SWMBO’s Legacy

For many people SWMBO has been a political giant and her legacy portentous. Yet, her party obtained the worst results in its history in the recent general election. So much for her legacy’s domestic endurance. This development ought to be shocking given Germany’s alleged economic success. Her economic team’s strategy for Germany to remain competitive in a globalizing economy was quite successful; we shall soon see how well it works in a de-globalizing economy. The trade-off of the past two decades was growth stemming from Germany running massive trade and current account surpluses. Germany, like China, also exported disinflation to her trading partners in the Eurozone. These excess savings coming from auto-euros, for lack of a better word, were recycled in generally uneconomic ventures in the periphery by an unimaginative and untalented German financial system until the wake-up call of the EU Sovereign and banking crises put an end to that long-term strategy. Inevitably, this easy money led to bubbles in property development in Ireland and Spain and fiscal deficits in Portugal and Greece. Industrial production disinflation resulted in two last decades of growth in Italy.

SWMBO’s handling of the crisis, informed by her domestic agenda, was an unmitigated social and political disaster which consequences we are still suffering. This has resulted in most member parties of the EU‘s Popular Party turning progressive and reneging from their market friendly and liberal ideals. Her obsession with austerity and lack of flexibility led to the rise of populism which worse face is the phyllo-autocratic Visograd coalition. Finally, her energy policy for Germany, a knee jerk reaction to the Fukushima Nuclear Plant accident, has re-enforced Putin’s grip on central and Eastern Europe. In addition, SWMBO allowed her lack of rapport with President Trump to extend to the US-EU relations and NATO without articulating a clear alternative defence strategy. It is difficult to rank which of these problems will have the largest or longer-lived consequences. Yesterday the EU Commission defused the Green agenda by including nuclear and natural gas plants as sources of green energy. This effectively pushes back the date for meeting zero emissions and should be a bonanza for mini-nukes such as those developed by Bill Gates’s Terra Power. But what does it say about SWMBO’s energy policy legacy?

Brexit was perhaps inevitable. The EU did show Cameron some flexibility as it accepted many of the reforms presented by his Government in the 2016 negotiations. In any event, further political integration does not seem to be a high priority anymore. Yet the loss of the UK’s membership makes the EU weaker politically, financially, and militarily. Conversely, the loss of Hungary would largely go unnoticed and yet Germany cedes on every abhorrent point to the satrap who has become effectively the Magyar dictator. While Brexit may turn out to be very bad for the UK, it marks the end of the EU for most market-oriented liberals like us. Illiberalism is on the rise in the EU, democracy compromised in many countries, and individual rights trampled on with every crisis. This is also SWMBO’s legacy because she turned a blind eye to all these problems as long as governments were well behaved in other areas of interest to Germany.

On the 70th anniversary of D-Day at Ouistreham, in the Calvados region of Normandy, President Hollande welcomed Chancellor Merkel who greeted some of the nonagenarian allied veterans in attendance with a firm handshake and a serious countenance while the band played “In the Mood”. We would love to know what was on her mind that day. She was not there as the leader of the common enemy of 1944, for that common enemy was Nazi Germany, which conveniently disappeared soon after the Allied victory. She was there as the very popular leader of a democratic, re-unified, affluent, industrious, and parsimonious but just in case, non-nuclear and semi-occupied by the US military, Germany. All the leaders of the victorious countries were in attendance, including the Presidents of the United States and Russia. While everybody else waited patiently for Queen Elizabeth’s grand entrance, SWMBO had a long conversation with President Putin staging her good relationship with the leader of the authoritarian movement.

Five years later on the 75th anniversary of D-Day, SWMBO was again a central character in the get together but Putin was a no show. Merkel’s black jacket and dark trousers were in sharp contrast to Queen Elizabeth’s strawberry pink coat. The new President of the United States was a source of concern to many in the stands, for Donald Trump had told his NATO allies that they should step up their defence spending as the US left the Iran nuclear deal, which many believed was a landmark of EU diplomacy. Merkel remarked, “It is no longer such that the United States simply protects us, but Europe must take its destiny in its own hands, that’s the task of the future.” What remains unclear is how exactly Europe will take its destiny into its own hands.

SWMBO has left no Grand Plan behind for new leaders to implement. There are those who believe that the EU needs to cosy-up to Russia to present a counterbalance to the US and China. No wonder the UK has left this EU club. Macron would like an EU military force, but minor problems aside, such as language, who will contribute what and to what end. Sovereign countries have their own foreign policy priorities. Take Spain for example. It has a land border with Morocco, a developing Arab country, which is currently blocking gas supplies into Spain from its neighbour Algeria as these two countries fight over control of the former Spanish Sahara. Not only does that territory still have rich phosphate deposits but also a large offshore gas field. How will Spain’s military priorities ever be in accord with Poland’s?

