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Snaking the Scotch (crossposted from Asia Times Online)

Snaking the Scotch

Ethnocentrism is the snake in Christianity’s garden, and last week it slithered into the Church of Scotland. It took the form of a screed denying the special claim of the Jewish people to the Land of Israel.

By no coincidence, the most successful Christian communities embrace the State of Israel, while the least successful ones abhor it. Almost four-fifths of Americans identify themselves as Christians, for example and two out of five worship every week. Less than two-fifths of Britons say they believe in God, by contrast, and only one out of eight attends weekly services. More than half of Britons never go to church, against only 18% of Americans.
This division is mirrored in attitudes towards the State of Israel. By a margin of nearly five to one, Americans say their sympathies are more with Israel than with the Palestinians, and the proportion is at an all-time high. Britons view Israel negatively by a margin of 65 to 17, and the numbers are similar across the European continent, according to a BBC poll.

We observe eruptions of unabashed Jew-hatred in the European nations most likely to become extinct, notably in Hungary, where the ethnic Hungarian total fertility rate is just 0.83 per female, barely a third of the replacement rate. The third-largest party in the Hungarian parliament, Jobbik, wants to list all Jewish officials of Jewish origin as a national security risk and blames the country’s economic problems on a “Jewish-Bolshevik conspiracy”. The party demonstrated on May 5 in Budapest to denounce the World Jewish Congress, which held its annual meeting in the Hungarian capital.

Hungary’s demographic disaster and Jobbik’s Jew-hatred are extreme cases, to be sure, but existentially challenged nationalities elsewhere in Europe evince a special animus against Jews and the Jewish State. Last week the Church of Scotland issued a report rejecting the notion that the Jewish people had any special claim on the Land of Israel, excoriating Zionism in general and the actions of past and present Israeli governments.

Both the Church of Scotland, the bearer of the Scots Calvinist tradition, and the country itself are a shadow of their former selves. The number of births per year has fallen by half since 1950 (and the number of births to married couples has fallen by four-fifths).

The Church of Scotland is shrinking; it had just 446,000 members in 2010, down from 1,319,000 in 1956. Its numbers shrunk by a quarter between 2001 and 2010, and are now shrinking even faster, by about 5% a year. At this rate its membership will fall by three-quarters in a generation.

Live Births Per Year in Scotland

UK Statistics Office

If we had some Scots, we would still have Scots Presbyterians, if we had some Presbyterians. That is a sad end to a great religious tradition that, among other things, fostered Christian Zionism. It may well have been a Kirk minister, notes the Church of Scotland report, who coined the phrase “a land without people, for a people without land”, referring to Jewish settlement of the then-sparsely populated Land of Israel at the end of the 19th century.

With the specter of disappearance visible at the horizon of a single generation, why is the Church of Scotland so concerned about the Jews’ claim on their historic homeland? One would think it had more urgent concerns. Its report, “The Inheritance of Abraham?,” is a junkyard dog’s assemblage of arguments against a special Jewish claim to the land.

The borders specified by the Bible are not the exact borders of the present state; even if they were, “The lack of detailed archaeological evidence supports the view that the range of scriptural material makes it inappropriate to try to use the Hebrew scriptures to determine an area of land meant exclusively for the Jewish people”; even if there were such evidence, the biblical grant of the land is conditional on a standard of behavior which the Church of Scotland doesn’t think Israel meets; even if the original Zionist concept was valid, it called for equal treatment of all of Israel’s citizens, and the Church of Scotland thinks Palestinian Arabs are badly treated, and so forth. It reads as if the presbyters had conducted a contest for the best excuse to turn the Jews out of Israel, and printed all the responses.

Christian friends from the Reformed tradition in America point to a specific bee in the Church of Scotland’s bonnet, namely the autumnal resurgence of Scots nationalism. The Scottish National Party, the region’s largest, launched a campaign for Scots independence from the United Kingdom in May 2012, with prominent support from Sean Connery and other celebrities. Patriotism might not be the last refuge of a scoundrel, as Dr Johnson said, but tribalism surely is the last refuge of an existentially challenged ethnicity.

As a regional entity clamoring for national status, Scotland imagines itself in a position similar to the Palestinian Arabs and identifies with them. The Irish tend to sympathize with the Palestinians out of the same misplaced nostalgia. Some Catholics conflate the problems of the poor with the misery of the Palestinians, for example Honduras’ Cardinal Andres Rodriguez Murcielago.

