter a deeper economic downturn later. Since there is little that stimulus can do to offset the impact of global trade uncertainty, it would seem prudent to keep fiscal powder dry for now.

Finally, premature German stimulus could discourage reforms not only in other eurozone countries but also inside companies. Such changes are a critical part of durable regional prosperity.

However these objections do not add up to case against fiscal stimulus. Instead they point to the need to design it very carefully. To work, a stimulus package should focus on areas most likely to prompt growth, such as infrastructure modernisation, digitalisation and enhancing human capital through education and training. The government should also supplement any package with further efforts to liberalise and reform the domestic economy. Government stimulus should avoid competing with the private sector and stay out of industries that face no funding constraints.

Germany would be right to make its efforts conditional on progress elsewhere in Europe. Other countries should also find ways to increase growth and strengthen the regional economic and financial architecture.

As appealing as it may seem, German fiscal stimulus is not a silver bullet. But it can, and should, serve as an important catalyst for a eurozone-wide effort to deal with longstanding challenges to high and inclusive growth.  
The writer is chief economic adviser at Allianz and president-elect of Cambridge university’s Queens College

Inequality in ‘stable’ Chile ignites the fires of unrest

Riots over price rises show that benefits of economic growth have not been widely shared

Benedict Mander in Buenos Aires

TOPSHOT - A bus burns down in downtown Santiago, on October 18, 2019, following a mass fare-dodging protest. - School and university students joined a mass fare-dodging protest in Santiago's metro following the highest fare rise in recent years, paralysing two of it's main lines. (Photo by CLAUDIO REYES / AFP) (Photo by CLAUDIO REYES/AFP via Getty Images)
A bus burns in downtown Santiago on Friday following a mass fare-dodging protest © AFP via Getty Images

Scarcely a week before Chile suffered its worst civil unrest since Augusto Pinochet’s dictatorship unravelled in the 1980s, President Sebastián Piñera — in an otherwise optimistic interview about his country’s prospects — delivered a warning.

“We need to make a great effort to include all Chileans,” the billionaire former businessman admitted, even as he pointed out that the country was “leading the growth [league tables] in Latin America”.

But Mr Piñera did not expect such a rapid, violent demonstration of the risks of inequality. Santiago has been convulsed by riots, looting and arson, triggered by a 3 per cent rise in metro fares that the government has been forced to suspend. The protests exposed deep-seated anger among Chileans that an unequal system has excluded them from the country’s remarkable economic performance in recent decades.

“You politicians, did this really have to happen so that you stop robbing money from the people?” asked a woman gesticulating to a television camera as she helped clean one of Santiago’s metro stations vandalised by protesters.

“Something deep is happening in Chile,” said Marta Lagos, a pollster and political analyst in Santiago. A huge portion of Chile’s population felt left behind, she said.

“This is not just a bunch of violent kids, it’s much more than that. This is just the tip of the iceberg. That produces a very volatile situation that everyone was ignoring.”

TOPSHOT - A demonstrator waves the Chilean national flag during a protest in Santiago, on October 20, 2019. - Fresh clashes broke out in Chile's capital Santiago on Sunday after two people died when a supermarket was torched overnight as violent protests sparked by anger over economic conditions and social inequality raged into a third day. (Photo by MARTIN BERNETTI / AFP) (Photo by MARTIN BERNETTI/AFP via Getty Images)
A demonstrator waves the Chilean national flag during a protest in Santiago on Sunday © AFP via Getty Images

The government has failed to understand the impact that high levels of inequality and precarious employment have had on society, according to Ms Lagos.

“Piñera thinks [the protests] are a security issue, a problem of violence and looting. He doesn’t realise that there is a profound social malaise which will persist . . . It cannot be fixed with a curfew,” she said, referring to emergency measures taken to control the protests over the weekend.

There have been three deaths so far from the unrest. One person was gunned down by security forces and two more died in a fire as they were looting a supermarket on the edge of Santiago.

Now, Mr Piñera’s centre-right government, whose lack of a majority in Congress has prevented it from implementing many of its pro-market reforms, is in danger of encountering even greater obstacles from an emboldened opposition.

“The Piñera government is now a lame-duck government. It is not going to be able to push its reforms through Congress,” said Patricio Navia, a political scientist at New York University.

While an all-important pension reform may eventually be approved, he added, that is only because Mr Piñera’s bill will be watered down to such an extent that it will probably closely resemble a proposal by the previous centre-left government.

