Thursday, June 30, 2016

India’s civil servants get 23% pay rise, to help consumption


More than 10m current and former Indian civil servants have been awarded a 23 per cent rise in salaries, allowances and pensions — a windfall aimed at boosting private consumption that will add to pressure on New Delhi’s finances.
The move, which will cost about $15bn a year, or 0.7 per cent of gross domestic product, was proposed in November by an independent pay commission constituted once a decade to review civil servants’ pay and recommend increases.
On Wednesday the government of Narendra Modi, prime minister, approved the hefty pay rise for India’s 4.8m central government employees, and its 5.4m retired civil servants, with the rise taking retrospective effect from January.
Economists say the wage rise will bolster private consumption, helping to propel India’s continuing economic expansion, but will make it tougher for New Delhi to achieve its goal of reducing its fiscal deficit. Mr Modi’s government had already accounted for about 75 per cent of the total cost in its budget, unveiled in February.
Rajeev Malik, senior economist at CLSA, the brokerage, said: “For growth, it’s positive simply because it’s a mini consumption boost. Finally people have money in their pocket, and a good number of them will spend it on conspicuous consumption.”
However, he added: “But purely from a fiscal management point of view, having this kind of shock every 10 years isn’t helpful.”
Analysts said it could also inadvertently stoke inflation, noting how it accelerated sharply after government wages were raised by nearly 40 per cent in 2008.
India’s economy grew 7.9 per cent in the first quarter of 2016, confirming its position as the world’s most dynamic large economy. But growth has relied mainly on private consumption, while investment remains sluggish.
The consumption boost will extend well beyond those who received a pay rise on Wednesday. India’s 29 states will over the next two years follow the government’s lead by raising the pay of their employees, although their strained finances may not permit them to match the magnitude of New Delhi’s largesse.
“Car sales and consumer durables have been doing fairly well and this would help keep that story alive,” said Pranjul Bhandari, chief India economist for global bank HSBC.
“In the past, purists have looked down on consumption-led growth as it can become inflationary very quickly. But at this point in India, we don’t really have an option. It’s going to be a while before private investment starts picking up,” she said.
Shares of consumer goods companies rose sharply on the Bombay Stock Exchange after the pay rise was approved.
Many analysts expressed dismay that Mr Modi’s government had approved a mass pay rise for all central government employees without any consideration of civil servants’ actual performance.
At the bottom end of the civil service pay scale, Indian government employees such as drivers, clerks and peons who carry out office errands — who far outnumber the professional staff — are already paid up to three times more than their private sector counterparts.
But top bureaucrats are still paid far less than they could earn in private sector jobs, which makes it difficult for the government to recruit talent to run the administration.
“The problem with this whole thing is you have way too many clerks, drivers and peons who get too much money,” said Sunil Jain, managing editor of India’s Financial Express newspaper. “But if you want to hire a top-class secretary [a high-level bureaucrat] you can’t pay that guy what he needs to be paid to lure him from the private sector.”

Saturday, June 25, 2016

Why Garbagemen Should Earn More Than Bankers


Thick fog envelops City Hall Park at daybreak on February 2, 1968. Seven thousand New York City sanitation workers stand crowded together, their mood rebellious. Union spokesman John DeLury addresses the multitude from the roof of a truck. When he announces that the mayor has refused further concessions, the crowd’s anger threatens to boil over. As the first rotten eggs sail overhead, DeLury realizes the time for compromise is over. It’s time to take the illegal route, the path prohibited to sanitation workers for the simple reason that the job they do is too important.
It’s time to strike.
The next day, trash goes uncollected throughout the Big Apple. Nearly all the city’s garbage crews have stayed home. “We’ve never had prestige, and it never bothered me before,” one garbageman is quoted in a local newspaper. “But it does now. People treat us like dirt.” 
When the mayor goes out to survey the situation two days later, the city is already knee-deep in refuse, with another 10,000 tons added every day. A rank stench begins to percolate through the city’s streets, and rats have been sighted in even the swankiest parts of town. In the space of just a few days, one of the world’s most iconic cities has started to look like a slum. And for the first time since the polio epidemic of 1931, city authorities declare a state of emergency.
Still the mayor refuses to budge. He has the local press on his side, which portrays the strikers as greedy narcissists. It takes a week before the realization begins to kick in: The garbagemen are actually going to win. “New York is helpless before them,” the editors of The New York Times despair. “This greatest of cities must surrender or see itself sink in filth.” Nine days into the strike, when the trash has piled up to 100,000 tons, the sanitation workers get their way. “The moral of the story,” Time Magazine later reported, “is that it pays to strike.”
Rich without Lifting a Finger
Perhaps, but not in every profession.
Imagine, for instance, that all of Washington’s 100,000 lobbyists were to go on strike tomorrow. Or that every tax accountant in Manhattan decided to stay home. It seems unlikely the mayor would announce a state of emergency. In fact, it’s unlikely that either of these scenarios would do much damage. A strike by, say, social media consultants, telemarketers, or high-frequency traders might never even make the news at all.
When it comes to garbage collectors, though, it’s different. Any way you look at it, they do a job we can’t do without. And the harsh truth is that an increasing number of people do jobs that we can do just fine without. Were they to suddenly stop working the world wouldn’t get any poorer, uglier, or in any way worse. Take the slick Wall Street traders who line their pockets at the expense of another retirement fund. Take the shrewd lawyers who can draw a corporate lawsuit out until the end of days. Or take the brilliant ad writer who pens the slogan of the year and puts the competition right out of business.
Instead of creating wealth, these jobs mostly just shiftit around.
Of course, there’s no clear line between who creates wealth and who shifts it. Lots of jobs do both. There’s no denying that the financial sector can contribute to our wealth and grease the wheels of other sectors in the process. Banks can help to spread risks and back people with bright ideas. And yet, these days, banks have become so big that much of what they do is merely shuffle wealth around, or even destroy it. Instead of growing the pie, the explosive expansion of the banking sector has increased the share it serves itself.
Or take the legal profession. It goes without saying that the rule of law is necessary for a country to prosper. But now that the U.S. has 17 times the number of lawyers per capita as Japan, does that make American rule of law 17 times as effective? Or Americans 17 times as protected? Far from it. Some law firms even make a practice of buying up patents for products they have no intention of producing, purely to enable them to sue people for copyright infringement.
