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                                          ARTICLE 1

The Dangers of a Stock Market Melt-Up 

By JEFF SOMMER 

Published: November 2, 2013 

 Investors aren’t worrying much about the stock market, and that worries Edward Yardeni.

 Minh Uong/The New York Times 

 It’s not that Mr. Yardeni, an independent economist and strategist, has a gloomy outlook on the market himself. To the contrary, he’s been generally optimistic about the prospects for stocks for about five years, and he remains so.

 “We’re in a bull market, and I think it can continue for the next few years,” he said in an interview last week. But what’s striking about his perspective is that while he remains a steadfast market bull, he finds himself increasingly preoccupied by a cloud on the horizon: the growing complacency of his fellow investors.

 They keep bidding prices higher and higher, with a speed and consistency that troubles him. In a word, he is worried that we may hurtling into a trajectory that cannot be sustained — what he calls a market “melt-up.”

 “The bull market would be more sustainable if investors fretted about all sorts of possible bearish problems,” he said. The economy isn’t all that strong, for example, and it might be much weaker if the Federal Reserve were not holding interest rates artificially low and buying bonds at a relentless pace. The Fed decided on Wednesday to continue its easy monetary policy, but it will have to tighten up eventually, perhaps causing stresses in the markets.

 People aren’t worrying nearly enough about such things for his taste. “That,” he said, “is making me a little bit nervous.”

 Of course, the market is not in perpetual upward motion; it fluctuates daily. After reaching a high on Tuesday, the Standard & Poor’s 500-stock index dropped on Wednesday, dipped slightly Thursday and rose on Friday. But whether the news has been good or bad, investors have remained remarkably unruffled — and stock prices have trended higher, without a major break, for a very long time.

 Based on valuations like the price-to-earnings ratio, we’re not in a full-blown asset bubble at the moment, in Mr. Yardeni’s view. Corporate earnings have increased steadily, and he contends that they will keep doing so, providing the foundation for a rise in the stock market for some time.

<p class="NoSpacing"> But he says there is now a significant danger that excessive exuberance could threaten the market’s climb.

<p class="NoSpacing"> “I expect the market to rise,” he said. “But I’m worried that it could just go through the roof. If it does that, we could have a nasty correction afterward, maybe a bear market, and that could cause serious problems for the economy.”

<p class="NoSpacing"> After all, there hasn’t been a significant market correction — defined as a drop in average share prices of more than 10 percent — since a 19.4 percent decline in the S.& P. 500 in 2011. (After stock prices drop 20 percent, a correction becomes a bear market, in Wall Street parlance.)

<p class="NoSpacing"> And since the start of 2012, the market has never been in negative territory for a calendar year. Since the market nadir in March 2009, the S.& P. 500 has already returned more than 180 percent, including dividends. Under conditions like that, it’s been hard not to make money, if you’ve been wise or lucky enough to have had money in the stock market.

<p class="NoSpacing"> There are many signs that people are no longer worrying all that much about the possibility of another market meltdown, of the kind that occurred in 2008, when the S.& P. 500 returned a negative 37 percent, dividends included. A global financial crisis and recession brought the economy to a perilous state back then, but for several years now, the Fed and other central banks have been flooding the world with liquidity.

<p class="NoSpacing">In its meeting last week, the Fed again delayed carrying out an exit strategy, or taper, from its bond-buying program known as quantitative easing. Janet L. Yellen, the Fed’s current vice chairwoman, has been nominated to succeed Ben S. Bernanke at the helm, and she will have to deal with some delicate issues for the markets.

<p class="NoSpacing"> Short-term interest rates remain extraordinarily low, and with the debt-ceiling crisis and partial government shutdown already fading into the past, medium- and longer-term rates have receded, too. These ultralow rates have made equity prices a bargain, at least in comparison with bonds, according to most financial models.

<p class="NoSpacing"> As the Fed’s balance sheet has swelled — it is heading toward $4 trillion, according to a new Fed study, up from $800 billion before the financial crisis — the stock market has risen, and many investors have noticed the correlation. While there is still plenty of money on the sidelines, many investors are responding enthusiastically now — excessively so, in Mr. Yardeni’s view.

<p class="NoSpacing"> One widely followed gauge of market sentiment, the Investors Intelligence Bull/Bear Ratio, soared last week to 3.19 from 1.96 two weeks earlier. (The percentage of market bears fell to 16.5 percent, the lowest since May 2011.) Ratios of 3.0 or higher have often signaled the onset of corrections or bear markets.

