How the euro helped Germany avoid becoming Japan

Berlin should be thankful for what the single currency, and Mario Draghi, have given it

Martin Wolf

James Ferguson web

To think that two and two are four/And neither five nor three/The heart of man has long been sore/And long ’tis like to be.”

Anybody thinking about the economy needs to recall these lines by the English poet AE Housman. Things must add up. The question is how.

People responsible for large economies cannot ignore this. A tragedy of the eurozone, especially of Germany’s role within it, is that the transition to thinking about how income and expenditure add up at eurozone and global levels has so far failed to occur.

This partly explains widespread German hostility to the policies of the European Central Bank. Yet those policies will not fundamentally change. They may have to become even more aggressive. If so, the disaffection revealed in resignations by three German officials from the ECB board, most recently Sabine Lautenschläger, and in attacks by German policymakers, will worsen. This hostility could have long-run consequences not dissimilar to those of three decades of Euroscepticism in the UK. It could prove catastrophic. The EU can survive without the UK, but not without Germany, its core country.

I feared that the euro would end up dividing the EU politically when it was launched some three decades ago. But there is no easy way back. It has to work. For Germans, the necessary realisation has to be that the euro is already working to their benefit, by stabilising their economy, despite its huge savings surpluses.

It cannot make those surplus savings highly remunerative, too, because the market does not need them. That is what it means to be in a global “liquidity trap”, with weak investment despite ultra-low interest rates: savings are not scarce but superabundant.

What are the euro’s benefits to Germany? An answer comes from a comparison with the economy that it most closely resembles: Japan’s. Both were reborn from the ashes of the second world war as allies of the US and dynamic exporters of manufactures. They are the world’s third and fourth largest economies. They also have the world’s second and third highest median ages. Germany’s fertility rate ranks 204th in the world, while Japan’s ranks 209th. These then are relatively large and rapidly ageing high-income countries, with strong manufacturing.

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Not surprisingly, both countries also have huge surpluses of private savings over investments. Between 2010 and 2017, the surplus of private savings over investment averaged some 7 per cent of gross domestic product in Germany and 8 per cent in Japan. The composition was different, however: the savings surplus of households was 72 per cent of Germany’s overall private surplus, while the corporate sector’s surplus was 76 per cent of Japan’s.

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Even at ultra-low interest rates, domestic private investment fell far short of private savings. As a matter of arithmetic, either fiscal deficits or capital flows abroad had to absorb these excess savings. Here is where the difference emerged. In Japan, net capital outflows (by definition, the mirror image of the current account surplus) absorbed just a third of the private surplus, with the rest ending up in fiscal deficits. In Germany, capital outflows absorbed all the private surplus, since the government too ran fiscal surpluses.

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The difference was not German fiscal virtue and Japanese fiscal vice. Japan was, instead, compelled towards fiscal deficits, because generating and sustaining current account surpluses of 8 per cent of GDP, which would have been required otherwise, was unworkable: the real exchange rate was too unstable and foreign partners too hostile.

Germany, however, has a stable and competitive real exchange rate. Close to 40 per cent of its exports of goods go to other eurozone countries. Here, the competitive position that Germany achieved in the early years of the eurozone is mostly still locked in. Moreover, the euro’s exchange rate reflects the competitiveness of a weighted average of its users. These benefits have greatly facilitated Germany’s desired combination of private, fiscal and trade surpluses.

The euro made prudence work.

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What would have happened if the German economy had not been sheltered by the eurozone?

The Deutschemark would surely have appreciated hugely, this time in a low-inflation world.

That would have pushed German domestic inflation below zero, damaged the profitability and performance of exports and inflicted losses on German financial institutions, with their huge foreign assets. It would have made it impossible to preserve strongly positive nominal interest rates and probably impossible to avoid persistent fiscal deficits, too.

In brief, the eurozone protected Germany from becoming another Japan. Germans should be thankful for what the euro has given them, praise Mario Draghi, outgoing ECB president, for his brave decisions to save the system from calamity and hope his successor Christine Lagarde will follow suit.

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Interest rates on German savings could not be significantly higher, whether it was inside or outside the eurozone. In today’s economy, the only way for German savers to enjoy higher returns is for them to take more risk.

As a country, however, Germany could help to shift the balance of desired savings and investment worldwide. As the world economy slows and even Germany’s economy shows signs of weakness, as foreign demand lags, the case for this grows. Policymakers in Germany and elsewhere should promote public and private spending — investment, above all. Huge opportunities do seem to exist. Moreover, the chance to borrow at today’s ultra-low long-term interest rates is a blessing, not a curse.

Be ambitious. In today’s economy, it is the only prudent thing to do.

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In South America, US Influence Faces a Backlash

By: Allison Fedirka

With a global economic slowdown looking increasingly inevitable, it’s time to turn from what’s driving that slowdown to what impacts it will have. Among the most important impacts is social unrest, as embodied in recent anti-government protests in South America – including in Chile and Ecuador.

