Time for a great reset of the financial system

A 30-year debt supercycle that has fuelled inequality illustrates the need for a new regime

Chris Watling

   © Bloomberg


On average international monetary systems last about 35 to 40 years before the tensions they create becomes too great and a new system is required.

Prior to the first world war, major economies existed on a hard gold standard. Intra-wars, most economies returned to a “semi-hard” gold standard. 

At the end of the second world war, a new international system was designed — the Bretton Woods order — with the dollar tied to gold, and other key currencies tied to the dollar.

When that broke down at the start of the 1970s, the world moved on to a fiat system where the dollar was not backed by a commodity, and was therefore not anchored. 

This system has now reached the end of its usefulness.

An understanding of the drivers of the 30-year debt supercycle illustrates the system’s tiredness. 

These include the unending liquidity that has been created by the commercial and central banks under this anchorless international monetary system. 

That process has been aided and abetted by global regulators and central banks that have largely ignored monetary targets and money supply growth.

The massive growth of mortgage debt across most of the world’s major economies is one key example of this. 

Rather than a shortage of housing supply, as is often postulated as the key reason for high house prices, it’s the abundant and rapid growth in mortgage debt that has been the key driver in recent decades.

This is also, of course, one of the factors sitting at the heart of today’s inequality and generational divide. 

Solving it should contribute significantly to healing divisions in western societies.

With a new US administration, and the end of the Covid battle in sight with the vaccination rollout under way, now is a good time for the major economies of the west (and ideally the world) to sit down and devise a new international monetary order.

As part of that there should be widespread debt cancellation, especially the government debt held by central banks. 

We estimate that amounts to approximately $25tn of government debt in the major regions of the global economy.

Whether debt cancellation extends beyond that should be central to the negotiations between policymakers as to the construct of the new system — ideally it should, a form of debt jubilee.

The implications for bond yields, post-debt cancellation, need to be fully thought through and debated. 

A normalisation in yields, as liquidity levels normalise, is likely.

High ownership of government debt in that environment by parts of the financial system such as banks and insurers could inflict significant losses. 

In that case, recapitalisation of parts of the financial system should be included as part of the establishment of the new international monetary order. 

Equally, the impact on pension assets also needs to be considered and prepared for.

Secondly, policymakers should negotiate some form of anchor — whether it’s tying each other’s currencies together, tying them to a central electronic currency or maybe electronic special drawing rights, the international reserve asset created by the IMF.

As highlighted above, one of the key drivers of inequality in recent decades has been the ability of central and commercial banks to create unending amounts of liquidity and new debt.

This has created somewhat speculative economies, overly reliant on cheap money (whether mortgage debt or otherwise) that has then funded serial asset price bubbles. 

Whilst asset price bubbles are an ever-present feature throughout history, their size and frequency has picked up in recent decades.

As the Fed reported in its 2018 survey, every major asset class over the 20 years from 1997 through to 2018 grew on average at an annual pace faster than nominal GDP. 

In the long term, this is neither healthy nor sustainable.

With a liquidity anchor in place, the world economy will then move closer to a cleaner capitalist model where financial markets return to their primary role of price discovery and capital allocation based on perceived fundamentals (rather than liquidity levels).

Growth should then become less reliant on debt creation and more reliant on gains from productivity, global trade and innovation. 

In that environment, income inequality should recede as the gains from productivity growth become more widely shared.

The key reason that many western economies are now overly reliant on consumption, debt and house prices is because of the set-up of the domestic and international monetary and financial architecture. 

A Great Reset offers therefore opportunity to restore (some semblance of) economic fairness in western, and other, economies.


The writer is founder and chief executive of Longview Economics

Fall from Grace

Merkel's Conservatives Mired in Scandal and Incompetence

Shameless deals for medical equipment, dubious foreign contacts and corona crisis mismanagement: Angela Merkel's conservatives are in bad shape as the election campaign looms. How did they lose their way?

By Melanie Amann, Matthias Bartsch, Sven Becker, Anna Clauß, Jürgen Dahlkamp, Markus Dettmer, Lukas Eberle, Florian Gathmann, Luise Glum, Kevin Hagen, Christoph Hickmann, Markus Kater, Martin Knobbe, Gunther Latsch, Timo Lehmann, Veit Medick, Maik Mosheim, Ralf Neukirch, Marcel Pauly, Sven Röbel, Cornelia Schmergal, Gerald Traufetter, Andreas Wassermann, Wolf Wiedmann-Schmidt und Steffen Winter



Armin Laschet, the newly anointed head of Germany's Christian Democratic Union (CDU), has been a politician for two-and-a-half decades. He knows how difficult it can be, and how quickly things can change. But even he might be getting a bit dizzy these days.

Not even two months have passed since he was elected head of the country's largest, most powerful political party, essentially transforming him into the chancellor-in-waiting and designated successor to Chancellor Angela Merkel. What could possibly go wrong? After all, the coronavirus vaccines had arrived, signaling a path out of the pandemic. It looked like it would be a good year for him and the CDU.

Now, though, nine weeks later, the 60-year-old Laschet is the head of a party that has slumped into its deepest crisis in decades and is struggling in the polls. Even as the country is set to vote in the general election this fall, the CDU and its Bavarian sister party, the Christian Social Union (CSU), still haven't agreed on who their candidate for chancellor will be. The Union, as the pairing of the two parties is known, seems unsure of itself on the eve of the campaign. Suddenly, it is looking as though it could be a difficult, even a bad year for the two parties. And for Laschet.

Indeed, the party received a premonition of what could be on the horizon in the state votes in Baden-Württemberg and Rhineland-Palatinate. The CDU came in second in both states, and also lost ground relative to elections four years ago. The press coverage on Monday has been a disaster for the party.

The Union has been in turmoil ever since it became known that to conservative lawmakers are thought to have enriched themselves with business deals involving medical protective equipment – at a time when workers across the country were fearful of losing their jobs, when the self-employed were facing ruin and when doctors and nurses were risking their health. Political representatives benefitting from a crisis that has gripped the entire country is not a good look.

The relationship of the Union parties to money has always been rather distinctive and has led to scandals in the past. That, though, had largely faded from memory over the last two decades, with the CDU under the leadership of the most unpretentious woman imaginable – a woman for whom a hearty German potato soup has always been the epitome of temptation. A woman who only became head of the party because she never had anything to do with slush funds.

Yet now, as Merkel's tenure comes to an end, and with just six months to go until the election, Germany is once again facing pressing questions about the governing party's approach to money.

Role Models?

The question as to who made money with mask deals isn't the only one. There are additional concerns about the corruptibility of politicians, about well-paid side jobs and about dubious ties between some Christian Democrats and the regime in Azerbaijan. Last Thursday, those ties led to the most recent resignation of a CDU lawmaker from parliament: Mark Hauptmann of Thuringia, who was head of the influential caucus of young Union parliamentarians.

While in office, Mark Hauptmann enjoyed excellent contacts with Azerbaijan. Foto: Hans Christian Plambeck / laif


Ultimately, though, the current troubles of the CDU and CSU have to do with expectations that politicians behave as role models – and their failure to do so. A failure exhibited, for example, by German Health Minister Jens Spahn, who urged the German populace in an October television appearance to avoid social gatherings due to the climbing number of coronavirus infections – only to meet with business leaders for a fund-raising dinner that very evening. 

And by Klaus-Peter Willsch, a CDU parliamentarian from the state of Hesse, who, as seen in a video, celebrated his 60th birthday with no mask and no apparent regard for social distancing rules – at a time when children's birthday parties were banned across his state.

Germans are tired and the acceptance of coronavirus rules is crumbling. And then it comes out that the rules apparently don't apply to everybody. The timing is dangerous.

A majority of the population, though, might be inclined to overlook such missteps if things were actually working. If people had the feeling that the government was doing its job protecting the population from the virus and ably leading the country through the pandemic. But that is not the case.

Instead, Germany is behind on vaccinations, even as the United States and Britain have forged ahead. There is a shortage of rapid tests that could at least enable a modicum of freedom for a few hours. Germany is not being well led in this pandemic. And the responsibility for this lies primarily with the Union.

