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When will Trump accuse Denmark of being a ‘currency manipulator’?

This is from the Financial Times today:

“Germany is using a “grossly undervalued” euro to exploit the US and its EU partners, Donald Trump’s top trade adviser has said in comments that are likely to trigger alarm in Europe’s largest economy. 

 Peter Navarro, the head of Mr Trump’s new National Trade Council, told the Financial Times the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an advantage over its main partners. His views suggest the new administration is focusing on currency as part of its hard-charging approach on trade ties.

In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.”

I must say that I find Navarro’s comments completely ludicrous and uninformed and I have little respect for this mercantilist “analysis”.

Adam Smith taught us back in 1776 that we should not judge the Wealth of Nations on the size of its trade surplus. Apparently Navarro never read the The Wealth of Nations or understood the insights of David Ricardo about comparative advantages.

Trade is not a zero sum game. Trade is a positive sum game, where both sides of the trade gains – otherwise the trade would never happen. Free trade makes us all more prosperous.

Furthermore, having an undervalued currency does not take anything away from other nations. In fact, an undervalued currency means that you are selling you goods to other nations at a too low price, which means that you effectively are subsidizing the consumers of other nations.

Hence, the if German cars are 20% “too cheap” because the “German euro” is undervalued then it means that Americans can save 20% on cars by importing them from Germany, which effectively is increasing their purchasing power. This increase in their purchasing power makes it possible for American consumers to buy more of other goods for example US produced Big Macs or books from Amazon. But Peter Navarro obvious does not understand this.

In addition to that it is rather bizarre to talk about Germany as being a “currency manipulator” as Germany does not have its own currency – as Germany is a member of the euro currency area.

To talk about Germany as a currency manipulator is as meaningful as to talk about Texas as a currency manipulator. Furthermore, the euro is a freely floating currency exactly as the US dollar and the inflation target of the European Central Bank is 2% – exactly the same as is the case for Federal Reserve.

So if Germany is a currency manipulator then the US is as well. And finally, the German Bundesbank and key German policy makers have been extremely critical about the ECB’s efforts to ease monetary policy over the past two years so if anything the Germans have been pushing for a stronger euro! Peter Navarro could rightly criticize the Germans for that but that would of course go completely counter to his “arguments”.

But of course this is not the “analysis” Peter Navarro is doing. He is instead (wrongly!) focusing on the trade and current account surplus and he is observing that Germany has a large current account surplus and the US has a current account deficit and therefore Navarro wrongly concludes that Germany is stealing jobs from the US.

Denmark – Navarro next target?

Navarro’s deeply flawed analysis makes me nervous as the direct consequence of it is that the US through the use of aggressive trade policies should force all nations, which are running sizable account surpluses to “revalue” there currencies. This effective means that the US would forces nations around the world to tighten monetary policy.

The consequence of this could be devastating. Just imagine that the Trump was able to threaten the ECB to “engineer” for example a 20% appreciation of the euro. This would effectively be a massively deflationary shock to the euro zone economy, which would without a doubt cause the euro crisis to flare up again with the real risk of causing euro area to disintegrate.

This in itself would have extremely negative consequences for the global financial system and the global economy. I am no fan of the euro as an idea, but I certainly do not want to see it blow up as a consequence of ‘madman policies’.

Closer to home I have another concern. Hence, if Navarro claims that Germany is a “currency manipulator” based on the size of the Germany current account surplus what would he say about my native Denmark?

The graph below shows the Danish and the Germany currency account surplus.

CA surplus Denmark Germany.jpg

As the graph shows the Danish current account surplus is very large – close to 7% of GDP – and only slightly smaller than the German current account surplus. The Danish current account surplus against the US alone is around 3% of GDP.

And contrary to Germany Denmark is not a member of the euro area. Rather the Danish krone is pegged to the euro and in principle Denmark could either float the krone or revalue against the euro.

Both scenarios seem unlikely for now and the Danish government and central bank is strongly committed to the present monetary arrangement, but a real fear – given Navarro’s attack on Germany – could be that the Trump administration will accuse other Europe nations – within and outside of the euro area including Denmark of “currency manipulation”.

And it seems only a matter of time before the Trump administration will start to talk about the need to a Plaza Accord version 2. That would certainly be bad news for the world and could force unwarranted tightening of monetary conditions on nations around the world – including my native Denmark.

