Time to Do the Hard Thing

By John Mauldin

We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.

When you write for a wide audience, no matter what you say, or how carefully you say it, some people will misunderstand.

Sometimes it’s amusing. Reading through my feedback (and I do read all of it), I get called both heartless capitalist and bleeding-heart socialist… in reaction to the same article.

In fact, I’m neither. I am a capitalist, and proudly so. I believe free markets are the best way to bring maximum prosperity and peace for everyone. But I’m not heartless, nor do I think markets are perfect. Even the best medicines can have serious side effects. That is doubly so when you aren’t taking the medicine correctly.

With a nod to Inigo Montoya of The Princess Bride, I don’t think the word capitalism means what we think it means, at least those of us of a certain age. Look at the two charts below from an interview Charles Payne did with David Bahnsen on Fox Business a few weeks ago. Notice that 49% of Millennials favored socialism. But if you ask if they favor “big business” or “free enterprise,” the numbers change significantly.

Source: Fox Business

In the future, I intend to substitute “free market” for capitalism where possible.

Much of the reaction to last week’s Inflationary Angst letter boiled down to, “Get government out of the way and the free market will work.” Others said the opposite: Government must help people even more than it already does. I wish it were that easy. Neither of those options are what we need, and today I will explain why.

French Connection

In my last letter I discussed how standard inflation measures don’t capture the higher living costs most people face, particularly for the very things needed to better themselves. It’s hard to start a business if you have health problems and can’t afford treatment. That college degree that would let you get a promotion is increasingly expensive. And you can’t move to the big cities where better jobs are available if housing costs are out of reach.

We can point to many reasons those are expensive. It’s no coincidence that healthcare, housing, and education are all well-protected from foreign competition. They’re also subject to many regulations that raise costs. Other factors are also at work. Few of them are things the government can change by fiat.

As much as people like Bernie Sanders and Elizabeth Warren might wish, European-style taxation and government benefits aren’t the answer. They aren’t even working in Europe. We see this in France, where street protests are becoming a way of life.

Here’s an enlightening snippet from a recent Bret Stephens column in The New York Times.

Successive French administrations of both the left and right have been trying to reform this and other aspects of the country’s statist economy for decades, with limited results. Social benefits, once given, are hard to pare, much less withdraw. Hence the frequent strikes: Since 1789, French governments have been acutely sensitive to mass protests, and too often have capitulated to them.

Hence also France’s perennial economic crisis.

The country’s unemployment rate has not fallen below 7 percent since 1983 and is now at 8.6 percent. Long-term unemployment exceeds 40 percent, compared with 13.3 percent in the US. The country’s annual growth rate has barely exceeded an average of 1 percent per year since the 21st century began. It’s expected to come in at 1.3 percent for this year.

As of last year, the median monthly take-home pay was just $1,930, meaning half of all French workers make even less. It’s why the country erupted in protest when Macron proposed raising fuel taxes a few cents per liter.

How much of this is a matter of the French making different, arguably better, choices when it comes to balancing work and leisure? Surely some. And how much of it is made up for by quality public services, strong worker protections, and fewer economic inequalities? Some, too.

Then again, the health service that used to be the toast of Francophiles is overwhelmed, understaffed, and “on the brink of collapse,” according to a report in The Guardian. French universities, while cheap, are overcrowded, underfunded, and notoriously mediocre: “Too easy to get in and too easy to get out,” as one local observer put it. French workers exercise their right to strike roughly seven times more frequently than German workers do, and 125 times more than Swiss ones.

As for income inequality, France is certainly much less unequal than the US. But France’s top 1 percent still held 22 percent of the country’s wealth at the beginning of 2018. That was despite a draconian effort by the previous Socialist government to impose a super-tax on high earners. It raised scant revenue while accelerating the exodus of the rich. Like many European attempts at imposing a wealth tax, it was quickly repealed.

All of this should stand as a stark warning to Democrats. France has the highest overall tax take among OECD countries (46.9 percent of GDP), the highest rate of government spending, (56.38 percent of GDP), the highest rate of safety-net spending, and the third-highest rate of pension spending.