Bizarrely, it’s precisely the jobs that shift money around – creating next to nothing of tangible value – that net the best salaries. It’s a fascinating, paradoxical state of affairs. How is it possible that all those agents of prosperity – the teachers, the police officers, the nurses – are paid so poorly, while the unimportant, superfluous, and even destructive shifters do so well?
When Idleness was Still a Birthright
Maybe history can shed some light on this conundrum.
Up until a few centuries ago, almost everybody worked in agriculture. That left an affluent upper class free to loaf around, live off their private assets, and wage war – all hobbies that don’t create wealth but at best shift it about, or at worst destroy it. Any blue-blooded noble was proud of this lifestyle, which gave the happy few the hereditary right to line their pockets at the expense of others. Work? That was for peasants.
In those days, before the Industrial Revolution, a farmers’ strike would have paralyzed the entire economy. These days, all the graphs, diagrams, and pie charts suggest that everything has changed. As a portion of the economy, agriculture seems marginal. Indeed, the U.S. financial sector is seven times as large as its agricultural sector.
So, does this mean that if farmers were to stage a strike, it would put us in less of a bind than a boycott by bankers? (No, quite the reverse.) And, besides, hasn’t agricultural production actually soared in recent decades? (Certainly.) Well then, aren’t farmers earning more than ever? (Sadly, no.)
You see, in a market economy, things work precisely the other way around. The larger the supply, the lower the price. And there’s the rub. Over the last few decades, the supply of food has skyrocketed. In 2010, American cows produced twice as much milk as they did in 1970. Over that same period, the productivity of wheat has also doubled, and that of tomatoes has tripled. The better agriculture has become, the less we’re willing to pay for it. These days, the food on our plates has become dirt cheap.
This is what economic progress is all about. As our farms and factories grew more efficient, they accounted for a shrinking share of our economy. And the more productive agriculture and manufacturing became, the fewer people they employed. At the same time, this shift generated more work in the service sector. Yet before we could get ourselves a job in this new world of consultants, chefs, accountants, programmers, advisors, brokers, doctors, and lawyers, we first had to earn the proper credentials.
This development has generated immense wealth.
Ironically, however, it has also created a system in which an increasing number of people can earn money without contributing anything of tangible value to society. Call it the paradox of progress: Here in the Land of Plenty, the richer and the smarter we get, the more expendable we become.
When Bankers Struck
“CLOSURE OF BANKS.”
On May 4, 1970, this notice ran in the Irish Independent. After lengthy but fruitless negotiations over wages that had failed to keep pace with inflation, Ireland’s bank employees decided to go on strike.
Overnight, 85% of the country’s reserves were locked down. With all indications suggesting that the strike could last a while, businesses across Ireland began to hoard cash. Two weeks into the strike, The Irish Timesreported that half of the country’s 7,000 bankers had already booked flights to London in search of other work.
At the outset, pundits predicted that life in Ireland would come to a standstill. First, cash supplies would dry up, then trade would stagnate, and finally unemployment would explode. “Imagine all the veins in your body suddenly shrinking and collapsing,” one economist described the prevailing fear, “and you might begin to see how economists conceive of banking shutdowns.” Heading into the summer of 1970, Ireland braced itself for the worst.
And then something odd happened. Or more accurately, nothing much happened at all.
In July, the The Times of England reported that the “figures and trends which are available indicate that the dispute has not had an adverse effect on the economy so far.” A few months later, the Central Bank of Ireland drew up the final balance. “The Irish economy continued to function for a reasonably long period of time with its main clearing banks closed for business,” it concluded. Not only that, the economy had continued to grow.
In the end, the strike would last a whole six months – 20 times as long as the New York City sanitation workers’ strike. But whereas across the pond a state of emergency had been declared after just six days, Ireland was still going strong after six months without bankers. “The main reason I cannot recollect much about the bank strike,” an Irish journalist reflected in 2013, “was because it did not have a debilitating impact on daily life.”
But without bankers, what did they do for money?
Something quite simple: The Irish started issuing their own cash. After the bank closures, they continued writing checks to one another as usual, the only difference being that they could no longer be cashed at the bank. Instead, that other dealer in liquid assets – the Irish pub – stepped in to fill the void. At a time when the Irish still stopped for a pint at their local pub at least three times a week, everyone – and especially the bartender – had a pretty good idea who could be trusted. “The managers of these retail outlets and public houses had a high degree of information about their customers,” explains the economist Antoin Murphy. “One does not after all serve drink to someone for years without discovering something of his liquid resources.”
In no time, people forged a radically decentralized monetary system with the country’s 11,000 pubs as its key nodes and basic trust as its underlying mechanism. By the time the banks finally reopened in November, the Irish had printed an incredible £5 billion in homemade currency. Some checks had been issued by companies, others were scribbled on the backs of cigar boxes, or even on toilet paper. According to historians, the reason the Irish were able to manage so well without banks was all down to social cohesion.
So were there no problems at all?
No, of course there were problems. Take the guy who bought a racehorse on credit and then paid the debt with money he won when his horse came in first – basically, gambling with another person’s cash. It sounds an awful lot like what banks do now, but then on a smaller scale. And, during the strike, Irish companies had a harder time acquiring capital for big investments. Indeed, the very fact that people began do-it-yourself banking makes it patently clear that they couldn’t do without some kind of financial sector.
But what they could do perfectly well without was all the smoke and mirrors, all the risky speculation, the glittering skyscrapers, and the towering bonuses paid out of taxpayers’ pockets. “Maybe, just maybe,” the author and economist Umair Haque conjectures, “banks need people a lot more than people need banks.”
Another Form of Taxation
What a contrast with that other strike two years earlier and 3,000 miles away. Where New Yorkers had looked on in desperation as their city deteriorated into a garbage dump, the Irish became their own bankers. Where New York was staring into the abyss after just six days, in Ireland things were still going swimmingly even after six months.
Let’s get one thing straight, however. Making money without creating anything of value is anything but easy. It takes talent, ambition, and brains. And the banking world is brimming with clever minds. “The genius of the great speculative investors is to see what others do not, or to see it earlier,” explains the economist Roger Bootle. “This is a skill. But so is the ability to stand on tiptoe, balancing on one leg, while holding a pot of tea above your head, without spillage.”
