The Story of the Seven Dwarfs Mining Inc: | How the Coronavirus Masked the Corporate Debt Bubble

Disney’s Seven Dwarfs team up to tell the story of corporate America (2012-2020)

by Tim Langeman 2233 words (17 min read)

Introduction

Before the coronavirus, a false narrative arose that the economy was healthy, as measured by:

  • growth in the stock market and a
  • reduction in the unemployment rate ..

when in fact this facade was only made possible with an increasing mountain of debt and low interest rates.

Wall Street Bubbles Cartoon, 1901
1901 Cartoon depicting JP Morgan as Bull

But there is more to the economy than the stock market and unemployment rate. The bond market is larger and “smarter” than the stock market. When assessing the pre-coronavirus economy, one must also take into account the stagnant profits1 corporations disguised by borrowing in the bond market to fund purchases of their own stock, artificially inflating the stock market.

Like an Injured Athlete taking Pain Killers

The US economy was like a professional football player who had been “playing hurt” for many years.

Brandon Scherff Injury: Falcons at Redskins 11/04/18
Brandon Scherff Injury, Nov 4, 2018
Keith Allison Sports Photos (CC BY-SA 2.0)

The economy used debt, like the football player uses pain killers.  The debt masks the economy’s  problems2 and allows it to perform at a higher level than otherwise would have been possible had  pain-killers not dampened the brain’s ability to perceive reality.  But unfortunately an economy is not like an athlete in that it can’t retire at the end of a 15-year career.

Featuring: The Seven Dwarfs

The story I’m about to tell is intended to illustrate how corporations borrowed money and then used that money to buy their own stock, inflating the stock price.3  In finance jargon this is called “leveraged stock buybacks”.4  Corporations have used stock buybacks as a major strategy to boost their share price but many corporations didn’t have enough profits to buy back their stock because the overall level of (pre-tax) corporate profits has been flat since 2012.5.  While some companies may have been able to legitimately afford to buy their own stock with real profits, over 50% of those buybacks were done using borrowed money.

In fact, if you look at who had been the buyer of most of the stock purchases in 2018 and 2019, it had mostly been the companies themselves purchasing their own stocks, not pension funds, individuals, or hedge funds.

I illustrate how this market manipulation works using a fairy tale featuring the seven dwarfs and their mining company “7 Dwarfs Mining, Inc.” Early in the story the dwarfs seemed to have discovered a easy way of making money until an unforeseen emergency struck and disrupted their carefully laid plans.

It is commonly known that emergencies reveal.

This story illustrates what emergencies can conceal.

The Founding Members:

Grumpy Dwarf
Grumpy Dwarf

Once upon a time, the 7 Dwarfs Mining company was founded in a small Forest Kingdom town by Seven dwarfs:6

  1. Dopey,
  2. Doc,
  3. Bashful,
  4. Happy,
  5. Grumpy,
  6. Sleepy, and
  7. Sneezy

After a number of years in business together, the mining company was valued at $7 million7 and generated $700,000 profit per year, which they split 7 ways.8

Assets# of SharesYearly ProfitProfit per ShareDebt
$7 million7$700,000$100,000$0

Going Into Debt to Hide Flat Growth

Federal Reserve: Profits before Taxes
Notice how Corporate Profits flattened out over the last 6-8 years

One year, Grumpy decided he was unhappy in the mining business. Perhaps this was due to his sour attitude, or perhaps he was feeling blue because the mine’s profits had not increased at all in the previous 6 years.9 Grumpy decided to sell his share in the mining company, but there were not a lot of other dwarfs that wanted to buy out his stake at the price of $1 million.

The other 6 dwarfs in the company wanted to continue in the business but they didn’t have the cash to buy out Grumpy, so they decided to borrow the $1 million from the bond market. Interest rates were low in the Forest Kingdom because the economy hadn’t fully recovered from the previous debt-fueled financial crisis a dozen years prior.10 The kingdom’s treasury secretary’s belief that low-interest rates stimulate growth was also a factor in setting the interest-rate climate.11 This easy lending environment allowed the dwarfs to succeed in borrowing $1 million at an interest rate of 3% per year.

