The Divine Comedy

Dali_Dante_Beatrice_Comforts_The_PoetPrint of Dante and Beatrice by Salvador Dali.

Review reprinted from the WSJ:

The Ultimate Self-Help Book: Dante’s ‘Divine Comedy’

‘The Divine Comedy’ is not just a classic of world literature. It’s the most astonishing self-help book ever written

By Rod Dreher

On the evening of Good Friday, a man on the run from a death sentence wakes up in a dark forest, lost, terrified and besieged by wild animals. He spends an infernal Easter week hiking through a dismal cave, climbing up a grueling mountain, and taking what you might call the long way home.

It all works out for him, though. The traveler returns from his ordeal a better man, determined to help others learn from his experience. He writes a book about his to-hell-and-back trek, and it’s an instant best-seller, making him beloved and famous.

For 700 years, that gripping adventure story—”The Divine Comedy” by Dante Alighieri—has been dazzling readers and even changing the lives of some of them. How do I know? Because Dante’s poem about his fantastical Easter voyage pretty much saved my own life over the past year.

Everybody knows that “The Divine Comedy” is one of the greatest literary works of all time. What everybody does not know is that it is also the most astonishing self-help book ever written.

It sounds trite, almost to the point of blasphemy, to call “The Divine Comedy” a self-help book, but that’s how Dante himself saw it. In a letter to his patron, Can Grande della Scala, the poet said that the goal of his trilogy—”Inferno,” “Purgatory” and “Paradise”—is “to remove those living in this life from the state of misery and lead them to the state of bliss.”

The Comedy does this by inviting the reader to reflect on his own failings, showing him how to fix things and regain a sense of direction, and ultimately how to live in love and harmony with God and others.

This glorious medieval cathedral in verse arose from the rubble of Dante’s life. He had been an accomplished poet and an important civic leader in Florence at the height of that city’s powers. But he wound up on the losing side of a fierce political struggle with the pope and, in 1302, fled rather than accept a death sentence. He lost everything and spent the rest of his life as a refugee.

The Comedy, which Dante wrote in exile, tells the story of his symbolic death, rebirth and ascension to a higher state of being. It is set on Easter weekend to emphasize its allegorical connection with Christ’s story, but Dante also draws on classical sources, especially Virgil’s “Aeneid,” as well as the Exodus story from the Bible.

Dante’s masterpiece is an archetypal story of journey and heroic quest. Its message speaks to readers, whether faithful or faithless, who are searching for moral knowledge and a sense of hope and direction. In its day, it’s worth recalling, the poem was a pop-culture blockbuster. Dante wrote it not in the customary Latin but in Florentine dialect to make it widely accessible. He wasn’t writing for scholars and connoisseurs; he was writing for commoners. And it was a hit. According to the historian Barbara Tuchman, “In Dante’s lifetime, his verse was chanted by blacksmiths and mule-drivers.”

Who knew? Not me. I always thought “The Divine Comedy” was one of those lofty, doorstop-sized Great Books more admired than read. Its intimidating reputation is likely why few people ever walk with Dante through the fires of the Inferno, climb with him up the seven-story mountain of Purgatory and rocket with him through the stars to Paradise.

What a pity. They will never discover the surprisingly accessible beauty of Dante’s verse in modern translation. Nor will they grasp how useful his poem can be to modern people who find themselves caught in a personal crisis from which there seems no escape. Dante’s search for deliverance propels him on a purpose-driven pilgrimage from chaos to order, from despair to hope, from darkness to light and from the prison of self to the liberty of self-mastery.

Dante showed me how to do it too. Midway through my own life, my journey brought me back to my hometown, where, in the wake of my sister’s death, I had hoped to start anew with my family. The tale of my sister Ruthie’s grace-filled fight with cancer and the love of our hometown that saw her through to the end changed my heart—and helped to heal wounds from the teenage traumas that had driven me away.

But things didn’t work out as I had expected or hoped. By last fall, I found myself struggling with depression, confusion and chronic fatigue—caused, according to my doctors, by deep and unrelenting stress. My rheumatologist told me that I had better find some way to inner peace or my health would be destroyed.

My guides were my priest, my therapist and, surprisingly, Dante Alighieri. Killing time in a bookstore one day, I read the first canto of “Inferno,” in which the frightened and disoriented Dante comes to himself in the dark wood, all paths out blocked by savage animals.

Yes, I thought, that’s exactly what this feels like. I kept reading and didn’t stop. Several months later, after much introspective prayer, counseling and completing all three books of “The Divine Comedy,” I was free and on the road to recovery. And I was left awe-struck by the power of this 700-year-old poem to restore me.

This will startle readers who think of “The Divine Comedy” only as the “Inferno” and think of the “Inferno” only as a showcase of sadistic tortures. It is pretty gory, but none of its gruesomeness is gratuitous. Rather, the ingenious punishments that Dante invents for the damned reveal the intrinsic nature of their sins—and of sin itself, which, as the poet says, makes “reason slave to appetite.”

On the spiral journey downward into the Inferno, Dante learns that all sin is a function of disordered desire—a distortion of love. The damned either loved evil things or loved good things—such as food and sex—in the wrong way. They dwell forever in the pit because they used their God-given free will—the quality that makes us most human—to choose sin over righteousness.

The pilgrim’s dramatic encounters in the “Inferno”—with tormented shades such as the adulterous Francesca, the prideful Farinata and the silver-tongued deceiver Ulysses—offer no simplistic morals. They are, instead, a profound exploration of the lies we tell ourselves to justify our desires and to conceal our deeds and motives from ourselves.

