Category Archives: GIS Statements

Populists, demagogues and the French elections

GIS statement by Prince Michael of Liechtenstein

The National Front’s lead in France’s election campaign has once again put the spotlight on populism. “Populism” has become a buzzword that is increasingly used as a negative label meant to discredit non-mainstream movements and kill any substantive discussion about the merits of their proposals.

Such methods are intellectually arrogant. They imply a disrespect for voters’ judgment and therefore contradict the idea of democracy. Populism is, in fact, an ingredient of any functioning democracy, though it needs to be reined in by a system of checks and balances. It is only when populism becomes demagoguery that it turns dangerous.

Such damaging demagoguery can be seen in the discussion about equality. It targets envy and leads to a totalitarian culture. Men are unequal by nature: this is the biggest driver and strength of mankind, while love – man’s most noble characteristic – is also only possible in accepting inequality. Inequality does not mean that we must see others as better or worse, but it does entail an acceptance of the individuality of other people, families and social groups. Since equality is deeply against human nature, a society that denies inequality can only be totalitarian.

‘Undemocratic’ bulwarks

Thomas Piketty, a French economist famous for his book Capital in the Twenty-First Century, claims, in a manner that is rather questionable scientifically, that inequality is the root of most of society’s problems. It is significant that – leaving his field of study, economics – he criticizes the European Parliament for its “inequality” because the votes there are not precisely linked to population size. It is true that a member of parliament from Luxembourg or Malta needs fewer votes to be elected than one from Germany or France, but the smaller member states should be properly represented.
His argument is further undermined when viewed from another perspective. The protection of democratic institutions and the rule of law is important: there must be checks and balances. These include “undemocratic,” well-entrenched institutions designed to withstand the negative forms of populism. Two countries that have maintained a strong democratic culture over a long period of time – the United States and Switzerland – ensure that the smaller and larger members of their federations are represented equally. In the U.S. Senate, Rhode Island’s representation is equal to California’s. A similar system exists in Switzerland, with its cantons.

Such architectures make these countries less prone to the negative consequences of populist excesses. This is also the role of monarchies. A monarchy is much better placed than a political party to withstand short-term turns toward populism and demagoguery.
French surprise?
France, which is proud of its democratic tradition, has a centralist system. The principle of subsidiarity, with strong regional representation and decentralization, is not a decisive factor in avoiding the excesses of a populist majority. Checks and balances are guaranteed by the judicial system, while sometimes the president’s party does not have the majority in parliament and the government is controlled by a different party, a phenomenon called “cohabitation.” Nevertheless, this centralist system can make France vulnerable to populist and even demagogic movements.

This year, the French election campaign is a huge, messy spectacle of populists and demagogues. Most candidates make promises and promote programs that will have damaging long-term consequences. This is not limited to Marine Le Pen’s National Front. Emmanuel Macron, who has been considered the favorite in recent weeks, is making proposals that are attractive on the surface, but are unrealistic and financially unsustainable. As the campaign heads toward the finish line, he has repeated an old nationalist-protectionist mantra, blaming Germany for being too productive and creating imbalances.

But France is always good for a surprise. Republican Francois Fillon still has a chance to win over enough voters, despite the allegations against him. Of all the candidates, his program is the most realistic, and he has the courage to address unpopular issues and big problems that urgently need solving. With Mr. Fillon, France has the chance to show Europe that it is possible to win an election without being a populist or a demagogue …

Read the full GIS statement here ->
Populists, demagogues and the French elections

The day Europe goes bankrupt

by Prince Michael of Liechtenstein

Behavioral scientists have observed that man as a species has developed an ability to ignore threatening or negative information. We tend not to look closely at bank statements showing debt or disturbing results of medical tests. Surprisingly, people with higher IQs are even more prone to this mental displacement than the less gifted. Such behavior could be called the ostrich principle. This does a serious injustice to the ostrich, which as any zoologist will confirm, does not stick its head in the sand when danger looms.

So with apologies to ostriches, we will still use this term to describe the shocking and nearly universal ignorance of the problem of Implicit Pension Debt.