Whatever else all this taxing and spending might be doing, it’s clearly not creating jobs or prosperity.

US median per capita monthly income is about $2,600, considerably more than France. Very few people in the US would be willing to have their incomes cut by 40% in order to live in the French utopia. But if you are going to raise US taxes in the US (you have to combine state and local with federal) the money will have to come from the entire food chain.

Suppressed Competition

Capitalism, at least the free market version, can’t work without competition. It motivates producers to offer the best products at the lowest prices, and lets consumers choose whatever best fits their needs. Yet instead of encouraging and protecting competition, the US government increasingly suppresses it.

Last February I wrote about a then-new book, The Myth of Capitalism, by old friend Jonathan Tepper and Denise Hearn. They aren’t leftists at all.
They respect classical capitalism and want it to work better than it is.

Here’s a quick snippet from the book.

"Free to Choose" sounds great. Yet Americans are not free to choose.

In industry after industry, they can only purchase from local monopolies or oligopolies that can tacitly collude. The US now has many industries with only three or four competitors controlling entire markets. Since the early 1980s, market concentration has increased severely. We’ve already described the airline industry. Here are other examples:

·         Two corporations control 90 percent of the beer Americans drink.

·         Five banks control about half of the nation’s banking assets.

·         Many states have health insurance markets where the top two insurers have an 80 percent to 90 percent market share. For example, in Alabama one company, Blue Cross Blue Shield, has an 84 percent market share and in Hawaii it has 65 percent market share.

·         When it comes to high-speed internet access, almost all markets are local monopolies; over 75 percent of households have no choice with only one provider.

·         Four players control the entire US beef market and have carved up the country.

·         After two mergers this year, three companies will control 70 percent of the world’s pesticide market and 80 percent of the US corn-seed market. The list of industries with dominant players is endless. It gets even worse when you look at the world of technology. Laws are outdated to deal with the extreme winner-takes-all dynamics online. Google completely dominates internet searches with an almost 90 percent market share. Facebook has an almost 80 percent share of social networks. Both have a duopoly in advertising with no credible competition or regulation.

Amazon is crushing retailers and faces conflicts of interest as both the dominant e-commerce seller and the leading online platform for third-party sellers. It can determine what products can and cannot sell on its platform, and it competes with any customer that encounters success.

Apple’s iPhone and Google’s Android completely control the mobile app market in a duopoly, and they determine whether businesses can reach their customers and on what terms. Existing laws were not even written with digital platforms in mind.

So far, these platforms appear to be benign dictators, but they are dictators nonetheless.

It was not always like this. Without almost any public debate, industries have now become much more concentrated than they were 30 and even 40 years ago. As economist Gustavo Grullon has noted, the “nature of US product markets has undergone a structural shift that has weakened competition.”

The federal government has done little to prevent this concentration, and in fact has done much to encourage it. Broken markets create broken politics. Economic and political power is becoming concentrated in the hands of distant monopolists.

The stronger companies become, the greater their stranglehold on regulators and legislators becomes via the political process. This is not the essence of capitalism.

True, nothing stops investors from creating competition for Facebook, Google, and Amazon. Well, nothing except that it would take tens of billions of dollars in a very high-risk venture.

Many of today’s large corporations would collapse if we had actually free markets—for instance, insurance companies protected from out-of-state competition. So in one sense, it’s true that we need government out of the way. But we need to remove not just regulations, but also the various subsidies and favors as well.

Do Hard Things

Sadly, I have a hard time getting conservative friends to see this. They think that resisting left-wing policies is enough. But we have to do more than stop bad policies. We have to offer something better than “let nature take its course.”

Tom B., one of my regular correspondents, is a good example. Reacting to last week’s letter, he sent the France article quoted above, and this note.

Wow, John… I gotta admit, I don’t agree with your 80% figure for suffering Americans, maybe it’s 20% or less. Many get healthcare from employers or government, the number getting unsubsidized Obamacare is less than 5M, I think.

