Commentary on Political Economy

Thursday 9 September 2021



There’s been some rumbling on the horizon for the wild west that is the cryptocurrency space. This week, that thunder turned to lightning as​ U.S. Securities and Exchange Commission Chair Gary Gensler put the nascent industry on notice of how far he’ll go to bring it to heel.​ In threatening to sue Coinbase Global if the exchange lets customers earn interest on digital tokens, the regulator sent a warning to other firms offering similar products or even just thinking about it. Big-name fans and purveyors of crypto were beside​ themselves with indignation at the prospect of a government crackdown. “The SEC,” said James Cox, a professor at Duke University School of Law,​ “is being aggressive for the first time in a long time.”​ —

Abolish our coal industry? Tell ’em they’re dreamingGREG SHERIDAN

A coal train travels through NSW’s Hunter Valley.

A coal train travels through NSW’s Hunter Valley.

12:00AM SEPTEMBER 9, 2021306






The demand by a senior UN official that Australia should abolish its coal industry by 2030 shows how absurd and ridiculous the world body often is.

If any Australian government were foolish enough to follow this advice there would be a net increase in global greenhouse emissions and Australia would be very substantially poorer.

The Morrison government should reject this call much more publicly and explicitly than it has so far.

The UN’s assurance that no coal community should be left behind, and that alternative jobs should be found for them, is evidence of the fairies at the bottom of the garden thinking that the UN so often gives expression to, and that continues to characterise so much of the global waffle on climate change.

There is nothing inconsistent with Australia maintaining and expanding its coal industry, and still making a proportionate and reasonable contribution to reducing greenhouse gas emissions, meeting and exceeding our Paris targets and further reducing emissions in years to come.

The sheer illogicality of the UN’s position is evident in the fact it would certainly drive up greenhouse gas emissions. This is based on the simple but intractable realities of coal.

Australia is typically the second biggest exporter of coal. But we are not the dominant producer of coal. Australia produces only about 6 per cent of the world’s coal. China produces about 50 per cent of coal globally.

Most nations that use coal have some coal of their own. Australia, with such a small population of 26 million, exports most of its coal. Our biggest coal export competitors are Indonesia, Russia, Colombia and South Africa.

In the event that we were self-destructive enough to abolish our coal industry, global coal use would not decline. Our export markets would be taken by Indonesia, Russia and so on. Countries such as China and India would be forced to use more of their own coal.

But Australian coal has a significantly higher calorific value than Indonesian, Chinese or Russian coal. This means it produces more energy per tonne. You burn less coal to produce a kilowatt-hour of energy. Coal-fired power stations using Australian coal produce fewer greenhouse gas emissions per unit of energy than those using Indonesian, Chinese or most other coal.

This is simply geological happenstance. But it’s also reality. Therefore if we follow the UN’s diktat we increase carbon emissions globally and impoverish ourselves.

Between thermal coal and metallurgical coal we typically earn well over $40bn in coal export income every year. We derive billions upon billions of dollars in royalties and in the tax payments of the companies and their 40,000-odd employees. The idea that anything substitutes for this in the short term is nuts. In abolishing the coal industry we would slice a huge chunk out of our national wealth, making it much harder to pay for the National Disability Insurance Scheme, Medicare, pensions, the massive debt we are accruing.

Our thermal coal goes to coal-fired power plants and our metallurgical coal is used to make steel. Both produce greenhouse emissions. The UN apparently wants us to abolish the lot.

None of the other big coal producers such as Indonesia, China and Russia will be influenced by the UN’s nonsense.

The idea that coal is on the way out globally just doesn’t square with any of the facts. Demand has certainly declined in North America and Europe. But as this column has frequently pointed out, China has commissioned more new coal-fired power than the entirety of the coal power sector in the US.

India, Indonesia and a swag of other developing countries throughout Asia and Africa have commissioned and are building hundreds of new coal-fired power stations. It’s not only developing nations. Japan, too, is producing new coal-fired power stations.

The Minerals Council of Australia and the advisory group Commodities Insights produce a useful publication, Commodity Demand Outlook 2030. Its analysis is based on the straightforward factors of what is the demand today and what is the approved capacity and most likely demand going forward. Its forecast is that the demand for imported coal will increase by just under a quarter between 2019 and 2030.

