Trouble is a Brewing!

By: David Chapman

Fri, Mar 27, 2015

Global FTSE Greece 20 ETF
Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data


There appears to be trouble brewing along a number of fronts of which Greece might only be one of them. Above is the sinking ship known as Greece as represented by the Global FTSE Greece 20 ETF (GREK-AMEX). Greece is just one of a number of growing global problems. The problems are both economic and geopolitical. All or anyone of them could have a profound negative impact on global stock markets, gold and oil.

As the first quarter of 2015 winds down, there are a number of ill-winds that threaten the global economy. One would think that seven years after the financial meltdown of 2008 and seven years of unprecedented amounts of QE coupled with historically and abnormally low interest rates that the global economy might be humming. Instead, it has been plagued by low growth in North America, and, anaemic growth and recessionary conditions in the Euro zone and Japan. China, the other BRICS and emerging markets are also slowing. Parts of the Euro zone have spent most of the period not just in a recession but also in what one can only be described as an economic depression with high unemployment and social unrest (Spain, Greece and to a lesser extent Italy and Portugal).

World trade is beginning to contract not grow after growing for the first few years following the financial collapse of 2008. Debt has grown at an unprecedented rate but the debt growth has not been accompanied with comparable economic growth. Most tellingly global debt to GDP has grown from 269% in 2007 to 286% in 2014. A sharply rising US$ is showing signs of causing financial instability particularly in emerging markets.

The Greek situation continues to deteriorate. As the Economist points out (Dangerous Liaisons - The Economist, March 21, 2015) the Greek crisis has become not just an economic crisis it is also becoming a geopolitical crisis. But the economic crisis continues to deteriorate as Greece could run out of cash as early as April. The spectre of a Greek default could hang over the heads of the Euro zone. Greece is also pulling the levers by demanding war reparations from Germany (Germany is Greece's largest creditor) and as well as cozying up to Russian Premier Vlad Putin. As the Economist notes - is this a whiff of blackmail?

Since the election of the Syriza Party in January, the Greeks have upped the ante in the Euro zone.

Many wonder why they would in particular alienate their biggest creditor and to a lesser extent France and Italy two countries that one would think Greece might wish to please. As to Russia, both Greece and Russia are Orthodox countries so there has always been a natural affinity. The biggest thing hanging over Greece has been the austerity programs pushed on Greece in order to receive loans from the Troika - the ECB, the IMF and the EU. Nonetheless Germany has pushed back hard against easing austerity or altering loan provisions largely because if they give into Greece then others such as Spain and Italy might come demanding a similar deal.

Austerity in particular has considerable social unrest in Greece as it has elsewhere.

Germany can't be seen to give in because at the end of the day Merkel has to please Germans not the Greeks. This in turn is another possible failure of the EU experiment and why the zone still might fall apart led by Greece if they were to exit (the "Grexit"). But all of the commotion is having some negative and positive effects. Below are two interesting but opposite charts. 

Money has been pouring out of Greek banks at a supposed rate of €2 million per week. The National Bank of Greece (NBG-NYSE) has fallen roughly 26% in 2015 but it has fallen an astounding 99.8% since it peaked in July 2007. Greece and Greek banks are heavily exposed to Euro zone banks particularly German banks so a complete Greek collapse could have a further negative impact on the German and Euro zone banking system, which in turn could require its own bail out. Except today, the laws have been changed to bail-ins rather than bailouts. Depositors and bondholders would be most impacted under that scenario.

While NBG has what looks like an enticing falling wedge triangle forming the bank might also be a candidate for bankruptcy. Meanwhile the chart of GREK appears as one that is in a longer term meltdown and it could soon fall under $10 making new lows. Has there been anything positive about the Greek crisis? While money has been fleeing the Euro zone largely being exchanged for US Dollars money has also been flowing into Germany as the Euro zones strongest economy. The result has seen German bunds move to negative yields and the German DAX soar to record highs. Germany has become the magnet for funds in the Euro zone.

National Bank of Greece

Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data

German DAX
Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data


While many in the Euro zone are suffering from the effects of austerity and the high price of imports, Germany has been able to largely weather the storm primarily because exports have grown due to the sharply lower Euro. If for whatever reason the Euro zone were to start to break up or just Greece leave Germany could benefit further. Not surprisingly, however, with stock markets off this week the DAX has also fallen.

The DAX's bull channel is currently up over 14,000. Given that the DAX has broken away from a more gentle bull channel could the DAX rise to those heights. The DAX breaks down under 10,000 although a move back under 11,000 would be a warning sign that a further decline could occur. The downside of a breakup of the Euro zone is that Germany could see its currency soar if they were to go back to the Deutsche Mark.

Both sides are essentially playing a game of "chicken" to see who blinks first. Trouble is Germany believes the Euro zone is protected and can withstand a "Grexit" without adverse consequences. As to the Greeks they believe they can default and stay in the Euro zone. The trouble is both sides could be wrong and a "Grexit" might become quite destabilizing for global financial markets. As well there are potentially dangerous geopolitical consequences of Greece's ongoing overtures to Russia. Further Greece is not the only Euro zone country making overtures to Russia.

But a potentially more destabilizing event could be slowly looming. The rapid rise of the US$ over the past year (up roughly 22%) has been causing numerous dislocations. The rapid rise of the US$ has helped the Euro zone and Japanese exports but it is squeezing US exporters and slowing the profits of the US multinationals whose operations are predominantly in foreign countries. The sharply rising US$ also means the US is importing everyone else's deflation. This is causing a problem for the Fed who may want to raise interest rates but its hands are tied due growing signs of deflation.

Exports may be the least of the problem. The big problem is that over the past several years the world went on a debt binge denominated in US$. US$ loans and bonds offered a cheaper alternative then local currency primarily because US interest rates were lower. The result was the world now has according the Bank for International Settlements (BIS) some $9 trillion of debt issued by sovereigns and foreign corporations. China has over $1 trillion of US$ denominated debt primarily backed against its shaky real estate market. Emerging markets are estimated to have issued over half of the $9 trillion.

Given the rise in the US$ the debt has become quite expensive to service. Many have earnings in their local currency but owe in US$. Much of the debt is held by Euro zone and US banks as well as pension funds and large funds. Large countries such as Russia and Brazil are heading into very deep recessions and China's real estate market is sitting on "quicksand". Could there be a blow-up of foreign issued US$ debt such as a sovereign default or a real estate collapse in China? The Fed potentially hiking interest rates does not help as that would most likely strengthen the US$ further. A wrong move could trigger a Lehman Brothers type of collapse.

In a crisis money would most likely flee to the safety zone of the US$ and Germany and possibly gold. None of that suggests that stock markets would benefit.

