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How can Britain exit the EU? As a nation state Britain doesn’t really exist

That's me, in 1941!

That’s me, in 1941!

My Comments: the first six years of my life were spent in England. Until I was probably fifteen I had no notion there was anything other than England when it came to where my aunts and uncles and cousins lived.

During those fifteen years, I lived also in France, in India and here in the US. Whenever I sent a thank you note or other mail to those aunts and uncles, the envelope was addressed to England and it always got there.

That construct is perhaps about to go away. On one hand I find that very distressing. On the other hand, I recognize that society today is very different than what it was 75 years ago when I first appeared on the planet. Changes happen and what is normal for my six year old grandson is very different from what was normal for me when I was six. Get used to it.

David Marquand / January 13, 2017

We are told that this will be the year Brexit is set in motion. That could be good or bad, depending on your perspective. But in any event, we are overlooking a serious point. The problem with “Brexit”, as shorthand for “British exit”, is that there is no such place as Britain.

Once upon a time there was a Roman province called Britannia, but it did not include Ireland, or Scotland north of Hadrian’s Wall. What does exist today is a state called the United Kingdom of Great Britain and Northern Ireland. It is not a nation state like France or Denmark. It is a multinational state, like the former Yugoslavia or the Austro-Hungarian empire.

It is also a distinctly odd state. It contains four nations, one far richer, more populous and more powerful than the other three. England contains almost 84% of the UK population, Scotland has just under 8.5%, Wales just under 5%, and Northern Ireland just under 3%. The state populations of Germany and the United States vary widely, but none towers over the rest to remotely this extent. To judge by what they say and do, the London-centred political and media elites are blind to the tangled history this oddity reflects. As a result the union state is now heading for break-up.

The story of the United Kingdom, the story that should shape the current debate but hasn’t thus far, is one of relentless English expansion – sometimes peaceful and sometimes warlike – at the expense of the non-English nations of the Britannic archipelago. Northern Ireland is the legatee of a war of conquest between the English crown and the native Irish, which ebbed and flowed for centuries and ended with the island’s partition between the overwhelmingly Catholic south and west and the predominantly Protestant north-east.

Wales was conquered by the English crown in complex medieval struggles, in which Welsh warlords were as apt to fight one another as to fight the English; the title “Prince of Wales” is a reminder of the English victory, not an emblem of Welsh defiance. Scotland was never conquered, despite brutal incursions by Edward I and Oliver Cromwell. But the Act of Union of 1707 that incorporated Scotland and England (an England that included Wales) into the new polity of Great Britain provoked fierce resistance in Scotland, overcome only by a mixture of threats and bribes.

It is not a pretty story: state-building is rarely a pretty process. Yet for much of the past two centuries, most of the inhabitants of the union state have taken it for granted; it has been in serious contention only in Ireland. The “mystic chords of memory” that Abraham Lincoln evoked in his first inaugural speech, when he hoped to forestall the secession of the southern states, have pulled three of the four nations of the United Kingdom together – thanks, not least, to its astonishing success as an imperial predator.

Now all is changed. The empire on which the sun never set has been consigned to the dustbin of history. Welsh steelworkers’ jobs depend on decisions taken by an Indian conglomerate, headquartered in Mumbai. More important, Lincoln’s mystic chords have been pulling the nations of the UK apart, instead of together, for nearly 20 years.

The first term of the Blair government saw a Scottish parliament sitting in Edinburgh for the first time since 1707, and a Welsh assembly sitting in Cardiff for the first time ever. The Good Friday agreement set up a new form of “power sharing” in Northern Ireland. There are now four capital cities, four administrations and four legislatures in the once monolithic union state. Each of the devolved administrations has its own political priorities and follows its own political trajectory.

In the last Westminster election, different parties or groups of parties won majorities in each of the four nations, for the first time in history: the Scottish National party won overwhelmingly in Scotland; the Labour party won comfortably in Wales; the Conservatives won easily in England; and the Democratic Unionists were the largest party in Northern Ireland.

Like a mortar bomb crashing into a building infested with dry rot, the EU referendum has torn great holes in the structure, the operational codes and the underlying assumptions of the increasingly rickety union state. Two of the union’s four nations voted to leave the European Union; two voted to remain. There were dramatic differences within three of the four. The Scottish vote to remain was pretty uniform across the nation. But in Northern Ireland, Sinn Féin areas voted to remain while DUP areas voted to leave. England voted to leave but London, Liverpool and Manchester voted to stay. Wales also voted to leave but Cardiff, the Vale of Glamorgan and Monmouth in the south, and Ceredigion and Gwynedd in the north, voted to remain.

Meanwhile the constitutional status of the referendum – and therefore of the leave majority – is in dispute. Since the UK is a parliamentary democracy, referendums can only be advisory. It is up to parliament to decide whether or not to accept the advice. But one thing is clear: the union state is not a unitary state, still less an English state. It would be outrageous to force Scotland and Northern Ireland to leave the EU in defiance of the wishes of their peoples. What is sauce for the English and Welsh leavers is also sauce for the Scottish and Northern Irish remainers.

The Scottish government has every right to hold another independence referendum; and now that the oil price is rising again, the only prudential argument against Scottish independence within the EU has lost its force. Equally, Northern Ireland has every right to rejoin the rest of the island of Ireland – a right guaranteed by the 1998 Good Friday agreement. Theresa May now faces one of the hardest choices ever faced by a British prime minister. She can strain every nerve to make sure that Scotland and Northern Ireland remain in the EU while also remaining in the UK – difficult but not impossible.

