Managing Director Christine Lagarde’s Opening Remarks for the United States 2016 Article IV Press Conference

Welcome to all of you for this briefing on the 2016 United States Article IV Consultation. By now, you will have seen our concluding statement which covers the range of fiscal policies, monetary policy, and the financial sector.

At the outset, I would like to emphasize we think that the U.S. economy is in good shape, despite some setbacks in very recent months. Unemployment is well below 5 percent, in the past year an average of 200,000 new jobs were created every month, and household incomes are rising at a healthy clip.

Having said this, today we will look beyond the important recent achievements and look forward to what will be needed to ensure strong, sustained and balanced growth in the years ahead. I would highlight in particular “four forces” that pose a challenge to future growth.

What are those four forces? Declining labor force participation, falling productivity growth, polarization in the distribution of income and wealth, and high levels of poverty in the U.S. Let me elaborate.

First, labor force participation is declining.
  • The U.S. population is aging and, as a result, a smaller share of the population will be active in the labor force in the coming years.
  • The workforce makes up the backbone of the U.S. economy. Mitigating the effects of population aging on labor supply and demand should therefore be a priority – both here in the U.S. but also in many of the advanced economies.
Second, productivity growth has also declined.
  • It has fallen from 1.7 percent in the decade prior to 2007 to 0.4 percent in the past five years.
  • Much of the gains in average per capita incomes in the 20 years before the financial crisis were from gains in productivity, innovation, and efficiency.
  • The fall in productivity growth seems, at least in part, to be linked to falling dynamism both in the U.S. labor markets and in the formation of new and productive enterprises.

Third, the distribution of income and wealth has steadily become more and more polarized. This is a double edged sword.
  • On the one hand, since 2000 around one quarter of a percent of the population has moved from earning close to the median income to earning 1.5 or more times the median. This is a good thing and has raised living standards for those families.
  • On the other hand, though, more than 3 percent of the population has moved into the group that earns less than half of the median income. For that group, economic insecurity and flat real incomes have resulted in either a stagnation or decline in living standards.
  • Our calculations suggest that since 1999, this polarization of the income distribution has knocked around 3½ percent off of badly needed consumer demand. That is around one year’s consumption over a period of 15 years.
Fourth, the share of the population living in poverty is at very high levels.
  • The latest data shows almost 15 percent of Americans—or 46.7 million people—living in poverty.1 Poverty is even higher for certain minority groups; for single parent (and particularly female-headed) households; for children; and for those with disabilities.
  • With such a large share of the population living below the poverty line, this undoubtedly is an important macroeconomic issue.
  • Not only does poverty create significant social strains, it also eats into labor force participation, and undermines the ability to invest in education and improve health outcomes. By holding back economic and social mobility, it creates an inter-generational persistence of poverty.
All in all, our assessment is that, if left unchecked, these four forces—participation, productivity, polarization, and poverty—will corrode the underpinnings of growth (both potential and actual) and hold back gains in U.S. living standards.

What are the policies needed to counter these “forces”? We have outlined a range of possible options.

Let me highlight a few:
  • Policies need to help lower income households – including through a higher federal minimum wage, more generous earned income tax credit, and upgraded social programs for the nonworking por.
  • There is a need to deepen and improve the provision of reasonable benefits to households to give incentives for work, raise the labor supply, and to support families. This should include paid family leave to care for a child or a parent, childcare assistance, and a better disability insurance program. I would just note that the U.S. is the only country among advanced economies without paid maternity leave at the national level and U.S. female labor force participation is 12 percent lower than that for men. Sensible skills-based immigration reform could also raise the labor supply and boost productivity.
  • Boosting productivity growth is another policy imperative. Productivity gains must inherently be based in the private sector. But public policies can help. A better tax system, efforts toward more trade integration, better infrastructure, a stronger and more vocationally oriented education system would all support higher productivity growth.
None of this is easy. However, there are many good ideas out there as to how best to address these issues. And that provides a strong foundation for progress.

In conclusion, I would like to reiterate that the near-term U.S. growth prospects are good despite the recent temporary setbacks. We think that growth should be 2.2 percent this year and higher still in 2017. And by countering the “four forces” I have just described, I am confident that the U.S. can remain on the frontier of innovation and opportunity.

So with that, I am happy to take your questions. Thank you.

1 The poverty rate is measured via income thresholds adjusted for household size and composition. Thresholds vary from $15.379 for a 2-person household to $24.230 for a 4-person household. Source: Income and Poverty in the United States: 2014, U.S. Census, September 2015.



The next leap

Helicopter money sounds radical. It may not be that much of a departure

WOULD “helicopter money” (the use of newly created money to finance government spending or tax cuts) be a revolutionary break from existing monetary policy? Its advocates argue that the tactic would give the global economy a much-needed boost; its detractors see it as a further step on the path towards fiscal irresponsibility and hyperinflation.