Apparently, Ukraine is on the verge of financial collapse. Moody's has downgraded Ukraine's debt to Ca, which apparently signals that default could be imminent. Ukraine owes its money primarily to Euro Zone and Russian banks. Sanctions have hurt Russia and if further sanctions were placed on Russia it might trigger a Russian default deliberate or otherwise. Russian banks and corporations are primarily exposed to the Euro Zone and even US banks. It is estimated that Russia has upwards of $600 billion or more in debt denominated in US$. The debt was primarily issued by Russian corporations and it is not sovereign debt although it is implied that Russia would back the debt.

The crisis in Ukraine could now be taking a different twist with the recent ouster of the governor of Dnipropetrovsk, the oligarch Kolomoisky by the President Poroshenko. Oligarchs and corruption run Ukraine. Despite being President, Poroshenko does not control all of the military. The country is divided between the Ukraine military as well as militias loyal to their own leader. The militias have their own agendas that do not necessarily align with Poroshenko and the Ukraine military. Kolomoisky controls militias that were instrumental with the fighting in Eastern Ukraine. The Ukraine military is trying to disband these militias with little success.

The border along Russia with the Baltics and elsewhere along the Russian border has become an armed camp with both NATO and Russian troops and armaments lined on both sides of the border facing each other. Russia has moved nuclear tipped missiles into the region. Both sides have being conducting ongoing dangerous reconnaissance along the borders along with ongoing military exercises. There continues to be talk of arming the Ukraine in the dispute over the breakaway Russian Eastern provinces. NATO warships prowl the Black Sea dangerously close to Russia. Many are worried that an accident or an inadvertent spark could trigger WW3 with nuclear weapons.

WTI Oil
Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data


Now into the fray comes the crisis in Yemen. Yemen may be inconsequential as an oil producer (ranked 37th in the world) but Yemen is on the entrance to the Red Sea at the Bab-el-Mandeb Strait. The Gulf of Aden is also the entrance to the Red Sea while the Red Sea leads to the Suez Canal and the Mediterranean Sea. It is the world's 4th largest oil delivery route delivering primarily to Europe.

The crisis in Yemen had started as a civil war between the former President Saleh and the al-Houthi tribes who dominate what is North Yemen and the current President Hadi and his forces largely in the South of Yemen. Saleh was ousted in 2011 during the initial Arab "Spring" uprisings. Saleh was originally backed by the US, as he was an ally in the US's fight against Al Qaeda. Hadi was brought to power in 2012 in a dubious election where he was the only candidate. He was backed by the US as well. The population of Yemen is roughly 60% Sunni and 40% Shiite. The Houthi's are Shiite sect and have aligned themselves with Saleh to oust Hadi. Hadi has fled Yemen for Saudi Arabia.

But into the fray has come Saudi Arabia and an Arab coalition of 10 to oust the Houthis. Saudi Arabia is Sunni Muslim. Shiite Iran, Saudi Arabia's enemy, backs the Houthis. Also in the mix in the country is Al-Qaeda in Yemen and possibly even ISIS forces. It is now believed that Saudi Arabia has amazed an army of 150 thousand that may be prepared to invade Yemen to take out the Houthis.

Oil prices have leaped roughly 6% since the crisis broke. Gold has also jumped. Saudi Arabia is the world's largest producer and exporter of oil. The Saudi fields are far from Yemen and it is unlikely that Houthi missiles could hit the Saudi fields. But anything involving Saudi Arabia and an important oil chokepoint spikes the price of oil. As well apparently, the US is providing logistical support to Saudi Arabia. The wild card that could change the entire situation is what if Iran or even Russia got involved to help the Houthis. Both Iran and Russia have demanded a halt to the Saudi intervention.

Irrespective, many analysts believe that neither Iran or Russia would become militarily involved.

Oil prices have managed to reverse higher over the past couple of weeks. Short-term the weekly WTI oil chart now looks bullish. A firm breakout above $54 could see oil prices move to at least $60 with an outside possibility to $65. While I am not showing a chart of gold, gold prices are also looking positive. A break above $1,240 would confirm the potential for a move to at least $1,350. Trouble in the mid-east may be the perfect panacea for both gold and oil.

The final item worth mentioning is the US attempts to throw roadblocks against the Asian Infrastructure Bank (AIIB). The AIIB is a new financial institution in Asia meant to provide finance and support for infrastructure projects in Asia. The bank is regarded as a rival for the IMF, the World Bank (WB) and the Asian Development Bank (ADB). Unlike the latter three institutions that are generally regarded to be dominated by the US, the AIIB would be dominated by China. The AIIB would be Yuan based as opposed to the IMF, the WB and the ADB which are US$ based.

Where the conflict comes in is that the US has gone out of its way to try to persuade other western countries to stay out of the AIIB. Many are not listening fearing that if they don't join they will have no say and it might cost them major business in Asia. As a result, Australia, Great Britain, Germany, France and Italy are considering either joining or have already joined. South Korea is also considering joining. Left out thus far besides the US are Japan and Canada. There is also a new BRICS bank coming that is expected to be a direct challenge to the IMF.

China has upwards of $4 trillion of reserves that needs to be recycled. What the Chinese are doing is not much different then what Great Britain did in the 19th century and the US did following WW2.

As noted the US effectively runs the WB and while Europeans are generally at the top of the IMF the US maintains a veto. China and many others want to get out from under the hegemony of the US and the US$. The AIIB is a start but it is also a direct challenge to US and US$ global hegemony.

Greece and the potential for the "Grexit"; $9 trillion in US$ denominated debt as the rising US$ puts the squeeze on; the great powers (NATO and Russia) facing each other along the border with Russia; the potential for a Ukraine default; a new crisis in the Mid-East; and, the US and China facing each other in a quest to change the financial direction of the world are all brewing trouble spots. Any one of them alone might not be a huge problem but put them all together and there could be trouble brewing.

China and Global Governance
.
Javier Solana
.
MAR 30, 2015

China government meeting Sri Lanka

MADRID – It is safe to say that the most consequential geostrategic development of the last two decades has been China’s rise. Yet the West has failed to accord China – not to mention the other major emerging economies – the degree of influence in today’s global governance structures that it merits. This may be about to change.
 
As it stands, China relies on bilateral arrangements to deepen its involvement in countries across Asia, Africa, and Latin America. Backed by $3.8 trillion in currency reserves, China has provided infrastructure investment in exchange for commodities, thereby becoming the world’s largest provider of financing for developing countries, with the China Development Bank already offering more loans than the World Bank.
 
But, given that these bilateral arrangements are executed by state-owned corporations, they often do not adhere to international best practices. The West has therefore urged China to move toward multilateral processes that meet international standards, while doing more to provide global public goods. US President Barack Obama has gone so far as to call China a “free rider” for its failure to fulfill the responsibilities that many would expect of a global power.
 
But, if Chinese President Xi Jinping’s recent foreign-policy initiatives are any indication, change may be imminent. Last July, China led the establishment of the New Development Bank by the five BRICS countries (Brazil, Russia, India, China, and South Africa) and contributed significantly to its $100 billion endowment.
 