The CDU holds the Chancellery and leads the government, but it has apparently lost the abilities that have made it Germany's strongest party for decades. The conservatives were consistently supported less for their party platform and more for the fact that they were good at governing – and were more or less upstanding. That era, though, seems to be over.


Suddenly, the CDU and CSU have produced their largest scandal since the party donation disgrace in 1999. Georg Nüsslein, 51, who was the CSU's pointman in parliament on health policy, stands accused of receiving a 660,000-euro fee for having arranged a multi-million euro deal for the acquisition of medical protective equipment. 

The alleged bribe money is thought to have ended up in a Caribbean tax haven via a Liechtenstein account belonging to an offshore company. Nüsslein denies the accusations.

Meanwhile, Nikolas Löbel, 34, until recently a CDU lawmaker from Mannheim, offered to obtain masks from a company in Baden-Württemberg for companies working in the health-care sector – and received a fee of 250,000 euros for his services.

Following extreme pressure from the Union, both Nüsslein and Löbel resigned from parliament and cancelled their party memberships. It remains to be seen whether they will face legal consequences. Nor is it clear what will happen with the money they were allegedly paid. Their political careers, though, appear to be finished.

Suddenly, a sense of uneasiness has spread throughout the Union, particularly since the resignation of Hauptmann, who claimed he did so to protect his family. Are there more cases out there of conservative sleaze? Are there others who finagled their way into shady payments for masks or other deals?

"Untrustworthy"

The trail to Hauptmann's dubious contacts leads to a neighborhood in Frankfurt located far away from the glass-and-steel skyscrapers of the financial district. In a residential building in the Rödelheim neighborhood are the offices of TY-Capital-Ug, a company that allegedly does business all over the world.

At the entrance hangs a mailbox, on which the company name is scrawled in red ink next to a Vietnamese woman's name. Nobody opens the door even after the buzzer is rung four times. A website for the company was registered in late April 2020, right at the peak of the first coronavirus wave. The company, the website claims, can "deliver premium-quality medical masks at competitive prices."

A specific Google search is necessary to find the company online. Yet the CDU parliamentarian Hauptmann was well aware of it when chaos surrounding the acquisition of masks erupted in his home state of Thuringia. 

In early April 2020, according to minutes taken by a district administrator's office in Thuringia, Hauptmann called the district administrator on the phone and offered her masks from Vietnam, with payment required in advance. The office declined. The minutes note that the offer was "untrustworthy."

Hauptmann, though, found success in the neighboring district, where he also touted the offerings of the company TY-Capital-Ug. The district administrator there bought 41,500 masks for 58,800 euros. 

The prices were rather high: 1.17 euros per surgical mask and 8.09 euros per FFP2 mask. 

The district administrator's office insists the prices were "competitive." In fact, though, they were far higher than what the Health Ministry in Berlin was paying suppliers at the time.

Another district also took advantage of the offer from Hauptmann, buying 41,000 masks for almost 55,000 euros, the same prices paid in the first district. Hauptmann also offered masks to the state of Thuringia, but the deal never materialized.

In an email, the company insisted that Hauptmann had merely established contact with the public officials in a "time of need," and that he wasn't paid a fee for his services. 

Hauptmann says he helped establish contact with the company "at the request of local intermediaries" and that he received no money for his services. 

He declined to say how he knew of the company.

Georg Nüsslein is thought to have cashed in a 660,000 euro fee through his consulting company. Foto: Christoph Hardt / Future Image / imago images


Was he just an altruistic helper in a time of need? After DER SPIEGEL reported on the initial allegations against Hauptmann on Wednesday evening, the pressure apparently became too great on the politician. On Thursday, he said he was resigning from his seat in parliament.

It was the third such incident in the Union within just a few days. Are there more to come?

Looking for Fees

Within the German Health Ministry, names are circulating of politicians who provided assistance to producers and sellers of medical protection equipment during the pandemic. They didn't all follow the same procedures.

There were those parliamentarians who rather harmlessly drew attention early on in the pandemic to companies in their own electoral districts. There were those who – abrasively or not – demanded to know in summer why the purchase price hadn't yet been transferred to the suppliers in question. And then, there were apparently a few who got involved because of the fees they could earn.

Health Minister Jens Spahn has promised "complete transparency" – but can his ministry actually publish all the names? It is the focus of an ongoing debate. Many lawmakers are afraid of being placed under a blanket of suspicion.

Top members of the Union group in parliament have requested that conservative lawmakers issue a statement. Group leader Ralph Brinkhaus and CSU parliamentary leader Alexander Dobrindt are demanding that every representative declare whether he or she received financial benefits from business deals conducted during the pandemic. 

Those who refuse to do so are invited in for a discussion. Such a thing is unprecedented in the fraction – and serves to show just how deep is the fear and how widespread the distrust has become within the Union.

One of those who became involved in the mask business out of honorable motives to help companies in her electoral district is the CSU lawmaker Andrea Lindholz. A company from her region turned to her after it had procured masks for the Health Ministry only to be told that the ministry didn't need them all. 

"I tried to figure out what had gone wrong and to be an intermediary. Such things are part of the day-to-day work for members of parliament," Lindholz says. 

"But I would never come up with the idea of holding out my hand after performing such a service. Those who take advantage of their positions for profit in such a crisis destroy trust in politics."

Lindholz is furious at the behavior of Nüsslein and Löbel. "It's a catastrophe for each and every one of us," she says.

The loss of trust is deep and reaches all the way to the grassroots of the party. "It's an absolute farce," says Andreas Rüther, a member of the CDU in Bielefeld. Rüther, 57, is the deputy mayor and has been a member of the party for almost 40 years and district chair since 2013. He now finds himself forced to constantly talk about the mask deals.

"You get questions from your friends, from your neighbors – and sometimes you get lumped together in a broad generalization: 'You're all good for nothing anyway,'" he says. "And all because a few people much higher up the ladder behave in a way that is damaging to the party."

The situation is similar in the city of Wuppertal. "Our members are stunned and angry," says CDU district chair Rolf Köster. He says he is even asked about the mask scandal during his morning walks with his golden retriever. Köster says his neighbors and acquaintances are "completely disgusted."

But what exactly is the issue here? Is it really just a couple of bad apples? Or does the Union have a structural problem?

Even in places where everything is aboveboard, CDU and CSU parliamentarians demonstrate a rather particular approach to money. On average, Union lawmakers earned at least 58,000 euros between the end of 2017 and summer 2020 from side jobs – in addition to their healthy salaries as parliamentarians.

A Lot of Side Gigs

By comparison, among SPD lawmakers, the average was around 15,500 euros per capita and in the Green Party, just 1,800. Only representatives from the business-friendly Free Democrats (FDP) earned more on average from side jobs.

The numbers should be approached with some caution, however. Fees from speaking engagements are included as are profits from companies owned by the parliamentarians. Still, the numbers produced by some in the Union are rather astonishing.

New CDU leader Armin Laschet has a difficult year ahead of him. Foto: Julia Sellmann / Die ZEIT / laif


At the top of the list is a CSU parliamentarian from Nuremberg named Sebastian Brehm – who during the current legislative period has earned 3.1 million euros as a tax consultant in addition to his salary as a representative. 

An additional top earner is CDU lawmaker Hans-Georg von der Marwitz, who owns an organic farm in the state of Brandenburg. His gross revenues since the beginning of the legislative period amount to almost 2.2 million euros. And then there is Albert Stegemann from Lower Saxony. 

As head of the family business, which breeds and sells milk cows, his additional earnings amount to 1.4 million euros.

Still, such company earnings, which representatives are legally required to disclose, don't tell the whole story because of the expenses that aren't reflected in the raw numbers. As such, it is almost impossible to compare them to compensation earned for serving on a supervisory board, for example, or speaking fees.

But the sheer number of such side jobs some CDU lawmakers have is enough to raise eyebrows. Joachim Pfeiffer, for example, has listed 26 side jobs and functions for the current legislative period. His party colleague Röring has 24 and CDU-man Stefan Kaufmann has 21. Most of them are honorary positions.