This opens the pilgrim Dante’s eyes to his own sins and the ways that yielding to them drew him from life’s straight path. The first steps to freedom require honestly recognizing that one is enslaved—and one’s own responsibility for that bondage.

The second stage of the journey begins on Easter morning, at the foot of Mount Purgatory. Dante and his guide, the Roman poet Virgil, stagger out of the Inferno and begin the climb to the summit. If “Inferno” is about recognizing and understanding one’s sin, “Purgatory” is about repenting of it, purifying one’s will to become fit for Paradise.

Like all the redeemed souls beginning the ascent, Dante girds himself with a reed symbolizing humility. This is a truth every 12-stepper knows: Alone, we are powerless over our addictions.

But we aren’t entirely powerless. On the Terrace of Wrath, where penitents must purge themselves, amid choking black smoke, of their tendency toward anger, the pilgrim meets a shade called Marco, whom he asks to explain why the world is in such a bad state. Marco sighs heavily and points to the poor choices that people make. “You still possess a light to winnow good from evil, and you have free will,” Marco says. “Therefore, if the world around you goes astray, in you is the cause and in you let it be sought.”

With these lines, the poet tells us to stop blaming other people for our problems. As long as we draw breath, we have it within ourselves to change.

Change is difficult and painful. But the penitents of Purgatory endure their purifications with joy because they know that they are ultimately heaven-bound. “I speak of pain,” says a repentant glutton, now emaciated, “but I should say solace.” The holy suffering of these ascetics unites them with Christ’s example and sacrifice, which gives them the strength to bear it.

Dante’s guide Virgil, who represents the best of human reason unaided by faith, can take the pilgrim to the mountaintop, but he cannot cross into Paradise. That task falls to Beatrice, the woman whom Dante had adored in life and in whose beautiful countenance young Dante saw a glimmer of the divine.

When he meets Beatrice at the summit, Dante confesses that after her death, he learned that he should set his heart on the eternal, on a love that cannot perish. But he forgot this wisdom and made his goal the pursuit of what Beatrice calls “false images of the good.” This confession and his abject sorrow open the door for Dante’s total purification, making him strong enough to bear the weight of heaven’s glory.

“Paradise,” which tracks Dante’s rise with Beatrice through the heights of heaven, is the most metaphysical and difficult of the three books of “The Divine Comedy.” It offers a vision of the Promised Land after the agonies of the purgatorial desert.

Allegorically, “Paradise” shows how we can live when we dwell in love, at peace with God and our neighbors, our desires not denied but fulfilled in harmonious order. It describes in rapturous passages how to be filled with the light and love of God, how to embrace gratitude no matter our condition and how to say, with the nun Piccarda Donati in an early canto, “In His will is our peace.”

The effect all this had on me was dramatic. Without my quite realizing what was happening, “The Divine Comedy” led me systematically to examine my own conscience and to reflect on how I too had pursued false images of the good.

A portrait of Dante from the late 16th century.  National Gallery of Art

I learned how I had been missing the mark in my vocation as a writer. My eagerness to chase after new ideas before I had mastered old ones was a form of intellectual gluttony. The workaholic tendencies I considered a sign of my strong professional ethic were, paradoxically, a cover for my laziness; the more time I spent writing, the less time I had for the mundane tasks necessary for an orderly life.

Most important of all, reading Dante uncovered the sin most responsible for my immediate crisis. Family and home ought to have been for me icons of the good—that is, windows into the divine—but without meaning to, I had loved them too much, seeing them as absolute goods, thereby rendering them into idols. They had to be cast down, or at least put in their proper place, if I was going to be free.

And “The Divine Comedy” persuaded me that I was not helplessly caught by my failings and circumstances. I had reason, I had free will, I had the assistance of good people—and I had the help of God, if only I would humble myself to ask.

Why did I need Dante to gain this knowledge? After all, my confessor had a lot to say about bondage to false idols and about how humility and prayer can unleash the power of God to help us overcome it. And at our first meeting, my therapist told me that I couldn’t control other people or events, but, by the exercise of my free will, I could control my response to them. None of the basic lessons of the Comedy was exactly new to me.

But when embodied in this brilliant poem, these truths inflamed my moral imagination as never before. For me, the Comedy became an icon through which the serene light of the divine pierced the turbulent darkness of my heart. As the Dante scholar Charles Williams wrote of the supreme poet’s art: “A thousand preachers have said all that Dante says and left their hearers discontented; why does Dante content? Because an image of profundity is there.”

That image is what Christian theologians call a “theophany”—a manifestation of God. Standing in my little country church this past January on the Feast of the Theophany, the poet’s impact on my life became clear. Nothing external had changed, but everything in my heart had. I was settled. For the first time since returning to my hometown, I felt that I had come home.

Can Dante do this for others? Truth to tell, it is impossible for me, as a believing (non-Catholic) Christian, to separate my receptiveness to the poem from the core theological vision both Dante and I share.

But the Comedy wouldn’t have survived so long if it were just an elaborate exercise in morality and Scholastic theology. The Comedy pulses with life, and it bears witness in its luminous lines and vivid tableaux to the power of love, the deathlessness of hope and the promise of freedom for those who have the courage to take the first pilgrim step.

Over Lent, I led readers of my blog on a pilgrimage through “Purgatory,” one canto a day. To my delight, a number of them wrote afterward to say how much Dante had changed their lives. One reader wrote to say that she quit a three-decade smoking habit while reading “Purgatory” over Lent, saying that the poem helped her to think of her addiction as something that she could be free of, with God’s help.

“I’ve had the sensation of maddeningly stinging, prickling skin during the nicotine withdrawal phase when I’ve tried to quit before,” she said, “but reading Dante helped me to imagine the sensation as a cleansing fire.”