<p class="NoSpacing"> Mr. Yardeni isn’t the only longtime bull to note the possibility of a melt-up. Laszlo Birinyi, an independent strategist based in Westport, Conn., did so in his current newsletter, called Reminiscences. “Historically, bull markets of this length and strength have a period of exuberance,” he said. “It doesn’t have to happen but it usually does and we would certainly leave the door open for what is termed a melt-up.”

<p class="NoSpacing"> Still, he reiterated his conviction that the bull market’s legs are strong enough to carry it considerably further — if excesses or external shocks don’t batter it too badly. And so did Mr. Yardeni, picking an easy-to-remember target of 2,014 for the S.& P. 500 next year. (It was nearly 1,762 on Friday.) “I just hope the market doesn’t blow right past my target in the next few months,” he said.

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<p class="MsoNormal">                        <span lang="EN-US" style="font-size:14.0pt; line-height:115%;font-family:"Times New Roman";mso-ansi-language:EN-US">The Dangers of a Stock Market Melt-up 

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<p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: 150%; text-align: center;">                          ARTICLE 2

<p class="MsoNormal" style="margin-bottom:0cm;margin-bottom:.0001pt;line-height: normal;mso-outline-level:2"><span lang="EN-US" style="font-size:14.0pt; font-family:"Times New Roman";mso-ansi-language:EN-US;mso-fareast-language: RU">Inflation/ <span lang="EN-US" style="font-size:13.5pt; font-family:"Times New Roman";mso-ansi-language:EN-US;mso-fareast-language: RU">The price is a blight 

<p class="MsoNormal" style="margin-bottom:0cm;margin-bottom:.0001pt;line-height: normal;mso-outline-level:1"><span lang="EN-US" style="font-size:16.0pt; font-family:"Times New Roman";mso-font-kerning:18.0pt;mso-ansi-language:EN-US; mso-fareast-language:RU">The rich world, and especially the euro zone, risks harmfully low inflation 

<p class="MsoNormal" style="margin-bottom:0cm;margin-bottom:.0001pt;line-height: normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Nov 9th 2013 | <span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US; mso-fareast-language:RU">From the print edition<span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US; mso-fareast-language:RU">

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">WHEN central banks adopted “quantitative easing” (printing money to buy financial assets) and other unorthodox means to buoy economies holed by the financial crisis, many feared that the result would be out-of-control inflation. Asset prices have certainly soared. But consumer prices have not. Indeed, the growing fear is that rich countries may be entering a twilight zone of ultra-low inflation.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">A downward lurch has been most notable in the euro area, where annual inflation dropped from an already low 1.1% in September to 0.7% in October; a year ago it stood at 2.5%. It is now a percentage point lower than the European Central Bank’s inflation target of “below but close to 2%”. The ECB lowered its main policy rate to 0.5% in May; on November 7th its governing council, responding to the weak inflation figures, reduced the interest rate further, to 0.25%.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Elsewhere, too, inflation is low and falling. Almost five years after the Federal Reserve led the way with quantitative easing, inflation is well below the Fed’s 2% target (which relates to a somewhat broader measure of consumer prices than the better-known consumer-price index). In August this wider measure stood at little more than 1%. Across the G7 economies, inflation has been weak this year and has recently fallen back to 1.3%; a year ago it was 1.8%. Even in Britain, which has the highest inflation (2.7%) in both the G7 and the European Union, the rate has been broadly stable this year.

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<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Slack energy prices have contributed to recent declines in overall inflation. That is a welcome development, boosting the purchasing power of both businesses and households. But core inflation, which by excluding the more volatile elements of energy and food offers a surer guide to underlying price pressures, tells a less heartening story. Across the G7 core consumer-price inflation has been stuck over the past year at 1.4% (see chart). On the Fed’s measure it is just 1.2%. And in the euro zone, core inflation has fallen over the past year from 1.5% to 0.8%, matching the record low of early 2010.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">One bright spot that has helped to keep G7 inflation from falling further is Japan, where the reflationary drive of Shinzo Abe, the prime minister, is stoking hopes that the past decade and a half of deflation may at last be coming to an end. Overall inflation has risen to 1.1%—higher than in the euro area—and core inflation is now at zero. But the immense difficulty that successive Japanese governments have encountered in trying to escape the shackles of deflation serves as a warning of the danger of letting inflation fall too low. Once people start to anticipate declining rather than rising prices, it can be very hard to reverse their expectations.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Abandoning reserve

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">That danger is less acute in America than in the euro area largely because the Fed is more proactive than the ECB. It surprised the markets in September by sustaining quantitative easing at its present pace of $85 billion of asset-purchases a month, rather than starting to curb it. A study by economists at the Federal Reserve, published this week, has fuelled speculation that it may keep interest rates at rock bottom even longer by lowering the level of unemployment at which it will consider rate increases from the current 6.5% (see <span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language: EN-US;mso-fareast-language:RU">Free Exchange<span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US; mso-fareast-language:RU">).