If, however, Scotland leaves the EU, along with a Northern Ireland rendered unstable once again by this week’s resignation of Sinn Féin’s Martin McGuinness as deputy first minister – with a consequent threat to power sharing – Wales will be yoked for ever to a Conservative-dominated England. That will stick in the throats of all self-respecting Welsh people. The United Kingdom will be of past tense. To neglect this bigger picture in the months to come would be a monumental mistake.

Turning 65 this year? Don’t overlook these 3 steps

retirement_roadMy Comments: The transition from working FOR money to having money FOR YOU is full of tension and hard to answer questions. If you’re beyond this stage, then don’t bother with this. On the other hand, if it’s today or in your future, then this is good stuff.

Gail MarksJarvis / The Chicago Tribune / January 6, 2017

If you will be turning 65 this year and plan to keep working, you have essential money decisions to make that can’t be ignored.

The arrival of your 65th birthday requires that you take specific steps so you don’t get in trouble with the government on Medicare rules and face fines later. And the years around your birthday command attention to money details that could make the difference between having plenty of money for retirement and running out of funds early. So don’t drift by this major time in your life without attention to the three issues people at age 65, or near retirement, must address.

Sign up for Medicare. When you are 65, you will be eligible to start taking Medicare to cover some of your doctor, hospital and other medical costs. Full Medicare coverage is not free so you typically don’t want to start taking it if you are still working full time, aren’t on Social Security and will have solid, affordable medical coverage at work until you decide to retire. But you can sign up for Medicare at 65 and get a small part of Medicare — the free benefits that cover some hospital care — even if you don’t need the full Medicare package while working. (See http://www.ssa.gov/pubs/EN-05-10530.pdf.) Signing up doesn’t have to mean you give up your health insurance at work. And the hospital coverage you get free through Medicare Part A can supplement the health insurance you have through your workplace insurance, said Philip Moeller, who walks people through the confusing Medicare requirements in his book, “Get What’s Yours for Medicare.”

If you are going to keep working after 65, you simply say on the Medicare form you fill out that you won’t be claiming the form of insurance yet that covers doctors because you have solid coverage through work. (See faq.ssa.gov/link/portal/34011/34019/Article/3773/How-do-I-sign-up-for-Medicare.) In other words, you aren’t taking Medicare Part B at that time. Part B is the Medicare insurance that you will use later in retirement to pay for doctors, outpatient treatment and supplies like knee braces or walkers.

After doing the basic sign-up at age 65, you will get a Medicare card in the mail and you will start being eligible for one of the three parts of Medicare: Part A. Later, when you actually retire, or when you don’t have solid medical insurance through work, you will need to sign up for full Medicare coverage. Then, you will be able to rely on all three parts of Medicare — Part A for hospitals, Part B for doctors, equipment like leg braces and walkers and outpatient medical services, and Part D for some prescriptions. For Part B, you will pay premiums each month — typically $104.90, although what you pay depends on your income. Your drug Part D cost depends on the plan you choose from numerous insurance companies, and you need to scrutinize them carefully to make sure they cover your particular prescriptions. Monthly premiums for popular drug plans range from about $18 to more than $66 and swing dramatically depending on where you live, Moeller said.

If you plan to rely on your employer insurance while working, beware: Employers can’t kick you out of their health insurance at 65 or as you age, but that rule applies only to businesses with 20 or more employees, Moeller notes. So if you work for a small company with only a few employees, at age 65 you could end up needing to sign up for Medicare and also start using — and paying for — all three types of Medicare: Parts A, B and D. Your employer is supposed to tell you if your insurance through work is considered to be sufficient enough that you don’t have to apply for full Medicare. If not, you will have to apply for full Medicare including Parts A and B.

If you don’t have acceptable coverage at work, and fail to sign up for Medicare when 65, the government can penalize you throughout your retirement. When you start using Medicare Part B for doctors, the penalties could boost your monthly payments by 10 percent for each full 12-month period. (See http://www.medicare.gov/your-medicare-costs/part-b-costs/penalty/part-b-late-enrollment-penalty.html.) If you miss the deadline for signing up for drug coverage through Part D, another penalty on drug coverage can last through retirement. (See http://www.medicare.gov/part-d/costs/penalty/part-d-late-enrollment-penalty.html.) There are specific times during the year when you must enroll. Make sure you pay attention to enrollment periods because there is no leeway.

If possible, wait on Social Security. Although you can start getting Medicare at age 65, and must pay attention to paperwork then, Social Security is different.

You don’t have to apply for Social Security at a certain age, and the longer you wait, the better. Most people who are around 65 now won’t be able to retire and get full Social Security retirement benefits until they are at least 66. If they are healthy and can work until 70, they will boost their Social Security benefits significantly. For each year a person waits to retire after 66, the person can increase his or her Social Security payments 8 percent a year. And there are also cost-of-living increases in Social Security benefits annually. Those payments are guaranteed. You aren’t going to find a guarantee like that in any investment. That makes waiting to retire a smart move if possible.

Budgeting and investing. When you start depending on Medicare, you will not be able to count on it for all your medical needs. Full Medicare covers only about half of your medical expenses. So as you plan for retirement, you will need to shop for supplemental insurance that picks up where Medicare leaves off. There are two types: Medigap insurance and Medicare Advantage plans. They differ in what they charge, what they cover, and whether they apply to your community, or cover your medicines, your doctors and the places where you might travel. Costs vary broadly with some of the expensive Medigap plans costing well over $600 a month per person. (See Medicare’s PlanFinder http://www.medicare.gov/find-a-plan/questions/home.aspx.)