A worker cleans up a supermarket looted during protests in Santiago, Chile, Sunday, Oct. 20, 2019. Chilean President Sebastián Piñera on Saturday announced the suspension of a subway fare hike that had prompted violent student protests, less than a day after he declared a state of emergency amid rioting and commuter chaos in the capital. (AP Photo/Esteban Felix)
A worker cleans up a supermarket looted during protests in Santiago on Sunday © AP

Eugenio Tironi, a political consultant in Santiago, compared the protests over the past week with the gilets jaunes movement that erupted in France last year, triggered by a rise in fuel prices.

“In Chile, it was not exactly a disproportionate rise in tariffs. It was the kind that has happened regularly in the past . . . but it adds to a more generalised feeling that salaries are not keeping up with the rising cost of living, especially as debt burdens increase,” he said. “This is far from over. It is huge.”

Although Ecuadoreans have also been rioting over austerity measures in recent days, the protests in Chile are different, said Mr Tironi. “At least in Ecuador there are clear movements against the government. Here there is none of that.”

He argued that, like the gilets jaunes, the Chilean protests were more spontaneous and decentralised.

That has made it harder for security forces to prevent the violence, although Mr Navia said it was a mistake not to empower the military with the ability to use force as necessary after declaring a state of emergency on Saturday.

This may have exacerbated looting, which Michelle Bachelet’s government was able to control after a big earthquake in 2010, he said. Television images showed looters over the weekend leaving shops with bottles of alcohol, televisions and even fridges.

Mr Navia drew parallels between Chile today and Venezuela 30 years ago on the eve of the “Caracazo” riots caused by fuel price increases that were part of an IMF austerity plan. Those paved the way for the rise of Hugo Chávez and his economically disastrous “Bolivarian revolution”.

Like Venezuela then, he said Chile today is “the most stable economy in Latin America, but it has three problems: high inequality, a high dependence on one commodity, and an increasingly distant and corrupt political class”.

While Chile’s challenges today may not be as serious as Venezuela’s 30 years ago, Mr Navia warned against the notion that Chile’s graduation into the OECD club of rich nations may put it into a superior class. “In reality, Chile still has very Latin American problems.”

This Is Not a Printing Press

By: Peter Schiff

Rene Magritte’s 1929 painting “The Treachery of Images,” depicts a tobacco pipe with a caption that reads “Ceci n’est pas une pipe,” (French for “This is not a pipe”). Everyone who has taken a course in modern art knows that Magritte’s exercise in contradiction was meant to draw a distinction between a real thing and a representation of that thing. Perhaps we should send Federal Reserve Chairman Jerome Powell a beret and an easel as he is attempting a similarly surrealistic take on monetary policy.

Early last week, the Chairman announced a new, as yet unnamed, Fed program through which the bank will now buy regular amounts of short-term U.S. government debt. Seeking to counter the rumblings that a new form of quantitative easing would be seen as an admission that the economy may be in trouble, Chairman Powell asserted during the annual meeting of NABE on October 8, “This is not QE. In no sense is this QE”. In other words, “Ceci n’est pas QE.”

On Friday, the New York Fed put some meat on the bone by detailing that the program will buy $60 billion per month of Treasury Bills, at least through the second quarter of next year. (R. Miller & C. Condon, Bloomberg) In addition, at least through January 2020, the Fed will continue with $75 billion in overnight repurchases and $35 billion in term repurchases twice per week. (N. Timiraos & P. Kiernan, Dow Jones Newswire) As a result, it is estimated that the Fed’s balance sheet will reach roughly $4.2-$4.3 trillion some time in Q2 2020. Of course, since the actual size of the purchases required to keep interest rates from rising could be much larger, the Fed’s balance sheet could be significantly larger as well.

The Fed even put out a Frequently Asked Questions page last week that among other things highlighted how the current moves differ from the original version of QE in 2008. It stresses that whereas the old version of QE was designed to spur economic growth in a sluggish economy, the current moves are simply designed to patch leaky financial pipes that are very much removed from the real economy. A statement on the FAQ page reads, “These operations have no material implications for the stance of monetary policy,” and should not have “any meaningful effects” on household and business spending or the overall level of economic activity. Instead, the Fed just wants to make sure there is enough cash sloshing around the system — because lately there hasn’t been.

But as the reliable American folk wisdom states: if something “looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” In this case, Powell can call the new Fed program anything he wants, but it certainly quacks like QE.

As it was originally defined just a few short years ago, QE was the attempt by central banks to buy and hold government debt in an effort to pull down interest rates and inject liquidity into stressed financial markets. Okay, check and check.

The only difference between then and now is that in 2008-2014 the Fed targeted the longer-dated end of the bond market, and this time it is targeting the shorter end…at least for now.

But bond maturity length never figured much into the definition anyway, so that doesn’t really seem to matter.

