Velocity

Sometimes you read something and think, only a Fed economist could come up with something that ridiculous. This paper put out by the Federal Reserve of St. Louis postulates that money hoarding is causing the velocity of money to collapse in the US economy.

In the paper they utilize the quantity theory of money equation as follows:

MV = PQ

In this equation:

• M stands for money.
• V stands for the velocity of money (or the rate at which people spend money).
• P stands for the general price level.
• Q stands for the quantity of goods and services produced.

Based on this equation, holding the money velocity constant, if the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference. According to this view, inflation in the U.S. should have been about 31 percent per year between 2008 and 2013, when the money supply grew at an average pace of 33 percent per year and output grew at an average pace just below 2 percent. Why, then, has inflation remained persistently low (below 2 percent) during this period?

Declining Velocity

The issue has to do with the velocity of money, which has never been constant, as can be seen in the figure below . If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.

They perform some algebra and show that Velocity equals nominal GDP/monetary base. Over time, this number has been falling. In their estimation, the recent gargantuan growth in the monetary base should have produced inflation. In their world, it has not. Their conclusion, people are hoarding money.

Ridiculous.

Nobody is hoarding money. These Fed economists think inflation is low because they are looking in the wrong place. We have phenomenal levels of inflation in the securities markets and in real estate. Household net worth is exploding, up nearly $10 trillion last year alone. Velocity in the financial markets is rocketing higher and there is clearly a race on to spend “money” as fast as possible.

Monetary debasement is creating copious amounts of inflation and a surging rate of velocity, or turnover of the monetary base, that only a Fed economist could miss. Of course, all of this inflation, unbacked by savings or incremental output, is the Austrian definition of malinvestment and wealth destruction. This is something missed by everyone at the Fed as well. 

 Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.

East is East and West is West

In my most recent post I recounted the story of John Law, the 18^th century central banker that set out to save France via a scheme that involved paper money and a stock market bubble, but that wound up in an inevitable state of collapse.

One of the more interesting aspects of that period was how Law acted as the bubble inflated. As the apparent wealth and power of France rose with the overvalued share price of the Mississippi Company, Law became more jingoistic and threatening toward France’s two major rivals, Britain and Holland.

Financial bubbles mislead not only investors into believing that they have far more wealth, power and influence than they actually do, but politicians as well.  And for politicians, power not utilized is power wasted.

As the US and the West seem to be on an apparent collision course with Russia over Ukraine, I can’t help but notice that today’s politicians in the West seem to be behaving as badly as did John Law with regard to threatening other countries. I will argue that while the causes of this current bellicosity may be many, the financial bubble in the West is surely one of the main drivers.

The West just flat out believes that its financial power and influence is so great that its wishes and demands cannot be refused by other nations. Russia must bend or be financially destroyed by sanctions, or worse. China, with their actions in the South China Sea also appears to be on Washington’s naughty list and they will certainly be targeted next. To the Austrian oriented analyst however, much of the West’s economic power is nothing but a mirage as decades of malinvestment fostered by central bank interference with market interest rates has created an economy that is far weaker and more vulnerable than most believe. 2008 was not a one-off event.

Here is where the tale gets interesting; Russia and China appear to have no interest in backing down, perhaps due to an understanding of the West’s inherent economic weakness.

As I recounted with the John Law story, the dissonant voice during bubbles gets silenced. In Law’s day, the primary loser was Britain’s ambassador to France, the Earl of Stair.

Stair saw through the smoke and mirrors of Law’s scheme and said so. British politicians thought it unwise to antagonize someone as powerful as Law and Stair was sacked.

Being right doesn’t help much in these instances, at least in the short term. Things are no different today. Reason and logic always take a back seat to fashion during a bubble, at least here in the West. While freedom of speech (generally) exists in the West, it can be powerfully silenced by fashion. Today, what is fashionable is to claim faith in the bubble.

While the West often clings to the fashionable, those in the East have learned a different lesson that they may be applying here. The lesson that Russia has learned from history is that when challenged by the Western powers you should give ground to your enemies until he is hopelessly overextended. Then you can counterattack and defeat them. This worked on Napoleon and Hitler.