PS Peter Navarro today again demonstrated that he is utterly clueless about what VAT is. Apparently he thinks VAT is some kind of import tax. However, VAT is applied equally to imported and domestically produced goods in all countries like Denmark and Germany, which have a VAT.

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The end of the Trump rally?

I generally don’t think I can beat the market, however, right now there is something, which worries me and that is that the “Trump rally” in the US stock market could be about to end.

It seems to me that what US stock market investors are really focusing on is the potential for deregulation and tax cuts (and infrastructure investments). And we might of course get that and deregulation and tax cuts and certainly should be welcomed news both for the US economy and the US stock markets.

But if you get supply side reforms then it will be because of the Republican majority in the House and the Senate (might) want this – not because of Trump. Trump continues to pay lip service to these ideas, but he has certainly not be consistent. There is nothing in Trump’s past that tell us that he is a “free market guy”.

Where he has been consistent – even very consistent – is on his protectionist message and his China bashing. Presently the markets are ignoring this and that might not be the wrong thing to do, but I must say Trump’s 35% tariff talk scares scares me a lot and so does his persistent attempt to “pick a fight” with China.

Another factor, which could spell the end of the “Trump rally” is that not only will the Federal Reserve hike interest rates next week, but the FOMC could also send a more hawkish signal than presently being priced by the market.

In this regard I would particularly focus on inflation expectations, which essentially have stopped rising since 5-year/5-year breakeven inflation expectations broke above 2% a couple of weeks ago. Meanwhile the US stock markets generally has continued to trade (moderately) higher. To me that there seems to be a bit of a disconnect.

skaermbillede-2016-12-06-kl-15-48-13

Hence, investors expected some Trumpflation as long as (medium-term) inflation expectation, where below 2%, but from here on investors are likely to increasingly think that there will be full monetary offset of any “fiscal stimulus” from the Trump administration.

So did I just say that the “Trump rally” might soon come to an end? I don’t know and I am not giving investment advice here, but…

John Allison just endorsed NGDP targeting

On Monday Donald Trump met with John Allison the former CEO of the BB&T and former CEO of the libertarian think tank The Cato Institute.

It has been suggested that Allison might be in the running to become new US Treasury Secretary.

Allison is widely known to be an staunch advocate of deregulation of the banking sector and in favour of a rule-based monetary policy. Many had taken his support for a rule-based monetary policy to mean that he favours a gold standard.

However, Allison ultimately would like to see a Free Banking system in the US, but also acknowledges that that is not realistic anytime soon. Instead watch what he says on this interview on Fox & Friends.

“We need discipline, we need somekind of rule, I like the Taylor rule, I like some kind of GDP indexing rule…”

There you go – John Allison who might become next US Treasury Secretary just endorsed Nominal GDP targeting.
Further than that Allison obviously strongly supports scaling back Dodd-Frank. Something I also strongly believe in.
So concluding, if John Allison supports NGDP targeting and significant deregulation of the financial sector I would  – for what it is worth -endorse him as US Treasury Secretary anytime and it certainly helps that I know that he would be strongly against any protectionist measures presently being discussed by the Trump camp.
HT George Selgin.

PS If I had been John Taylor I might chosen the title “John Allison just endorsed the Taylor rule” and that would have been equally correct. The point is that we now have a potential future US Treasury secretary who is open-minded and well-informed enough to serious be thinking about NGDP targeting. That is good enough for me.

Highland Capital's Tom Stemberg Speaks On Economy At The National Press Club

The Trump-Yellen policy mix is the perfect excuse for Trump’s protectionism

It is hard to find any good economic arguments for protectionism. Economists have known this at least since Adam Smith wrote the Wealth of Nations in 1776. That, however, has not stopped president-elect Donald Trump putting forward his protectionist agenda.

At the core of Trump’s protectionist thinking is the idea that trade is essentially a zero sum game. Contrary to conventional economic thinking, which sees trade as mutual beneficial Trump talks about trade in terms of winners and losers. This means that Trump essentially has a Mercantilist ideology, where the wealth of a nation can be measured on how much the country exports relative to its imports.

Therefore, we should expect the Trump administration to pay particularly attention to the US trade deficit and if the trade deficit grows Trump is likely to blame countries like Mexico and China for that.

The Yellen-Trump policy mix will cause the trade deficit to balloon

The paradox is that Trump’s own policies – particularly the announced major tax cuts and large government infrastructure investments – combined with the Federal Reserve’s likely response to the fiscal expansion (higher interest rates) in itself is likely to cause the US trade deficit to balloon.