When in our history have people not had to relocate for economic opportunity? I’m from a fading steel town in AL, and made my way to the Silicon Valley. Didn’t our ancestors endure far worse hardship to come here? You might also think how government intervention in the three big sectors of housing, education, and healthcare has driven up prices, and that more than the Fed is to blame for inflation.

Europe has far worse economies than ours, yet little problem with drug addiction. These deaths of despair are a unique phenomenon to us that I don’t begin to understand. I do not believe the answers lie in economics, most of these people have marginalized themselves from the economy in ways that are hard to reverse. BTW worker laments are common these days, as they always have been…

When haven’t we seen this? Remember “The Jungle” by Upton Sinclair? Haven’t auto assembly lines always required workers to go at a fast pace?

Tom thinks only 20% of Americans are suffering the kind of angst I described. I think it’s more, and to be fair I probably should use Ray Dalio’s 60% line, but let’s go with Tom’s number. It still means some 66 million people are, in his words, “marginalized from the economy in ways that are hard to reverse.”

Hard to reverse? Maybe so, but that’s no reason not to try.

Tom is right: getting everyone connected to the economy and sharing in our prosperity is a big challenge. So was sending men to the moon. When JFK called on Americans to set that goal, he said we do such things because they are hard. The nation went to work and, a remarkably short time later, Neil Armstrong took that one small step, representing us all and indeed, all mankind.

We’re Americans. We can do hard things.

As for those worker laments, maybe their growing prevalence says something important. I think one of our greatest achievements is to have eliminated the kind of working conditions depicted in The Jungle. A capitalism that lets such horrors return, or anything remotely like them, isn’t working like it should.

But humanitarian concerns aside, abandoning millions of people to the wolves probably won’t end well for the top tier. Historically, regimes survived by giving the masses bread and circuses, which worked for a time but had limits. Marie Antoinette learned the hard way. We have limits now, too, and they’re getting closer.

Reach Out & Listen

Whatever happens in the 2020 elections, governing such a bitterly polarized country will be tough. Which means the economic problems I’ve described will fester and probably get worse. That leads nowhere good.

The only way out of this, the only way to preserve what we have and get through the 2020s, is for people to set aside their tribal loyalties, work together, and find solutions. That means none of us will get everything we want. We’ll have to compromise in unpleasant and distressing ways. But the alternatives will be even less pleasant and more distressing.

One alternative, increasingly discussed by serious people, is for the US to simply break up. Let the blue states do their thing and the red states do theirs. The problem: no state is purely blue or red. All have substantial minorities loyal to the other tribe. So it would be messy, to say the least.

We don’t have to put ourselves through that trauma. As I said above, we can do hard things when we have to. Recently I ran across this story about 1970s Durham, North Carolina. Courts had just ordered the city to integrate its schools. Violence was a real possibility.

Two local activists who to that point had basically hated each other were pressured into leading a series of public meetings to ease the process. Ann Atwater was a single, poor black parent and C.P. Ellis led the local Ku Klux Klan. Neither wanted anything to do with the other, but both saw what had to be done.

To plan their ordeal, they met and began by asking questions, answering with reasons, and listening to each other. Atwater asked Ellis why he opposed integration. He replied that mainly he wanted his children to get a good education, but integration would ruin their schools. Atwater was probably tempted to scream at him, call him a racist, and walk off in a huff. But she didn’t. Instead, she listened and said that she also wanted his children—as well as hers—to get a good education. Then Ellis asked Atwater why she worked so hard to improve housing for blacks. She replied that she wanted her friends to have better homes and better lives. He wanted the same for his friends.

When each listened to the other’s reasons, they realized that they shared the same basic values. Both loved their children and wanted decent lives for their communities. As Ellis later put it: ‘I used to think that Ann Atwater was the meanest black woman I’d ever seen in my life… But, you know, her and I got together one day for an hour or two and talked. And she is trying to help her people like I’m trying to help my people.’ After realizing their common ground, they were able to work together to integrate Durham schools peacefully. In large part, they succeeded.

