Still going strong

China’s Communist Party at 100: the secret of its longevity

Ruthlessness, ideological agility and economic growth have kept it in power

On july 1st China’s Communist Party will celebrate its 100th birthday. 

It has always called itself “great, glorious and correct”. 

And as it starts its second century, the party has good cause to brag. 

Not only has it survived far longer than its many critics predicted; it also appears to be on the up. 

When the Soviet Union imploded in 1991, many pundits thought that the other great communist power would be next. 

To see how wrong they were, consider that President Joe Biden, at a summit on June 13th, felt the need to declare not only that America was at odds with China, but also that much of the world doubted “whether or not democracies can compete”.

One party has ruled China for 72 years, without a mandate from voters. 

That is not a world record. 

Lenin and his dismal heirs held power in Moscow for slightly longer, as has the Workers’ Party in North Korea. 

But no other dictatorship has been able to transform itself from a famine-racked disaster, as China was under Mao Zedong, into the world’s second-largest economy, whose cutting-edge technology and infrastructure put America’s creaking roads and railways to shame. 

China’s Communists are the world’s most successful authoritarians.

The Chinese Communist Party has been able to maintain its grip on power for three reasons. 

First, it is ruthless. 

Yes, it dithered before crushing the protests in Tiananmen Square in 1989. 

But eventually it answered bullhorns with bullets, terrorising the country into submission.

China’s present leaders show no signs at all of having any misgivings about the massacre. 

On the contrary, President Xi Jinping laments that the Soviet Union collapsed because its leaders were not “man enough to stand up and resist” at the critical moment. 

For which read: unlike us, they did not have the guts to slaughter unarmed protesters with machineguns.

A second reason for the party’s longevity is its ideological agility. 

Within a couple of years of Mao’s death in 1976, a new leader, Deng Xiaoping, began scrapping the late chairman’s productivity-destroying “people’s communes” and setting market forces to work in the countryside. 

Maoists winced, but output soared. 

In the wake of Tiananmen and the Soviet Union’s downfall, Deng fought off Maoist diehards and embraced capitalism with even greater fervour. 

This led to the closure of many state-owned firms and the privatisation of housing. 

Millions were laid off, but China boomed.

Under Mr Xi the party has shifted again, to focus on ideological orthodoxy. 

His recent predecessors allowed a measure of mild dissent; he has stamped on it. 

Mao is lauded once more. 

Party cadres imbibe “Xi Jinping thought”. 

The bureaucracy, army and police have undergone purges of deviant and corrupt officials. 

Big business is being brought into line. 

Mr Xi has rebuilt the party at the grassroots, creating a network of neighbourhood spies and injecting cadres into private firms to watch over them. 

Not since Mao’s day has society been so tightly controlled.

The third cause of the party’s success is that China did not turn into a straightforward kleptocracy in which wealth is sucked up exclusively by the well-connected. 

Corruption did become rampant, and the most powerful families are indeed super-rich. 

But many people felt their lives were improving too, and the party was astute enough to acknowledge their demands. 

It abolished rural taxes and created a welfare system that provides everyone with pensions and subsidised health care. 

The benefits were not bountiful, but they were appreciated.

Over the years Western observers have found plenty of reasons to predict the collapse of Chinese communism. 

Surely the control required by a one-party state was incompatible with the freedom required by a modern economy? 

One day China’s economic growth must run out of steam, leading to disillusion and protests. 

And, if it did not, the vast middle class that such growth created would inevitably demand greater freedoms—especially because so many of their children had encountered democracy first-hand, when they got their education in the West.

These predictions have been confounded by the Communist Party’s continuing popularity. 

Many Chinese credit it for the improvement in their livelihoods. 

True, China’s workforce is ageing, shrinking and accustomed to ridiculously early retirement, but those are the sorts of difficulties every government faces, authoritarian or not. 

Vigorous economic growth looks as if it will continue for some time yet.

Many Chinese also admire the party’s strong hand. 

Look, they say, at how quickly China crushed covid-19 and revved up its economy, even as Western countries stumbled. 

They relish the idea of China’s restored pride and weight in the world. 

It plays to a nationalism that the party stokes. 

State media conflate the party with the nation and its culture, while caricaturing America as a land of race riots and gun massacres. 

The alternative to one-party rule, they suggest, is chaos.

When dissent emerges, Mr Xi uses technology to deal with it before it grows. 

Chinese streets are bristling with cameras, enhanced by facial-recognition software. 

Social media are snooped on and censored. 

Officials can solve problems early or persecute citizens who raise them. 

Those who share the wrong thought can lose their jobs and freedom. 

The price of the party’s success, in brutal repression, has been horrendous.

No party lasts for ever

The most dangerous threat to Mr Xi comes not from the masses, but from within the party itself. 

Despite all his efforts, it suffers from factionalism, disloyalty and ideological lassitude. 

Rivals accused of plotting to seize power have been jailed. 

Chinese politics is more opaque than it has been for decades, but Mr Xi’s endless purges suggest that he sees yet more hidden enemies.

The moment of greatest instability is likely to be the succession. 

No one knows who will come after Mr Xi, or even what rules will govern the transition. 

When he scrapped presidential term limits in 2018, he signalled that he wants to cling to power indefinitely. 

But that may make the eventual transfer only more unstable. 

Although peril for the party will not necessarily lead to the enlightened rule that freedom-lovers desire, at some point even this Chinese dynasty will end. 

A blueprint for central bank digital currencies

Threats to privacy come from the state as well as technology companies

The editorial board

Bitcoin: alternative token-based designs for a digital currency could preserve anonymity but facilitate crime © Alain Pitton/NurPhoto/Getty

Britain’s choice of world war two codebreaker Alan Turing to feature on its new plastic £50 note is ironically apt, and for several reasons. 

His work on cryptography speaks to the new front in monetary debates — how best to protect personal data in an age of digital payments. 