Side jobs are not forbidden, but they have been the focus of fierce debate in recent years. After all, being a parliamentarian is actually a fulltime job. How much time can really be leftover for other work? Conservatives tend to have a different view: They say that they are loath to become dependent on holding public office.

For historian Frank Bösch, of the Leibniz Centre for Contemporary History Potsdam, it's not surprising that conservative parliamentarians are in the center of the current mask scandal. "Because of the specific career structures of CDU/CSU representatives, the danger of private enrichment has grown," says Bösch, who has authored two definitive works on the history of the CDU.

Until 1965, he says, "40 percent of those in the Union were self-employed and, in the ensuing decades, it was a third, with the share slowly shrinking," Bösch says. Among politicians on the left side of the spectrum, though, there has "historically been a different moral approach to the private-sector earnings of politicians" – and greater efforts at transparency. 

Bösch notes that members of the federal parliament in Germany have been required to disclose earnings from companies and associations since 1972. The chancellor who pushed the law through was Willy Brandt, a Social Democrat.

For years, though, the rules governing the reporting of side jobs have been the focus of significant criticism. They primarily have two weaknesses: Members of parliament are not required to disclose the names of their financial backers in many instances. And the amount must only be roughly noted, from level one (over 1,000 euros) to level 10 (over 250,000 euros).

Tightening Up the Rules

The rather lenient rules offer plenty of loopholes. Those who book certain earnings through a company acting as an intermediary only have to report the name of the company, while the person with whom the deal was made, and the size of the deal, can both remain undisclosed. 

Nikolas Löbel, the CDU lawmaker who received a quarter million euros for facilitating a deal for masks, had the fee paid to his limited company. The deal would likely never have become public knowledge had Löbel not mailed around his fee demands.

Thus far, every effort to tighten up the rules has been the focus of furious opposition – frequently from Union representatives. In 2006, Friedrich Merz, who recently lost the election to become the CDU party chair, even filed a legal challenge to changes passed by the SPD-Green coalition government, pursuing the case to Germany's highest court, where he lost.

Now, Union leaders Brinkhaus and Dobrindt want to pave the way for increased transparency. They have their sights set on eliminating paid work in areas that are directly linked to issues representatives work on in parliament.

Hartmut Bäumer, the head of Transparency International in Germany, views such a reform as little more than window dressing. Had such a rule been in place, Bäumer says, it would have had little effect on Löbel's mask deal.

After all, Löbel isn't typically involved in health-care issues. "If the Union is serious about transparency and openness, then every lobbying activity that is directly financially advantageous to a representative must be prohibited in the future," Bäumer says.

Carsten Schneider, a senior member of the SPD group in the German parliament, demands "comprehensive and binding reform to criminal law," with clear penalties attached. The Green Party would like to see paid lobby work banned entirely. Some in the CDU would also like to see far-reaching reform. 

"We should use these events as a motivation to broadly examine our relationship to business," says Elisabeth Motschmann of the CDU. She is in favor of clear rules "independent of the pandemic." Norbert Röttgen, another senior member of the CDU, says: "We need harsh, dissuasive consequences. Those who derive financial benefit from their seats should no longer be in the parliament or in the CDU."

Lindholz, the CSU member, demands that politicians no longer be allowed to engage in consulting on the side. "Working as a representative and working as a consulting firm should be mutually exclusive," she says. "Those interested in consulting should withdraw from active politics."

But even that would hardly account for the fateful urge for money currently exhibited by some young lawmakers in the Union – by Löbel and Hauptmann, for example. 

Other members of the Young Group, an assembly of younger lawmakers within the Union fraction in parliament, have taken a striking number of expensive trips in the last several years, paid for by autocratic regimes.

Three young conservatives flew business class to Oman in December 2018, for example, with the costs picked up by the Sultanate. CDU lawmaker Christoph Bernstiel, meanwhile, flew to Saudi Arabia in 2019, with the 6,556 tab for the trip covered by Riyadh. 

And then there is Philipp Amthor, who is widely seen as an up-and-coming star in the party. He lobbied on behalf of the U.S. firm Augustus Intelligence using parliament stationary and was named a director of the company in return, in addition to receiving stock options. 

No long-term damage was done, however: Just recently, the CDU in his home state of Mecklenburg-Western Pomerania made him its lead candidate for the general election later this year.

Courting a Dictator

But even as the focus is currently on younger parliamentarians from the Union, some of the older ones have often been no better. Karin Strenz, for example.

She maintains excellent ties to the regime of Azerbaijan despot Ilham Aliyev – a relationship in which public prosecutors have long taken an interest. 

In January 2020, prosecutors searched Strenz's offices in the Bundestag, with a similar raid on Axel Fischer, another CDU parliamentarian, following last week. 

Both are under investigation for corruption. Strenz rejects the accusations and Fischer calls them "untenable."

The dictator Aliyev follows the same strategy of other despots from the Caucasus: At home, they shut down any form of opposition while posing as committed democrats abroad. In their search for recognition, they tend to spend a significant amount of money on lobbying in the West.

Philipp Amthor conduction lobbying on behalf of a U.S. company and received stock options for his troubles. Foto: Janine Schmitz / Photothek / Getty Images


And again, it is primarily Union politicians who play the role of willing assistants to Azerbaijan. In September 2011, former Economics Minister Michael Glos of the CSU and the former CDU parliamentarian for Berlin Karl-Georg Wellmann accepted an invitation to an independence festival in Baku. The trip was paid for by the Azerbaijan government, including business-class air travel, luxury hotel rooms and a gala dinner.

Glos is a member of the German-Azerbaijani Forum, which is at the center of the lobbying work and was led for many years by Otto Hauser, who was briefly government spokesman under Chancellor Helmut Kohl in 1998. Hauser now bears the title "Honorary Consul of Azerbaijan."

Representative Eberhard Gienger is also on the Azerbaijan team. The former world champion gymnast is now focusing on performing verbal tricks on behalf of Azerbaijan. In an interview published on a government-allied website, he promoted the holding of "major sporting events in Azerbaijan" to "strengthen civil society."

Hauptmann, the parliamentarian from Thuringia who was so deeply active in helping sell the expensive coronavirus masks, is also involved in the pro-Azerbaijan activities.

Hauptmann used to regularly publish a small newspaper for his electoral district called the Südthüringen Kurier, the primary mission of which was to praise his work and that of the CDU in the region. But in April 2018, an item appeared in the publication that had nothing to do with the state of Thuringia. 

It was an advertisement – in English – for a "shopping festival" in Baku, the capital of Azerbaijan. The next such shopping festival followed six months later, as did the next ad, purchased by the Azerbaijan Embassy in Berlin. In total, Azerbaijan spent 16,000 euros for such advertisements in Thuringia. Why? For what?


Hauptmann says the money didn't go to him, but to the marketing agency responsible for the ads, with which he has no legal involvement, he adds. He insists he isn't corrupt. Neither did he receive the money, nor did he do anything to justify its payment. But there are inconsistencies.

Donation Troubles

In March 2018, the daughter of a family that owns a juice company in Azerbaijan praised the company's "premium quality pomegranate juice" in Hauptmann's newspaper. 

Then, in November 2018, Hauptmann organized the first German-Azerbaijani Economic Dialogue together with the embassy in Berlin. The juice company was one of the sponsors. 

Hauptmann says that he didn't receive any money on that occasion either. Financing, he says, went through an event management company that frequently works with the Union.

It isn't totally clear why Hauptmann founded a company in July 2020 in Zossen, a town in the state of Brandenburg. 

Called HGC, which stands for Hauptmann Global Consult GmbH, the company is focused on worldwide import and export deals. What is clear, though, are the advantages that can be derived from such a construct: The representative does not have to publicly report exactly how much the company brings or the clients it works with. 

As chance would have it, Zossen also has the lowest corporate tax rates in all of Germany.

The Südthüringen Kurier wasn't just popular with the Azerbaijan regime. The more democratically minded Taiwan also saw an advantage in advertising to Hauptmann's readers. 