Likewise, at the latest Asia-Pacific Economic Cooperation meeting in Beijing, China spearheaded the creation of the Asian Infrastructure Investment Bank (AIIB). And it has established a $40 billion Silk Road Fund, to support its ambitions to re-create the ancient overland and maritime routes connecting Asia to Europe.
 
In implementing its so-called “one belt, one road” strategy, China will pursue investments affecting some 60 countries – including in Central Asia, where its portfolio already contains projects worth more than $50 billion. The maritime route will include the Indian Ocean, the South China Sea, and the Mediterranean. Together, they will form not just a road, but a network to facilitate the transfer of goods and ideas across Eurasia.
 
Europe’s role in this initiative is already emerging with the Greek port of Piraeus, operated partly by the Chinese state-owned naval company COSCO, set to be a stop on the maritime route. The Piraeus port will be connected to the rest of Europe by Chinese-financed infrastructure in the Balkans and Hungary, consolidating China’s position as the European Union’s main commercial partner.
 
The New Silk Road initiative reaffirms China’s desire to establish itself as a Eurasian power.

Not only will it connect the dynamic economic hubs of East Asia and Western Europe; it will also open access to Central Asian countries, where Russia’s influence is in decline. It could also help to ease territorial tensions between China and its immediate neighbors.
 
So far, China’s efforts to increase its influence seem to be working – and not just in the developing world. The United Kingdom recently announced its intention to serve as a founding member of the AIIB, triggering a flood of applications from the likes of Australia, Brazil, France, Germany, Korea, Russia, Turkey, and Spain.
 
In the US, however, such developments are perceived as geopolitical setbacks. This interpretation is fundamentally flawed. After all, China’s decision to bypass the main international financial institutions, which were created in the aftermath of World War II, has been driven by the refusal of the developed countries that lead them to give it a role commensurate with its economic might.
 
At the Asian Development Bank, for example, Japan and the US each claim around 13% of the votes, compared to less than 6% for China, and the president is always Japanese. A similar situation prevails at the World Bank, where an American is always in charge, and the International Monetary Fund, where the managing director is always a European. Though the G-20 countries agreed in 2010 to increase China’s IMF quota from 3.65% to 6.19% – a small step in the right direction – the US Congress has refused to ratify the agreement, preventing the reforms from being implemented.
 
The fact is that China’s new initiatives are not revisionist, but reactive. If new powers are not given access to the existing global governance structures, they will create structures of their own. This means that the advanced countries have the power to prevent the international order’s fragmentation into ideological and economic blocs – but only if they can overcome their strategic mistrust of China.
 
In this sense, the participation of more European countries in the AIIB is a positive development, as it helps to ensure that the new bank complements, rather than rivals, existing institutions. (In fact, Europe’s impact would be even greater if the EU, rather than individual members, was represented at the AIIB, as it is at the G-20 and the World Trade Organization.)
 
The West must still do more not only to welcome China to the table of global governance, but also to accept and cooperate with the institutions that the Chinese are now creating. Only with an open attitude can Western leaders ensure that Chinese-led institutions adopt best practices of multilateralism and accountability, and that they adhere to international labor and environmental standards.
 
Now is the ideal time to initiate this process. If the EU, the US, and China take this year to align their intentions, based on their shared interests, they will be prepared to make the most of the G-20 summit in China in 2016.
 
China’s move into multilateral processes is good news for the world. Europe – and especially the US – must overcome their strategic mistrust of China. They must not squander the opportunity to participate in and shape these processes, so that the benefits are shared as widely as possible.
 

Opinion

The Glory Days of Private Equity Are Over

Too many funds are chasing too few opportunities, and many of those will be too expensive. It won’t end well.

By Andy Kessler

March 29, 2015 4:45 p.m. ET

           Financial Cliff Photo: Getty Images


Private equity is done. Stick a fork in it. With Kraft singles and Heinz ketchup as toppings, there are many signs that private equity has peaked as an asset class.

Sure, private equity is pervasive, which is one of its problems. According to Dow Jones LP Source, 765 funds raised $266 billion in 2014, up 11.7% over 2013. Ever since David Swensen, the investment manager of the Yale University endowment, almost 30 years ago began successfully allocating outsize portions of the portfolio to “alternate” assets, especially private equity, the so-called Swensen model has been widely duplicated. Last week the Stanford endowment named Swensen-disciple Robert Wallace as CEO. There is a lot of capital chasing similar deals.

When it comes down to it, private equity is pretty simple. You buy a company, putting up some cash and borrowing the rest, sometimes from banks but often via exotic instruments that Wall Street is happy to sell. Then you manage the company for cash flow, making sure you can make interest payments with enough left over for fees and investor dividends. With enough cash flow, you either take the company public or sell it to someone else. And how do you generate cash flow? You can expand the company, but more likely you slash costs, close divisions, cut staff, curtail marketing, eliminate research and development and more. In other words, cutting to the bone.

The Swenson model has worked for the past three decades. But it’s a bull-market investment vehicle whose time is done. Here are the main reasons private equity has peaked—the first four are reasonably obvious, but the last one is the killer.

First, interest rates are going up. As they say on “Game of Thrones,” winter is coming. The Federal Reserve will no longer be “patient” on raising rates. This year? Next year? It doesn’t matter. Rising interest rates mean private equity will see higher costs of capital, wreaking havoc on Excel spreadsheets justifying future returns.

Second, as The Wall Street Journal pointed out last week, banks are slowing lending for leveraged deals. Since 2013, regulators have been discouraging leverage above six times earnings before interest, taxes, depreciation and amortization, or Ebitda, a measure of cash flow. Leveraged loans are the lifeblood of private equity; limits are already crimping the ability to do deals.

Third, tax reform is in the air, and interest-rate deductions are on the chopping block. The Lee-Rubio tax reform plan introduced in March “eliminates the deductibility of new debt.” We all pay taxes on interest income, yet companies get tax deductions on interest payments, which only encourages debt.

These tax writeoffs are the air that has filled the private-equity balloon for decades. Lee-Rubio may not get anywhere, but the interest-tax symmetry is long overdue and makes enough sense that it could end up in future tax reform. As an aside, this won’t be pretty for debt-laden cable and telecom companies.

Fourth, private equity has been holding back the economy. When you buy out a drugstore chain or car-rental company and load it with debt, you aren’t investing in the productivity of the economy.

More often, by cutting back on new products and services, you are removing productivity from the economy. While generating wealth for endowments and pension funds, private equity can destroy wealth in the economy—my guess is 0.5%-1% lower gross domestic product in an already subpar recovery.

And, by the way, of that $266 billion raised last year by private equity, only $33 billion was for venture capital. Venture investments rarely involve debt—they are productivity creators on steroids. With so many billion-dollar-valued startups, it is hard to argue for more venture capital, but instead expect capital allocated to debt-backed investment to peak and decline.