Napoleon actually made it all the way to Moscow and captured what was then nothing but a burned out shell of a city. He was left there starving with his troops through a bleak Russian winter. He left France with 500,000 men under his command and returned with but 25,000. The Germans fared no better in WW II.

Today, infinite dollar creation has made the US supremely vulnerable to a dollar-selling counterattack.

The questions before us then are: Does Russia understand just how vulnerable the West has made itself economically via nearly infinite fiat money and credit creation? Are they willing to play the dollar card as a way to reduce the West’s ability to interfere in their traditional spheres of influence? Is China willing to go along with Russia here, recognizing that the West’s wrath will soon be directed its way?

While the following story appears to have been denied by Russia and China, Hank Paulson, US Treasury secretary in 2008, claims that China said that Russia had approached it about dumping US bonds during the crisis.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=afbSjYv3v814

Perhaps Paulson was just looking to burnish his reputation as an economic firefighter, or perhaps the story is true, either way, it does highlight the very real potential for economic calamity should these two act in concert against the dollar.

To this analyst, the US appears to be acting in a fashion similar to that of John Law nearly three centuries ago during another financial bubble. Russia and China do not appear to be too afraid, however. Perhaps this is because they believe that they hold the ultimate card in this game of poker with the potential to create a dollar crisis.

Unfortunately, the US, clinging to the mirage of infinite economic power that has been engendered by the financial bubble has made itself acutely vulnerable here. What is worse, Washington’s actions towards Russia and China just may force these two powers to pull the pin on the dollar hand grenade.

Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.

The More Things Change...

Bill Gross, “King of the Bond Market”, was recently quoted in the FT as he gave a presentation to an audience of financial advisers in Chicago:

I’ll be handing you the keys to the Pimco Mercedes.

I am sure that at this point the audience members leaned just a little farther up in their seats in order to make sure that they heard every word uttered by the biggest bond owner in the world (outside of the voracious central bank owners, of course).

Mr. Gross then went on to explain that he was selling insurance to other bond buyers against market volatility. He is, for a small fee, willing to insure others against falling bond prices.

Now, this might be a reasonable thing to do, or it might be quite foolish. As the FT points out, it doesn’t really pay to write flood insurance right before a big flood. Over time though, it can be quite a reasonable business if priced correctly.

Mr. Gross says about the strategy that:

….over time it has been a very respectable structural template alpha generator.

In short, it has generally paid to write this type of insurance.

My response to this is, of course it has paid to write insurance in the bond market over the past several decades. After all, the market has seen almost nothing but interest rate declines (price appreciation) for most of the past thirty years.  The last 15 years of interest rate declines were in fact turbocharged by central banks printing copious amounts of new scrip and using it to buy bonds. Selling insurance against losses in this type of environment was a good idea for several decades. The premiums rolled in and you rarely had to pay out on losses.

The question is, is it a good idea today to sell such insurance? I suspect not.

The reason, quite simply, that this is so is that interest rates are nearly zero today and even the Fed realizes that they must stop their infinite dollar creation soon. Logic, therefore, might require a little caution with regard to the financial insurance business. When the biggest bond buyer steps away and stops creating infinite amounts of liquidity I would think that an accident in the bond market might become a more likely scenario. Hence, we should expect the price for insurance to start to rise.

Alas, the market is acting in the opposite fashion. According to this, admittedly month old, FT article there are now so many players desperate to sell insurance here that insurance prices in the market are actually falling. Why would this be?

Now, I doubt that many financial advisors would be willing to lean forward in their seats to hear what I am going to say, but I am going to let you in on a major secret of the money management business:

If you are a fund manager, clients don’t care if you lose most of their money if everyone else is losing money too. Lose their shirts for them in a bear market and you are probably OK. If, however, you fail to participate fully in a bull market your clients will fire you. Failure to perform in a bull market is the cardinal sin of money management.

The pressure to participate in what has been a 33 year bull market in bonds must be enormous. Of course, I am certain that Mr. Gross truly believes that his strategy will be a profitable one for his clients, but I am also certain that with interest rates near zero it has become enormously difficult to produce outsized returns for clients and the pressure to do so in this environment is substantial. It is this pressure that is leading so many to want to sell insurance in order to pick up a little added yield even after a 33 year bull market in bonds that has resulted in interest rates near zero.