Hence, a fiscal expansion will cause domestic demand to pick up, which in turn will increase imports. Furthermore, we have already seen the dollar rally on the back of the election Donald Trump as markets are pricing in more aggressive interest rate hikes from the Federal Reserve to curb the “Trumpflationary” pressures.

The strengthening of the dollar will further erode US competitiveness and further add to the worsening the US trade balance.

Add to that, that the strengthen of the dollar and the fears of US protectionist policies already have caused most Emerging Markets currencies – including the Chinese renminbi and the Mexican peso – to weaken against the US dollar.

The perfect excuse

Donald Trump has already said he wants the US Treasury Department to brand China a currency manipulator because he believes that China is keeping the renminbi artificial weak against the dollar to gain an “unfair” trade advantage against the US.

And soon he will have the “evidence” – the US trade deficit is ballooning, Chinese exports to the US are picking up steam and the renminbi continues to weaken. However, any economist would of course know that, that is not a result of China’s currency policies, but rather a direct consequence of Trumponomics more specifically the planed fiscal expansion, but Trump is unlikely to listen to that.

There is a clear echo from the 1980s here. Reagan’s tax cuts and the increase in military spending also caused a ‘double deficit’ – a larger budget deficit and a ballooning trade deficit and even though Reagan was certainly not a protectionist in the same way as Trump is he nonetheless bowed to domestic political pressures and to the pressures American exporters and during his time in offices and numerous import quotas and tariffs were implemented mainly to curb US imports from Japan. Unfortunately, it looks like Trump is very eager to copies these failed policies.

Finally, it should be noted that in 1985 we got the so-called Plaza Accord, which essentially forced the Japanese to allow the yen to strengthen dramatically (and the dollar to weaken). The Plaza Accord undoubtedly was a contributing factor to Japan’s deflationary crisis, which essentially have lasted to this day. One can only fear that a new Plaza Accord, which will strengthen the renminbi and cause the Chinese economy to fall into crisis is Trump’s wet dream.

 

Donald Trump will replace Janet Yellen with a DOVE in 2018

Some have suggested that when Janet Yellen’s term as Federal Reserve chair expires in 2018 then Donald Trump will try to replace her with a more “hawkish” chairman. Some even has suggested that he could try to re-introduce the gold standard and appoint the king of monetary policy rules John Taylor as new Fed chairman.

I, however, believe that is completely wrong. Donald Trump doesn’t care about the Gold Standard (luckily) and certainly he does not care about a rule-based monetary policy.

The fact is that Trump’s entire policy agenda is inflationary. On the supply side his anti-immigration stance will push up US labour cost and this protectionist agenda will push up import prices.

On the demand side his call for underfunded tax cuts and massive government infrastructure investments also increase inflationary pressures.

So if unchecked (should write un-offset by the Fed?) Trump’s economic policy agenda will push inflation up. However, Trump does not – yet – control monetary policy and if the Federal Reserve is serious about it’s 2% inflation target it sooner or later will have to offset the Trumpflationary policies by hiking interest rates potentially aggressively and allow the dollar to strengthen significantly.

I have argued (see here and here) that initially the Federal Reserve will welcome a “fiscal boost” to support aggregate demand as the Fed for some odd reason is not willing to use monetary policy to hit the 2% inflation target. However, the alliance between the Trump administration and the Federal Reserve could be short-lived if inflation expectations really start to take off.

So in a situation where the Fed moves to hike interest rates more aggressively – for example in the second half of 2017 or in early 2018 it will become clear even to Trump that the Fed is “undermining” his promise of doubling US growth and “create millions of jobs”.

That could very well create a conflict between the Fed and the Trump administration and it is very likely that Trump will accuse Yellen of have too tight a monetary policy. Furthermore, with mid-term elections due in 2018 the Republicans in the Senate and the House are unlikely to be cheering for a “growth killing” tightening of monetary policy.

As I have repeated on the social media over the last couple days – the GOP is (deflationary) “Austrians” when they are in opposition and (inflationary) “Keynesians” when they are in power – they never really favour monetarist and rule-based policies.

After all it was Richard Nixon who famously said “we are all keynesians now” – or rather this is how Milton Friedman interpreted what Nixon said.