At the same time, the discrimination the war hero faced for his sexuality shows why privacy is important, including from the government.

In an interview with the Financial Times this week, European Central Bank executive Fabio Panetta said that a digital euro would protect consumer privacy — the public’s greatest concern over a central bank digital currency, according to a consultation by the ECB. 

Referring to Facebook’s attempt to launch the Libra stablecoin, Panetta warned that if central banks did not provide an alternative they would cede the ground to Big Tech. 

Companies could then use their dominant market position to set privacy standards.

Central bank digital currencies, however, raise questions about how to protect data from the state. 

If CBDCs became the dominant money then central banks could have vast data repositories of nearly every transaction in an economy. 

The need to clamp down on illegal money laundering would mean central banks, just like commercial banks today, would not allow individuals to hold their money anonymously — linking these transactions, however compromising, to individuals.

That might be acceptable in authoritarian regimes like China, where a digital currency project is moving ahead at pace. In democracies it is not. 

For this reason the Bank for International Settlements is right to call for the preservation of a two-tier financial system in its annual economic report. 

The so-called central bankers’ central bank advocates an account-based design with regulated private banks dealing with the public and the central bank maintaining digital currencies to make the payment system more efficient. 

It calls for digital identities tied to these accounts — fighting identity fraud as well as money laundering.

This arms-length structure would preserve privacy — since the state could access records only once a criminal investigation begins — and allow the private and public sector to do what they do best. 

The BIS argues the central bank coins could work as the plumbing of the system while banks and others could innovate and have responsibility for keeping data secure.

Alternative token-based designs for a digital currency could preserve anonymity but facilitate crime.

One such token in the private sector, bitcoin, is the favoured means of payment for hackers’ ransom demands, as well as for some of those avoiding tax; this week the South Korean government seized millions of dollars’ worth of cryptocurrency from 12,000 people accused of tax evasion. 

Monero, a cryptocurrency that promises even more privacy than the pseudonymous bitcoin, has started to become the choice of many criminals. 

Cash has the same problem: at one point investigators concluded 90 per cent of £50 notes were in the hands of organised crime.

A two-tier financial system means banks could, as they do at present, have responsibility for checking identities and keeping up with “know your client” rules. 

While state-run identity schemes such as India’s Aadhar can be used to make sure digital currencies are going to the right place, there are valid ideological questions about government-run ID schemes. 

The BIS blueprint is a good start for central banks considering digital currencies, but more radical steps such as handing more personal data to the central banks need more widespread consultation and support.

Real rates ain’t as real as you think

Is there any signal amid the Treasury market noise?

Robert Armstrong 

    © Financial Times

The noise in real yields

At the beginning of this week, before the Chinese market started throwing its toys out of the pram, the lead story on the FT’s markets page was about record-low real yields. 

Here is the bollocks par (or, translated into US profanity, the nut graph):

The real yield on 10-year US Treasuries fell further below zero on Monday as growing anxiety over the outlook for economic growth added fuel to a recent rally in bond markets. 

The idea here — and it is a very widespread idea — is that significant moves in real yields tell us something useful about economic growth. 

But how do we track real yields? 

Usually they are thought of as nominal Treasury yields, minus expected inflation. 

But that’s not how they are actually calculated; actually, they are not calculated at all. 

We just treat the yield on Treasury inflation protected securities (Tips) as the real rate, and subtract that from the yield on standard Treasuries, to find out what inflation expectations are. 

Here’s how those three have been acting lately (using 10-year maturities):

Broadly, since April, Tips yields and Treasury yields have fallen together, implying stable inflation expectations and falling real rates and hence “anxiety over the outlook for economic growth”. 

But two things strike me as funny here, making me suspect real yields may not be telling us what we think they are telling us. 

One is minor, one major. 

The minor point, pointed out to me by César Pérez Ruiz of Pictet Wealth Management, is that the gold price is not rising. 

Gold is strongly inversely correlated with real yields (gold yields nothing, so the opportunity cost of owning it falls with real returns available elsewhere). 

But in the past few months, as real yields have fallen to all-time lows, gold has fallen. 

Here is a chart (data from the Federal Reserve) of gold and Tips yields, with the gold price inverted, to show the correlation and its recent breakdown:

As Ruiz put it, why is gold at $1,800, instead of heading for $2,100? 

He thinks gold prices are anticipating that economic growth is going to disappoint, so inflation will be lower and real rates are going to rise. 

He may well be right about growth (my guess is he is), but notice what this implies about how the market works. 

It suggests that an inflation premium is not added on top of a real interest rate that corresponds in some way to the general level of real growth in the economy. 

Instead, changes in inflation expectations can pull real yields up or down, depending on what nominal yields do. 

If you think that nominal yields are not determined by economic expectations alone, but also by “technical” supply/demand/portfolio composition issues, this makes sense. 

But it draws into question the assumption that the decline in real yields is best understood as a reflection of growth expectations.

Now the second, more important funny thing. 

Real yields have fallen below the level of the long, dreary, pre-vaccine stage of the pandemic, between August of last year and February of this year. 

Is the growth picture now really as dim now as it was then, before we knew how effective vaccines were? 

We are expecting earnings for the second quarter to be up 70 per cent or so; GDP is expected to come in at something like 7 per cent; inflation is running at 5 per cent or so. 

And things are as bad as a year ago? 

Something is wrong with the picture that Treasury and Tips yields are drawing — which suggests, again, that these two securities might not be economic bellwethers so much as creatures of the more or less eclectic forces of supply and demand.

If you think the government bond market might be sending bad signals about the economy, it is easy to guess where the static is coming from: the Fed, and its $120bn a month of bond buying. 

What would yields on Treasuries and Tips be if the Fed was not in the market?

The Fed does buy Tips — in fact, it now owns about a fifth of the outstanding supply of them, according to data from the Fed and the Securities Industry and Financial Markets Association. 