A paper from Toby Nangle of Columbia Threadneedle, a fund-management group, argues that helicopter money is not as radical a leap as you might think. Money is created in two ways. By far the largest proportion is generated by the banking sector when it lends to consumers or businesses. The bank creates a deposit in the name of the borrower which can then be spent.

Mr Nangle refers to this as “inside money”. The other type, which he calls “outside money”, is that created by the government and central bank, including the notes and coins that everyone carries around.

Mr Nangle’s insight involves looking at outside money in a different way. In the conventional view, the government collects taxes from the private sector and uses the proceeds to finance its spending, covering any shortfall by borrowing in the bond markets. Instead, he suggests, look at the process through a monetary lens. The government creates money to pay its bills—public-sector wages, defence equipment and so on. Doing this without limit would quickly undermine confidence in its currency. So governments offset this monetary expansion by “sterilisation”—taking money out of the system through taxes or debt issuance.

Now think about quantitative easing (QE), the creation of new money to buy government bonds. In effect, this is undoing, or reversing, the sterilisation process. The aim was to prevent excessive monetary tightening. In Britain, the chart shows that bank credit (inside money) was shrinking after the financial crisis but, thanks to QE, the Bank of England partially offset this by creating outside money.

In addition, QE in effect reduces government debt held by the private sector, at least for as long as central banks hold on to their respective governments’ bonds and remit the interest payments back to the treasury in question. In accounting terms, one bit of the government owes money to another bit.

On a net basis, the ratio of government debt to GDP in Japan has been falling, not rising.

The only difference between the current situation and the use of helicopter money is that, in theory, central banks plan to unwind their bond purchases in the long term. Government bonds will eventually end up back in the private sector. (Either the central bank will sell the bonds in the market, or it will fail to reinvest when the bonds mature.)

However, it is almost eight years since the failure of Lehman Brothers and no central bank has started to unwind QE. In the circumstances, would the use of helicopter money be that much of a policy shift?

Mr Nangle’s argument is ingenious but raises questions. If helicopter money is so similar to QE, then would it really be effective? After all, despite several rounds of QE, developed economies have not reattained their pre-crisis growth rates. The essential difference, enthusiasts argue, is that the expansion of the money supply would be avowedly permanent, and thus would have a more stimulatory effect.

That difference might well cause helicopter money to be seen in a different light by the markets.

The idea of financing government spending by printing money is regarded with horror by many bond investors because it is a drug to which governments would quickly become addicted. Why bother with the unpopularity of raising taxes or the need to placate bond markets when a friendly central bank can fund all your spending promises? The first government to try it might see considerable downward pressure on its currency. Mild depreciation would be welcome; a rapid plunge would not.

In the end, Mr Nangle comes out against helicopter money because it would be harder to reverse than QE. Instead of selling government bonds to the market, the central bank would have to push up short-term interest rates, perhaps by a lot, since this would probably be its main tool. The impact on small firms and mortgage-holders might be crippling.

But the debate isn’t going to go away. With short- and long-term rates close to historic lows, there isn’t a lot central banks can do on the rates front if more monetary stimulus is needed.

Expect to see lots of sophisticated arguments in favour of helicopter money in order to quell the doubts of the markets.

Four Regional Banks Oversold on Brexit

Citizens Financial, Zions, SVB and Regions Financial endured steep sell-offs, making their valuations more attractive.