There is a great deal of wisdom in this observation: each nation views the other nations through the carnival-mirror of its own preoccupations. But there may be something deeper to the Church of Scotland’s newfound obsession with repudiating the Jews’ claim to the Land of Israel. It denounces Christian Zionism, which it defines (quoting an Arab Christian) as “a movement within Protestant fundamentalism that understands the modern state of Israel as the fulfillment of biblical prophecy and thus deserving of political, financial and religious support.”

That is a canard, for many Christians who could not possibly be characterized as fundamentalists understand Israel in biblical terms.

“Hardly anybody will dispute that the foundation of this state had something to do with the biblical prophecy,” the principal author of the Catechism of the Catholic Church, Christoph Cardinal Schonborn said in 1996. No-one would characterize Cardinal Schonborn as a Protestant fundamentalist.

Like so many other European nations, the Scots are failing as Christians while they fail as a people. Failing Christians cling all the more passionately to their national identity. Writing at the end of World War I, the great German-Jewish theologian Franz Rosenzweig depicted this tragic frame of mind as follows:

Just as every individual must reckon with his eventual death, the peoples of the world foresee their eventual extinction, be it however distant in time. Indeed, the love of the peoples for their own peoplehood is sweet and pregnant with the presentiment of death. Love is only surpassing sweet when it is directed toward a mortal object, and the secret of this ultimate sweetness only is defined by the bitterness of death. Thus the peoples of the world foresee a time when their land with its rivers and mountains still lies under heaven as it does today, but other people dwell there; when their language is entombed in books, and their laws and customers have lost their living power.

Nationalism is the mortal enemy of Christian faith. Michael Wyschogrod, one of Orthodox Judaism’s great theologians, explained it as follows:

As understood by Christianity, a model of dual loyalty develops. The individual belongs both to a nation and to a religion. He is a Frenchman and a Christian or a German and a Christian. As Frenchman or German, he is a member of a national community with territorial and linguistic boundaries. But he is also a member of the supra-national church which has no national boundaries. … The church is a spiritual fellowship into which men bring their national identities because they possess these identities but not because such identities play a role in the church. The church thus understands itself as having universalized the national election of Israel by opening it to all men who, in entering the church, enter a spiritualized, universalized new Israel.

In one sense, Israel is beyond the “laws” of history. It is not subject to the rise and fall of all other peoples and empires, a fact which causes angry philosophers of history whose schemes Israel undermines to refer to it as a fossil not subject to historic destruction.

But at the same time, Israel does not abandon the domain of history. It refuses to exchange its historical and national messianism for a doctrine of individual salvation. Israel refuses to invent the idea of a church which forces men to live in two jurisdictions and to assume two identities: a member of a nation and a member of a church. When such a bifurcated existence is decreed for human life, European wars in which Christian fights Christian, not as Christian but as German, Frenchman or Pole, become possible. That such a church-sanctioned conflict was the rule rather than the exception in the history of Europe was not simply the result of a failure of Christianity. Once religion and nationality are separated, the historical order in which national destinies are realized is almost inevitably de-Christianized.

The nations of Europe stopped having children because they lost their Christian faith (as Mary Eberstadt argues in a brilliant new book, How the West Really Lost God, they also lost their faith because they stopped having children). As Christianity sloughs off the declining peoples of the West, some of them cling instead to ethnic identity. Rosenzweig wrote that once Christianity taught the Gentiles the Hebrew promise of eternal life, they abandoned their ancient fatalism about the inevitable extinction of their tribe.

“Salvation is of the Jews,” said St John: the God of Israel first offers eternal life to humankind. But the newly converted never abandoned their predilection for their own ethnicity. After Christianity taught them about the election of Israel, the Gentiles wanted the same kind election for themselves. In some cases that can lead to philo-Semitism – for example, among the Scots Calvinists of the past century. In other cases it leads to what one might call Election envy, Jew-hatred inspired by jealousy.

What makes America unique, an “almost-chosen people” in Abraham Lincoln’s quip, is the absence of ethnicity. As a nation founded on a covenant rather than an ethnicity it absorbs folk from every ethnicity, and despite the sin of slavery and ugly episodes of racism and xenophobia, America remains less polluted by the original sin of ethnic hatred than any land on earth. That helps explain why Americans instinctively sympathize with the State of Israel.