An ad for Taiwan has appeared in several issues of the paper since 2015, at a total cost of 24,000 euros. From 2018 to 2020, Vietnam was also in the paper's pages, spending a total of 12,620 euros for the pleasure.

The Wetzlar Kurier, a paper published by the CDU representative Hans-Jürgen Irmer, has also earned money with ads for Taiwan. The paper also publishes press releases from the Taiwanese representation in Germany. 

"I have supported Taiwan for years against communist China. Nobody has to pay me for that, it is something I do out of conviction," Irmer says. He says he "of course gives Taiwan a special discount."

The CDU's approach to money has always been rather unique. Even Konrad Adenauer, the first head of the CDU and Germany's first postwar chancellor, knew that money was a political resource. 

When he began, his party had hardly any of it. The CDU's only source of revenues at the time was membership payments – in contrast to the SPD. The Social Democrats had been banned by the Nazis during the Third Reich and received millions in compensation after the war.

Karin Strenz was visited by public prosecutors last year. Foto: BildFunkMV / imago images


From the very beginning, donations were a focus of the very top echelons of the CDU and Adenauer kept a close eye on how the money was divvied up. 

The disturbing lack of ethics displayed by Chancellor Helmut Kohl in the late 1990s likely stems from those early days. In December 1999, the year after he was voted out of office, Kohl declared that he had accepted up to 2 million euros in donations without reporting them. He never revealed where the money came from.

Kohl wasn't the only one who crossed the boundaries. Wolfgang Schäuble, who is the current president of the Bundestag, was forced to admit that he had, in 1994, accepted 100,000 deutsche marks in cash from the arms lobbyist Karlheinz Schreiber in his office. 

And in 1991, then-CDU treasurer Walther Leisler Kiep received a million marks in an envelope from the same Karlheinz Schreiber in a meeting at a restaurant in Switzerland.

Some Rules Don't Apply

They all felt it was OK since they figured they were serving their party – not the same thing as personal enrichment. One thing all these incidents seem to have in common is the conviction that some rules simply don't apply.

Despite all of these stories, the Union was always able to come back. They didn't receive support because they were the cleanest, most morally upstanding party, but because a majority of the voters was consistently convinced that the party was good at governing. But that is no longer the case today, and that is why the current crisis is so dangerous.

In this second phase of the pandemic, Merkel's cabinet seems to be completely disoriented. Last year, the government was able to keep the virus more or less under control – with an early shutdown and a lot of luck. Germany was seen as an example to be followed. 

But then, the government lost its way. Instead of developing a long-term strategy, it continued to take things one day at a time, week in and week out. The number of fatalities continued to climb, and for the last several weeks, the country has been wallowing in a half-hearted shutdown.

Germany suddenly seems ponderous and overly bureaucratic, particularly when it comes to its vaccination program. Whereas the U.S. made vaccine purchases early on in a centrally coordinated effort, the German government left the buying of vaccines to a hesitant European Commission, and then failed to exert the necessary pressure.

Then, instead of agreeing on a master plan for a nationwide vaccination program with the state governors, Merkel bickered with them for hours at a time over incidence rates and the re-opening of home improvement stores. 

Whereas the U.S. and Britain are on track to offering all of their citizens vaccinations by the end of May and by the end of July, mass vaccination is only just starting in Germany.

Moreover, it is primarily Union ministers who are currently standing out for under-performing.

There’s Health Minister Spahn, the face of this crisis. He has chalked up a considerable list of failures, but he also keeps getting himself and the government into trouble with his overly hasty promises. When he promised free rapid tests for all by March 1, the chancellor even intervened to slow him down. 

A short time later, it was revealed that Spahn had participated in the fundraising dinner in Saxony. For a brief time last year, Spahn was more popular than the chancellor in polls, but his popularity has since plummeted dramatically.

The rest of Merkel’s team is hardly doing any better.

Transportation Minister Andreas Scheuer of the CSU deceived parliament in the scandal surrounding failures in a government program to collect tolls from heavy trucks and then torpedoed the work of the committee investigating the affair.

Economics Minister Peter Altmaier of the CDU has proven unable to complete the task of disbursing corona crisis aid to businesses.

Defense Minister Annegret Kramp-Karrenbauer of the CDU has proven unable to get a grip on the mishap-prone armaments sector nor on far-right elements in one of the armed forces’ prestigious special units.

Education Minister Anja Karliczek of the CDU is watching helplessly as the pandemic exposes the country’s deficits in digitizing the school system.

Meanwhile, Helge Braun, the CDU head of Merkel’s Chancellery, has been looking more like a conductor who has no idea where his orchestra is these days than the federal government’s top corona response coordinator. 

When the government’s much-maligned app for warning people of exposure to the coronavirus was recently discussed on a talk show, Braun went so far as to ask why the government always had to provide everything in Germany.

Lame Duck

And as far as the chancellor is concerned, she’s a lame duck approaching the end of her term in office. Crises used to be Merkel’s finest hours – she always rose to the occasion. But this time, she doesn’t come across as having the situation under control.

After he was voted out of office, Helmut Kohl admitted to having received up to 2 million euros in donations that he didn't report. Foto: Marc Darchinger


So, what’s left if the CDU no longer even stands for good governance? The unity that used to be the hallmark of the party has also withered. The recent election of the party’s new chair exposed just how divided the CDU is. 

The party has no political platform yet for the election and not even a central vision for what the CDU intends to do following 16 years of Merkel in power.

The Social Democrats, meanwhile, have already presented their draft election platforms and the Greens are scheduled to do so soon, but the Union doesn't want to present its plans until the summer, shortly before elections. It’s little wonder that impatience is growing. 

"In terms of content, we should be moving forward,” says CDU national committee member Röttgen. "We need to be presenting the issues and ideas we want to use to win the election. We need clarity, and time is running out.”

But it sounds easier than it really is. Laschet only narrowly won the election for chairman and doesn't have much flexibility. He’ll have to listen and work with all wings of the party. What the beleaguered conservatives need right now, though, are clear messages and a clear course.

In some ways, the CDU’s crisis is reminiscent of the decline of the SPD. There’s a lack of contour, there is plenty of conflict, and there is a rivalry between the government and the party's parliamentary group. 

Recent meetings of Union parliamentarians have descended into attacks on party leaders. Economics Minister Altmaier has been a particular focus of the discontent.

Nervousness is widespread within the party, and a sense of fear can even be sensed in some conversations. It’s no longer implausible that the CDU might lose control of the Chancellery in the next election. 

So far, neither the SPD nor the Greens have benefited from the downward trend in the Union, but mathematically, only minor shifts are needed. It’s also conceivable that the SPD and Greens could join forces with the business-friendly FDP to form a government with SPD head Olaf Scholz as chancellor.

Laschet will have to try to turn things around. But how? The scandal is threatening to undo everything he has set out to do in the coming months. His plan was based entirely on bringing quiet to the party: Peace in the ranks, quiet in the surveys and as little controversy and friction as possible. 

If he managed that, the thinking goes, a majority of voters would once again back the conservative parties. Instead, a sense of panic is prevailing. And instead of easily crossing the finish line into the Chancellery, Laschet is forced to maneuver his party through the crisis. Is he up to the task?

When the Löbel affair blew up on March 5, Laschet started making phone calls. It was clear to him that Löbel had to go. The party leader spoke to Paul Ziemiak, the CDU’s general secretary, and told him to make it clear to the CDU in Baden-Württemberg that expulsion proceedings would be launched if necessary. The message was quite clear.

Publicly, though, Laschet went into hiding, saying nothing at a time when half the country was agitated over the scandal. Indeed, Laschet didn’t speak publicly until Sunday, March 7. By then, his predecessor as CDU chair Annegret Kramp-Karrenbauer had already spoken out. Once again, it seemed like he was late to the party.

"No Plan and No Strategy"

People close to Laschet have defended their boss’ actions. They say that Laschet was acting in the background and that it’s not his style to just send out a tweet and then act in public like he knows everything. "He sorted out the situation within 48 hours, and he did so rather quietly.”