Evercore ISI
Not surprisingly, U.S. regional banks are broadly lower on the Brexit news.
That said, select names appear oversold, many of which include banks with higher interest-rate sensitivity. While such concerns are valid, the magnitude of the respective sell-offs appear steep and valuations more attractive. Such names include Citizens Financial Group, Zions Bancorp (down 8%), SVB Financial Group and Regions Financial.
The Brexit vote pressures long-term yields, reaffirming net interest margin (NIM) pressure concerns for regional banks. Average long-term yields have steadily trended lower this quarter implying greater reinvestment risk and greater NIM pressure for banks. For the month of June the average 10-year yield is 1.68%, versus 1.81% in April and May. Quarter-to-date, the average 10-year Treasury yield is 1.77%, below the first-quarter average rate of 1.92%.
While trading has been volatile, we note that the current yield on the 10-year Treasury is 1.57% post-Brexit, significantly below the aforementioned 1.77% average second-quarter yield. Last night, the 10-year Treasury yield hit 1.42%, versus the 1.74% close prior to the Brexit news.
Rate-hike expectations have been pushed out by one year and odds of a cut tick higher. Fed-fund futures currently fully price in a rate hike by January 2018. Just prior to the Brexit vote, futures fully priced in a hike by January 2017. Additionally, our Portfolio Strategist Dennis DeBusschere noted that the odds of a rate cut increased from virtually zero (1.2%) to a still-low but interesting 8.5%. We currently model a 25 basis-points hike in September and another 25 basis-points hike in June 2017.
We note that for our most-asset-sensitive names (SVB Financial, Comerica, Zions, Texas Capital BancShares, Cullen/Frost Bankers, PNC Financial Services Group, KeyCorp, Regions Financial), the elimination of our modeled September hike (but maintaining our June 2017 hike) would reduce our fiscal 2017 earnings-per-share estimates by about 5%.
European exposure is limited for regional banks. We note that select banks have limited direct exposure to Great Britain and/or Europe. Such include Wells Fargo with $27 billion of U.K. exposure (1.4% of assets), including $3 billion of sovereign-debt exposure; Capital One Financial with $3.2 billion in U.K. credit-card receivables (1.4% of loans, about 2% revenue); U.S. Bancorpwith select European exposure, including trust and card businesses (European amount not quantified, but these businesses overall account for about 23% of U.S. Bancorp revenue); U.S. Bancorp also has $1.5 billion in deposits at European banks (0.5% of total deposits), $254 million in German sovereign debt, and $22 million in preferred stock in a European bank; SVB Financial with U.K. loans of $800 million (4.5% of SVB Financial loans); and Discover Financial Services  with limited, but unquantified exposure via the Pulse Network and Diners Club. Additionally, we note many banks have some level of loan exposure to companies that export products.
-- John Pancari
-- Stephen Moss
-- Rahul Patil

Who’s Winning the Middle East’s Cold War?

Robert Harvey
. oil

LONDON – A cold war is taking place in a very hot place. A key component of the sectarian competition between Shia and Sunni Islam in the Middle East is geopolitical, with Iran facing off against Saudi Arabia and its Gulf allies in a struggle for regional dominance.
As with the original Cold War between the Soviet Union and the United States, the conflict does not involve direct military confrontation between the main rivals, at least not yet. It is being fought diplomatically, ideologically, and economically – especially in the oil markets – and through proxy wars, such as the conflicts in Syria and Yemen. There are few problems in the wider Middle East that cannot be traced back to the power rivalry between Saudi Arabia and Iran.
For the moment, the Iranians seem to be riding high. Following Supreme Leader Ayatollah Ali Khamenei’s decision to agree to an international deal limiting Iran’s nuclear capability to peaceful purposes, Western sanctions have been all but removed. Now that it is once again acceptable to do business with Iran, its ailing economy is set for a rebound. Meanwhile, Iran’s creeping de facto annexation of parts of Iraq – astonishingly, with American acceptance – continues because no one except the so-called “Islamic State” has the stomach to stand up to it.
Iran also has an overwhelming manpower advantage, with a population of an estimated 77 million, compared to Saudi Arabia’s 28 million. And while its army is far less well equipped than its rival’s, it is much larger. Moreover, Iran’s main Arab ally, Syrian President Bashar al-Assad, has been given a reprieve as the conflict in his country drags on without conclusion.
This has left the Saudis feeling abandoned and vulnerable. They believe that their great traditional ally, the US, betrayed them by concluding the nuclear deal with Iran. Meanwhile, they fear that the chaos in neighboring Iraq has exposed them to chronic strategic risks.
The Saudis are also recoiling under a barrage of criticism of their Wahhabi brand of Islam, which is widely blamed for incubating extremism and inspiring terrorism. Meanwhile, Saudi Arabia’s human rights record – including the denial of elementary rights for women – is under constant scrutiny.
Against this background, the Kingdom is taking the fight to its enemies. King Salman bin Abdulaziz Al Saud is the country’s above-the-fray ruler, but his son, Prince Mohammad bin Salman Al Saud, currently wields much of the power.
As Minister of Defense, Mohammad has continued the Saudi policy of backing anti-Assad rebels in Syria, in concert with Turkey, while unleashing a war on pro-Iranian tribesmen in Yemen (at an enormous humanitarian cost). He has also backed, if not instigated, an increase in domestic repression, and has launched an economic offensive against Iran – the consequences of which have been seen, until recently, in plunging global oil prices.
In early May, Saudi Arabia’s longstanding oil minister, Ali al-Naimi, was replaced by Khalid al-Falih, an ally of Mohammad’s. The reshuffle is an indication of Mohammad’s determination to use oil prices as a weapon against Iran and its ally, Russia. As the world’s swing producer, with boundless reserves of cheaply extractable oil, Saudi Arabia can flood or throttle the market at will.
And for now, the Saudis are flooding the market. They are seeking to rein in Iran and Russia, both of which need higher oil prices to sustain economic growth. And they are hoping to bankrupt the US shale-oil producers that have reduced America’s dependence on Middle Eastern oil. As Mohammad recently declared, the Kingdom doesn’t care about oil prices; “$30 or $70 – they are all the same to us.” Iran and Russia, by contrast, need a barrel of oil to be worth at least $70.
The US oil industry has proved more adaptable and resilient than expected; cheaper shale fields have opened even as old ones have closed. But the Saudi oil offensive has helped convince Iran and Russia to drag Assad, kicking and screaming, to the negotiating table.
Mohammad’s new economic plan, Vision 2030, unveiled in May, is another front in the economic war, designed to show that Saudi Arabia is immune to the domestic economic pressures afflicting Iran and Russia. The plan calls for economic diversification and envisages the establishment of a huge sovereign wealth fund to cushion the impact of lower oil revenues that the ruling class has traditionally used to purchase social peace.
The Saudi strategy is not without its costs. Gulf remittances of around $10 billion a year to Egypt (itself under increasing economic pressure and a dizzying fall in tourist receipts after recent terrorist attacks) have been scaled back to around $3 billion. And funding to Lebanon has been cut almost completely.
And yet the long-term outcome of this cold war is not hard to predict. Iran and Russia can never be more than foothold powers in the Arab world. The Shia might be able to maintain influence in Iraq, Syria, and Lebanon (through Hezbollah), but they will be unable to compete more broadly. Some 90% of Arabs are Sunni Muslims, and thus potential Saudi allies.
The Saudis can afford to be more mature, and less suspicious than they have been. The US should take steps to reassure them – while never easing up pressure to improve human rights and implement political and economic reforms.