The final reason private equity is done: It is fresh out of fat targets. In October 2007, KKR and TPG and Goldman Sachs bought the utility TXU Corp. for $48 billion. Bowing to the green gods and regulators, who put so many restrictions on electric generation, the deal now known as Energy Future Holdings Corp. has been a bust, filing for bankruptcy last year. So no more utilities.

Earlier this month, Dutch semiconductor firm NXP bought Freescale for $11.8 billion. Freescale, the old semiconductor arm of Motorola, was bought by Blackstone, Carlyle, TPG and Permira in 2006 for $17.6 billion. Firms that are R&D-intensive aren’t great candidates for buyouts, as interest payments squeeze the research needed for innovation. Dell’s buyout two years ago notwithstanding (Dell is more of a packager and distributor), don’t expect many technology buyouts down the road.

So what’s left? Mattress companies seem to change hands regularly. There are a few more food companies beyond Kraft. General Electric is selling off international-lending divisions. But these are too small to soak up hundreds of billions in private-equity capital that the Swenson model now demands.

The reality is that the best companies with high-enough cash flow to pay down interest can’t be bought. No one is buying Apple or Google. But this is also true of cash machines Uber and Airbnb or high-growth companies like Snapchat and Pinterest. Private equity can’t afford them. And with the Dow bobbing around 18,000, public companies are increasingly off the table. Maybe the oil patch?

Good luck with that.

Capital will still chase increasingly expensive deals. That won’t end well. So it’s back to basics—creating companies rather than squeezing the last life out of old ones. Just like Wall Street shrinking and curtailing once-profitable businesses, private equity will begin a slow decline. Yes, we’ll see more deals and even a few successes. But the returns from private equity won’t match those of the past 30 years. And capital will flow elsewhere—let’s hope to productive and wealth-creating segments of the economy.


Mr. Kessler, a former hedge-fund manager, is the author of “Eat People” (Portfolio, 2011).

Editorial

Stronger Dollar in a Weak Global Economy

By THE EDITORIAL BOARD

MARCH 30, 2015

 
In the last several months, the dollar has strengthened tremendously against other currencies like the euro, the pound and the yen. This largely reflects the realization among investors that the American economy will do much better than other major economies in the coming months.
 
The dollar is now the strongest it has been against more than two dozen other currencies in more than 10 years, according to an index compiled by the Federal Reserve. One euro was trading at $1.09 on Friday, down from $1.37 a year ago; many analysts predict that the two currencies could reach parity in the coming months for the first time since 2003. At the same time, the yen has fallen about 14 percent against the dollar.
 
Like any major move in the financial markets, the strengthening of the dollar has unnerved investors and policy makers. Some, like the governor of the Reserve Bank of India, Raghuram Rajan, have complained that we are in the “age of competitive devaluation and beggar-thy-neighbor policy.” He and officials in other countries, like South Korea, are worried that central banks have engineered the depreciation of currencies like the euro and the yen by printing money and aggressively buying bonds in a bald attempt to make their exports cheaper.
 
The European Central Bank and the Bank of Japan are buying lots of bonds to stimulate weak regional economies, but not necessarily to hurt other countries. If they are successful, it will ultimately benefit the entire global economy, including the United States, which is also hurt when the dollar appreciates because that makes American goods more expensive for buyers abroad.
 
The bigger question is whether monetary policy and a depreciating currency can make a significant difference. There is growing evidence that simply increasing the money supply may not be enough to revive weak economies, especially if demand in the rest of the world is not growing quickly enough.
 
Countries cannot export their way to growth if other nations are not in a position to buy their goods and services.
 
That might help to explain why Japan’s economy is still struggling two years after its central bank began buying bonds in a big way, which has helped to send the yen tumbling against the dollar. A major part of the problem is that the government of Prime Minister Shinzo Abe has not done enough to reform the economy, for instance by getting businesses to invest more of their savings and increasing the employment of women.
 
There are some signs of a European revival, though not enough to celebrate a return to growth.
 
Several countries, like Greece, Italy and France, are still shrinking, stagnant or barely growing.
 
A weaker euro is good for all the countries that use it but will primarily benefit big exporting nations like Germany, which is already one of the strongest eurozone economies. Even if the euro reaches parity with the dollar, this might not significantly help weaker countries like Greece that are not big exporters or nations like Portugal that export mostly to other European countries. To help those nations, policy makers in the eurozone have to move away from mindless austerity and push through long-delayed reforms to encourage investment and job growth.
 
For the United States, a stronger dollar will serve to dampen growth, though by how much nobody can accurately predict because the relative values of currencies are hard to forecast.

Some American manufacturers have said they are losing orders or seeing their profits decline as they are forced to cut prices to compete with the lower prices offered by European and Japanese businesses.
 
The appreciation of the dollar is a good reason for the Federal Reserve to hold off on raising interest rates this summer. But more than anything else, the stronger dollar serves as a reminder that the world is still far too reliant on the United States, which itself has not yet fully recovered from the financial crisis. That does not augur well for sustainable global growth.

The Radical Humaneness of Norway’s Halden Prison

The goal of the Norwegian penal system is to get inmates out of it.

By JESSICA BENKO

MARCH 26, 2015


Like everything else in Norway, the tw­o-­hour drive southeast from Oslo seemed impossibly civilized. The highways were perfectly maintained and painted, the signs clear and informative and the speed-­monitoring cameras primly intolerant. My destination was the town of Halden, which is on the border with Sweden, straddling a narrow fjord guarded by a 17th-­century fortress. I drove down winding roads flanked in midsummer by rich green fields of young barley and dense yellow carpets of rapeseed plants in full flower. Cows clustered in wood-­fenced pastures next to neat farmsteads in shades of rust and ocher. On the outskirts of town, across from a road parting dark pine forest, the turnoff to Norway’s newest prison was marked by a modest sign that read, simply, HALDEN ­FENGSEL. There were no signs warning against picking up hitchhikers, no visible fences. Only the 25-­foot-­tall floodlights rising along the edges hinted that something other than grazing cows lay ahead.


Smooth, featureless concrete rose on the horizon like the wall of a dam as I approached; nearly four times as tall as a man, it snaked along the crests of the hills, its top curled toward me as if under pressure. This was the outer wall of Halden Fengsel, which is often called the world’s most humane maximum-­security prison. I walked up the quiet driveway to the entrance and presented myself to a camera at the main door. There were no coils of razor wire in sight, no lethal electric fences, no towers manned by snipers — nothing violent, threatening or dangerous. And yet no prisoner has ever tried to escape. I rang the intercom, the lock disengaged with a click and I stepped inside.

To anyone familiar with the American correctional system, Halden seems alien. Its modern, cheerful and well-­appointed facilities, the relative freedom of movement it offers, its quiet and peaceful atmosphere — these qualities are so out of sync with the forms of imprisonment found in the United States that you could be forgiven for doubting whether Halden is a prison at all. It is, of course, but it is also something more: the physical expression of an entire national philosophy about the relative merits of punishment and forgiveness.