In other words, the fact that something is difficult does not automatically make it valuable.
In recent decades those clever minds have concocted all manner of complex financial products that don’t create wealth, but destroy it. These products are, essentially, like a tax on the rest of the population. Who do you think is paying for all those custom-tailored suits, mansions, and luxury yachts? If bankers aren’t generating the underlying value themselves, then it has to come from somewhere – or someone – else. The government isn’t the only one redistributing wealth. The financial sector does it, too, but without a democratic mandate.
The bottom line is that wealth can be concentratedsomewhere, but that doesn’t also mean that’s where it’s being created. This is just as true for your former feudal landowner as it is for the current CEO of Goldman Sachs. The only difference is that bankers sometimes have a momentary lapse and imagine themselves the great creators of all this wealth. The lord who was proud to live off his peasants’ labor suffered no such delusions.
Bullshit Jobs
And to think that things could have been so different.
Nearly a century ago, economist John Maynard Keynes famously predicted that we would work fifteen-hour weeks by the year 2030. He thought that our wealth and prosperity would increase dramatically and that we would convert much of that wealth into leisure. Keynes was certainly not the only one to believe that it was just a matter of time before we solved the “economic problem.” Well into the 1970s, economists and sociologists forecasted that “the End of Work” was near.
In reality, that’s not at all what has happened. We’re plenty more prosperous, but we’re not exactly swimming in a sea of free time. Quite the reverse. We’re all working harder than ever. Many people explain these circumstances by assuming we use money we don’t have to buy stuff we don’t need to impress people we don’t like. In other words: we sacrificed our free time on the altar of consumerism.
But there’s one puzzle piece that doesn’t fit. Most people play no part in the production of iPhone cases in their panoply of colors, exotic shampoos containing botanical extracts, or Mocha Cookie Crumble Frappuccinos. Our addiction to consumption is enabled mostly by robots and Third World wage slaves. And although agricultural and manufacturing production capacity have grown exponentially over the past decades, employment in these industries has dropped. So is it really true that our overworked lifestyle all comes down to out-of-control consumerism?
David Graeber, an anthropologist at the London School of Economics, believes there’s something else going on. A few years ago he wrote a fascinating piecethat pinned the blame not on the stuff we buy but on the work we do. It is titled, aptly, “On the Phenomenon of Bullshit Jobs.”
In Graeber’s analysis, innumerable people spend their entire working lives doing jobs they consider to be pointless, jobs like telemarketer, HR manager, social media strategist, PR advisor, and a whole host of administrative positions at hospitals, universities, and government offices. “Bullshit jobs,” Graeber calls them. They’re the jobs that even the people doing them admit are, in essence, superfluous.
When I first wrote an article about this phenomenon, it unleashed a small flood of confessions. “Personally, I’d prefer to do something that’s genuinely useful,” responded one stockbroker, “but I couldn’t handle the pay cut.” He also described his “amazingly talented former classmate with a Ph.D. in physics” who develops cancer detection technologies, and “earns so much less than me it’s depressing.” But of course, that your work happens to serve a weighty public interest and requires lots of talent, intelligence, and perseverance doesn’t automatically mean you’re raking in the cash.
Or vice versa. Is it any coincidence that the proliferation of well-paid bullshit jobs has coincided with a huge boom in higher education and an economy that revolves around knowledge? Remember, making money without creating anything of value isn’t easy. For starters, you have to memorize some very important-sounding but meaningless jargon. (Crucial when attending strategic trans-sector peer-to-peer meetings to brainstorm the value add-on co-creation in the network society.) Almost anybody can collect trash, but a career in banking is reserved for a select few.
In a world that’s getting ever richer, where cows produce more milk and robots produce more stuff, there’s more room for friends, family, community service, science, art, sports, and all the other things that make life worthwhile. But there’s also more room for bullshit. As long as we continue to be obsessed with work, work, and more work (even as useful activities are further automated or outsourced), the number of superfluous jobs will only continue to grow. Much like the number of managers in the developed world, which has grown over the last 30 years without making us a dime richer. On the contrary, studiesshow that countries with more managers are actuallyless productive and innovative. In a survey of 12,000 professionals by the Harvard Business Review, half said they felt their job had no “meaning and significance,” and an equal number were unable to relate to their company’s mission. Another recent pollrevealed that as many as 37% of British workers think they have a bullshit job.
By no means are all these new service sector jobs pointless – far from it. Look at healthcare, education, fire services, and the police and you’ll find lots of people who go home every day knowing, despite their modest paychecks, they’ve made the world a better place. “It’s as if they are being told,” Graeber writes, “You get to have real jobs! And on top of that you have the nerve to also expect middle-class pensions and health care?”
There is Another Way
What makes all this especially shocking is that it’s happening in a capitalist system, a system founded on capitalist values like efficiency and productivity. While politicians endlessly stress the need to downsize government, they remain largely silent as the number of bullshit jobs goes right on growing. This results in scenarios where, on the one hand, governments cut back on useful jobs in sectors like healthcare, education, and infrastructure – resulting in unemployment – while on the other investing millions in the unemployment industry of training and surveillance whose effectiveness has long been disproven.
The modern marketplace is equally uninterested in usefulness, quality, and innovation. All that really matters is profit. Sometimes that leads to marvelous contributions, sometimes not. From telemarketers to tax consultants, there’s a rock-solid rationale for creating one bullshit job after another: You can net a fortune without ever producing a thing.
In this situation, inequality only exacerbates the problem. The more wealth is concentrated at the top, the greater the demand for corporate attorneys, lobbyists, and high-frequency traders. Demand doesn’t exist in a vacuum, after all; it’s the product of a constant negotiation, determined by a country’s laws and institutions, and, of course, by the people who control the purse strings.
Maybe this is also a clue as to why the innovations of the past 30 years – a time of spiraling inequality – haven’t quite lived up to our expectations. “We wanted flying cars, instead we got 140 characters,” mocks Peter Thiel, Silicon Valley’s resident intellectual. If the postwar era gave us fabulous inventions like the washing machine, the refrigerator, the space shuttle, and the pill, lately it’s been slightly improved iterations of the same phone we bought a couple years ago.