Also, realize that your income impacts what you will be charged for Medicare and the taxes you pay on Social Security. So financial planners suggest that people examine their savings a few years before retiring to ensure that during retirement they have a blend of IRA and Roth IRA plans. Roth IRAs don’t get taxed in retirement and IRAs are taxed. So by plucking a little money from each of the two plans for expenses each year, retirees can keep their taxes down and hold on to more of their Social Security and Medicare benefits than they would if they didn’t consider tax implications.

What To Do If Social Security Is Your Primary Source of Retirement Income

SSA-image-3My Comments: There is talk in Washington that future Social Security benefits will be cut. How real this is I have no idea. But the fact it’s even talked about suggests the threat today is higher than before. I’m not talking about what might happen in 2035, but in 2017.

If you are not yet 62, much less a few years away from your Full Retirement Age (FRA) you better consider that your future benefits from Social Security will not be as robust as you were led to believe.

Henry K. Hebeler | January 3, 2017

Here’s a do-it-yourself plan for low savers, but be aware than not even a professional planner can foresee all the financial surprises that occur in all of our lives that can come from such things as an elderly parent or other relative who needs help, a collapsing stock market, high inflation, disability, or living beyond our original estimate of life expectancy.

The list of unknowns is large, so we counter that by making a new plan as needed, just as a commander does when the enemy changes tactics. We’ll also cover some common ways to enhance retirement income. That said, a professional planner can add perspective and help on investments, insurance, estate planning and annual budgeting. Click through to see what you need to know.

Determine how much emergency money you will need
A fair estimate might be one year of your Social Security payments. The most likely use of much of this will be for uninsured dental, hearing and sight expenses.These are not covered by Medicare and most Medi-gap policies. Other emergency uses include replacement and maintenance of autos, plumbing, furnace, appliances and furnishings. Emergency funds might be a source to help a relative, make a sudden trip, and other things which might otherwise be unaffordable.

It’s not good to use credit for such items when retired. If you do not have an emergency fund, start building one, perhaps with a part-time job or make an allowance in your retirement budget to build one within a reasonably short number of years. Retirement debts are negative investments — mostly with higher interest rates than the rates retirees get from their portfolio.

I believe it’s good to retire without a mortgage, but if your interest rates are modest and the years to pay off the mortgage are not more than a decade away, I’d not use savings to pay the remaining mortgage. When it does gets paid, they’re be some extra funds available to compensate for inflation, the constant need for home maintenance and ever increasing medical costs.

Calculate the amount of your savings that can be used for annual income

To get that, start with your current savings. Then subtract emergency funds, any debts other than your mortgage, and any known commitments for large cash outlays. Further subtract any savings you would use to reach the age you will start Social Security.

To calculate the annual income you can get from the residual savings, divide the net savings by your remaining retirement life expectancy. You can get a personal life-expectancy estimate from sites such as http://www.livingto100.com.

For example: $300,000 savings less $100,000 for emergency funds, credit-card debt and delayed Social Security leaves $200,000. If you take $200,000 net savings divided by a life expectancy of 20 years, you would get an annual inflation-adjusted budget from savings of $10,000 if you can invest with a return equal or greater than inflation.

If you will get a pension, calculate the annual value accounting for whatever reductions come from choosing a survival benefit for your spouse
If it is not a cost-of-living-adjusted (COLA) pension, multiply the annual amount by your current age divided by 100. This is an approximate way of making a COLA adjustment because you then will be setting aside part of your pension to be used later to compensate for inflation. Example:$20,000 annual fixed-payment times 65 for this retirement age divided by 100 = $13,000 pension for this do-it-yourself calculation.

Get your annual Social Security income from http://www.ssa.gov. If you have a spouse, add the spouse’s Social Security income which you can get from the same site with both of your Social Security numbers.

The primary earner must file before a spousal benefit is payable. Usually a lower-earning spouse gets 50% of the primary earner’s full-retirement-age benefit if the spouse starts at the spouse’s full retirement age and less if starting earlier.

Add the annual amounts you can get from savings, pension and Social Security
This is your pre-tax annual source of retirement funds from which you can determine a budget based on the retirement conditions you foresee. Unlike the federal government, you cannot spend more than this, so figure out a budget distribution that fits your income level. If it’s at all possible while still working, try living on this budget for six months to refine the numbers.

The bad news
One of the major differences between budgets when working and retirement is health insurance because employers have paid the lion’s share for you. Now you will have to pay for Medicare, a Medigap policy and the uninsured charges — usually dental, ear and eye-care costs as well as what might be a large deductible before the insurance will pay anything. Fidelity estimates that the total retirement costs for health insurance, Medicare and uninsured bills will be $260,000. This does not include long-term-care, which Fidelity says average $130,000 per couple. This often leads to Medicaid for those who have spent their assets down to a few thousand dollars. Not all doctors and facilities for the aged will accept Medicaid, so if this looks like part of the journey you may have to take, do some detailed research on welfare for your location and dentists willing to do pro bono work.

There’s some hope for low savers

Part-time jobs are a common source of additional income, but become more difficult for the elderly.