As the global economy slows, wealth disparities will be thrown into sharper relief, and citizens’ demands on governments to provide for them will grow.

Governments unable to meet these demands or sufficiently justify their policy approaches will continue to be challenged by the people.

This will undoubtedly have domestic consequences – but it’s also worth exploring the impact this will have on international ties.

In South America, anti-government citizen protests will call into question the United States' role, influence and relations in the region.

Within nearly every South American country there is a fault line between an open-market, fiscally conservative camp on the one hand and a controlled-market, pro-social spending camp on the other.

The two sides’ positions naturally align them with different international powers that follow similar economic orders: the first with the United States and the second with countries like Russia or China.

This means that when South American countries implement austerity measures, protesters tend to lash out against their governments for following U.S.-designed policies.

Consequently, this creates a backlash against the U.S. and a space into which extra-regional powers like Russia can advance their positions in the region.

The U.S. and the Global Economy

The United States has, needless to say, played a pivotal role in shaping the global economic order for the past 75 years.

The U.S. ranked as the world’s single largest economy for the entire 20th century and into the 21st. Its 2019 nominal gross domestic product totals $21.44 trillion, accounting for nearly a quarter of the global economy, according to the most recent International Monetary Fund figures.

But U.S. economic influence goes beyond the sheer size of its economy. In the wake of World War II, much of the global economy faced two major challenges – reconstruction and avoiding yet another repeat of such a catastrophic conflict.

The United States found itself in the unique position of having been a combatant in the war but without having large swaths of its economic hubs destroyed by it.

This afforded Washington the opportunity to heavily influence the postwar reconstruction of international monetary and trade systems.

These systems were laid out in the Bretton Woods Agreement, which was based on the premise that equal terms for trade and international economic collaboration would help secure prosperity and peace.

In practice, it helped regulate exchange rates, curtail speculative capital flows, promote foreign direct investment and discourage the formation of closed, controlled trade blocs.

Bretton Woods underpinned the operational framework for major world economies – with smaller allied economies in tow – for nearly three decades.

Even after the Bretton Woods system formally ended, its key institutions remained in place, along with sustained U.S. influence in global economic policy.

Both the IMF and what is now the World Bank came into existence under Bretton Woods.

The IMF currently serves as the lender of last resort to countries in financial trouble in an effort to help stabilize the global economy. Its aid is often conditioned on countries meeting specific criteria, which are often aligned with U.S. views and priorities.

The U.S. also has a larger voter share in the IMF than any of the other 189 member countries.

Amendments, reforms and other decisions require 85 percent support to pass, and while the U.S. cannot fully control the IMF, its share of the votes is large enough to give it effective veto power over any action the fund may try to take, putting the U.S. in a position to direct the general course of the IMF.
Largest Voting Shares in International Economic Organizations

The World Bank evolved out of the International Bank for Reconstruction and Development, the institution that funded Europe’s reconstruction.

It serves as a major source of development assistance to lower-middle-income and low-income countries. As with the IMF, the U.S. has the highest share of votes of any country.

In addition, the U.S. dollar remains the global currency for commodity trade and prices.

The U.S. also has immense sway over the behavior of other countries – for instance, by using the SWIFT money transfer system to enforce economic sanctions on other entities.

Though Russia and China, among others, are making attempts to stand up alternatives to these U.S.-tied mechanisms, they are still a long way from being direct or equal substitutes.

In South America, the United States’ impact on national economies and individual livelihoods goes well beyond the general influence it has in the global system to include specifically prescribed and designed policies.

As the Third World debt crisis unfolded in the early 1980s, many countries in the region found themselves in need of loans, investment and help servicing debt.

In what became known as the Washington Consensus, institutions such as the U.S. Treasury Department and the IMF offered a solution: South American countries could adopt policies of fiscal reform, privatization, market deregulation and free-market trade in exchange for loans and investments.

After a decade, however, it became clear the United States’ recipe for success in these countries was not producing the desired results, and many participant countries felt the U.S. had left them in the lurch.

Critics who argued the policies did more harm than good managed to push out the governments that had accepted the Washington Consensus.

The entire process sowed seeds of resentment and doubt over U.S.-led economic policies among political parties across South America.

How the Economic Becomes Political

Most South American economies are characterized by political cycles where power alternates between governments favoring free-market economic policies and those advocating more interventionist, social-spending policies.

This feature is rooted in their colonial pasts, dependence on exports of raw materials and past experiences with U.S.-driven economic policies.

As a result, domestic discussions over economic models and policies are closely linked with the question of whether to accept or reject political alignment with the United States.

A free-market economy is often associated with a pro-U.S. stance, while a highly controlled, high-social spending economy tends to have a more antagonistic stance toward the U.S.

Swings between cycles have become particularly pronounced in the past 20 years as part of the prolonged fallout from the Washington Consensus.

A significant anti-U.S. wave swept through the region at the turn of the century.

After 15 years, there were signs of this tide ebbing as more pro-market, pro-U.S. leaders were elected.

But slowing global economic conditions have changed matters.