Nixon of course had the utterly failed Fed chair Arthur Burns (see more on Burns and Nixon here) to do the dirty work of easing monetary policy when monetary policy already was far too easing.

If Trump reminds me of any US president it is Nixon. So why should we believe Trump would replace Janet Yellen with John Taylor when he can find his own Arthur Burns to help him support his agenda with overly easy monetary policy ahead of the 2020 presidential elections?

If this hypothesis just has a small probability of being right then the market certainly is right is to price in higher inflation during a Trump presidency. I certainly hope I am totally wrong.

PS for a discussion of Nixon and Burns’ relationship seen Burton Abrams very good (and scary) paper How Richard Nixon Pressured Arthur Burns: Evidence From the Nixon Tapes.

PPS Paul Krugman once called for Ben Bernanke to show up for a FOMC press conference in a Hawaii shirt to signal that he would be “irresponsible” and thereby push inflation expectations up and lift interest rates from the ZLB. Maybe Trump is that Hawaiian shirt.

“Make America Keynesian Again”

Today I was asked to do an interview with a Danish radio station about Donald Trump and about whether one could say anything positive about him or rather about his economic agenda. I declined to do the interview. I frankly speaking has nothing positive to say about Trump.

To me Donald Trump is an absolutely vile person and and his views on immigration and trade are completely the opposite of mine. However, I have also in the run up to the election in presentations and comments stressed that the presidential election from an overall financial market perspective would not be a big deal and judging from the market reaction today this indeed seems to be the case.

Reading the markets

But what exactly are the markets telling us today about the economic consequences of a Trump presidency combined with the fact that GOP now has the majority in both the House and the Senate?

First, of all we should concluded that the markets are fairly relaxed about the outcome of the election. This to me is an indication that Trump really will never be able (or seriously want to) implement many of the bizarre “promises” on trade and immigration he made during the election campaign.

Second the markets certainly do not expect the outcome of the election to cause a US recession or a global economic crisis. After all US stock markets are in fact trading in positive territory today. We get the same message from the currency markets where the dollar is little changed over the past 24 hours.

The Republican Keynesians

However, there is one market where we have seen a significant reaction to the outcome of the election and that is in the bond market. Just take a look at the graphs below.

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The first graph is the yield on 10-year Treasury bonds and the second graph is 2-year yields.

We see that the 10-yield has increased around 10bp overnight. This certainly is a significant reaction, but it is equally notable that 2-yields in fact is slightly down.

What this is telling me is that more than anything else the markets expect Trump to be an old-school Keynesian. We know that Trump has already promised to increase Federal spending on infrastructure and he has of course also promised major tax cuts. With the Republicans controlling both the House and the Senate he should be able to deliver on some of these promises.

In fact there would be nothing unusual about having a Republican president who is also a “keynesian” (yes, I know he has no clue about what that is). In fact historically public spending has grown faster under Republican administrations than under Democrat administrations. Just take a look at the graphs below.

Since the Second World War public spending has grown by around a quarter of a percent per year faster when the president has been Republican than when there has been a Democrat president.

The picture is even more clear when we look at Federal government investments:

…and on the budget deficit:

So based on history we can certainly say that Republican presidents tend to be less fiscally conservative than Democrat presidents and judging from the action in the bond markets today there is little reason to believe that Trump should be any different from former Republican presidents.

And what will Trump spend money on? There is little doubt what the markets think – infrastructure! This is from Trump’s victory speech:

We are going to fix our inner cities, and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” he said. “We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.

And see what effect that kind of speech had on copper prices today:

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Keynesian president + Keynesian Fed chair = No monetary offset

So it seems like the markets expect Trump to push for an expansionary fiscal policy agenda and this is visible in the bond market. However, it is also notable that it is only long-term bond yields, which have increased while 2-year yields haven’t increased overnight.

That tells me that the markets do not expect the Federal Reserve to (fully) offset the impact on nominal demand from a more expansionary fiscal policy.

This effectively means that an easier fiscal policy stance will cause monetary conditions to be eased. The reason is that if fiscal policy is eased then that will push up the equilibrium interest rate level. If the Fed does not hike interest rates to reflect this then it will automatically ease monetary policy by keeping the fed funds rate below the equilibrium interest rate.

This of course is the standard result in a New Keynesian model when interest rates are at the Zero Lower Bound (see for example here).