The treatment of inmates at Halden is wholly focused on helping to prepare them for a life after they get out. Not only is there no death penalty in Norway, there are no life sentences. The maximum term for any crime is 21 years — even for Anders Behring Breivik, who is responsible for probably the deadliest recorded rampage in the world, in which he killed 77 people and injured hundreds more in 2011 by detonating a bomb at a government building in Oslo and then opening fire at a nearby summer camp. “Better out than in” is an unofficial motto of the Norwegian Correctional Service, which makes a reintegration guarantee to all released inmates. It works with other government agencies to secure a home, a job and access to a supportive social network for each inmate before release; Norway’s social safety net also provides health care, education and a pension to all citizens.


With one of the highest per capita gross domestic products of any country in the world, thanks to the profits from oil production in the North Sea, Norway is in a good position to provide all of this, and spending on the Halden prison runs to more than $93,000 per inmate per year, compared with just $31,000 for prisoners in the United States, according to the Vera Institute of Justice, a nonprofit research and advocacy organization.

                      A card game between inmates. Credit Knut Egil Wang for The New York Times       


That might sound expensive. But if the United States incarcerated its citizens at the same low rate as the Norwegians do (75 per 100,000 residents, versus roughly 700), it could spend that much per inmate and still save more than $45 billion a year. At a time when the American correctional system is under scrutiny — over the harshness of its sentences, its overreliance on solitary confinement, its racial disparities — citizens might ask themselves what all that money is getting them, besides 2.2 million incarcerated people and the hardships that fall on the families they leave behind. The extravagant brutality of the American approach to prisons is not working, and so it might just be worth looking for lessons at the opposite extreme, here in a sea of blabaerskog, or blueberry forest.
 
“This punishment, taking away their freedom — the sign of that is the wall, of course,” Gudrun Molden, one of the Halden prison’s architects, said on a drizzly morning a few days after I arrived.
 
As we stood on a ridge, along with Jan Stromnes, the assistant warden, it was silent but for the chirping of birds and insects and a hoarse fluttering of birch leaves disturbed by the breeze. The prison is secluded from the surrounding farmland by the blueberry woods, which are the native forest of southeastern Norway: blue-­black spruce, slender Scotch pine with red-­tinged trunks and silver-­skinned birches over a dense understory of blueberry bushes, ferns and ­mosses in deep shade. It is an ecosystem that evokes deep nostalgia in Norway, where picking wild berries is a near-­universal summer pastime for families, and where the right to do so on uncultivated land is protected by law.
 
Norway banned capital punishment for civilians in 1902, and life sentences were abolished in 1981.
 
But Norwegian prisons operated much like their American counterparts until 1998. That was the year Norway’s Ministry of Justice reassessed the Correctional Service’s goals and methods, putting the explicit focus on rehabilitating prisoners through education, job training and therapy. A second wave of change in 2007 made a priority of reintegration, with a special emphasis on helping inmates find housing and work with a steady income before they are even released. Halden was the first prison built after this overhaul, and so rehabilitation became the underpinning of its design process. Every aspect of the facility was designed to ease psychological pressures, mitigate conflict and minimize interpersonal friction. Hence the blueberry forest.
 
“Nature is a rehabilitation thing now,” Molden said. Researchers are working to quantify the benefits of sunlight and fresh air in treating depression. But Molden viewed nature’s importance for Norwegian inmates as far more personal. “We don’t think of it as a rehabilitation,” she said. “We think of it as a basic element in our growing up.” She gestured to the knoll we stood on and the 12 acres of blabaerskog preserved on the prison grounds, echoing the canopy visible on the far side. Even elsewhere in Europe, most high-­security prison plots are scraped completely flat and denuded of vegetation as security measures. “A lot of the staff when we started out came from other prisons in Norway,” Stromnes said. “They were a little bit astonished by the trees and the number of them. Shouldn’t they be taken away? And what if they climb up, the inmates? As we said, Well, if they climb up, then they can sit there until they get tired, and then they will come down.” He laughed. “Never has anyone tried to hide inside. But if they should run in there, they won’t get very far — they’re still inside.”
“Inside” meant inside the wall. The prison’s defining feature, the wall is visible everywhere the inmates go, functioning as an inescapable reminder of their imprisonment. Because the prison buildings were purposely built to a human scale, with none more than two stories in height and all modest in breadth, the wall becomes an outsize presence; it looms everywhere, framed by the cell windows, shadowing the exercise yards, its pale horizontal spread emphasized by the dark vertical lines of the trees. The two primary responsibilities of the Correctional Service — detention and rehabilitation — are in perpetual tension with each other, and the architects felt that single wall could represent both. “We trusted the wall,” Molden said, to serve as a symbol and an instrument of punishment.
 
When Molden and her collaborators visited the site in 2002, in preparing for the international competition to design the prison, they spent every minute they were allowed walking around it, trying to absorb the genius loci, the spirit of the place. They felt they should use as much of the site as possible, requiring inmates to walk outside to their daily commitments of school or work or therapy, over uneven ground, up and down hills, traveling to and from home, as they would in the world outside. They wound up arranging the prison’s living quarters in a ring, which we could now see sloping down the hill on either side of us. In the choice of materials, the architects were inspired by the sober palette of the trees, mosses and bedrock all around; the primary building element is kiln-­fired brick, blackened with some of the original red showing through.
 
The architects used silvery galvanized-­steel panels as a “hard” material to represent detention, and untreated larch wood, a low-­maintenance species that weathers from taupe to soft gray, as a “soft” material associated with rehabilitation and growth.
 
The Correctional Service emphasizes what it calls “dynamic security,” a philosophy that sees interpersonal relationships between the staff and the inmates as the primary factor in maintaining safety within the prison. They contrast this with the approach dominant in high-­security prisons elsewhere in the world, which they call “static security.” Static security relies on an environment designed to prevent an inmate with bad intentions from carrying them out.
 
Inmates at those prisons are watched at a remove through cameras, contained by remote-­controlled doors, prevented from vandalism or weapon-­making by tamper-­proof furniture, encumbered by shackles or officer escorts when moved. Corrections officers there are trained to control prisoners with as little interaction as possible, minimizing the risk of altercation.
 
Dynamic security focuses on preventing bad intentions from developing in the first place.
 
Halden’s officers are put in close quarters with the inmates as often as possible; the architects were instructed to make the guard stations tiny and cramped, to encourage officers to spend time in common rooms with the inmates instead. The guards socialize with the inmates every day, in casual conversation, often over tea or coffee or meals. Inmates can be monitored via surveillance cameras on the prison grounds, but they often move unaccompanied by guards, requiring a modest level of trust, which the administrators believe is crucial to their progress.
 