Michelle Togut, a Jewish reader in Greensboro, N.C., told me that she was surprised by how contemporary the medieval Italian poet seemed. “For a work about what supposedly happens after you die, Dante’s poem is very much about life and how we choose to live it,” she said. “It’s about spurning our idols and taking a long, hard look at ourselves in order to break out of the destructive behaviors that keep us from both G-d and the good life.”

The practical applications of Dante’s wisdom cannot be separated from the pleasure of reading his verse, and this accounts for much of the life-changing power of the Comedy. For Dante, beauty provides signposts on the seeker’s road to truth. The wandering Florentine’s experiences with beauty, especially that of the angelic Beatrice, taught him that our loves lead us to heaven or to hell, depending on whether we are able to satisfy them within the divine order.

This is why “The Divine Comedy” is an icon, not an idol: Its beauty belongs to heaven. But it may also be taken into the hearts and minds of those woebegone wayfarers who read it as a guidebook and hold it high as a lantern, sent across the centuries from one lost soul to another, illuminating the way out of the dark wood that, sooner or later, ensnares us all.

(Blogger’s Note: The two books, The City of Man and In God We Trust, are both structured on Dante’s Divine Comedy.)

Gross Output Statistics

Chad Crowe

A new macroeconomic statistic is being deployed today to complement GDP (Gross Domestic Product), the number we use to measure economic growth. Why pay attention to gross output? Because GDP presents many problems and is often an inaccurate measure of actual economic productivity (see previous post: Phony Statistics). For example, if you pay someone to dig a hole and then pay them to fill it back in, GDP goes up by both payments, but obviously the economy has not grown at all, money has just been shifted from your pocket to the hole digger’s. Gross output gives a better indication of real economic change and is more responsive to the business cycle.

GDP is a useful measure of a country’s standard of living and economic growth. But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.

In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship. GDP data at the end of 2013 put consumer spending first in importance (68% of GDP), followed by government expenditures (18%), and business investment third (16%). Net exports (-2%) makes up the difference.

Thus journalists and many economic analysts report that “consumer spending drives the economy.” And they focus on retail spending or consumer confidence as the critical factors in driving the economy and stock market. There is an underlying anti-saving mentality in this analysis, as evidenced by statements frequently made during debates on tax cuts or tax rebates that if consumers save their tax refund instead of spending it, it will do no good for the economy. Presidents including George W. Bush and Barack Obama have echoed this sentiment when they encouraged consumers to spend rather than save and invest their tax refunds.

Although consumer spending accounts for about 70% of GDP, if you use gross output as a broader measure of total sales or spending, it represents less than 40% of the economy. The reality is that business outlays—adding capital investment and all business spending in intermediate stages of the supply chain—are substantially larger than consumer spending in the economy. They make up more than 50% of economic activity. The 2012 data are gross output $28,693 billion, and GDP $16,420 billion.

The critical importance of business activity is clear when you look at employment statistics and leading economic indicators. Employees in the consumer side of the economy (retail outlets and leisure businesses) account for about 20% of the labor force, and another 15% work for various levels of government. Yet the vast majority of employees, 65%, work in mining, manufacturing and the service industries.

John Paul II on Modernity

JPIINice quote regarding the vision of John Paul pending his canonization as a saint by the Catholic Church:

“This son of Poland was…a man of global vision with a deeply humanistic soul, forged by what he regarded as the crisis of modernity: a crisis in the very idea of the human person. That crisis, he believed, was not confined to communism’s materialist reduction of the human condition, which he tenaciously fought as a university chaplain, a professor of ethics, a charismatic priest and a dynamic bishop. The crisis could also be found in those Western systems that were tempted to measure men and women by their commercial utility rather than by the innate and inalienable dignity that was their birthright.”

(Full article WSJ)

The Tides of History…

ukraine

…advance and recede. Some interesting Big Think, something we don’t get too often from our political process. From the WSJ:

A West that prefers debt-subsidized welfarism over economic growth will not offer much in the way of an attractive model for countries in a hurry to modernize. A West that consistently sacrifices efficiency on the altars of regulation, litigation and political consensus will lose the dynamism that makes the risks inherent in free societies seem worthwhile. A West that shrinks from maintaining global order because doing so is difficult or discomfiting will invite challenges from nimble adversaries willing to take geopolitical gambles.

What Samuel Huntington Knew

The dictators are back. The political scientist saw it coming.

‘What would happen,” Samuel Huntington once wondered, “if the American model no longer embodied strength and success, no longer seemed to be the winning model?”

The question, when the great Harvard political scientist asked it in 1991, seemed far-fetched. The Cold War was won, the Soviet Union was about to vanish. History was at an end. All over the world, people seemed to want the same things in the same way: democracy, capitalism, free trade, free speech, freedom of conscience, freedom for women.

“The day of the dictator is over,” George H.W. Bush had said in his 1989 inaugural address. “We know what works: Freedom works. We know what’s right: Freedom is right.”

Not quite. A quarter-century later, the dictators are back in places where we thought they had been banished. And they’re back by popular demand. Egyptian strongman Abdel Fatah al-Sisi will not have to stuff any ballots to get himself elected president next month; he’s going to win in a walk. Hungarian Prime Minister Viktor Orbán presides over the most illiberal government in modern Europe, but he had no trouble winning a third term in elections two weeks ago.

In Turkey, Recep Tayyip Erdogan has spent recent months brutalizing protesters in Istanbul, shutting down judicial inquiries into corruption allegations against his government, and seeking to block Twitter, YouTube and Facebook, the ultimate emblems of digital freedom. But his AKP party still won resounding victories in key municipal elections last month.