In fact, it has become increasingly profitable not to innovate. Imagine just how much progress we’ve missed out on because thousands of bright minds have frittered away their time dreaming up hypercomplex financial products that are ultimately only destructive. Or spent the best years of their lives duplicating existing pharmaceuticals in a way that’s infinitesimally different enough to warrant a new patent application by a brainy lawyer so a brilliant PR department can launch a brand-new marketing campaign for the not-so-brand-new drug.
Imagine that all this talent were to be invested not inshifting wealth around, but in creating it. Who knows, we might already have had jetpacks, built submarine cities, or cured cancer.
Friedrich Engels, a close friend of Karl Marx, described the “false consciousness” to which the working classes of his day – the “proletariat” – had fallen victim. According to Engels, the 19th-century factory worker didn’t rise up against the landed elite because his worldview was clouded by religion and nationalism. Maybe society is stuck in a comparable rut today, except this time at the very top of the pyramid. Maybe some of those people have had their vision clouded by all the zeros on their paychecks, the hefty bonuses, and the cushy retirement plans. Maybe a fat billfold triggers a similar false consciousness: the conviction that you’re producing something of great value because you earn so much.
Whatever the case, the way things are is not the way they have to be. Our economy, our taxes, and our universities can all be reinvented to make real innovation and creativity pay off. “We do not have to wait patiently for slow cultural change,” the maverick economist William Baumol challenged more than 20 years ago. We don’t have to wait until gambling with other people’s money is no longer profitable; until sanitation workers, police agents, and nurses earn a decent wage; and until math whizzes once again start dreaming of building colonies on Mars instead of starting their own hedge funds.
In the end, it’s not the market or technology that decides what has real value, but society. If we want this century to be one in which all of us get richer, then we’ll need to free ourselves of the dogma that all work is meaningful. And, while we’re at it, let’s also get rid of the fallacy that a higher salary is automatically a reflection of societal value.
Then we might realize that in terms of value creation, it just doesn’t pay to be a banker.
New York City, 50 Years Later
Half a century after the strike, the Big Apple seems to have learned its lesson. “Everyone in NYC wants to be garbage collector,” read a recent newspaper headline. These days, the people who pick up after the megacity earn an enviable salary. After five years on the payroll, they can take home as much as $70,000 plus overtime and perks. “They keep the city running,” a Sanitation Department spokesperson explained in the article. “If they were to stop working, however briefly, all of New York City would come to a standstill.”
The paper also interviewed a city sanitation worker. In 2006, Joseph Lerman, then 20, got a call from the city informing him he could report for duty as a collector. “I felt like I’d won the jackpot,” he recounts. Nowadays, Lerman gets up at 4 a.m. every morning to haul garbage bags for shifts of up to 12 hours. To his fellow New Yorkers, it’s only logical that he is well paid for his labors. “Honest,” the city spokesperson smiles, “these men and women aren’t known as the heroes of New York City for nothing.”

Brexit and the Future of Europe: George Soros


Britain, I believe, had the best of all possible deals with the European Union, being a member of the common market without belonging to the euro and having secured a number of other opt-outs from EU rules. And yet that was not enough to stop the United Kingdom’s electorate from voting to leave. Why?
The answer could be seen in opinion polls in the months leading up to the “Brexit” referendum. The European migration crisis and the Brexit debate fed on each other. The “Leave” campaign exploited the deteriorating refugee situation – symbolized by frightening images of thousands of asylum-seekers concentrating in Calais, desperate to enter Britain by any means necessary – to stoke fear of “uncontrolled” immigration from other EU member states. And the European authorities delayed important decisions on refugee policy in order to avoid a negative effect on the British referendum vote, thereby perpetuating scenes of chaos like the one in Calais. 
German Chancellor Angela Merkel’s decision to open her country’s doors wide to refugees was an inspiring gesture, but it was not properly thought out, because it ignored the pull factor. A sudden influx of asylum-seekers disrupted people in their everyday lives across the EU.
The lack of adequate controls, moreover, created panic, affecting everyone: the local population, the authorities in charge of public safety, and the refugees themselves. It has also paved the way for the rapid rise of xenophobic anti-European parties – such as the UK Independence Party, which spearheaded the Leave campaign – as national governments and European institutions seem incapable of handling the crisis.
Now the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible. Britain eventually may or may not be relatively better off than other countries by leaving the EU, but its economy and people stand to suffer significantly in the short to medium term. The pound plunged to its lowest level in more than three decades immediately after the vote, and financial markets worldwide are likely to remain in turmoil as the long, complicated process of political and economic divorce from the EU is negotiated. The consequences for the real economy will be comparable only to the financial crisis of 2007-2008.
That process is sure to be fraught with further uncertainty and political risk, because what is at stake was never only some real or imaginary advantage for Britain, but the very survival of the European project. Brexit will open the floodgates for other anti-European forces within the Union. Indeed, no sooner was the referendum’s outcome announced than France’s National Front issued a call for “Frexit,” while Dutch populist Geert Wilders promoted “Nexit.”
Moreover, the UK itself may not survive. Scotland, which voted overwhelmingly to remain in the EU, can be expected to make another attempt to gain its independence, and some officials in Northern Ireland, where voters also backed Remain, have already called for unification with the Republic of Ireland.
The EU’s response to Brexit could well prove to be another pitfall. European leaders, eager to deter other member states from following suit, may be in no mood to offer the UK terms – particularly concerning access to Europe’s single market – that would soften the pain of leaving. With the EU accounting for half of British trade turnover, the impact on exporters could be devastating (despite a more competitive exchange rate). And, with financial institutions relocating their operations and staff to eurozone hubs in the coming years, the City of London (and London’s housing market) will not be spared the pain.
But the implications for Europe could be far worse. Tensions among member states have reached a breaking point, not only over refugees, but also as a result of exceptional strains between creditor and debtor countries within the eurozone. At the same time, weakened leaders in France and Germany are now squarely focused on domestic problems. In Italy, a 10% fall in the stock market following the Brexit vote clearly signals the country’s vulnerability to a full-blown banking crisis – which could well bring the populist Five Star Movement, which has just won the mayoralty in Rome, to power as early as next year.