The Dwarfs’ Epiphany: Earnings per Share

Earnings per Share
Earnings Per Share by Nick Youngson
CC BY-SA 3.0 Alpha Stock Images

After Grumpy exited the company, the 6 remaining dwarfs renamed their business: “6 Dwarfs Mining, Inc“. The total value of the company (market cap)12 was still $7 million and they split the same $700,000 profit six ways instead of seven. This resulted in profits of $116,666/share, a 16.7% increase over the prior year. Grumpy sulked for the next year and a half about missing out on the share price increase his exit had created, but Dopey reminded him that it was his own idea to leave. 🙁

ExitMarket CapLeverage RatioYearly ProfitProfit per Share% Profit Increase
per Share
EquityDebt
Original 7 Dwarfs$7 m7/7$700,000$100,000$7 m$0
Post-Grumpy Exit$7 m7/6$700,000$116,667 1316.7%$6 m$1 m
(Note: I’m abbreviating “million” as “m” to save space in this chart.)

Upon learning of this increase in EPS (Earnings Per Share), the 6 remaining dwarfs were elated! By taking on debt to buy out Grumpy’s stake, they managed to reduce their number of shares, thereby achieving their first share price increase in 6 years! Things were looking up! **

** “Earnings per Share” were up even though the Dwarf’s equity in the company was down.14

Scrabble Series Debt
Scrabble Series Image By: ccPixs.com

Setting Dopey’s Debt Plan in Motion

Bashful was known to wear his heart on his sleeve, especially if he had romantic feelings for someone.15 So the next year, after Bashful’s most recent crush departed the village, Dopey encouraged a lovestruck Bashful to retire from the company and follow his sweetheart to the neighboring Mountain Kingdom to the North. Dopey wanted to reduce that number of shareholders in the mining company because he had learned the benefits of having fewer shareholders from Grumpy’s exit, even if that comes at the expense of having more debt. He calculated that splitting $7 million five ways would result in a share price of $1.4 million per share. This would be a 40% increase over the original $1 million share price, although the company’s profit was still the same $700,000 per year. Once again, the dwarfs went to the bond market and used borrowed money — an additional $1 million dollars — to buy out one of their fellow dwarf’s share.

ExitMarket CapLeverage RatioYearly ProfitProfit per Share% Profit Increase
per Share
EquityDebt
Original 7 Dwarfs$7 m7/7$700,000$100,000$7 m$0
Post-Grumpy Exit$7 m7/6$700,000$116,66716.7%$6 m$1 m
Post-Bashful Exit$7 m7/5$700,000$140,000 1640%$5 m$2 m

After the successful payoff, Dopey said to Doc: “Wow, this debt thing is really an easy win. A few years ago we were struggling with plans to make efficiency improvements to the mines but that would have required us to invest some of our profits into new machinery, research and development, and employee training. Instead, I only needed to identify the key to Bashful’s heart and use some accounting wizardry17 to increase our share price the “easy way” — with more debt.”

Following the Plan

Dopey had a reputation for harebrained plans, but he knew that Sleepy’s drowsiness was no reason to doubt his intelligence or acumen.18 Dopey concluded that the two things that would most motivate Sleepy to sell his share were the attraction of sleeping in until noon and a bonus of $100,000, so he struck up a conversation with Sleepy on these two themes when the two had a private moment together. The next year, Sleepy was enjoying a restful retirement in the tropics and the mining company had one fewer shareholder.