Asked why they support Israel, most devout American Christians will cite Genesis 12:3: “And I will bless them that bless thee, and curse him that curseth thee: and in thee shall all families of the earth be blessed.” Many will add that the perseverance of the Jewish people despite persecution and hardship shows that the God of the Bible is a God of kept promises, and that God’s faithfulness to the Jews stands surety for His promises to the Christians as well.

As a Jew, I do not tell my Christian friends how to read the Bible (although it is always instructive to compare notes). But there is something else on which we can agree. Every Christian knows that each day, battle is joined afresh against an inner pagan. That is what Christians mean when they say that they must renew their conversion each day.

The inner pagan is not an abstract entity: it is the residual of the nation out of which the Christians believe they were called to theEkklesia/I>, what Eusebius (quoted by Henri de Lubac) called “the tribe of Christians.”

The national life of the Jewish people in its historic homeland stands guard as it were on the flanks of Christianity. The Election of Israel keeps the snake out of Christianity’s garden. Christians who tire of the demands of Christianity and prefer to worship their own ethnicity will rage against the Jewish people as an obstacle to idolatry, while the most devout and self-confident Christians view the continued presence of God’s people as a blessing.

Syria Attack Shows There’s No Alternative to Neutralizing Iran

Update (May 6): The Jerusalem Center for Public Affairs today published  a detailed account of Iran’s plans to take over Syria.

There’s only one way to cut the Gordian Knot of regional conflict in the Middle East, and that is to de-fang Iran–destroy its capacity to make nuclear weapons and destroy the bases of the Revolutionary Guard.

Israel’s reported strike on a stockpile of Iranian missiles near Damascus overnight highlights the extent of Iran’s military presence in Syria. We do not (and will not) know the details, but the series of fireballs that “turned day into night” around the Syrian capital, as one observer told news media, make clear that an enormous amount of ordnance was in place. It was no secret that the Assad regime now depends on Iran and its cat’s paw Hezbollah. Hezbollah chief Hassan Nasrallah declared April 30 that Syria’s civil war had become a regional conflict: “Syria has real friends in the region and the world that will not let Syria fall in the hands of America, Israel or Takfiri (extreme jihadi) groups,” Nasrallah said in a broadcast on Hezbollah’s al-Manar TV channel. “How will this happen? Details will come later. I say this based on information … rather than wishful thinking.”

Israel’s head of military intelligence, Gen. Aviv Kochavi, warned in March that Iran and Hezbollah already had built an army of 50,000 in Syria and planned to double its size. Syria had an estimated 220,000 regular soldiers in 2010, but probably can field less than half that number today; at a prospective strength of 100,000, the Iranian-Hezbollah force would become the dominant military power in Syria, in effect an army of occupation.

The events of the past eighteen hours make clear that Iran intends to use Syria as a base for missile attacks on Israel. The Iranian Fateh-110 missiles can deliver a 1,500 lb. warhead accurately at a distance of 300 km (Tel Aviv is 214 km from Damascus). Iranian Revolutionary Guards launching missiles at Israeli cities from Syria represents a much greater threat to Israel than Hezbollah in southern Lebanon does. Hezbollah is vulnerable to Israeli retaliation; the Iranians don’t care how much Israel might retaliate against their Syrian hosts. Israel had to degrade Iran’s missile capability in Syria. By the end of July 2006, about half of Lebanon’s 1.2 million Shia had fled their homes in the face of Israel’s incursion into the south of the country. Most went to Syria. Things are different now: Syrians are fleeing into Lebanon. A repeat of Israel’s 2006 attack would have catastrophic impact on Hezbollah’s Shia base, which has nowhere to run. And the Israelis, if they are forced back into Lebanon, will not deal with Hezbollah as gingerly as did the Olmert government in 2006.

The Stock Market Rally That Makes You Poorer

Update: Stocks are up big on today’s employment report. In fact, Americans worked less in April than in March: multiply the increase in payrolls by the decline in hours worked, and the total number of working hours fell. Almost all the increase in employment was in retail, hospitality and temp agencies, and probably reflects employers spreading the work around a larger number of workers working fewer hours in order to save on health benefits.