Nor are there surveillance cameras in the classrooms or most of the workshops, or in the common rooms, the cell hallways or the cells themselves. The inmates have the opportunity to act out, but somehow they choose not to. In five years, the isolation cell furnished with a limb-­restraining bed has never been used.
It is tempting to chalk up all this reasonableness to something peculiar in Norwegian socialization, some sort of civility driven core-­deep into the inmates since birth, or perhaps attribute it to their racial and ethnic homogeneity as a group. But in actuality, only around three-­fifths of the inmates are legal Norwegian citizens. The rest have come from more than 30 other countries (mostly in Eastern Europe, Africa and the Middle East) and speak little or no Norwegian; English is the lingua franca, a necessity for the officers to communicate with foreign prisoners.
CreditKnut Egil Wang for The New York Times                           

 
Of the 251 inmates, nearly half are imprisoned for violent crimes like murder, assault or rape; a third are in for smuggling or selling drugs. Nevertheless, violent incidents and even threats are rare, and nearly all take place in Unit A. It is the prison’s most restrictive unit, housing inmates who require close psychiatric or medical supervision or who committed crimes that would make them unpopular in Units B and C, the prison’s more open “living” cell blocks, where the larger population of inmates mixes during the day for work, schooling and therapy programs.
 
I met some of the prisoners of Unit A one afternoon in the common room of an eight-­man cell block. I was asked to respect the inmates’ preferences for anonymity or naming, and for their choices in discussing their cases with me. The Norwegian news media does not often identify suspects or convicts by name, so confirming the details of their stories was not always possible. I sat on an orange vinyl couch next to a wooden shelving unit with a few haphazard piles of board games and magazines and legal books. On the other side of the room, near a window overlooking the unit’s gravel yard, a couple of inmates were absorbed in a card game with a guard.
 
An inmate named Omar passed me a freshly pressed heart-­shaped waffle over my shoulder on a paper plate, interrupting an intense monologue directed at me in excellent English by Chris Giske, a large man with a thick goatee and a shaved head who was wearing a heavy gold chain over a T-­shirt that strained around his barrel-­shaped torso.
 
“You have heard about the case? Sigrid?” Giske asked me. “It’s one of the biggest cases in Norway.”
 
In 2012, a 16-­year-­old girl named Sigrid Schjetne vanished while walking home one night, and her disappearance gripped the country. Her body was found a month later, and Giske’s conviction in the case made him one of the most reviled killers in Norwegian history.
 
He explained to me that he asked to transfer out of Unit A, but that officials declined to move him.
 
“They don’t want me in prison,” he said. “They want me in the psychiatric thing. I don’t know why.”
 

He was denied the transfer, I was later told, partly because of a desire not to outrage the other inmates, and partly because of significant concern over his mental health — and his history of unprovoked extreme violence against young women unfortunate enough to cross his path.
 
Giske had previously spent two years in prison after attacking a woman with a crowbar. This time, there was disagreement among doctors over whether he belonged in a hospital or in prison. Until the question was settled, he was the responsibility of the staff at Halden. It was not the first, second or even third casual meal I had shared with a man convicted of murder since I arrived at the beginning of the week, but it was the first time I felt myself recoil on instinct.
 
(After my visit, Giske was transferred to a psychiatric institution.)
Omar handed me a vacuum-­sealed slice of what appeared to be flexible plastic, its wrapper decorated with a drawing of cheerful red dairy barns.
 
“It’s fantastic!” he exclaimed. “When you are in Norway, you must try this! The first thing I learned, it was this. Brown cheese.”
   

In the kitchen of the house where some inmates have overnight visits with their families. Credit Knut Egil Wang for The New York Times

According to the packaging, brown cheese is one of the things that “make Norwegians Norwegians,” a calorie-­dense fuel of fat and sugar salvaged from whey discarded during the cheese-­making process, which is cooked down for half a day until all that remains are caramelized milk sugars in a thick, sticky residue. With enthusiastic encouragement from the inmates, I peeled open the packaging and placed the glossy square on my limp waffle, following their instructions to fold the waffle as you would a taco, or a New York slice. To their great amusement, I winced as I tried to swallow what tasted to me like a paste of spray cheese mixed with fudge.
 
Another guard walked in and sat down next to me on the couch. “It’s allowed to say you don’t like it,” she said.
 
Are Hoidal, the prison’s warden, laughed from the doorway behind us and accepted his third waffle of the day. He had explained to me earlier, in response to my raised eyebrows, that in keeping with the prison’s commitment to “normalcy,” even the inmates in this block gather once a week to partake of waffles, which are a weekly ritual in most Norwegian homes.
 
At Halden, some inmates train for cooking certificates in the prison’s professional-­grade kitchen classroom, where I was treated to chocolate mousse presented in a wineglass, a delicate nest of orange zest curled on top. But most of the kitchen activity is more ordinary. I never entered a cell block without receiving offers of tea or coffee, an essential element of even the most basic Norwegian hospitality, and was always earnestly invited to share meals. The best meal I had in Norway — spicy lasagna, garlic bread and a salad with sun-­dried tomatoes — was made by an inmate who had spent almost half of his 40 years in prison. “Every time, you make an improvement,” he said of his cooking skills.
 
When I first met the inmates of C8, a special unit focused on addiction recovery, they were returning to their block laden with green nylon reusable bags filled with purchases from their weekly visit to the prison grocery shop, which is well ­stocked, carrying snacks and nonperishables but also a colorful assortment of produce, dairy products and meat. The men piled bags of food for communal suppers on the kitchen island on one side of their common room and headed back to their cells with personal items — fruit, soda, snacks, salami — to stash in their minifridges.
 
I met Tom, an inmate in his late 40s, as he was unpacking groceries on the counter: eggs, bacon, bread, cream, onions, tomato sauce, ground beef, lettuce, almonds, olives, frozen shrimp. Tom had a hoarse voice and a graying blond goatee, and his sleeveless basketball jersey exposed an assortment of tattoos decorating thick arms. His head was shaved smooth, with “F___ the Police” inked in cursive along the right side of his skull; the left side said “RESPECT” in inch-­tall letters. A small block of text under his right eye was blacked out, and under his left eye was “666.” A long seam ran up the back of his neck and scalp, a remnant of a high-speed motorcycle accident that left him in a coma the last time he was out of prison.
“You are alone now, yeah?” Tom nodded toward the room behind me. I turned around to look.
There were maybe eight inmates around — playing a soccer video game on the modular couch, folding laundry dried on a rack in the corner by large windows overlooking the exercise yard, dealing cards at the dining table — but no guards. Tom searched my face for signs of alarm. The convictions represented among this group included murder, weapons possession and assault.
 
I was a little surprised, but I stayed nonchalant. I might have expected a bit more supervision — perhaps a quick briefing on safety protocol and security guidelines — but the guards could see us through the long windows of their station, sandwiched between the common rooms of C7 and C8. It was the first of many times I would be left alone with inmates in a common room or in a cell at the end of a hallway, the staff retreating to make space for candid conversation. “It’s O.K.,” Tom assured me, with what I thought sounded like a hint of pride.
 