First, it triggered greater scrutiny of governments, the services they provided and their use of funds.

Second, people became more focused on their quality of life and living conditions, especially as those conditions started to decline.

Last, it renewed the debate over whether these countries should continue following their current policies or adopt new ones to better deal with the economic problems they’re facing.

As economic pressures intensify, the polarization between the two sides of the cycle becomes more apparent, relations grow more strained and unrest more common.

South America's Public Backlash Against the U.S.

And, as the slowdown continues, there is a higher risk of backlash against the U.S. and increasing opportunities for powers outside the Western Hemisphere to expand their political influence in the region.

Doubts, critiques and debates over the Washington Consensus are sharp in the region’s recent memory.

In light of the slowing global economy, they’ll be revived as countries consider the U.S. role in driving the current decline and which economic policy path to pursue.

There are active political camps in a number of these countries that reject the neoliberal U.S. model and demand more spending and action from their governments to address economic shortcomings.

As segments of the population reject their governments’ U.S.-aligned economic policies, space will open for other actors, particularly Russia and China.

This opening will be primarily political; economic ties can play a supportive role but won’t be foundational, since a global slowdown means even major powers will have more limited resources that they’ll need at home.

Similarly, security ties will be symbolic at best. But the political sphere is ripe for the taking and promises the greatest potential return for outside powers.

Realignments to Watch For

Russia has already started to capitalize on this opportunity, focusing so far primarily on the Caribbean.

There are two advantages for Russia in focusing its time and attention here.

First, its proximity to the U.S. is valuable to Russia.

Second, Moscow has Cold War ties in this region that it can tap into.

Russia’s economic and security interactions, primarily concentrated on Cuba and Venezuela, reflect a pragmatic approach that takes into consideration Moscow’s economic constraints and a desire to avoid any major conflict with the U.S.

Russia’s interest in Venezuela’s energy sector has shifted to focus on acquiring strategic hard assets and revenue-generating endeavors, while it phases out less strategic and unprofitable projects.

Similarly, on defense Russia continues to honor past agreements and promote political and technical exchanges but has reigned in things like loans and credit to buy more Russian military equipment. In Cuba, Russia has put forward funding for small projects to help boost the island’s economy but resisted any high-cost initiatives such as providing the island with discounted fuel to make up for losses resulting from Venezuela’s decline.

China, on the other hand, faces a more challenging path given that its ties with South America have been mainly economic and commercial.

The trade war with the U.S. and China’s domestic economic pressures have forced Beijing to be more selective and pragmatic about its economic engagements in South America.

But current conditions also make developing political ties more attractive.

Until recently China was able to offer countries like Venezuela and Ecuador generous loans with favorable terms in exchange for commodities, usually oil.

This approach has been phased out because of falling oil prices and increased uncertainty over loan repayments.

Trade and investment, the other pillars of Chinese engagement in the region, will also come under increased scrutiny during the slowdown.

South American trade with China includes large volumes of raw materials and natural resources.
Slowing demand and the likelihood of lower commodity prices will pressure South American countries to trade more value-added goods, which is a hard sell in China.

While China still has hundreds of billions of dollars available for foreign investments, its internal slowdown and mounting debt have already forced it to be more selective with who it gives funding to and make an extra effort to assure partners that those funds will actually appear.

Overall, then, this puts China in a good place: The opening of political space in parts of South America will coincide with China’s need to put more emphasis on political relationships as the economic ones face more constraints.

South American governments’ oscillation between polarized economic policy platforms, coupled with those policies' close ties to U.S. relations, creates a distinctive regional reaction to the global economic downturn.

The pursuit of economic policies aligned with U.S. and IMF principles is fiercely at odds with an alternative, more socialist approach.

In the event that countries reject the U.S.-aligned policies – and current protests and elections suggest that is a real possibility – there will be an opening for outside actors like Russia and China.

These actors will also be vulnerable to an economic slowdown, but their desire to build stronger political ties becomes an alternative to potentially reduced economic investment that neatly coincides with the current dynamics of the region.

The degree to which Russia and China can build political influence and maintain that hold will depend on a host of variables.

But at this point what is clear is that the current environment makes public backlash against the U.S. likely – and that, at the very least, opens the door for Russia and China.

Stop Inflating the Inflation Threat

Given the scale and severity of inflation in America in the 1970s, it is understandable that US monetary policymakers developed a deep-seated fear of it. But, nearly a half-century later, the conditions that justified such worries no longer apply, and it is past time that we stopped denying what the data are telling us.

J. Bradford DeLong


BERKELEY – In light of current macroeconomic conditions in the United States, I’ve found myself thinking back to September 2014. That month, the US unemployment rate dropped below 6%, and a broad range of commentators assured us that inflation would soon be on the rise, as predicted by the Phillips curve. The corollary of this argument, of course, was that the US Federal Reserve should begin rapidly normalizing monetary policy, shrinking the monetary base and raising interest rates back into a “normal” range.