Just after Obama’s re-election we heard Republican leaders explain that Obama had just gotten lucky — the economy was in the recovery phase of a normal business cycle, and Obama caught the right wave. As the stock market rallied through the first four months of 2013 and regained its old peak, the story seemed credible — until a couple of weeks ago, that is.

We’ve had one depressing economic report after another. Employment is barely growing, according to the ADP survey, which showed just 119,000 new jobs created in April and 118,000 in May. The April purchasing managers’ index for manufacturing fell sharply from 54.6 to 52.1 (50 is dead in the water).

The Shadow Government Statistics website calculates the true unemployment rate — the proportion of the working-age population that can work but doesn’t — at 23%. That includes so-called “long-term discouraged workers” not included in the labor force. Even the government’s own broad measure of unemployment still stands at almost 15%, twice the pre-crisis level.

On a GDP basis, the economy grew at an 0.8% rate in the fourth quarter of 2012 and at a 2.5% in the first quarter. That’s just 1.5% without counting inventories. Investment in industrial equipment actually fell during the quarter. It’s an economy that is flying barely above stall speed.

No, Obama didn’t win re-election because the vote happened to occur at the cusp of a normal business cycle recovery. The economy really is that bad. So is Obama. Sadly, so was the Republican ticket.

Why is the economy so bad? According to the usual chatter, it’s because payroll taxes went up and took $140 billion out of personal income during the first quarter. But another big category of personal income — receipts on assets — fell by $125 billion, a hit to personal income almost as big as payroll taxes. And almost all of that was due to lower dividends. It turns out that companies are paying a lot less cash out to stockholders. The S&P 500 dividend per share fell from about $9 to about $8 during the first quarter, and the GDP data indicate that drop occurred throughout the corporate world.

Another sign of economic weakness is that the sales of S&P 500 companies fell by 5% during the quarter. Profits per share, though, were higher. How is the stock market managing to levitate above a busted economy, where the sales growth of top companies can’t even keep up with nominal GDP? Part of the reason is leverage.

Why Does Classical Music Make You Smarter?

Thirty-six million Chinese kids now study classical piano, not counting string and woodwind players. Chinese parents pay for music lessons not because they expect their offspring to earn a living at the keyboard, but because they believe it will make them smarter at their studies. Are they right? And if so, why?

The intertwined histories of music and mathematics offer a clue. The same faculty of the mind we evoke playfully in music, we put to work analytically in higher mathematics. By higher mathematics, I mean calculus and beyond. Only a tenth of American high school students study calculus, and a considerably smaller fraction really learn the subject. There is quite a difference between learning the rules of Euclidean geometry or the solution of algebraic equations: the notion that the terms of a convergent infinite series sum up to a finite number requires a different kind of thinking than elementary mathematics. The same kind of thinking applies to playing classical music. Don’t look for a mathematical formula to make sense of music: what higher mathematics and classical music have in common is not an algorithm, but a similar demand on the mind. Don’t expect the brain scientists to show just how the neurons flicker any time soon. The best music evokes paradoxes still at the frontiers of mathematics.

In an essay for First Things entitled “The Divine Music of Mathematics,” just released from behind the pay wall, I show that the first intimation of higher-order numbers in mathematics in Western thought comes from St. Augustine’s 5th-century treatise on music. Our ability to perceive complex and altered rhythms in poetry and music, the Church father argued, requires “numbers of the intellect” which stand above the ordinary numbers of perception. A red thread connects Augustine’s concept with the discovery of irrational numbers in the 15th century and the invention of the calculus in the 17th century. The common thread is the mind’s engagement with the paradox of the infinite. The mathematical issues raised by Augustine and debated through the Renaissance and the 17th-century scientific revolution remain unsolved in some key respects.

Link to My Appearance Last Night on CNBC’s “The Kudlow Report”: Why the Gold Price Drop is Good

Why the Drop in the Gold Price is Good (for most of usS)

Gold is not an investment, but an insurance policy against the collapse of the dollar. The dollar isn’t going to collapse, despite America’s need to borrow nearly half a trillion dollars a year overseas. That’s because our trade deficit is shrinking, from 6% of GDP in 2006 to 3% today; it well may be a trade surplus by 2020 due to the energy boom. If you have a current account surplus, you can finance a big government deficit for a long time–just look at Japan. The bad news is that the economy is still very weak. The good news is that we can paper over the deficits resulting from a weak economy for the foreseeable future. The price of insurance against dollar doom has fallen. That’s good (don’t you want the cost of your life insurance to fall? The last thing you want is for your life insurance policy to pay out).