A man named Yassin, the uncontested pastry king of C8, politely motioned for me to move aside so he could get to the baking pans in the cabinet at my feet. When Halden opened, there was a wave of foreign news reports containing snarky, florid descriptions of the “posh,” “luxurious” prison, comparing its furnishings to those of a “boutique hotel.” In reality, the furniture is not dissimilar from what you might find in an American college dorm. The truly striking difference is that it is normal furniture, not specially designed to prevent it from being turned into shivs, arson fuel or other instruments of violence. The kitchen also provides ample weapons if a prisoner were so inclined. As one inmate pointed out to me, the cabinets on the wall contained ceramic plates and glass cups, the drawers held metal silverware and there were a couple of large kitchen knives tethered by lengths of rubber-­coated wire.
 
“If you want to ask me something, come on, no problem,” Tom said, throwing open his hands in invitation. “I’m not very good in English.”
 
Yassin stood up, laughing. “You speak very nice, Tom! It is prison English!” Yassin speaks Arabic and English and is also fluent in Norwegian, a requirement for living in the drug-­treatment block, where group and individual counseling is conducted in Norwegian. Like many in the prison, Tom never finished high school. He was raised in a boys’ home and has been in and out of prison, where English is common, for more than 30 years. (Yassin’s first prison sentence began at 15. Now 29 and close to finishing his sentence for selling drugs, he wants to make a change and thinks he might like to run a scared-­straight-­style program for teenagers.
 
Before this most recent arrest, the background photo on his Facebook profile was the Facebook logo recreated in white powder on a blue background, with a straw coming in for the snort. He immigrated to Norway as a child with his Moroccan family by way of Dubai.)
“I don’t leave Norway,” Tom said. “I love my country.” He extended his arm with his fist clenched, showing a forearm covered in a “NORGE” tattoo shaded in the colors of the Norwegian flag. But I couldn’t detect any tension between Tom and Yassin in the kitchen. Tom was adamant that overcoming his substance-­abuse problem was his responsibility alone. But he conceded that the environment at Halden, and the availability of therapists, made it easier. Compared with other prisons, “it’s quiet,” he said. “No fighting, no drugs, no problem,” he added. “You’re safe.”
 

The officers try to head off any tensions that could lead to violence. If inmates are having problems with one another, an officer or prison chaplain brings them together for a mediation session that continues until they have agreed to maintain peace and have shaken hands. Even members of rival gangs agree not to fight inside, though the promise doesn’t extend to after their release. The few incidents of violence at Halden have been almost exclusively in Unit A, among the inmates with more serious psychiatric illnesses.
 
If an inmate does violate the rules, the consequences are swift, consistent and evenly applied. Repeated misbehavior or rule violations can result in cell confinement during regular work hours, sometimes without TV. One inmate claimed that an intrepid prisoner from Eastern Europe somehow managed to hack his TV to connect to the Internet and had it taken away for five months. (“Five months!” the inmate marveled to me. “I don’t understand how he survived.”)
 
It is perhaps hard to believe that Halden, or Norway more broadly, could hold any lessons for the United States. With its 251 inmates, Halden is one of Norway’s largest prisons, in a country with only 3,800 prisoners (according to the International Center for Prison Studies); by contrast, in the United States, the average number is around 1,300 at maximum-­security prisons, with a total of 2.2 million incarcerated (according to the federal Bureau of Justice Statistics). Halden’s rehabilitation programs seem logistically and financially out of reach for such a system to even contemplate.
 
And yet there was a brief historical moment in which the United States pondered a similar approach to criminal justice. As part of his “war on crime,” Lyndon B. Johnson established the President’s Commission on Law Enforcement and Administration of Justice, a body of 19 advisers appointed to study, among other things, the conditions and practices of catastrophically overstretched prisons. The resulting 1967 report, “The Challenge of Crime in a Free Society,” expressed concern that many correctional institutions were detrimental to rehabilitation: “Life in many institutions is at best barren and futile, at worst unspeakably brutal and degrading. . . . The conditions in which they live are the poorest possible preparation for their successful re-­entry into society, and often merely reinforce in them a pattern of manipulation and destructiveness.” And in its recommendations, the commission put forward a vision for prisons that would be surprisingly like Halden. “Architecturally, the model institution would resemble as much as possible a normal residential setting. Rooms, for example, would have doors rather than bars. Inmates would eat at small tables in an informal atmosphere.
 
There would be classrooms, recreation facilities, day rooms, and perhaps a shop and library.”
In the mid-­1970s, the federal Bureau of Prisons completed three pretrial detention facilities that were designed to reflect those best practices. The three Metropolitan Correctional Centers, or M.C.C.s, were the first of what would come to be known as “new generation” institutions. The results, in both architecture and operation, were a radical departure from previous models. Groups of 44 prisoners populated self-­contained units in which all of the single-­inmate cells (with wooden doors meant to reduce both noise and cost) opened onto a day room, where they ate, socialized and met with visitors or counselors, minimizing the need for moving inmates outside the unit. All the prisoners spent the entire day outside their cells with a single unarmed correctional officer in an environment meant to diminish the sense of institutionalization and its attendant psychological stresses, with wooden and upholstered furniture, desks in the cells, porcelain toilets, exposed light fixtures, brightly colored walls, skylights and carpeted floors.
   

Guards and inmates teamed up in the exercise yard of Unit C. Credit Knut Egil Wang for The New York Times

 
But by the time the centers opened, public and political commitment to rehabilitation programs in American prisons had shifted. Much of the backlash within penological circles can be traced to Robert Martinson, a sociology researcher at the City University of New York. In a 1974 article for the journal Public Interest, he summarized an analysis of data from 1945 to 1967 about the impact of rehabilitation programs on recidivism. Despite the fact that around half the individual programs did show evidence of effectiveness in reducing recidivism, Martinson’s article concluded that no category of rehabilitation program (education or psychotherapy, for example) showed consistent results across prison systems. “With few and isolated exceptions,” he wrote, “the rehabilitative efforts that have been reported so far have had no appreciable effect on recidivism.” Martinson’s paper was immediately seized upon by the news media and politicians, who latched on to the idea that “nothing works” in regard to prisoner rehabilitation. “It Doesn’t Work” was the title of a “60 Minutes” segment on rehabilitation. “They don’t rehabilitate, they don’t deter, they don’t punish and they don’t protect,” Jerry Brown, the governor of California, said in a 1975 speech. A top psychiatrist for the Bureau of Prisons resigned in disgust at what he perceived to be an abandonment of commitment to rehabilitation. At the dedication ceremony for the San Diego M.C.C. in 1974, one of the very structures designed with rehabilitation in mind, William Saxbe, the attorney general of the United States, declared that the ability of a correctional program to produce rehabilitation was a “myth” for all but the youngest offenders.
 