That’s right – increase by a quarter between 2019 and 2030.

That’s not inconsistent with the International Energy Agency’s prediction that overall global thermal coal use could decline a bit by 2040. If coal were really on the way out, as so many ABC commentators relentlessly proclaim, there would be no need to pressure Australia to abolish the industry by government diktat.

Similarly, if renewable energy were really remotely competitive in price terms there would be no need to subsidise it and force its use through regulatory compulsion. Similarly, the reluctance of Western banks to finance coal has not stopped profitable coal projects finding their capital from other sources.

There are hundreds of new coal-fired power plants under construction or approved in many different parts of the world. Developing countries, as well as nations such as Russia and China, are not going to take the slightest bit of notice of UN blather on these subjects. If you favour lower greenhouse gas emissions you should favour Australian coal.

The Morrison government did not answer the UN’s ridiculous demands. I think the Morrison government is trying to be too clever by half here, trying to finesse saying one thing to Joe Biden and Europe’s climate warriors and another thing to Australian coal communities.

This week was the eighth anniversary of Tony Abbott winning for the Coalition its biggest electoral victory since John Howard in 1996, and without which victory there would never have been Turnbull or Morrison governments. Abbott won that election by taking very strong positions. Why hasn’t the Morrison government forced Labor to choose either the UN or the Australian coal industry? The government can’t hide in the shadows on coal.

Former resources minister Matt Canavan tells me: “There is no climate rationale to shut down the highest quality coal in the world. We should be publicly pushing back against this crazy agenda. By being silent we are giving it implicit credibility.”

Modern coal-fired power stations, so-called critical and super critical stations, are much less carbon intensive than old coal-fired stations. They are getting close to gas. The Morrison government lost, and then gave up, the argument for coal stations in Australia. That means we have higher electricity prices than we should.

Worse, losing one argument just prepares you to lose the next argument. Handicapping our industry by not building smart hi-tech coal-fired power stations, as Malcolm Turnbull once proposed, is one thing. To lose the immense chunk of our national income tied up in our coal export industry is a whole new level of craziness.  But here’s the thing. You seldom win a battle if you won’t fight.

John Authers in his newsletter today:

"Does market calmness like this beget greater volatility later on? The crisis of 2008 had many of us looking up the works of​ economist Hyman Minsky, who held that stability creates instability. Easier financial conditions lead to over-confidence and excessive speculation;​ that creates the conditions for an over-leveraged crash."

I was looking up Minsky 35 years ago! They still get him wrong! Minsky never said anything as IDIOTIC as "stability brings instability". He had the Marx (and Keynes) inspired insight that capitalism works on credit. And credit expansion, unless regulated by the State, inevitably leads to catastrophes!

Here is the rest of the newsletter:

It’s Quiet —​ But Not Too Quiet

When markets get dull, it is an old standby for financial commentators to say that they’re too quiet. But sadly, even that might not be true this time. Or at least, it’s not true of the remarkably steady advance of the U.S. stock market.​

Ever since election week last November, the S&P 500 has avoided a drawdown from top to bottom of even as much as 5%. That’s unusual, and quite a streak. The rest of the world has undergone two mini-corrections in that time. The first,​ in March, brought it back into line with the U.S., while the second, starting in June, has left the American market far ahead. With the S&P up 35% in the last 12 months, and the rest of the world up 25%, stocks across the globe have enjoyed calm​ progress:

Intuitively, this seems wrong. So far this year has seen the Jan. 6 insurrection, huge swings in perception of the pandemic, and the horrors of the withdrawal from Afghanistan. After a successful honeymoon, President Joe Biden has run into serious political trouble. And yet none of this has troubled the markets. How come?