Another distinction that Powell makes is that the current program is more modest in scope than the full-blown QE programs of 2009-2014, which added more than $4 trillion to the Fed’s balance sheet, according to data from the St. Louis Fed, (the vast majority of which it still holds to this day).

And while it’s true that the $180 billion or so that the Fed has pumped into the markets over the last month is just a spit in the bucket compared to what it had amassed in the early part of this decade, please remember that the Fed has just started…give it time! $180 billion in one month is actually a much faster pace than what was seen at the height of the QE era (which topped out at $85 billion per month).

Should anyone really expect that the new program will end in the middle of next year as the Fed now suggests? It has never fully ended any of its prior stimulus plans, why would this one be any different?

In fact, thanks to the Fed, the U.S. economy will be even more heavily indebted in eight months than it is now. So the Fed will be forced to buy even more debt to keep interest rates from rising in an economy even more vulnerable to higher rates than it is today. Like any drug habit, the more drugs you consume today, the more you will have to consume tomorrow to achieve the desired effect.

If we can agree that it makes no difference what we call the program, it is nevertheless important to focus on the differences between QE then and QE now. Back in 2009, the program was all about reliquifying the long bond market that had been decimated by billions of dollars of worthless subprime bonds. But a decade later, the home mortgage market is relatively calm, at least for now.

Long-term interest rates are already rock bottom, and mortgage delinquencies are not currently causing panic in the banking system. Today, problems are popping up in a very different place, the very short-end of the bond market, particularly in the overnight “repos” where banks lend spare cash to one another on a very short-term basis.

As it turns out, the Fed’s $50 billion per month of bond sales, which began early in 2018 and ended in Second Quarter of this year, drained liquidity from the overnight market at the same time increased government borrowing was sucking up all available cash. Last year’s tax cuts, combined with increased Federal spending, pushed this year’s deficit past $1 trillion for the first time since 2012. (G. Heeb, Markets Insider, 9/14/19) Deficits are currently expected to stay north of $1 trillion per year for the foreseeable future.

That means more new government bonds than expected are likely to hit the market.

Contrary to his campaign promise, President Trump has actually shortened the maturity of the national debt. (US Govt. Finance: Debt, Yardeni Research, Inc., 10/10/19) Shorter maturities means that more debt will need to be refinanced each month.

Banks have dutifully bought those bonds, as they are often required to do by capitalization laws that were put in place since the Crisis of 2008. But this has not left enough cash to keep the overnight market well-lubricated.

This problem erupted into broad daylight just a few weeks ago, when yields on overnight bonds skyrocketed to 10% or more. Rates that high in an overlooked, but vital, part of the financial system could have caused the economy to seize up, so the Fed intervened with all guns blazing. It bought approximately $53 billion of overnight loans in just the first day of the crisis.

At that point, most market observers believed that the problem was caused by a confluence of temporary events that would last just one day, or maybe a week. But those hopes quickly faded, and we have been left with a crisis that now appears permanent.

In light of this, it is not surprising that the Fed expanded its intervention into the short-end of the Treasury market. But don’t expect the problems to end there. The debt crisis is like a cancer that I believe will continue to spread. The Fed is out of miracle cures. In fact, it never had any.

This all reminds me of when Fed Chairman Ben Bernanke first introduced the QE program in 2009, stressing that that it did not constitute “debt monetization” (the situation where a government buys its own debt) because QE was “temporary” and the bonds that the Fed was buying in an emergency would be sold back to the market once the crisis abated. (Testimony before U.S. House Budget Committee, 6/3/09)

At the time, I predicted, when virtually no one else on Wall Street did, that the Fed would never be able to sell those assets back into the market. It turns out, the Fed was only able to sell less than 25% of what it had bought before it encountered a crisis that forced it to scrap the whole process.

As I have said many, many times, quantitative easing is a monetary Roach Motel: Once central bankers check in, they can never check out.

For now, Chairman Powell is occupying a different room in this particular motel than had his predecessors. But rest assured, not only will he occupy that room, but I expect he will also be expanding into many more. None of the rooms will have a good view and all will have dirty linen.

The real question is when investors will get wind of the stench?

The Fed has been successful in fooling the markets regarding the temporary nature of zero-percent interest rates, the efficacy of QE, and its ability to normalize rates and shrink its balance sheet.

Had the markets not been fooled, the program would have produced a much different result.

Its “success” was purely a function of the belief that the policy was temporary and reversible.

The realization that it is neither could cause a flight from the dollar and Treasuries that could usher in a financial crisis far worse than what was experienced in 2008.

Practising Peronology

If the Peronists win in Argentina, which Fernández will be in charge?