That may seem out of reach now. But if you, like me, remember the segregated South, you know how deep those attitudes were. Somehow people got past them, though not perfectly or easily.

Our greatest enemy isn’t “the other side,” but the feeling on both sides that reconciliation is impossible. I reject that thought. I believe we can get through this period together. Yes, it will be hard. But that’s why we must do it: because it is hard.

My great fear is we’ll have to go through the economic equivalent of World War II before we finally compromise. It may take a new low point to make us bite the bullet—hopefully not a literal one.

As I’ve said in previous letters, there are things we can do to avoid that, but both sides will have to give up some of their ideological “no compromise” positions. They’re going to do that anyway after the Great Reset, from a decidedly lower base. Better to make the hard decisions today.

Christmas in Puerto Rico, Pat Cox, and More

I’m finishing this letter a little early (Thursday afternoon) because tonight is a very large community Christmas party. Later tonight Pat and Cheryl Cox fly in. We will spend the next three days working on parts of my book. I’m really getting tired of talking about this book and looking forward to finishing it.

We are also deep in planning for the upcoming Strategic Investment Conference which will be in Scottsdale, May 11–14. I really think this will be the best and most unique conference we’ve ever done. Mark your calendars.

With that I will hit the send button. I’m looking forward to Christmas in Dorado Beach. It has been one year since we moved here, and while I admit that taxes were a big reason we came, Shane and I now realize we should have come for the lifestyle and oh yes, the tax situation is better.

Your as busy as ever but more relaxed analyst,

John Mauldin
Co-Founder, Mauldin Economics

How to reform today’s rigged capitalism

We must address weakened competition, feeble productivity growth, high inequality and degraded democracy

Martin Wolf

© Efi Chalikopoulou

“It is clear then that . . . those states in which the middle element is large, and stronger if possible than the other two [wealthy and poor] together, or at any rate stronger than either of them alone, have every chance of having a well-run constitution.”

Thus did Aristotle summarise his analysis of the Greek city states. The stability of what we would now call “constitutional democracy” depended on the size of its middle class. It is no accident that the US and UK, long-stable democracies today succumbing to demagogy, are the most unequal of the western high-income countries. Aristotle, we are learning, was right. (See charts.)

My September analysis of “rigged capitalism” concluded that “we need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits.

What we increasingly seem to have instead is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy.”

So what is to be done?

Chart showing that The US and UK are league leaders in inequality.  Inequality of household disposable incomes after taxes and cash transfers (2016)

The answer is not to overthrow the market economy, undo globalisation or halt technological change. It is to do what has been done many times in the past: reform capitalism. That is the argument I made in a recent debate with former Greek finance minister Yanis Varoufakis on whether liberal capitalism should be saved.

I argued, in effect, that “if we want everything to stay the same, everything must change”, as the Italian author Giuseppe Tomasi di Lampedusa wrote. If we want to preserve our freedom and democracy we need to embrace change.

Here are five policy areas that need to be addressed.

Chart showing the huge spikes in mergers and acquisitions. Number of M&A deals in the US, thousands

First, competition. Thomas Philippon’s wonderful book, The Great Reversal, demonstrates how far competition has weakened in the US. This is not the result of inevitable forces, but of policy choices, especially abandonment of an active competition policy. US markets have become less competitive: concentration is high, leaders are entrenched and profit rates are excessive.

Moreover, this lack of competition has hurt US consumers and workers: it has led to higher prices, lower investment and lower productivity growth. In a paper on reducing inequalities, in an invaluable collection on “Beyond Brexit: A Programme for UK Economic Reform”, Russell Jones and John Llewellyn argue that concentration and mark-ups have also risen in the UK.

Chart showing  the steep decline in publicly listed companies.  Number of publicly listed companies in the US. Number of publicly listed companies in the US, thousands.