The ferocity of the April  gold price plunge, to be sure, probably has to do with fears that Cyprus as well as other cash-strapped sovereigns will be selling gold. That’s bad (for them) but doesn’t affect the rest of us too much.

Gold has a place in the portfolio as a disaster hedge. Just because disasters are less likely now than a year ago doesn’t mean they can’t happen. Lots could go wrong. But a fall in the price of disaster insurance is a good thing.

Goodbye to Blighty?

It’s revolting to watch the outpouring of morbid glee at the death of Baroness Thatcher from the British left–not from Occupy Wall Street fringe elements, but from trade union leaders and senior Labor MPs. London’s Daily Mail today reports:

Paul Kenny, general secretary of the GMB union, said: ‘Mrs Thatcher will be remembered by many for the destructive and divisive policies she reigned over which in the end, even in the Tory Party, proved to be her downfall. Her legacy involves the destruction of communities, the elevation of personal greed over social values and legitimising the exploitation of the weak by the strong.’

Labour shadow pensions minister Gregg McClymont came under fire for ‘condoning’ an inflammatory tweet about the former Conservative prime minister. He was accused of being ‘extremely foolish’ when he described a university student’s political views as ‘spot-on’ following a reference to Lady Thatcher a ‘f***** witch’.

Dancing on the grave of one’s political opponents is unthinkable in American terms. In part this is because any American president bears the dignity of the office of head of state, while a British prime minister is a servant of the sovereign. But that does not explain the eruption of hatred against a dignified, intelligent, and principled woman who led her country longer than any 20th-century prime minister–almost as long as Franklin Roosevelt led the United States. This eruption of hatred is inexcusable. But it is not entirely inexplicable.

The victory of the West in the Cold War would have been impossible without her. The book to read is The President, the Pope and the Prime Minister, by her close adviser and friend John O’Sullivan (I reviewed it when it first appeared in 2007).

Baroness Thatcher was a great woman, one of the few political leaders to change a country’s direction for the better. During the 11 years of her ministry the compound annual growth rate of per capita real national income was 2.5%, compared to just 1.9% during the preceding 11 years of (mainly) Labour governments. She believed in free markets and unleashed a wave of creative destruction that reshaped much of England.

I spent two years in London as a graduate student in the mid-1970s, when the city had a characteristic stink: few had central heating and all the buildings reeked of mildew. Civil servants wore old shirts with frayed collars and smoked their cigarettes down to the stub. Billboards advertised “barley wine” as the drink with the most alcohol for the money. The docklands looked like a post-apocalyptic ruin. When I came back to London as an investment banker in the 1990s, it was a transformed city. The docklands had become prime real estate and the city overflowed with money. Taxi drivers speculated in the real estate market and immigrants from all over Europe flocked to London; there were French bus drivers, Spanish waiters, Portuguese hotel staff, and Polish carpenters. It was a pleasure to hear Jamaican cabdrivers inveigh against the lazy (overwhelmingly white) spongers living on the dole in the Midlands and the north of England, while good jobs went to foreigners.

Last month I stopped briefly in London for business, and found myself hoping that I never would return; it reminds me too much of what might become of us. It is the great capital city of a great nation where the British are entirely marginalized. At the top, Arab and Russian money has turned Knightsbridge and Belgravia and South Kensington into an impossibly priced theme park for absentee owners. At the bottom, what used to be the Cockney London–within earshot of the bells of the Bow Church–has become Little Bengal.

Memo to Jew-Haters on Yom HaShoah: You Are Dying

A man walks into a Jewish restaurant and asks the boss: “How do you prepare your chickens?” “We tell them up front they’re not going to make it,” he replies. To those Italians who voted for Beppe Grillo’s Five Star Alliance, or Greeks who support the Golden Dawn movement, or Jobbik Party voters in Hungary, among others: Permit me to tell you up front that you are not going to make it, either. Your countries are dying because you no longer wish to live. One can “foresee a time when your land with its rivers and mountains still lies under heaven as it does today, but other people dwell there; when your language is entombed in books, and your laws and customs have lost their living power,” to paraphrase Franz Rosenzweig.