Alberto is a uniter. Not so his running-mate, Cristina, an ex-president

TRES DE FEBRERO, a grimy industrial suburb of Buenos Aires, is named for the date of a battle that took place nearby in 1852. The victorious general, Justo José de Urquiza, went on to promulgate Argentina’s federalist constitution.

Today the district is a battleground in a national election whose result could be nearly as momentous. It pits President Mauricio Macri, a reformer who has failed to modernise Argentina’s economy, against Alberto Fernández, whose Peronist movement is the reason the country needs so much reform.

In 2015 Tres de Febrero voted for Mr Macri, helping end 14 years of Peronist rule in Argentina. But his mistakes helped bring about a recession, an inflation rate of more than 50% and a $57bn bail-out agreement with the IMF, the fund’s largest ever (see chart).

Argentina’s poverty rate of 35.4% is its highest in more than a decade. Now voters in Tres de Febrero are swinging back to the Peronists.

“I voted for Macri, but not again,” says Carlos, a worker at a biscuit factory. “After four years I can barely pay my bills or feed my family.” He backs Mr Fernández, who has a commanding lead in the polls nationwide. Mr Fernández could win in the first round of voting, scheduled for October 27th.

What stirs hope in Tres de Febrero inspires fear in the financial markets and much of Argentina’s middle class. That is largely because Mr Fernández’s running-mate is Cristina Fernández de Kirchner (no relation), who preceded Mr Macri as president and created the economic mess that he tried, but failed, to clean up. During her eight-year presidency, she vastly increased welfare, subsidies and public employment.

She warred with foreign creditors and hobbled exporters with high taxes and an overvalued exchange rate. Her tenure ended with a stalled economy, a fiscal deficit of 5.9% of GDP and high inflation.

Memories of that era spooked the financial markets on August 11th, when Mr Fernández decisively won a primary vote that is considered to be a dress rehearsal for the election. The peso plunged by 25% against the dollar, propelling inflation higher. Most Argentina-watchers assume that Mr Fernández will win the presidential election. Their main question is whether he will bring back kirchnerismo—Ms Fernández’s left-wing sort of Peronism—or plot his own, more moderate course.

He fulminates against Mr Macri’s “neoliberal” policies, including the IMF agreement, while reassuring voters that he is not like his divisive running-mate. The coalition he leads is called Frente de Todos (Front for All). “Alberto is a bridge-builder, always looking for dialogue rather than confrontation,” says Jorge Argüello, a former diplomat who has known him since university days.

Once a goalkeeper on a university football team, Mr Fernández portrays himself in television ads as a seasoned crisis manager and a regular guy, who loves playing catch with his collie, Dylan. As chief of staff for the late Néstor Kirchner, who was Ms Fernández’s husband and preceded her as president, he oversaw negotiations with the IMF and creditors after the country defaulted in 2001. Mr Fernández is “totally non-ideological”, says Federico Sturzenegger, who was a central-bank governor under Mr Macri.

But will he be in charge? According to a recent poll, more Argentines believe that Ms Fernández, rather than Mr Fernández, would be de facto leader of the government, were they victorious. To counter that impression, other than in places where she remains popular, the Peronist campaign has kept her out of the limelight.

Some Peronologists think her only ambitions now are personal, not political. She faces prosecution in half a dozen corruption cases. Because she is now a senator, she cannot be sent to prison; as vice-president, she might hope for a pardon. Her frequent visits to Cuba are probably not motivated by ideology: her daughter is undergoing medical treatment there.

But Ms Fernández’s alignment with the movement’s left wing suggests that, should she be in effective charge, the consequences would be more than personal. One of the left’s most powerful organisations is La Cámpora, a Peronist youth group with cells throughout the country, which was founded by her son, Máximo Kirchner.

The Peronist candidate for mayor in Tres de Febrero, Juan Debandi, is a member. In the next congress, which will also be chosen on October 27th, perhaps 40 deputies in the 257-seat lower house will be from Ms Fernández’s wing of Peronism. The views of La Cámpora will prevail, predicts a gloomy businessman. If that happens, hyperinflation will be a “high probability”.

To avoid bending to the Peronist left Mr Fernández is expected to seek alliances with Peronist governors, most of whom have no sympathy for La Cámpora, and perhaps with Mr Macri’s defeated coalition, Juntos por el Cambio (Together for Change). Sergio Berensztein, a political consultant, thinks Mr Fernández could form a “government of national unity” with the opposition.

Avoiding triumph and disaster

His government would probably be less radical than Ms Fernández’s was, but less reformist than Mr Macri had hoped his would be. It would seek a revised agreement with the IMF. It would probably need a more aggressive rescheduling of Argentina’s debt than Mr Macri has proposed. It would try to control the budget deficit, in part by omitting to raise pension benefits in line with past inflation, and to forge a “social pact” with unions and businesses to help contain inflation.