And then there is Russia. In a Journal op-ed Monday, foreign-policy analyst Ilan Berman pointed out that Russia had $51 billion in capital flight in the first quarter of 2014, largely thanks to Vladimir Putin‘s Crimean caper. That’s a lot of money for a country with a GDP roughly equal to that of Italy. The World Bank predicts the Russian economy could shrink by 2% this year. Relations with the West haven’t been worse since the days of Yuri Andropov.

But never mind about that. Mr. Putin has a public approval rating of 80%, according to the independent Levada Center. That’s up from 65% in early February.

Maybe it’s something in the water. Or the culture. Or the religion. Or the educational system. Or the level of economic development. Or the underhanded ways in which authoritarian leaders manipulate media and suppress dissent. The West rarely runs out of explanations for why institutions of freedom—presumably fit for all people for all time—seem to fit only some people, sometimes.

But maybe there’s something else at work. Maybe the West mistook the collapse of communism—just one variant of dictatorship—as a vindication of liberal democracy. Maybe the West forgot that it needed to justify its legitimacy not only in the language of higher democratic morality. It needed to show that the morality yields benefits: higher growth, lower unemployment, better living.

Has the West been performing well lately? If the average Turk looks to Greece as the nearest example of a Western democracy, does he see much to admire? Did Egyptians have a happy experience of the democratically elected Muslim Brotherhood? Should a government in Budapest take economic advice from the finance ministry of France? Did ethnic Russians prosper under a succession of Kiev kleptocrats?

“Sustained inability to provide welfare, prosperity, equity, justice, domestic order, or external security could over time undermine the legitimacy of even democratic governments,” Huntington warned. “As the memories of authoritarian failures fade, irritation with democratic failures is likely to increase.”

The passage quoted here comes from “The Third Wave,” the book Huntington wrote just before his famous essay on the clash of civilizations. The “wave” was a reference to the 30 or so authoritarian states that, between 1974 and 1990, adopted democratic institutions. The two previous waves referred to the rise of mass-suffrage democracy in the 1830s and the post-Wilsonian wave of the 1920s. In each previous case, revolution succumbed to reaction; Weimar gave way to Hitler.

Huntington knew that the third wave, too, would crest, crash and recede. It’s happening now. The real question is how hard it will crash, on whom, for how long.

A West that prefers debt-subsidized welfarism over economic growth will not offer much in the way of an attractive model for countries in a hurry to modernize. A West that consistently sacrifices efficiency on the altars of regulation, litigation and political consensus will lose the dynamism that makes the risks inherent in free societies seem worthwhile. A West that shrinks from maintaining global order because doing so is difficult or discomfiting will invite challenges from nimble adversaries willing to take geopolitical gambles.

At some point the momentum will shift back. That, too, is inevitable. The dictators will err; their corruption will become excessive; their cynicism will become transparent to their own rank-and-file. A new democratic wave will begin to build.

Whether that takes five years or 50 depends on what the West does now. Five years is a blip. Fifty is the tragedy of a lifetime.

Fed Gambles

images …with your future.  From the WSJ:

In Going Long, the Fed Is Short-Sighted

The Fed is clearly doing everything it can, at the expense of small savers, to provide the U.S. Treasury with minimal borrowing costs to help it finance a profligate administration and Congress.

Stock and bond traders spent most of last year in a state of high anxiety over what would happen when the Federal Reserve began “tapering” its monthly $85 billion purchases of Treasurys and mortgage-backed securities. But when the tapering was actually announced in December, the Dow Jones Industrial Average rose sharply, apparently out of relief from all the suspense. Today, after various fluctuations including last week’s swoon, the Dow is pretty much where it was back then.

The taper this month will take the purchases down to $55 billion, $30 billion in Treasurys and $25 billion in the tainted mortgage-backed securities that were the product of Uncle Sam’s “affordable housing” fiasco of the 2000s. So far, the worst fears of the markets haven’t happened.

Why not? One reason may be that the Fed isn’t tapering as much as the numbers might indicate.

While the Fed is buying fewer securities, those it is buying have longer maturities. So the Fed’s purchases, though shrinking, are relieving banks and the Treasury from a higher proportion of their risks.

Numbers compiled by the Federal Reserve bank of St. Louis record the lengthening of Treasury maturities in the Fed’s ballooning portfolio. The face value of that portfolio now stands at something over $2.3 trillion, of which bonds with maturities of more than 10 years account for 26%, compared with 18% only four years ago. Maturities between five and 10 years now account for 37%, versus 26% in 2010. But maturities from one to five years have dropped to 37% from 42%. Short-term notes, 91 days to a year, ran around 23% of holdings in the pre-2008 years. Today, they are zero.

This might all sound rather arcane, but longer maturities mean that the Fed is buying more risk. That mitigates whatever tightening effect tapering might have on the markets.

John Butler, a fund manager for Amphora Commodities in London, has commented that by buying a greater proportion of longer-dated securities from the banking system and thus relieving bankers of risk means that monetary policy may be no more tighter than it was before tapering. That would be debatable considering the substantial $10 billion increments the Fed is removing from the “buy” side of the Treasury and MBS side of the market each month. But it certainly can be said that by relieving banks and the Treasury of some of their long-term risk, the Fed is softening the market impact of tapering.

Long bonds normally return greater yields than shorter-term securities because in a fiat money system subject to bouts of inflation, they carry greater risk. Thanks in part to the Fed’s purchases, the 10-year Treasury is currently yielding less than 3%, which doesn’t offer much protection against a future inflation loss.