Today, US unemployment is 2.5 percentage points lower than it was when we were all assured that the economy had reached the “natural” rate of unemployment. When I was an assistant professor back in the 1990s, the rule of thumb was that unemployment this low would lead to a 1.3 percentage point increase in inflation per year. If this year’s rate of inflation was 2%, next year’s would be 3.3%. And if unemployment remained at the same general level, the inflation rate the following year would be 4.6%, and 5.9% the year after.

But the old rule of thumb no longer applies. The inflation rate in the US will remain at about 2% per year for the next several years, and our monetary-policy choices should reflect that fact.

To be sure, the conventional wisdom among economists back in the 1990s was justified. Between 1957 and 1988, inflation responded predictably to fluctuations in the rate of unemployment. The slope of the simplest possible Phillips curve, when accounting for adaptive expectations, was -0.54: each percentage point decline in unemployment below the estimated natural rate translated into a 0.54 percentage point increase in inflation the following year.

The estimated negative slope of the Phillips curve – that -0.54 figure – between the late 1950s and the late 1980s was drawn largely from six important observations. In 1966, 1973, and 1974, inflation rose in a context of relatively low unemployment. Then, in 1975, 1981, and 1982, inflation fell amid conditions of relatively high unemployment.

Since 1988, however, the slope of the simplest possible Phillips curve has been effectively zero, with an estimated regression coefficient of just -0.03. Even with unemployment far below what economists have presumed was the natural rate, inflation has not accelerated. Likewise, even when unemployment far exceeded what economists presumed was the natural rate, between 2009 and 2014, inflation did not fall, nor did deflation set in.

Although the past 30 years have not offered any analogues to the data points furnished by the 1950s-1980s era, there are many who still believe that monetary policymakers should remain focused on the risk of rapidly accelerating inflation, implying that inflation poses a greater threat than the possibility of recession.

For example, three very sharp economists – Peter Hooper, Frederic S. Mishkin, and Amir Sufi – recently published a paper suggesting that the Phillips curve in America is “just hibernating,” and that estimates showing a near-flat curve over the past generation are unreliable, owing to the “endogeneity of monetary policy and the lack of variation of the unemployment gap.”

I do not understand why they came to this conclusion. After all, the computer tells us that the 1988-2018 estimates are probably around three times more precise than the 1957-1987 estimates. And besides, the window captured in standard specifications of the Phillips curve is too short to allow for any substantial monetary-policy response.

Yes, an outbreak of inflation could be a threat. But the single-minded focus on that risk is the product of a different era. It comes from a time when successive US administrations (those of Lyndon Johnson and Richard Nixon) were desperate for a persistently high-pressure economy, and when the Fed chair (Arthur Burns) was eager to accommodate presidential demands. Back then, a cartel that controlled the global economy’s key input (oil) was capable of delivering massive negative supply shocks.

If all of these conditions still held, we might be justified in worrying about the return of 1970s-level inflation. But they don’t.

It is past time that we stopped denying what the data are telling us. Until the structure of the economy and the prevailing economic-policy mix changes, there is little risk that the US will face excessive inflation over the next five years. Monetary policymakers would do well to direct their attention to other problems in the meantime.

J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

Premonitions of Europe’s migration crisis become reality

A scenario dating back to the mid-90s illustrated how high the human costs could rise

Frederick Studemann

Nguyen Dinh Gia, father of 20-year-old Nguyen Dinh Luong who is feared to be among the 39 people found dead in a truck in Britain, poses with his son's photograph at their house in Can Loc district of Vietnam's Ha Tinh province on October 29, 2019. - Initially identified as Chinese, many of the 39 people who were found dead in a truck in Britain are now believed to be Vietnamese after families came forward saying they feared their relatives were in the refrigerated trailer. (Photo by Nhac NGUYEN / AFP) (Photo by NHAC NGUYEN/AFP via Getty Images)
Nguyen Dinh Gia, father of 20-year-old Nguyen Dinh Luong who is feared to be among the 39 people found dead in a truck in Britain, poses with his son's photograph last month © Nhac Nguyen/AFP/Getty

Civil war on the fringes of Europe. Mass upheavals of people, fleeing conflict. Pressure on the borders of the EU, prompting ever-louder calls for action. Meanwhile, in the shadows, the sordid business of people smuggling grows. In the midst of all this, a refrigerated lorry is intercepted by officials who, opening up the vehicle, reveal its horrific cargo: scores of migrants who had risked their lives in search of a better life.

This may read like a snapshot of the migration crisis facing Europe right now. The discovery in the UK last month of 39 Vietnamese migrants who had frozen to death in a trailer truck delivered another grisly reminder of the realities of illegal migration.

But this scenario dates back to the mid-1990s and comes from the imagination of David Pirie, a British screenwriter and producer. His film Black Easter, a television drama made for the BBC, told the story of a policeman who, in the process of investigating the murder of a nurse, uncovers a sprawling web of people smuggling, corruption and murder.

While it won a prize, Black Easter was never rebroadcast and is now almost impossible to find in film libraries. And yet it has resonated over the decades. “A lot of people have been in touch to say how extraordinary it is, like a prophecy,” Mr Pirie explained this week.