In the past decade, Amazon, Apple, Facebook, Google, and Microsoft combined have made over 400 acquisitions globally. Dominant companies should not be given a free hand to buy potential rivals. Such market and political power is unacceptable. A refurbishment of competition policy should start from the assumption that mergers and acquisitions need to be properly justified.

Second, finance. One of Prof Philippon’s most striking conclusions is that the unit cost of financial intermediation has not fallen in the US over 140 years, despite technological advances.

This stagnation in costs has, alas, not meant financial stability. There is also evidence that there is now simply too much credit and debt.

Radical solutions exist here, too: raise the capital requirements of banking intermediaries substantially, while reducing prescriptive interventions; and, crucially, eliminate the tax-deductibility of interest, so putting debt finance on a par with equity.

Chart showing the slowdown of new entrants onto stock markets. Number of US IPOs.

Third, the corporation. The limited liability joint stock corporation was a great invention, but it is also a highly privileged entity. The narrow focus on maximising shareholder value has exacerbated the bad side-effects.

As the British Academy’s “Principles for Purposeful Business” report argues, “the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems”.

That is self-evident. It is also hopeless to rely on regulation alone to save us from the consequences of myopic business behaviour, particularly when business uses its vast resources to lobby on the other side.

The US Business Roundtable has recognised this. We need new laws, to effect required changes.

Chart showing that Inequality weakens social mobility. The  elasticity of intergenerational earnings, measuring both the persistence of relative earnings between between  fathers and sons and the measure of inequality (0 = absolute equality, 1= absolute inequality)

Fourth, inequality. As Aristotle warned, beyond a certain point, in­equality is corrosive. It makes politics far more fractious, undermines social mobility; weakens aggregate demand and slows economic growth.

Heather Boushey’s Unbound spells all this out in convincing detail. To tackle it will require a combination of policies: proactive competition policy; attacks on tax avoidance and evasion; a fairer sharing of the tax burden than in many democracies today; more spending on education, especially for the very young; and active labour market policies, combined with decent minimum wages and tax credits.

The US has poor labour force participation of prime-aged adults, despite unregulated labour markets and a minimal welfare state. It is possible to have far better outcomes.

Chart showing that the US labour force performance for prime-age men and women has become notably poor. Labour force participation aged 25-55 (%)

Finally, our democracies need refurbishing. Probably, the most important concerns are over the role of money in politics and the way the media works. Money buys politicians.

This is plutocracy, not democracy. The malign impact of fake news (which is the opposite of what the US president means by the term) is also clear. We need public funding of parties, complete transparency of private funding and also far greater use of consultative forums.

Without political reform, little of what we need elsewhere will happen. If things then stay as they are, economic and political performance is likely to get worse, until our system of democratic capitalism collapses, in whole or in part. The cause then is great. So is the urgency.

We must not accept the status quo. It does not work and has to change.

A Holiday Haircut for Chinese Dollar Debt

By Nathaniel Taplin

Investors in dollar debt backed by one of China’s largest cities may find themselves with a much shorter haircut before the winter holidays. One date to watch: Dec. 16.

Chinese state-owned enterprises have occasionally punted on yuan-denominated debt, but offshore defaults are far rarer.

Investors have therefore viewed SOE dollar debt as more or less a sure thing. Any change to that assumption could mean higher refinancing costs for local governments, leading to more defaults and making it harder to shore up tepid infrastructure investment at home.

A proposal by Tewoo Group, a commodity trader owned by the Tianjin government, to restructure $1.25 billion of offshore notes now threatens to make this scenario a reality. According to Tewoo’s late-November proposal, investors would accept a write-down of around 60%—or new longer-dated bonds with lower coupons. A $300 million payment is due Dec. 16.

The looming deadline comes as Chinese local governments have been on an offshore borrowing binge. Local government financing vehicles had, by early December, issued a record $5.19 billion of high-yield dollar bonds in the second half of 2019, according to Debtwire, 9% more than in the entire first half. Nearly 80% of the total is for refinancing.