If all of this sounds alarming, it’s little more than a rerun of 2017, the first year of Donald Trump’s presidency. The following chart shows daily percentage changes for the S&P over the last five years. The past 12 months has been calm, but 2017 was spectacularly dull, even as Trump was embarking on a controversial and iconoclastic presidency:

The same picture emerges if we use the VIX volatility index, which infers volatility from the options market. Biden has presided over a steady calming in volatility, as measured by the VIX, while Trump’s effect back in 2017 was even more soporific:

So the eerie​ calm under Biden isn’t in fact​ so eerie. New presidents, it turns out, tend to preside over periods of relative calm. Indeed, according to Bespoke Investment Group, this is still only the 13th streak of 300 days or more without a 5% drawdown since the S&P’s inception in 1928. The run in Trump’s early days lasted almost twice as long:

If we take another measure of calmness, and look at the average daily move (up or down) in the index over a year, then 2017 was the quietest in more than half a century. Calmer still was the period from 1963 to 1964 which saw the Kennedy assassination and the arrival of Lyndon Baines Johnson —​ if possible, a period that appears even more traumatic than the hyper-polarized partisanship of the last few years. Extreme political angst doesn’t, in itself, upset markets if there is confidence that financial conditions will stay benign.

Does market calmness like this beget greater volatility later on? The crisis of 2008 had many of us looking up the works of​ economist Hyman Minsky, who held that stability creates instability. Easier financial conditions lead to over-confidence and excessive speculation;​ that creates the conditions for an over-leveraged crash.

The absence of stock market volatility, viewed in isolation, doesn’t necessarily have that effect. The long​ period of calm under Trump ended with a dramatic market accident as a number of speculators who had been betting on low volatility were forced out of business. The year of 2018 ended with another drawdown as markets revolted at the prospect of steady quantitative tightening by the Fed. But while 2018 was quite a rough year for markets, it was nothing exceptional; it’s hard to make the case that a historically calm year led to a major crash. Similarly, Lyndon Johnson managed to preside over strong equity performance until a brief bear market in 1966. His last full year in office, 1968, was one of the most turbulent in the nation’s history, but a perfectly good one for the stock market, which rose 8%.

Debt Markets ARE Too Quiet

Where Minsky would find more grounds for concern is in the credit market. The calm there is stupefying. And in many ways it is legitimately terrifying. This chart shows the yield on the Bloomberg U.S. Corporate High Yield index, which has been at its lowest ever this year, and its spread compared to Treasury bonds, which is closing in on its record tightest level set ominously on the eve of the credit crisis in summer 2007:

This isn’t merely a phenomenon of the American junk bond market. If we look at the euro zone, where the bond market had to contend with what was in effect an extended crisis that lasted well into the last decade, we see spreads compared to Treasuries reaching record lows as well, on the eve of a European Central Bank meeting:

Credit spreads in Europe haven’t been this tight this consistently since, again, the summer of 2007. In the credit market, unlike stocks, stability like this should ring alarm bells. Investment-grade issuers, and not just low-grade junk issuers, have rushed to issue more debt this week, locking in generously cheap funding while they have the chance. That means that that much more debt will have to be rolled over in future, creating that much more pressure on the Federal Reserve and other central banks to keep the liquidity flowing. If potential lenders aren’t able to refinance that debt in future, then we have the seeds of a Minsky Moment, the point at which investors recognize that debt is unsustainable and lose confidence.

If we take this argument a step further, it suggests that there could be a grave error in what appears to be the current policy of​ first​ tapering off asset purchases (which help to provide potential lenders with liquidity by giving them cash in return for bonds they were holding) and only later​ raising rates. Raising rates while keeping the liquidity going would discourage yet more debt issuance, while ensuring that existing debt can be rolled over safely. That way, conceivably, it might be possible to retreat from the current extraordinarily lenient financial conditions without creating a crisis along the way.​

Mike Howell of Crossborder Capital Ltd. in London puts this view eloquently. Assuming central banks want to avoid a crisis, they may find that they have no choice but to steer the U.S. and​ euro zone into Japanified conditions with permanently low rates leading to permanently high levels of debt, forcing central banks to continue be lenient:

The impact of more debt on the economic outlook needs to be carefully considered. The issue (again-and-again) is that the world economy is burdened by too much debt, rather than too much liquidity. Liquidity has become a necessary counterpart of debt, because (unlike equity) debt needs to be re-financed on maturity. With the average maturity of the near-US$300 trillion of World debt standing at around 5 years, this suggests close to US$60 trillion needs to be rolled over each year. This whopping funding burden demands a lot of balance sheet capacity, i.e. liquidity.