By Implicit Pension Debt (IPD), we understand pension obligations that governments, including regional and local authorities, have incurred toward current and future pensioners. Most tax and accounting codes require companies to report such implicit debts on the liability side of the ledger as obligations. Not so with governments, whose accounting practices would under normal circumstances be considered as falsifying public accounts.
Six European countries have an implied pension debt exceeding 300 percent of GDP

One of the Maastricht Treaty criteria for adherence to the euro stipulates that public debt should not exceed 60 percent of gross domestic product. Anything above that level – and this is borne out by empirical data – is detrimental to sustainable economic development. Unfortunately, official figures already show the average debt-to-GDP ratio in the eurozone hovering close to 90 percent. Germany is also breaking the rules with a ratio of about 70 percent.

Now comes the shocking but consciously or subconsciously suppressed data about implicit pension debt. According to a recent study, six European countries – Austria, Finland, France, Germany, Italy and Poland – have an IPD exceeding 300 percent of gross domestic product. This includes three of the European Union’s four largest economies. Ten more European countries have ratios between 200 and 300 percent.
And the kicker? The data cited above are based on the present value of future pensions as of 2006. More up-to-date figures probably won’t be available until the end of 2017, when Eurostat is supposed to start publishing accrued-to-date pension entitlements statistics in its new European System of National Accounts.

Some of the European Union’s biggest economies could get crushed by pension debt

Back in 2006, two French journalists, Philippe Jaffre and Philippe Ries, published a novel called Le Jour ou la France a fait fallite (“The Day France went Bankrupt”). The book is brilliant in its foresight. It describes how France’s public debt inexorably rises until the day comes when creditors refuse to grant additional loans. The country’s debt is downgraded by the rating agencies and domestic banks, due to their high exposure to government bonds, become insolvent. The French economy stops working as wages go unpaid and the financial system collapses. To restore financing, creditors demand drastic measures. The novel culminates with Sotheby’s moving into the Louvre and auctioning its treasures, including the Mona Lisa.

In hindsight, one can only admire the two authors’ forward-looking realism. What they failed to anticipate, however, was the audacity of the European Central Bank. Through two mechanisms – quantitative easing (particularly the buying of government bonds) and the “target system” credit facilities – monetary policymakers have converted the debt of some high-spender countries into a liability of the entire eurozone.
Delayed collapse
The target system means that the ECB funds trades. For example, an exporter in one country is paid through his central bank. The ECB then gives a credit to this central bank and debits the importing country. The problem, however, is that Germany has now piled up 800 billion euros in target credits with the ECB. It will never be able to recover this sum, as the debtor countries will not be able to cover their debits. Thus, such transactions amount to hidden transfer payments with artificial money. Their effect is to delay financial collapse, at the cost of making the situation even worse.
The issue is no longer when France goes bankrupt, but when Europe does. The level of debt declared in the national accounts is already worrying. With implicit pension liabilities a multiple of that, it appears that a systemic implosion is unavoidable.
Just printing money is not a sustainable solution. A more sensible response would be to reduce the state’s role in the economy and to drastically streamline the regulations and controls that are stifling business. But nobody in power is proposing this, and even if they did, it might already be too late.
National insolvency could be triggered by an incident or accident, which in turn could lead to a European or even global contagion

The ostrich principle is irresponsible because it ignores the possibility of fiscal collapse and its economic, social and political consequences. What would these be?

In free societies with respect for constitutional principles, governments would need to sell off their assets – especially real estate and shares in state-owned companies. The Louvre auction is a dramatic example. But it would also mean a sweeping reorganization of the economy that would leave less room for the state and more for business.
More likely, the ostrich principle will continue to apply. In that case, national insolvency could be triggered by an incident or accident, which in turn could lead to a European or even global contagion.
In this worst-case scenario, political decision makers might decide to take the path of least resistance and confiscate or socialize private wealth. The effect of such autocratic measures would be to destroy prosperity and social cohesion, under the hypocritical banner of equality and justice.
To boost revenue for the profligate public sector, income controls might also be introduced. Europe would proceed – as Friedrich Hayek forecast – on the “road to serfdom.” Thirty years after the fall of the Berlin Wall, we will have arrived back at the economic and social model of East Germany.