At the Fed’s target of 2% annual inflation (which the CPI is currently undershooting if you believe those numbers), a 10-year Treasury with a 2.75% coupon would net less than 1% at maturity. If inflation rises above 3% it becomes a loser and from 5% inflation on up it becomes a big loser. Even a one-year spike of 10% in a decade of otherwise modest inflation could produce a loss at maturity for bonds with the remarkably low coupons Treasurys carry today.

The Fed has made no secret of its plans to go long, but the whole concept of “quantitative easing,” including the term itself, is shrouded in obfuscation. While the Fed says its policies are a form of economic stimulus, any such effect is far less obvious than what is plainly visible. The Fed is clearly doing everything it can, at the expense of small savers, to provide the U.S. Treasury with minimal borrowing costs to help it finance a profligate administration and Congress.

Banks, especially the big ones, aren’t doing so badly either. According to the Federal Deposit Insurance Corp., the banking industry had record earnings of $154.7 billion in 2013. The largest, “systemically important” giants have an added fillip in that their too-big-to-fail designation and close connections with the Fed reduce their borrowing costs versus their less-favored brethren. The Fed pays a quarter of a percentage point to borrow from the banks the money it uses for supporting the Treasury and the mortgage market under “quantitative easing.” That pads bank earnings as well.

So everyone wins, right? Well, except maybe for the Fed itself, and of course savers.

The Fed has put itself in a position that offers no easy way out. If credit demand rises and that huge holding of excess bank reserves finds its way into the global economy, it could trigger inflation in excess of the Fed’s strange 2% target, and it could happen fast. The Fed could find itself sitting on a lot of devalued Treasury and mortgage-backed debt that would lose money even if held to maturity.

Who knows what the world will look like 10 years from now, or even next week? At least the Fed has an incentive to try to contain inflation. But given the size of the bank reserves already exploded by the Fed, maybe it already has failed in that task.

Easy Money

ezmoney

Wanna know what’s driving inequality? While failing to stimulate Main Street…

Recent quote by economist and former Treasury Secretary Lawrence Summers from the Washington Post:

“In the face of inadequate demand, the world’s primary strategy is easy money. Base interest rates remain at essentially floor levels throughout most of the industrial world. While the United States is tapering quantitative easing, Japan continues to ease on a large scale and Europe seems to be moving closer to taking such a step. All this is better than the kind of tight money that in the 1930s made the Depression great. But it is highly problematic as a dominant growth strategy.

“We do not have a strong basis for supposing that reductions in interest rates from very low levels have a large impact on spending decisions. We do know that they strongly encourage leverage, that they place pressure on return-seeking investors to take increased risk, that they inflate asset values and reward financial activity. The spending they induce tends to come at the expense of future demand. We cannot confidently predict the ultimate impacts of the unwinding of massive central bank balance sheets on markets or on the confidence of investors. Finally, a strategy of indefinitely sustained easy money leaves central banks dangerously short of response capacity when and if the next recession comes.”

What we see here is the continuation of a policy that:

  1. rewards leveraged risk taking,
  2. punishes saving,
  3. creates asset bubbles,
  4. discourages job creation,
  5. and puts us all at greater risk of a economic correction.

All this to save a few politicians’ and bureaucrats’ hides for their egregious errors in the past (and future!).

 

FREE Lunch!

IGWT-Kindle-Cover

Who said there’s no such thing as a FREE lunch?

FREE eBook download for *Two Days* only. This weekend, April 12&13, download a FREE copy of In God We Trust: A Novel of American Politics from Amazon.com (a $10 value):

Okay, so it won’t feed your belly, but maybe it’ll satisfy your soul…

Click here or the book cover to go to Amazon…

A chronicle of our times based on real events, In God We Trust is a story of political intrigue, religious and Freemason conspiracies, and the corruption of money. It’s the story of Dante Jefferson Washington, a young, black, religious conservative and Deputy Chief of Staff to South Carolina Senator Winston J. Sinclair. Dante’s ambitions for public service soon become entangled in the unholy alliance of money, politics, and religion that define our national political dysfunction. His journey echoes that of his Italian namesake in The Divine Comedy.

Dante pursues his Beatrice in a former college classmate, a beautiful immigrant medical student caught between her British Christian and Pakistani Muslim heritage. Their lives and those of their two closest friends are torn apart by the disaster of 9/11 and the war that follows.

——-

The author is a prize-winning political scientist and economist. The political narrative is informed by recent research into national partisan polarization that challenges and dispels some of the popular myths and ideological stereotypes promoted by both party extremes.

What is this book about?
On the plot level it’s about our current political dysfunction seen through the eyes of a “coming-of-age, loss of innocence” protagonist. It is also a mystery of conspiracies of Freemasons, religious orders, and backroom politics. On a timeless, philosophical level it’s about whether the social order should be derived from the laws of a higher power or from the laws established by man’s reason. Even if one rejects the idea of a higher power, the religions of the Book then reflect the wisdom of the ages, so the question is to what extent man’s enlightenment improves or supplants that wisdom of the ages. The answer is unclear and worth contemplating…

 

People’s Capitalism

class-warfare-07

Finally. The WSJ finds somebody who thinks outside the box of economic obsolescence. The constraints on capitalism have been evident for almost 200 years, but the socialists just get it completely backwards: we don’t need state capitalism, we need democratic capitalism. Marx thought nobody should be a capitalist, but the more obvious solution is that if capitalism works, then it must work for everybody. Everybody should be a worker AND a capitalist. How else to survive in a capitalist world?

What’s more, capital accumulation works on the upside and the downside: It empowers people to produce and create wealth while capital assets as savings also protect us from the vicissitudes of a risky, uncertain world, obviating the need for expanding inefficient state entitlement programs.