In my opinion, this is the type of behavior that is exhibited at major bull market tops. Of course, I have been thinking this way for several years and financial asset prices just jet ever higher.

There is an axiom to major bull markets that I would like to add right here; major players in bull markets, no matter how irrational their investment calculus, see their reputations becoming ever more lustrous while dissonant voices are dismissed (or worse, exiled to the writing of blogs that no one reads).

This, of course, is nothing new. It is part of human nature and it has always been so. Today, the world is desperate to believe that central bank printing can create wealth from thin air, a constantly growing economy, jobs for everyone, stock, bond and real estate prices that will never again be allowed to fall and all of this can be done without any inflation in the price of goods and services.

In that world, selling insurance against financial loss seems to be the wise choice. Buying insurance, on the other hand, amounts to flushing money down the toilet. Your performance will suffer and you, as a fund manager, run the risk of being fired. Again, dissonant voices in bull markets are silenced.

All of this brings me to the subject of today’s scribbling, the original dissonant voice, the Earl of Stair.

Now, I am unsure as to how many Earl’s there have been, but I am referring to the gentleman who was Britain’s ambassador to France in the early 18^th century.

As a bit of background, the information that I am going to relay comes from the book Millionaire written by Janet Gleason in 1999. The book’s title comes from the fact that the word millionaire was coined at this time in France thanks to the efforts of one John Law. At this time,  money was so ubiquitous that it seemed as if everyone could become rich on the back of rising prices in the greatest share scheme of its day.

Before Bernanke and Greenspan ran amok by artificially forcing down interest rates via the printing press leading to a series of financial market bubbles, there was John Law.

Gleason in her book details how Law, in the early 18^th century, wound up as the central banker of France, took control of the Mississippi Company, moved France from using gold as money to a paper standard that then unleashed an incredible bubble in the Mississippi Company shares that enveloped all of Europe before crashing.

While the scheme was running full tilt it appeared that paper money and Mississippi shares were allowing France and her people to amass incredible fortunes. Everyone was desperate to participate. Every word uttered by Law was dissected and analyzed for a key as to how far Mississippi shares could rise, and the power of France appeared to be on the upswing as its apparent wealth skyrocketed.

Not everyone fell for the scheme, however. Britain’s ambassador to France, the aforementioned Earl of Stair, was quite skeptical of it all. Though he was a good friend of Law’s, Gleason says:

Stair was distrustful of Mississippi speculation and scoffed at every price rise. In August, as share prices zoomed upward he had commented venomously that the frenzied market was ‘more extravagant and more ridiculous than anything that ever happened in any other country.’ Law had then offered him a large number of shares and was offended when he refused them with the pompous rejoinder that he did not think it became the king’s ambassador to give countenance to such a thing.

As Law’s power grew, Stair did notice that this power was going to Law’s head:

He….pretends he will set France much higher than ever she was before and put her in a condition to give law to all Europe; that she can ruin the trade and credit of England and Holland whenever he pleases; that he can break our bank whenever he has a mind and our East India Company.

As France’s power was on the rise and Law’s influence was strengthening, Law’s overt jingoism frightened those back in London and the wisdom of antagonizing Law, as Stair was apt to do, was questioned. As Gleason points out:

The career of Stair, the weakling who had picked an argument with a prizefighter, was doomed. When Lord Stanhope visited Paris in early 1720, his predictable conclusion that Law should not be provoked heralded the end of a brilliant diplomatic career for Ambassador Stair. The following spring he was recalled.

Stair, of course, was right about Law, paper money and the Mississippi Bubble. It was all completely ridiculous and doomed to failure. Stair, as the dissonant voice in the bubble, had to be silenced, however.

Today, Bill Gross is implementing a strategy that was a great idea three decades ago while I contend that it is nothing but folly today. Gross remains the “King of Bonds” while those of us with dissonant voices scribble our musings for just a few other like-minded individuals. I am confident that, like Stair, we will be proven correct about today’s bubble. Unfortunately, also like Stair, we will apparently have to run a gauntlet of abuse from bubble believers before it all ends.

Things rarely ever change.

I would also like to make one other concluding point; just how threatening to other powers Law was willing to become as the Mississippi Bubble expanded. This too sounds suspiciously familiar to modern day bubble chroniclers, though this is a topic for another day. 

Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.

