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September Pegasus Now Available!

Here’s the September issue of Pegasus.

First is an article from Richard Van Scotter about education being necessary if we are to understand the subtleties of life and the skills for holding the office of citizen.

Next, we include two short book reviews, one on Amazon and the other on Facebook.

Lastly, we have a collection of cartoons meant to bring meaning and humor to some of today’s important issues.  We hope they serve as discussion starters, suggesting points of view that can only be presented metaphorically

I would be most interested in your thoughts and feedback.

Once Again, Capitalism Saves Humanity – Really?

Merck and Ridgeback Biotherapeutics – two capitalist companies – have collaborated to create a pill with the off-putting name of “molnupiravir” to effectively treat Covid infections, saving lives and reducing hospitalizations.

The biological impact of the pill is to degrade the ability of the Covid virus to replicate itself into more viruses inside its host, thus reducing the number of viruses blindly working away, turning our cells against us. The fewer viruses in us, the less harm done to us by the infection and the less dangerous the virus to humanity in general.

Molnupiravir and similar antiviral drugs yet to be developed, promise, first, stabilization of the impacts of Covid infections and then subjugation of the global pandemic.

Similarly, the novel vaccines developed by Pfizer, Moderna and others have done more to thwart the pandemic and reduce transmission of the virus than most every regulation and order issued and imposed by our governments.

Thus, inventions made by capitalist companies have once again thwarted nature and reduced its capacity to harm civilization.

Some 250 years ago, the industrial revolution brought about by capitalist modes of production and distribution similarly manipulated nature into providing resources for human wealth creation.

The industrial revolution, now in its 4th generation of technological inventiveness, saved humanity from poverty, existential stagnation, elitist autocracies and theocracies and much suffering and brought us into enjoyment of our current standards of living – with modern medicines, electricity, the internet, longer lives, more education and all the rest of what we consume, enjoy and abuse.

Now, it must be admitted that capitalism did not do this all on its own. Public goods – law, police, market and political freedoms, roads, bridges, sewers, risk mitigation subsidies, etc. – were necessary supports for private sector invention and production. But as wealth was created by capitalism, taxes collected by governments increased so that governments could buy more public goods.

A capitalist may have invented the flush toilet, which did so much to lower death rates and extend lives, but governments or public utilities put in the water mains to bring water to our homes and the sewers to carry away our effluent.

Thus, has modern civilization been created by a virtuous circle of first, capitalism, then wealth creation, then more effective, responsible, government, leading to more fruitful capitalism, then to more wealth creation and then to more sophisticated and responsible government, which then gave rise to more…

We should, however, never overlook, nor diminish with ingratitude, the role of capitalism in bringing to us so much of the lives we live and wish to live.

Lord Skidelsky and the Liquidity Conundrum

Several times recently, I have circulated some personal concerns as to what is the “net impact” of the massive infusions of fiat currencies – liquidity – into national and global economies.  Has it mostly helped those who own capital assets, especially financial assets, do better and better, without breaking a sweat or taking a risk?

Our friend, Lord Robert Skidelsky, recently expressed similar concern in a column for Project Syndicate.

I am most honored to be in his company, as he has written a noted biography of John Maynard Keynes.  He may be the only independent in the British House of Lords.

He has kindly given us permission to send to you his commentary.

His thoughts on “where has all the money gone?” are here:

Where Has All the Money Gone?
Robert Skidelsky
September 15, 2021

Quantitative easing risks generating its own boom-and-bust cycles and can thus be seen as an example of state-created financial instability.  Governments must now abandon the fiction that central banks create money independently from government and must themselves spend the money created at their behest.

LONDON – Amid all the talk of when and how to end or reverse quantitative easing (QE), one question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?

Between 2009 and 2019, the Bank of England injected £425 billion ($588 billion) – about 22.5% of the United Kingdom’s 2012 GDP – into the UK economy.  This was aimed at pushing up inflation to the BOE’s mandated medium-term target of 2%, from a low of just 1.1% in 2009. But after ten years of QE, inflation was below its 2009 level, despite the fact that house and stock-market prices were booming and GDP growth had not recovered to its pre-crisis trend rate.

Since the start of the COVID-19 pandemic in March 2020, the BOE has bought an additional £450 billion worth of UK government bonds, bringing the total to £875 billion or 40% of current GDP.  The effects on inflation and output of this second round of QE are yet to be felt, but asset prices have again increased markedly.

A plausible generalization is that increasing the quantity of money through QE gives a big temporary boost to the prices of housing and financial securities, thus greatly benefiting the holders of these assets.  A small proportion of this increased wealth trickles through to the real economy, but most of it simply circulates within the financial system.

The standard Keynesian argument, derived from John Maynard Keynes’s General Theory, is that any economic collapse, whatever its cause, leads to a large increase in cash hoarding.  Money flows into reserves and saving goes up, while spending goes down.  This is why Keynes argued that economic stimulus following a collapse should be carried out by fiscal rather than monetary policy.  Government has to be the “spender of last resort” to ensure that new money is used on production instead of being hoarded.