Does this mean that the so-called Sumner Critique does not apply? According to the Sumner Critique an easing of fiscal policy will not have (net) impact on aggregate demand if the central bank has an inflation target (or a nominal GDP) as the central bank will act to offset any impact on aggregate demand from a easier fiscal policy.

However, the Sumner Critique does not necessarily apply if the central bank’s inflation target is not credible and/or central bank is not willing to “enforce” it. And this seems relevant to the present situation. Hence, US core inflation continue to be below the Fed’s inflation target so one can certainly argue that there is room for an increase in aggregate demand without the Federal Reserve having to tighten monetary conditions.

Obviously the Fed could have done this on it own by for example not signaling a rate hike in December or signaling that it would re-introduce quantitative easing if inflation once again started to trend downwards.

However, the Fed clearly has “mental” problems with this. It is clear that most key Fed policy makers are worried about the consequences of keeping interest rates “low for longer” and more QE clearly seems to be a no-go.

In other words the Fed has put itself in a situation where further monetary easing is off the table and this is of course the reason why a number of Fed officials in the last couple of months have called for old-school keynesian fiscal stimulus.

It all seems to have started in August. This is Janet Yellen at the Jackson Hole symposium on August 26:

Beyond monetary policy, fiscal policy has traditionally played an important role in dealing with severe economic downturns. A wide range of possible fiscal policy tools and approaches could enhance the cyclical stability of the economy.25 For example, steps could be taken to increase the effectiveness of the automatic stabilizers, and some economists have proposed that greater fiscal support could be usefully provided to state and local governments during recessions. As always, it would be important to ensure that any fiscal policy changes did not compromise long-run fiscal sustainability.

Finally, and most ambitiously, as a society we should explore ways to raise productivity growth. Stronger productivity growth would tend to raise the average level of interest rates and therefore would provide the Federal Reserve with greater scope to ease monetary policy in the event of a recession. But more importantly, stronger productivity growth would enhance Americans’ living standards. Though outside the narrow field of monetary policy, many possibilities in this arena are worth considering, including improving our educational system and investing more in worker training; promoting capital investment and research spending, both private and public; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals.

“Promoting capital investment” of course means government infrastructure spending.

Since August we have heard this again and again from Fed officials. This is Federal Reserve Vice Chairman Stanley Fischer at the New York Economic Club on October 17:

Some combination of more encouragement for private investment, improved public infrastructure, better education, and more effective regulation is likely to promote faster growth of productivity and living standards.

Said in another way – the Fed chair and the Vice chairman are both old-school keynesians and now we will have a keynesian in the White House as well.

The consequence is that if we get massive government infrastructure investments then that will push up the equilibrium interest rate, which will allow the Fed to hike interest rates (which they for some reason so desperately want to) without really tightening monetary conditions if interest rates are increased slower than the increase in the equilibrium rate.

This means that we de facto could have a keynesian alliance between the Trump administration and the Federal Reserve, which would mean that will get both monetary and fiscal easing in 2017 and this might be what the markets now are realizing.

Just take a look at what have happened in 5-year/5-year inflation expectations over the paste 24 hours:

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Over the past 24 hours long-term inflation expectations hence have increased by nearly a quarter of a percentage point.

Hence, Donald Trump just eased US monetary conditions significantly by pushing down the difference between the Fed fund target rate and the equilibrium rate. Paul Krugman should love Donald Trump.

The Sumner Critique strikes back – A future conflict between the Fed and Trump?

Obviously this is only possible because the Federal Reserve has not been willing to ensure nominal stability by clearly defining its nominal target and has been overly eager to increase interest rates, but I do think that this keynesian stimulus implemented could increase aggregate demand in 2017 and likely push core inflation above 2%.

But if this happens then the keynesian alliance between the Federal Reserve and Trump Administration might very well get tested. Hence, if fiscal-monetary easing push unemployment below the natural rate of unemployment and inflation (and inflation expectations) start to accelerate above 2% then the Federal Reserve sooner or later will have to act and tighten monetary conditions, which could be setting the US economy up for a boom-bust scenario with the economy initially booming one-two years and then the Fed will kill the boom by hiking interest rates aggressively.

Knowing Trump’s temperament and persona that could cause a conflict between the Fed and the Trump administration.

This is of course pure speculation, but even though the Trump administration and the Fed for now seem to favouring the same policy mix – aggressive fiscal easing and gradual rate hikes (slower than the increase the in equilibrium rate) it is unlike that this kind of old-school keynesian stop-go policies will end well.