Capital ownership is not a new idea, but it gets buried under the morass of the neoclassical debate over government vs. business. And in the 21st century the constraints on tax and redistribution and its negative effects on wealth creation should be obvious to all.

From the WSJ:

Capital for the Masses

Thomas Pikettey’s new book from the left provides unwitting support for private retirement accounts.

‘Capital in the 21st Century,” by French economist Thomas Piketty —its title inviting comparison with Karl Marx’s “Das Kapital”—has electrified the intellectual left in the U.S. since its English publication in March. The book is bold, brilliant and perfectly aligned to the current obsession with economic inequality.

Mr. Piketty argues that, in modern market economies, private returns on capital investment are systematically higher than the rate of growth of income and output, and that the difference explains the increase in inequality. A fortunate few derive their income from capital: Some are celebrity capitalists like Warren Buffett or Bill Gates but most are mere business executives who extract enormous salaries from corporate earnings. Capital returns enable them to accumulate wealth at far higher rates than the mass of men whose wages grow no faster than the economy or their own productivity.

Mr. Piketty believes that capital divergence is natural and inexorable and that the only effective corrective is highly progressive taxes on investment income and wealth, preferably on a global basis to forestall capital flight to low-tax jurisdictions.

“Capital” is a serious work that merits careful consideration and vigorous debate. Indeed the book’s rhapsodic reception is already instructive in an unintended way. For the left that is now extolling “Capital” long ago lost interest in capital ownership, and in recent years ferociously opposed policies for democratizing capital advanced by the right.

That story begins with the 1976 essay of Peter Drucker in the Public Interest (later expanded to a book) on “pension fund socialism.” Drucker observed that the growth of invested pension funds—corporate, union, public employee, professional and individual—had made wage earners the owners of one-third, soon to be one-half, of the equity capital of American industry.

“The U.S., without consciously trying, has ‘socialized’ the economy without ‘nationalizing’ it,” Drucker wrote. Capital investment was better for workers than owning just their own firms because it offered higher returns through trading and diversification—advantages that, Drucker suggested, could be improved with earlier vesting and portability. The corporate income tax, he added, had become exceedingly regressive, because its rate was much higher than that on low-income pensioners—eliminating it, at least for pension holdings, would be a great stroke for income equality.

The left was contemptuous. Writing in the New York Review of Books, Jason Epstein pronounced Drucker’s book “the sort of torpid whimsy that high-price business consultants concoct to amuse their clients.” Hadn’t Drucker noticed that the stock market was flat while the consumer-price index was soaring (this was 1970s stagflation)? Corporations, Mr. Epstein opined, were ripping off poor pensioners just as effectively as the then-notorious New York City politicians who had diverted city pension funds.

In the ensuing decades, academic and think-tank economists, most of them right of center, put forth a succession of proposals for transforming Social Security from a wage-transfer program (from workers to retirees) to one of real capital investment and heritable personal ownership. The aims were to anticipate the retirement of baby boomers, improve on Social Security’s already poor returns on payroll taxes, increase national savings, and promote widespread ownership of productive capital.

President George W. Bush campaigned for personally owned and invested Social Security accounts in 2005. He was crushed by an avalanche of objections from progressive intellectuals, AARP lobbyists and Democratic politicians. The objections ran the gamut from high brokerage fees to consumer confusion to corporate self-dealing. But the central, ultimately decisive argument was that exposing average folks to the vicissitudes of stocks and bonds would be tantamount to shredding the social contract.

“Capital” is a comprehensive refutation of that argument. If returns on capital are as superior to the growth of GDP and wages as Mr. Piketty has found, then short- and medium-term fluctuations are a detail. They can be managed through classic diversification, as practiced by many progressive professors in their own TIAA-CREF accounts. Social Security can be divided into a minimum tax-financed guarantee augmented with personally owned, professionally managed investments like TIAA-CREF’s. Nations such as Chile with capitalized pension systems have employed these and other approaches with little fuss and much success.

Nor do Mr. Piketty’s other concerns help the opponents of capitalized pensions. He believes that corporate insiders often reap large windfalls while outside investors stand helplessly (or ignorantly) by. Yet outsiders have earned much more from corporate investments than from their own wages or Social Security benefits, and pension funds have fueled many efforts to de-feather executive nests. He shows that the earned fortunes of great entrepreneurs become dramatically large over time—but that is due to the value of time and the arithmetic of compounding, which are equally available to the most diminutive capitalist.

Yet Mr. Piketty has no interest in expanding capital ownership: It doesn’t even make his list of inferior alternatives, and he dismisses capitalized pensions with a few uncharacteristic rhetorical slights. Like others on the left, he seems to have concluded that the only way to promote economic equality is confiscatory taxation—redistribution of capital returns rather than wider distribution of capital ownership. After Marx’s idea of comprehensive state ownership of the means of production proved to be hellacious and tyrannical, progressive attentions turned in a different direction. They would leave ownership—with all of its risks and tribulations—alone, and control its rewards through taxation and regulation.

But redistribution of capital returns is easier to describe in a book than to accomplish in practice, even if one sets aside, as Mr. Piketty largely does, the incentive and growth effects of high tax rates. Taxation and regulation are shaped by powerful, conflicting pressures that may democratize capital returns—or, just as easily, may protect and amplify them more than corporate managers could possibly do on their own. The statist intellectual imagines redistributing capital profits while leaving owners with the losses, but the opposite—profits for owners and managers, losses for taxpayers—has been frequently observed in the wild.