None of this bodes well for a serious program of eurozone reform, which would have to include a genuine banking union, a limited fiscal union, and much stronger mechanisms of democratic accountability. And time is not on Europe’s side, as external pressures from the likes of Turkey and Russia – both of which are exploiting the discord to their advantage – compound Europe’s internal political strife.  
That is where we are today. All of Europe, including Britain, would suffer from the loss of the common market and the loss of common values that the EU was designed to protect. Yet the EU truly has broken down and ceased to satisfy its citizens’ needs and aspirations. It is heading for a disorderly disintegration that will leave Europe worse off than where it would have been had the EU not been brought into existence.
But we must not give up. Admittedly, the EU is a flawed construction. After Brexit, all of us who believe in the values and principles that the EU was designed to uphold must band together to save it by thoroughly reconstructing it. I am convinced that as the consequences of Brexit unfold in the weeks and months ahead, more and more people will join us.

Thinking the Unthinkable: James Mauldin


As many of you know, I am in the process of writing a book on what the world will look likein 20 years. Much of the book is about exciting new technologies, which I’m convinced will make the world of 2036 far more exciting and wonderful than it is today. Nobody will want to go back to the good old days of 2016. But the potential wealth humanity can create seems to be counterbalanced by the amount of wealth that governments and central banks can destroy.
For the last few years I’ve been talking about the exciting changes that lie ahead in what I call the Age of Transformation. Today, we’ll look at the Dark Side of that age. We are going to talk about government and the wealth destruction that governments have the potential to unleash. We begin with a poem:
If buttercups buzz’d after the bee
If boats were on land, churches on sea
If ponies rode men and if grass ate the cows
And cats should be chased into holes by the mouse
If the mamas sold their babies
To the Gypsies for half a crown
If summer were spring
And the other way ‘round
Then all the world would be upside down!

That was an English children’s song from the 1600s and 1700s. In ages past, it was traditional for a defeated army to walk through the ranks of the victorious army. It was also traditional for the losing army to play the song of the victors. When Cornwallis surrendered for the second time to the Americans, Washington refused to let the British play an American song, so they played the children’s song “When the World Was Turned Upside Down.” At least, that’s what the legends say.
In this case, the losing army was twice as big as the winning army. Most military strategists assume that you need an army three times the size of the defending army to attack a well-fortified position. It was unthinkable to the British officers and their soldiers that they could lose. And Cornwallis might have held out, even with heavy losses, had he known that just two weeks later General Clinton and the British Navy would arrive. He would have lost of few thousand soldiers, but the English would have won the war, and the US would now be Australia, albeit much bigger and without Vegemite.
Losing was unthinkable to the British, but lose they did; and that is what we are going to talk about today: thinking the unthinkable.
If I had come on to this stage four years ago and told you, my friends, that we were going to have 40% of the world’s governmental debt at negative interest rates, $10 trillion on central bank balance sheets, and $10 trillion worth of dollar-denominated emerging-market debt, and that global GDP growth would average only 2%, unemployment would be below 5%, and interest rates would be negative in much of the world and less than 50 basis points in the US, you would have laughed me out of the room. You would have all hit the unsubscribe button. Today’s world was unthinkable a mere four to five years ago.
But now, given what has happened and what I think is likely to happen, we have to start thinking the unthinkable. When I say this, I mean in the next 2–5–10 or 20 years, not next quarter. I have great news for you, too: we are going to get through this. Yes, we face potentially disastrous problems, but we’ll survive to be better than ever. Like my friend George Friedman said yesterday, “The world is going to hell… but we’re okay.”
(Sidebar: while editing this, I decided to Google the words thinking the unthinkable. I found numerous speeches and books and articles that either had that phrase as their title or contained the words. This quote from The Weekly Standard gave me pause:
As a futurist, Herman Kahn’s job was to think about the unthinkable. And the unthinkable subject in the 1960s was thermonuclear war. Kahn’s analysis struck a nerve; going beyond consideration of how to prevent a nuclear war, he assessed how the United States could survive and win one. This step proved more than most national defense experts could bring themselves to contemplate. The use of rationalist methods to study an event of such hideous proportions was nothing short of an outrage; in fact, it earned Kahn a place in the annals of film history as the inspiration for the mad title character of Stanley Kubrick’s Dr. Strangelove.
I certainly hope I don’t inspire such a response. And I’m sure there will be people who will find some of the ideas and scenarios I am considering implausible, but I am worried that we are on a slippery slope of ideas and actions with no real way to pull back. Back to the speech.)
The Weakest Link
Before we can contemplate what might happen in the future, we have to first examine what I think of as a global economic chain with a series of weak links. I am going to argue that there are five major weak links.
The first weak link is Europe and its debt. On average, across the continent, the debt-to-GDP ratio is about 90%. It is up to 135% and will soon be a 140% in Italy. Either Europe mutualizes all its debt and Germany says, “Ja, vee vill take it,” or the debt problem will continue to worsen. If they mutualize, they can put the debt on the balance sheet of the ECB, and then all the countries of the Eurozone will pinky swear to balance their budgets in the future, giving up their national sovereignty to Brussels.
A European treaty is actually what my teenage girls called a pinky swear. They mean it when they sign those treaties, but the problem is actually adhering to the treaty.
Today you heard Anatole Kaletsky tell us that Europe’s big problem is unfunded liabilities, and they will have to cut their pensions. Can anybody tell me how loud French pensioners will scream when their pensions are cut? Or what French farmers will get up to when their subsidies are cut?
I am suggesting to you that there might be some political problems brewing in Europe. (We will deal with the implications of Brexit and European cohesion at the end of the letter.) So Europe is a weak link – but maybe not the weakest. Remember the Weakest Link TV program? The lady would run through the questions, and then with that sharp British accent, she would say to a contestant, “You are the weakest link,” and the player had to walk off in shame. The weakest link could be Europe, but it could also be China.
Xi Jinping is the most powerful Chinese leader since Deng Xiaoping and will likely be compared by historians to Mao Zedong and Sun Yat-sen in his importance. He has taken China by the neck and is wringing it. He has at least five more years left in his term – and note my use of the words at least. This is a man who has decided, “I am going to take China into the next century. I have a vision, and we are going to do it.”