These political parties have returned old-fashioned Jew-hatred to the political mainstream. Southern Europe’s economic crisis and social dissolution, the new anti-Semites imagine, is the work of a global conspiracy of Jewish bankers run by the Rothschilds, the Illuminati, and the Freemasons. Beppe Grillo, the recipient of a fifth of the Italian vote in Italy’s February elections, says: “Hitler may have been sick, but the idea of eliminating the Jews was to eliminate their financial dictatorship.” A Jobbik candidate for the European Parliament wrote: “Anti-Semitism is not just our right, but it is the duty of every Hungarian homeland lover, and we must prepare for armed battle against the Jews.” A member of the Greek Parliament for the Golden Dawn read out extracts from the anti-Semitic forgery Protocols of the Elders of Zion.

May I ask you to consider — just for the sake of argument — an alternative explanation? Hypothetically speaking, is it possible that the Jews have nothing at all to do with your misery, but that you are destroying yourselves?

Consider the facts: by 2040, you will have about 60% more elderly dependents than you have now, and about half as many young workers. Your economies will collapse, along with your social safety net. The trajectories in the chart below well may understate the problem. In the United Nations’ low variant, Hungary’s total fertility rate stays above one child per female. Excluding the Roma (Gypsies), though, Hungary’s fertility rate has already fallen to a chillingly low 0.85:

Three European Countries: Elderly (60+) vs. Young (15-24) Population (2000 = 100)

Source: United Nations

You are dying because you wish to die; that is, because you do not wish to rear children. Only 10% of Hungarian men and 12% of Hungarian women are married by age thirty, which is to say that only a tenth of young Hungarians intend to have children. If you don’t have children, you will disappear, Jews or no Jews. Long before you disappear, your economies will collapse under the weight of dependent elderly.

That is enough to make anyone crazy. But there is an obstacle to self-diagnosis: if you have tried to visualize your own extinction, you will have failed. The mind revolts at the prospect of national extinction. We cannot imagine our death as individuals. Sigmund Freud observed: “It is indeed impossible to imagine our own death. … Whenever we attempt to do so we can perceive that we are in fact still present as spectators. In the unconscious every one of us is convinced of his own immortality.” Even less can we imagine that no one will speak our language, sing our songs, laugh at our jokes, nod at our history — that we will not only pass out of earthly existence, but out of all remembrance as well.

We cannot think of a world that has erased us from memory. We could not if we tried, because we require language in order to think, and we cannot think in an extinct language. Our minds are not a tabula rasa, taking the imprint of sense data as it strikes us at random. Perception begins with consciousness, and consciousness is rooted in identity. We hear and see things that have meaning for us. A world without us has no meaning for us, and we have no capacity to perceive it.

Because you Jew-haters cannot conceive of a world from which you have erased yourselves, it is impossible for you to form a rational judgment about your future, and almost as hard to form a rational judgment about your present, which points inexorably to the absence of a future. If you could form a rational judgment, you probably would emigrate, as have 250,000 to 500,000 young Hungarians over the past ten years. And if you cannot form rational judgments, you will make irrational judgments — for example, about a conspiracy of Jewish bankers. Es zol gor nisht helfen (Yiddish: It’s hopeless). That’s why the United States of America is here: we receive the refugees from people who want to live and therefore abandon dying cultures.

The question remains: why are we Jews the subject of your paranoid obsession? Why not a global Chinese conspiracy, for example? There are only 30,000 Jews left in Italy, for example, and fewer than 5,000 in Greece.

May I suggest an explanation? Your obsession is not with the Jews as such, but with your mortality and the imminent extinction of your culture.

You are obsessed with something that no man and no people is capable of imagining, for you will not be a spectator at your own funeral nor a witness to your own national extinction. You anti-Semites may or may not be Christians, but somewhere in the back of your minds you recall John 4:22: “Salvation is of the Jews.” Substitute the word “eternity” for “salvation,” and the origin of your obsession becomes clear. The peoples of the world first acquired the hope of eternal life from the Jews, and Christianity promised the Jews’ salvation to the Gentiles.