This has been felt particularly in recent months not just because of the terrible multiple deaths of migrants, but also more widely as Europe marks 30 years since the collapse of communism and the fading of the dreams it spawned.

Black Easter, says Mr Pirie, was about the fading of the optimism unleashed by the fall of the Berlin Wall in 1989. Barely had people finished dancing in the streets at the elimination of the dividing walls and borders when events on the ground fuelled calls for the creation of new borders and walls.

Back in the 1990s, that may have seemed out of kilter with the temper of the times — the stuff of thriller fantasy. Today it is all too real.

The drama of Mr Pirie’s film is set against the backdrop of hundreds of thousands of refugees crowded on Europe’s borders, many fleeing a civil war that has broken out in Russia. The authorities are battling to contain the situation. As a result, people smuggling is rife.

The drama is set in the then near future — the turn of the 21st century — as an illustration of how quickly events might turn nasty. The conflict in former Yugoslavia had already exposed a darker side to the systemic change unfurling across Europe and gave him material to work with.

The script drew on his research in the Czech Republic, at what was then the EU’s external border, where he visited a refugee camp located in a former Red Army base. Running up to the border there was the so-called “highway of love” — a main transport link along which prostitutes worked, many of whom had been trafficked from further east.

“There was an apocalyptic feel to it all,” Mr Pirie remembers. As voters, and eventually policymakers, started to react the term “Fortress Europe” began to emerge as a notion.

His fictional interpretation was too controversial for some of the film’s financial backers. Some of its German producers were particularly nervous. “Many of the themes — like deadly transportation — did after all have echoes of the past,” recalls Mr Pirie. A number of funders pulled out.

His own reaction to recent events is one of outrage and shame that such things can be allowed to happen and at how the whole issue of migration has been mishandled.

The case of the deaths in the trailer in Essex “really struck hard,” he says. In his script Mr Pirie sought to illustrate how quickly human life can come to be seen as expendable, how people can slip between the cracks in bigger political and social developments.

Black Easter takes this to a grisly conclusion when the policeman discovers the link between officials and criminals to conspire to find a solution to the migration problem through “disposal”.“This particularly alarmed our backers,” recalls Mr Pirie.

“And now it alarms me.” It is another aspect of Black Easter that the writer sincerely hopes never amounts to prophecy.

viernes, noviembre 15, 2019


George Friedman's Thoughts: Flipping the Cards

By: George Friedman

Let me turn over some cards. Reasonable people (every one of you, I’m sure) are likely wondering what in the world I am doing, swinging from discussions of enchantment to the benefits of solid over liquid propellants in missiles, and back again. The motivation is embedded in my life; I have been asked to write a book on the geopolitics of space and warfare.

In a way, it would be a 20-year follow-on to my book “The Future of War,” published in 1996.

It has also been my personal desire to write a book embedding the concept of geopolitics in the tradition of western philosophy, showing the lineage from Plato to Hegel from which that line arises.

On the surface, these must be two separate books. However, the more I thought about it, the more I realized these ideas are really one book. I was personally shaped by war, and intellectually by political philosophy, with assorted other sordid threads. For me, war and philosophy have been indelibly linked.

Humanity is going into space to wage war more efficiently, and, as with the seas, it will transform who we are. But the underlying question of all change is, who are we? What is the thing that is permanent, and what is the thing that is, in Aristotle’s words, “coming to be and passing away”?

When Europeans took to the high seas, the vast nothingness from which no land can be seen, they were changed. They were changed not only because they were going somewhere, but because they encountered a realm, still part of Earth, in which they confronted something they had never confronted before – a realm in which every landmark ceased to exist, and in which the laws of life and community had been transformed. Far out on the Atlantic, sailors discovered the nothingness from which there was no appeal but going forward or dying.

It seemed to me that this moment must have transformed humanity, not only because of the new understanding of the map of the world, but because of the experience of existing in an uncontrollable nothingness. This world evolved, of course, into a realm of business and war. It became a realm that still overwhelmed those of us who had sailed on it. The sense of aloneness, with only God aware of you, had dissipated.

And it was the geopolitical reality of the Spanish Main, the Royal Navy and the Boeing 707 that turned this realm into something humanity could grasp and even own. The transformation of the oceans from an existential crisis into the commons on which humanity did business and waged war turned it from a metaphysical moment to a geopolitical one.

But the truth was deeper. The oceans revealed the aloneness in which humans live deep in their souls and also that the aloneness is far from the entirety of the human condition – and that what took humanity beyond the abysmal moment was geography and politics, place and community. In other words: geopolitics.

The abysmal moment of aloneness is embedded in geopolitics. Geopolitics is about more than war, but in a sense, it is always about war. The experience of the soldier begins with his buddies (and a sergeant or two), but there is the moment that he must face alone, an ocean of angry danger, seeking to annihilate him, and he alone, not by choice, selecting between life and death.