2017 – a year of inflation?

Given these factors and others I for the first time since 2008 think that we could see inflation increase more significantly in 2017 in the US. This is of course what we to some extent want, but I am concerned that we are getting higher inflation not because the Federal Reserve has moved towards a more rule-based monetary policy framework, which ensure nominal stability, but because we are moving back towards old-school keynesian stop-go demand “management”.

PS I apologize to serious (New) Keynesians about using the term “keynesian” here. I here use the term as to refer to the kind demand management policy, which so failed during the 1970s. They where inspired by Keynesian economic think and was as such keynesian. However, that is not say that present day keynesians would necessarily agree with these policies.

PPS See also my comment over at Geopolitical Intelligence Service on why the US is “Still the Greatest”– also after Trump has become president.

Update: Read my follow-up post here.

Can Stephen Moore justify Donald Trump’s economic policies?

Today Donald Trump unveiled his team of economic advisers. Interestingly enough there are very few economists among the economic advisors and only one who can be said to have any free market credentials – the Heritage Foundation‘s chief economist Stephen Moore.

Stephen Moore claims to be a free market economist, but then he needs to explain why he is a Trump supporter.

So my question to Stephen Moore is please explain why Donald Trump’s following positions are good free market policies:

45% tariff on trade with China

Default on public debt

10 dollar minimum wage

Keynesian activist fiscal policies 

And the utter and complete erosion of the Rule of Law

In fact it could be very interesting to hear Stephen Moore explain what would happen to the US’ ranking on the Heritage Foundation’s Index of Economic Freedom if these Trump policies were indeed implemented.

And finally, I wonder if Stephen Moore thinks that Donald Trump would be able to explain the tax plan that Stephen Moore has put together for Trump with Arthur Laffer and Larry Kudlow?

I look forward to the answers.

 


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com

 

The very unpleasant echo from the 1930s

I am trying very hard not to become alarmist, but I must admit that I see very little positive news at the moment and I continue to see three elements – monetary policy failure/weak growth, the rise of extremist politics (Trump, Orban, Erdogan, Putin, ISIS etc) and sharply rising geopolitical tensions coming together to a very unpleasant cocktail that brings back memories of the 1930s and the run up to the second World War.

It has long been my hypothesis that the contraction in the global economy on the back of the Great Recession – which in my view mostly is a result of monetary policy failure – is causing a rise in political extremism both in Europe (Syriza, Golden Dawn, Orban etc) and the US (Trump) and also to a fractionalization and polarization of politics in normally democratic nations.

That is leading to the appeal of right-wing populists like Donald Trump, but equally to the appeal of islamist groups like ISIS among immigrant youth in for example France and Belgium. Once the democratic alternative loses its appeal extremists and populists will gain ground.

The geopolitical version of this is Ukraine and Syria (and to some extent the South China Sea). With no growth the appeal of protectionism and ultimately of war increases.

Unfortunately the parallels to the 1930s are very clear – without overstating it try to look at this:

  • Syrian war vs Spanish civil war: Direct and indirect involvement of authoritarian foreign regimes (Stalin/Hitler vs Erdogan/Putin)
  • Euro  zone vs the gold standard
  • The rise of populists and extremists: Communists, Nazis and Fascists vs Syriza, Golden Dawn, Jobbik, Orban, regional separatism in Europe, anti-immigrant sentiment, Trump and ISIS (in Europe) etc.
  • The weakening (failure?) of democratic institution: Weimar Republic vs the total polarization of politics across Europe – weak and unpopular minority governments with no “political muscle” for true economic reforms across Europe.

Maybe this is too alarmist, but you would have to be blind to the lessons from history not to see this. However, that does not mean that history will repeat itself – I certain hope not – but if we ignore the similarities to the 1930s things will only get worse from here.

PS if you are looking for more empirical evidence on these issues then have a look at Manuel Funke, Moritz Schularick and Christoph Trebesch’s recent very good post on voxeu.org on The political aftermath of financial crises: Going to extremes.

HT Otto Brøns-Petersen.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

A warning from the past: The politics of Trump and Corbyn – it is time for classical liberals to wake up

When I see what is being said about the new Labour leader in UK Jeremy Corbyn I fear that we are underestimating the change in electoral preferences in Europe.
 
It is said that Corbyn will cause Labour to collapse from within. That might very well be, but ask yourself why he was elected in the first place. And then ask yourself why Donald Trump is doing great in polls in the US and Syriza ruled Greece for six months and might – god forbid – continue to rule the country for sometime. 
 