Home downsizing, done early rather than late, can add to retirement savings as well as reduced-living costs. Some live with relatives or even friends to reduce cash outflows. Moving to another location might have lower costs and benefit from a nearby relative that might provide some assistance.
By far, the best thing that low-saving people can do is to delay the start of Social Security payments, whether it be by working longer or using savings to support the delay. It is virtually impossible to count on investments to beat the lifetime benefits from the 6% to 8% increase each year of Social Security delay plus an inflation boost, especially when the generous spousal and survivor benefits are included. The primary earner gets a 67% lifetime boost in Social Security income when starting at 70 instead of 62. Further, it’s impossible to beat Social Security’s longevity benefits with insurance. And Social Security benefits from a lower tax rate.

Few people know that even after you have started Social Security, you can suspend Social Security payments as long as you are more than your full-retirement age, but less than 70 years old. Each year of suspension will increase benefits by 8% from the payment amounts the year suspension began. And each of those years will bring lifetime inflation increases. See www.ssa.gov for more information.

The Basics of Investing

investment-tipsMy Comments: This is brilliant. It comes from Rod Rehnborg who is based in Hong Kong. Too often, people in my profession start out in the weeds and drag the reader further into the weeds with every word they write. Before long you have no idea what is going on.

For some of you this may be too basic. But I encourage you to read this before you take the next step, whatever that might be.

Here’s what Mr. Rehnborg has to say:

Given stories of gigantic “ponzi schemes,” bank failures, and obscene Wall Street bonuses, the thought of handing over your hard-earned money to the financial industry is not very appealing. And, as a result, most people I meet wonder what to do with their shriveled, shrinking, nest egg. Of course, the answers to that all-important question are as numerous as there are nest eggs out there. Nevertheless, it may make sense to “hit the reset button,” and reflect on the very basics of investing.

Why do we save?

A generation ago, people use to save towards the purchase of a good—a TV, car, washing machine, home, etc. But this changed with the advent of the credit card, the auto loan, and second mortgages. Instant gratification was invented and we could pay for the goods AS we enjoyed them, not BEFORE. The birth of consumer loans also meant that there were now only two reasons to save: 1) for a rainy day and 2) for when we grow old and can no longer work but still need to consume.

In other words, the most common reason we save today is to pay for something much later (i.e.: retirement). Thus, the important thing is to have the money we save now grow in such a way that it will match up with the cost of those things we will want to pay for later. There are two things to consider: 1) how much our investment is going to grow and 2) how much the price of the things we will want to pay for in the future will be.

The price something will be in the future depends largely on how much inflation there will be. If our savings do not earn the same percent return as the inflation rate, then we are actually growing poorer even as we save. So the first question as savers we should ask ourselves is what the likely future inflation rate will be.

Inflation: What causes it?
Basically inflation is determined by how much money is available in the economy. And this amount of money is largely determined by how much people get paid for work and how easy it is to borrow money. Since wages have not gone up much in recent years, and the current job market is terrible, and given how hard it is to borrow money because of the financial crisis, there is not much chance that inflation will increase in the next year or two at least. In fact, the bigger worry right now is DEFLATION.

What’s the problem with deflation? The big problem with deflation can be easily understood by looking at a home financed with a mortgage. If you borrowed money for a house and the house drops in value because the cost of everything is dropping, you still owe the same amount of money but the house is worth less. When we enter into deflation, all people want to do is save money to repay debt. Economists call this the “paradox of thrift” in that savings is a “good thing,” but if everyone saves at the same time, then it can have negative effects for the overall economy.

So, what is the best way to save for the future in a deflationary environment? That’s pretty easy: Just leave your money in the bank and watch its purchasing power grow as the prices of everything else fall. A very forward thinking Japanese person in 1990 who was planning to purchase a house in 2009, only needed to leave his or her money in the bank as house prices just hit a twenty-four year low in Japan!

In order to fight off deflation, the US government is scrambling to bail out financial companies in the hope that they will lend more, and is also coming out with “stimulus packages” of government spending to pump into the economy so that more people get wages. In turn, all this government activism is raising the fear that inflation could rise dramatically in the future. Why? Because governments around the world are promising to pay for lots of things; and the way governments pay for things is either by borrowing the money by selling bonds or, if not enough people want to buy this government debt, by printing actual money to buy their own debt. But for the moment at least governments are losing the battle against deflation as people are paying down their debt faster than the government can print money and inject it into the economy.

Let us now look at some main types of investments to see how they fit into the inflation/deflation picture.

Stocks are simply a way to own a piece of a business that will be earning profits that should, on average, grow at or above the rate of inflation. When you buy a stock you are essentially passing your extra money forward to someone else who needs it and who will hopefully be good stewards of it by using it to invest in the equipment and people and other assets required to grow their business.

A bond is just a loan to either a government or company. The main concern with bonds is whether the borrower will be able to pay you back and what interest rate you will receive. Now, there is a big debate about US Federal government bonds (a.k.a.“treasuries”). These bonds have no risk of you not getting your money back since the government can always raise taxes or even just print money to pay you back. However, it is by no means certain whether government bonds will be a safe investment or a horrible one—it all depends on whether there is inflation or deflation. The current interest rate you receive on bonds is very low, but you will be happy with even a small return on your money if there is deflation and the cost of living drops. It seems that buying government bonds now is really a game of chicken, and best left to professional speculators, which is ironic since government bonds are supposed to be among the safest of investments.