Plato said that the philosopher was golden and the soldier silver. Philosophy is the love of wisdom. The soldier’s love is of his city or country or honor or fear of being a coward. The philosopher loves one thing that comprises everything. The soldier loves everything but also fears many things.

There is an intimate link between the solder and the philosopher that Plato described. They are not the same, but they are inseparable. Their souls are profoundly different. One guards the wall, not because his city is just, but because it is his honor and duty to do so. The other guards the soul of the city, not by being just, but by caring about what justice is. So, they are the two precious metals that make up what is great in humanity – and what is horrible.

There are three Greek words that must be mentioned here: logos, phronesis and techne. Logos means two things – reason and language. The New Testament’s Book of John begins, “In the beginning was the Word, and the Word was with God, and the Word was God.” The word it used was “logos.” Logos is the highest thought a human can have, whether of God or of reason. It is the essence of philosophy and of Christian theology.

Phronesis means a practical wisdom. We Americans speak of getting things done. The type of reason that makes it possible to get things done is phronesis. Plato sat on a log and spoke of important things. It is said that he fought in an Athenian war. But in the end, he left us logos, reason and words.

Alexander the Great was taught by Aristotle, who learned from Plato. Aristotle understood that Alexander did not need what he had to offer; Alexander knew from his birth how to be a soldier, the greatest soldier who ever was. And using his phronesis – his practical reason – Alexander conquered the world. Logos is exceptional in humans. Phronesis is what makes our species what it is.

Techne is the point at which logos and phronesis meet. Techne, like philosophy, needs to understand the underlying principle of things, but not as an end itself. Techne is intended to do things with that knowledge, to change the way in which we live.

It combines the practical wisdom of phronesis with the transcendent reason of logos, to do things that are transcendent. The Wright brothers made it possible for men to fly, perhaps the most extraordinary of things. They sought to understand the nature of air, not as an end in itself but to fly in it. That is both phronesis and techne.

In space, we enter a realm even more profoundly alien than the oceans, a place where even making a sound is impossible. And we enter that realm in order to wage war and guard the walls of our nation, as others will theirs. And the principles that Plato taught about the nature of the soldier’s soul will go there as well.

And what will take him there is techne, or technology, and what will save his life is phronesis, practical reason. But we will be in a place that only philosophy can grasp, because it, more than the oceans, will change our souls.

Therefore, why not a book that embeds geopolitics within the Western tradition, through grasping the meaning of space and, first of all, the most human of things, war? So, flipping the cards over, why not pose the question of place within the history of thought by considering the strangeness and the commonness of a place in which there is no gravity or air or sound? And why not link the story of logos with that of phronesis and techne?

My son, who recently retired as a lieutenant colonel from the United States Space Command, is the ultimate warrior, seeing space through the practical eyes of phronesis and the techne of using the basic principles. He makes the sacred his own, not elevating it to logos but making it human through phronesis.

So, to be banal, it will be one book, not two, linking the emergence of humanity’s presence in the place where the gods were said to live, with the history of thought that led us to this.

I think I will name it hubris.

Central banks are still missing their inflation targets

Big gaps persist despite years of monetary policy easing

Caroline Grady    

A graphic with no description

As the world’s largest central banks resume asset purchases, the debate over the effectiveness of monetary easing rumbles on. One reason: policymakers have failed to close big gaps between average inflation and their targets.

The European Central Bank is just days away from renewing its bond-buying programme — and this time with no stated end-date. Meanwhile, the US Federal Reserve has returned to a schedule of Treasury purchases to prevent a repeat of the September liquidity squeeze in the repo market.

Investors are even weighing up the possibility of Australia adopting quantitative easing. Its policy rate stands at 0.75 per cent after three interest rate cuts in recent months, leaving little room for further easing. And the Reserve Bank of Australia has acknowledged that unconventional measures “would need to be on the table” if the economy were to take a really big hit.

However, one similarity between Australia’s central bank and its QE peers is the persistent miss on inflation mandates. Australia’s average 2 per cent inflation over the past decade falls short of its 2.5 per cent target.

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The extent of the inflation shortfall across the world has parallels with the size of balance sheet expansion. Switzerland has the largest inflation gap over the past decade at 2 percentage points. Japan has not fared much better. Both central banks now have assets in excess of national output, far above other major central banks.

The eurozone inflation gap is smaller at 0.7 percentage points and the balance sheet expansion more moderate. The ECB’s balance sheet is equivalent to 40 per cent of the bloc’s gross domestic product, a proportion that has doubled since quantitative easing was launched in 2015.

Christine Lagarde, the incoming ECB president, will have to navigate this new landscape while finding consensus within a divided governing council. With eurozone inflation dropping close to a three-year low, analysts expect bond purchases could run for several years yet.

The Fed Gives Investors a Green Light

With the Federal Reserve unlikely to tighten until inflation gets a lot warmer, rates could stay low

By Justin Lahart

Federal Reserve Chairman Jerome Powell noted that measures of longer-term inflation expectations “are at the lower end of their historical ranges.” Photo: eric baradat/Agence France-Presse/Getty Images 

The only thing that seems likely to get the Federal Reserve to raise rates again is a lot more inflation.

