Sunday, June 3, 2012

Can Kenya replicate Indonesia’s turnaround?

Can Kenya replicate Indonesia's turnaround?

Africa Can... - End Poverty

Jakarta Recently, a friend from Indonesia visited me in Nairobi. He is one of the world's leading experts on social development and a long-term Jakarta resident. One of his observations stuck in my mind: "Kenya is just like Indonesia ten years ago", he said.

Comparing Kenya with Indonesia is counterintuitive—except perhaps when it comes to traffic jams—because of the many differences between the two countries. Indonesia is the world largest island state with more than 17.000 islands and a demographic heavyweight with 240 million people (six times more than Kenya). It is also 85 percent Muslim, while Kenya is about 85 percent Christian. Indonesia has massive natural resources – coal and gas (and some oil) – that it exports to other Asian countries, especially China, while Kenya's economy is fuelled by a strong service sector.

There are many more reasons to challenge a comparison between these two countries but when one digs below the surface, there are also some similarities. Economically my friend was spot on: in GDP per capita terms, Kenya is roughly at the level of Indonesia a decade ago (about US$800 per capita). Today Indonesia is far ahead, but I don't see any reason why Kenya couldn't follow suit. Indeed, Indonesia is a good benchmark case for Kenya because it was never a "star reformer", but instead a consistently strong performer.

Both countries experienced major social, political and economic upheavals, which were also historical turning points. Indonesia's defining moment was the massive East Asian crisis in 1997/1998, followed by the transition to a new government. In Kenya, the shock came in 2007/2008 in the wake of disputed elections. In response to social and political grievances, Indonesia introduced radical decentralization of government in 2001, ten years or so before Kenya also opted to embrace devolution.

Indonesia saw improvements in governance, but not at once and not across the board. Doing business there remains difficult and reforms have been progressing unevenly. Yet it kept on growing substantially in a short period of time. It is now an emerging Middle-Income economy with an average per-capita income of US$ 3,500 (see figure). True, this is partly reflecting an exchange rate effect (a stronger Rupiah translating into a higher GDP in dollar terms), but once Kenya starts its export engine the same would apply.

Figure – Learning from Indonesia: What a decade of strong growth can achieve

Source: World Bank estimates

Even if Indonesia is not "best practice" according to textbook economics—and in fact precisely because it isn't—it strikes me as a very good fit for thinking about Kenya's prospects. Over the last decade, Indonesia has been dealing with many institutional challenges, some of them similar to Kenya's today. Like Kenya, it had a critical mass of reformers eager to advance the country but challenged by supporters of the status quo. Like in Kenya a vibrant and innovative private sector emerged and with it, a middle class which increasingly used the democratic space provided by new technologies and an open media.

How did Indonesia engineer a successful decade of economic development despite average performance on the reform front? It did three essential things which Kenya should consider to embark on the emerging economy path:

Stability. After the fall of Suharto in 1998 and the turbulence that followed, Indonesia entered a phase of socio-political and economic instability; yet it emerged as a relatively stable democracy. It has held three elections (1999, 2004, 2009) which were all peaceful and where the losers accepted defeat (even though in 1999 complex coalition politics in parliament led to the emergence of a surprise President, Abdulrahman Wahid).
Strategic reforms in public financial management, including customs. When Sri Mulyani Indrawati took over as Minister of Finance in 2005, she was determined to reduce corruption and improve the Public Financial Management system, including customs. With sound macroeconomic management and determined action to reduce fuel subsidies, she gained the space to advance more ambitious reforms to help spend the people's money well.
Successful crisis management. Like Kenya, Indonesia has been hit by a number of domestic and external shocks. But it leveraged these crises to put in place one of the Asia's most ambitious social protection programs and coupled it with the world's largest village empowerment initiative (covering more than 70,000 villages). These programs provided an important buffer for the poor during economic crises. They also opened new avenues to tackle corruption, as the funds were directly transferred to local communities and individuals, and short-circuited the chain of officials through which funds were channeled in the past.

The story of Indonesia's development over the last decade is a positive one. Per-capita incomes increased and millions of Indonesians were lifted out of poverty. The country's reform track-record was mixed: it was not a great success but neither was it a spectacular failure. Indonesia is now one of the world's main emerging economies because it managed to get a few 'basic' things right: it remained politically stable, made progress in some strategic governance areas, and leveraged integration with Asia's growth engines, riding on the wave of globalization. Can Kenya replicate the Indonesian experience? It has all the assets to do so.

This article is also been published by Kenya's "Saturday NATION" in the column "Economics for Everyone"

Follow Wolfgang Fengler on Twitter: www.twitter.com/ @wolfgangfengler

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Taking credit

Aid Thoughts

When you have a moment, I'd really like to see your source for that

While the Millennium Village Project's shaky claim of reducing child mortality resulted in an impressive backlash, these sorts of assertions are not uncommon. Very frequently, donors, NGOs and philanthropists make unsubstantiated claims to impact which go unchallenged, either because they go unnoticed by those who know better or because we're all just too busy to raise the alarm every time someone makes a bogus claim (or, perhaps, we're being funded by said entity).

For example, take this tweet by Oxfam international:

Together w/our partners we reduced the maternal mortality rate in Upper East #Ghana by 7% in 2010 bit.ly/LPXbKI

— Oxfam International (@Oxfam) May 30, 2012

That's quite a claim. What does Oxfam have to back up this claim? The tweet links to an article in the Ghana Business News:

Speaking at a ceremony in Bolgatanga to introduce phase II of the project and to present the donation g, Mrs Rosemary Anderson Akolaa,, Health Advocacy Manager of Oxfam lauded the effort of the TBAs, the Community Health Committees and other stakeholders for their effort at bringing reducing mortality rate in the Region by seven per cent in 2010.

So, one of Oxfam's managers in Ghana made the claim – what is it based on? To make this claim, Oxfam needs to:

Describe the data it is using to estimate the 7% drop in maternal mortality.
Convincingly show us that this drop is due to Oxfam's (and partner's) intervention. For example, did maternal mortality in the Upper East region fall faster than in other regions which did not receive the intervention?

As far as I can tell, Oxfam has done neither of these. Can we stop making claims we haven't yet made an effort to back up?