Iran’s Infiltration of Latin America

With U.S. influence waning, Tehran moves in, as a new report on Argentina shows.

By Mary Anastasia O’Grady 

Alberto Nisman, the prosecutor investigating the 1994 bombing of the Argentine-Israeli Mutual Association community center, who died in 2015. Photo: Associated Press

Argentine prosecutor Alberto Nisman died of a single bullet to the head in January 2015, a day before he was scheduled to testify to Argentina’s Congress about an alleged government coverup of the 1994 Iranian terrorist bombing of a Buenos Aires Jewish community center.

There is still no official court ruling on whether he was murdered, but a new investigative report—to be published Tuesday—goes a long way in proving motive.

Joseph Humire, the executive director of the Washington, D.C., based Center for a Secure Free Society, uses thousands of documents and legal wiretaps released to the public to show how the prosecutor’s death eliminated a key stumbling block for Iran and “paved the way for [it] to move into a new phase of its information and intelligence operations in Latin America.” If the theocracy, which is the No. 1 state-sponsor of terrorism in the world, did not murder Nisman, it was the biggest beneficiary of his death.

Nisman was the special prosecutor investigating the terrorist attack on the Jewish community center—known by its Spanish initials as the AMIA. In 2006 he indicted eight former Iranian officials (including former President Ali Rafsanjani) and one Lebanese national. The following year, at Nisman’s behest, Interpol issued “red notices” for the arrest of six of the accused. But Iran took no action.

Using legal wiretaps, Nisman later built a case that President Cristina Kirchner’s government had a covert agreement with Iran to wipe Tehran’s fingerprints off the AMIA attack in exchange for Iranian oil and reopening Iran’s market to Argentine grain and beef.

Nisman had filed a criminal complaint against members of the Kirchner government the week before he died. Killing him did nothing to stop the public from learning of the contents of his report. Yet his death did put the brakes on his plan to bring the Iranian crime into the international arena. It had the potential to undermine the key foreign-policy objectives of Tehran.

Iran’s asymmetric warfare against the West demands commercial engagement because it allows Tehran to deploy political operatives specializing in propaganda, intelligence and terrorism and to finance their activities under the guise of business activity.

In December 2014, Iran’s priority was to end U.N. sanctions in order to facilitate this capability. This meant securing legitimacy via successful negotiations with the five permanent members of the U.N. Security Council plus Germany. Nisman was about to get in the way.

In a safe-deposit box in Buenos Aires some months after Nisman’s death, investigators discovered a document signed by him and dated December 2014. It is an appeal to Argentine authorities to formally request that the U.N. invoke its charter and intervene in the AMIA case.

“Iran’s refusal to extradite its accused, according to Nisman, placed it in noncompliance with its international obligations to support a legal case of international terrorism with another U.N. member,” Mr. Humire writes. Moreover, “Nisman cited Sudan and Libya as precedent for U.N. intervention when state sponsorship of terrorism obstructs justice on an international terrorism case.”

By 2015 the nuclear talks were entering a crucial stage. Whether President Obama would have reconsidered the U.S.’s legitimization of Iran, already under way, is far from certain. The U.S. president doesn’t like to let facts get in the way of his legacy agenda.