That compares to almost about 29 per cent of outstanding Treasury notes and bonds, but the Fed’s holdings of Tips and the share of the total outstanding they own grew faster in the past year than for Treasuries. 

I asked James Athey of Aberdeen Standard Investments about this, and he gave the following picture — which sounds a lot like the way Ruiz sees things:

The problem here is that Tips are an order of magnitude less liquid and less utilised by investors when compared to nominal Treasuries — therefore the Tips market isn’t as efficient, and nominal Treasuries exhibit the first-mover status. 

Which leads me to my working model for this stuff: Nominals move first, the market has some idea where [inflation expectations] should be and so real [rates] move as a remainder . . . ie. Tips yields merely serve the purpose of generating an “acceptable” (equilibrium? Market derived?) break-even inflation rate given the nominal rate is what it is.

So the Fed is lowering real yields by buying Tips, and its even heavier buying of Treasuries suppresses real yields, too, because the Fed can’t control inflation expectations, so as nominal rates go down, real rates must also go down given stable inflation expectations.

The more you think about this stuff, the less it looks like real yields are a good growth indicator. 

We don’t know what the true level of real rates are. 

More importantly, we can’t be sure Fed interventions affect Treasuries and Tips symmetrically, so it is not clear that changes in real yields tells us all that much about growth, either.

Bob Michele of JPMorgan Asset Management told me that “right now, yields are anything central banks want them to be” but suggested we might look to historical experience to determine what real and nominal yields would be without Fed intervention:

Pre-pandemic, the real yield on the 10-year Treasury averaged about +0.5 per cent from 2014-19. 

If we look at the current level of real yields (-1.13 per cent) and replace it with the 0.5 per cent average, you lift the 10-year by 1.63 to 2.88 per cent.

But using post-great financial crisis and pre-pandemic yields as a guide may be conservative. 

Before the financial crisis, QE was not such a standard part of the Fed arsenal: 

I like to look at the 1992-94 experience. 

That was a time when the Fed put in place very aggressive monetary policy following the savings and loan crisis — but, without a QE programme distorting markets. 

Put differently, they left the yield curve to investors like me to price! 

The 10-year UST traded at a spread of almost 4 per cent above the fed funds rate in November 1992, over a year ahead of the Fed’s first rate hike in January 1994. 

Anyway, in that period where the Fed was behind the curve but not implementing a QE programme, the 10-year UST traded ~2.5-4 per cent above the fed funds rate — implying a yield of 2.5-4 per cent today based on that comparison.

If Michele’s arguments are even directionally correct, not only do we not have a good grasp on what today’s real yields are telling us about the economy (because we don’t know if the impact of QE on Treasuries and Tips is symmetrical) but we should be ready for the possibility that the rate environment will change significantly when — or more to the point, if — the Fed tapers its asset buying programme.

Did Climate Change Cause This?

Flood Disaster Could Become a Major Issue in German Election

This week's devastating floods in western Germany could very well bring climate change to the forefront of the country's national election. A similar weather disaster in 2002 tipped the ballots.

By Anna Clauß, Lukas Eberle, Christoph Hickmann, Martin Knobbe, Timo Lehmann, Julia Merlot, Gabriel Rinaldi und Jonas Schaible

Devastation in Walporzheim: A force so strong it could only be a force of nature. Foto: David Klammer / laif / DER SPIEGEL

Perhaps at the end of Germany's current election campaign, the candidates will be asked this: Where were you on Thursday, July 15? 

What did you do, what didn’t you do, and what did you say? 

Perhaps this Thursday will go down as the day that changed everything, or at least a lot of things, and when nature rendered any kind of campaign planning worthless. 

Perhaps this Thursday was the day the real campaigning began. 

The day after the storm, after the flood.

On Thursday, Armin Laschet, the chancellor candidate for the center-right Christian Democratic Union (CDU) visited the city of Hagen and the town of Altona, where he appeared in rubber boots on a flooded street and promised quick help.

Olaf Scholz, the candidate for the center-left Social Democratic Party (SPD), was on vacation in the Allgäu region of the Alps. 

He cut his holiday short to travel to Bad Neuenahr-Ahrweiler in the disaster region, where he called for greater climate protection measures.

Annalena Baerbock, the Green Party candidate was also on vacation, but her party wouldn’t say exactly where. 

She issued a press release calling for quick, unbureaucratic help, and had a spokesperson announce she was now coming home early from vacation.

It will take a few weeks before we know what was right and what was wrong, what had an effect and what didn’t. 

In any case, the consequences of the mass flooding on Thursday in Germany will reverberate for some time to come.

So, far the campaign running into the September election for Germany's parliament, the Bundestag, which will also determine who becomes Angela Merkel’s successor as chancellor, has been characterized by a disturbing imbalance. 

The issues at stake could hardly be greater: Most importantly, the climate crisis – and the question of how humanity can keep the planet habitable – demands answers. 

Instead, the debate has focused on the resumé of the Green Party candidate and passages in a book she wrote that appear to have been copied. 

And the fact that the CDU dressed up female employees at their party headquarters as policewomen or nurses and printed photos of them on posters. 

So far, the campaign has been petty and lacked the gravitas of an election of this importance.

Armin Laschet, the governor of North-Rhine Westphalia and chancellor candidate of the center-right Christian Democratic Union party visited the site of floods in Altena, Germany, on Thursday. Foto: Ralph Sondermann

That phase may now be over. 

Anyone who wants to continue discussing book chapters and resumés after the images of the flooded Ahr valley, after dozens of dead, missing and destroyed lives, after the images from a German disaster area, will have to ask him or herself whether they have lost their mind. 

The campaign is being reshuffled with the kind of force that only forces of nature can create.

That’s not to say that Baerbock hasn't made mistakes. 

She has – and through her negligence, she has also provided an opportunity for all those who would have preferred not to talk much about climate change. 

But now the issue is back in the election campaign, and it is unlikely to go away. 