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John Rawls's Critique of Capitalism

Economist's View

Daniel Little:

Rawls on a property-owning democracy, by Daniel Little: John Rawls's critique of capitalism was deeper than has been commonly recognized -- this is a central thrust of quite a bit of important recent work on Rawls's theory of justice. Much of this recent discussion focuses on Rawls's idea of a "property-owning democracy" as an alternative to both laissez-faire and welfare-state capitalism. This more disruptive reading of Rawls is especially important today, forty years later, given the great degree to which wealth stratification has increased and the political influence of wealth has mushroomed. (I've addressed this set of issues in prior posts; link, link.) Martin O'Neill and Thad Williamson's recent volume, Property-Owning Democracy: Rawls and Beyond, provides an excellent and detailed discussion of the many dimensions of this idea and its relevance to the capitalism we experience in 2012. It includes contributions by a number of important younger political philosophers.

O'Neill and Williamson make the point in their introduction that this issue is not merely of interest within academic philosophy. It also provides a powerful conceptual and normative system that might serve as a basis for a more successful version of progressive politics in North America and the UK. Politicians on the left have found themselves locked into a defensive battle trying to preserve some of the features of welfare state capitalism -- usually unsuccessfully. The arguments underlying the idea of a property owning democracy have the potential for resetting practical policy and political debates on more defensible terrain.

The core idea is that Rawls believes that his first principle establishing the priority of liberty has significant implications for the extent of wealth inequality that can be tolerated in a just society. The requirement of the equal worth of political and personal liberties implies that extreme inequalities of wealth are unjust, because they provide a fundamentally unequal base to different groups of people for the exercise of their political and democratic liberties. As O'Neill and Williamson put it in their introduction, "Capitalist interests and the rich will have vastly more influence over the political process than other citizens, a condition which violates the requirement of equal political liberties". A welfare capitalist state that succeeds in maintaining a tax system that compensates the worse-off in terms of income will satisfy the second principle, the difference principle. But in the striking recent interpretations of Rawls's thinking about a POD, a welfare state cannot satisfy the first principle. (It would appear that Rawls should also have had doubts about the sustainability of a welfare state within the circumstances of extreme inequality of wealth: wealth holders will have extensive political power and will be able to effectively oppose the tax policies that are necessary for the extensive income redistribution required by a just welfare capitalist state.) Instead, Rawls favors a form of society that he describes as a property-owning democracy, in which strong policies of wealth redistribution guarantee a broad distribution of wealth across society. Here is how Rawls puts it in Justice as Fairness: A Restatement:

Property-owning democracy avoids this, not by the redistribution of income to those with less at the end of each period, so to speak, but rather by ensuring the widespread ownership of assets and human capital (that is, education and trained skills) at the beginning of each period, all this against a background of fair equality of opportunity. The intent is not simply to assist those who lose out through accident or misfortune (although that must be done), but rather to put all citizens in a position to manage their own affairs on a footing of a suitable degree of social and economic equality.

O'Neill and Williamson draw out the implications of this view of a just society by contrast with the realities of 2012:

The concentration of capital and the emergence of finance as a driving sector of capitalism has generated not only instability and crisis; it also has led to extraordinary political power for private financial interests, with banking interests taking a leading role in shaping not only policies immediately affecting that sector but economic (and thereby social) policy in general.... The United States is now further than ever from realizing what Rawls termed the "fair value of the political liberties" -- that is, the core value of political equality.

How would the wide dispersal of wealth be achieved and maintained? Evidently this can only be achieved through taxation, including heavy estate taxes designed to prevent the "large-scale private concentrations of capital from coming to have a dominant role in economic and political life".

It seems apparent that progressives lack powerful visions of what a just modern democracy could look like. The issues and principles that are being developed within this new discussion of Rawls have the potential for creating such a vision, as compelling in our times as the original idea of justice as fairness was in the 1970s. It is, in the words of O'Neill and Williamson, "a political economy based on wide dispersal of capital with the political capacity to block the very rich and corporate elites from dominating the economy and relevant public policies". And it is a society that comes closer to the ideas of liberty and equality that underlie our core conception of democracy than we have yet achieved.

(Williamson and O'Neill provided an excellent exposition of the idea and some of the foundational questions that need to be explored in 2009 in "Property-Owning Democracy and the Demands of Justice" (link). The concept of a property-owning democracy originates in writings by James Meade, including his 1965 Efficiency, Equality and the Ownership of Property.)

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Microfinance as an allegory for aid

Owen abroad

Microfinance has been touted as a 'bottom up solution' to poverty. The Nobel Peace Prize 2006 was awarded jointly to Muhammad Yunus and Grameen Bank "for their efforts to create economic and social development from below." Give people access to credit, the story went, and they will be able to invest in businesses of their own. The Acumen Fund promises "Dignity not Dependence. Choice not charity."

But in the latest episode of Development Drums, David Roodman explains that rigorous evaluations of micro-credit suggest that, on average, it has no effect on poverty. (The results are more positive for other financial services.)

Why then, David asks, does he witnesss women queueing up enthusiastically for their loans? Should he explain to them that, according to the results of complex evaluations, microfinance is doing them no good? Are they mistaken about what is in their interest?

David's answer is that while microcredit has, on average, no effect on poverty, it can produce significant benefits for the poorest people, by enabling them to manage volatile and uncertain incomes. We should think of microcredit not as a catalyst for economic growth, but as a utility, providing a key service to poor people. Subsidizing the provision of this service is a relatively low-cost way to help people to increase their welfare.

Int his book, Due Diligence: An impertinent enquiry into microfinance, David explodes the lavish claims made by the microfinance industry about the difference it makes, while accepting that financial services have an important role to play in supporting poor people.

This is, I think, a microcosm of a bigger story about aid as a whole. There is plenty of evidence that aid improves people's lives, for example by providing food, water, education and health. It is much harder to show that aid catalyses economic, social and political transformation. (This is partly because, even if aid did have such effects, they would be very difficult to demonstrate statistically.)

As in the case of microfinance, the aid industry tends to over-promise and under-deliver. Everyone wants individuals and countries to be able to stand on their own two feet, and not depend on hand-outs from others. But it does not follow that microfinance can bring this about for individuals, nor that aid can bring it about for countries. Setting this as the standard for success undermines the case for both, by neglecting the very important and demonstrable success of both against more realistic objectives, of helping people to live better lives while that process of development is taking place.

You can listen to Development Drums here on the website, or you can subscribe to it free in iTunes.

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The End Of The Euro: A Survivor’s Guide

The End Of The Euro: A Survivor's Guide

The Baseline Scenario

By Peter Boone and Simon Johnson

In every economic crisis there comes a moment of clarity. In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone. Economic chaos awaits them.