You have long since abandoned the promise of Christianity, as your refusal to have children shows. All that remains is your residual envy of the Jewish promise of eternity, death’s envy of life.

The Global Failure of Keynesianism

The world’s central banks are playing leapfrog, each trying to ease faster than the other. Since 2008, the world’s central banks have expanded their balance sheets by a staggering $4.7 trillion. The Federal Reserve’s quantitative easing forced the hand of the Bank of Japan, which earlier this week announced that it would double its rate of securities buying, pushing the 10-year Japanese government bond yield down to an all-time low of 0.43%. The Fed’s easing reduced the U.S. dollar’s exchange rate and boosted U.S. exports, largely at the expense of Japan and Europe. With some of Japan’s top export names at risk of bankruptcy, Japan responded with aggressive easing to reduce the value of the yen. Europe is the big loser, and the European Central Bank this week indicated that it might follow suit.

The central banks have been working straight from the playbook that John Maynard Keynes devised in the 1930s, and it has been a dismal failure. They are competing for a stagnant volume of world trade. Quantitative easing has shifted the pain around the world, but it hasn’t restored growth. Once again, the world has to learn the hard way that Keynesian economics fails. It’s disheartening that no major political party anywhere in the world has articulated a clear alternative.

Many conservatives bought into the market consensus, namely that Fed easing would boost asset prices, asset prices would boost consumption, and higher consumption would drive the overall economy. There was an element of self-consolation in this credulity: if the U.S. economy was indeed recovering, it “explains” the Obama victory last November and takes the Republican leadership off the hook for a devastating defeat. The alternative view — that Obama crushed Romney despite a very weak economy — puts the blame on Republican leaders. The fact is that Obama wasn’t lucky. We did a bad job.

Today’s reports from the Labor Department showed the smallest increase in employment in 10 months at just 88,000 and, more importantly, the lowest labor force participation rate since 1979 at just 63.9%. Americans are dropping out of the labor force because they can’t find work. The Shadow Government Statistics website puts the true unemployment rate (the proportion of Americans who could be working but aren’t) at 23%.

Conservatives (along with the market consensus) gave too much credibility to the supposed recuperative powers of the U.S. economy, and put too much faith in the Federal Reserve’s Keynesian machinations. The Fed has bought nearly $3 trillion of Treasury and mortgage-backed securities since the 2008 crisis, accelerating its purchases in recent months, in order to suppress long-term yields and (especially) the yield on risky securities.

That’s boosted the stock market, but–as we have seen from a week of disappointing economic data–not economic growth. As I wrote in Barron’s March 13, the Fed’s largesse has encouraged investors to lever up existing assets with cheap credit, but not to invest in new plant and equipment:

Optimism about U.S. consumers drove employment gains in February. Evidently the wealth effect from rising equity and home prices has spilled over into employment. About two-thirds of the employment growth came in construction and consumer-related services. This is good for stocks. But you don’t need a growth story to explain the improvement in equities. Leverage is driving stocks. The Fed is persuading businesses to re-lever balance sheets but not to break ground on new plants. Cheap leverage favors existing assets. The recovery remains lopsided with investment lagging badly.

Usually the stock market anticipates economic growth, but under the extraordinary regime of quantitative easing, equity prices reflect the cheapness of leverage more than expected earnings growth. That’s why low-volatility sectors with bond-like cash flows (consumer durables, consumer discretionary, utilities) have led the market while capital-goods producers like Cisco and Caterpillar have lagged.

Even the very modest growth the U.S. has managed to sustain during the past two years depends to a great extent on export growth. That might be the biggest contribution the Fed has made to growth; quantitative easing has helped keep the dollar cheap and that has been helpful to exports. The Fed did not target the dollar — Ben Bernanke simply does not think that way. The Fed, rather, targeted the risk composition of investor portfolios (negative short-term rates and long rates depressed by Fed purchases of longer Treasuries are supposed to force investors to invest in brick and mortar). It didn’t work out that way, to be sure; investors are buying existing brick and mortar with cheap leverage rather than investing in new plant and equipment.

Japan, meanwhile, has gotten the other end of the stick. As the yen rose, Japan’s exports collapsed. Top Japanese names like Sony and Panasonic saw their stock price crater and their cost of credit soar. This forced the Bank of Japan to act aggressively and force down the yen exchange rate.