Commodities are goods that we, as a society use in our daily lives (oil, gold, food, etc.), a.k.a. “stuff.” The idea is that the prices of this “stuff” will rise in line with inflation and if you think the world might be running out of “stuff,” then maybe the prices will rise even faster than inflation. When talking about commodities, it’s important to keep in mind that demand for most of them will fluctuate in line with the economy. So when the economy is strong, there is generally more demand for “stuff” like oil and copper. The one commodity that is different from the others is gold. Gold has been used for ages as the ultimate store of value, since aside from its good looks it is extremely hard to dig out of the ground and thus there is never going to be any meaningful increase in supply of it. There is also not much practical use for it either so its predominant purpose is as a money substitute.

While in theory gold should hold its value against inflation, the reality is that historically gold has just barely kept up with inflation and has performed much worse than stocks and bonds over the long term. If you are determined to invest in something that will hold up amidst inflation, consider a vegetable garden or solar panels. The money spent on creating a source of food and electricity for yourself will pay off handsomely if inflation drives food and energy prices higher.

Hedge funds
Recently, it seems like hedge funds are vying with terrorists for public scorn, but let’s have a quick look at what they actually do. Most hedge funds use those basic assets discussed above, but do things with them so that the return is different than the assets themselves. The result is that the returns that hedge funds deliver will be different than what you would receive if you owned the stocks, bonds, or commodities themselves. Investors give hedge funds lots of money to manage because investors value the diversification provided by hedge funds. There is actually a useful social purpose for hedge funds in that they help keep money flowing around the financial markets so that companies with good ideas can raise money to expand their businesses even when financial markets are weak.

So that’s a brief and totally non-comprehensive overview of some of the issues worth considering amidst all the chaos and emotion of investing these days. There are no easy answers, although a mix of stocks, hedge funds, and vegetable gardens seems sensible to me.

—Rod Rehnborg manages an investment fund for institutional clients at Marshall Wace GaveKal. His specialty is “market neutral” investment strategies in Japanese stocks that deliver returns with low correlation to the stock market. He is based in Hong Kong.

The Risks That Threaten Global Growth

changeaheadroadsignMy Comments: Readers of this blog will recall my observations about risk in general and in particular, those that will influence our economic well being in years to come.

With the new administration seemingly in favor of conflicts over trade between nations, and of retreating from the forces that have fostered global economic growth for the past 7 decades, these comments by Martin Wolff seem prescient.

Just as I tend to agree with Trump’s call to ‘drain the swamp’, or in my words, re-assess the assumptions on all levels that led us to where we are now, there are major forces at work over which we have virtually no control that demand a reassessment of economic assumptions. The next few decades are going to be tough for a lot of us.

by Martin Wolff, January 3, 2017

What is going to happen to the world economy this year? Much the most plausible answer is that it is going to grow. As I argued in a column published at this time last year, the most astonishing fact about the world economy is that it has grown in every year since the early 1950s. In 2017 it is virtually certain to grow again, possibly faster than in 2016, as Gavyn Davies has argued persuasively. So what might go wrong?

The presumption of economic growth is arguably the most important feature of the modern world. But consistent growth is a relatively recent phenomenon. Global output shrank in a fifth of all years between 1900 and 1947. One of the policy achievements since the second world war has been to make growth more stable.

This is partly because the world has avoided blunders on the scale of the two world wars and the Great Depression. It is also, as the American economist Hyman Minsky argued, because of active management of the monetary system, greater willingness to run fiscal deficits during recessions and the increased size of government spending relative to economic output.

Behind the tendency towards economic growth lie two powerful forces: innovation at the frontier of the world economy, particularly in the US, and catch-up by laggard economies. The two are linked: the more the frontier economies innovate, the greater the room for catch-up. Take the most potent example of the past 40 years, China. On the (possibly exaggerated) official numbers, gross domestic product per head rose 23-fold between 1978 and 2015. Yet so poor had China been at the beginning of this colossal expansion that its average GDP per head was only a quarter of US levels in 2015. Indeed, it was only half that of Portugal. Catch-up growth remains possible for China. India has still greater room: its GDP per head was about a 10th of US levels in 2015.

The overwhelming probability is that the world economy will grow. Moreover, it is highly likely that it will grow by more than 3 per cent (measured at purchasing power parity). It has grown by less than that very rarely since the early 1950s. Indeed, it has grown by less than 2 per cent in only four years since then — 1975, 1981, 1982 and 2009. The first three were the result of oil price shocks, triggered by wars in the Middle East, and Federal Reserve disinflation. The last was the Great Recession after 2008’s financial crisis.

This is also consistent with the pattern since 1900. Three sorts of shocks seem to destabilise the world economy: significant wars; inflation shocks; and financial crises. When asking what might create large downside risks for global economic growth, one has to assess tail risks of this nature. Many fall into the category of known unknowns.

For some years, analysts have convinced themselves that quantitative easing is sure to end up in hyperinflation. They are wrong. But a huge fiscal boost in the US, combined with pressure on the Fed not to tighten monetary policy, might generate inflation in the medium term and a disinflationary shock later still. But such a result of Trumponomics will not occur in 2017.

If we consider the possibility of globally significant financial crises, two possibilities stand out: the break-up of the eurozone and a crisis in China. Neither is inconceivable. Yet neither seems likely. The will to sustain the eurozone remains substantial. The Chinese government possesses the levers it needs to prevent a true financial meltdown. The risks in the eurozone and China are unquestionably real, but also small.