To understand why, first strip away your illusions. Europe's crisis to date is a series of supposedly "decisive" turning points that each turned out to be just another step down a steep hill. Greece's upcoming election on June 17 is another such moment. While the so-called "pro-bailout" forces may prevail in terms of parliamentary seats, some form of new currency will soon flood the streets of Athens. It is already nearly impossible to save Greek membership in the euro area: depositors flee banks, taxpayers delay tax payments, and companies postpone paying their suppliers – either because they can't pay or because they expect soon to be able to pay in cheap drachma.

The troika of the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) has proved unable to restore the prospect of recovery in Greece, and any new lending program would run into the same difficulties. In apparent frustration, the head of the IMF, Christine Lagarde, remarked last week, "As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time."

Ms. Lagarde's empathy is wearing thin and this is unfortunate – particularly as the Greek failure mostly demonstrates how wrong a single currency is for Europe. The Greek backlash reflects the enormous pain and difficulty that comes with trying to arrange "internal devaluations" (a euphemism for big wage and spending cuts) in order to restore competitiveness and repay an excessive debt level.

Faced with five years of recession, more than 20 percent unemployment, further cuts to come, and a stream of failed promises from politicians inside and outside the country, a political backlash seems only natural. With IMF leaders, EC officials, and financial journalists floating the idea of a "Greek exit" from the euro, who can now invest in or sign long-term contracts in Greece? Greece's economy can only get worse.

Some European politicians are now telling us that an orderly exit for Greece is feasible under current conditions, and Greece will be the only nation that leaves. They are wrong. Greece's exit is simply another step in a chain of events that leads towards a chaotic dissolution of the euro zone.

During the next stage of the crisis, Europe's electorate will be rudely awakened to the large financial risks which have been foisted upon them in failed attempts to keep the single currency alive. If Greece quits the euro later this year, its government will default on approximately 300 billion euros of external public debt, including roughly 187 billion euros owed to the IMF and European Financial Stability Facility (EFSF).

More importantly and currently less obvious to German taxpayers, Greece will likely default on 155 billion euros directly owed to the euro system (comprised of the ECB and the 17 national central banks in the euro zone). This includes 110 billion euros provided automatically to Greece through the Target2 payments system – which handles settlements between central banks for countries using the euro. As depositors and lenders flee Greek banks, someone needs to finance that capital flight, otherwise Greek banks would fail. This role is taken on by other euro area central banks, which have quietly leant large funds, with the balances reported in the Target2 account. The vast bulk of this lending is, in practice, done by the Bundesbank since capital flight mostly goes to Germany, although all members of the euro system share the losses if there are defaults.

The ECB has always vehemently denied that it has taken an excessive amount of risk despite its increasingly relaxed lending policies. But between Target2 and direct bond purchases alone, the euro system claims on troubled periphery countries are now approximately 1.1 trillion euros (this is our estimate based on available official data). This amounts to over 200 percent of the (broadly defined) capital of the euro system. No responsible bank would claim these sums are minor risks to its capital or to taxpayers. These claims also amount to 43 percent of German Gross Domestic Product, which is now around 2.57 trillion euros. With Greece proving that all this financing is deeply risky, the euro system will appear far more fragile and dangerous to taxpayers and investors.

Jacek Rostowski, the Polish Finance Minister, recently warned that the calamity of a Greek default is likely to result in a flight from banks and sovereign debt across the periphery, and that – to avoid a greater calamity – all remaining member nations need to be provided with unlimited funding for at least 18 months. Mr. Rostowski expresses concern, however, that the ECB is not prepared to provide such a firewall, and no other entity has the capacity, legitimacy, or will to do so.

We agree: Once it dawns on people that the ECB already has a large amount of credit risk on its books, it seems very unlikely that the ECB would start providing limitless funds to all other governments that face pressure from the bond market. The Greek trajectory of austerity-backlash-default is likely to be repeated elsewhere – so why would the Germans want the ECB to double- or quadruple-down by suddenly ratcheting up loans to everyone else?

The most likely scenario is that the ECB will reluctantly and haltingly provide funds to other nations – an on-again, off-again pattern of support — and that simply won't be enough to stabilize the situation. Having seen the destruction of a Greek exit, and knowing that both the ECB and German taxpayers will not tolerate unlimited additional losses, investors and depositors will respond by fleeing banks in other peripheral countries and holding off on investment and spending.

Capital flight could last for months, leaving banks in the periphery short of liquidity and forcing them to contract credit – pushing their economies into deeper recessions and their voters towards anger. Even as the ECB refuses to provide large amounts of visible funding, the automatic mechanics of Europe's payment system will mean the capital flight from Spain and Italy to German banks is transformed into larger and larger de facto loans by the Bundesbank to Banca d'Italia and Banco de Espana– essentially to the Italian and Spanish states. German taxpayers will begin to see through this scheme and become afraid of further losses.

The end of the euro system looks like this. The periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment.

Instead, there will be recognition that the ECB has lost control of monetary policy, is being forced to create credits to finance capital flight and prop up troubled sovereigns — and that those credits may not get repaid in full. The world will no longer think of the euro as a safe currency; rather investors will shun bonds from the whole region, and even Germany may have trouble issuing debt at reasonable interest rates. Finally, German taxpayers will be suffering unacceptable inflation and an apparently uncontrollable looming bill to bail out their euro partners.

The simplest solution will be for Germany itself to leave the euro, forcing other nations to scramble and follow suit. Germany's guilt over past conflicts and a fear of losing the benefits from 60 years of European integration will no doubt postpone the inevitable. But here's the problem with postponing the inevitable – when the dam finally breaks, the consequences will be that much more devastating since the debts will be larger and the antagonism will be more intense.

A disorderly break-up of the euro area will be far more damaging to global financial markets than the crisis of 2008. In fall 2008 the decision was whether or how governments should provide a back-stop to big banks and the creditors to those banks. Now some European governments face insolvency themselves. The European economy accounts for almost 1/3 of world GDP. Total euro sovereign debt outstanding comprises about $11 trillion, of which at least $4 trillion must be regarded as a near term risk for restructuring.

Europe's rich capital markets and banking system, including the market for 185 trillion dollars in outstanding euro-denominated derivative contracts, will be in turmoil and there will be large scale capital flight out of Europe into the United States and Asia. Who can be confident that our global megabanks are truly ready to withstand the likely losses? It is almost certain that large numbers of pensioners and households will find their savings are wiped out directly or inflation erodes what they saved all their lives. The potential for political turmoil and human hardship is staggering.