Read the original GIS statement here ->
Opinion: The day Europe goes bankrupt


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defence, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyse the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyse and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Trumponomics is worth a second look

GIS Statement by Prince Michael of Liechtenstein

Trumponomics is worth a second look | The public perception of President Donald Trump’s economic program is that it is a chaotic mix of protectionist measures, tax relief for rich people, uncoordinated increases in infrastructure spending and antisocial cuts in healthcare benefits. However, it may be worth taking a closer look at the administration’s agenda before jumping to premature conclusions.

Alan Greenspan
Alan Greenspan

The United States, along with Europe, has a long track record of Keynesian overspending. This means that the present administration is saddled with a difficult economic, financial and fiscal legacy.
The biggest public focus is now on claims of protectionism. But the mantra of the present administration is not against free trade per se, but against the unfair practices of some U.S. trading partners. Obviously, it would be best for the world to have an unrestricted global exchange of goods and services. Realistically, however, every country will have its restrictions.

China and bilateralism

Unfortunately, behind the praiseworthy aim of fighting unfair practices is the largely unfounded claim – featured prominently in the presidential campaign – that unfair Chinese labor practices have caused the loss of millions of U.S. industrial jobs. No mention was made of the real culprit: failures by American labor unions and politicians, which have resulted in insufficient modernization of industry and improvements in worker skills and productivity.
It is correct that the U.S. has a huge trade deficit with China and that the U.S. imposes fewer restrictions on trade and business in general than China does. However, one must also consider that China’s total purchasing power is still inferior to the U.S., which contributes to its lower import figures. That doesn’t mean President Trump is wrong to insist on fair practices by China, which is something that previous U.S. presidents have done …

Read the full article here ->
Trumponomics is worth a second look


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defence, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyse the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyse and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

The U.S. and China’s ‘free trade’ agendas

GiS Expert View by Henrique Schneider

“Pursuing protectionism is like locking oneself in a dark room,” said China’s President Xi Jinping. “Wind and rain may be kept outside, but so is light and air.” Mr. Xi’s words of warning were directed at the new president of the United States. Meanwhile in Washington, Donald Trump erected new barriers to free trade. Why does Communist China seem to embrace free trade while the capitalist U.S. resorts to protectionism? The answer is simple. In both countries trade, or its absence, is just an instrument of politics. China’s approach to trade is best described as mercantilism. Its government allows for some economic freedom within its borders.
However, it pushes and regulates exports and curbs imports. The more the country exports, the more money it accumulates and the more power it has.
China does allow for some internal trade. But it has a set of “strategic industries” that are ring-fenced by regulation. This regulation makes it almost impossible for foreigners to supply, invest or acquire any stake in them. Also, a large network of state-owned enterprises operates independently from China’s free-trading commitments …

Continue reading ->
The U.S. and China’s ‘free trade’ agendas

25 years after Maastricht, the euro is worth rescuing

GIS Statement* by Prince Michael of Liechtenstein

For the euro currency to thrive, the ECB must commit to protecting its value, as opposed to aiding politicians in their current budgetary troubles (source: dpa)


Europe is commemorating the inception of its common currency, the euro, a quarter of a century ago. The goal to establish it was set forth in the Maastricht Treaty, which was drafted in December 1991 and entered into force in 1993. The currency began its virtual existence in 1999, and euro bills and coins entered circulation in 2002. The anniversary is remembered, but not celebrated. The euro, created with great enthusiasm, is now widely perceived as a failure. In fact, the common currency was introduced not only for valid economic and business reasons. There was a political agenda attached to the project as well – to push forward the process of European integration and unification.

In the Maastricht agreement, conditions were set to guarantee the stability of the new currency and to make certain that it would enhance economic growth within the European Union. The supranational European Central Bank (ECB) was supposed to act independently and stay focused on ensuring monetary stability. Another crucial Maastricht criterion was that member states were to avoid budget deficits of more than 3 percent of their gross domestic product (GDP), and accumulated public debts in excess of 60 percent of their GDP.

That was the plan. However, there was also the political agenda of the “ever-closer union” and the “harmonization” mania. This led to misconstrued risk premiums for loans. Also, the critically needed program for weaker regions to increase their productivity, and a transition period before they fully entered the common currency system, were neglected. Under national currencies, countries restored their competitiveness through currency devaluation; under the euro, this avenue was closed to them. This resulted in financial signals that were misguiding. Business in southern Europe turned en masse to construction, financed with – thanks to the euro – comparatively cheap debt.