Mr Fernández would be friendlier than was Ms Fernández to exports, which should get a boost from the peso’s devaluation. Another win could come from fast-rising production from the Vaca Muerta shale oil and gas deposits in northern Patagonia. Mr Berensztein thinks Mr Fernández would “do the minimum reforms to get the country going”.

But he might not do much more. He has given little sign that he means to overhaul an overgrown state that undermines the productivity of its citizens and enterprises. His coolness towards a trade accord agreed in June by Mercosur, a trade bloc dominated by Brazil and Argentina, with the European Union is discouraging. The agreement, if ratified, could be a “total game shifter”, says Mr Sturzenegger. To win its battles, Argentina needs to compete.

Nixon and Trump: The Politics of Impeachment

By George Friedman

The evolution of the American political system inevitably has an impact on the global system. If the United States shifts direction in even minor matters, there are regional consequences. Political events are difficult to predict, but the key variables of the process can be identified by comparing the current evolution to a roughly similar prior event. My intent is to benchmark the current impeachment inquiry into President Donald Trump to the one that forced Richard Nixon to resign. It is an attempt to define what matters and what doesn’t within the impeachment process, rather than the potential global outcome triggered by hypothetical events.
The Watergate Scandal
Nixon resigned as president in August 1974. Tapes of him discussing the break-ins at Democratic Party headquarters at the Watergate building were released on Aug. 5, and he resigned four days later. Until that point, a substantial segment of the electorate continued to support him. He had won reelection in 1972 by defeating George McGovern, who ran on an anti-war platform. That platform was perceived by many as supporting what was then called the “counterculture,” which was seen as a systematic attack by a marginal group on American middle-class values. Nixon positioned himself as the spokesman for the “silent majority,” which was seen as the politically subdued core of American society and values.

Nixon did not simply run against McGovern or the counterculture. He ran against the media, which he saw as having been hostile to him well before his first election, hostile to the war in Vietnam from the beginning, and unwilling to praise him for his foreign policy initiatives (including the opening to China and detente with the Soviets) and his championing of middle American values. Looking back at Nixon’s press conferences, the hostility and contempt of the reporters was palpable, as was Nixon’s defensive anger.

The Watergate scandal began in August 1972 and developed with increasing intensity for two years. There was much discussion of impeachment or criminal indictment of the president, but this was impossible. A substantial part of the electorate supported him, seeing the scandal as something manufactured by his political enemies and the media. Interestingly, despite Nixon’s landslide victory, both houses of Congress were controlled by the Democrats, who held hearings on the Watergate affair in the summer of 1974.

The Democrats understood that while they might be able to impeach the president in the House of Representatives, they did not have anywhere close to the two-thirds majority needed to convict in the Senate. Given the passions on both sides, the Democrats were loath to bring an impeachment vote up in the House knowing that conviction was impossible. It would be seen as useless political melodrama. In addition, they could not try him on the same offense later. Likewise, senators did not want the House to put them in a position of holding a vote that might fail. Since both houses were controlled by the same party, they were equally solicitous of each other.

The problem for the Democrats, then, was the deep division in the country. According to polls, a majority of voters were hostile to Nixon, but he retained enough support – in the 40 percent range – to deter Democrats running in districts that were close (and many were close in 1974). Since impeachment is a political rather than a judicial process, a powerful minority of voters saw it as a desire to reverse McGovern’s defeat. Indeed, the number of voters who opposed Nixon politically was larger than the number of voters who wanted him impeached. The political risk of alienating those voters was too great.

The debate might have gone on indefinitely but for the emergence of a “smoking gun,” a bit of evidence so conclusive that even Nixon’s Republican supporters could not ascribe it to Democratic or media manipulation. The smoking gun was the revelation that Nixon had taped many of his office conversations and that some included conversations on Watergate. The House and Senate demanded the tapes, but Nixon refused to release them. That alone started to erode his political support on the theory that he would only hide the tapes if they were harmful to him.

After the courts ordered the release of the tapes, it was discovered that one of them had been erased while others clearly implied Nixon either had knowledge of the cover-up or ordered the break-in himself. The mood among his Republican supporters and in the Senate then shifted. A group of senior senators told Nixon that he would be convicted by the Senate if it came to a vote and convinced him to resign.

The key to this event had little to do with members of Congress. It had everything to do with Republican voters, who were persuaded that, while the attacks on Nixon had been carried out for political reasons, he was guilty and had to be removed. The smoking gun had brought them there (and Republican anger at the media and the Democrats was no less then than it is today). So despite the loathing for Nixon’s enemies, there was a sea change among his supporters, such as never took place during the Clinton impeachment. During the Clinton impeachment, Democratic voters did not agree that there had been a smoking gun requiring conviction, and therefore the Senate found Bill Clinton not guilty.