[L]arge debt burdens are forcing the West to converge on to Japanese-like inflation rates and interest rates.​ Japanification is coming and low yields will persist unless the unending rise in debt is stopped! Too much debt is the problem, not too much liquidity.

That excessive weight of debt helps explain why the stock market is able to move upward​ so calmly. But the calmness that should concern us is in debt, not equity.

This is getting... very interesting...

I keep talking of “vigliaccheria italiana ed europea”… here is some evidence:


Danilo Taino | 08 settembre 2021

Le difficoltà a creare una Difesa comune sono molte e radicate. Ce n’è una spesso sottovalutata: la maggioranza dei cittadini europei non ne vuole sapere. Cresciuti nella pace e nella democrazia, protetti dallo scudo della Nato per lo più americano, non sembrano avere realizzato che il mondo è cambiato, diventato più pericoloso.


disegno di Doriano Solinas

disegno di Doriano Solinas

Quanto è probabile che l’Unione europea riesca a darsi una seria politica comune di Difesa? Quell’autonomia strategica di cui parla Emmanuel Macron e che un po’ tutti ritengono indispensabile? Dopo la sconcertante ritirata di Joe Biden dall’Afghanistan, la questione è balzata in testa alle priorità politiche europee, almeno per ora. Le difficoltà a creare una Difesa comune sono però molte e radicate. Ce n’è una spesso sottovalutata: la maggioranza dei cittadini europei non ne vuole sapere. Cresciuti nella pace e nella democrazia, protetti dallo scudo della Nato per lo più americano, non sembrano avere realizzato che il mondo è cambiato, diventato più pericoloso. Che è tornata la competizione aggressiva tra potenze, simile a quella della prima metà del Novecento, ancora più articolata di quella tra Usa e Urss durante la Guerra Fredda.

Il serio sondaggio d’opinione più recente sull’atteggiamento degli europei di fronte alla Difesa lo ha svolto il Pew Research Center all’inizio del 2020. In generale, la fiducia nella Nato era crollata, per lo più a causa della politica di America First di Donald Trump: ad esempio dal 60 al 49% in Francia, dal 67 al 57% in Germania tra il 2017 e il 2019 (in Italia era invece cresciuta del 3%, al 60%, nello stesso periodo). Ma quello che è interessante per capire se le opinioni pubbliche europee sono disposte a farsi carico della Difesa è il dato che riguarda l’Articolo Cinque della Nato, secondo il quale i membri considerano un attacco a un Paese dell’Alleanza come un attacco a se stessi. E quindi devono intervenire al suo fianco. Alla domanda se il proprio Paese dovrebbe difendere un alleato della Nato aggredito militarmente dalla Russia, il 66% degli italiani rispondeva di no. Risposta negativa anche dal 60% dei tedeschi, dal 53% dei francesi, dal 56% degli spagnoli. I soli europei in maggioranza favorevoli a intervenire erano gli olandesi, i britannici e i lituani. Funambolicamente, però, il 75% degli italiani riteneva che, nel caso di un attacco russo, gli Stati Uniti sarebbero intervenuti. Lo stesso il 72% degli spagnoli, il 63% dei tedeschi, il 57% dei francesi. Può darsi che il caso Afghanistan chiarisca un po’ la realtà. Ma l’impressione è che la maggioranza degli europei ritenga di vivere ancora nel mondo di ieri. Comprensibile. Purtroppo non è così.

The most neglected aspect of the decline of the Western Roman Empire - albeit not by the greatest scholars, like Momigliano or Mazzarino, not to mention Burckhardt (Nietzsche’s closest friend) - is the central role of Christianity. Christians and the priesthood above all, not only saw the Roman State as an oppressor, but also spread that culture of pacifism and passivity that defeated every attempt by the State to form strong armies. This is not to deny the economic factors at work in the late Empire. But culture, and religion, play important, decisive roles.

So This Is a Normal Presidency?

At this point the American people would settle for competency.


By Jason L. Riley

Sept. 7, 2021 6:41 pm ET





President Biden at a briefing with local leaders on Hurricane Ida’s aftermath in Hillsborough Township, N.J., Sept. 7.