What happened this week is too terrible for that.

On Thursday morning, Christian Beu sat on the side of the road at the entrance to Walporzheim. 

He’s a big, heavyset man in his forties, who can’t be knocked over easily. 

His legs were covered with mud up to his hips and he had mud stains on his face. 

Beu had a terrible night. 

He spent it here in the vineyard. 

It’s the only place he felt safe with his family.

Beu said his house, which is right on the Ahr River, is no longer inhabitable. 

When emergency struck, he stuffed the bare necessities into a duvet cover – clothes for his wife, his children and himself. 

Everything happened so fast that he didn’t even have a chance to grab his shoes.

Walporzheim is located in the district of Ahrweiler in the western German state of Rhineland-Palatinate, a small village of around 600 inhabitants nestled between vineyards. 

Beu said the water arrived at 10 p.m. on Wednesday night. 

The electrician explained how he tried to turn off the main fuse in the basement. 

But he didn't make it – within just a few minutes, the water on the ground floor had already risen almost to the ceiling. 

At 11 p.m., Beu fled with his family.

"I just thought, we’ve got to get out of here and go to the highest place," he said. 

Together with another family they were friends with, they struggled to the edge of town and then climbed high into the vineyard. 

Both families spent the night there. 

They didn’t dare to venture back down until around 4 a.m. on Thursday morning.

The masses of water almost completely destroyed Walporzheim. 

On Thursday, the morning after the flood, streets could be seen littered with meter-high piles of rubble, including parts of bridges, tree trunks and cars. 

A yellow excavator roamed through the village clearing away debris. 

Paramedics carried an elderly man, perhaps in his sixties and covered in mud, away on a stretcher.

"You could watch as one stair step after another disappeared."

A police helicopter circled overhead and the Federal Agency for Technical Relief arrived along with the emergency management team. 

Firefighters with axes in hand waded through the mud and peered into destroyed homes.

A woman with a gym bag in her hand and a baby tied to her back emerged from a doorway. 

"I just have to get out of here," she said, adding that her husband was about to pick her up in his car. 

She said she spent the night on the second floor. 

A video on her smartphone showed the torrent running through her house. 

"It was an avalanche of water," she said.

Oliver Marquardt, a father of two, was looking for his car. 

He owns two. 

One of them escaped the flood unscathed – he had managed to park it in the vineyard at 9 p.m. the night before. 

He had parked the other, a Peugeot 208, in a restaurant parking lot. 

Now, the lot was completely covered with debris, and the car was missing. 

"It’s gone," he said. 

Marquardt and his family spend the night in the attic. 

"You could see one step of the stairs after the other disappear," he said.

But smashed cars were the least worrisome of the damage caused by the flooding. 

Ambulances could be seen on Thursday all around the Ahr valley, and helicopters circled overhead rescuing people from villages with long ropes. 

The devastation was visible everywhere. 

By Friday, the number of deaths in the German floods had risen to over 100, with that figure expected to go up even more as more bodies are recovered.

But there are more to those figures than just numbers – each one is a fate. 

For every affected family, it will be the disaster of a lifetime. 

In such moments of need, people often take a lot closer look at the people in power than they normally would. 

Whether they send help, what they promise and whether they strike the right tone. 

Most importantly: Whether they show up.

The Rhine River in Cologne Foto: Christoph Hardt / ddp images

It’s a very fine line, and you can get a lot wrong in the early hours and days. 

If Armin Laschet hadn't rushed to Altena and Hagen, he would have been rightly told that he was acting as if he had already become chancellor and was no longer interested in the people of his home state. 

He wouldn’t have been able to rid himself of that stain easily. 

As governor of the state of North Rhine-Westphalia, he is responsible by virtue of his office. 

And he is likely to remember the response of his predecessor, the Social Democrat Hannelore Kraft, in the summer of 2014. 

At the time, a storm in the city of Münster in the state had caused severe flooding and deaths, but it took Kraft several weeks to travel to the site of the disaster. 

By way of explanation, the governor said that she had been on a ship in the eastern state of Brandenburg for a week and had no mobile phone reception there. 

Incidents like that had helped Laschet defeat Kraft in an election three years later.

But how should Annalena Baerbock, Laschet’s rival for the Chancellery respond? 

Or Olaf Scholz?

It was more challenging for them from the start. 

Should they cut off their holidays? 

They could have been accused of knee-jerk responses or trying to boost their images by showing up at the disaster site. 

Scholz did so, anyway, and traveled to Rhineland-Palatinate. 

The two couldn’t please everyone during the first few hours, anyway. 

They just had to make as few mistakes as possible.

At least they hit the right tone on Twitter. 

Baerbock wrote that her thoughts are with the people "whose streets and homes have been flooded by heavy rain." 

She also thanked the emergency workers. 

So did Scholz. 

At first, Laschet didn’t tweet anything, but he did arrive at the scene early.

But then, as he so often does, he gave a botched television interview and quickly grew cantankerous when asked a question about his climate policies. 

"You don’t change your policies just because of a day like this," he said. 

The sentence is likely to haunt him for some time to come. 

There will be many protestations again in the coming days that this isn’t an election issue, but of course it is. 

People want to know how politicians are going to guide them through a situation like this week’s flooding. 

That too is politics, and anyone who fails here can lose the election, as the conservative candidate Edmund Stoiber did in 2002.

Memories of 2002

Things were looking good for chancellor candidate Edmund Stoiber at the time – the federal government coalition between the center-left Social Democratic Party (SPD) and the Greens had seemed aimless after four years, and his conservative Christian Democratic Union and the Bavarian Christian Social Union, which share power at the national level, were 5 percentage points ahead of the SPD in polls. 

But then came the massive flooding of the Elbe and Danube rivers. Gerhard Schröder moved quickly.

The incumbent chancellor travelled to the flood area, put on his rubber boots and made it seem like he was on top of things. 