But if Nisman had a hearing at the U.N., his extensive investigation could not have been ignored.

According to Mr. Humire, the prosecutor had produced more than “1,500 pages of open source reporting on Iran and Hezbollah” and another 1,500 pages of classified material that is still not public on the AMIA attack. At a minimum it would have challenged Iran’s denials that it supports terrorism.

Mr. Humire argues that the classified material, which is in a 2003 Argentine report, should be declassified so Argentines have the “knowledge necessary to grasp the seriousness and longevity of Iran’s influence in their country.” The rest of the hemisphere also deserves to know about Iran’s designs. As Mr. Humire says: “At a time when U.S. influence has diminished in the region, Latin America is arguably Iran’s top foreign policy priority outside of the Middle East.”

Authoritarian Venezuela, Bolivia and Nicaragua have welcomed the presence and influence of Iran. But others are being surreptitiously invaded, beginning with embassies, cultural centers and mosques.

Peru’s southern rural communities are typical targets for launching networks. Front companies in the beef and oil industries in Brazil and Uruguay are used to provide cover for Iranian operatives. As for Chile, Mr. Humire’s report shows how Iran has infiltrated universities.

It’s not hard to see how the end of sanctions on Iran—triggering the liberation of $150 billion in assets and the reopening of international economic channels—will increase Iran’s penetration of the Western Hemisphere.

2014 Resistance Holding Gold Stocks after Brexit

By: Jordan Roy-Byrne

What a last 24 hours for markets! At one point Gold was up $100/oz, S&P futures were limit down and the British Pound was down over 8%! The volatility has subsided, perhaps temporarily and Gold settled around $1320/oz with Silver settling below key resistance at $18.

The miners predictably gapped up but the strength was sold. As miners remain below 2014 resistance we expect Gold to retest $1300/oz before moving higher.

The chart below plots the weekly candlestick charts of GDXJ (top) and GDX. The miners gained 5% to 6% on the week thanks to Brexit but note that miners sold off today after testing 2014 resistance. GDXJ, which has resistance at $43-$45 reached $43.76 today before declining and GDX, which has resistance at $27-$28, reached $27.71 before declining.

VanEck Vectors Gold Miners and Junior Gold Miners Weekly Charts

We should also note that the miners remain stretched when viewed through the lenses of history. Specifically, Brexit pushed the rebound above the 2008-2009 rebound.

HUI Bull Market Analog

Given the action in the miners today and their historically overbought condition, coupled with Gold selling off from much higher levels, I expect Gold to retest $1300/oz next week. A retest is only that and nothing more. While Gold has technically not formed a reverse head and shoulders bottom, it nevertheless has a potential measured target of $1550/oz. There is some resistance at $1330 and $1380 to $1400. However, there is very little resistance from $1400 to $1550.

Gold Weekly Chart

News events rarely change market trends as the market typically leads news but Brexit could be an indication of a new bullish development for precious metals. That would be the long-term disintegration of Europe which would be very negative for the Euro, the world's second largest currency. This news propelled Gold through $1300 and could be the catalyst to take it towards $1400 over the next few months. Meanwhile, the gold stocks could back and fill just a bit before again testing 2014 resistance levels.

Robots may cut off the path to prosperity in the developing world

Sarah O’Connor

‘Radical inshoring’ trend means western companies are taking back manufacturing

An Adidas prototype sneaker with a 3D printed sole sits on display ahead of a news conference to announce Adidas AG's earnings in Herzogenaurach, Germany, on Thursday, March 3, 2016. German sport-shoe maker Adidas forecast sales and earnings to increase as much as 12 percent this year as consumers spend more ahead of the Euro 2016 soccer tournament. Photographer: Krisztian Bocsi/Bloomberg©Bloomberg
There is a gloomy view you hear in the developed world that goes something like this: first the factories went overseas, now the robots are coming for the jobs that are left. In other words, automation will sweep up the crumbs that globalisation left behind.
But the relationship between globalisation and automation is more interesting than that. Rich countries are beginning to see factories return to their shores — and they have the robots to thank.
Take Adidas. When Herbert Hainer, chief executive, joined the German sportswear company in 1987, factories were beginning to close in Germany and move to China. This month, he announced Adidas would bring some shoe production back to Germany for the first time in three decades thanks to a highly automated factory in Bavaria. “I find it almost uncanny how things have come full circle,” he said.
It is important to keep some perspective. Adidas made 301m shoes last year; the two new factories (the other will be in the US) will produce about 1m. Still, you can see how this trend could take off.

Ditch the complex global supply chains and you save transport and storage costs. You are less polluting and your customers do not have to worry that your products were made in sweatshops. You are also more nimble and responsive to demand.