Tall bill for mistakes

The consequences were dire. A much larger disaster, however, was brought about by disregard for the deficit criteria. These were immediately flaunted by the two largest members of the community, the supposed stability guarantors Germany and France. Other governments took their cue from them and breaking the deficit ceilings became common practice.

The list of sins was expanded further when the eurozone’s entrance criteria were diluted to accept countries such as Greece. It was clear from the onset that some countries in the EU did not meet the requirements and never would. They cheated the system while the ECB, the European Commission and other member states looked the other way. Greece was the most striking case, but a few other states were in the same category.

In the new eurozone, states happily spent and accumulated debt. Politicians eschewed reform under the protective shield of baseless triple-A ratings on their burgeoning sovereign debt. Such fictions can continue only to a point; in 2010 a severe fiscal crisis hit. In many instances, the euro was blamed. It was an easy scapegoat.

The present policy of the ECB, of low to negative interest rates and “quantitative easing” (which consists of increasing the money supply and buying financial assets especially sovereign debt from banks) represents a complete breach of the rules and criteria of the ECB. This policy not merely debases the currency, it also erodes the public’s remaining trust in European institutions and, in consequence, the European Union.

How to rescue the euro

A grave mistake of the past was that not all eurozone criteria were correct. The pursuit of the “ever-closer union” and “harmonization” caused the architects of the euro zone to ignore the large regional differences in the real economy and economic behavior. Making matters worse, the proper criteria were given short shrift by many member states and the European Commission. Now the ECB has joined in the destructive process.

As the cures for the assumed failure of the euro are promoted, they again turn up to be the harmonization and the ever-closer union. It is said that what Europe needs to salvage its common currency is a common economic policy – which is rather difficult to accept, as a currency should serve the economy, not vice versa. In this bubble, the very same assumptions which led to undermining the euro are presented as the tools of its rescue. This is only a way of centralizing EU economies, nearly certainly making them more inefficient, and a script for arriving at a planned economy.

As a businessman, I appreciate the convenience of a common currency. It is hugely advantageous in trade inside the eurozone, as well as globally. As a means of exchange, saving and investment, the euro is beneficial to the entire European society and certainly worth maintaining. But this can work only if the political agenda, attached to the euro from the beginning, is dropped. A proper system requires a central bank committed to the value of the currency. It will also be necessary to allow some members of the eurozone to disengage in an orderly fashion and return to their national currencies.

The time is high for the technocrats to realize that Europe is successful in its rich, natural diversity, not in “harmonization” of an artificial, “ever-closer union.”


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defence, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyze the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyse and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Americans vote for change and for stability

GIS statement by Prince Michael of Liechtenstein

Pence Trump Liechtenstein

The citizens of the United States have cast their votes and given their verdict after an extremely ugly campaign that took a strange turn as early as the primaries. The Democrats started almost immediately with two main candidates, which led to a less-than-impressive campaign for the nomination. The Republicans had many potential standard-bearers, but no favorite. This allowed outsider Donald Trump to win the nomination, even against the party establishment’s fierce opposition.

The electorate found little to like in either candidate – each had just two main points of attraction. For Hillary Clinton, the first was that she represented continuity of the existing political class, appealing to voters afraid of the unknown. For Mr. Trump, it was his status as the outsider, appealing to those who feel left out by system or dissatisfied with the state of politics. The second point, however, was rather negative: each was billed as the lesser of two evils. Most voters said they would cast their ballot for a candidate not because they agreed with his or her policies, but simply because the other candidate would be much worse.

The result was a campaign full of mudslinging. Ms. Clinton was portrayed as corrupt and Mr. Trump as an uncontrollable rogue. From a distance, it looked as if the U.S. was choosing between an unscrupulous insider and a riverboat gambler.

Both took populist positions, a phenomenon that democracies throughout the whole Western world are struggling with – including in the more established parties. So far, fortunately, institutions have been robust enough to hold back the worst consequences of this rise in populism.

Exaggerated reactions

In the end, the winner was Donald Trump. The Republicans retained control of the House of Representatives and the Senate. All of the pre-election prognoses proved drastically wrong.