Schröder followed his political instincts – and no one could beat him in that discipline at the time. 

"Of course, the dramatic flood situation shortly before the 2002 federal election was an important factor in Gerhard Schröder’s subsequent election victory," said Stoiber, looking back.

Stoiber hesitated at the time. 

At the point that Schröder was already trudging through the disaster area in his rain jacket with a determined look on his face, Stoiber, who was the governor of Bavaria at the time, was still with his wife and friends on the North Sea island of Juist. 

"I didn’t want to campaign on the natural disaster," he said of the time. 

But he soon realized that he also needed to make an appearance. 

He travelled to where Schröder had already been, showing up in a light blue polo shirt.

Politics is always a battle of images, and Schröder won that one. 

He continued to campaign on the issue, too, inviting representatives of other EU countries that had also been hit by the floods to a crisis summit in Berlin and postponing tax reform so money would be available for an aid package worth billions. 

"I didn’t have those possibilities as a challenger,” Stoiber said. 

The conservatives lost to Schröder’s SPD on election night.

So, how likely is it that this week’s flooding will have an impact on the election? 

Does Laschet have an advantage because of his deep ties to the region as governor of a state hit by the flooding? 

Or will the Greens benefit as the focus shifts to climate change, one of their core issues? 

There are two levels at play here – the operational, which is about getting relief to the region quickly. 

And the fundamental, meaning plans for the future. 

Operationally, Laschet has the advantage. 

And otherwise?

Flood damage in the town of Schuld in the Eifel region of North Rhine-Westphalia: There will be many protestations again in the coming days that this isn’t an election issue, but of course it is. Foto: Christoph Reichwein / dpa

As the dead were being counted on Thursday, Robert Habeck was on a stage in the North Sea beach town of Sankt Peter-Ording, a light wind blowing. 

It was a completely different world.

With Baerbock on vacation, Habeck, her party co-chair, is on a campaign tour in northern Germany. 

One day before, he had been walking barefoot through the area's coastal mudflats, accompanied by photographers and camera operators. 

Habeck was playing the nature lover as nature destroyed livelihoods elsewhere.

He knew that every word counts, that it would be very easy to get it wrong. 

Was he exploiting the disaster politically? 

Was he showing off that he had been telling people about such dangers all along?

"Campaigning on a day like today is really out of the question," he said. 

It’s not just about flooded cellars, he said, but about deaths and injuries. 

"I have invitations and requests to go there, but that would be wrong," Habeck said. 

He says he experienced flood warnings as a government minister in his home state of Schleswig-Holstein, in northern Germany. 

"I know that in situations like this, rubber-necking politicians just get in the way." 

He makes an exception here for Laschet. 

Laschet's words, Habeck said, are relevant to people who have responsibility in the region.

Habeck was striking the right chord now – he knew that this wasn't the Green Party's hour – that would come in a few days, when the discussion shifts from the event itself to the causes. 

He knew that he has to avoid arousing even the slightest suspicion that the catastrophe is convenient for the Greens.

As harsh as it may sound, though, the floods do play to the Greens’ advantage. 

The natural disaster gives them a chance to revamp an election campaign that hasn’t been going very well for them so far. 

That’s not to say that there are cynical and evil people running around within the Green Party. 

Any other party would be calculating when it came to an event like this.

A Turning Point

For years, the Greens have been in a quandary, politically and morally. 

They issued warnings about something that had been proven in many studies, but whose effects weren’t really being felt in Germany. 

Climate change remained abstract. 

At least until 2018.

That year, the country experienced an unusual heat wave that lasted from spring onward. 

There was little rain, and the drought caused lawns and fields to wither. 

The president of the German Meteorological Service (DWD) at the time said climate change had Germany "in its grip," and "Heisszeit" ("hot spell") became the word of the year. 

The Green Party’s numbers in the polls soared.

In early August of that year, they were at 15 percent, then rose to 16 to 17 percent in September, 20 percent in October and 22 percent in November. 

The weather pattern continued the next year. 

The spring of 2019 was also too warm, and the Greens, who until then had generally performed weaker in actual elections than in the polls, garnered 20.5 percent of the votes in the election for the European Parliament. 

It was the party’s best-ever performance in a country-wide election in Germany, and it is also the moment the party decided to field its own candidate to run for chancellor. 

Without the extreme weather of 2018, it’s possible the party never would have done so.

The Greens' dilemma resembles that of the police. 

Cops, of course, want to prevent murders, assaults and burglaries, but if there were no more crimes, some might wonder if the police are actually needed.

The major question now is the degree to which this week’s severe weather is linked to climate change. 

It is a battle over who has the authority to interpret events, and it began on Thursday on social media and in newspaper editorials. 

The issue will be debated bitterly, because so much hinges on it.

Some will say that these kinds of disasters have always happened. 

Others will say it hasn’t happened with this frequency.

Yet others will claim it is a coincidence. 

And there are many who will say it is climate change.

The issue is already dividing society. 

But where does the truth lay?

A Consequence of Climate Change

If you call the German Meteorological Service, meteorologist Andreas Friedrich handles press enquiries. 

He knows how sensitive the subject is and he is cautious when he addresses it.

"It’s not easy to clearly attribute this one event to climate change, but it certainly plays a role," he said. 

"We have had a precipitation radar system in Germany for 20 years, which allows us to record precipitation without gaps," he said. 

"It clearly shows that heavy rainfall events have increased in Germany in recent years." 

It can be assumed "that the extremes will not only become more frequent, but also more extreme in the coming years," he said. 

"That is a consequence of climate change that we are experiencing."

For a scientist, this statement is surprisingly clear, decidedly so. 

It also provides an idea of how tough and heated the discussions could get. 

On Thursday, Chancellor Angela Merkel made clear which side she’s on. 

She said that there have always been floods or storms. 

"But the frequency is simply worrying and requires that we take action," Merkel said during a trip to the United States.