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">By contrast, the euro area looks increasingly vulnerable to a slide into deflation. Although the region emerged this spring from a painfully protracted double-dip recession, the recovery is expected to be a feeble one. GDP will fall by 0.4% this year and rise by only 1.1% in 2014, according to forecasts from the European Commission published on November 5th.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Such weak growth is unlikely to overcome the forces pushing inflation down. Output will remain well below its full potential next year, estimates the commission; all that idle capacity acts as a drag on prices. Unemployment across the euro area will stay stuck at a woefully high 12.2%, which will keep wages down. The strength of the euro will also exert a downward pull. It has been trading this week at $1.35, more than 5% higher than a year ago; on a trade-weighted basis it is 8% higher.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Very low inflation in the euro zone makes it much more difficult for uncompetitive countries, predominantly in southern Europe, to regain lost ground. Workers tend to resist nominal cuts in pay more fiercely than they do the subtler erosion of their income through inflation. If inflation in the countries with which the weak economies trade is high, they can improve their competitiveness simply by keeping their rate lower. That is in essence how Germany gained a big edge in the first decade of the euro.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">But with overall inflation so low, peripheral countries must instead adjust through outright deflation or something close to it, meaning a freeze or absolute cuts in wages. Already, in September, when euro-wide inflation was 1.1%, prices were falling by 1% in Greece. They were flat in Ireland and rising by just 0.3% in Portugal.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">A sustained period of deflation would be particularly hard on the euro zone’s periphery, weighed down by debt. Cyprus, Ireland, Portugal and Spain have high public and private debt; Greece and Italy have high public debt. When prices are falling, debt, which is fixed in nominal terms, becomes more onerous in real terms. Higher inflation, in contrast, makes escaping heavy debt much less burdensome.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Central banks have had to move beyond past orthodoxies in order to coax a modest recovery from the ruins of the financial crisis. Now, to avoid the blight of stagnating or falling prices, they may have to venture still further into unconventional territory. <p class="MsoNormal">

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Article 3
<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal;mso-outline-level:2"><span lang="EN-US" style="font-size:18.0pt;font-family:"Times New Roman";  mso-ansi-language:EN-US;mso-fareast-language:RU">Britain 

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal;mso-outline-level:3">'''<span lang="EN-US" style="font-size: 13.5pt;font-family:"Times New Roman";mso-ansi-language:EN-US;mso-fareast-language: RU">Little England or Great Britain? '''

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal;mso-outline-level:1">'''<span lang="EN-US" style="font-size: 16.0pt;font-family:"Times New Roman";mso-font-kerning:18.0pt;mso-ansi-language: EN-US;mso-fareast-language:RU">The country faces a choice between comfortable isolation and bracing openness. <span style="font-size:16.0pt; font-family:"Times New Roman";mso-font-kerning:18.0pt;mso-fareast-language: RU">Go for openness '''

<p class="MsoNormal" style="margin-bottom:0cm;margin-bottom:.0001pt;line-height: normal"> Nov 9th 2013 | From the print edition

<p class="MsoNormal" style="margin-bottom:0cm;margin-bottom:.0001pt;line-height: normal">

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">ASKED to name the European country with the most turbulent future, many would pick Greece or Italy, both struggling with economic collapse. A few might finger France, which has yet to come to terms with the failure of its statist model. Hardly anybody would plump for Britain, which has muddled through the crisis moderately well.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Yet Britain’s place in the world is less certain than it has been for decades. In May 2014 its voters are likely to send to the European Parliament a posse from the UK Independence Party, which loathes Brussels. Then, in September, Scotland will vote on independence. In 2015 there will be a general election. And by the end of 2017—possibly earlier—there is due to be a referendum on Britain’s membership of the European Union.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:  EN-US;mso-fareast-language:RU">Britain <span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language: EN-US;mso-fareast-language:RU"> could emerge from all this smaller, more inward-looking and with less clout in the world (and, possibly, with its politics fractured). Or it could become more efficient, surer of its identity and its place in Europe and more outward-looking. Call them the Little England and Great Britain scenarios.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US; mso-fareast-language:RU">The incredible shrinking nation 