For the last three years Europe's politicians have promised to "do whatever it takes" to save the euro. It is now clear that this promise is beyond their capacity to keep – because it requires steps that are unacceptable to their electorates. No one knows for sure how long they can delay the complete collapse of the euro, perhaps months or even several more years, but we are moving steadily to an ugly end.

Whenever nations fail in a crisis, the blame game starts. Some in Europe and the IMF's leadership are already covering their tracks, implying that corruption and those "Greeks not paying taxes" caused it all to fail. This is wrong: the euro system is generating miserable unemployment and deep recessions in Ireland, Italy, Greece, Portugal and Spain also. Despite Troika-sponsored adjustment programs, conditions continue to worsen in the periphery. We cannot blame corrupt Greek politicians for all that.

It is time for European and IMF officials, with support from the US and others, to work on how to dismantle the euro area. While no dissolution will be truly orderly, there are means to reduce the chaos. Many technical, legal, and financial market issues could be worked out in advance. We need plans to deal with: the introduction of new currencies, multiple sovereign defaults, recapitalization of banks and insurance groups, and divvying up the assets and liabilities of the euro system. Some nations will soon need foreign reserves to backstop their new currencies. Most importantly, Europe needs to salvage its great achievements, including free trade and labor mobility across the continent, while extricating itself from this colossal error of a single currency.

Unfortunately for all of us, our politicians refuse to go there – they hate to admit their mistakes and past incompetence, and in any case, the job of coordinating those seventeen discordant nations in the wind down of this currency regime is, perhaps, beyond reach.

Forget about a rescue in the form of the G20, the G8, the G7, a new European Union Treasury, the issue of Eurobonds, a large scale debt mutualisation scheme, or any other bedtime story. We are each on our own.

A version of this material appears also on the Huffington Post.

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Jamie Dimon And The Fall Of Nations

The Baseline Scenario

By Simon Johnson

"Why Nations Fail: The Origins of Power, Prosperity, and Poverty," by Daron Acemoglu and James Robinson, is a brilliant and sometimes breathtaking survey of country-level governance over history and around the world. Professors Acemoglu and Robinson discern a simple pattern – when elites are held in check, typically by effective legal mechanisms, everyone else in society does much better and sustained economic growth becomes possible. But powerful people – kings, barons, industrialists, bankers – work long and hard to relax the constraints on their actions. And when they succeed, the effects are not just redistribution toward themselves but also an undermining of economic growth and often a tearing at the fabric of society. (I've worked with the authors on related issues, but I was not involved in writing the book.)

The historical evidence is overwhelming. Many societies have done well for a while – until powerful people get out of hand. This is an easy pattern to see at a distance and in other cultures. It is typically much harder to recognize when your own society now has an elite less subject to effective constraints and more able to exert power in an abusive fashion. And given the long history of strong institutions in the United States, it appears particularly difficult for some people to acknowledge that we have serious governance issues that need to be addressed.

The governance issue of the season is Jamie Dimon's seat on the board of the Federal Reserve Bank of New York. Mr. Dimon is the chief executive of JPMorgan Chase, currently the largest bank in the United States. This bank is "too big to fail" – meaning that if it were to get into difficulties, substantial financial support would be provided by the Federal Reserve System (and perhaps other parts of government) to prevent it from collapsing.

I am well aware of the moves afoot to carry out the intent of the Dodd-Frank reform legislation and to make it possible for such banks to fail, with consequent losses for their creditors. In my assessment, we are still a long way from putting in place the necessary resolution mechanisms and backing them up with sufficient political will.

If Greece were to default tomorrow – a hypothetical scenario, although I am worried about the current European trajectory – and this had devastating effects on the European and thus the United States financial system, would JPMorgan Chase be allowed to go bankrupt in same fashion as Lehman Brothers? It would not.

The Federal Reserve Bank of New York would be a key player in the decision in how to provide support and on what basis to huge financial institutions in distress – although the final determination would presumably rest with the Board of Governors in Washington.

In the Acemoglu and Robinson tour de force, I find one of the greatest elite wealth-making (for themselves) strategies of all time to be underemphasized. Persuade the government to let you build a big bank; take a great deal of risk in that bank (particularly by increasing leverage, i.e., debt relative to equity); pay yourself based on the return on equity, unadjusted for risk; get cash payouts while times are good; and when events turn against you, the central bank can bail you out – and keep you in place because you are regarded as indispensable. This is the history of modern America.

We had strong institutions for a long time in this country – including effective checks on the power of bankers. Many people remember that history and still hold its image in their mind's eye as they look at modern Wall Street. It's time to wake up. In recent decades we abandoned the governance mechanisms that previously served us well. Global megabanks have obtained excessive and inappropriate power – the power to take a great deal of risk, with cash for their executives on the upside and huge damage for the rest of us on the downside.

Since I wrote about this issue here last week, a great deal of support has been expressed for the recommendation that Jamie Dimon should step down from the board of the New York Fed – including by over 32,000 people who signed the petition I drafted. (The petition is addressed to the Board of Governors of the Federal Reserve, as only they have the power to remove a director of a Federal Reserve Bank. I have requested an appointment with a governor on Monday, in order to deliver this petition and discuss the substantive issues; a relevant Fed staff member is currently checking availability. I hope to write about that meeting here next week.) (Update: no Fed governor is apparently available next week; we are looking for future dates.)

The pressure on Mr. Dimon is increasing with a steady flow of news articles concerning the care with which risk has been managed at his bank – including the suggestion that the board's risk committee lacks sufficient experience to understand or monitor the complexity of JPMorgan's operations. (See also the coverage from Forbes and CBS MoneyWatch.)

We need an independent inquiry into how exactly JPMorgan lost so much money so quickly on its London trading operations – which supposedly were just "hedging." It would also be helpful to know how Jamie Dimon, widely regarded as a good risk manager, did not know what was happening in London until Bloomberg News brought it to his attention – and why even then he denied there was a serious issue. Is this is a systematic breakdown in management and risk control systems? What exactly went wrong with the relevant models? What can we learn that would help improve the safety of the financial system? Have the largest banks grown too big and too complex to be managed safely?

More broadly, how can we rely on the Federal Reserve to oversee and constrain the actions of Mr. Dimon while he continues to sit on the board of the New York Fed – with the job of overseeing and potentially constraining the actions of that organization?