You can’t hide the weather, which raises questions.

German Interior Minister Horst Seehofer offered even clearer words. 

"No one can seriously doubt that this disaster is related to climate change," the minister said. 

He announced the German government would set up a federal aid program in coordination with the affected states and municipalities. 

"You can expect it to be a big package," he says.

More than anything, this week’s events change everything for Laschet as a chancellor candidate. 

His campaign so far has been designed to lull people into a sense of security, to make them feel that things can stay more or less as they are. 

Laschet was counting on satisfied citizens who, after a year and a half of the pandemic, would vote as they had done so many decades before. 

This would mean a majority would cast votes for the CDU and its CSU sister party. 

Of course, Laschet also talked about change, but it always seemed like he was talking about Germany as if it were some kind of dollhouse, where all you had do was push one little bed from one corner to the other -- the point being that there wouldn’t be any radical changes. 

Then came the weather. 

And sometimes there is nothing more radical than the weather.

Unemployment statistics can be fudged and gaps in the budget can be hidden. 

But you can’t hide the weather. 

This, of course, raises questions: What needs to be done to ensure that these kinds of disasters remain the exception rather than the rule?

It also poses problems for Olaf Scholz. 

It’s not that Scholz lacks ideas. 

Some traditional Social Democrats feel he worries too much about climate change rather than too little. 

But no matter how hard he tries, the Greens will always be perceived as having had the ideas first.

This week’s flooding is likely to shape the agenda for weeks to come. 

It’s not the kind of event you can quickly move beyond – it’s not a slight hiccup on the campaign trail. 

It’s going to force some rethinking in the campaign.

For the CDU, it had immediate tangible consequences. 

Anyone who tried to visit the party’s website on Thursday at times only got an "Error 503” message. 

The company that takes care of the CDU’s website is located in Rheinbach, a town that was hit heavily by the storm. 

Several districts there had to be evacuated. 

The CDU’s server and print shop were put out of commission.  

Liquidity Crisis: Wells Fargo & Repo Markets Sound Alarms

By Matthew Piepenburg

Every financial crisis ultimately boils down to a liquidity crisis, namely: Not enough fiat dollars to keep the financial wheels sufficiently greased.

Below, we look at two warning signs from Wells Fargo (NYSE: WFC) and the reverse repo market which warn of precisely that: a liquidity crisis.

From Debt Binge to Credit Crunch: A Chronicle of Excess

In a world in which consumers, corporations, and sovereigns have falsely confused debt-based growth as actual growth, a liquidity crisis is not a theoretical debate, but a mathematical certainty.

For years, self-serving politico’s, central bankers, Wall Street sell-siders, and a woefully unsophisticated cadre of main stream financial “journalists” have endeavored to downplay this rise-and-“pop” certainty by deliberately ignoring the $280T debt elephant in the global living room.

Of course, that debt, for years, has been “monetized” by increasingly debased currencies and rising money supplies created literally from central bank mouse-clicks rather than productivity, as evidenced by the embarrassing fact that global GDP is less than 1/3 of the global debt.

Needless to say, money (i.e., “liquidity”) created out of thin air, and then justified with even thinner (yet comfortably titled) policies like Modern Monetary Theory has its temporary charms.

It Was the Best of Times…

Risk assets—namely stocks, bonds and real estate– love easy money, be it printed out of nowhere or lent at rock-bottom (and artificially repressed) interest rates.

For years, the big boy corporations on the major exchanges have been borrowing trillions per annum to buy their own stocks and/or pay dividends, which naturally makes stocks go up rather than down.

In short, when money is flowing, risk assets rise on a rising tide, even if that tide is artificial, “printed,” pretended or extended (yet ultimately a source of financial drowning).

It Was the Worst of Times…

In the meantime, those good-time rising tides benefited an increasingly smaller segment of the social-contract, which explains why historical levels of wealth inequality have led to equally inevitable (and rising) tides of undeniable social unrest.

Economics Matters—History Turns on “Dimes”

Despite the fact that such appalling debt dangers existed long before COVID, the “experts” now conveniently blame our fractured societies (and growing debt burdens) on a pandemic while distracting the masses with a media that is far more obsessed with transgender bathroom rights, racial headlines, the latest COVID variant and the sorrows of Prince Harry than they are with the fact that our financial system is rotting right below our feet.

This financial rotting has real consequences for society not just market analysis.

After all, social unrest always follows a financial crisis (and inequality), despite the perpetrators’ best efforts to shield themselves from blame.

Transparency Matters—But It’s Gone

Of course, as every magician (or covert operative) knows, the best way to pull off a trick is to distract the audience from the real slight-of-hand, allowing the hocus-pocus of a self-inflicted financial disaster to hide from immediate view via lies of omission rather than the courage of accountability.

Perhaps the greatest of these lies was the daily-telegraphed message that extreme money printing and debt expansion was only “temporary” and “under control” as opposed to a full-out addiction which always ends in a fatal financial overdose.

For years, we’ve been told that $28T in global central bank money printing was not inflationary, and finally, when that inflation did rear its head, we’re now being told it’s only “transitory.”

Most, however, know better.

Swapping One Addiction for Another

Frankly, even the central bankers themselves (from Yellen to Powell) are finding it harder to whistle past (or double-speak through) the graveyard of debt and dying dollars which they alone created through appalling balance sheet expansion (addiction) like this:

There was even “frightening” talk of central bank “tapering,” as these bankers ran out of excuses, credibility and options to justify more money printing.

But if one addiction loses its source, there’s always a new drug pusher (and “liquidity” source) to step up, and in a global financial system marked by an addiction to easy money (rather than needed austerity or actual productivity), the newest addiction to replace Fed money printing is now government deficit spending.

That is, extreme fiscal policy is gradually replacing (or at least joining) extreme monetary policy (and governmental guarantees of commercial bank lending) to keep dollars flowing and hence a slowly tanking financial system momentarily “greased” with yet another deadly liquidity “fix.”