To succeed, Xi has to rid the Chinese system of endemic corruption and cronyism and build a consumer society. The problem is that you don’t create a consumer society from the top down; you have to do it from the bottom up. I could give you tons of research on that. It’s a basic economic axiom.
So, China has problems. Their debt has just ballooned. Depending on whom you want to listen to, 40% to 80% of the last $6 trillion the Chinese borrowed went to pay interest on the debt they already had. In less polite circles we would call that a Ponzi scheme.
Now, they do have a lot of money. Yes. Can they print more? Yes. Do they want to have a New Silk Road? Do they want to be the world’s reserve currency? Do they want to be the most powerful country in the world? Of course they do. You get into private conversations with Chinese who are hard-core Chinese, and you can see their dreams. Their vision is not unlike the spirit of “Manifest Destiny” that moved the United States westward in the 1800s. We saw ourselves building an empire. The Chinese see themselves rebuilding their own ancient empire.
You don’t do that on the back of a weak currency – but then we come to the problem of a strong Chinese currency. Oh, by the way, their debt service is up to 30% of GDP, but that’s a detail that is mostly overlooked. (Please note more than a hint of sarcasm.)
Weak link number three is Japan. I have been talking about Japan for years. The line I coined six years ago is one that everybody tosses around now: “Japan is a bug in search of a windshield.” Japan is doing exactly what I said it would do in my book End Game five years ago and in Code Red over two years ago. It will get honorable mention in the next book.
Japan is monetizing its debt and putting it into the central bank. They are going to continue doing this at an astounding rate. I shorted the yen when it was at 100. I should have shorted it when it was at 90, because I was already writing about it then, but at the time I didn’t have the money or the testosterone. I was a lot happier when it was at 125 than now when it is back down to 102. One of the things I try to avoid when I place money with money managers is a “true believer.” A true believer’s certainties can take you over the cliff. But I must confess to being a true believer about the ultimate weakness of the yen. I still think 200 is a real possibility. For what it’s worth, I still have my money exactly where my mouth is. Only now, the cash value is back to where I started almost 2½ years ago. Oh well… We true believers are a hardy bunch. By the way, have I introduced you to some of my gold bug friends? And then there’s the survivalists. Just saying…
The Japanese have placed 30% of their total government debt on the balance sheet of their central bank. It is going to 70–80% – count on it, says the true believer. That is a lot of yen to put into the system, and that is what I think drives the ultimate valuation of the yen.
Emerging markets are the fourth weak link. How do they dig out? They borrowed $10 trillion in dollars that they have to pay back from income earned in their local currencies. Dollar valuation can create serious problems for their debt. And it happens at the worst possible time, during a crisis or global recession when the US dollar is the cleanest dirty shirt in the closet. The value of the dollar will rise at precisely the time when the profits and tax revenues of the emerging-market corporations and countries will fall.
 Then there is a final weak link – and that is us, the US.
We are the most global, powerful, incredible, fabulous country in the history of the world. But here is our problem. When we next fall into recession, the deficit explodes to $1.3 trillion, even if we lose only the revenue we lost last time. If we have to add in the extra cost of safety nets, it’s $1.5 trillion minimum, plus the almost three quarters of a trillion dollars of “off-balance-sheet” debt. US total debt will be rising at over $2 trillion per year in short order.
All in, we are adding $2 trillion plus a year to an already huge total national debt. In five years we could be at $30 trillion debt. We are into 2020 and we are now facing $30 trillion in debt and people are going, “Whoa, what the hell are we doing?” You think there is angst today in the Tea Party?
Lacy Hunt is right: debt constrains growth. It constrains nominal GDP; and if we don’t get nominal GDP, we won’t get wage growth; we won’t get the labor participation rate up; we’ll get more of the gig economy; we’ll get a recession where we are back to 8–9–10% unemployment. People are going to be upset. Juan Williams may be right that Clinton is a shoo-in. That may be the best thing that ever happened to Republicans, because she will have to figure out what the heck to do, and she has no clue. Because it doesn’t make any difference which of these links breaks. We are all connected. The whole chain breaks.
When it breaks, the result is a global recession every bit as serious as the last one; it’s just different in its causes and effects. But there is a common denominator in each of the weak links mentioned above: Debt. And I do mean debt with a capital D. You can’t just wish debt away or declare a jubilee, because there are banks and pension companies and you and me on the other side of that debt. Somebody owns that debt, and that somebody is you and I in our pensions, in the insurance we buy, in the bond funds in our portfolios, in our foundations, our banks, and corporations. Those bonds silently permeate every part of our lives. Kill them and it all goes pear-shaped. 
WWTFD
And so then you have to ask the question “WWTFD” – what will the Fed do? Well, I can tell you what I think they are going to do. The answer actually takes us back to my seminary days. This is one of the few times my theological education actually informs my economic views.
Cornelius Van Til was a Dutch theologian who came over to the United States, went to Princeton, got his PhD, taught at Westminster, and created a philosophical school called presuppositionalism. He said, if I know what your presuppositions are, if I know your true core foundational beliefs, I can tell how you are going to act. I can tell you what your values are; I can tell you who you are. I know how you will ultimately interpret the Scriptures. Your presuppositions determine how you act and work and think in the world.
If your presupposition tells you that the Bible says there are four corners of the earth and therefore the earth must be flat, your presupposition is that the world is flat; and so if you sail far enough you will fall off the end of the ocean. So you don’t go exploring. That’s what a presupposition will do. A presupposition does not mean that you’re right, but it’s what you believe.
What will the Fed do? They are going to pray.
The Fed is not that different, by the way, from the Oral Roberts tent revivals of my youth. How many of you people went to a tent revival? There are a few of us, okay. The rest of you won’t admit it. Oral (or pick your favorite evangelist) would stand there and he would say, “You’ve got to believe!” And you believed.