And Then a Miracle Occurred

Did I miss it?

The entire world acts as if the Keynesian Miracle has actually occurred. Printing money and credit from thin air, after countless failed attempts throughout history, does seem to create wealth in the eyes of the investing world today. No longer does the artificial lowering of interest rates via unbacked money and credit distort the structure of the economy. Malinvestment will never again exist if one is to judge these things by the elevated stock, bond and real estate prices that exist today.

Of course, the (remaining) Austrian economics community thinks this to be rubbish. Unfortunately, we are becoming fewer in number and this is especially true for those, like this author, who have been investing based on Austrian economic principles. It has been a wipeout the last couple of years and Austrian oriented investors are being carted from the field.

Household net worth is soaring on the back of skyrocketing stock, bond and real estate prices from the money and credit created from thin air, thus seeming to justify the Keynesian actions of Fed chairmen Greenspan, Bernanke and Yellin. The Fed’s Z.1 report tells us that net worth rose $1.5 trillion in Q1, despite real GDP growth of -1% and a savings rate that was just over 1% of GDP. That is, there are no additional goods and services in the US economy to back up the $1.5 trillion in new claims on goods and services, and nobody cares. The second quarter looks like more of the same.  Everyone just expects that growth and savings will come….eventually. Everyone now believes that you really can get something for nothing.

While I remain steadfast in the belief that we are reaching the zenith of the greatest financial bubble ever, all of this faith in central planning exhibited by the masses has started me asking; what if I a miracle occurred and the Keynesian model actually worked?

Suppose the Keynesians are correct, shouldn’t I just put my stakes down in Keynesland and enjoy the prevailing something for nothing environment with all of the other believers?

What would a successful Keynesland be like?

The Bernanke’s and Krugman’s of the world would delight in the constantly rising GDP. The mandarins with their hands on the tools of economic policy for society would know how to guide our economic ship through the shoals and financial collapses would be a thing of the past. No doubt the proles would sing the praises of the economic overlords who delivered them into this promised land of constant economic growth.

I can hardly imagine a more dreary and frightening world, however. Keynesland would be a world without rights for the individual. Keynesland is a world where the ends justify the means. All must be sacrificed to the god of GDP expansion and his cohort, the god of financial crisis containment. There can be no permanent rights in a world that focuses on outcomes instead of the protection of the natural rights of the citizen.

Natural law and free will would be expunged from Keynesland, lest financial panic return. There is no future for the follower of natural law in this world, he must pull up stakes and look elsewhere.

Even if the Keynesian promise of something for nothing is correct, does it mean anything? What does it do for my soul if wealth can be conjured from thin air? How does a soul grow if it is not occasionally challenged by (economic) failure? Thomas Merton tells us that souls are like Olympic athletes because they too need to be pushed by adversity to become great.

I remain convinced that the economics of Keynesland would result in disaster. Its biggest problem however, would be that it would produce men without souls. If man isn’t allowed to use his free will to follow natural law he is no longer man. 

No, even if Keynesian economics were true, I wouldn’t want to put down stakes in Keynesland. There seems to be far more nobility for the individual living in Austrianland, let us keep our course set for a future arrival there. 

 Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.

The Notion of Safety

There is so much that I read about economics that strikes me as not just flawed, but so completely idiotic that it makes me want to light my hair on fire. I ran across just such an article this morning

http://www.forbes.com/sites/steveforbes/2014/05/19/why-one-ivy-league-economist-thinks-the-u-s-dollar-is-invincible-and-what-this-means-for-investors/

Forbes Magazine interviewed Cornell economist Eswar Prasad on his view of how the dollar became invincible. He started out making a very salient point, the massive issuance of Fed liabilities and government debt should have weakened the dollar considerably. It has not as there has been nearly infinite demand for dollars and dollar receivables.

I agree with this. As I have pointed out in other posts, the Asian crisis of 1997-8 convinced the emerging countries of Asia that having large dollar balances were needed to protect themselves from periods of sustained financial outflows during periodic bouts of panic.

They then went on a binge of dollar accumulation, and we see from IMF COFER reports that foreign exchange reserves held worldwide grew nearly seven fold between 1999 and 2013.

This has been a fundamental driver in allowing the U.S. to experience three major asset bubbles over this time.