That is not Mr. Piketty’s teaching but it shouts from his pages. “Capital” begins with luminous excursions into intellectual history and economic theory, building to a monumental empirical demonstration employing original data laboriously assembled over many years. It then culminates in a proposal for global surveillance and taxation of individual wealth that would astonish a World Federalist. The only hope for social justice in the modern world is utopia: “political integration . . . not within the reach of the nation-states in which earlier social compromises were hammered out.”

Mr. Piketty is a prodigious scholar and likable writer. Here’s hoping that his labors will promote an end that was no part of his intention: to stimulate the progressive left to rethink its hostility to broadening the ownership of capital.

Cheap Capital + Expensive Labor = ???

Interest-Rate-Grinch Low interest rates aren’t working? Depends on who you talk to. They’re working very well for corporations, banks, and leveraged asset holders, not so well for workers and savers. The only response I can add to this essay is, “Duh.”

From the WSJ:

Soaring Profits but Too Few Jobs

Low interest rates aren’t working, but we need a debate about what will.

Facts often speak for themselves, but sometimes they scream out at us. That is what the employment market is doing.

Today, 75 months after the Great Recession began, 57 months after it ended, and 32 months after real gross domestic product surpassed its previous high, fewer Americans have jobs than in December 2007.

Before the recession, the average duration of unemployment was about 16 weeks. It then surged to more than 40 weeks in 2011 and still stands at 37 weeks today. The long-term unemployed (27 weeks or more) constitute 37% of the total, and research by Princeton’s Alan Krueger, Judd Cramer and David Cho suggests that the odds of these Americans ever regaining permanent full-time jobs are dismal.

During the recession, 60% of job losses occurred in middle-wage occupations paying between $13.83 and $21.13 per hour, while 21% of losses involved jobs paying less than $13.83 hourly. During the recovery, however, only 22% of new jobs paid middle wages while fully 58% were at the lower-wage end of the scale. In other words, millions of re-employed workers have experienced downward mobility.

Median household income fell for four consecutive years (2008-11) before making marginal gains in 2012 and 2013. The income of the median household now stands 6.1% lower than it was at the beginning of the Great Recession and—remarkably—4.4% lower than when it ended.

According to a report last week from the Commerce Department, corporate profits after taxes in the fourth quarter of 2013 rose to an annual level of $1.9 trillion—11.1% of GDP, a postwar high. Meanwhile, total compensation—wages and benefits such as health insurance and pensions—fell to their lowest share of GDP in at least 50 years. From December 2007 through the third quarter of 2013, the compensation share of national GDP declined to 61% from 64%. A simple calculation shows that if compensation had remained at the 2007 share, workers would have earned $520 billion more in 2013.

There’s no end in sight. The Wall Street Journal’s Justin Lahart reported recently that analysts expect profits for the S&P 500 to grow by 7.4% in 2014, far faster than nominal GDP. So profits will once again command a larger share of national output. Some of this, he says, reflects short-term factors. Persistently low interest rates have allowed companies to refinance debt, cutting interest costs even as they have increased net debt for 14 consecutive quarters. Moreover, companies have been able to offset gains in gross profits with losses incurred during the recession, reducing their effective tax rates.

But less cyclical trends are at work as well. Companies have not boosted hiring in line with revenues, or wages in line with productivity. As Richard Cope, the CEO of a rapidly growing firm, told this newspaper’s Jonathan House, “Businesses are sitting on tons of cash . . . and they’re choosing to invest their capital in hardware, rather than hiring.” The reason: They believe that “investing in technology is likely to have [a] better effect on sales than hiring more people.” But even these investments slowed in 2013 after robust gains in the years immediately following the recession.

Economists don’t agree about why the recovery has been so grindingly slow. Let me offer my own non-economist’s suggestion: However necessary a low-interest-rate regime may have been at the beginning of the recovery, it has moved through a phase of diminishing returns, which have now turned negative.

The current regime has allowed the banking system to recover and spurred gains of 250% in the equities markets from their spring 2009 low. No doubt the “wealth effect” boosted consumption among those fortunate enough to hold substantial amounts of stock. Homeowners who have been able to refinance have benefited as well.

That’s the upside. But the downside has been sizable. Low interest rates have reduced the purchasing power of retirees struggling to supplement fixed incomes with decent returns on low-risk investments. And the low rates have altered business decisions, at least at the margin. Today’s interest-rate regime lowers the cost of capital—and therefore of capital investment relative to labor. To be sure, the substitution of technology for labor is a continuing process. But the pace of that substitution is crucial for the job market, and current policies are having the unintended effect of accelerating it, further retarding job creation.

We should be having a robust national discussion about these trends, which polls say are of intense concern to the American people. Instead, Republicans are banging away at the Affordable Care Act while Democrats are busy scheduling votes on a grab bag of subjects designed to boost turnout from the party’s base in the fall elections. The economic problems we face are getting lost in the partisan din.

We need new policies—not just monetary, but fiscal, tax and labor-market policies as well—that focus relentlessly on aligning growth with job creation and compensation with productivity. The alternative is more of the same for average American households.

————–

Time to think outside the box.

What, Me Worry?

M policyUnfortunately, this is not an April Fool’s joke.

Central bank strategy, and what we refer to now as “forward guidance” is a never-ending puzzle. In divining future Fed policy we may also need to consider the international ramifications. The three major currency blocs in the free world today are the Japanese yen, the Euro and the US dollar.

For reasons of historical experience, both the Bank of Japanese (BoJ) and European Central Bank (ECB) have been far more reticent to lower interest rates and provide excess liquidity relative to the Fed in the wake of the world-wide financial crisis. But the US has pushed hard for coordination among the central banks to prevent wide exchange rate fluctuations through competitive depreciation of currencies. In the last year, the Fed’s argument has persuaded both the BoJ and now the ECB to provide more credit to their banking systems to stimulate their economies.