Still, Laschet is in danger of getting sucked into the maelstrom of defeats and poor poll standings, just as his predecessor was. If the party continues to fall in the polls, doubts will be sowed and criticism of the party leadership will grow louder. Critics claim that Laschet has "no plan and no strategy.”

All this would be only half as bad if Laschet could at least provide moral authority in the mask scandal that is beyond any doubt. But Laschet himself is already exposed to the scandal – thanks to his son.

Johannes Laschet is a model and works for the fashion apparel company Van Laack among others. At the end of November, Van Laack CEO Christian von Daniels chatted publicly about the fact that he had secured a major contract from the state of North Rhine-Westphalia (NRW) for protective equipment and had risen to become the state’s largest producer of masks during the pandemic. 

The order had been organized by Johannes Laschet. It was a "stroke of luck” that he had such a good connection to the governor’s office in the state, Daniels enthused.

Germany's government has not performed well in the pandemic in recent months: Here, Transport Minister Andreas Scheuer, Bavarian Governor Markus Söder, Health Minister Jens Spahn and Chancellor Angela Merkel.


And it didn’t stop at one order. On several occasions, Laschet’s government bought protective equipment from Van Laack. In April alone, it purchased close to 40 million euros worth of scrubs. 

Later, the NRW police ordered masks for 4 million euros – all without a tender. The opposition was furious and spoke of suspicions of distorting competition. Laschet is still fighting allegations of cronyism to this day.

The state government, for its part, has defended itself, saying decisions have to be made quickly in a pandemic. But a law firm in the city of Koblenz has concluded in a legal opinion that Laschet’s government "grossly violated the prevailing regulations of public procurement law” when it awarded its first contract to Van Laack. 

The law firm said there was no justification for conducting the award procedure "in such a non-transparent manner and with only one company.”

The state’s procurement authority is also looking into the matter. The office hopes to determine whether it was legal for the state government to order 1.25 million cloth masks for police officers from Van Laack in November. 

The Interior Ministry in Düsseldorf then withdrew the contract and announced it would issue a new EU-wide invitation to tender. All of a sudden, an actual orderly bidding process took shape that supposedly hadn’t been possible before. The deadline for the submission of tenders recently expired. Van Laack has also applied again, says CEO Daniels. And if the company doesn’t win the bid this time? 

"That would be relevant damage for us that we would then have to claim,” says Daniels. The masks that he produced bear the state seal: "I can’t just sell them to a supermarket chain or send them to America,” he says. 

This means Laschet is also threatened with claims for damages.

On top of all that, a strong rival is also lurking in Munich: Bavarian Governor Markus Söder. Söder knows that in upper echelons of politics, you need to be as little exposed to attack as possible. 

When he became governor of Bavaria three years ago, he immediately threw out Ludwig Spaenle as his state’s education minister. Spaenle is the godfather of Söder’s son – and people say Söder didn’t want any rumors about family connections to pop up.

Blurring the Lines

For Söder, the CSU is a party with its feet firmly planted in the ground – one in which politicians spend their time traveling in second class rather than hanging out in first class lounges. When he affords himself a luxury privately, then it’s something like a large television in the living room, Söder says.

Söder is well aware of his party’s long history of affairs and scandals – and that makes him even more determined to position himself as a blemish-free politician. The mask crisis could have been his moment if it weren’t for the fact that the whole scandal began with the Nüsslein case. With a politician from the CSU.

"He’s still raging,” one member of the CSU’s party executive says of Söder, long after the accusations against Nüsslein first surfaced. The state governor’s office is said to have immediately requested a list from the state’s health ministry of names of members of parliament who have lobbied for mask manufacturers.

But further trouble is also looming. One relationship that is likely to be the subject of closer scrutiny is that between mask lobbyist Andrea Tandler and Monika Hohlmeier, a member of the European Parliament with the CSU. Tandler’s father Gerold and Hohlmeier’s father Franz Josef Strauss were long time friends in the CSU swamp. A year ago, Hohlmeier opened doors for Tandler to Federal Health Minister Spahn.

Tandler then exchanged mails directly with the minister, and the ministry placed a large order from the Swiss company Emix, for which Tandler sought buyers on the German market. 

Hohlmeier denies any personal gain, but it’s striking: Other suppliers never got responses to their offers, but Emix secured a deal with outrageously expensive masks. 

With a rumored volume of up to 800 million euros from Spahn’s ministry alone – neither Spahn nor Emix have provided any figures – Tandler is likely to have become a multimillionaire in the meantime given the usual market commissions. She isn’t discussing that either. 

Florian von Brunn, a member of the state parliament with the Social Democrats has filed a criminal complaint against unknown persons at the Munich Public Prosecutor’s Office because Bavaria also bought from Emix.

The scandal is currently growing more dangerous for the CSU by the day – also for Söder. The Bavarian Health Ministry was also one of the major customers of the apparently well-oiled mask connection. 

A search warrant shows that anti-corruption investigators recently went looking not only for documents relating to Nüsslein’s company and various offshore firms, but also communication that took place with Alfred Sauter, the former Bavarian state justice minister with the CSU. 

Sauter drew up the contracts for the mask deliveries to the Bavarian Health Ministry.

Last Wednesday, new searches were conducted in Munich, this time at the home of Michael Kraess, lobbyist with high-level contacts within the CSU leadership. 

The Munich Public Prosecutor’s Office is now listing him as a defendant and has initiated investigations into him on initial suspicions of "bribery of office holders.” 

Neither Kraess nor his lawyers could be reached for comment on the allegations by the time this issue went to press.

This is the backdrop against which Söder and Laschet will have to vie with each other over which of the politicians is appointed as the Union's joint chancellor candidate. It is the question of all questions and could even set the course for the next decade. 

There is growing pressure within the party to decide on the matter as soon as possible.

Söder has always clearly seen the risks of a candidacy and talked about it early on with confidants. To win an election, you need troops, he once said internally of the CDU, "not a military hospital.”

That was long before three members of parliament had to resign because of scandals within days of each other. 

And his own party was back at the center of scandals that have haunted it over the years of cronyism and a blurring of the line between politics and business.

‘A sugar rush’: why the Fed fears a booming US economy won’t last

Central bank forecasts fastest growth since Reagan era but pandemic concerns weigh on longer-term outlook

James Politi in Washington 

For all the enthusiasm about the sharp economic acceleration that is starting to unfold, the Fed is far less certain of a long-lasting boom in the years to come © Financial Times


For months, Jay Powell and the Federal Reserve have offered a wary, downbeat assessment of the US economy’s ability to recover from the pandemic, but this week they embraced a much rosier outlook and predicted a burst of economic activity this year.

The Fed’s optimism, driven by the accelerating vaccination rollout and Joe Biden’s $1.9tn fiscal stimulus, has raised hopes that the US can quickly recover ground lost during the coronavirus crisis and usher in a new era of economic momentum.

The upwardly revised median forecast from Fed officials, released on Wednesday, projects that output will surge by 6.5 per cent this year — the fastest pace since 1984, when Ronald Reagan was president.

Unemployment is predicted to fall to 4.5 per cent by the end of the year and there is stronger inflation in sight, with core personal consumption expenditure, the central bank’s preferred measure, rising above its target to 2.2 per cent.

“Everything is pointing to a handful of quarters of pretty darn fast economic growth,” said Wendy Edelberg, director of the Hamilton Project and a senior fellow at the Brookings Institution.

“We have a lot of economic activity that’s been postponed, and a huge amount of pent up demand for face-to-face services, and we’re going to see a surge in that kind of spending.”

But for all the enthusiasm about the sharp economic acceleration that is starting to unfold, especially in sectors such as travel and hospitality and leisure, the Fed is far less certain of a long-lasting boom in the years to come. 

That explains why its top officials are so reluctant to even hint at removing monetary support for the recovery.

US central bankers are still concerned about a potential relapse in the fight against the virus, see fiscal support from the stimulus starting to fade next year, and worry that the labour market will continue to struggle.

“There’s no indication that we’re going to see a sustained runaway economy,” said Edelberg.

The Fed forecasts that growth will slow significantly after this year to 3.3 per cent in 2022 and 2.2 per cent in 2023. 