Professor Prassad:

Now, emerging markets want a lot more foreign exchange reserves, which need to be held in government bonds. Financial institutions have to hold more safe assets, and private investors want more safe assets. The supply has shrunk, the euro zone isn’t quite what it seemed like it was—the safe part of the euro zone is quite small, actually. Germany and a handful of other countries.  Japan and Switzerland, don’t want money coming into their economies. So, who’s left?  The U.S. And the U.S. is doing its bit for the world by prodigiously providing large amounts of safe assets. That is U.S. government securities.

What I want to challenge here is the good professor’s notion of safety.

Yes, the U.S. started issuing prodigious amounts of securities after the financial crisis as budget deficits were running at nearly 10% of GDP per year for a while. What I don’t quite understand is just how anything in the financial world that is issued in prodigious quantities can be considered safe?

Even today, the budget deficit amounts to about 4% of GDP while government debt yields next to nothing and GDP growth limps along at Depression era rates. Someone that has to borrow 4% of GDP per year in a system where GDP grows less than 2% per year is going to have a financial accident at some point.

Additionally, government tax receipts are artificially high currently given the out of control explosion in equity prices driving massive capital gains tax payments for the government.

I have a hard time viewing these securities as safe under these conditions. Unfortunately, an even bigger issue exists, holders of Treasury debt must compete with other asset classes as well and this problem is monumental.

There is an old children’s riddle; which weighs more, one pound of cotton or a pound of lead? The answer, of course, is that they both weigh the same.

Applying the same rationale, which is more valuable, $1000 in equities or $1000 in Treasury debt? Again, they both have the same value and are exchangeable for the same amount of goods and services.

Just looking at the prodigious amounts of Treasury debt that has been issued is pretty meaningless since we must look at how fast we have been issuing other dollar based claims (stock values, other new debt issuance, real estate increases, the value of small businesses etc.) as well to see if Treasury holders have an increasing, decreasing or constant claim on the amount of goods and services that exist in the system.

If a Treasury holder earning his 100 basis points per year sees an infinite number of other dollar based claims being created each year he just might want to consider that the debasement is making him worse off over time. Wouldn’t an investment that buys much less tomorrow be an unsafe security holding?

You can see where I am going with this. According to the Fed’s Z.1 reports, we can see that Household Net Worth (total dollar receivables) has increased $31 trillion over the past ten years, or about $3 trillion per year (and this excludes those dollar based receivables that foreigners are piling up in Prasad’s dash for safety). Given that GDP averaged about $15 trillion per year over this time frame, we can see that dollar claims grew at a rate of about 20% per year relative to GDP. Unfortunately, real GDP growth averaged less than 2% per year and savings as a percent of GDP averaged about 1% over this time period. Real goods and services to back up all of these incremental dollar based claims do not exist. Either the value of these dollar based assets must fall or the value of goods and services must increase enough to balance all of the claims we have been creating. This would mean CPI type inflation.

Dollar based assets cannot be considered safe. The inference of safety here neglects the basic notion that these dollar based receivables are claims on goods and services and these claims are growing far faster than the goods and services that back them up. This is the fundamental economic imbalance of our time. All dollar based assets are being debased and are very unsafe if one wants to preserve purchasing power.

In the investing world we often see that good ideas in the beginning become silly when everyone starts to participate. Tech stocks were a good idea in 1990 and a very bad idea in 1999. Las Vegas real estate was a good idea in 1999 and a very bad idea in 2007. For the emerging market countries having dollars in 1997 would have been a good idea and, it seems to me, a very bad idea today.

What Professor Prassad hasn’t noticed is that the emerging market countries have started to change their behavior over the past couple of years. As I noted in my initial post on this blog, holdings for foreign central banks at the New York Fed have been falling of late and have fallen in each instance of emerging market turmoil since 2011. Perhaps they have already discovered something that the good professor has not; dollars issued in infinite size aren’t all that safe any longer. The move by China and Russia to conclude their huge gas deal recently, almost certainly to be settled in a currency other than dollars, is another indication that emerging markets aren’t viewing the dollar as the safe haven that they once did.

Anything issued in near infinite amounts, as we see with dollar based assets today, cannot be considered safe. I have a word for economists who think otherwise, gullible.

 Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.