A third set of risks is geopolitical. Last year I referred to the possibility of Brexit and “election of a bellicose ignoramus” to the US presidency. Both have come to pass. The implications of the latter remain unknown. It is all too easy to list further geopolitical risks: severe political stresses on the EU, perhaps including the election of Marine Le Pen to the French presidency and renewed inflows of refugees; Russian president Vladimir Putin’s revanchism; the coming friction between Mr Trump’s aggrieved US and Xi Jinping’s ascendant China; friction between Iran and Saudi Arabia; possible overthrow of the Saudi royal family; and the threat of jihadi warfare. Not to be forgotten is the risk of nuclear war: just look at North Korea’s sabre-rattling, the unresolved conflict between India and Pakistan and threats by Mr Putin.

In 2016, political risk did not have much effect on economic outcomes. This year, political actions might do so. An obvious danger is a trade war between the US and China, though the short-term economic effects may be smaller than many might suppose: the risk is longer term, instead. The implications of the fact that the most powerful political figure in the world will have little interest in whether what he says is true are unknowable. All we do know is that we will all be living dangerously.

An important longer-run possibility is that the underlying economic engine is running out of steam. Catch-up still has great potential. But economic dynamism has declined in the core. One indicator is falling productivity growth. Another is ultra-low real interest rates. Mr Trump promises a resurgence of US trend growth. This is unlikely, particularly if he follows a protectionist course. Nevertheless, the concern should be less over what happens this year and more over whether the advance of the frontier of innovation has durably slowed, as Robert Gordon argues.

A good guess then is that the world economy will grow at between 3 and 4 per cent this year (at PPP). It is an even better guess that emerging economies, led yet again by Asia, will continue to grow faster than the advanced economies. There are substantial tail risks to such outcomes. There is also a good chance that the rate of innovation in the most advanced economies has slowed durably. Happy New Year.

The Makings of a Caliphate

My Comments: As a lifelong Democrat, I’m very aware that if a million more people in this country had better jobs and were feeling good about their financial future, Hillary Clinton would probably be taking the oath of office later this month. Pieter-Bruegel-The-Younger-Flemish-ProverbsBut they didn’t so a different force will be running the asylum for the next few years.

It somehow has to work out, despite so many people with no clue at the helm. Our lives are at stake. As for the middle east, the following words are a useful perspective that puts those tensions in an understandable context. Whether we learn anything from this is another matter.

December 14, 2016 / By Anisa Mehdi

At this time of year, on the crowded roads of Amman that intersect at the Fifth Circle, men in red velvet suits with white pompoms on their hats hawk “Santa” paraphernalia to drivers stuck in the rush hour snarl. Christmas trees adorn major malls. Wrapped packages dress windows, enticing passers-by to come in and buy. Though Christians make up only about 6 percent of Jordan’s population, in this Muslim-majority country, signs of another religion’s holiday are accepted markers of winter.

Call it tolerance. Call it appreciation. Call it capitalism. There is no prohibition on fun, diversity or commercialism in Islam. As in Judaism, the great prohibition in Islam is polytheism.

Allowance for alternate forms of worship, lifestyle and religious legislation is woven into Islamic scripture and jurisprudence. Where, then, did the horrific massacres of Muslims and people of other faiths in the Islamic State’s so-called caliphate come from? The multiconfessional nature of Islamic civilization is something the Islamic State does not understand. Nor does it comprehend the broad range of social and cultural expressions that historically inhabit a caliphate. Therefore, it is important to distinguish between calling for the restoration of a caliphate and the goals of the Islamic State.

A History of Heterogeneity

Analysts searching for the meaning of the caliphate usually consider its political structure, economy, leadership and territorial conflict. Beyond its geopolitical identity, what are the historical pillars of Islamic empire? What has been the reality on the ground in terms of social structure, culture and daily life? If the Islamic State, the Taliban, al Qaeda, Boko Haram and other political perversions of Islam knew the rich cultural history of Muslim caliphates, they would run in the opposite direction.

A caliph is defined as a successor to the Prophet Mohammed, who died in 632, leaving the election of leadership in the hands of his close companions. The caliphate — a society ruled by the caliph — has been in flux ever since. Following the reign of the first four caliphs, dynasties emerged to rule an expanding empire. The Baghdad-based Abbasids took power from the Damascus-based Umayyad dynasty in 749. They ruled for over 500 years until Hulagu Khan and his Mongol armies destroyed the capital in 1258. During that time, emirates and sultanates — including surviving Umayyads who maintained a rival caliphate from Andalusia on the Iberian Peninsula from 929 to 1031 — threatened Abbasid leadership from time to time. From 909 to 1171, the Fatimid dynasty ruled from Cairo, taking on invading Crusaders from the north for nearly a century.

Shifting imperial boundaries in what we now call the Middle East are nothing new. Claims on this fertile and prosperous region that connects continents date back to Alexander the Great, 300 years B.C. As Peter Frankopan illuminates in The Silk Roads: A New History of the World, after Alexander’s campaigns,”The intellectual and theological spaces of the Silk Roads were crowded, as deities and cults, priests and local rulers jostled with each other. The stakes were high. This was a time when societies were highly receptive to explanations for everything from the mundane to the supernatural, and when faith offered solutions to a multitude of problems. The struggles between different faiths were highly political. In all these religions — whether they were Indic in origin like Hinduism, Jainism and Buddhism, or those with roots in Persia such as Zoroastrianism and Manichaeism, or those from further west such as Judaism and Christianity, and, in due course, Islam — triumph on the battlefield or at the negotiating table went hand in hand with demonstrating cultural supremacy and divine benediction. The equation was as simple as it was powerful: a society protected and favored by the right god, or gods, thrived; those promising false idols and empty promises suffered.