Until that happens, it will be giving investors a green light to buy stocks and other risky assets.

Similar occasions have had very unhappy endings.

The Labor Department on Wednesday reported that core consumer prices, which exclude food and energy items to better track inflation’s trend, were up 2.3% in October from a year earlier.

That was a bit less than September’s on-the-year gain of 2.4%, but it is significantly higher than it was earlier in the year.

Moreover, October’s consumer price level was pushed lower by declines in apparel and lodging prices—two volatile categories that will likely reverse themselves in the months ahead.

Throw in businesses’ urgency to raise prices to offset rising wages and tariff costs and inflation seems likely to get warmer.

The Commerce Department inflation measure that the Fed prefers runs cooler than the Labor Department’s, showing core prices up 1.7% on the year in September.

But it, too, seems likely to pick up in the year ahead, with many economists projecting it will rise a bit above the Fed’s 2% inflation target next year.

A bit above 2% might not be enough to move the Fed to take back any of its three rate cuts this year.

After years of low inflation, the central bank is worried that inflation expectations—which economists believe help to shape inflation’s path—have slipped to the point that it will be hard to keep inflation at its target.

Indeed, in Congressional testimony Wednesday, Fed ChairmanJerome Powellnoted that measures of longer-term inflation expectations “are at the lower end of their historical ranges.”

So the Fed isn’t likely to raise rates until its preferred measure of core inflation moves meaningfully above 2%—let’s call it 2.3%.

As Evercore ISI policy strategists point out, that differs from the late 1990s, when, after a series of insurance rate cuts, the Fed moved to raise rates again once it had an all clear on growth.

This trepidation implies an even longer sweet spot for stock market investors.

They know the Fed will cut rates again if risks to the economy emerge and that it isn’t likely to take away the punch bowl anytime soon.

A similar late 1990s sweet spot helped fuel a technology stock bubble that ended badly, contributing to the recession that followed.

The 2008 financial crisis brought home even more clearly the perils of bursting bubbles.

Asset price excesses don’t appear close to what they were in either of those episodes, but that could change.

As Fed Cuts Rates, China Has Few Good Options

The Federal Reserve cut rates again but China’s central bank has so far declined to follow suit, even with manufacturing activity on a downward slide

By Nathaniel Taplin

The world’s two largest economies are both struggling, but in one of them policy makers still have plenty of tools to respond. In the other, not so much.

The Federal Reserve on Wednesday cut U.S. benchmark rates for the third time this year, responding to weakness in manufacturing and tepid inflation. In contrast, the silence from China’s central bank remains deafening. The bank’s preferred measure of growth in economywide finance outstanding has increased by less than a percentage point since hitting a trough in late 2018.

The result: China’s October factory purchasing managers index weakened sharply, data released Thursday showed, suggesting a stabilization in investment and industry at the end of the third quarter will be hard to sustain. The drop in the nonmanufacturing index—nearly a full point to its lowest level since early 2016—was even more striking.

China’s October factory purchasing managers index weakened sharply. Photo: str/Agence France-Presse/Getty Images          

The simple reality is that even if Beijing wants to shore up growth, there isn’t much it can do in the short run. Housing prices are rising less quickly but are still bubbly. More aggressive monetary policy is certain to pump up the property market again and add fuel to out-of-control food prices, risking social discontent and more financial excesses at property developers.

The obvious solution is more fiscal support for infrastructure. But consumer price inflation running at 3% is beginning to pressure government bond yields higher too, and recent tax cuts mean local governments are even less well-placed than usual to fund infrastructure from revenues. Meanwhile, manufacturing investment remains tepid as the trade war and falling producer prices hit profits.

The results of all of this are evident in October’s PMI. Investors were cheered by an unexpectedly strong reading in September, but most of the good news reversed this month. New export orders—which were probably boosted by front-loading in September in advance of an expected U.S. tariff increase in October—dipped again. Output, overall new orders and factory-gate prices dropped as well, although the latter may partly reflect lower oil prices.

The volatile construction-sector PMI bounced back but the trend is still downward since late 2018—and that fits with weakening output of key construction-related goods like cement and steel, and gradually easing house-price gains.

All this leaves Beijing with few good policy options. A trade deal and a renewed push on deregulation and reform are needed to shore up growth. On the former, the odds appear to be even-to-good. On the latter, investors are hoping for some news out of the secretive Communist Party plenum this week in Beijing.

Since the 1980s, a pragmatic and flexible—rather than dogmatic—approach to economic policy-making has been a key strength of the People’s Republic. As the economy worsens, it isn’t clear whether the current leadership is willing to embrace that tradition.

Heart-Failure Deaths Rise, Contributing to Worsening Life Expectancy

Rate surges as population ages and health of younger generations worsens

By Betsy McKay

Marta Molina Butler of Oakland, Calif., changed her diet and started exercising more since she was diagnosed with heart failure in 2018. Photo: Isabel Molina 

Deaths from heart failure, one of the nation’s biggest killers, are surging as the population ages and the health of younger generations worsens.