Along the Roads to Damascus, Moscow and Beijing….

Niall Ferguson is alarmed.

His fear, the United States isn’t aggressive enough in the foreign policy arena, leaving openings for the evil Russians and Chinese. He warns us that this is making the world a more dangerous place as the unipolar world where the U.S. was completely dominant and was acting as the world’s policeman slips away. Ferguson is terrified that the American public doesn’t have the attention span required to expand the Empire.

Mr. Ferguson does so love his empires and, begrudgingly, I may have to admit that he does have a point. A unipolar world historically has been a fairly orderly place.  I would argue that the last time that the world was such a unipolar place was during the Roman Empire, and it was nothing if not orderly.

From Vermont Royster’s In Hoc Anno Domini which appears every year in the Wall Street Journal on the last publishing day before Christmas:

When Saul of Tarsus set out on his journey to Damascus the whole of the known world lay in bondage. There was one state, and it was Rome. There was one master for it all, and he was Tiberius Caesar.
Everywhere there was civil order, for the arm of the Roman law was long. Everywhere there was stability, in government and in society, for the centurions saw that it was so.

Behavior unacceptable to the Romans was dealt with swiftly and effectively. Unfortunately, especially if one wasn’t a citizen of Rome, something was just not quite right about all of this orderliness. Royster saw it like this:

But everywhere there was something else, too. There was oppression—for those who were not the friends of Tiberius Caesar. There was the tax gatherer to take the grain from the fields and the flax from the spindle to feed the legions or to fill the hungry treasury from which divine Caesar gave largess to the people. There was the impressor to find recruits for the circuses. There were executioners to quiet those whom the Emperor proscribed. What was a man for but to serve Caesar?

There was the persecution of men who dared think differently, who heard strange voices or read strange manuscripts. There was enslavement of men whose tribes came not from Rome, disdain for those who did not have the familiar visage. And most of all, there was everywhere a contempt for human life. What, to the strong, was one man more or less in a crowded world?

Yes, orderliness came with a price, a contempt for human life.
Today, as Vladimir Putin calls for a multipolar world, do the non-occidental countries and people of the world feel as persecuted as those subjects of Rome felt? Is the price for American imposed orderliness too high for many of them?

The answer is clearly, yes. America’s military presence on the borders of Russia and China has clearly pushed these countries into an alliance aimed at halting U.S. interference in their traditional spheres of influence. Additionally, the exorbitant privilege that the U.S. has enjoyed in being able to print the world’s reserve currency has extended, in the eyes of these two, far too much power to those in Washington and these countries will move to change this.

Ferguson believes that this will be a more dangerous world.

Perhaps.

Royster, on the other hand, saw something that entered the world during the Pax Romana that would change everything and offer a new hope:

Then, of a sudden, there was a light in the world, and a man from Galilee saying, Render unto Caesar the things which are Caesar's and unto God the things that are God's.

And the voice from Galilee, which would defy Caesar, offered a new Kingdom in which each man could walk upright and bow to none but his God. Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me. And he sent this gospel of the Kingdom of Man into the uttermost ends of the earth.

This message was quite revolutionary and it didn’t sit well with the Roman authorities of the day. It was, however, a necessary precursor for the development of all individual liberty that was enjoyed by much of Western civilization during the past many centuries. Atheist Murray Rothbard on the sudden light that entered the world:

I am convinced that it is no accident that freedom, limited government, natural rights, and the market economy only really developed in Western civilization. I am convinced that the reason is the attitudes developed by the Christian Church in general, and the Roman Catholic Church in particular. Christianity, with its unique focus on (a) the individual as created in the image of God, and (b) in the central mystery of the Incarnation, God created his Son as a fully human person- (this) means that each individual and his salvation is of central divine concern….

Thus, even though I am not a believer, I hail Christianity, and especially Catholicism, as the underpinning of liberty.

Though it is hard to ignore, and not be somewhat fearful of, what was lost after the fall of the Roman Empire, something better had already been introduced. Yes, it was more than one thousand years between the building of the Pantheon and Brunelleschi’s dome at the Cathedral of Santa Maria del Fiora in Florence, but the concept of natural law had been firmly rooted by then and would be developed further by Catholic and Protestant scholastics and this would allow the concept of liberty and natural law to flourish in many parts of the world for centuries. Perhaps there exists today in some distant part of the American Empire another insignificant and destitute individual who will rise to prominence and remind us again of the critical importance of natural law.