2020 Ferrari F8 Tributo
2020 Ferrari F8 Tributo
Debt King License Plate
Debt King License Plate

The pattern continued again the following year with Happy given a $150,000 bonus contingent on his retirement, causing the share price to rise to $2,333,333 (a 133% increase). All the remaining dwarfs were extremely happy at this turn of events, as was Happy himself. 🙂 Dopey took out a loan to buy a red Ferrari with the vanity license plate “Debt King” in anticipation of his upcoming buyout. Yet, at the same time, the company’s total profit remained the same $700,000 per year it had been originally before Grumpy exited.19

ExitMarket CapLeverage RatioYearly ProfitProfit per Share% Profit Increase
per Share
EquityDebt
Original 7 Dwarfs$7 m7/7$700,000$100,000$7$0 m
Post-Grump Exit$7 m7/6$700,000$116,66716.7%$6 m$1 m
Post-Bashful Exit$7 m7/5$700,000$140,00040%$5 m$2 m
Post-Sleepy Exit$7 m7/4$700,000$175,00075%$4 m$3 m
Post-Happy Exit$7 m7/3$700,000$233,333 20133%$3 m$4 m

(Note: These figures are simplified. They do not include reinvesting profits or interest charges on the debt.)

 

A Declining Credit Rating

Credit Rating Chart
Credit Rating Chart

One of the unnoticed consequences of Dopey’s plan was that the mining company’s credit rating began to deteriorate as the company borrowed money in the bond market. The company was effectively agreeing to devote some of its future revenue (i.e. paying interest on the additional debt in the future) in exchange for a higher earnings per share today. Before Grumpy exited, the company had a AAA credit rating, but as Bashful, Sleepy, and Happy’s shares were bought out, the company’s credit rating fell to AA, then A and now stood at BBB, the lowest investment grade.21

Dopey was warned that if the company was assessed another credit downgrade the company would fall to a non-investment grade status (often referred to as “junk” bond status22). Were that to happen, pension funds and many investors would no longer be legally permitted to own the company’s debt and the interest rate the dwarfs would have to pay would spike higher. Dopey calculated that there was a higher risk to the company’s finances in the coming years, but he figured that would be Doc and Sneezy’s problem, not his, because he, Dopey, planned to be the next dwarf to exit. After Dopey left the company his financial interests would be separate from the mining company and he would not longer care if the company should happen to suffer losses.

The Unforeseen

Coronavirus
Rapidico virus

The number of shares now stood at 3, with Dopey, Doc, and Sneezy remaining, when something unforeseen happened — a sickness called Rapidico took hold in the neighboring kingdom of Achin. As the illness reached the cities of the Dwarfs’ Forest Kingdom the advisors to the kindom’s Queen — Queen Elizabeth II’s23 privy council24recommended that the kingdom go into lockdown to prevent the spread of the disease.

The Response

A lockdown seemed like a radical idea, and one that the queen deferred to individual provinces.25 As other provinces of the kingdom went into lockdown, Dopey, Sneezy, and Doc were dismissive and continued business as usual at 3 Dwarfs Mining, Inc.

Sneezy Dwarf
Sneezy (Disney Fandom)

A month and a half later, an outbreak of Rapidico took place at 3 Dwarfs Mining, Inc., set off by an asymptomatic Sneezy. Dopey later recalled, “Sneezy is always sneezing; I didn’t think nothing of it.” But the tight quarters of the mine proved to be fertile ground for the contagion to spread and many mine workers were infected. True to his name, Doc threw himself into the job of treating the afflicted dwarfs and heroically saved countless lives, but the mine’s production ground to a halt nonetheless. Other businesses were similarly affected and the queen was forced to move beyond her earlier deference to provincial autonomy and call for a strict quarantine.26

Quarantine Sign
Quarantine (PublicDomainFiles.com)

The Divided Kingdom

Because the Forest Kingdom was so fractious and the forest creatures so impatient, financially vulnerable, and headstrong, not all parts of the kingdom followed the queen’s orders closely. This disunity among the provinces resulted in stubborn pockets of disease in the lagging parts of the kingdom which hampered the economic recovery.27

The length of the quarantine caused heavy losses to the 3 Dwarfs Mining, Inc., requiring them to borrow more money. Of the original $7 million that the company had started with, the 3 Dwarfs Mining Inc had only $3,638,841 equity left ($9,846,549 assets – 6,207,708 debt)28 because they had borrowed in the bond market to buy out the shares of Grumpy, Bashful, Sleepy, and Happy, resulting in a debt of $6,207,708.29

The Risk and Reward of a High Leverage Ratio

Debt vs. Equity: The Risk and Reward of Leverage: Dopey's Debt Plan

Companies can choose how much risk they want to take to accelerate growth (Risk vs Reward). The use of debt is a key contributor to the speed at which a company can grow but it also increases the risk that the company will falter should an unforeseen risk arise.