Tianjin is something of a special case, with some of the nastiest debt dynamics in the country. Photo: Feng Jun/Zuma Press

Tianjin itself is something of a special case, with some of the nastiest debt dynamics in the country thanks to years of overinvestment and overreliance on slow-growing, old-economy smokestack industries.

China think tank MacroPolo earlier this year calculated that Tianjin’s government-financing-vehicle debt equaled 102.5% of its annual economic output, against an average for all provinces of just 61.7%. Tewoo’s troubles have also been apparent for some time. A company subsidiary missed a payment on an onshore bond in July.

Still, that doesn’t mean investors in dollar bonds from state-backed companies in other provinces might not be in for nasty surprises too. Local governments that might normally bail out their champions are hurting. Big tax cuts over the past year have squeezed revenue. Land prices have begun cooling along with the real-estate market, hitting a main source of nontax revenue.

As a whole, state-owned enterprises that are held at the local level are struggling, in part because many of them are in property-related industrial sectors. In the first 10 months of 2019 their profits were up only 1.6% on the year—down from 6.3% growth for the first nine months. And refinancing options outside the bond market have dried up in late 2019, as growth in bank lending has slowed again.

More haircuts for Chinese dollar debt could be ahead—or else close shaves.

Restoring Central Banks’ Credibility

The old central-bank playbook of slashing interest rates to spur consumption, investment, and employment has become less effective since the 2008 financial crisis. Yet without effective tools and the public's confidence, central banks will be unable to rise to the occasion when the next recession arrives.

Larry Hatheway

lhatheway7_Claudio Santistebanpicture alliance via Getty Images_ECBFedLagardePowell

ZURICH – Recent jumps in equity prices and bond yields suggest that recession fears are receding. But the global economic expansion cannot last forever, and when the next recession comes, central banks may not be adequately prepared to respond. Enhancing central-bank credibility to bolster the effectiveness of monetary policy is thus an urgent priority.

Before the 2008 financial crisis, central bankers could rely on slashing interest rates to spur consumption, investment, and employment. But that playbook no longer works as well as it once did. One reason is elevated uncertainty, owing to globalization, societal aging, changing consumer preferences, growing income and wealth inequality, rising health-care costs, rapid technological change, and other factors. Even in the absence of recession, for many households and businesses, the future seems daunting and unpredictable.

This uncertainty will exacerbate the downturn when it comes. When uncertainty spikes, low or even negative real (inflation-adjusted) interest rates may not induce higher spending. Rather, savings may rise and investment may falter even as interest rates plunge. If governments are unwilling or unable to boost demand with fiscal policy, the result will be a prolonged and deep economic slump.

Few would doubt that monetary policy should be eased in such circumstances. In theory, central banks have extraordinary means to respond, through negative interest rates, asset purchases, “forward guidance,” and the like. Yet, in practice, central banks face tight constraints, which means that their response to the next recession may prove insufficient.

Broadly, these constraints fall into two categories: laws or established policies that define what monetary policy can do; and political and institutional limits that hem in central banks’ decision-making. The legal limitations vary according to the political and institutional environment and history of a central bank’s jurisdiction.

In conducting open market operations, for example, the US Federal Reserve may purchase only debt securities issued or guaranteed by the US federal government. In contrast, the Bank of Japan may purchase private-sector securities such as equities or corporate bonds, giving it potentially greater latitude to expand its balance sheet and stimulate corporate finance.

Such differences could matter in the event of a severe slump that requires extraordinary measures. To take an extreme example, the Fed cannot unilaterally create “helicopter money” – a metaphor invoked by Milton Friedman to describe how a central bank might distribute cash directly to individuals in order to stimulate consumption.

To create cash (a central-bank liability), the Fed must purchase an asset. Yet because private-sector IOUs are not eligible assets, the Fed cannot distribute cash directly to the bank accounts of ordinary Americans (nor could it drop $20 bills from the sky, even if it had the helicopters).

So, in the US case, helicopter money would actually have to be a fiscal transfer from the federal government to its citizens, underwritten by Fed purchases of Treasury securities. As such, it is a policy that only Congress and the president can enact. The problem is that legislating such measures would take considerable time, whereas the next economic or financial crisis will probably require swift and decisive action.