SWMBO’s political legacy is also confusing. The EU’s Popular Party is no longer a conservative market friendly party. Many of its member parties have moved closer the centre-left. This is perhaps why SWMBO was so comfortable Governing with the Socialists in a Grand Coalition. These “conservatives” are the parties, which often raise taxes, adore big government, as well as protectionism, industrial policies, and anti-globalism. There are still those who cling onto the small Government aspirations of the 1980s. They are sometimes very popular, like Isabel Diaz Ayuso, the President of the Region of Madrid, but their efforts are undermined by their fellow party members. The microcosm of Madrid politics is a good an example of this trend. Ms Ayuso is business friendly, has lowered income taxes, and is one of the few politicians in the EU who believes there was a cost benefit analysis that needed to be made before perpetuating the lock-downs. Conversely, the Mayor of Madrid, who is also unusually the PP’s national spokesperson, is a populist who has just passed the City’s 2022 budget with the support of disaffected communist council members. Not only does not Mr Almeida lower real estate taxes to pre-sovereign and banking crises levels, as these were the taxes the IMF demanded should be raised to balance the public sector accounts temporarily, on the contrary the Mayor is negotiating the implementation of a Mansion tax with his communist allies. This is the state of the EU’s conservatives.

Finally, one would think that SWMBO would be the defender of the Maastricht Treaty’s strictures in defence of the common currency’s values. These are no longer a priority, inflation is rampant, the currency debased by the ECB’s printing press and the periphery countries are all but insolvent were it not for the surprising fact that most of them pay nothing to finance the rollover of their maturing bonds. Her party in tatters, conservatism abandoned, fiscal prudence a thing of the past, the euro debased, further political union derailed, the traditional alliance with the US questioned, the Green Agenda defanged, despots such as Putin, Erdogan or Orban tolerated what exactly is SWMBO’s legacy?

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Why me Worry

We have been of the opinion that this recovery was to be fraught with much more uncertainty than rosy official forecasts led us to believe. In our view, GDP growth forecasts were too optimistic and inflation estimates too sanguine. Recent data confirms that the Fed needs to acknowledge that inflation is not a temporary problem and that it may have something to do with the growth in monetary aggregates. Chairman Powell has been financing the large incremental US fiscal spending that provided incomes support to households and state guarantees to corporate debt. As we have been pointing out, inflation in countries such as Switzerland, which also suffers from supply disruptions and higher commodity prices, has not risen sharply nor is it above its central bank’s target. It is therefore less likely that the recently shelved Build Back Better spending plan succeeds in coming back to the floor of the House. We are going into a by-election year with the Fed on a tightening mode and the Congress on a more cautious spending path than had been anticipated. Traditionally, these developments would not be good news for the stock market.

In the backdrop, the Omicron variant is causing a large increase in infection rates, including yours truly. Luckily, this surge in cases has not resulted in commensurate increases in hospitalizations or fatalities. The public policy response to these surges in infection cases falls along the Red-Blue States divide. Blue States’ Governors are moving faster to restrict commerce and movement than their Red States counterparts. This is not just a US political divide between liberal and collectivist politicians, it is a global trend best exemplified by China’s zero Co-Vid tolerance policy. At least in China, nobody can accuse politicians of staging a “power grab”. In any case, Governments the world over seem to be losing credibility very fast over their handling of the pandemic.

This respiratory infectious disease has revealed the worst aspects of contemporary human culture and society. From day one, experts told us that the worst-case scenario was for this virus to become endemic, it has. We were also told to expect the virus to mutate; if we were lucky, the mutations would lead to a less lethal version dominant variant of the virus. Omicron seems to be a very fast spreading milder version, but we do not know whether it will become dominant or cede its three months of fame to a new and improved variant? The biggest risk is for a new mutation to be both more infectious and more deadly; some observers believe that the Delta variant presented such a threat. High levels of vaccination have not brought about herd immunity as previously advertised. Why would they have when the flu vaccine does not? Luckily, vaccines work fairly well as a prophylactic, thus senior citizen who have taken the full course today have a very good rate of survival when infected.