Listen to article

Length 5 minutes


Joe Biden was supposed to deliver a return to presidential normalcy, and that may be all he thinks is necessary to satisfy the 81 million voters who elected him. Sooner or later, however, the country will start pining for a return to competency as well, and it’s far from clear that this administration is up to the task.

Mr. Biden’s long, hot mess of a summer culminated with an ill-advised and horrifically bungled withdrawal of U.S. forces from Afghanistan. Images of the Taliban commandeering U.S. military aircraft and armored vehicles won’t soon be forgotten by Americans—or our enemies. But that’s not the only reason the president’s Real Clear Politics job-approval rating has dropped to 45% from 54% since late-May.


WSJ Opinion Potomac Watch

Joe Biden Sinks in Polls




Mr. Biden told us Covid would be more or less under control in time for Fourth of July celebrations. Yet the Delta variant continues to hamper job growth, throttle travel plans and wreak havoc on the new school year while the White House argues with government regulators over when to roll out booster shots. Yes, hourly earnings have crept up as employers offer higher wages to lure people back to work, but what good is that bigger paycheck if it’s being eaten up by higher prices? Adjusted for inflation, wages have been falling this year. Job growth in August was less than a third of what economists were expecting and the worst monthly increase since January.

Remember when the White House assured us in the spring that the migrant surge on the southern border was “seasonal” and nothing to worry about? Oops. “The Border Patrol made about 200,000 arrests at the southern border in July, marking the busiest month at the border in 21 years and a 12% increase over the previous month,” the Journal reported in August, citing U.S. Customs and Border Protection data. Detention centers are so overwhelmed that illegal immigrants are being released into the population without being screened for Covid.


Opinion: Morning Editorial Report

All the day's Opinion headlines.



After Afghanistan, immigration is Mr. Biden’s biggest unforced error and more evidence that competency is not his forte. The situation on the border has worsened to the point where White House officials were relieved when the Supreme Court ruled against the administration last month and effectively revived a Trump-era policy that required asylum seekers to wait in Mexico while their claims are being adjudicated. Among some administration officials, “the Supreme Court’s order was quietly greeted with something other than dismay,” the New York Times reported this week. “It brought some measure of relief.” The reprieve, it is hoped, will give the administration “an opportunity to take a step back, come up with a more humane version of Mr. Trump’s policy,” and “reduce the enormous number of people arriving at the border.”


Back to School With No Idea What to Expect August 24, 2021

Meritocracy Is Worth Defending August 17, 2021

Biden Is Delivering Obama’s Third Term August 10, 2021

If Biden Is Serious About Covid, He’ll Protect the Border August 3, 2021

Could Larry Elder Really Replace California Gov. Gavin Newsom? July 27, 2021

If that’s the plan, someone ought to tell Congress. Democrats will spend the next few weeks trying to ram through on a party line vote the largest expansion of government since Lyndon Johnson’s Great Society. And they’ve tossed in an amnesty proposal for good measure that will do nothing to curb illegal immigration. Mr. Biden and his fellow Democrats are betting that their $3.5 trillion “human infrastructure” package will compensate for the missteps voters have witnessed thus far. But the risks are considerable, and not just because it puts a progressive wish list—large tax increases, green subsidies, child tax credits, free college—ahead of the more-immediate needs of everyday people. Mr. Biden’s ambitions would seem to exceed his mandate. His party holds a slim majority in the House, where it lost seats in November 2020, and the Senate is evenly split. Bipartisan moderation would seem to be in order, not Great Society 2.0.

Another risk is that the Biden administration’s cradle-to-grave entitlement bonanza could backfire insofar as it increases government dependency, shrinks the size of the labor force and hampers economic growth. The federal government’s enhanced unemployment benefits finally ended this week, a tacit admission by the White House that paying people not to work might be one reason why there are 8.4 million people unemployed in a labor market with 10 million job openings. Labor-force participation remains below its pre-pandemic level and some groups are struggling more than others.

In July the black unemployment rate fell by a full percentage point to 8.2%, which is further than it fell for whites, Hispanics or Asian-Americans. However, the decline was not due to more blacks finding work. Instead, it resulted from some 250,000 blacks leaving the labor force and thus reversing a previous trend. According to the Bureau of Labor Statistics, labor participation rates in July ticked upward for the other groups but declined for blacks. Mr. Biden likes to talk about “equity,” but that’s not what his policies are producing. Growing the welfare state is unlikely to help.