But in his Treatise on Money, Keynes provided a more realistic account based on the “speculative demand for money.”  During a sharp economic downturn, he argued, money is not necessarily hoarded, but flows from “industrial” to “financial” circulation.  Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.”  A depression is marked by a transfer of money from industrial to financial circulation – from investment to speculation.

So, the reason why QE has had hardly any effect on the general price level may be that a large part of the new money has fueled asset speculation, thus creating financial bubbles, while prices and output as a whole remained stable.

One implication of this is that QE generates its own boom-and-bust cycles.  Unlike orthodox Keynesians, who believed that crises were brought on by some external shock, the economist Hyman Minsky thought that the economic system could generate shocks through its own internal dynamics.  Bank lending, Minsky argued, goes through three degenerative stages, which he dubbed hedge, speculation and Ponzi.  At first, the borrower’s income needs to be sufficient to repay both the principal and interest on a loan.  Then, it needs to be high enough to meet only the interest payments.  And in the final stage, finance simply becomes a gamble that asset prices will rise enough to cover the lending.  When the inevitable reversal of asset prices produces a crash, the increase in paper wealth vanishes, dragging down the real economy in its wake.

Minsky would thus view QE as an example of state-created financial instability.  Today, there are already clear signs of mortgage-market excesses.  UK house prices increased by 10.2% in the year to March 2021, the highest rate of growth since August 2007, while indices of overvaluation in the US housing market are “flashing bright red.”  And an econometric study (so far unpublished) by Sandhya Krishnan of the Desai Academy of Economics in Mumbai shows no relationship between asset prices and goods prices in the UK and the US between 2000 and 2016.

So, it is hardly surprising that, in its February 2021 forecast, the BOE’s Monetary Policy Committee estimated that there was a one-third chance of UK inflation falling below 0% or rising above 4% in the next few years.  This relatively wide range partly reflects uncertainty about the future course of the pandemic, but also a more basic uncertainty about the effects of QE itself.

In Margaret Atwood’s futuristic 2003 novel Oryx and Crake, HelthWyzer, a drug development center that manufactures premium-brand vitamin pills, inserts a virus randomly into its pills, hoping to profit from the sale of both the pills and the antidote it has developed for the virus.  The best type of diseases “from a business point of view,” explains Crake, a mad scientist, “would be those that cause lingering illness […] the patient would either get well or die just before all of his or her money runs out.  It’s a fine calculation.”

With QE, we have invented a wonder drug that cures the macroeconomic diseases it causes.  That is why questions about the timing of its withdrawal are such “fine calculations.”

But the antidote is staring us in the face.  First, governments must abandon the fiction that central banks create money independently from government.  Second, they must themselves spend the money created at their behest.  For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs.

Doing this will bring about a recovery without creating financial instability.  It is the only way to wean ourselves off our decade-long addiction to QE.

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University.  The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

Democracy in Decline: What Is To Be Done?

The ESGX platform is a new associate of the Caux Round Table.

At noon (CDT) on Tuesday, September 28, it is presenting a discussion about “Democracy in Decline: Impact Investing to Reverse Global Trends” and you are invited to join us.

I will be one of the discussants.

The questions raised by ESGX are:

The success of many developed economies has depended on strong and reliable rule of law – and on the reliability of democracy itself – as both provide critical reassurance to investors.  And yet, around the world, democracy appears to be in decline, threatened both by the rejection of science, logic and reason, as well as by political activists seeking to replace long-trusted power structures with new regimes.

In this special episode, we’ll explore the threats to democracy globally and how we can act to combat them.  We will discuss the following questions:

-Which countries provide the most free and fair labor markets?
-Are companies domiciled in more democratic countries at an advantage and more investible?
-What are the links between culture, values and democracy?
-What positive role can individuals, companies, investors and governments play? 

My perspective is a traditional one: the quality of a democracy is driven by underlying social, cultural and economic conditions.

If those fall short, democracy cannot thrive.

In June 59 BC, in writing to his friend Atticus on the rising threats to Roman constitutionalism from the triumvirate of Pompey, Crassus and Julius Caesar, Cicero noted that “virtue” had evaporated among many Romans.  His phrase was virtutuem adligatam – “virtue is in chains.”  It was a straight run from there to the collapse of the Roman Republic not too many years later.

Some of you may recall the quip of Benjamin Franklin on walking out of the meeting hall having just signed the proposed constitution for the new independent North American colonies.  He was challenged by a Philadelphia matron of some distinction: “Mr. Franklin, what kind of a government have you given us?”

Franklin replied: “A Republic, madam, if you can keep it.”

Karl Marx famously linked constitutional democracy as a political system to economics – to the rise of a middle class.  The corollary to his syllogism is “Lose your bourgeoisie and you will lose your constitutional democracy.”

We should also note what my professors Samuel Beer and Barrington Moore, a Marxist, taught me that a bourgeoisie is habits of mind and heart, as well as having an economic function to perform for society.

For more information or to register, please click here.

I do hope you can join us.