Neither the House nor the Senate held the power to remove Nixon from office. Nor did those who despised him. That power was held by Nixon’s supporters, who represented a substantial minority by 1974 that could sway state and local elections. Their standard for removal was far higher than others’, and without a smoking gun, the scandal would likely have lurched on indefinitely. But there was a smoking gun, one that tore away illusions about Nixon. But Nixon’s supporters never forgave the Democrats for trying to destroy him before they had a smoking gun, and for 12 years after Jimmy Carter, Republicans dominated the presidency.
The Ukraine Affair
The United States today is at a point similar to where it stood in 1974. The country is divided into two camps, as alienated from each other as were middle America and the counterculture. The Democrats are becoming the political party of the current culture, and the Republicans are the party seeking to hold on to past values. Trump has the support of a minority of voters, which still represents a significant segment of the electorate. He and his backers hold the media responsible for the political crisis, and the media is strongly arrayed against Trump. The passion on both sides is extreme. The president’s opponents and supporters not only are extraordinarily convinced of their positions but, more important, have little contact with each other. Both groups represent hostile tribes, much as it was during the Nixon crisis.

But the important thing to keep in mind is that opposition to impeachment is larger than Trump’s own support base. This is the single most important fact that will determine the future course of this debate. Just as the Republicans in 1974 required a smoking gun to support impeachment, so too does the system today.

The question is whether the Ukraine affair is that smoking gun. There have been many allegations leveled against Trump that were supposed to be smoking guns – but that turned out not to be. Ultimately, the public, not politicians, will decide what really is a smoking gun. And if one were found, the public mood would shift in support of impeachment. It would slash support for Trump into the 20s or less. That would change the decision-making process of politicians in both parties. What happened with Nixon had many predecessors, but it wasn’t until the tapes were released that his presidency collapsed. There are many precursors with Trump as well, but none were sufficiently convincing to cause the voters to shift dramatically. And as in 1974, it is not the Democratic voters that are decisive but the Republican ones. It was their shift that freed Republican senators to change their position and guarantee Nixon’s removal from office. Today, the Democrats have fixed positions, and they can’t remove Trump from office. Only the Republicans can, and their voters aren’t convinced.

There are two things that the Nixon and Trump impeachment processes have in common. The first is that the social divide during both events was profound. The second is that for a couple of years before Nixon’s end, and before this moment for Trump, there were endless assertions of impeachable offenses that alienated the Nixon faction and energized his enemies. That process raised the bar for conviction, because it made the smoking gun essential. So many accusations arose, all of which ultimately went nowhere, that incontrovertible evidence – the tapes – became necessary.

On the current claim against Trump – that he tried to persuade the Ukrainian government to investigate Joe Biden – my opinion or any one of yours really doesn’t matter. The key is whether this charge breaks the back of his support, leaving him with only a handful of supporters. In the Nixon era, evidence exhaustion was overcome by the tapes. The issue now is whether anything will come out that can overcome evidence exhaustion in this case. If Trump’s political support remains as is, he will not be convicted. Most understand that impeachment and conviction are a political, not judicial, process, but many fail to see that this doesn’t mean politicians get to decide what happens. Politicians want to be reelected, so in the end, as is appropriate in a republic, the people will decide this issue. They will decide if Ukraine is a smoking gun.

The Eurozone’s 2% Fixation

The European Central Bank’s inflation target of “below, but close to, 2%” currently dominates economic policymaking in the eurozone. Moreover, the idea that this target supersedes the bloc's fiscal rules seems to be gaining ground – with potentially worrying implications for financial stability.

Daniel Gros


BRUSSELS – Economic policy discussions in Europe used to be dominated by the number three, namely the 3%-of-GDP upper limit on national fiscal deficits. Although the fiscal rules enshrined in the Maastricht Treaty were in fact much more complex, public debate tended to focus on the 3% figure, especially when deficits ballooned during the euro crisis nearly a decade ago.

Today, however, the number two holds sway over economic policymakers, in the form of the European Central Bank’s 2% inflation target. Although the Treaty on the Functioning of the European Union does not define price stability, the ECB, whose sole official task is to ensure price stability in the eurozone, itself decided some years ago that it means inflation “below, but close to, 2%” over the medium term.