The Federal Reserve is sitting there and they are reading a book by John Maynard Keynes called The General Theory Of Monetary Employment, Interest, and Money. Their core belief, their presupposition, is that consumption is the key driver of the economy. I want to borrow an idea from David Rosenberg, who says that this is not the case. He has made the case that the driver of the economy is income. We were having that discussion in a bar one time, God knows where, and I have never forgotten it. Maybe his explanation squared with my own presuppositions. Because for me, that’s it, that’s the truth: income and production are the drivers; they are the keys. You must have production and entrepreneurship. Keynes was right about animal spirits, but it is not debt and consumption that drive animal spirits; it is profits or at least the potential for profits. Income drives the animal spirits. If I borrow money as an entrepreneur, it is because I thi nk borrowing will help me make more money.  
So what are these guys going to do? Their economically religious presupposition is that deflation is the worst thing in the world. When you become a central banker, they take you into the back room; they do a DNA swap on you; and you become genetically, viscerally, aggressively opposed to deflation. You do anything you can to make sure deflation never happens on your watch. If that means negative rates, you have to think the unthinkable. If that means more quantitative easing, you keep right at it: you keep printing. That is what is happening in Europe and Japan, and it’s what has happened in the US.
Now here is the problem. I am not going to try to take you through this chart, but basically it shows the Fed’s predictions and what really happened. If we go back for the last 100 quarters with their predictions, they are zero for 100. It is statistically impossible to be worse. They have changed their models in three fundamentally different ways over the last 40 years – and, dear gods, every time it made things worse, not better.
The Fed has the smartest people in the room, all the PhDs from Stanford and MIT. I have never met a Fed economist who was not ten times smarter than I am. We’ve had some on the stage here. I mean, their credentials are intimidating; they drip knowledge and history. Lacy Hunt is the most intimidating of the former central bankers I know. I love him, but he is intimidating. He remembers every single paper he ever read in his entire life, and he can quote from them ad hoc; and he reads everything, while I read just a little bit.
So what is the Fed going to do? They are going to fight deflation, which is a corollary, a by-product of a global recession. They will see the Dragon of Deflation, and like St. George they will set about to slay that dragon. So will every other central bank. This is not just the Fed; it’s all their fellow central bankers, too.
And now we come to thinking the unthinkable.
Because, whether we land in a Trump world or in a Clinton world, when the Fed is trying to manage a recession, will the US let the rest of the world devalue against the dollar? No. We are going to have to think the unthinkable: that the government and the central bankers of the world’s reserve currency will actually try to manage the valuation of the dollar down, in ways that will boggle your mind. Quantitative easing and negative rates are just the beginning. Purposely weakening the dollar may be the stupidest idea we have ever heard of, and I am mentioning it to you on this stage because it is unthinkable. Yet it is no more unthinkable than negative rates were four years ago, or having $10 trillion on central bank balance sheets.
We get into an unthinkable world, and my mind comes back to the Alamo. Click here and you can hear the “El Deguello.” This was a song that was brought from Spain, and General Santa Anna played it for 13 nights at the Alamo. The translation is roughly “slit throat.” It was the song your bugler played to announce that you would give no quarter to the vanquished.
For 13 nights, the men in the Alamo heard this song saying, “We are going to kill youtomorrow,” and for 13 nights 150 men held out against 5000. Eventually they ran out of bullets, and they fought with knives and swords against bullets. They lost. I think that emerging markets are like those beleaguered few trying to hold the Alamo. Emerging-market central banks will eventually lose, too, because they are coming to a gunfight with a knife.
How do we avoid such a debacle? We have got to do something with the debt.
We may just declare some kind of debt jubilee, which I said above was crazy and unthinkable. But then again, when our backs are to the wall and we are offered a last cigarette and a blindfold, we may start thinking about alternatives.
Could we, the major developed countries of the world, all monetize our debts together – not separately, together – and recognize that we all allowed debt to go too far? We have to rationalize the whole system. We need to do it in a coordinated fashion so that no one major country gets an advantage in terms of currency valuation. It’s a controlled currency war. The smaller, emerging markets will be on their own. Sadly, that is my attempt at an optimistic approach to thinking the unthinkable.
I have absolutely zero confidence in any idea I have proposed in the last seven minutes. But I am telling you that they are all possible. Central banks and their governments have painted themselves into the mother of all corners, and they are going to paint themselves into more corners because their belief system and their presuppositions are fundamentally wrong.
I think they will continue to make the system worse until they have to do something drastic. At that point the only thing they will be able to do collectively is rationalize the debt. One country cannot do that without every country doing it, too. One country doing it alone creates a massive dislocation and a preference for its own currency, which devalues its currency. Without a collective devaluation, we will have currency wars that make the ’30s look like a spring picnic. Back then they were at least devaluing against something: they devalued against gold. Today there is no tether on our currencies.
So how then do we invest? The problem we have as investors is that there is nothing we can do except invest in the global markets. That is where we get global growth. That’s it.
I had this conversation with Harry Markowitz (the Nobel laureate who developed Modern Portfolio Theory) two months ago. We talked for an hour and a half, discussing MPT and diversifying portfolios; and my argument was that in the future diversifying among asset classes will be futile, because correlations will be going to one in a world turned upside down. In order to actually see performance, I maintained, we have to diversify among the trading strategies that we use to trade the asset classes.
You cannot afford to be passive and be long this and short that. That won’t produce results you will be happy with. But if you diversify among smart traders, you have a chance to get your assets from here to the other side. Harry just pointed out that what I was suggesting is still consistent with Modern Portfolio Theory; it’s just a different way of trading diversified asset classes.
You really do want to get to the other side of what I see as the coming crisis, too, because on the other side will be one hellacious bull market. Technology is going to take us to places we have never dreamed of. Three billion people are coming into the emerging-market middle classes, even if later rather than sooner. It is going to be a phenomenal world. You have just got to figure out how to get your assets from here to there.
Look, the Fed models don’t work. Yet for whatever reason, we somehow continue to accept that the Fed is smart enough to manage the most important price in all the world, the price of money denominated in the world’s reserve currency. Which is to say, they manage interest rates, which is basically the price of money. They do this based upon the models they create, which have never been right. They get nothing else right, and we think they can get interest rates right? They are going to screw it up, which is precisely what they have been doing for the past six years. We are in the beginning stages of the most massive monetary policy mistake in the history of the world, with the possible exceptions of Weimer Germany and Zimbabwe. But the implications are far more global now.