And despite fears of a dangerous spike in inflation among some economists, the central bank sees nothing of the sort. 

Even with interest rates close to zero, core PCE inflation will fall back to 2 per cent next year and 2.1 per cent in 2023, according to the forecast.

“A reflation on the reopening of the economy is very unlikely to be sustained. Airfares are going to go up, but they’re not going to keep going up year after year. 

It’s very much a transitory thing,” said Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives.

She added: “The fiscal stimulus is a one-time sugar rush. It’s big — but it’s still a one-time package; one set of cheques is going out. 

And after that, we’ll go back to fundamentals.”

While very large by historical standards, the 6.5 per cent growth forecast has to be put in the context of the last year’s 3.5 per cent contraction.

But it is nevertheless significant. 

In June 2020, when Fed officials were predicting a deeper contraction in the economy of 6.5 per cent last year, they also forecast a smaller rebound of 5 per cent in 2021.

“It’s a bounceback, but it’s a pretty good bounceback,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics.


Much is resting on the vaccine programme: volunteers monitor people after they received their first dose of the Moderna COVID-19 vaccine © Getty Images


During his press conference on Wednesday, Powell made clear that he was very confident of a short-term burst this year. 

“As the economy reopens, will start spending more. 

You can only go out to dinner once per night, but a lot of people can go out to dinner,” he said.

But Powell has not embraced this as a fundamental shift, saying “some social distancing” might linger and pre-pandemic employment levels could be very difficult to bring back: “It’s just a lot of people who need to get back to work and it’s not going to happen overnight, it’s going to take some time. 

No matter how well the economy performs.”

The risk that the pandemic could surge again still worries Powell. 

“We’re clearly on a good path with cases coming down . . . but we’re not done and I’d hate to see us take our eye off the ball before we actually finished the job”, he said on Wednesday.

Still, in the short-term, things are undoubtedly looking up. 

Rosner-Warburton of MacroPolicy pointed to improving conditions beyond consumer spending driven by stimulus cheques: “It is also a housing market that has been on fire . . . the goods sector, the manufacturing sector that has recovered very quickly from Covid.”

Gagnon of the Peterson Institute said that even with the hefty upgrades to its economic forecasts, the Fed might still be too cautious and that there is “upside risk” to its projections.

“I think we’re going to be going to a higher pressure economy. 

If this pandemic drags on and the variants are problematic and we can’t reopen the economy, we might get a worse outcome than the Fed is projecting,” Gagnon said.

He added: “On the other hand, if the vaccines really do work, I think we could get a better outcome than the Fed is forecasting and is not really willing to show yet.”

China’s Strategic Standpoint

By: George Friedman


One of the hardest problems of foreign policy is developing an accurate evaluation of a potential adversary’s intentions and capabilities, which are frequently separate realities. 

I discussed this recently in a piece that pointed out the degree to which the United States misinterpreted the Soviet Union’s intentions and capabilities. 

The Soviets were focused on reconstruction after World War II, something that required decades of work. 

A war that would devastate Western Europe gave them no incentive to start a war. 

The United States, meanwhile, was obsessed with counting equipment, not evaluating the ability of the Soviet logistical system to support a massive offensive. 

The U.S. focused on worst-case intentions and capabilities. 

The real ones were very different.

This was in part due to another miscalculation: the underestimation of Japanese capabilities in World War II. 

Washington knew war was likely and so had a plan designed to counter it. 

But planners underestimated the degree to which the Japanese understood the war plans and the flexibility of naval planners in declining combat on American terms. 

They also underestimated Japan’s naval command and failed to understand the actions that aircraft carriers made possible. 

They understood the intent to fight but not the intent to define the battle and the hardware needed to do so.

During the Cold War, the U.S. was on the defensive against a Russian attack that never came. 

Similarly, during World War II, Washington saw Japan as utterly dependent on raw materials from the south and assumed a direct thrust southward. 

It could not conceive that Japan would launch an indirect attack. 

In both cases, the U.S. ignored reality. 

Russian constraints militated against offensive war. Japanese constraints militated against direct attack. 

The U.S. had vast resources and could survive the misunderstandings, but the constancy of miscalculations in other wars such as Vietnam and Iraq indicate a central problem of military planning. 

If the U.S. ever faces China, nothing is more important in understanding how China sees its strategic position, or precisely how China’s strategic position will compel it to act.

China has two core problems: maintaining unity and preventing social instability. 

Events along the border with Tibet and in Xinjiang, and lesser events in Inner Mongolia must be contained. 

At the same time, the economic divide between coastal and western China that fueled Mao’s revolution and has still not been resolved must be managed. 

One element of this management is economic growth. 

The early years were explosive since development was measured from Mao’s economic disaster. 

Since about the mid-2000s, growth has been increasing, but it has led to tensions in the Chinese economic elite. China’s primary strategic focus is internal.


China has therefore tended to focus inward, but what complicates this is that domestic consumption cannot yet maintain economic growth and that access to global markets is a strategic imperative. 

China depends on access to sea lanes connected to its eastern ports. Ideas about overland transport to Europe, the much-heralded Belt and Road Initiative, have not yet matured as an alternative.

Access to global oceans is still the foundation of Beijing’s strategy, just as Japan’s access to raw materials was its. 

The two strategic problems have important things in common. 

China must enhance its naval power, which, whatever Beijing’s intent, makes other Pacific powers such as the U.S. extremely anxious. 

The most important element of this is the vast American alliance system of formally and informally hostile countries to China: Japan, South Korea, Taiwan, the Philippines, Indonesia, Vietnam, Singapore, Australia and India. 

It constitutes a massive strategic alliance but also a very significant economic alliance involving key Chinese trading partners.


This creates a long stretch of chokepoints that could block China’s access to the oceans and thus hurt domestic economic development and potentially generate social unrest. 

The United States has not blocked China’s access, nor has it threatened to. 

But China must consider what is possible, and the capability the U.S. has is a profound threat to China. 

From the U.S. point of view, moving eastward from the Aleutian-Malacca line would give China entree to the Pacific, which would threaten fundamental U.S. interests. 

The U.S. cannot abandon the alliance. 

China cannot accept the threat.

China cannot afford to engage U.S. forces directly. Its own navy is untested in war and has only exercised in fleet-counterfleet operations. 

China might well defeat the U.S. fleet, but it can’t be certain it would, and defeat would be catastrophic to the regime. 

In addition, the U.S. has vast resources and capabilities. 

In looking at U.S. warfighting strategy in the past, initial defeat can generate a massive counterattack. 

So unless the U.S. seems intent on blockading Chinese ports, the risk of war is too great.

But China also must see the U.S. as averse to war, and the appearance of the Chinese might be enough for the U.S. to decline a larger conflict and withdraw forces on the blockade. 

A secondary Chinese strategy, then, could be to demonstrate an appetite for combat in an area that is not critical to the United States and might not trigger a response. 

The idea has been bandied about that China might invade Taiwan. 

This would be militarily and politically unwise. Amphibious operations are complex, and are won or lost by vast logistical efforts. 

Reinforcement and resupply would be vulnerable to U.S. anti-ship missiles, submarines and air power. 

The Chinese must assume that any invasion would likely be defeated.

Even so, China must demonstrate its military will and capability without risking defeat. 

In other words, it must attack a target of little value and assume the U.S. would not risk combat at a location where Chinese forces have concentrated. 

But this strategy has two problems too. 

First, the U.S. will recognize the ploy and might choose to engage to deter greater combat. 

Even if Washington wanted to decline, its allies may raise enough hell that it may not be able to. 

This dovetails into the second problem: The members of the alliance are also vital trading powers. 

One of the paradoxes of the Chinese position is that those that pose the greatest strategic risk are also essential elements of the Chinese economy. 

Seizing an island off of Taiwan might trigger a U.S. response, but it would convince the alliance members of Chinese danger and force them, with U.S. support, to take economic action.

China must maintain economic growth to maintain stability. 

It cannot take actions that would make this difficult. 

Nor can it tolerate the possibility of U.S. naval action that would cripple the Chinese economy. 

China’s current economic situation is satisfactory. 