One can perceive a general strategic vision here: coordinated devaluation of currencies to reduce debt liabilities and forestall rising unemployment. This makes debt less burdensome while devaluing the real value of assets priced in those currencies. In other words, the bad debts of the financial crisis get absorbed by all the citizens of the world’s most productive economies, hopefully without them noticing. It’s the hidden inflation tax through gradual currency devaluation.

But one wonders who is going to blink first when it comes to tightening up monetary policy in the face of rising prices? The virtue of a stealth devaluation is that the inflation rates are obscured. How many people notice when their dollar  buys fewer European or Asian goods? Of course, financial markets will notice as liquidity flies to the protection of real assets, something that has been occurring  for the past several years (that’s where rising prices in select real estate, farm land, and luxury goods are coming from).

Will the Fed risk rising unemployment to stop perceived inflation? I doubt that will be politically feasible. The BoJ has engineered a swift depreciation of the yen, but one wonders what yen holders have to show for it. And will the ECB tolerate higher inflation or will dollar holders begin to abandon their large dollar reserves in the face of persistent depreciation? Trying to stimulate the real economy by manipulating currency values is a very tricky balancing act.

From the WSJ:

The Fed’s Missing Guidance

Janet Yellen should make clear what the central bank will do if inflation exceeds the 2% target rate.

Janet Yellen, like Ben Bernanke before her, believes that the Federal Reserve should communicate the reasons for its current policies and the strategy of its future policy actions. And so we have been told the basic plans are for gradually reducing the volume of large-scale asset purchases, and for keeping short-term interest rates low—”for some time,” as she said in her speech on Monday—in order to stimulate employment and raise the inflation rate toward 2%.

But the Fed’s leaders should also be telling the public and financial markets what they think about the risk that future inflation could rise substantially above the Fed’s 2% target—and what the Fed would do to prevent such inflation or reverse it if that occurs.

Experience shows that inflation can rise very rapidly. The current consumer-price-index inflation rate of 1.1% is similar to the 1.2% average inflation rate in the first half of the 1960s. Inflation then rose quickly to 5.5% at the end of that decade and to 9% five years later. That surge was not due to oil prices, which remained under $3 per barrel until 1973.

Although history teaches that a rapid expansion of the money supply leads eventually to rising inflation, the current inflation risk is not, as many people assume, that the Fed’s policy of quantitative easing has greatly expanded the money supply. Although the commercial banks received trillions of dollars of reserves in exchange for the assets that they sold to the Fed, these reserves were not converted into money balances but were deposited at the Federal Reserve, which now pays interest on such excess reserves. The broad money supply (M2) increased only about 6% in the past year.

The real source of the inflation risk is that the commercial banks can use their enormous deposits at the Fed to start lending when corporate borrowers with good credit ratings are prepared to borrow. That increase in lending to businesses will be welcomed until the economy is back at full employment.

The big question is how the Fed will respond when the lending is excessive and leads to inflationary increases in demand? The Federal Open Market Committee (the central bank’s policy-making body) and Chairwoman Yellen should reassure the public that the Fed will not tolerate high inflation and will take steps to prevent such a recurrence of rising inflation even if that requires allowing the unemployment rate to rise. To be credible they also should tell the public and the financial markets what policies they will use to limit that inflationary lending.

The Fed’s traditional anti-inflation strategy—raising the federal funds rate at which banks lend to each other—won’t work. Commercial banks have so much in excess reserves that they don’t need to borrow from each other.

As an alternative, the Fed could increase the interest rate paid on excess reserves. This would give commercial banks an incentive to keep their excess reserves on deposit at the Fed.

But this policy would create two problems. It would be politically awkward for the Fed to pay large amounts of interest to commercial banks as a way of discouraging them from lending to businesses and households. It would also be a political problem to pay more interest on the $2.5 trillion of excess reserves than the Fed itself earns on its current portfolio of bonds and mortgage-backed securities.

So paying higher interest rates on excess reserves is not a viable strategy for limiting commercial bank lending, especially if the interest rate has to be raised substantially to limit inflationary pressures.

The Fed has been experimenting with repurchase agreements (known as repos) to manage short-term market interest rates. Repos are essentially short-term sales of securities by the Fed—which suck money out of the financial system—with a promise to buy them back at a price that implies the Fed’s desired interest rate. This allows the Fed to deal with a wide range of financial institutions, not just banks but also primary dealers, money-market mutual funds, etc., and to do so in a way that obscures the interest rate that it is paying.

Repos may obscure the implied interest rate, but the repo strategy will not stop the Fed from losing money when it pays more than it earns on its bond portfolio. To be effective in preventing inflation, the Fed will have to push short-term market rates to a high enough level to deter excessive commercial borrowing. And with higher market rates, the banks still will want to lend to commercial borrowers unless the interest rate on excess reserves also rises substantially.

The alternative to interest-rate strategies is quantitative restrictions on bank lending. One way would be to increase required reserves, making it impossible for the commercial banks to use all of their current excess reserves to make loans. The Fed could pay a moderate rate of interest on such newly required reserves, reducing the pain felt by banks on their lost earnings. A different form of quantitative restriction would be to increase substantially the capital requirements imposed on the banks, particularly an increase in the leverage ratio that relates bank capital to all of the bank’s assets rather than a risk-weighted measure of assets.

I am not advocating either of these quantitative restrictions. But I think it is important for the Fed to explain now how it will prevent the banks from using their current short-term reserve assets to finance inflationary commercial lending in the future. If the public is convinced that the Fed is really committed to price stability, it will be less costly in unemployment to prevent or reverse future increases in inflation.

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