“There were strong incentives, therefore, for rulers to invest in the right spiritual infrastructure, such as the building of lavish places of worship. This offered a lever over internal control, allowing leaders to form a mutually strengthening relationship with the priesthood who, across all the principal religions, wielded substantial moral authority and political power. This did not mean that rulers were passive, responding to doctrines laid out by an independent class (or in some cases caste). On the contrary, determined rulers could reinforce their authority and dominance by introducing new religious practices.”

It’s all politics.

An Un-Islamic Caliphate

Although Mustafa Kemal Ataturk officially put the kibosh on the caliphate in 1924 with the fall of the Ottoman Empire, its restoration has been an ongoing conversation among Muslim peoples searching for identity, security and self-determination in the wake of post-Word War I colonialism.
Where did it start?

During the life of the prophet in Medina, Muslims lived in community with Jews and Christians. Although there were tensions among them, each religious group was governed by its own scriptural civil and penal codes: worship and marriage, birth and death, theft and murder. Intrareligious disputes were often brought to Mohammed for arbitration. Medina was an oasis, an agricultural economy, and men and women both farmed the fields. Its large markets were renowned for produce, leather, woven baskets and blankets made and sold by women. The superintendent of the market under the second caliph, Umar, was a woman. There were schools and courts. Women owned property and inherited from their parents and husbands.

There were battles, mostly with the powerful families of Mecca bent on persecuting the nascent Muslim community that posed a threat to their pre-eminence and the profitability of their markets. The battles of Badr and Uhud mark triumph and defeat, respectively, that live in legend and allegory today. Raids on passing caravans supplemented the economy with goods and earned a reputation for fierceness. Perhaps it was not a perfect governance structure, but by and large, peace reigned in Medina until the prophet’s death, at which time political rivalries began unraveling Muslim unity. Nevertheless, respect for people of other faiths, particularly within the Abrahamic tradition, remained.

Historically, the great Muslim-administered civilizations contained populations that varied linguistically, culturally and religiously. From the Iberian Peninsula to the Malay Peninsula, from the outskirts of Vienna to the outlying islands of Indonesia, heterogeneity prevailed even if equality did not. Taxes were higher on non-Muslims in some economic structures in which only Muslims were allowed to enter into military service. (The taxes were considered payment for security.) Churches and synagogues welcomed worshippers on their prescribed days. People were buried in cemeteries according to local religious tradition and culture. In the Jewish cemeteries of Toledo, Spain, headstones facing Jerusalem are inscribed in Hebrew and Arabic. The Metropolitan Museum of Art’s “Art of the Arab Lands, Turkey, Iran, Central Asia and Later South Asia” describes the multicultural nature of these societies: Artisans and craftspeople of different faiths made the windows, doors and sacred artifacts for great houses of worship, libraries and palaces across continents and centuries, as well as household objects and books, sacred and secular alike.

The art and architecture of the far-reaching empires that eventually became Muslim-majority nations were breathtaking. Think of 16th-century Ottoman and Persian miniatures and the competition among artists for excellence, described in Orhan Pamuk’s thriller, My Name is Red. Universities flourished, starting with the Al-Qarawiyyin mosque and religious school in Fez, followed by Baghdad’s “House of Wisdom.” Sciences ranked high in intellectual pursuit. Advancements in astronomy and navigation set the stage for the eventual exploration of the Americas — the success of which ironically triggered the economic decline of Silk Road societies. Demand for gold and chocolate outpaced desire for silks and spices, and trans-Atlantic traders outbid their trans-Asian competitors.

The caliphates and empires of Islam are rich with culture, gender equity (especially as compared with contemporaneous non-Muslim societies), literacy and the arts. They have also fought with one another as furiously as they fought the Crusaders. Safavids and Ottomans from the 16th to 19th centuries. Arabs and Turks during and after World War I. Syria’s rebels and government today, as well as Libya’s, along with the Islamic State and those it hopes to subjugate.

Muslims and non-Muslims, superpowers and small powers, powerbrokers and pawns alike must recognize that the extreme behaviors of politically motivated Muslims are not synonymous with Islamic values or the cultures of the caliphates.

What’s happening today is tribal and political. It’s about land, resources, trade routes and trading partners. It’s about power, control of women, managing neighboring states and creating a new status quo. The next time you read, “revive,” “restore,” “Islamic” and “caliphate,” remember: It’s not about religion.

It never is.

Income Inequality Is Off The Charts

My Comments: The greatest economic threats to the health and welfare of the world I will leave to my grandchildren will arise from the disparity between the haves and the have-nots.

One side of this argument arises from the contempt that was pervasive across the planet toward a political movement driven by what came to be known as communism. This arose in Russia and the Soviet Union as a philosophy and embraced the notion of ‘to each according to his needs’. It was a rejection of free enterprise and the notion that every individual member of society have the ability to rise above the others and receive ‘more than what he needs’.

We’ve long established that any system that denies individuals the opportunity to win or lose the economic game of life is going to fail. Without the ability to dream of success, people simply fail if there is no motivation to excel.

The other side of this argument hinges on the unfettered ability to succeed with total disregard to the aspirations and dreams of others playing the same economic game. Any barrier imposed by society is deemed contemptible and must be removed. And yet we live with barriers and have done for millenia and survived. And survived well. How many of us argue against the notion that you should drive your car on just one side of the street, and not whichever side you choose on any given day?