What we are seeing is 1930s style politics. It is the politics of fascists and communists. It might be much less extreme, but remember these things don’t happen overnight. It is a gradual process where men in nazi uniforms put on suits – as they are doing in Sweden in the form of the Swedish Democrats. Or keep on the uniforms as Jobbik in Hungary.
 
It is a reflection of the fact that we are now eight years into an economic crisis – in my view mostly a results of failed monetary policies – as it was the case in 1930s. Mainstream democratic politicians failed to get us out of this crisis. In fact they made it worse and therefore people who otherwise would never have voted for Corbyn or Trump are now willing to listen to them.
 
And with mainstream democratic politics weakened in the US and Europe authoritarian figures from Putin, Erdogan, Orban and Assad are now increasingly setting the agenda for Europe and the world.
 
We might be on the way out of the crisis economically in both the US and Europe, but remember that was in fact also the case in 1936. The US had given up the gold standard as had many European countries, but the economics turnaround came too late to change the political sentiment. The result was catastrophic. And with anti-immigrant sentiment increasing in both Europe and the US we have reasons to fear the worst. The fact that it is now becoming political acceptable to suggest mass deportation of Mexican immigrants in the US or of muslims in Europe is horrendous.
 
The similarities between the Great Recession and the Great Depression are unfortunately many. That also goes for the politics and geo-politics of the times: Populism, extremism, anti-foreigner politics, protectionism and war.
 
And who are most to blame other than the central bankers that brought us into this mess? Well, the classical liberals – like myself – who again and again failed to speak out against these tendencies.
 
Classical liberals initially had a very hard time identifying the causes of the crisis and many resorted to ill-informed internet-Austrian analysis of the crisis instead of embracing the monetarist explanation of the crisis (think of Hayek versus Cassel in the 1930s). This has caused classical liberals to oppose monetary easing that would have ended this crisis long ago. As a result many classical liberals – particularly German style ordo-liberalists – should be blamed for helping to create an economic situation, which have created the fundation for the populism and extremism.
Classical liberals also failed because they ignored the social injustice done by the massive rise in unemployment in Europe and partly in the US and the effect that has on the political sentiment. Classical liberals didn’t really care about the suffering of Europe’s unemployed – as was the case in 1930s. In Greece and Hungary parties like Golden Dawn and Jobbik show that they care (or rather pretend to care) for the suffering of the unemployed.
 
At the same time many classical liberals out of fear of the effects on public finances have not spoken out against the anti-immigrant rhetoric and as a result borderline racisme has become politically acceptable on the political right in the US and Europe.
 
Effectively the centre-right is no longer providing a message of hope and optimism. Instead the centre-right is increasingly being taken over by anti-immigrant crazies like Donald Trump and on the left the centrist and market oriented (social) democrats of 1990s have been replaced with people like Jeremy Corbyn who has praised IRA, Hezbollah and Hugo Chavez and who dream of a Great Britain where militant labour unions rule the land.
 
It is time for a counter-revolution against the politics of fear and hatred. It is time for liberals of the left and the right to speak out against those who would like to close the borders for goods, capital and people. It is time to speak out against the authoritarian tendencies in Europe and US politics and to the the libertarians who like the feeling of revolution and the anti-establishment sentiment, which is in the air when Trump and Corbyn speak I tell you – Hitler was also anti-establishment.
If we fail to speak out against racism and protectionism of Donald Trump and the economic fantasies of Jeremy Corbyn we will lose our freedom. 

Ronald Reagan comments on Donald Trump’s immigration plan

I can’t stand protectionism in any form. Therefore, I get terribly upset when I hear calls for closed borders – also when it comes to immigration. Therefore I am not impressed with this either:

(Donald) Trump outlined three “core principles”: that the U.S. must build a wall across the U.S.-Mexico border, that immigration laws must be fully enforced and that “any immigration plan must improve jobs, wages and security for all Americans.”

…He would also consider tariffs and foreign aid cuts and would seize “all remittance payments derived from illegal wages.”

I could of course comment on Donald Trump’s plans to turn the US into North Korea myself, but I will instead leave it to a president, who Trump claims made the US great. Watch Ronald Reagan’s comments on Trump’s “Wall” here.

And if that is not enough for you take a look at this.

HT Steve Horwitz

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