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">In many ways Britain has a lot going for it right now. Whereas the euro zone’s economy is stagnant, Britain is emerging strongly from its slump. The government has used the crisis to trim the state. Continental Europeans are coming round to the long-held British view that the EU should be smaller, less bureaucratic and lighter on business. There is even talk of deepening the single market in services, a huge boon for Britain.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US;  mso-fareast-language:RU">London <span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language: EN-US;mso-fareast-language:RU"> continues to suck in talent, capital and business. Per person, Britain attracts nearly twice as much foreign direct investment as the rich-country average. That is because of the country’s history of openness to outsiders—a tradition that has mostly survived the economic crisis. Although the British are hostile to immigration, they excel at turning new arrivals into productive, integrated members of society. Britain is one of only two EU countries where fewer immigrants drop out of school than natives. (Its most worrying neighbourhoods are white, British and poor.)

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">But this could all fall apart in the next few years. The most straightforward way Britain could shrivel is through Scotland voting to leave the United Kingdom next September. At a stroke, the kingdom would become one-third smaller. Its influence in the world would be greatly reduced. A country that cannot hold itself together is scarcely in a position to lecture others on how to manage their affairs.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">The referendum on the EU was promised last year by the prime minister, David Cameron, in a vain attempt to shut up the Little Englanders in the Tory party and ward off UKIP; Ed Miliband, Labour’s leader, may well follow suit. If Britain left the EU, it would lose its power to shape the bloc that takes half its exports. And, since Britain has in the past used that power for good, pushing the EU in an open, expansive, free-trading direction, its loss would be Europe’s too. To add to the carnage, the plebiscite could break up the Conservative Party—especially if Mr Cameron fails to get re-elected in 2015.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:  EN-US;mso-fareast-language:RU">Britain <span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language: EN-US;mso-fareast-language:RU"> could also become more isolated and insular simply by persisting with some unwise policies. As our <span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language: EN-US;mso-fareast-language:RU">special report<span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US; mso-fareast-language:RU"> this week shows, the government’s attempts to bear down on immigrants and visitors are harming the economy. Students, particularly from India, are heading to more welcoming (and sunnier) countries. Firms find it too hard to bring in even skilled workers, crimping the country’s ability to export. Mr Cameron has made some concessions: it is now a bit easier to get a British visa in China, and he backed down on a mad plan to demand large bonds from visitors from six emerging markets, lest they abscond. But Britain’s attitude to immigration is all wrong. It erects barriers by default and lowers them only when the disastrous consequences become obvious.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US; mso-fareast-language:RU">No Europe, no Scotland, split party—nice one, Dave 

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">The shrinking of Britain is not preordained. In a more optimistic scenario, Britain sticks together and stays in Europe, where it fights for competitiveness and against unnecessary red tape. British pressure gradually cracks open services markets, both in the EU and elsewhere, creating a bonanza for the country’s lawyers and accountants. Britain becomes more tolerant of immigration, if not in love with it. It even stops bashing its biggest export industry, financial services.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">The difference between the Little England and Great Britain scenarios is leadership. Mr Cameron should start by changing the thing over which he has most control: immigration policy. A more liberal regime would boost business, help balance the nation’s books and shrink the state, relative to the size of the economy. Immigrants, especially from eastern Europe, produce far more than they consume in public resources. Both Mr Cameron and Mr Miliband know this, but they are cowed by widespread hostility to the influx.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size: 12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US;mso-fareast-language:  RU">Europe <span lang="EN-US" style="font-size:12.0pt; font-family:"Times New Roman";mso-ansi-language:EN-US;mso-fareast-language: RU"> is another issue where they should try to lead public opinion, not cravenly follow it. Mr Miliband’s policy is unknown. Mr Cameron has lurched alarmingly, sometimes saying Britain is committed to reforming the EU for the good of all, at other times threatening to leave if unspecified demands are not met. The first course is the astute one—both less likely to lead to a calamitous British exit and more likely to succeed in making the union more liberal.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">On Scotland, Mr Cameron and Mr Miliband are on the side of Great Britain. But it is a decision for Scots. Although a Caledonian state could more or less pay its way to begin with, assuming that it was able to hold on to most of the North Sea oil- and gas-fields, that resource is drying up. An independent Scotland would be too small to absorb shocks, whether to oil prices or to its banks. And the separatists cannot say how the country could run its affairs while keeping the pound. For their own sakes, Scottish voters should reject their political snake-oil.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:  EN-US;mso-fareast-language:RU">Britain <span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language: EN-US;mso-fareast-language:RU"> once ran the world. Since the collapse of its empire, it has occasionally wanted to curl up and hide. It can now do neither of those things. Its brightest future is as an open, liberal, trading nation, engaged with the world. Politicians know that and sometimes say it: now they must fight for it, too. <p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal;mso-outline-level:2"><span lang="EN-US" style="font-size: 12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US;mso-fareast-language: RU">  