These and similar rules are imposed by society on it’s members and we’ve long since become comfortable with them and don’t see them as a barrier to be railed against. But suggest that bankers and stock-brokers be required to act in the best interest of their clients, with rules and regulations and penalties if you don’t and before you know it, the wailing starts.

It’s known as the DOL Fiduciary Standard rule. It goes into effect on April 1, 2017. I believe there are valid and rational reasons why society should impose this rule on those of us who act in a professional capacity to help others grow their money. Right now the rule is coming from the Department of Labor and is directed toward anyone who acts in an advisory capacity with respect to money being accumulated for retirement. Naturally, there are exceptions which no one is talking about.

I think this rule should be expanded. Yes, it will be disruptive and will no doubt have unintended consequences. But I see income inequality as the canary in the coal mine. If we don’t take steps to correct it, the coal mine will fill with noxious gas and everyone who enters will die.

With Trump in the White House, there’s going to be shouting all up and down Wall Street to get rid of this rule. NO. Amend it here and there, phase in the penalties if you will, but it’s a very necessary step, among many, that are necessary to diminish the growing economic disparity between members of our society. It’s not about denying some the opportunity to succeed any more than it’s about making sure none of us ‘has more than we need’. It’s about doing the right thing without resorting to stealing to make sure I succeed and you don’t. We all have the right to be successful, and society has an obligation to keep us playing on a level playground.

Theo Anderson | December 29, 2016

The income gap between the classes is growing at a startling rate in the United States. In 1980, the top 1 percent earned on average 27 times more than workers in the bottom 50 percent. Today, they earn 81 times more.

The widening gap is “due to a boom in capital income,” according to research by French economist Thomas Piketty. That means the rich are living off of their wealth rather than investing it in businesses that create jobs, as Republican, supply-side economics predicts they would do.

Piketty played a pivotal role in pushing income inequality to the center of public discussions in 2013 with his book, “Capital in the Twenty-First Century.” In a new working paper, he and his co-authors report that the average national income per adult grew by 61 percent in the United States between 1980 and 2014. But only the highest earners benefited from that growth.

For those in the top 1 percent, income rose 205 percent. Meanwhile, the average pre-tax income of the bottom 50 percent of workers was basically unchanged, stagnating “at about $16,000 per adult after adjusting for inflation,” the paper reads.

It notes that this trend has important political consequences: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”

But the authors also note that the trend is not inevitable or irreversible. In France, for example, the bottom 50 percent of pre-tax income grew by about the same rate — 32 percent — as the overall national income per adult from 1980 to 2014.

The difference? In the United States, “the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions and an eroding minimum wage,” the paper reads.

Piketty and Portland

President-elect Donald Trump’s administration promises at least four years of policies that will expand the gap in earnings. But a few glimmers of hope are emerging at the local level.

The city council of Portland, Oregon, for example, recently approved a tax on public companies that pay executives more than 100 times the median pay of workers. The surtax will increase corporate income tax by 10 percent if executive pay is less than 250 times the median pay for workers, and by 25 percent if it’s 250 and over. The tax could potentially affect more than 500 companies and raise between $2.5 million and $3.5 million per year.

The council cited Piketty’s “Capital in the Twenty-First Century” in the ordinance creating the tax. Steve Novick, the city commissioner behind it, recently wrote that “the dramatic growth of inequality has been fueled by very high compensation of a few managers at big corporations, as illustrated by the fact that 60 to 70 percent of people in the top 0.1 percent of income in the United States are highly paid executives at large firms.”

Novick said that he liked the idea when he first heard about it because it’s “the closest thing I’d seen to a tax on inequality itself.” He also said that “extreme economic inequality is — next to global warming — the biggest problem we have in our society.”

Investing in children

There is also hopeful news in the educational realm. James Heckman, a Nobel Laureate in economics at the University of Chicago who has spent much of his career studying inequality and early childhood education, recently published a paper that lays out the results of a long-term study.

In “The Life-cycle Benefits of an Influential Early Childhood Program,” Heckman and others report that high-quality programs for children from birth to age 5 have long-term positive effects across a range of metrics, including health, IQ, participation in crime, quality of life and labor income.

Predictably, perhaps, the effects of the programs weren’t limited to children. High-quality early childhood education also allowed mothers “to enter the workforce and increase earnings while their children gained the foundational skills to make them more productive in the future workforce,” a summary of the paper reads.

“While the costs of comprehensive early childhood education are high, the rate of return of [high-quality programs] imply that these costs are good investments. Every dollar spent on high quality, birth-to-five programs for disadvantaged children delivers a 13 percent per annum return on investment.”

The research is important because early childhood education has bipartisan support. Over the summer, the Learning Policy Institute released a report that highlighted best practices from four states that have successful early childhood education programs. Two of them — Michigan and North Carolina — are swing states in national politics. The others are Washington and a solidly red state, West Virginia.

Although it isn’t a substitute for other policy tools to address inequality, like progressive taxes, early childhood education has strong bipartisan support because it produces measurable payoffs for both children and the economy. One study found, for example, that the economic benefit of closing the educational achievement gaps between children of different classes would be $70 billion each year.

Early childhood education fosters an “increasingly productive workforce that will boost economic growth, provide budgetary savings at the state and federal levels, and lead to reductions in future generations’ involvement with the criminal justice system,” the Economic Policy Institute recently noted. “These benefits will, of course, materialize only in coming decades when today’s children have grown up. But the research is clear that they will materialize — and when they do, they are permanent.”