Just like we saw QE 1 fatally morph from QE2-4 into “Unlimited QE,” we shall soon see fiscal policy 1 morph into unlimited “fiscal policy” at a nation-state near you; beginning, of course, with Biden et al.

But as we’ve said many times elsewhere, addiction—be it to monetary stimulus or fiscal stimulus—always ends the same way: One either quits or dies.

Again, even the bankers and a small handful of brain-celled politicos know this, which is why we are starting to see signs of a genuine hangover (i.e., liquidity crisis) in our artificial yet liquidity-addicted financial system.

As for these flashing warning signs, let’s just consider two recent tremors percolating below our feet: 1) Wells Fargo and 2) the reverse repo market.

1. Wells Fargo Welches in Panic

We’ve given many prior warnings regarding the objective evidence of banking risk in the global financial system, and despite Basel III’s virtue signaling, we also warned that those risks were anything but “transitory.”

In fact, even the big boys in the big banks are getting nervous—as well as ahead of—the financial crisis they see coming after years of benefiting almost exclusively from a credit binge which they themselves engineered.

In short, the liquidity they once relied upon is drying up.

Thinking always of themselves first and clients second, Wells Fargo just announced that they are permanently suspending/closing all personal lines of credit (from $3k to $300K) in the coming weeks.

Yes. That’s kind of a big deal…

Wells Fargo is effectively confessing that they are worried (seriously worried) about inevitable credit/loan defaults on their consumer credit lines for which they charge interest at anywhere from 9% to 21% (and who thought usury was dead?).

Why the sudden change of heart at that oh-so generous bank?

Because Wells Fargo is worried about a crisis ahead—namely a liquidity crisis.

Nor is Wells Fargo alone. Many insider businesses (i.e., publicly-traded fat cats) who benefit from the best loan terms and unfair capital access are taking on less debt.


Because their massive debt exposures have just gotten too big to ignore, and they have no choice but to borrow less rather than more.

Of course, less borrowing means less lending, and less lending means tightened credit, and tightened credit means a credit crunch (i.e., liquidity crisis), and a credit crunch in a world/market addicted to credit (i.e., debt) means ”uh-oh” for risk assets like stocks, bonds and real estate.

Meanwhile, as Wells Fargo hunkers down for the pain ahead, JP Morgan, one of the smartest insiders in the entire (rigged) banking system, is beginning to carefully hoard and stockpile cash ($500B) and moving more to the safety of short-term bonds.


Well, they’d like to have some dry-powder when risk assets tank and rates rise, for the best time to buy is when there’s blood in the streets; and the best time to lend is when inflation and rates are rising, not falling.

But more to the point, JP Morgan (like Wells Fargo) sees a liquidity crisis on the horizon…

But what suddenly tipped them off?

Let’s talk about the Reverse Repo market…

2. The Reverse Repo Market—Banks Losing Trust in Each Other

Signals from that esoteric (and hence media-misunderstood) corner of the banking system known as the repo market have been making neon-flashing warning signs.

Traditionally, the reverse repo market is where banks went to borrow from banks, typically offering collateral (US Treasuries) for some short-term liquidity—i.e., money at low rates.

But in September of 2019, those rates spiked dramatically for the simple reason that banks began distrusting each other’s credit risk and collateral. That’s a bad sign.

What is happening now is that the Fed, rather than the commercial banks, are taking a much greater role in back-stopping this increasingly fractured intra-bank repo (credit) market.

And unlike retail clients paying double-digit rates for credit lines, the Fed has lifted the interest (IER) they pay to banks (no shocker there) as banks are parking more money at the Fed where they are exchanging cash for Treasuries in a now unignorable flight to safety.

As a result, the repo market has skyrocketed as banks are parking nearly $1T per day at the Fed, which is 3X the normal operational amount.

This is a screaming sign of counter-party risk among the banks themselves, whose last hope is the Fed, not each other.

And why are the too-big-to-fail banks looking for low-rate handouts and T-bills from these grotesquely bloated (and Fed-supported) repo markets?

Because they see a crash coming and are bracing for the transition from credit addiction to financial crisis—i.e., less “liquidity” to grease the broken wheels of an overheated credit system.

Risk Assets Facing Real Risk

What does this mean for the great inflation-deflation debate?

Well, a liquidity crisis is never good for risk assets like stocks, which will see a price decline and hence “deflation;” but don’t confuse that with the real-world notion of inflation—namely rising prices for the things most mortals need to live.

As more banks are swapping T-bills as collateral from the Fed rather than each other for cash, this means massive amounts of money (“liquidity”) is coming out of the system.

The money markets are moving alarming amounts of dollars to the Fed, which means bank reserve accounts are moving from the banks to the Fed itself; this, in turn, means less bank reserves and hence less bank lending—i.e., a credit tightening rather than credit binging.

Such reduced “liquidity,” as mentioned above, is a very bad omen for risk asset markets.

Gold’s Direction and Meaning

As for gold, when markets tank, gold can follow, but with far less depth and speed. 

Many tapped out investors are forced to sell safer precious metals to cover risk asset losses, and the pinch to gold is temporary yet real when markets decline.

But as deflation hits the exchange prices, inflation in the price of everything else continues its slow climb north, which gold eventually and consistently follows.

In short, in a financial crisis, gold ultimately shines brightest as its inherent value is inherently superior to tanking currencies, stocks and other risk assets.

As liquidity dries up in a financial crisis, the trend will be disinflationary, but please remember that disinflation is not deflation; it’s a just slower rate of inflation.

Between 1972 and 74, for example, when risk assets fell in nominal terms by 50% (“deflationary”), consumer prices had risen by 10% (“inflationary”).

Informed gold investors have known for years that the banking system is deeply flawed and that at some point a monetary collapse far greater than the GFC of 2008 is inevitable, which, by the way, does not mean imminent.