Spanish retailer Inditex, owner of the Zara chain of stores, owes much of its success to its “nearshoring” strategy: it can adapt to fluctuating fashions because more than 60 per cent of its clothes are made in Spain, Portugal and other nearby countries such as Morocco and Turkey.
Only wardrobe perennials, such as shirts and chinos, are made in low-cost factories in Asia.
Adidas says it is moving closer to a future in which customers can have shoes made on demand, perhaps even by a robot in the corner of the shop .
Tyler Cowen, an economics professor at George Mason University in the US, believes robots and 3D printers could create a world of “radical insourcing” where developed countries no longer need to outsource production to countries where wages are low.

“Why should a wealthy nation buy from a poorer exporter when it can automate and produce similar goods at home without incurring high labour costs?” he asked in a recent paper.
This would not do much for jobs in developed countries, admittedly. The new Adidas factory will have about 160 staff, a fraction of the number required to make the same number of shoes in Asia. But set aside the rich world for a moment. What would “radical insourcing” mean for all the developing countries that saw manufacturing exports as their path to prosperity?

Industrialisation was the west's route to riches. There are strong links between manufacturing jobs and the development of a secure middle class. Exporting manufactured goods powers “catch-up growth” and technological convergence with advanced economies, so the theory goes.

But developing countries are displaying signs of what Harvard professor Dani Rodrik calls “premature deindustrialisation”. While manufacturing jobs peaked at about 25 per cent of the US workforce and 40 per cent of Germany's, they already seem to have peaked in Brazil, India and China at less than 15 per cent.
A world of “radical insourcing” would accelerate this trend, cutting off one well-worn path to development. Poor countries with natural resources could still sell raw materials but economies that rely on commodity exports tend to be highly unequal, unless they have strong democratic institutions.

It is not all gloom. Technology may threaten the old development model but it brings cheaper renewable energy, medicines, internet and smartphones to people in poor countries. Prof Cowen foresees a developing world where phones, software, films, drugs and ideas are plentiful but many basic goods are expensive.

Technology can also create opportunities for developing countries to sell to the world. It is already delivering microfinance loans to entrepreneurs and online education to bright young people. And there is still time to find a new path: all those factory jobs making things for domestic and export markets will not disappear overnight. But nor will they be there forever.
Last month a company called Kuka, which makes industrial robots, became the target of a €4.5bn takeover bid. The owner? German. The bidder? Chinese.

The Psychology of Mortality

'Death Anxiety Makes Us Hate People Who Are Different'

Interview Conducted by Rafaela von Bredow and Johann Grolle

                             Oil painting from Hieronymus Bosch, ca. 1500.

The fear of death is our constant companion. Psychologist Sheldon Solomon has researched how that anxiety affects our lives -- and found that being reminded of death can bring out our worst.

SPIEGEL: Professor Solomon, you have spent almost your entire professional life focusing on the fear of death. Can you remember the first time you ever experienced this fear?

Solomon: I do. I was eight years old and my mother said one night: "Say goodbye to your grandmother because she's not going to be around much longer." And she died the next day of cancer.

Afterwards, I went upstairs and started leafing through my stamp collection. I had a lot of American stamps and they happened to all have dead presidents on them. So there was George Washington. He was a great guy, but he's still dead. Here's Thomas Jefferson. And then, like a psychological lightning bolt, I was like: "Oh, wow. This does not bode well for me." And I had what I, at least in retrospect, remember as a convulsing realization that that would be my inevitable fate.

SPIEGEL: And this shock still affects you 50 years later?

Solomon: Essentially, yes. In the lovely language of the anthropologist Ernest Becker, there's always a rumbling of panic beneath the surface of our consciousness. Our big forebrain gives us the capacity to think abstractly and symbolically and we are smart enough to realize that, like all living things, our lives are of finite duration. That conspires to give rise to potentially paralyzing existential terror.

SPIEGEL: Despite being so concerned, you seem quite happy...

Solomon: Each of us must live with this terror. Becker's claim is that in order to be able to get up in the morning, we embed ourselves in carefully constructed symbolic belief systems that the anthropologists call "culture." Culture gives us each a sense that life has meaning and that we have value -- by offering us assurances of immortality. Either literally, through the heavens, the soul's afterlives or reincarnation, or by the prospect that some vestige of ourselves will persist over time -- from having kids, amassing great fortunes or producing great works of art or science. Yet no culturally constructed symbolic belief system is ever powerful enough to completely eradicate the anxiety that is engendered by the awareness of death.

SPIEGEL: Do you suffer more than others from this existential terror?