The ECB regards this goal as sacrosanct. But it has not been able to achieve its target in a long time. That hardly makes it unique: inflation has remained stubbornly below 2% in most advanced economies for almost a decade. Moreover, the persistence of below-target inflation does not seem to have had adverse economic consequences. Eurozone employment has been steadily increasing, and unemployment has fallen to record lows. But the ECB fears that its credibility is at stake, and regards abandoning its inflation target as out of the question.

The ECB has highlighted the looming threat of a eurozone downturn, or even a mild recession, as a further argument for using all available policy instruments to make its stance even more expansionary. This view appears reasonable at first. But, given that the ECB should look only at medium-term price stability, not at the business cycle, the imminent risk of a downturn is not an argument for loosening monetary policy – especially in view of the fact that the business cycle no longer seems to have an impact on prices.

With inflation stuck at around 1%, and no prospect of it reaching “close to” 2% anytime soon, the ECB has increasingly called on national governments in the eurozone to do their part by loosening fiscal policy. This is somewhat surprising, because the Maastricht Treaty assigns the responsibility for ensuring price stability to monetary, not fiscal, policy. Calling for higher deficits is also difficult to understand in light of the continued strength of the eurozone’s labor market. Moreover, although ECB officials are usually careful to add that any fiscal expansion should be within the rules of the Stability and Growth Pact, they implicitly seem to encourage policymakers to set aside those constraints.

In fact, the idea that the ECB’s 2% inflation target supersedes all other rules seems to be gaining ground. For example, most eurozone member states have constitutionalized budget rules in accordance with the so-called “fiscal compact,” which prescribes a cyclically-adjusted deficit of not more than 0.5% of GDP. But the average cyclically-adjusted deficit across the eurozone is now about 1% of GDP, implying that member states overall are already not observing the compact. Any increase in the average budget deficit would thus imply an even more serious violation of the existing fiscal rules.

True, Germany is currently running a budget surplus even on a cyclically-adjusted basis, and would thus have room for fiscal expansion under the compact. But most other large eurozone member states already have deficits well in excess of 0.5% of GDP. Correcting these imbalances to comply with the compact would more than offset any expansion that Germany might still undertake within those rules.

The logic behind the argument that achieving the inflation target overrides all else is simple: low inflation can indicate the presence of some (possibly hidden) economic slack. Policymakers can then use this logic to justify expansionary fiscal and monetary policies even when growth is satisfactory and unemployment is falling.

But the argument is rather weak, because the relationship between economic slack (including unemployment) and inflation has broken down almost everywhere in recent years. True, increasingly sophisticated econometric analysis, which incorporates other variables such as inflation expectations, seems to confirm that the so-called Phillips curve still works – that is, that unemployment or other forms of economic slack have some downward impact on wages and inflation.

The ECB has been very active in pursuit of this dynamic. But the relationship is less simple than before, making it harder to justify the argument that policymakers should have their foot on the accelerator just because inflation is below 2%.

However, the expansionist view is gaining broad traction. In particular, it jibes with the widespread feeling, especially in Europe, that after years of perceived austerity, governments have finally found a reason to spend more.

Central bankers second this argument. They may not say so publicly, but, by calling for more active fiscal policy, they are implicitly admitting their inability to reach their own inflation targets.

In the longer term, this policy drift will increase levels of public debt. And although ultra-low interest rates are likely to make this sustainable for some time, history suggests that high debt levels lead to a financial crisis sooner or later. It remains to be seen whether this time really is different.

Daniel Gros is Director of the Centre for European Policy Studies.

Following the Greater Depression on eBay

by Jeff Thomas

I’m often asked how I see the warning signs that allow me to gauge the timing of the coming economic crisis.

Although careful research into an economy can result in a relatively accurate prognostication, the timing is always the most difficult aspect to pinpoint.

However, a good indicator is to track how others within the economy are surviving the situation. This tells us much more than their questionable claims that they’re doing just fine.

One very telling way to do this is to follow their extravagances. In prosperous times, they’re likely to buy expensive toys. Then, as they increasingly feel the pinch, they’ll sell off those toys first, before resorting to selling their more essential possessions. For example, someone will sell off his beloved sports car before he sells the more essential family SUV. Or he’ll get rid of the vacation house before he puts his primary home on the market.

Therefore, an early warning that a people are facing financial difficulty is that they begin to offer such big toys for sale in order to continue to pay the bills. And an early warning that an entire economy is in trouble is when tens of thousands of people engage in such a sell-off. This is particularly true for those who bought their big toys with a bank loan.

Yachts are the first toy that most people will sell, since it’s pure luxury and a liability. A yacht has been defined as "a hole in the ocean that you shovel money into." Quite so. They’re costly to maintain. And, of course, that’s why it’s prestigious to own one. Many people buy them to impress others, even if they can’t really afford them.