Preparation is Wiser than Timing

But for gold investors (rather than traders/speculators), timing is not the motive, preparation is.

When the monetary system implodes under its own excess (for which the foregoing warning signs from Wells Fargo to the repo markets are merely the first tremors), gold will be far kinder than currencies and traditional (and now historically bloated) risk assets.

The obvious question today is how much deficit spending (inflationary, by the way) will governments desperately commit to in order to fill the gap of dollars now coming out of the commercial banking system?

Again, we already know that commercial bank lending (and credit availability) is down:


Meanwhile, M2 money supply, compliments of deficit spending, was up 25% in 2020 as governments monetized their debt with, alas, more debt…

As hinted above, are we transitioning from unlimited QE to unlimited deficit spending to “solve” liquidity crises? Are we coming out of one type of addiction and heading into another?

The sad answer is yes, and again, we all know how addictions end.

In short, what we are seeing in the repo market will not be the cause of the next yet inevitable implosion, but is merely a dying canary in the financial coal mine:

The markets, alas, are handing investors clear warning signals of a liquidity crisis and hence financial crisis.

Who will heed it? 

The Chinese Economy’s Great Wall

For better or worse, China and its economic policies now play a decisive role in the global economy, giving everyone an interest in its efforts to increase its own domestic consumption spending. But for China to reach its current growth targets, it will need to change its approach to the world.

Jim O'Neill

LONDON – As we move through 2021, there are more signs of a return to pre-pandemic normalcy, at least in countries not reeling from dangerous new variants of the coronavirus. 

High-frequency economic indicators in many parts of the world are strengthening, concerns about mass unemployment are giving way to inflation fears, and the G7 has just held an in-person summit.

But there is a problem at the heart of the global economy: China’s interactions with the rest of the world appear to have taken a further negative turn because of the pandemic.

Having created the BRIC (Brazil, Russia, India, and China) category in 2001, I have closely followed China’s ascent, and have come to be seen as a China bull. 

I became excited about the country’s economic potential in 1990, when I visited Beijing for the first time while working for the Swiss Bank Corporation. 

As I strolled the capital’s bustling street markets, I was surprised by how normal it felt. Might this supposedly “communist” country become a major force in the world economy?

That question stayed in my mind throughout the 1990s, partly owing to international macroeconomists’ persistent hand-wringing about the world economy’s growing dependence on US consumption. 

Those concerns had been building since my earliest days as a professional economist in the 1980s, when I found myself at the center of the policy dilemmas surrounding the Plaza (1985) and Louvre (1987) Accords.

At the time, US policymakers were eager to boost domestic demand in other developed countries (namely, Germany and Japan). 

And following China’s relative success in handling the 1997 Asian financial crisis, I came to see it as the alternative global engine that everyone had been looking for.

But the goal of boosting domestic consumption poses a dilemma for the Chinese development model. 

Most data show that Chinese consumer spending still probably accounts for less than 40% of the country’s overall GDP.

Investment spending and exports are what have fueled the Chinese juggernaut for most of the past three decades (and especially the early years). 

China’s modest consumption-to-GDP ratio stands in stark contrast to that of the United States, which, at around 70%, is probably excessive. 

The upshot, in terms of the global economy, is that Chinese consumer spending is technically only about one-third that of US consumer spending.

But several additional points are worth noting. 

While Chinese consumer spending remains relatively low, it has increased from around one-sixth that of the US over the past 20 years. 

Moreover, this marginal growth has had a much more powerful effect on the global economy than have changes in US consumption. 

And the Chinese consumer’s global influence has enormous potential to rise further relative to that of the US.

It is therefore in everyone’s interest that Chinese consumption demand continue to increase. 

While it is unlikely that China’s consumption spending will ever reach 70% of GDP, an increase to 50% is a perfectly reasonable and desirable target for both China and the world. 

If China’s GDP (in current US dollars) were to grow to match that of the US by 2030, a 50% consumption-to-GDP ratio would imply an additional $4 trillion of consumer spending globally.

In their latest deliberations, China’s leaders expressed a desire to double household incomes over the next 15 years, which would imply an average annual increase of around 4.5% in real (inflation-adjusted) GDP.

Given China’s aging workforce, this target is much more realistic than one attempting to match the double-digit growth rates of the past, and it would be broadly consistent with the Chinese economy’s rise to parity with the US. 

But if China’s consumption-to-GDP ratio does not increase, I doubt it will achieve its goal.

Like any other country, China’s economic growth will be driven over the medium term by the rate of productivity growth and the size and composition of its labor force.

Because the labor force has stopped growing, additional economic growth will have to come from increased productivity.

Here, China must resolve a major contradiction. 

Typically, an economy’s most productive sectors are in manufacturing, not services; and it is in manufacturing that additional productivity gains are easiest to achieve. 

But China must simultaneously boost the role of personal consumption, which generally implies higher demand for services. 

Achieving both objectives simultaneously is easier said than done.

I suspect that Chinese policymakers have not yet thought enough about this dilemma or about how it might affect China’s other international challenges. 

Even before the COVID-19 pandemic, it was clear that China’s economy is simply too big for its policymakers to ignore the global implications of their decision-making. 

Issues ranging from Chinese tech giants like Huawei to the presence of Chinese students at Western universities had become sources of tension. 

And, of course, there are international concerns about China’s human-rights record and the domestic failures that allowed COVID-19 to escalate from an outbreak to a pandemic.

At the end of the day, China will need the rest of the world if it is to increase both domestic consumption and productivity. 

The best way that China can improve its international standing is through soft diplomacy that respects other countries preferences and aspirations, rather than treating them as sources of confrontation. 

Without such a change in attitude, China will not reach its goal of doubling incomes within 15 years, leaving its people – and the rest of us – worse off as a result.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK treasury minister, is Chair of Chatham House and a member of the Pan-European Commission on Health and Sustainable Development.