Esther George, president of the Kansas City Fed, made a strong statement at the end of last week, emphasizing that all Federal Reserve Bank board members have a responsibility to uphold the integrity and perceived legitimacy of the Federal Reserve System. She ended with a powerful line that cuts to center of the current debate: "No individual is more important than the institution and the public's trust."

Those who would still prefer to keep Mr. Dimon in his current position rely on some combination of three counterarguments.

First, one line is that Mr. Dimon is elected to "represent the banks," so he is just doing his job when he argues his corner – for example, against financial sector reform. Ernest Patrikis, former general counsel of the New York Federal Reserve, takes exactly this position; I quoted him in my column last week.

As a factual matter, any such statement defining Mr. Dimon's responsibility as a board member at the New York Fed is inaccurate. Here are two passages from the first paragraph of the Guide to Conduct from the Board of Governors' Web site:

"Directors of Federal Reserve Banks and branches have a special obligation for maintaining the integrity, dignity, and reputation of the Federal Reserve System."

"To ensure the proper performance of System business and the maintenance of public confidence in the System, it is essential that directors, through adherence to high ethical standards of conduct, avoid actions that might impair the effectiveness of System operations or in any way tend to discredit the System."

Ms. George made this point clearly and effectively in her press release last week. All board members have a responsibility – first and foremost – to the Federal Reserve System. If they have a problem with that, they should avoid serving or step down when appropriate.

For example, Jeffrey R. Immelt – chief executive of General Electric – stepped down from the New York Fed board in April 2011 when it became clear that GE Capital would be regulated by the Fed as a systemically important financial institution (and as a thrift). That was an entirely appropriate decision, removing any perception of a potential conflict of interest.

The second line – including from Mr. Dimon himself – is that at the New York Fed he plays "an advisory role."

Again, this is not factually accurate. Here is some relevant text from the Guide to Conduct:

"In their capacity as directors, these individuals are charged by law with the responsibility of supervising and controlling the operations of the Reserve Banks, under the general supervision of the Board of Governors, and for ensuring that the affairs of the Banks are administered fairly and impartially."

Plenty of governmental or quasi-governmental bodies have advisory groups. I'm on two – for the Congressional Budget Office (for economic forecasts) and for the Federal Deposit Insurance Corporation (for the resolution or liquidation of systemically important financial institutions). Advisory groups do not oversee budgets and are not involved in personnel decisions.

I have no problem with the Federal Reserve – or anyone else in government – seeking and receiving input on local economic conditions. But that is no reason for a "too big to fail" banker or any other excessively powerful special interest to be on the board of the New York Fed.

The board of the New York Fed is not "advisory." If Mr. Dimon really thinks that, he needs another orientation session with New York Fed officials. Or he could read the Federal Reserve Act.

The third position acknowledges that governance at the regional Feds is an anachronism, but argues that Mr. Dimon has done nothing wrong and that these boards can be fixed only by legislative action (see this editorial in The Financial Times on Wednesday, for example).

To be clear, I am not accusing Mr. Dimon or anyone else of any wrongdoing. I am calling for an independent inquiry into the JPMorgan losses – along the lines that my M.I.T. colleague Andrew Lo has suggested for all serious financial "accidents."

I am also agreeing with Treasury Secretary Timothy F. Geithner who, when asked about Mr. Dimon's role at the New York Fed, told the PBS NewsHour:

"It is very important, particularly given the damage caused by the crisis, that our system of oversight and safeguards and the enforcement authorities have not just the resources they need, but they are perceived to be above any political influence and have the independence and the ability to make sure these reforms are tough and effective so we protect the American people, again, from a crisis like this."

Legislative action to further adjust the governance of the New York Fed will not happen this year and is not likely in the near future. Frankly, saying in this context "we'll wait for Congress" is the functional equivalent of saying, "let's not fix it."

Undermining the "integrity, dignity, and reputation of the Federal Reserve System" in current fashion poses grave risks. A powerful elite has risen with control over global megabanks – and the ability to mismanage their way into disaster, with huge negative implications for the broader economy.

We should be strengthening the power of the New York Fed and other institutions to constrain reckless risk-taking. Instead, we are standing idly by while our "extractive elite" (to use a great term from Professors Acemoglu and Robinson) enrich themselves and endanger the rest of us.

If you want to see where we are heading, on our current course, read "Why Nations Fail."

A version of this post appeared this morning on the NYT.com's Economix blog; it is used here with permission. If you would like to reproduce the entire blog post, please contact the New York Times.

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First Deflation, Then Inflation. But the Timing…?

The Big Picture

First Deflation, Then Inflation. But the Timing…?
John Mauldin
June 2, 2012

US Unemployment Turns Back South
A Synchronized Global Slowdown
Why Would You Buy a Bond with Negative Interest?
First Deflation, Then Inflation
New York, Madrid, Tuscany, and Singapore
A New Adventure
And Bad Dad

One of the more frequent questions I am asked in meetings or after a speech is whether I think we will have inflation or deflation. My ready answer is, "Yes." Then I stop, which I must admit is rather fun, as the person who asked tries to digest the answer. And while my answer is flippant, it's also the truth, as I do expect both outcomes. So the follow-up question (after the obligatory chuckle from the rest of the group) is for a few more specifics. And the answer is that I expect we will first see deflation and then inflation, but the key is the timing. Today we will examine that question in more detail, as we look at how interest rates could actually be negative (!!!) this week in German and Swiss bonds and why the US ten-year has dipped below 1.5%. The very poor May employment number needs some analysis, too, and we'll check the prospects of a synchronized global slowdown. Rarely have I come to a Friday with so much data that simply begs for a more thorough look, but we will try to hit at least the most important topics.

US Unemployment Turns Back South

The US unemployment numbers for May were released this morning, and they were rather dismal. Mainstream economists were expecting something on the order of 150,000 new jobs, but they came in sharply lower at 69,000. March and April estimates were revised down 50,000. As long-time readers know, I pay as much or more attention to the direction of the revisions than to the actual monthly numbers, as the direction of the revision is a reasonable leading indicator. And what it indicates is what I was writing four months ago: we are in for another summer of poor jobs growth.

With the revisions, we have had the first back to back sub-100,000 new jobs months since last summer, with the average gain for the last three months a poor 96,000.