In this particular case, the leverage ratio30 I’m comparing is the ratio of market cap31 to debt. Notice how the Leverage ratio increases as the number of shares (or equity) decrease. Reducing the equity, in this case, increases the leverage ratio (7/2 = 3.5), which increases the profit per share.

Notice how the profit per share increases as the leverage ratio increases.

ExitMarket CapLeverage RatioLeverageProfit per Share
Original 7 Dwarfs$7 million7/71.0$100,000
Post-Grump Exit$7 million7/61.17$116,667
Post-Bashful Exit$7 million7/51.4$140,000
Post-Sleepy Exit$7 million7/41.75$175,000
Post-Happy Exit$7 million7/32.33$233,333
Planned Dopey Exit$7 million7/23.532$350,000

Note: This chart has been simplified33

When Dopey planned to exit, the share price would have risen from $1 million to $3.5 million on the leverage ratio alone. A more complex calculation that reinvests profits each year would have the original $1 million share price to rise to $4,923,274, not including a bonus of $200,000, which would leave Dopey with a total exit package of $5.1 million dollars!34

When things are going well, leverage has the effect of multiplying a company’s earnings per share by the leverage ratio. But when an unforeseen tragedy hits, it leaves companies with less of a cushion to ride out a storm.

The “Debt Bomb” Goes Undiscovered

Debt Bomb
Debt Bomb (Creative Commons Zero – CC0 )

There had been a concern before the Rapidico virus hit, that a large number of Forest Kingdom companies had also been following Dopey-like plans to increase their share price the easy way — through financialization — that is “financial engineering” that inflates share price but does nothing to improve labor productivity. In the 7 Dwarfs Mining Company, profit growth is assumed to be zero, but EPS (earnings per share) still goes up anyway because the number of shares goes down. The shareholders retain ownership in the company, but often with higher levels of debt.

Resetting the “Debt Bomb”

Ticking Time Bomb
Reset the Clock on a Debt Bomb Creative Commons 4.0 BY-NC

The result is a potential “debt bomb”35 36 where a buildup of debt can threaten the whole economy. The companies contributing to this “debt bomb” report share price growth, but this “growth” is artificial because total profits are flat and earnings per share growth is only made possible by taking on more debt. When the debt bomb explodes (or pops like a bubble) it threatens to spill over into the broader economy, threatening the whole country, not just the borrowers. 37

The Rapidico crisis had given the government the opportunity to blame some of the kingdom’s problems, which had been years in the making, on the Rapidico virus and the country of Achin, even though a significant part of the financial problems were the fault of the kingdom’s systemic dysfunction. Had the kingdom not already experienced a financial crisis a dozen years prior, and had there not been such low interest rates, the Dwarfs would not have taken on so much debt, leaving their mining company financially vulnerable in a time of crisis. Had the Rapidico crisis not happened, such debt dysfunction was bound to lead to another recession anyway and leave the kingdom to grapple with questions about the authenticity of the prior decade’s growth.

Debt for Productive Purposes?

Amish Hay Wagons
Productive Purposes

When some of the queen’s more intellectually self-critical advisors speculated that it would have been better had the Forest Kingdom’s companies invested the money they borrowed into productive assets rather than share buybacks, others replied that too few workers could afford to buy38 what the companies would have produced.3940

Sweeping it Under the Rug?

Sweep it Under the Rug
Sweep it Under the Rug
from “Whistle While You Work”
Disney’s Snow White and the 7 Dwarfs, 1937

A lone advisor commented that the prior 6-8 years of flat profits41 during supposed “good times” boded poorly for future growth prospects. “When was the last time we’ve generated substantial growth without a lot of debt and the creation of another artificial bubble?”, said the deputy finance minister. Many advisors agreed with her, but were hesitant to break the bad news to the public. Nevertheless, all agreed that the queen’s legacy depended upon her taking steps to prevent such a debt bomb from re-emerging and requiring yet another bailout. You might be able to afford this bailout, but we haven’t done anything to pay down the debt from the previous financial crisis and we certainly can’t afford to make bailouts the norm. Next time, her advisors said, you won’t have the Rapidico virus to blame for the bailout and you won’t be able to sweep all that debt under the rug.