The harsh anti-Trump reactions both within and without the U.S. are unfair, exaggerated and – especially when it comes to the financial markets – ridiculous. The prophesies of doom and gloom ignore quite a lot of fact.

Taking a dispassionate look at the situation, one sees that the difference between Mr. Trump and Ms. Clinton is mainly one of style. Ms. Clinton holds to the center-leftist line of the Democratic Party establishment, while Mr. Trump represents the voters who oppose that line. But when it came to trade, for example, both offered protectionist policies.

The strategies to prevent Mr. Trump from winning backfired. The arrogant conclusion that mainly uneducated white males would vote for him was plain wrong. Stirring up fear before a vote is usually counterproductive, as was also the case with Brexit. Allegations that Russia supported the Trump campaign by hacking into the Clinton campaign’s e-mail accounts were never proven. Obviously, these accusations did not significantly affect the vote.

Responsibility and cooperation

The result boils down to one fact: voters were turned off by the mudslinging and wanted change. They sent a strong message. However, the vote to keep Republicans majorities in both houses of Congress is a call for a certain degree of stability.

The U.S. government’s executive branch is important, but not all-powerful. It is ensconced in a robust system of governance with sophisticated checks and balances. The Republican majority in the House and Senate will follow a responsible line and are not dependent on the president.

For Donald Trump, the world will also change once he enters the Oval Office in January. The real danger is that the media and political establishments around the world, frustrated by this result, might try to marginalise the democratically elected president of the United States. The American people have made their choice, and the only way to avoid negative results is to accept their decision and find constructive ways to work with Mr. Trump. An outsider needs support to perform his duties successfully, not antagonism.

Read the original GIS statement here ->
Americans vote for change and for stability


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defence, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyse the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyse and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

In defense of referenda

GIS statement by Prince Michael of Liechtenstein

Many well-meaning people around the world – especially those in the media and politics – have been shocked by three referenda that have not brought the results they had hoped for. The series started with Brexit. A slight majority in the United Kingdom voted, against the recommendation of their government and advice of European and world leaders, to exit the European Union.

In the second referendum, Hungarians voted to amend their constitution to block EU immigration settlement plans, against some rather strong requests from other European governments. The pressure included threats: Luxembourg Foreign Minister Jean Asselborn said Hungary should be “excluded” from the bloc. The government-sponsored proposal was overwhelmingly accepted by those who voted. However, the turnout of just 40 percent made the result void under Hungary’s constitution.

The third plebiscite resulted in the people of Colombia rejecting – by a tiny majority – a peace agreement that the government negotiated with FARC rebels.

referendum_colombia_farq

All three referenda were initiated by governments. The UK government wanted confirmation that the country should remain in the EU, while the Colombian government wanted its peace agreement sanctioned. Both failed.
Hungary’s case was different. The widely desired outcomes were for the proposals from the UK and Colombian governments to be approved, but for the Hungarian government’s proposal to be rejected. Just the contrary took place, although the Hungarian government failed to mobilize enough voters.
This has led many to question both the legitimacy of referenda in democracies and the system of direct democracy as such. Also, doubt has been cast on the people’s judgment when it comes to major issues.
It is true, as critics suggest, that in these three cases the governments’ main motive may have been to transfer responsibility for such decisions onto the people. However, the critics of referenda miss that the idea of direct democracy is not for governments to initiate such votes. Plebiscites usually bring excellent results if they are brought about by groups of concerned citizens. The problem in most Western democracies is that citizens are frustrated – and they are using these votes to voice their dissatisfaction.
A system of strong local autonomy and direct democracy using referenda initiated by citizens brings superior outcomes and normally shows the people’s sound judgment. Obviously, there must be a certain hurdle for such initiatives, such as a petition with a large number of authenticated signatures.
Switzerland has such a system, and it produces plenty of sensible decisions. For example, the Swiss voted by a big majority not to reduce time spent at work. They also rejected an initiative to increase the Swiss National Bank’s mandatory gold reserves.
In the United States, referenda do not play a role at the federal level. This reflects the fear of populism held by some of the framers of the constitution. They are also less necessary, because the main purpose of the constitution was to create a system of checks and balances and to provide for the protection of the freedom of the individual against the state.