The unemployment rate rose to 8.2%, as the labor force rose a very strong 642,000. This is why I wrote, at the beginning of this recession some four years ago, that employment would take longer to come back this cycle. That is because of the way they count employment. If you have not looked for a job in the last four weeks, you are not counted as unemployed. The rise in the labor force is largely due to the growing number of people now looking for jobs, as those on extended unemployment benefits are beginning to come to the end of their two-year benefits period in fairly large numbers each month.

As more people look for a job, the statistical reality is that it takes more new jobs to move the unemployment number down. And with numbers like this month's, that means the unemployment rate will start to march back up. That is not something anyone wants, least of all politicians, who are fond of taking credit when the number of jobs rise but try to change the subject when unemployment climbs.

The more realistic unemployment number would be one that counted people who are unemployed but would take a job if they could get one. While economists can argue how to actually come up with that number, nobody (without a serious political bias) would argue that it is less than 10%, and some would argue it's north of 12%. And the duration of unemployment is now back to a median time of over 9 months, with that number sadly rising as well. It is just taking longer to find a job if you don't have one.

CNN Money did a story last month with the note that "… there are far more jobless people in the United States than you might think. Last year, 86 million Americans were not counted in the labor force because they didn't keep up a regular job search. While it's true that the unemployment rate is falling, that doesn't include the millions of nonworking adults who aren't even looking for a job anymore. And hiring isn't strong enough to keep up with population growth. As a result, the labor force is now at its smallest size since the 1980s when compared to the broader working age population."

The household survey (which is different from the establishment [or business] survey) showed the creation of 422,000 jobs. We get the unemployment percentage (of 8.2%) from the household survey. You can't really look at the monthly numbers on the household survey, because they fluctuate wildly. "Change in the adjusted household survey over the last five months: +491,000, +879,000, -418,000, -495,000, +400,000. That nets out to +857,000, little different from the establishment survey's 823,000. Further evidence that one should look at the adjusted household numbers as a longer-term check on the establishment survey and basically ignore the monthly changes." (The Liscio Report)

The interesting thing to me in the household report was that the number of part-time jobs was up 757,000, which is far larger than the rise in the number of employed. Full-time employment actually dropped by 266,000. The broader measure of people who are unemployed or underemployed (part-time but wanting full-time work) is now back up to 14.8%. The Gallup Poll people, using a different survey basis, show an 18% underemployed rate.

But why should we worry? "The jobless rate in the U.S. could drop to as low as 6 percent by the first half of 2013, a bigger decrease than most economists currently project, according to research from the Federal Reserve Bank of New York. The relationship between the number of Americans newly unemployed and those recently finding work indicates joblessness will continue to decline, according to economist Aysegul Sahin." (BusinessWeek) Such scholarly work should help Mr. Sahin to land a job with the White House on the President's Council of Economic Advisors. Although, to be fair to the Fed, their more consensus view is that unemployment will still be 7.4% to 8.1% in the 4^th quarter of 2013.)

Perhaps the key driver of the US economy is consumer spending. And consumer spending requires consumers to have income. But this month's survey and the revisions to recent reports shows that hours worked are down slightly and wages are not keeping up with inflation. Total payrolls were down 0.3% for May, which is just a killer for consumer spending. GDP for the first quarter was revised down to 1.9%, and it looks like this quarter may not be any better or may even be worse, despite the higher expectations of mainstream economists.

But I suggest that you not take much comfort from consensus forecasts. There are certain analysts who I can almost always count on to be wrong. And they get there with the aid of a large number of graphs and charts and words to prove their points. But being consistently wrong can be useful, and I appreciate the effort it involves. However, there is wrong and there is just really bad. The Blue Chip economics consensus has never forecast a recession. And they largely miss recoveries. Essentially, they always forecast a continuation of the current trend. As a group, they are largely useless. They are not even a good contrarian indicator.

My friend James Montier (now of GMO) has long had fun with the poor track record of consensus economic forecasts. This graph pretty much says it all.

A Synchronized Global Slowdown

While synchronized swimming may be an event (if an odd one) at this summer's London Olympics, a synchronized global slowdown is not an event in which you want to get a medal. We looked at a spate of bad data last week, and we got even more this week. Lost in the bad employment data this morning was the news out of Asia. Australian manufacturing is clearly in a recession. India is posting its slowest growth in nine years. China is on the edge of a downturn in manufacturing. Unemployment is rising all over Europe and is much worse than in the US. German (!!!) credit default swaps are rising and are now higher than in 2008! Bank deposits in Europe are contracting at a faster rate than at any time in the last 14 years (the farthest back I can find data).

And while I don't want to steal too much thunder from next week's Outside the Box, I will pass along just this one graph from Greg Weldon (www.weldononline.com), showing that the PMI numbers for Europe came in almost universally bad. Note that the two-year average is getting ready to go negative.

The jobs number suggests the US is at stall speed. I wrote at the beginning of the year that if someone could guarantee 2% growth for the year I would take it. That still seems like a good bet, as I don't think we are going to get near 2%. An economic shock from Europe, which is quite possible, could push the US and most of the rest of the world into recession. The weakness in China and the rest of Asia gives even more cause for concern.

Recessions are almost always by definition deflationary. And with that thought in mind, let's turn our eyes to this week's rather puzzling moves in European interest rates.

Why Would You Buy a Bond with Negative Interest?

It is entirely understandable why Spanish and Italian interest rates are rising, as the news, especially from Spain, is quite negative. But so far, there is little evidence that there is significant shorting of Spanish debt, as almost everyone believes that the European Central Bank will ride to the rescue of Spain, as it has in the recent past. That is a tough environment for short sellers. One morning you wake up and there is massive movement against your short position and you can't get out without large losses. But the longer interest rates rise without ECB intervention, the more likely they are to rise even faster at some point, forcing either an ECB intervention or a failed Spanish bond auction and an eventual default. Given that the latter events are so disastrous, it is not unreasonable to think that the ECB will act, at some point.

Yields on Spanish ten-year bonds are now at 6.62%, up 50 basis points in the last 45 days. That is a record 548 basis points higher than similar German debt. Greece, Portugal, and Ireland had to seek aid when rates rose over 7%. "Economy Minister Luis de Guindos said late yesterday that the future of the euro is at stake, as data showed a net 66 billion euros ($81 billion) of capital left Spain in March. 'I don't know if we're on the edge of the precipice, but we're in a very, very, very difficult situation,' he said at a conference in Sitges, Spain.