I am afraid that the one thing we can count on is that whatever policy the Fed chooses will be the wrong policy. They believe they can set the price of money and thereby balance demand and supply. Can anybody name me one instance where fixed prices worked in the real world, creating a paradise where supply and demand were balanced? They have manipulated the system and set the wrong price of money. They have created a world where savers are penalized, companies are paid to buy their competition rather than compete, and only the participants on Wall Street are rewarded with appreciation of their assets. My Austrian and monetarist economics school friends, who predicted inflation from all the QE that we saw, have actually seen inflation – it has just been in asset prices that benefited Wall Street and not Main Street.
And it’s not just a US problem. It’s Europe and Japan and anywhere in the world where interest rates and savers have been repressed.
Unless we see the central bankers of the world reevaluate their religious convictions about how monetary policy should be run, we are going to enter yet another period when the unthinkable becomes reality. And to be ready for it, and to potentially profit from it, you need to begin to think the unthinkable today.
Some Quick Thoughts on Brexit
It is way too early to draw any conclusions about Brexit, other than to talk in terms of general concepts and feelings, which I will briefly offer, but I promise a later letter that will go into the implications of Brexit in far more detail, after my researchers and I have looked at the issues in depth.
  1. First, my good friend and fellow writer/thinker Barry Ritholtz reminded me of the wisdom of screenwriter William Goldman, from a century ago, talking about the world in which he lived, that “Nobody knows nothing.” If you think you know how Brexit is going to turn out, you probably have a presupposition that is clouding your thinking. This is unknown territory. There be dragons out there, but we have no idea whether they are good dragons or bad dragons. It depends on which near-future science fiction novel you’re reading. Because economics is getting ready to turn into science fiction.
  2. Cameron resigned. Big shock (note sarcasm). I would have done the same, because who on God’s green earth would be so insane as to want to go through the next two years of negotiations with the EU? Talk about a way to age 20 years in the next two – and that will be the new prime minister’s role. Whatever the outcome, nobody will appreciate the work. Cameron is young enough that he can make a comeback if Brexit ends up looking like a bad decision. If it turns out to be a good decision, well, his daddy is rich and his ma is good-lookin’, and he can make a lot of well-paid speeches, sit on a lot of boards, do a lot of consulting, and make a ton of money. There are worse gigs. Ask Tony Blair. Or Bill Clinton.
  3. The next prime minister (if and when they can find somebody masochistic enough to take the job) will notify the EU of his or her intentions along about October or November, probably. Then they have two years to negotiate the exit strategy. This is a classic equilibrium-theory, prisoner’s-dilemma situation. The longer the British take to come to an agreement with the EU, the more the other EU members realize they need Britain and its market, not to mention its monetary and banking prowess. But the longer the British take, the more uncertainty there is in the market; so the more problematic the situation becomes for their economy, as businesses have to make a decision about whether to move to Ireland or to the mainland to have unfettered access to EU markets.
And the EU would like to immediately punish Britain so that nobody else will want to leave. But then the United Kingdom just stalls, so it really is pointless for the EU to bluster and try to take quick action. But waiting allows those who want to call for referenda in other EU countries to take heart and plunge ahead.
What we will end up with is a massive multiplayer Nash equilibrium-theory game, whereby all players try to make their least-bad decisions. I want to make it clear: There are no good decisions that will make everybody happy. This is a divorce, and it’s pretty rare to see both parties to a divorce walk away totally happy. This is not going to be one of those rare instances. This is going to be a very ugly, nasty, brutal, lawyer-riddled, expensive divorce.
Which is why I have to think more about the implications of the process before just offering a lot of off-the-top-of-my-head comments. This is a game changer. But it’s just not quite clear yet how the game will be changed.
  1. Okay, I see you asking for my reactions. I’m already getting those phone calls and emails. So, my first reaction is that this is the first domino in a series of dominoes that will create more referenda and embolden numerous separatist movements. I saw a poll in which 90% of the Dutch questioned wanted to have their own referendum. I have no idea what that actually means. What happens when Italy decides to conduct a referendum? Polar political opposites like the Lega Norde and the Five-Star Movement (which just captured the Rome mayoralty) would both generally vote for leaving the EU. That might constitute a majority in Italy. God knows what the EU would look like afterwards. Seriously, Brexit might actually precipitate a breakup of the EU before the debt issue can even go critical again.
  2. This European situation is actually becoming as interesting as Game of Thrones.Forget the Kardashians, this is Reality with a capital R. Fortunes will be lost and made; every country will have to actually weigh the costs of staying or going – no more kicking the can down the road. Will Germany decide to pick up the costs and debts of the rest of the EU? Will Italy willingly enter into a long-term, deflationary recession, as Greece has done? That is the price they may pay to stay. Do you release the Krakens, otherwise known as the ECB and Draghi, to go after individual country debts to the detriment of Germany and the other northern and more vested nations? Do you actually think the Dutch or the Finns, not to mention the Austrians, will go along with such behavior? And do you think the Belgians, who have been on the verge of breaking up for several decades, can keep their emotions in one piece, just for the kids? Europeans live in interesting times.
  3. Finally, Brexit is going to take some time to play out. From my perspective, it is not at all clear what the actual financial implications are. I wanted duly noted that I’m on record as saying many years ago that the pound would go to parity. Ditto for the euro, which I talked about rising to $1.50 in 2003 and falling back to a dollar over a few decades. I think we are on track. Those calls have been better than my Japanese yen call – so far.
  4. What does Scotland do? We are already seeing calls from authority figures in both Scotland and Northern Ireland to hold additional referenda on leaving the United Kingdom. I think it makes sense for Northern Ireland to join with their Irish compatriots, which would have them once again back in the EU and allied with the far more prosperous Ireland. Scotland, on the other hand, has to decide if it wants to hop from the frying pan into the fire. If I were a thinking Scot (and are there any other kind? – just ask any Scot you know), I think I might want to see how the dust settles before I decide which way to jump.
Those are my personal observations for now. As I think about it, they are fodder for multiple letters. I have to admit that being a writer on economics and finance today is more fun than I would’ve ever possibly imagined. Not that what we’re getting ready to experience is going to be fun, but there’s just so much great material sitting out there in front of you. The writer in me is just salivating.