Read the original GIS statement here ->
In defense of referenda


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defense, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyze the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyze and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Cheap money policy does not fool citizens

GIS Statement by Prince Michael von Liechtenstein

The socialist idea of a planned economy is gradually being made a reality by the monetary policies of central banks, such as the United States Federal Reserve and the European Central Bank. The idea is also promoted by a considerable number of western economists and politicians. The conventional wisdom within that group is that economies are driven mainly by consumption. They blissfully ignore the importance of investment and savings – even of the kinds that help people set money aside for retirement.
The purported logic behind the banks’ current monetary policy is that extremely low to negative interest rates will discourage savings and boost consumption, fanning economic growth. This is superficial, short-term thinking from ideologically misguided people.
The policy, if successfully applied, would lead to an increase of the indebtedness of households in the affected countries. Indebted peoples tend to be less free than societies with savings, which give individuals freedom and independence. One is tempted to start suspecting that a hidden agenda might play a role here – a politically motivated desire to push private households deeper into debt in order to gain better control of consumption and to be able to centralize investments by institutions. This would amount to a triumph of economic planners over markets.

yellen-draghi-2016

Fortunately, people have not been responding as expected. Citizens understand mathematics and they know that they need a financial cushion in hard times, and for retirement. They are aware that low to negative interest rates are eroding their financial reserves and the value of their nest eggs and retirement entitlements. Those negative effects are exacerbated by planned inflation. Inflation is biting already, but that is obscured by statistics that do not reflect the purchasing structure of a typical middle class household. Rightfully, people worry of being impoverished in their old age.
And they are acting on their concerns. Demonstrably, people in the countries with extremely low to negative interest rates have been saving more. They are bucking the trend that many politicians and central banks are irresponsibly trying to spawn.
The savings rate (the ratio of the disposable income that private households put aside as reserves) increased in Sweden from some 5 percent in 2006 to more than 16 percent in 2016. In Denmark during the same period, it shot up from a negative rate to more than 8 percent, and it has remained stable in Germany at around 10 percent. Even the U.S., normally not a savings champion, has seen a stable savings rate of some 5 percent. Switzerland, on the other hand, long a nation of big savers, increased its savings rate during that decade from about 15 percent to some 20 percent.
A danger exists that once the misguided monetary policy fails, as it must, some of the money-hungry governments will then try to confiscate large chunks of these savings. They also may be wiped out by inflation as soon as the huge money supplies created by central banks hit the economies.

Read the original GIS statement here ->
Cheap money policy does not fool citizens


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defense, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyze the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyze and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Market economies, regulation and crony capitalism

GIS statement by Prince Michael of Liechtenstein

It has been the intellectual fashion among commentators, politicians and some economists to claim that the financial crisis of 2008 and the ensuing economic downturn were caused by excessively free markets, or “turbo-capitalism.” From this they deduce that free markets foster inequality, and that inequality is the main source of today’s social and economic problems.
The result is a cry for more regulation and government intervention whose aim, in the words of one German finance minister, is to put the markets on a leash. We certainly need sensible regulations. But in this context, we should not forget the best and most efficient regulator. That would be competition, which keeps markets clean, honest and working for the best interests of all stakeholders and society in general. It must also be admitted that the biggest problems arose in the most highly regulated sector: the global financial industry. The tangled thicket of regulations favored large players (“too big to fail”) and led to concentration. This encouraged cartels and unethical price-fixing, as shown in the Libor scandal. Such malpractice by a handful of big players appears to have been silently tolerated by the regulatory authorities.