The internet had a parallel during the heyday of Rome, the Roman network of roads. It was along this road network that the message of the importance of the individual was transmitted by Christ’s apostles. Hopefully, today’s network can again successfully spread the message of the importance of the individual, diminish the clamor for empire, keep America’s Empire from going too far down the same road with regards to the contempt for human life that developed in Rome and help us to extend the notion of natural rights and individual liberty further than ever before.  Royster however, knew that St. Paul was deeply concerned about how this would all play out with future empires and future Caesars and he concluded In Hoc Anno Domini with this reminder:

Along the road to Damascus the light shone brightly. But afterward Paul of Tarsus, too, was sore afraid. He feared that other Caesars, other prophets, might one day persuade men that man was nothing save a servant unto them, that men might yield up their birthright from God for pottage and walk no more in freedom.

Then might it come to pass that darkness would settle again over the lands and there would be a burning of books and men would think only of what they should eat and what they should wear, and would give heed only to new Caesars and to false prophets. Then might it come to pass that men would not look upward to see even a winter's star in the East, and once more, there would be no light at all in the darkness.

And so Paul, the apostle of the Son of Man, spoke to his brethren, the Galatians, the words he would have us remember afterward in each of the years of his Lord:

Stand fast therefore in the liberty wherewith Christ has made us free and be not entangled again with the yoke of bondage.

Ferguson doesn’t quite grasp that the American form of orderliness has convinced much of the rest of the world that their liberties are being infringed upon by the American Empire. He doesn’t recognize that in their eyes the U.S. has been willing to trample the notion of natural law in order to achieve its own vision of orderliness that many find rather abhorrent. These people just may recognize that order and rule of law are not ends in and of themselves. They may feel that they are only means by which their natural rights are to be protected. Much of the world believes that America has forgotten this, that America expects the world to give up its birthright to serve Washington and the words of St. Paul, therefore, remain as relevant as ever to these people. He misses that it is a Russian leader that is reminding the world to avoid the yoke of bondage. It never dawns on Ferguson that much of the world sees the American Empire as the danger. Empires are about force and subjugation and are always an affront to natural law and this hasn’t changed since the days of Rome.

Valdimir Putin as he targeted the U.S. yesterday:

The model of a unipolar world has failed. Everyone can easily see it today, even those who try to act in the usual manner, to keep their monopoly, to dictate their rules of the game in politics, commerce and finance, to impose their cultural and behavioural norms,

The world is multipolar, people want to decide their own destinies, preserve their cultural and historical identities and civilisations.

In the China-Russia alliance the overextended American Empire has met a powerful force, and this could be a very good thing for the U.S. The cost of empire to the American public will be exposed as the de-dollarization begins in this China-Russia led alliance. The exorbitant privilege extended to the U.S. via their ability to print the world’s reserve currency has hidden much of the cost of the Empire. As this crumbles, the ability of the U.S. to project power throughout the world will collapse, centralization of power will diminish and an increase in individual liberty should result. This multipolar world will be very different from the one seen during the Cold War. Today, in contrast to the Cold War, Russia and China are in a position to offer better economic and individual liberty concessions to other countries than the U.S. is currently offering. The playing field is far more level than before and this will be ever more apparent as the dollar fades as the world’s reserve currency. It will be quite the paradox for those of us who grew up during the Cold War if it winds up that Russia and China are the ones that keep us all from being entangled in the yoke of bondage.

 Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.

Elon Musk Should Heed Albert Einstein

If I had an hour to solve a problem and my life depended on the solution, I would spend the first 55 minutes determining the proper question to ask, for once I knew the proper question, I could solve the problem in less than five minutes.

Albert Einstein

Like everyone, I often fall behind in starting many of the tasks that I assign myself. Having undergone a little shoulder surgery recently, I was grateful for the chance to just sit and clear up some reading that I have been meaning to get to. Fortune Magazine (which I still receive in paper form) had an article on Elon Musk (as Fortune’s Business Person of the Year) that looked interesting last December and I finally settled in to read it last week.