To be sure, helicopter money is typically viewed as a last resort. But even less heterodox policies may be hamstrung by policy norms. For example, the Fed has been reluctant to endorse the option of breaching the “zero lower bound” (ZLB) and introducing negative policy rates. Yet if the equilibrium real interest rate falls below zero, as seems likely in the next recession, that self-imposed ZLB limitation could pose problems.

In fact, the Fed’s own staff has estimated that the ZLB floor could prevent it from delivering an appropriately low real interest rate as often as 40% of the time, given plausible estimates of the neutral real policy rate and the odds of below-trend growth. Such failures could threaten the next recovery, and even the Fed’s independence.

Central bankers also face political and institutional constraints. In Europe, financial institutions (particularly the Bundesbank), pensioners, and savers dislike negative interest rates. Whether these constituencies’ opposition to monetary-policy easing has prevented the European Central Bank from acting as forcefully as it might otherwise have done is an open question. But, clearly, an air of timidity has damaged the ECB’s credibility.

The ECB staunchly opposes high inflation, but has been tolerant of below-target inflation. In 2012, then-ECB President Mario Draghi famously committed to do “whatever it takes” to save the euro. Yet he never mustered the same resolve to ensure that inflation would reach the bank’s mandated target.

Economists agree that credibility reinforces monetary-policy effectiveness. If consumers, workers, and businesses don’t believe that a central bank is committed to achieving its mandate, they will adjust their behavior accordingly. Low inflation expectations will lead to low inflation outcomes.

Those outcomes are not costless. When inflation is too low, it is harder to push down real interest rates, particularly if citizens oppose negative nominal rates. In such circumstances, a central bank that is unwilling to commit to its inflation target partly surrenders its most important policy tool: the ability to cut real interest rates in the event of a downturn.

Forfeiting policy tools is especially problematic now that the traditional transmission channels for monetary policy are proving less effective. Easing policy is less likely to depreciate the currency and boost net exports if other central banks are doing the same. And while loose monetary policies may boost asset prices, consumption won’t increase much if the benefits are accruing only to the wealthy.

Whenever the next downturn comes, it will be too late to remedy central banks’ shortcomings.

But by making changes before they are necessary, central banks can restore their credibility.

For example, the ECB could immediately announce a “whatever it takes” commitment to a symmetric inflation target, and then back it up with a round of easing. Doing this when confidence in growth is returning would send a powerful signal that the policy change is structural and not just another belated cyclical Band-Aid.

Central bankers should also revisit legal and self-imposed policy constraints, with an eye toward amending or removing those that could hinder policy flexibility in “tail risk” scenarios.

Demonstrating a willingness to act before the crisis arrives is a costless way for central banks to safeguard their most important asset: the belief that they know what they’re doing.

Larry Hatheway is Group Head of Investment Solutions and Group Chief Economist at GAM.

Is it better to impeach and lose or never to impeach at all?

Lessons from Watergate for Donald Trump and the Democratic Party

After a couple of false alarms, Donald Trump’s “Watergate” moment has arrived. On December 4th the House Judiciary Committee will begin a process of deliberation that will probably lead to it drafting articles of impeachment against the president by the end of the year. Whether a hot-button charge of bribery—the most specific ground for presidential dismissal described in the constitution—will make the list is unclear: Democratic leaders say it might. Yet the case against Mr Trump, that he sought to shake down a foreign leader for political favours using military aid and other state resources as leverage, is essentially already proven.

The White House record of Mr Trump’s “Do us a favour” call to President Volodymyr Zelensky was the smoking gun. The public hearings House Democrats conducted in November mostly underlined that. They also revealed how many of those around Mr Trump—including Mike Pence, Mick Mulvaney and Mike Pompeo—knew of or facilitated his scheme. Having conceded their original defence (that there was no shakedown), Mr Trump and his supporters have therefore fallen back on a line that takes less account of the Ukrainian matter in hand: the president is the victim of a vast left-wing conspiracy. This is nothing less, writes a columnist in American Greatness, a pro-Trump publication, than a “de facto, three-year-long singular effort to delegitimise and ultimately remove Trump from office before the 2020 election.” Mr Trump calls the congressional probe into his behaviour a “coup”.