Market distortions

Meanwhile, irresponsible and populist overspending by governments over the past 30 years led to large budget deficits and sovereign debt. One of the main reasons why central banks adopted a policy of easy money was to alleviate this fiscal burden. Money is the raw material of the financial system. As in any industry, government intervention to keep raw materials cheap will distort markets, exaggerate profits and encourage waste and abuses. The problems in the financial sector were created by a regulatory concentration of the industry combined with cheap money. Capitalism, based on competition and free markets, was replaced by regulations and government intervention. In order to camouflage the crony system between governments and big banks, the term “turbo-capitalism” was coined. True markets and capitalism took the blame.
It did not stop there, however. Capitalism and free markets were also blamed for inequality, which was identified as the fundamental problem. This diagnosis is totally false. It is true that inequality is rising. But one has to analyze the reasons carefully before jumping to populist, ideological conclusions. Liberalization of markets for labor, goods and services has helped approximately 1 billion people escape from poverty over the past 25 years. In both magnitude and speed, this is an unprecedented step.
But an era of cheap money has brought huge problems. Zero to negative interest rates have destroyed the personal savings of vast numbers of people, encouraged a culture of debt and threaten to wipe out pension savings. Poverty may again become the norm among elderly people in the developed world.
A side effect of cheap money is asset bubbles, which drastically increase inequality on paper even if they fail to make the rich richer on a lasting basis (because bubbles burst). With so much money sloshing around, the equity and real estate markets are too expensive, reducing investment in the economy and hindering growth.
The real reason for today’s economic malaise and rising inequality is overregulation. This creates inefficiencies and encourages politicians to intervene in the economy for short-term, populist aims. Unfortunately, they will find cronies in the private sector, because market inefficiencies can be very profitable to a privileged few – to the detriment of business and the broader public.
Politicians and regulators should not be putting markets on a leash. They should be devising lean and efficient rules to allow free markets to do their work. Competition and innovation lead to prosperity, from which everyone benefits.

Read the original statement here -> GIS

Democracy and populists: a misconception

GIS* statement by Prince Michael of Liechtenstein

It is almost impossible to listen to politicians, intellectuals and media personalities lately without hearing the lament that liberal democracies are being threatened by populists, usually of an authoritarian bent.
At face value this assessment seems correct. But on closer examination, doubts grow about whether Western political systems can still be called democratic and liberal.
Representative democracy depends on legislators who represent the public interest (res publica), not that of a party or its ideology. In practice, however, this only works if most parliamentarians are independent people rather than professionals who view politics as a career. Unfortunately, in nearly all Western democracies, the latter predominate.
We commonly refer to parliamentarians as lawmakers. Today this is doubly true, as parliaments have evolved into factories belching forth new legislation, to the detriment of their true role of representing the nation’s long-term interests.
The political system has also evolved, as established parties do whatever it takes to uphold the status quo and maintain their grip on power. In so-called Western democracies, this has meant the established parties have become extremely populist themselves.
A myopic focus on the next election has led to strong uniformity within the political mainstream. Many people have stopped voting because they no longer see any differences. Without a real opposition, there is an absence of vigorous, fact-based debate – a vital ingredient of any democracy.
One way of stifling debate is the concept of “political correctness,” which excludes alternative thinking or raising ideas labeled as “radical.”

democracy-switzerland

Absurd system

Meanwhile, the tsunami of laws and regulations has led to a “nanny” state that little resembles its liberal roots. The powers of government have become increasingly centralized, to the detriment of individual responsibility and autonomy which would be better invested in regions and municipalities. As is well known, democracy functions best in smaller entities, where issues are closer to home and the individual voter can still be heard.
In Europe, countries like Switzerland and Liechtenstein – which uphold strong traditions of local autonomy, direct democracy by referendum, and a militia system requiring members of parliament to earn their own livings – are not threatened by authoritarian movements.
What we now call “liberal democracy” has in fact traveled a long way down the road toward centralized bureaucracy. It is a system that cannot be trusted. No longer liberal, it cannot really be called democratic, either.
The system’s absurdity became painfully obvious during the presidential campaign in the United States. Neither of the two major parties was able to select a convincing candidate after a lengthy series of primaries. Instead, we have been offered the political equivalent of mud-wrestling – an appalling spectacle on both sides.
According to a Reuters/Ipsos poll, 66 percent of American voters are convinced that the U.S. is on the wrong track, while 22 percent think things are headed in the right direction. The situation in Europe is not much different.
What ordinary people have grasped, consciously or subconsciously, is that the current political system is populist and ridden with self-interest. Its resistance to change and decentralization is palpable, as is its hostility to notions of personal responsibility and freedom of thought and expression. No wonder voters are looking for alternatives.

Read the original GIS statement here ->
Democracy and populists


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defence, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyse the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyse and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.