Martinson’s paper was quickly challenged; a 1975 analysis of much of the same data by another sociologist criticized Martinson’s choice to overlook the successful programs and their characteristics in favor of a broad conclusion devoid of context. By 1979, in light of new analyses, Martinson published another paper that unequivocally withdrew his previous conclusion, declaring that “contrary to my previous position, some treatment programs do have an appreciable effect on recidivism.” But by then, the “nothing works” narrative was firmly entrenched. In 1984, a Senate report calling for more stringent sentencing guidelines cited Martinson’s 1974 paper, without acknowledging his later reversal. The tough-on-crime policies that sprouted in Congress and state legislatures soon after included mandatory minimums, longer sentences, three-­strikes laws, legislation allowing juveniles to be prosecuted as adults and an increase in prisoners’ “maxing out,” or being released without passing through reintegration programs or the parole system. Between 1975 and 2005, the rate of incarceration in the United States skyrocketed, from roughly 100 inmates per 100,000 citizens to more than 700 — consistently one of the highest rates in the world. Though Americans make up about only 4.6 percent of the world’s population, American prisons hold 22 percent of all incarcerated people.
Today, the M.C.C. model of incarceration, which is now known as “direct supervision,” is not entirely dead. Around 350 facilities — making up less than 7 percent of the incarceration sites in the United States, mostly county-­level jails, which are pretrial and short-­stay institutions — have been built on the direct-­supervision model and are, with greater and lesser fidelity to the ideal, run by the same principles of inmate management developed for the new-­generation prisons of the 1970s. The body of data from those jails over the last 40 years has shown that they have lower levels of violence among inmates and against guards and reduced recidivism; some of these institutions, when directly compared with the older facilities they replaced, saw drops of 90 percent in violent incidents. But extrapolating from this tiny group of facilities to the entire nation, and in particular to its maximum-­security prisons, is an impossible thought experiment. Much about the American culture of imprisonment today — the training of guards, the acculturation of prisoners, the incentives of politicians, the inattention of citizens — would have to change for the Norwegian approach to gain anything more than a minor foothold in the correctional system. The country has gone down a different road during the past half century, and that road does not lead to Halden Fengsel.
 
Even understanding how well the Norwegian approach works in Norway is a difficult business. On a Saturday afternoon in Oslo, I met Ragnar Kristoffersen, an anthropologist who teaches at the Correctional Service of Norway Staff Academy, which trains correction officers.
 
Kristoffersen published a research paper comparing recidivism rates in the Scandinavian countries. A survey of inmates who were released in 2005 put Norway’s two-­year recidivism rate at 20 percent, the lowest in Scandinavia, which was widely praised in the Norwegian and international press. For comparison, a 2014 recidivism report from the United States Bureau of Justice Statistics announced that an estimated 68 percent of prisoners released in 30 states in 2005 were arrested for a new crime within three years.
 
I asked Kristoffersen if he had spent time at Halden. He reached into his briefcase and pulled out a handful of printed sheets. “Have you seen this?” he asked while waving them at me. “It’s preposterous!” They were printouts of English-­language articles about the prison, the most offensive and misleading lines highlighted. He read a few quotes about the prison’s architecture and furnishings to me with disgust. I acknowledged that the hyperbolic descriptions would catch the attention of American and British readers, for whom the cost of a prison like Halden would probably need to be justified by strong evidence of a significant reduction in recidivism.
 
Somewhat to my surprise, Kristoffersen went into a rant about the unreliability of recidivism statistics for evaluating corrections practices. From one local, state or national justice system to another, diverse and ever-­changing policies and practices in sentencing — what kinds and lengths of sentences judges impose for what types of crimes, how likely they are to reincarcerate an offender for a technical violation of parole, how much emphasis they put on community sentences over prison terms and many other factors — make it nearly impossible to know if you’re comparing apples to apples. Kristoffersen pointed out that in 2005, Norway was putting people in prison for traffic offenses like speeding, something that few other countries do. Speeders are at low risk for reoffending and receiving another prison sentence for that crime or any other. Excluding traffic offenders, Norway’s recidivism rate would, per that survey, be around 25 percent after two years.
Then there was the question of what qualifies as “recidivism.” Some countries and states count any new arrest as recidivism, while others count only new convictions or new prison sentences; still others include parole violations. The numbers most commonly cited in news reports about recidivism, like the 20 percent celebrated by Norway or the 68 percent lamented by the United States, begin to fall apart on closer inspection. That 68 percent, for example, is a three-­year number, but digging into the report shows the more comparable two-­year rate to be 60 percent. And that number reflects not reincarceration (the basis for the Norwegian statistic) but rearrest, a much wider net. Fifteen pages into the Bureau of Justice Statistics report, I found a two-­year reincarceration rate, probably the best available comparison to Norway’s measures. Kristoffersen’s caveat in mind, that translated to a much less drastic contrast: Norway, 25 percent; the United States, 28.8 percent.
 
What does that mean? Is the American prison system doing a better job than conventional wisdom would suggest? It is frustratingly hard to tell. I asked Kristoffersen if that low reincarceration rate might reflect the fact that long prison sentences mean that many prisoners become naturally less likely to reoffend because of advanced age. He agreed that was possible, along with many other more and less obvious variables. It turned out that measuring the effectiveness of Halden in particular was nearly impossible; Norway’s recidivism statistics are broken down by prison of release, and almost no prisoners are released directly from maximum-­security prisons, so Halden doesn’t have a recidivism number.
 
After nearly an hour of talking about the finer points of statistics, though, Kristoffersen stopped and made a point that wasn’t about statistics at all.
 
“You have to be aware — there’s a logical type of error which is common in debating these things,” he said. “That is, you shouldn’t mix two kinds of principles. The one is about: How do you fight crimes? How do you reduce recidivism? And the other is: What are the principles of humanity that you want to build your system on? They are two different questions.”
 
He leaned back in his chair and went on. “We like to think that treating inmates nicely, humanely, is good for the rehabilitation. And I’m not arguing against it. I’m saying two things. There are poor evidence saying that treating people nicely will keep them from committing new crimes. Very poor evidence.”
 
He paused. “But then again, my second point would be,” he said, “if you treat people badly, it’s a reflection on yourself.” In officer-­training school, he explained, guards are taught that treating inmates humanely is something they should do not for the inmates but for themselves.
 
The theory is that if officers are taught to be harsh, domineering and suspicious, it will ripple outward in their lives, affecting their self-­image, their families, even Norway as a whole. Kristoffersen cited a line that is usually attributed to Dostoyevsky: “The degree of civilization in a society can be judged by entering its prisons.”
 
I heard the same quotation from Are Hoidal, Halden’s warden, not long before I left Halden. He told me proudly that people wanted to work at the prison, and officers and teachers told me that they hoped to spend their whole careers at Halden, that they were proud of making a difference.
 
“They make big changes in here,” Hoidal said as we made our way through the succession of doors that would return us to the world outside. There was, improbably, an actual rainbow stretching from the clouds above, landing somewhere outside the wall. Hoidal was quiet for a moment, then laughed. “I have the best job in the world!” He chuckled and shook his head. He sounded surprised.