Yachts that originally sold for $500,000 have dropped to between $100,000 and $200,000 in the last few years. And they’re commonly available at those prices. That tells us that many owners who had been in the seven-figure income category are feeling the pinch and are trying to unload a toy that they still would like to keep, but they need the cash. They may not be broke, but they’re feeling squeezed by the times.

But how about the owner who’s in the six-figure income category? Well, the same holds true. He bought a nice boat for $100,000 and those boats are now selling for $25,000 to $30,000.

Notice that the drop in price is greater than for the bigger yachts, percentage wise. That tells us that, at present, this category of owner is being hit harder than his richer brother. But that can change at any time. Just keep an occasional eye on asking prices. Also bear in mind that there are more boat owners in the lower category than the higher category, so, all things being equal, the asking prices indicate which level of owner is being hit the hardest at any given time.

In order to check on the average guy who makes a five-figure salary, we look at those boats that are small enough to put on a trailer and park in the yard. The under-20-foot group have been hit hardest. 

A day sailer that cost $25,000 new may be offered for $5,000 or less, but there are almost no buyers.
Boats are a great indicator, as they’re often the first item to be let go. After all, even if they just sit there, they’re costing money to maintain.

But equally telling would be motorcycles. In the US, there’s a certain pride in a fellow buying himself a full-dress Harley Davidson Electra Glide. It might have cost him $25,000. But if he’s feeling the pinch – if inflation is costing him more at the grocery store, but his boss hasn’t given him a raise in two years, due to a stagnant economy – he’ll be pressed for spending money for essentials. 

Something will have to go if the bills are going to be paid. And the missus may tell him that the family SUV is more important than the bike, so it’s time to park the beloved Harley in the driveway and put a For Sale sign on it.

But what happens when an economic crunch becomes more prolonged? That’s when we can look down the street and see several Harleys with signs on them. How long do they sit? Have the prices been dropping? As the economy worsens, the owner begins to realise that buyers are fewer than they once were. He may drop his price to $20,000, only to find that others have already dropped theirs to $16,000. As time passes, he may drop to $10,000 or even $5,000 and still have no takers.

This, of course, was what happened in the Great Depression, when a beautiful new 1929 Packard Super 8 sold new for $2,400, but those who had lost their money in the crash lowered their prices over and over until some were being offered for $100.

And, often, there were no takers even at that price.

A periodic check of eBay can therefore provide you with a snapshot of the economy that’s not otherwise visible – how people are coping. This is information that, understandably, most people would not share and is certain never to appear on CNN.

But eBay is not the only inside source of the current state of the economy.

Do you have a good pawn shop in your area? Drop in once a month and note some of the prices. Ask a few questions. Even in a depression, a Fabergé egg would retain value, as it’s a true collectible. 

Those who remain wealthy in a crisis period will still be buying, and their tastes will be likely to run to fine art.

However, on the other end of the scale, you have "junk collectibles" – the items that were once thrown away, but are now collected by those who cannot afford a Matisse. A 1952 Topps Mickey Mantle baseball card in mint condition may fetch as much as $30,000 presently, but that price is likely to go through the floor in a depression… After all, it’s really only a piece of printed paper, not a Degas.

During a depression, such as we will soon be passing through, one of the greatest casualties will be luxury cars. In the Great Depression, new Cords, Duesenbergs and Pierce-Arrows were driven into barns and forgotten, as no one wished to be seen to be rich during a depression. In the 1930s, the wealthy drove Fords and Chevrolets, even though they could still afford their luxury car.

So there are two considerations here. The first is that the reader may choose to monitor the "hidden economic decline" by checking periodically on what toys the newly rich jettison on their way to becoming the newly poor.

The second is that the reader may wish to consider unloading his own luxury toys whilst a market for them still exists. He may love his Porsche Cayenne at present, but it may well become a liability in the leaner times to come. Sell it while it’s still salable.

And one last take-away: If you’ve always wanted to own a 35-foot sloop, but couldn’t raise the $150,000, they’ve already dropped to the neighbourhood of $40,000 and that’s by no means the bottom. The bottom comes after a crash, when owners that had not prepared for a crash find themselves in desperate straits.

When the day comes that the present owner can’t even afford the mooring fees and yacht yard costs, the price could go as low as a dollar.

In the meantime, those who liquidate their big toys now and move the proceeds into real money (gold and silver) will find that, after a crash, it will be a buyer’s market.

There’s an old saying that, "When no one has a farthing, the man with a penny is king."

If you plan ahead, you may be that man.

Editor's Note: The economic trajectory is troubling. Unfortunately, there's little any individual can practically do to change the course of these trends in motion.

The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation. We think everyone should own some gold.