"Investors have lost more on Spanish debt this year than any government securities apart from those of Greece. Spain, the fourth-biggest euro economy, owes bondholders 731 billion euros, more than the three countries that have already been bailed out combined. (Prime Minister) Rajoy's suggestion that his country risks being forced out of capital markets reinforces concern that it may not be able to manage its debts…" (Bloomberg)

But in recent speeches, ECB president Mario Draghi has said that European leaders must clarify their own vision of what Europe is to be. He correctly points out that it should not be up to the ECB to fill a policy vacuum created by European inaction.

" 'Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no,' Draghi told the European Parliament. 'Can the ECB fill the vacuum of the lack of action by national governments on the structural problem? The answer is no.'

"In his sharpest criticism yet of euro zone leaders' handling of the crisis, Draghi urged they spell out detailed plans for the euro and fiscal cooperation, something he believes will require governments to surrender some of their sovereignty to succeed.

"'How is the euro going to look like a certain number of years from now? What is the union vision that you have a certain number of years from now? The sooner this is specified, the better it is,' Draghi said." (Reuters)

That does not sound like a man who wants to buy Spanish bonds. And that is why, the longer he hold off, the more the market may sense he is waiting on European leaders to act. And that may take some time, as so far all they seem to want to do is kick the much-dented can down the road.

But even given the pessimism in Europe, why should Germany be able to sell €5 billion of two-year bonds at zero percent interest last week and see them trade this week at a slightly negative interest? Why would anyone buy a bond that is guaranteed to not even give you your money back? Is that a sign of severe potential deflation?

The answer is, not really. Buying German bonds, even at a slightly negative rate, is actually a cheap call option on the eurozone breaking up. A German bond that became a new Deutschemark-denominated bond would rise in value at least 40-50% almost overnight. If you are a pension fund, for instance, with a lot of sovereign debt from a variety of European peripheral countries and you think a break-up of the eurozone is possible, it is a way to hedge your investment portfolio.

Switzerland actually sold outright this week bonds that have a negative coupon. Again, not a sign of deflation but another call option, betting that the Swiss Central Bank will have to give up on its peg to the euro. That peg has got to be one of the biggest losing trades in central banking history, and the Swiss seem determined to lose even more money. If the euro goes to $1.15 or lower, that trade becomes an even more massive loser. At what point in the next year will the Swiss Central Bank decide it has endured all the pleasure it can stand in fighting the fall of the euro? If they abandoned the peg, the move in the Swissie (as traders call the Swiss franc) would be large and almost instantaneous. And the reward for investors outside of Switzerland buying Swiss bonds with a negative yield will be large.

First Deflation, Then Inflation

As noted above, recessions are by definition deflationary. Deleveraging events are also deflationary. A recession accompanied by deleveraging is especially deflationary. That is why central banks all over the world have been able to print money in amounts that in prior periods would have sent inflation spiraling upward. This drives gold bugs nuts as they see the money being printed, but they are not factoring in the velocity of money. If the velocity of money were flat, inflation would be quite significant by now. But velocity has been falling and is going to fall even further. The US Fed and the ECB are going to be able to print more money than we can imagine without stoking inflation … at least for a while longer.

But interest rates are down in a lot of countries. Look at this table of ten-year bond yields (courtesy of Barry Ritholtz at The Big Picture):

Today's employment numbers not only sent stocks tumbling and gold soaring, they had a significant effect on bond yields, which fell across the board. Look at today's numbers from Bloomberg.com. Note the 30-year US Treasury is at 2.52%!

One of the champions, for a rather long time, of the deflationary outlook has been my friend David Rosenberg (formerly chief economist at Merrill and now with Gluskin Sheff in Toronto). He has been talking for years about a target of 1.5% for the ten-year US bond. Today we got down to 1.5% and did not even pause, ending the day at 1.47%. I noted that in a phone conversation to Rich Yamarone, the chief economist at Bloomberg, and he said he believes we will scare 50 basis points before we are through. To which Rosie replied in a later text, "He's nuts." We will all be at a special evening for the University of Texas McCombs School of Business next Thursday. I will offer to hold their coats while they have a lively discussion.

Since I was thinking about bond yields, I called Dr. Lacy Hunt (one of the more brilliant economists in the country, and not just in my opinion). He has been forecasting interest rates for a long time and been the guiding light at Hoisington Asset Management, which has established perhaps the best track record I know of for bond returns, if a tad volatile. They have been long bonds for a very long time, which has been the correct position, if a difficult and lonely one. Most bond managers think rates are set to rise.

Not Lacy. He thinks we will get close to 2% on the 30-year bond and has said so for decades. (Interestingly, he will be in the audience on Thursday, along with Van Hoisington. I think I will refrain from saying anything about bonds that night and talk about something more predictable, like politics or Europe.)

Dr. Gary Shilling wrote his first book, called simply Deflation, in 1998 and followed it up recently with another great work, titled The Age of Deleveraging. He first went long bonds in 1982, which has been one of the great trades of the last 30 years. He lists a whole host of reasons for a deflationary period over the next few years.

The argument for deflation is rather straightforward. The boom in the US and much of the world from 1982 until 2008 was partially the result of financial innovations and massive leveraging. That process has come to its end, and the private sector is deleveraging and will do so even further as the economy softens and we slip into the next recession. Governments are coming to the end of their ability to borrow money at reasonable rates in Europe, and soon in Japan and eventually in the US (and that time is not as far off as we would like). I described the whole process in my book Endgame. Assuming the US government deals with its coming deficit crisis in a realistic manner, the results will be deflationary. I will comment later on the Fed response.

The next big deflationary force is the slowing of the velocity of money. I have written numerous e-letters and devoted a lot of space in the book to the velocity of money and won't go into it again here. It has been falling for five years, pretty much as I wrote it would, back in 2006. (I was writing about the velocity of money at least as far back as 2001, and probably earlier. It is a very important concept to grasp.) We are now close to the historical average velocity of money, but since velocity is mean-reverting it will go well below the historical average. This process takes years; it is not something that is going to end any time soon.

A slow-growth, Muddle-Through economy is deflationary. High and persistent unemployment is deflationary.

Absent some new piece of data that I can't see now, we are in for lower bond yields in the US. Rates are going lower and are going to stay low for longer than any of us can imagine.

I think the Fed will respond to the government acting in a fiscally responsible manner, which is inherently deflationary, by fighting that deflation with the only tool it has left; and that is outright monetization of debt. They will call it something else, of course, but that will be the actual outcome.