Unfortunately, the policy response is pitting old vs young and wealthy countries vs the rest of the world. Lockdowns and other mobility restrictions undermine the education of our children and the professional training of young adults. Sadly, we have been right to worry about three significant problems caused by lockdowns that have gone largely under or unreported. Children’s cognitive development has suffered, there has been a marked deterioration of mental health, and we observe a surge in non-Covid related health problems and fatalities as many patients shunned hospitals for routine testing or these tests were not always available. In the interim, we perpetuate the virus’s success in the developing world by restricting access to vaccination as wealthy countries hoard supplies to provide booster shots to their residents.

As Co-Vid vaccines have become a big business, the quality of medical advice may be compromised, as is so often the case with Big Pharma. There is nothing that large pharmaceutical companies like better than developing a molecule to treat an endemic and widespread disease. Whether it is good for the patient is a different matter (e.g. statins). Many healthy younger people question why are they better off taking boosters, which often result in a day or two of most uncomfortable side effects, rather than taking their chances at infection, which is often asymptomatic, and thus obtain natural immunity. The argument that they are protecting others by getting a vaccine is rather specious given that population infection rates are the same or higher today than they were at low levels of vaccination. By now, those who are at the highest risk from exposure should know that their best course of action is to avoid contagion by isolating, as other schemes are far from full-proof.

Interestingly, according to data collated by the University of Oxford, vaccination rates are highest in countries such as Portugal or Spain. Granted, these countries have a very high percentage of the population aged 65 or older, but so do France or Italy, which have lower rates of vaccination take-up yet, have similar cultures. In Portugal, where 89% of the population is fully vaccinated, the Government will shut down bars and nightclubs on Christmas Day and reduce the capacity utilization of all other public venues. Regulation will also require proof of a negative test to attend most public gatherings. All this begs the question, what good are these vaccines? If we follow the logic of the Pharma complex, infection only occurs because the patient did not have enough boosters. This tautological argument has been bought hook, line, and sinker by public health officials who have no better alternative course. It is also interesting to note that vaccination rates are lower in countries that have very high development indices and much higher household incomes such as Sweden, Austria or Germany. We shall soon see how much longer the public buys into this argument.

Symbols are very important in our culture, thus the success of facemasks as a strong message that we are doing something about the problem irrespectively of the fact that facemasks were not required in Germany in the first wave and the incidence, hospitalization, and fatality rates there were much lower than in most countries where they were mandatory. The Government of Spain, which effectively much like the US Federal Government has no say on health policy issues as these are decided by Regional Governments, has re-introduced the mandatory use of facemasks in the streets to general derision. Thus, in the wee hours of Christmas Day when young Santa helpers leave the night clubs where they have been doing what young people do in nightclubs for hours in the middle of the night, they will have to wear a mask on the street. Thank God for small mercies. This is surely going to protect grandma from contagion a few hours later at the family Christmas lunch.

These are hopefully all temporary problems. The biggest problem is the culmination of the Big Power Grab that started with the systematic demonization of de-regulation and small Government that ensued from the Great Financial Crisis. In Atlas Shrugged, a 1957 poorly written but interesting novel best read in Cliff Notes format, Ayn Rand advocates reason, individualism, and capitalism in a dystopian United States governed by coercion. Ayn Rand was the intellectual muse of a group of Objectivist philosophy followers that included a young Alan Greenspan. Dr Greenspan has lived to see a version of what Ms Rand depicted in her rambling work of fiction.

Whereas private enterprise seems to be entering a new Golden Age as innovative companies flourish, especially in the US, we have not seen such Big Government for decades. Indeed, the platforms that ensued from the Internet Revolution are increasingly the object of Government intervention. The users of these platforms condone censorship, because some ideas are hurtful to some people! It should then not surprise that Dr Mario Draghi, the celebrated Italian PM, has introduced a Co-Vid vaccine passport. There are no good medical arguments for introducing a Scarlet Letter system and for good reason; this idea has failed elsewhere. On the contrary, many privacy and individual rights issues arise from such coercion. Might the same person, who allegedly saved the euro, destroy civil rights in the birthplace of modern Humanism?

While we worry about safety at family gatherings or cancel some of our travel plans, collectivism has triumphed in yet another Latin American country. Chile has elected a 35-year-old Bolshevik, soon to be followed by a new and improved version of Lula in Brazil. Latin America is lost. Eastern Europe is looking to Russia for leadership, as Putin readies a military occupation of Ukraine. Over in China, XMBO is consolidating his Imperial Powers. Europe is leaderless as SWMBO is now grocery shopping full time. Biden is alone as the leader of the free world. Inflation has reared its ugly head and the economic recovery is faltering. Yet, pretty much all that most people talk about this Holiday Season is Co-Vid, mercifully perhaps on its way to becoming a not so nasty cold, while the S&P 500 reached an all time high yesterday. What, me worry?

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