Hey, who’s worrying? The Rats can still sell us Tik Tok to pervert…OUR children! It’s called Western free enterprise! FT article just now:

Tencent and NetEase shares fall as China urges end to profit focus in gaming

Beijing warns tech companies over ‘erroneous tendencies’ in latest assault on sector

A man plays an online video game at an internet cafe in Beijing

The meeting with video game executives in Beijing marked the latest attack by authorities on China’s tech sector  © Florence Lo/Reuters


September 9, 2021 5:00 am by Hudson Lockett and Primrose Riordan in Hong Kong

Shares in Tencent and NetEase fell sharply on Thursday after authorities ordered the Chinese technology companies to move away from a focus on profit in online gaming.

The country’s two leading gaming companies were on Wednesday summoned for talks in Beijing, where top officials asked them to “profoundly understand the importance and urgency of preventing minors from online game addiction”, according to Xinhua, the state news service.

Hong Kong-listed shares in NetEase and Tencent dropped as much as 7.7 and 4.8 per cent, respectively, on Thursday, while the Hang Seng Tech index fell 3 per cent.

The moves followed a sell-off in New York-listed Chinese tech shares. The Nasdaq Golden Dragon index of large US-listed Chinese stocks closed 3.4 per cent lower, its worst performance in more than three weeks.

The meeting in Beijing marked the latest attack by authorities on China’s tech sector after shares in the sector had experienced a tentative recovery as the steady drumbeat of punitive measures slowed following Beijing’s announcement in late August that it would limit children to three hours of gaming a week.

But the Chinese Communist party’s Publicity Department and government regulators, including the National Press and Publication Administration, renewed the regulatory pressure.

They urged online gaming companies “to break from the solitary focus of pursuing profit or attracting fans and other erroneous tendencies, and change game rules and designs inducing addictions”, according to Xinhua.


The Chinese control revolution: the Maoist echoes of Xi’s power play

Ke Yan, an analyst with DZT Research who writes on the Smartkarma platform, said the move was the latest step in the government’s “continuous effort of fine-tuning the online game industry”.

“No details were given how they are going to stop the dominance of Tencent and NetEase,” Ke said, adding that the guidance around preventing monopolistic behaviour “impacts the big players”.

Tencent, which has come under regulatory pressure over its lucrative Honor of Kings mobile game in recent months, said it took the physical and mental health of minors “very seriously”.

“We appreciate the guidance and instruction from the relevant regulators, and will work hard to be in full compliance with all rules relating to youth game addiction and content regulation,” the company said.

NetEase said it planned to “strictly follow” anti-addiction rules and instructions in regards to gaming for minors. “We seek to build and promote a wholesome gaming environment in China,” the company said.

From Afghanistan to the Mexican border, and soon in many other domestic matters (the fiscal stimulus, welfare policies, social policy), America and the West are a right dishonourable mess. The results will not wait to manifest themselves.

John Authers has just provided me with MOMENTOUS empirical evidence for my thesis that the gap between "bullshit jobs" or Big Tech, and "real effort" or manufacturing and services, is what will bring capitalism down... It is doing it already, as anyone can see.



To get John Authers' newsletter delivered directly to your inbox, sign up​ here.

A Really, Really Interesting Chart

I spend a lot of my professional life drawing charts. You had probably noticed this. Often, producing a chart that tells a story clearly and without distortion takes a lot of work. And sometimes, the first numbers I key into the terminal lead to something truly fascinating that needs no further explanation. This is one of those charts.

The latest revision of the Atlanta Federal Reserve’s Wage Tracker, for August, is now out. It’s enthralling​ research that has been running since 1997, and breaks down earnings growth by gender, age, skill, level of education and so on. This is how wages have risen since 1997 for the high-skilled, compared to the low-skilled:

For the third month in a row, wages for the low-skilled have risen faster than for the high-skilled. In the previous history of the survey, which now goes back almost 25 years, this had only ever happened in two months, in early 2010. Wage growth for the low-skilled is also exceeding that for the high-skilled by the most on record.​

In terms of the momentous macroeconomic issues of the moment, this is good for growth, as poorer people are more likely to spend their pay rises than richer people. It’s also potentially bad for inflation. Wage growth for the lowest skilled is the fastest since August 2008 (not coincidentally, the month before the Lehman bankruptcy), and that could easily lead to higher prices.​

More interestingly still, it does suggest a shift in the balance of power between labor and capital. This isn’t as yet a deep-seated or well-established trend, of course. But if it continues it could rattle a lot of assumptions, and alleviate a lot of social tension.