And they will be able to monetize more than you think they can without causing a repeat of the 1970s. Eventually it will catch up to us, as there is no free lunch, but they are betting they will be able to reduce some of the threat of actual inflation by cutting back on the money supply and raising rates. But we are years off from that. So, yes, at some point inflation will be back.

Anybody who says they know the timing is a lot more confident in his/her crystal ball than I am. Mine is rather cloudy on this topic. But I think I can see out a year or so, and it looks like continued low rates and deflation. By the way, just to appease the gold bugs among my readers, given my deflationary call, I will note in passing that solid gold stocks were up hugely during the deflationary Great Depression of the '30s. Even with the dollar on the gold standard. Just saying.

New York, Madrid, Tuscany, and Singapore

It is time to hit the send button, as I have to get up too early to go to New York this morning (it is already way too late). I get back Tuesday and then head to Austin on Thursday, as noted above. Then it's another quick trip to New York the following week for my partners at Altegris. I will be doing some media on that trip as well.

The on Friday that week, hopefully after I finish my letter, I get on a plane for Rome and then Tuscany but via an overnight stay in Madrid. I normally can wait to book tickets and get reasonable prices (everything is relative), and use the system-side upgrades I get from American Airlines to fly business or first. This time nothing was working. Finally, Myra, who does my travel and stays busy at it, realized the problem was the London Olympics. Traffic flow is messed up. The best way for me to go is through Madrid. Spend the night and fly out at a civilized hour the next morning.

That means I can meet with interesting people in Madrid rather than staying in a stuffy airport hotel. But I can't eat dinner at ten PM (as is the custom) and get home at 2 AM. So I suggest a late lunch at a place that is cool. Cool trumps food. Get them both?! You are my next BBF. You drop me off at five and go on your way. You get $25,000 worth of secrets (I will only hold back one or two). The secrets of the universe for a fun dinner.

I'm back from Italy for a week, then it's off to NYC for a day. That night I fly to Singapore from JFK, through Frankfurt. While the speaker fee was quite fair, I just wanted to not beat up my body, so the deal was, I get to travel on Singapore Air in one of their first-class cabins. I have heard it is the best experience one can have on a commercial flight. I am quite looking forward to it.

I am not in Singapore long, and so get back on Saturday to New York, where I will stay two nights before taking off for the week to the Naval War College in Newport, Rhode Island, which may be one of the coolest times I spend this year. I will fill you in on the details later.

And then we have David Kotok's Maine fishing trip the first Friday in August. Then home the second week of August for almost 30 days. What a brilliant plan! Travel close to 200,000 miles in one year, and your plan is to be in Texas in August and early September? Texas as in the Furnaces of Hell? Texas in August? Oh well. God did in fact create air conditioning. I will survive.

A quick note about my travels. It seems like I am always on the road. It is an insane schedule –I get that. But each trip in and of itself makes perfect sense. Bluntly, most of them are for money. My speaking fees are high enough that I get excited to get on a plane and go somewhere. And if that excitement wears thin, then we will raise the price until the thrill returns.

Now, next Thursday is a freebie for Lew Spellman. It also gets my great friends in for an evening and Rosie in the night before for some guy time. We don't get enough of that. Austin is a quick trip. I can see George and Meredith Friedman of Stratfor for lunch and into the afternoon, comparing notes on the world. A few more meetings with fun people, then on to the hotel to read, think, and write before dinner – and then we are on. I get a charge out of doing panels with guys like Rosie and Rich. You have to bring your "A" game or you get crushed.

A New Adventure

The problem of late is just so many great opportunities that I don't feel I can say no to, although if I keep ending up in NYC I may need to get some kind of timeshare. I half expect this run could end for any reason at any minute, and I want to enjoy it. I honest to God have to pinch myself sometimes to make sure I'm not dreaming. Some of this seems so surreal, from the perspective of this country boy. Now, I work hard as Hades, but lots of people work hard. I recognize my good fortune and just want to enjoy it while it lasts.

And thank you gentle reader, for making it happen. Without you sticking with me, it would never have turned out this well. I am grateful.

And, we will soon be announcing significant changes to our publishing business. We have created Mauldin Economics, with an in-house team of analysts and editors to bring my readers world-class investment advice, including specific buy and sell recommendations. We have worked a long time to figure out how to do this in a manner that Tiffani and I and our entire, rapidly growing team can be proud of. At the end of the day, it is all about serving you.

Our first new investment product will come your way within two weeks, along with major changes in our website. And there will be more publications and website features in the near future.

But with all the changes, one thing will not change. I will write this letter every week for as long as I can, and it will be free. If you like what you read here, then every now and then take the time to introduce me to a few of your friends. I can always use another best friend like you.

And Bad Dad

But sometimes friends and even Dads really mess up. As many of you know, I have Korean twin girls who we adopted at six months old. They were beyond identical. While their siblings could tell them apart, they were almost 14 before I could be right more than 50% of the time. Honestly, in the early years, I was wrong a lot. That was not good, but by their early teens I got it up to about 90% of the time.

Fast-forward. Two weeks ago I said that I was in Tulsa for the graduation of my daughter. I was late getting there because of my investment conference. When the other twin, Amanda, graduated from the same school a few years ago, it was later in May; so I just assumed there would be no conflict, when we planned our conference. But there was, sadly. And though I left very early the morning after the conference, between late flights and an early start to the ceremony this year, I just simply missed her walking.

But I got there and we all went out. But then I had mentioned in this letter about the trip and graduation and all, and instead of saying "Abigail" I said "Amanda"! It was Abigail's moment and Bad Dad, who finished writing at 6 in the morning, just blew it.

But Abigail, I am proud of you for getting it done and already having several internships in addition to your job. There are some kids I worry about, but you are not one of them. You are a winner and always will be, and any firm that gets you will be lucky.

And the twins both gave me graduation pictures. Standing in the same robe, in front of the same flag. My assistant Mary put them side by side on my office wall. And looking at them, for a second they were four years old again and Dad couldn't tell them apart. But just for a second. I have learned to discern that each of them is slightly prettier than the other one, so that makes it easy to tell them apart now.

Trust me, it's not any harder than figuring out Europe. And certainly not as hard as it will be to get out of bed in a few hours. So enjoy your week, and over the next few months we will look at some deflation trades that might work for you.

Your learning to enjoy the ride analyst,

John Mauldin

John@FrontlineThoughts.com

Source: JohnMauldin.com (http://s.tt/1derW)

First Deflation, Then Inflation. But the Timing…?

By John Mauldin

June 2, 2012