Solomon: I don't believe so. It is usually about this time, five to nine years of age or so, when children, in light of their intellectual and emotional maturation, really do become explicitly self-aware to the point where they recognize that their parents are not the omniscient and omnipotent creatures that they thought. That they are not only fallible but also finite. And it's at that point that we switch our psychological allegiance from relying solely on our parents as the basis for psychological security to the culture at large. Rather than just being a good boy or girl, now I want to be a good American, a good German, a good Christian, a good fill-in-the-blank, depending on the cultural construction upon which our identity is ultimately centered.

SPIEGEL: At what point did you decide to focus your career on the fear of death, a rather dark topic, it must be said?

Solomon: Accidentally, as happens in science quite often. What happened, literally, is that I was in the library looking for some books by Freud and I saw a book with a very interesting green dot. Its author was Ernest Becker. In the very first paragraph of the book, Becker writes: I want to figure out what makes people act the way they do. I was like, yeah, me too!

SPIEGEL: Thinkers have been considering the fear of death for centuries.

Solomon: That's correct. It's an idea that goes back to the Old Testament and further, to the ancients. There is no shortage of strands of thought -- artistic, philosophical and theological -- that point to the uniquely human awareness of death as literally the psychodynamic lynchpin toward which all of our behavior is directed. Only psychologists have avoided the subject.

When I first started working on it, the attitude was: This is nonsense.


Solomon: They said: Even if one grants that these are intriguing ideas, they're unscientific and highly speculative.

SPIEGEL: How were you able to convince them of the contrary?

Solomon: I think this is our small contribution. We said, let's try to figure out if the fear of death influences behavior; let's subject it to empirical scrutiny. Again, we were the beneficiaries of an accident of sorts. We had a graduate student who was in a death and dying course and her class was asked to jot down their thoughts about how they might feel and think as they were physically dying. We heard that and decided: That's exactly what we're going to do. Let's ask some people to answer those questions about death and others to answer questions about other negative stuff, like going to the dentist or a car accident. And then we'll see if the members of the two groups behave differently.

SPIEGEL: Did it work?

Solomon: The very first study that we did was with court judges in Arizona, where we had half of the judges think about their own deaths, and then we asked them to set bond for an alleged prostitute, which was the most common crime in Arizona at the time. The average bond for that crime was $50, but when the judges were reminded of their mortality before setting a bond, they set bonds that were nine times higher, at $455.

SPIEGEL: Wow. That much more?

Solomon: It still astonishes me. What was remarkable is that judges are supposedly trained to administer the law in an evenhanded and rational fashion. But when we explained to them what we were doing, they said there's no way that our stupid questionnaire could have had any effect on their judgment. But the results have been replicated many times, both here and in other countries. So there have been many instances where punitive reactions to moral transgressors are magnified by these death reminders.

SPIEGEL: In your book, you go even further. You even believe that Hitler's success can be explained by Germans' fear of death.

Solomon: We must be very cautious; we should be suspicious of any monolithic explanation of anything. In our book, if we have overstated the case, and we surely have, it's because we believe that psychologists have been oblivious to the possibility that the awareness of death has any effect on what people do. Regarding Hitler: There was the defeat in World War I. There were the incredibly humiliating terms imposed upon the Germans. There was the economic instability engendered by the Depression. The combination of those factors made this a ripe substrate for the emergence of a charismatic leader.

SPIEGEL: Economic distress and aggrieved national feelings are different than the fear of death.

Solomon: You need not know that death is on your mind for these concerns to be lurking perpetually.

Let's take another example that we examined closely: Prior to September 11th, President George W. Bush's approval rating was as low as that of few presidents in the history of presidential polling. Soon after, he had the highest approval rating. We thought: Maybe September 11th was like a giant death reminder. The message was: Terrorists are diabolical, but they're also smart. What did they target?

They targeted the Pentagon. They targeted the Twin Towers and possibly the White House.

They targeted the ultimate symbols of American military, economic and political might. And there's good evidence that people in Montana were just as traumatized as people who lived in Manhattan. So it was both a symbolic as well as a literal death reminder.

SPIEGEL: You're probably going to tell us next that Donald Trump is playing on these same fears.

Solomon: That's true. America has been in a persistent state of economic insecurity. And you have lower-middle class, poorly educated white males who are feeling particularly existentially threatened right now by the changing demographics in the US, where they're about to become a minority. And here's Trump, who says: I'm going to make America great again! I'm going to build a big wall! I'm going to keep all of the Muslims out! We did our first study a couple of months ago and found that after being reminded of death, subjects expressed a greater willingness to vote for Trump.

SPIEGEL: You seem to believe that only the dark elements of our cultural identity are intensified by our fear of death. It makes us nationalist, xenophobic and intolerant. But why?

There are many positive elements to culture as well.