And that leads to one final readthrough. Low-skilled workers endured a truly terrible deal from 2011 to 2013, when their wages didn’t even gain 1% per year. Higher-skilled workers did far better. Barack Obama was president at the time. If any one chart helps to explain how Donald Trump was able to disrupt the coalition that elected Obama, this might be it. And if this continues, it could be fantastic political news for Joe Biden, who could do with some at present. It’s worth watching this, very closely.​

Europe With a Little Less PEPP

My late parents-in-law used to have a large sign prominently displayed in their kitchen: “Make New Mistakes.”​ It's a great dictum for life, and central banks are doing their level best to follow it. They aren’t making the old mistake, of messing up their communications and scaring the market into throwing a tantrum when they try to start removing support. We await with trepidation to find out what the new mistake is.

The latest example of avoiding the mistakes of the 2013 “taper tantrum” comes from the European Central Bank, which on Thursday duly announced what most of us would call a taper of its Pandemic Emergency Purchase Program, or PEPP, that was introduced last year to deal with the pandemic. It will make purchases in the final quarter at a “moderately slower pace” than in the preceding two quarters.

But President Christine Lagarde channeled her inner Margaret Thatcher to say that​ “the lady isn’t tapering.”​ Rather, she said, “we are recalibrating, just as we did back in December and back in March. We are doing that on the basis of the framework, which is a joint assessment.”

The market believed her. Euro-zone bond yields fell after the announcement. Both German yields and, quite dramatically, Italian yields​ are lower now than they were when when the PEPP​ started. No tantrums here.

Why so relaxed? In part, Jorg Kramer of Commerzbank AG says, all the nudges and winks from the ECB suggest that the PEPP purchases will go on for longer into next year, even if at a somewhat slower pace than before.​

the ECB will decide on the more important question of how the PEPP programme will continue after March 2022 only at its meeting in December. We are more than ever of the opinion that the ECB will then loosen its monetary policy further:

Economic growth is expected to slow significantly in the fourth quarter – because of the new Corona wave, less growth in the important export market China and because of the continuing supply bottlenecks. This significant growth slowdown is not yet included in the ECB's forecasts. The many doves on the ECB Governing Council will not let such a negative economic surprise slip by as an argument for further easing.

Beyond that, he points out that the ECB’s inflation projections are rising, which implies that it will be more​ aggressive about tapering. The ECB also increased its growth projections, which on the face of it would also imply that it is time to taper. Lagarde​ conceded that inflationary pressures look more durable than they did earlier this year —​ which in itself sounds a little hawkish.

However,​ Lagarde continues to say she is​ confident that the current inflation is driven by transitory bottlenecks, and the market evidently attached lot of importance to that. Further, growth is still expected to regress to an anemic 2.1% in 2023, when inflation is projected to be 1.5% on both a headline and a core basis —​ not remotely the kind of projection to worry anyone, and indeed a justification for continuing to juice the market with asset purchases.​ This chart of the ECB’s projections comes from Pictet​ Asset Management Ltd:

Kramer also points out that many governors of the ECB will want to keep borrowing costs low for their indebted governments, which also gives them an incentive to keep feeding in support. Put all this together, and it seems reasonable to expect a continuation of the PEPP in December. This projection​ comes from Pictet, and many other analysts seem to expect a pattern of purchases along these lines:​

That is how the lady managed to taper without the faintest sign of a tantrum. It has been achieved with a slight strengthening of the euro compared to the dollar. The fact that she has done this probably makes it a little easier for the Fed to start to taper​ sooner rather than later —​ although the inflation data over the next week, starting with producer prices on Friday, will be rather more important. And even if the central banks have avoided the mistake of eight years ago, there remains the risk that they will commit a new one.​

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