Certainly, a war would not improve it. It is running a risk of U.S. action that would also cripple it. 

The key Chinese solution is to seek an accommodation with the United States on outstanding economic issues, being aware of the fact that the U.S. has no appetite for war and will initiate only under significant pressure from China. 

China must weaken the anti-China alliance by making it clear that it has no intention of waging war and that it will align its economy with others. 

In other words, China must decline combat and make economic and political peace – without appearing that it is doing so under duress.

China is a great power. 

But all great powers have weaknesses, so their competitors must understand these weaknesses. 

Fear and prudence make powers concentrate on strength and neglect the weaknesses, and in doing so tend to magnify the power of a competitor. 

Accurate and dispassionate analysis is needed to avoid overestimation and underestimation and thus miscalculation. 

The 1970s Never Ended

By John Mauldin 


Big economic storms are rare and usually end quickly, but they tend to have long-lasting effects. 

Today I want to talk about a storm 50 years ago that still affects us now. 

Important things happened in the 1970s.

I personally remember that decade well. 

I was in my 20s and they were formative years. 

I met people and learned things that led me where I am now. 

The funny part is its larger events, important as they were in hindsight, didn’t get nearly as much attention at the time. 

Those events did not even register to me as important. We didn’t have social media and 24-hour news networks. 

The “well-informed” people read local newspapers and watched Uncle Walter (Cronkite) in the evening. 

Business people and bankers read The Wall Street Journal

Political junkies read The New Republic or National Review. 

But none of us really knew everything as it happened, with the one exception of the Vietnam War. 

Selected portions of that were played out on our TVs in the evening and in papers. 

For that matter, most business and national news was also only consumed in light detail. 

Even back then, there was too much to portray in 30 minutes or a short column.

In any case, we are still dealing with the legacy of that time. 

But as I’ll show at the end, we may be starting to at least recognize some of the mistakes. 

That’s the first step to actually fixing them.

1971 Memories

A half-century later we are still enduring the effects of 1971, when Nixon “closed the gold window.” But to understand why, we have to consider the window’s origin.

Currency devaluations, leading to inflation, depression, and worse, were common before World War II. 

The 1944 Bretton Woods conference designed a new system which took effect in the 1950s. 

The US would hold most of the world’s gold, guaranteeing other nations could convert their gold reserves at a fixed $35 per ounce rate. 

Essentially, this tied other countries to the US dollar.

Bretton Woods “worked” for almost 20 years but with side effects, not unlike today’s euro problems. 

You can’t tie independent countries with their own fiscal policies to the same currency. It guarantees balance of payment problems.

Starting in the mid-1960s, various European countries began demanding payment for their dollars in gold. 

They wanted the US to balance its budget, which had gone wildly into deficit because of the Vietnam War. 

The US was literally using Air Force planes to ship gold from Fort Knox to New York and outbound. 

You can read many interesting stories like this one

We tend to think of crises as happening over very short periods. 

This one was building for years.

West Germany, faced with having to devalue the Deutsche Mark, instead abandoned the Bretton Woods system in May 1971. 

The dollar weakened considerably, concurrent with rising unemployment and inflation. 

Nixon appointed former Democratic Texas Governor John Connally as Treasury Secretary in early 1971. In an international meeting, Connally uttered the famous saying: “The dollar is our currency but your problem.”

As the situation worsened, Nixon called an emergency meeting at Camp David which included the Federal Reserve Chairman Arthur Burns and a young Paul Volcker. After much debate, Nixon listened to the ever-confident Connally. 

On August 15, 1971, President Nixon ended the Bretton Woods system and also imposed wage and price controls in the US. (CPI inflation was almost 6% at the time.) 

He added import tariffs, too. 

Basically, the opposite of what most economists would suggest. The dollar crashed even more and we had to invent the word “stagflation” to define the widespread misery. 

This was all later dubbed the “Nixon Shock

We can’t blame Nixon for everything, though. Other things were happening at the same time: social unrest amid the Vietnam War, the civil rights movement, more women entering the workforce, technological changes, and more. 

Much of it was good and necessary but still disruptive.

But whatever the causes, that period seems to have been a kind of economic fulcrum. I’m not the only one to notice it, either. A host of writers and websites have chronicled the seemingly sudden changes. 

For instance, try WTF Happened in 1971? 

You’ll see page after page of charts, each with a little red arrow pointing to 1971 as a turning point.

You can browse those later but for today I want to focus on income and job-related changes. I think they are the most relevant to today’s challenges, as we will see below. But first let’s quickly review some charts.

Hourly compensation grew roughly in line with productivity from 1948 until the early 1970s. From there, productivity rose far faster than income.


Source: WTF Happened in 1971?


Similarly, wages rose in line with GDP per capita before splitting in the 1970s.



Source: WTF Happened in 1971?


Income at the top of the pyramid, relative to the bottom 90%, began rising in the 1970s after a long post-Great Depression decline.



Source: WTF Happened in 1971?


This next chart again shows that the income gains were not as widely shared since 1971.


Source: WTF Happened in 1971?


If we really want to make it look bad, let’s look at just the top 1%. 

I should point out that this gets somewhat skewed by the increasing amounts made by a small number of entrepreneurs who created wildly profitable businesses. 

Nevertheless, the simple fact of the matter is we live in a relative world. Relative to the average worker, the top 1%, no matter how they ended up there, are incomprehensibly wealthier than the average person.


Source: WTF Happened in 1971?


One reason for that is the productivity we talked about earlier. It really shows up as the capital equipment and technology which is bought to reduce the cost of labor (robots, bank ATMs, computers, automated production lines, and many others). 

It all reduces the share of income going to labor while raising income for machine-owning capitalists.


Source: WTF Happened in 1971?


Let’s note a caveat to the above chart. 

Economists use the Gini coefficient to measure the statistical dispersion of income within a nation or any other group of people. 

A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income). 

A Gini coefficient of one (or 100%) expresses maximal inequality among values, where one person makes all the money.

Quite often, the Gini coefficient as used by economists only measures income and does not include taxes and/or government transfers (like food stamps or tax credits). The chart below comes from a recent Wall Street Journal op-ed by former senator (and economist) Phil Gramm. 

It shows the Gini coefficient both with and without federal payments to lower income households (transfers) and taxes. Viewed this way, the Gini coefficient has been roughly stable since 1970.


Source: The Wall Street Journal


Let me state emphatically, this does not negate the real problem of income and wealth disparity. 

You can’t dismiss those realities. 

The income differences are real and the wealth disparity even worse. 

Those transfers simply maintain a semblance of balance, at great and rapidly growing cost.

Given that the technological revolution combined with increasing digitalization of the economy is going to make that income differential even more stark, we in the US are going to have some very difficult choices over this next decade.

Now, let’s get back to data from 1971. Income for the average Black American, relative to White Americans, rose in the 1950s and 1960s, then slowed considerably in the 1970s and after.


Source: WTF Happened in 1971?


Flat or slow wage growth is bad enough, but far worse when living costs are rising. 

That’s what has happened… and guess when it started.



Source: WTF Happened in 1971?


Owning your home is supposedly the key to financial success. 

But after the 1970s, home prices in major cities rose far faster than incomes did. 

This same phenomenon was happening all over the country.


Source: WTF Happened in 1971?


You can debate some of these numbers and their sources, but it’s clear the 1970s were a turning point in the average American’s financial condition. 

Wage growth stagnated while living costs kept rising. 

Not always and everywhere, but enough to form a long-term trend that is increasingly problematic.

It would be less problematic if either side of the equation were different. Income rising commensurate with inflation, or flat inflation along with flat income, would be a different ball game. 

But that’s not what happened.

I write often about inflation. 

This time I want to look at the other side of the ledger. 

Why haven’t wages grown like they once did?

IQ Tests

Most people derive their income from their employment. 

That’s why unemployment is a problem. It’s also why people want better, higher-paying jobs.

We say the path to a better job is to increase your skills. In an ideal economy, every worker would match with a job that fits their particular skills. Unfortunately, we have barriers. 

In the 1960s there were efforts to remove race as a job barrier. 