Solomon: Perhaps we're just interested in the capacity for tremendous evil that lurks within all of us (laughs). But death reminders magnify any pre-existing beliefs. Conservatives who are reminded of their mortality like liberal people a lot less. Liberals reminded of their mortality actually like conservative people a little bit more, because they become more tolerant and open minded. We also know that, when people are reminded of their mortality, they become more generous and if you ask them to give to charity, they will do so. But it's really important that we get a handle on the malignant manifestations of death denial. Death anxiety makes us hate people who are different. It makes us uncomfortable with our bodies and bodily functions. It turns us into mindless conspicuous consumers of stuff. It makes us go shopping, makes us eat and drink and smoke more. It undermines our physical as well as our psychological well-being.

SPIEGEL: You also argue that the fear of mortality influences our sexual behavior as well. How so?

Solomon: Ernest Becker said sex and death are twins. When I first read that, I was like: Oh man. I was already miserable, but at least there are a few things left that I enjoyed. And then: Sex and death are twins. But Becker was right: Sex as a physical activity reminds us that we're animals. Animals have sex. They die. We have sex. Therefore, we're animals, and we die. The other problem is that, after we reproduce, we've carried our baton around the relay race of life for one lap, and then it's off to the next generation. That too makes us aware of our own mortality.

SPIEGEL: You write that the moment awareness was achieved was a key moment in humanity's development. When did that happen, do you think?

Solomon: Evolutionary arguments are of necessity highly speculative. But our argument is that, by becoming self-aware, humans learned to anticipate the future, to plan and to ask questions about the world. There came a point where consciousness would have become highly problematic in the absence of the coincident development of mechanisms of denial that enabled us to take full advantage of self-awareness without being overwhelmed by death anxiety. And we go back to the cognitive awakening, something like 50,000 years ago. That is concurrent with the first appearances of grave goods, body ornaments and art. All these things are a way to prevent us from being explicitly aware of the tragic elements of the human condition.

SPIEGEL: Art was just a way to deny death?

Solomon: Yes. "Without art, the crudeness of reality would make the world unbearable," Bernhard Shaw said. And Ralph Waldo Emerson wrote: "We fly to Beauty from the terrors of finite existence."

SPIEGEL: Religion offers hope of immortality even more explicitly than does art.

Solomon: Yes, and that is likely the most important function of all religions. I like the idea that religion is an unbelievably creative way for large groups of unrelated people to get along and to foster social cohesion and social coordination. In the beginning was the beat. We were dancing and drumming and singing long before we engaged in discursive language. And yet, the conquistador Juan Ponce de León did not go looking for the Fountain of Social Glue. He went looking for the Fountain of Youth. And the people building the pyramids did not have images of lots of folks yoked arm in arm. No, they're like: I want to live forever.

SPIEGEL: Do our attitudes to death change throughout our lives? What happens, for example, when a doctor diagnoses a deadly disease? Does that intensify one's fear of death?

Solomon: That's a great question, and I don't know. But we want to find the answer and right now we are looking at people who are terminally ill. My wife is a bereavement counselor in the local hospice and she talks about how people react completely differently to terminal diagnoses.

Sometimes they react as we might expect: They get incredibly anxious, fearful and demoralized.

But other times, they literally find life never more meaningful. It's a psychological wake-up call that instigates a process by which they savor every last moment.

SPIEGEL: If we're mortal anyway, why should it matter whether we have 30 years left to live or just one year?

Solomon: Henning Mankell, the Swedish crime writer, wrote captivatingly about exactly that question. He wrote about his reaction to receiving a terminal cancer diagnosis and how, for 10 days, he felt like he was on his way to hell. He describes himself as both paralyzed and terrified, and then he describes in a very poignant, literary and beautiful way how he comes to the realization that you've just proposed, which is, it actually doesn't matter. He was then able to return to life in light of that realization.

SPIEGEL: Has your research helped you come to terms with death?

Solomon: That is a question I am often asked: You've been thinking about death for 40 years.

Has it changed you? Has it alleviated your fear of death? What I say is: sadly, probably not. I actually feel that, to a certain extent, this has been my own death denial mechanism. Then sometimes I think maybe I have made some progress -- that I'm making a couple of baby steps on the road to coming to terms with death.

SPIEGEL: In this process of coming to terms with death, does it help to consider that immortality may even be worse than mortality?

Solomon: You're right! If we were immortal, then life would be meaningless, because nothing would be of consequence. Certainly one way of taking the edge off the prospect of our inevitable demise is to ponder how much more horrendous it would be if we persisted in perpetuity. And yet, if you told me I had X number of days left to live, I would lobby for X plus one.

SPIEGEL: And when the day does come: How do you want to die?

Solomon: I just want to be sitting here with my cheeks stuffed with chocolate, and then just kind of fall asleep.

SPIEGEL: Mr. Solomon, we thank you for this interview.