The article was one of the best summaries that I have read on the new philosophical direction of our society: technology as destiny and our summum bonum. We can see how far our society has moved towards technology as our summum bonum (highest order) when the author of the article quotes a physicist, David Deutsch, regarding his definition of an optimist. According to Deutsch, optimists are those who believe that any problem that doesn’t contradict physics can be solved. I think that Aristotle, Plato and St. Thomas Aquinas would beg to differ.

Much of the article focuses on two of Musk’s companies, Tesla and SpaceX and the comparison of Musk to Steve Jobs of Apple and Pixar fame. For me however, the crux of the article comes from its focus on how Musk is using technology to seduce mankind to move towards an electric (Tesla) and solar powered future here on an ecologically challenged Earth and if we fail in that, SpaceX can help us colonize Mars.

What could be wrong with that you might ask?

Nothing in so far as the technology goes, but Musk, violating the Einstein method above, is asking the wrong question in my opinion. He is focused on the question, how do we save mankind on a planet we seem determined to destroy with pollution?

The more important question is, is mankind worth saving?  There is another question that Musk should also be asking before he spends precious resources figuring out how to colonize Mars; if we place technology at the apex of our society, do we lose something that is more important than a clean planet? 

To get a better idea of where Musk has run off the rails I am going to turn to the thoughts of C.S. Lewis, largely borrowing from his book The Abolition of Man.

For Lewis, following Natural Law (or the Tao as he called it) must be our summum bonum, or goal, as it has been throughout most of history. Natural Law, in contrast to today’s moral relativism, tells us that some things are objectively good or bad and that we are to use our free will to follow this natural law. For example, if a fire breaks out we may feel two competing instincts; the flight to safety impulse would be a strong one. We would also feel the need to help others before we ourselves should flee. Natural Law tells us which of these two instincts is the correct one.

Lewis became quite concerned that technology was replacing natural law as our summum bonum and the result was The Abolition of Man.

For Lewis, technology represented man’s power over nature. In Abolition, he used three examples of technology: the airplane, wireless and contraceptives. His view was that technology could be withheld from some men by other men. It could be withheld by those who sell the products, by those who allow the sale (government) and the owners of the sources of production. Man’s power over nature is thus the power of some men over others. 

As man modifies the environment today, he obviously exercises power over successor generations as well. Additionally, in modifying the environment bequeathed to it, today’s generation rebels against tradition and limits the power of the predecessor generations.

He points to the idea, perhaps many centuries from now, when one age will by scientific education, genetic manipulation and propaganda be able to exercise complete power and be able to make its descendants whatever it pleases. All who will come after this point will be nothing but patients, or trousered apes in the parlance of Lewis. They will be incapable of utilizing their free will to follow natural law. They will no longer, therefore, be men. The conquest of nature will be the conquest of everyone by a few.

And what of these few, those whom Lewis called the controllers? What is to guide these controllers? If technology is their summum bonum, they must eliminate natural law, otherwise man’s conquest of nature is incomplete. All that will be left to guide them will be their own urges and instincts.

Since these controllers will be able to eliminate natural law and free will from the minds of men and replace it with whatever they choose, they will no longer be men but they will be gods. The paradox however, will be that these gods will be controlled by their urges. The conquest of nature by man will, in reality, be nature’s conquest of man, the abolition of man. Man will cease to exist.

For man to exist natural law and free will must exist and they must be our purpose, our summum bonum.  The concluding question here should be, what is the point of colonizing Mars with trousered apes? What is the point of a clean planet if everyone is left with a polluted soul?

The Fortune article ends:

George Bernard Shaw famously said, “The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.” By that definition Jobs and Musk are the ultimate in unreasonable men. And the world is much better for it.

Shaw, and Fortune, could not have been more wrong! After all, just what is it that Shaw’s unreasonable man is progressing towards?

Peter Kreeft in his book C.S. Lewis for the Third Millenium wrote:

Aristotle rated (technology) as third on the hierarchy of values after (1) knowledge of the truth for its own sake, and (2) practical knowledge, or knowledge for living, for acting. The modern world has simply turned this hierarchy upside down as it has turned man upside down.

Some things are objectively true and we must always place a desire to understand this above other things, including technology. Without that, we cannot right ourselves.

 Disclaimer: Nothing on this site should be construed as investment advice. It is all merely the opinion of the author.