The death rate from the chronic, debilitating condition rose 20.7% between 2011 and 2017 and is likely to keep climbing sharply, according to a study published Wednesday in the journal JAMA Cardiology.

The rapid aging of the population, together with high rates of obesity and diabetes in all ages, are pushing both the rate and number of deaths from heart failure higher, the study said. Most deaths from heart failure occur in older Americans, but they are rising in adults under 65, too, the study showed.

The findings help explain why a decadeslong decline in the death rate from cardiovascular disease has slowed substantially since 2011 and started rising in middle-aged people, helping drive down U.S. life expectancy.

The number of Americans who are 65 and over rose nearly 23% between 2011 and 2017 to 50.9 million, and is projected to expand another 44% to 73.1 million by 2030, according to the study, citing Census Bureau data. Some have dubbed the aging population a “Silver Tsunami.”

Stephen Sidney, lead author of the study Photo: Kaiser Permanente

“It’s just staggering,” said Stephen Sidney, director of research clinics at the Kaiser Permanente Northern California Division of Research and lead author of the study. If current trends don’t change, Dr. Sidney said, “in terms of overall burden on society, we’re going to somehow need to figure out how to take care of all those people.”

Heart failure is a progressive condition in which the heart can’t pump enough blood for the body’s needs. The risk increases with age. It can be caused by long-term high blood pressure or by damage to the heart. Medical advances help more people today survive heart attacks, but survivors are sometimes left with damage that makes it difficult for their hearts to pump adequately.

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An estimated 6.2 million Americans suffer from heart failure, according to federal statistics.

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<65 br="" years="">The American Heart Association predicts that more than 8 million will have the condition by 2030.

Heart disease, including heart failure, is the nation’s No. 1 cause of death. But taken alone, heart failure itself killed more Americans in 2017 than influenza and pneumonia combined, the nation’s eighth-leading cause of death, and slightly fewer than diabetes, the seventh-leading cause. It was a contributing factor in more than half—54%—of all heart-disease deaths in 2017, according to the study.

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Heart failure cost the U.S. health-care system $30.7 billion in 2012 and is projected to cost about $70 billion in 2030, according to a report released Wednesday by the National Forum for Heart Disease & Stroke Prevention, an organization that works to end cardiovascular health disparities. Heart failure is a leading cause of hospitalization in the Medicare population.

Marta Molina Butler was regularly fatigued and out of breath when she was diagnosed with heart failure in September 2018. The 56-year-old preschool co-director had been under stress for nearly a year, she said, caring for her husband after he was diagnosed with throat cancer. She was overweight, ate frozen and processed foods because they weren’t time-consuming to make and stopped taking walks. She didn’t regularly measure her blood pressure, though she had had problems with hypertension in the past.

“I kind of attributed some of my symptoms to being overwhelmed,” said Ms. Butler, who lives in Oakland, Calif. “They come on slowly. You adapt to them.”

Since her diagnosis, she has lost 28 pounds, started eating more fresh fruits, vegetables and lean proteins, and walks 2½ miles a day. Her husband is now cancer-free, helping relieve the stress.

“I feel like probably a better version of myself,” she said. “In some ways I’m healthier.”

She is also on several medications for her blood pressure and other problems, and is coming to terms with her diagnosis. She would like to be off the drugs, but knows she can’t. “My heart nurse has explained that they expect me to take the pills the rest of my life,” she said.

Hypertension, obesity and diabetes helped drive a 51% increase in the number of heart-failure deaths in adults under age 65 between 2011 and 2017, the study showed.

Jamal Rana, senior author of the study Photo: Kaiser Permanente

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Those risk factors are particularly worrisome because they are leading to more cases of a type of heart failure which lacks effective treatments, said Jamal Rana, senior author of the study and chief of cardiology at Kaiser Permanente Medical Center in Oakland. That condition, called heart failure with preserved ejection fraction, occurs when the heart muscle becomes stiff and can’t properly fill.

While the U.S. population under 65 is growing much more slowly, more of them have risk factors for heart failure, said Sadiya Khan, a cardiologist and assistant professor of medicine at Northwestern University Feinberg School of Medicine. She isn’t connected with the latest research and has studied heart failure in middle-aged cohorts. Young African-Americans have the highest rates of death from heart failure among people under 65, her research has showed.

“We need prevention” to address heart failure, saidKeith Ferdinand,a preventive cardiologist and professor of medicine at Tulane University School of Medicine, who also wasn’t involved in the research. That includes putting more people at risk of heart failure on blood-pressure medication, and more use of a class of diabetes drugs called SGLT-2 inhibitors that have been shown in recent research to lower the risk of heart failure.

“The way we’re going to stop these increasing burdens of heart failure and overall heart deaths is going to be controlling risk factors,” Dr. Ferdinand said. “We’re not going to operate ourselves out of these big public-health challenges.”