Although the liberal backlash against Mr Trump has been overboard and self-defeating at times (starting with the handful of Democrats who talked about impeaching him from the very beginning), this is not a credible defence. It is plainly designed to distract from and minimise the specific charges the president faces, which he and his advisers are at the same time striving to discredit. (Mr Pompeo’s statement this week that he had a “duty” to investigate the president’s damaging and untrue claim that Ukraine, not Russia, was behind the 2016 election hack was especially dismal.)

Tellingly, their partisan attack-line was also used by Richard Nixon and his supporters as the evidence against him mounted. “Watergate was a coup d’état that…destroyed a president who had humiliated the liberal establishment,” fumed “Pitchfork Pat” Buchanan, a Nixon aide and sometime Republican presidential candidate, fully 40 years later. Though Watergate is known for the bipartisan moment when Republican support crumbled before the proof of Nixon’s crookedness, the grievance his investigation and removal stirred on the right lasted long after that moment passed.

Mr Trump’s accusers can take three, somewhat contradictory, lessons from this historical echo. First, tough political outcomes always look easier in retrospect than they did at the time. Partisanship, an older blight than many recall, has made most things worth fighting for highly uncertain at times. If the impeachment experts that the Judiciary Committee will convene at its first hearing make a strong case that Mr Trump warrants the ultimate constitutional check, history might therefore seem to recommend it.

Yet the Watergate comparison also shows how much harder dislodging Mr Trump would be than removing Nixon was. He is far more popular with Republicans. Having governed as a centrist, Nixon endeared himself to conservatives only when his progressive accusers started to seem more threatening than his support for civil rights and detente with China had. And today’s Republicans are more ideologically aligned, and thus tribal, than they were then. That is largely a product of the grievance-powered conservative media bubble, currently thrumming with anti-Ukraine and anti-left conspiracy theories—which is in turn partly a response to Nixon’s removal. The genius behind Fox News, Roger Ailes, was a former Nixon aide driven by a determination to create a counterweight to the liberal establishment that did him in.

Fox and its peers were designed, in other words, to go to war for a conservative champion at such a time as this. And in Mr Trump they have a champion to die for. This is his biggest advantage in an impeachment knife-fight. Where fulminating against the libs was something Nixon mostly did alone with his Scotch bottle, until it became his last-ditch defence, it is Mr Trump’s main method. In his policies and rhetoric he governs like a wartime president, as the Atlantic’s Ron Brownstein puts it—forever rallying his supporters against the enemy that is the other half of America. Whether an impeachment trial could actually strengthen him, as he claims, is hard to predict. A small majority already wants to see the back of him. But Mr Trump is uniquely well prepared to survive it.

That might argue for abandoning the effort, whatever the experts advise. Some nervous Democrats want this. Yet the comparison with Watergate also points to the rising possible cost of such a retreat. Although Nixon and then Bill Clinton considered their accusers malevolent and tried to block them, illegally at times, neither disputed that a president can be subject to investigation. Mr Trump, who has ordered his administration not to comply with the congressional probe and says the constitution lets him do “whatever I want as president”, disputes this every day.

The right of kings

A growing number of conservatives agree with him. Indeed Mr Trump’s argument is a logical extension of the post-Watergate view on the right that checks on the presidency are illegitimate when wielded by the other side. That was the essence of Mr Buchanan’s rhetoric and also of a recent speech by William Barr, the attorney-general, in which he asserted that the president’s accusers were subverting the constitution and undermining the rule of law. Mr Barr is known for taking an expansive view of executive power—but only, it seems, when a Republican is in charge.

If Democrats want to leave him the field they know what to do. They have only to refrain from impeaching Mr Trump, not because it would be unwarranted, but because it would be too hard.