The 1964 Civil Rights Act banned pre-employment tests, which had sometimes been used to screen out minorities, unless they were directly relevant to the job.

Litigation followed to define exactly what that meant. Many companies had been in the habit of giving IQ tests to job applicants. 

In 1971 the Supreme Court ruled (Griggs v. Duke Power Co.) such tests were overly broad. The court also gave employers the burden of proving any pre-employment tests had legitimate business purposes.

This was difficult and risky, so employers found another screening method: demanding college degrees for many roles that hadn’t previously required them. 

It wasn’t what LBJ had in mind and actually had the opposite effect, but it was legal. Once again, well-intentioned social policies backfired.

Note this all happened about the same time Nixon closed the gold window. I suspect it also contributed to some of the sharp turns in those charts above.

When government makes hiring people more difficult, employers will find different ways to hire (often fewer) people. 

They may start by squeezing more productivity from the workers they already have. 

They will also automate more tasks, essentially expanding the labor supply with non-human labor. 

This puts downward pressure on wages.

But this particular method was even worse, because it told people the only way to advance their careers was to get a difficult, expensive, and time-consuming college degree. 

This further disadvantages poorer students, some of whom then go into debt to pay for degrees.

Do these degrees really deliver anything employers need? 

Sometimes, but we have established a system in which people think they need a degree, any degree, just to get a foot in the door. 

And they’re not wrong.

Those who are employers know how this works. Some highly skilled positions are hard to fill, but they tend to be those where all the applicants have degrees anyway. 

So education is kind of a non-factor there. 

At the other end are roles where you have too many applicants, and you need some impartial way to prioritize them. 

College degrees are handy in that case, even if not strictly required for the job.

I can personally say mea culpa

Back in the 1980s up until the mid-2000s, but especially after the development of online job websites, I would advertise for a job and get lots of applicants. 

I remember once getting 300 applications for an executive assistant role. A college degree wasn’t really necessary; talent and skill were. 

But we had to sort through 300 applications. The “easy” solution was to simply start with the college graduates.

That’s not unreasonable. Even if someone’s degree is far afield from what you do, the fact they have one gives you some useful information. 

You know they are willing to sit in a classroom, turn in assignments, take tests, and otherwise go through a defined process to reach a goal. These are helpful.

The problem is those skills aren’t unique to college graduates. Many others may have them, but haven’t had the opportunity to prove it. 

Employers would have a larger talent pool if they had other ways to sort it, beyond the presence or absence of a college degree.

Ironically, requiring college education for jobs that don’t really need it aggravates the income disparity you might think it would fix. It becomes a kind of self-fulfilling prophecy. 

Employers require degrees for higher paying jobs, so of course the higher paying jobs go to people with degrees.

The Jobs Problem Is Really a Data Problem

College degrees have become a proxy for the IQ tests that were made illegal 50 years ago. 

They aren’t a particularly good proxy, but large employers lack better options.

This is an economic problem for everyone. People contribute more to growth when they are deployed efficiently in jobs that fit their particular talents and goals. Businesses filled with workers who are just there for a paycheck tend not to produce much, and may even be a net drain on the economy.

Data from the National Federation of Independent Business and other groups consistently shows that finding skilled workers is a top problem for employers. 

There are lots of jobs but matching them with people who can do them is a real issue. 

It’s a big problem, especially for small businesses where the entrepreneur is trying to produce a product, increase sales, and a dozen other things all at once.

What we need are ways to

  • Define the specific skills needed for each job role, and
  • Identify people who have those skills, and
  • Match them with each other.

Moreover, the matching process has to be more efficient than sorting through resumes, and objective enough to not discriminate in illegal ways.

All that is possible without college degrees. 

Many professional organizations offer certification programs, specific to certain job categories, which interested people can achieve far more easily and less expensively than a college degree. Some people acquire specialty skills in military service. 

These offer the kind of objective, third-party certification employers need to see. They just need to see it.

In other words, some of our economy’s jobs problem is really a data problem. We have many jobs available. 

We also have many workers available, who already have the skills employers want, or could acquire them fairly soon.

Yet many employers are still hiring more by pedigree than skill. In so doing, they may reduce their own odds of success. 

One recent study mentioned in The New York Times found that 74% of new US jobs require a four-year college degree, which only one-third of American workers possess. 

That’s a recipe for frustration for both employers who can’t find workers and workers who can’t find jobs. 

Let’s quote from that article:

For the past four decades, incomes rose for those with college degrees and fell for those without one. But a body of recent and new research suggests that the trend need not inevitably continue.

As many as 30 million American workers without four-year college degrees have the skills to realistically move into new jobs that pay on average 70 percent more than their current ones. That estimate comes from a collaboration of academic, nonprofit, and corporate researchers who mined data on occupations and skills.

The findings point to the potential of upward mobility for millions of Americans, who might be able to climb from low-wage jobs to middle-income occupations or higher.

But the research also shows the challenge that the workers face: They currently experience less income mobility than those holding a college degree, which is routinely regarded as a measure of skills. That widely shared assumption, the researchers say, is deeply flawed.

“We need to rethink who is skilled, and how skills are measured and evaluated,” said Peter Q. Blair, a labor economist at Harvard, who was a member of the research team.


That doesn’t mean no one should go to college. 

The experience has value. 

That said, it often doesn’t have the kind of value we are trying to squeeze out of it. Organizations like Opportunity@Work and Rework America Business Network are trying to promote alternative approaches. Solving this problem will pay giant economic dividends. 

I highly recommend reading the data at these links especially if you are looking to try to find skilled labor for your business. 

There is also an excellent NBER working paper

All of these will help you think outside the box in your hiring practices.

Imagine if millions of unemployed and underemployed people could have sustainable jobs that match their abilities. 

It would go a long way toward solving the fiscal problems I discussed last week. 

We would need less safety net spending and we would have more and higher-earning taxpayers. Businesses would run better and the economy grow faster. 

We could begin, at least, to reverse those 1970s trend changes.

Of course, we want to maintain the progress we made in the last 50 years, too. Not everything has gone wrong. 

Quite a bit has gone right, as I’ll discuss in next week’s letter.

Closer to Traveling, Inflation, and College Degrees

Theoretically, next week I get my second vaccine shot at the local Walgreens. 

The first one was a nonevent for me. 

Hopefully the second will be as well. 

I am looking forward to beginning to travel after the end of the Strategic Investment Conference (May 5–15). 

This is simply going to be the best conference we’ve ever done. 

You really should register Click here to do it now.

The website I mentioned above also had this quaint list of prices from 1971.

Just glancing through it brought back lots of memories.


My family lived in Bridgeport, Texas, on the edge of West Texas where there were no ports or bridges. 

There was a man-made lake. I remember going to the local grocery store with my mother where she would buy what was on sale. 

I remember there would always be a few low-cost items to draw people into the store. 

Three pounds of hamburger for a dollar (although I can assure you the fat content wasn’t the 80 to 90% we get today). 

Mother would add oatmeal to make it “stretch.” Three dozen eggs for a dollar. 

Milk was under one dollar a gallon. 

On annual summer vacations to Aberdeen, Mississippi (near Tupelo) we bought gas for $0.17 a gallon in East Texas. 

Tuition, room, and board for Rice University was about $3,000 a year. 

I was lucky enough to have a full tuition ride and loans for the room and board at 3%.

I will readily admit that while Rice was a fabulous experience, I don’t use my degree today (let alone my Master of Divinity from Southwestern Baptist Theological Seminary). 

Tammi Cole, my executive assistant/financial officer/scheduler/boss, has a chemistry degree. 

She was a bench chemist for a while before she started her own business that had nothing to do with chemistry before she moved to Texas. 

My daughter introduced us when I was looking for help. 

I can guarantee you that whatever she does for me doesn’t require chemistry knowledge. (Enormous amounts of patience, yes.) 

My wife Shane has her own technical degrees, and she needs even more patience. 

I am not sure how you put sainthood on a job and/or marriage skill qualification.

And with that, I will hit the send button. 

You have a great week

Your watching those inflation numbers analyst,



John Mauldin
Co-Founder, Mauldin Economics