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<p align="center" class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt: auto;text-align:center;line-height:normal;mso-outline-level:2"><span lang="EN-US" style="font-size:14.0pt;font-family:"Times New Roman";mso-ansi-language: EN-US;mso-fareast-language:RU;mso-bidi-font-weight:bold">Article 4

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal;mso-outline-level:2"><span lang="EN-US" style="font-size: 14.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US;mso-fareast-language: RU">Dirty money 

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal;mso-outline-level:3"><span lang="EN-US" style="font-size: 13.5pt;font-family:"Times New Roman";mso-ansi-language:EN-US;mso-fareast-language: RU">Mistrust the trusts 

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal;mso-outline-level:1">'''<span lang="EN-US" style="font-size: 14.0pt;font-family:"Times New Roman";mso-font-kerning:18.0pt;mso-ansi-language: EN-US;mso-fareast-language:RU">The crackdown on shell companies is a good start. The next target should be trusts '''

<p class="MsoNormal" style="margin-bottom:0cm;margin-bottom:.0001pt;line-height: normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Nov 9th 2013 | <span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US; mso-fareast-language:RU">From the print edition<span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";mso-ansi-language:EN-US; mso-fareast-language:RU">

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 * <span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman";     mso-ansi-language:EN-US;mso-fareast-language:RU">
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<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">ONLY a fool holds dirty money in his own name. The world’s financial system offers safer and friendlier ways to hide the proceeds of crime. Shell companies—those with no real operations—are one, phoney trusts and foundations are another.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Belatedly, life is getting a bit more difficult for tax evaders, money launderers and those who abet them. One big move—now backed by the British government—is to oblige limited-liability companies to give details of their real owners. This newspaper has argued in favour of such a duty: limited-liability status is a kind of public subsidy (if the firm goes bust, the shareholders are not responsible for its debts). It was never meant to be a means of concealing ownership. Yet in many places it is just that: only six of 69 jurisdictions surveyed last year by Eurodad, an anti-corruption network, required all types of firm to record beneficial-ownership information.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Spurred by complaints from the police, pressure from campaigners and public distaste for tax-dodgers, the British government wants not only to set up a proper registry of beneficial ownership, but also to make its contents public. If the detailed regime matches the promise, this will be an important breakthrough. But Britain should also coax its offshore dependencies into greater openness. Some are conscientious, others less so. Even official investigators can find it hard to get the information they need. America can do more to help, too: states such as Nevada apply scandalously little scrutiny to the identity of those forming companies. European governments are keen to collect more tax, but many have been less eager to make corporate ownership transparent.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Cleaning up corporate ownership will increase public confidence in the financial system. But it is only the start. The misuse of trusts and other non-corporate entities is also a big problem. These have proper purposes, such as managing charitable donations, ring-fencing employee pension plans, safeguarding assets for children or organising wills and bequests. But they too enjoy a legal advantage: they are a way of parking assets. That seems fine as long as the trusts pay tax on profits (just as companies do) and their beneficiaries pay tax on any disbursement or benefit (just as shareholders do).

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Instead, trust law has become a murky world. In many places there is no rule that trusts must disclose their existence, let alone pay tax on their earnings. “Orphan assets”, no longer legally owned by the person who put the money into the trust but not yet belonging to the trust’s potential beneficiaries, offer plenty of room for abuse. Some trusts, revealingly, even have flee clauses, where the trustees are obliged to try to change the domicile of the trust if the tax police start asking questions. A structure that was set up to protect the wives of medieval crusaders has ended up being used by the sort of businesspeople who greet the Russian leader as “Vladimir”.

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Swiss knives

<p class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal"><span lang="EN-US" style="font-size:12.0pt;font-family:"Times New Roman"; mso-ansi-language:EN-US;mso-fareast-language:RU">Far better to concentrate on two simple rules. First, all trusts and foundations should be registered, just as companies are, and their beneficiaries, both actual and potential, should be disclosed. Second, the trustees and the beneficiaries should be legally responsible for reporting any disbursements or benefits, and for making sure the tax is paid on them. Both the European Union and America are tiptoeing in this direction, but Luxembourg, Switzerland and some micro-states are resisting. It would be much better if they worked together. Trusts are a useful vehicle—but not for dodgy goods.

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