Will the Dopey Financial Plans Stay Concealed?

A cute little girl is hiding behind a tree and peeks around holding her finger to her lips saying, shhh
Stay Hidden? photo by Sheila Brown (CC0 Public Domain)

“I know we’ve got to face our problems,” said the queen,42 but a financial crisis is no time to address deep weaknesses within the economy. Calling attention to the country’s debt dysfunction will only erode consumer confidence when we need it most. Besides, many of the Debt-Dopies are particularly crafty and hire former members of parliament as their lobbyists! Another bailout is inevitable. It is better for me to let the “Debt Dopies” 43 remain concealed by the wider bailout for now, encourage optimism about the economy’s revival, and let someone else deal with the problem later.”

To repeat my opening statement:

It is commonly known that emergencies reveal.

This story illustrates what emergencies can conceal.

Dopey Dwarft
Dopey’s Debt Plan to increase EPS (Earnings per Share)

 

by Tim Langeman

Perhaps you have ideas on how this story could be improved. I welcome your suggestions.

I also welcome suggestions about who you think would be interested reading about and collaborating on this issue.

Tags:

Note:

This is a very simplified example of financialization involving only debt and share buybacks at large corporations. More complicated cases can involve some profit growth, executive compensation, and cost-cutting. This story is not about small businesses. It has been simplified to a case of only 7 shareholders for illustrative purposes.

Questions:

  1. Had you heard how much many USA large corporations’ credit ratings declined in the years before the coronavirus crisis started in early 2020 and that much of their debt was rated just above “junk” status at that time?44 45 NPR’s Planet Money has an accessible and entertaining story on why Credit ratings declined. It was this 9-minute podcast story which inspired me to do the research for this piece.
  2. Did you know that most of the stock purchases made before the crisis were NOT made by pensions, individuals, foreign investors, or hedge funds, but by the companies themselves?
  3. Did you know that over half of companies’ stock buybacks were funded with debt?
  4. Why do you think many large corporations chose to borrow money to buy back their stock rather than invest it for productive purposes between 2012 and 2020? Here’s some possibilities to start with:
    • Too much regulation to make investment profitable?
    • Taxes too high?
    • Too much political uncertainty?
    • Customers already have what they need?
    • Customers too maxed out to afford to buy more?
    • The company has a mature market position- there is little room to grow. Better to draw down on the company’s credit rating (“mortgage the company”) and redirect the money to other companies with better opportunities?
    • Executives don’t want to take a risk on long-term innovation and growth when low-interest rates make significant short-term debt-driven share price increase a low-risk choice?
    • Perverse incentives reward executives for hitting bonus targets in any way they choose, even if their choices are contrary to the long-term interests of the company?
  5. How would you feel if it turns out that, contrary to conventional wisdom, corporate profits (before taxes) had been flat from roughly 2012 – 2020 and stock prices were inflated with debt?4647
  6. What other political or economic things are being revealed or concealed by the coronavirus?

 

Background Reading:

  1. Financialization is profit margin growth without labor productivity growth. (by Ben Hunt)
  2. Texas Instruments: a poster child for financialization, the Obama/Trump Zeitgeist: an unparalleled transfer of wealth to the managerial class (by Ben Hunt)
  3. 9 Questions about the Finance System: Was the Pre-Coronavirus Stock Market a Bubble Inflated by “Financial Engineering”? (2014-2020) (by Tim Langeman)

 

See Linked Spreadsheet for Details of Dopey’s Financial Plan.

(Improve my numbers: download Excel version, tweak and Email me.)

 

Videos


Social Capital CEO Chamath Palihapitiya’s case against stock buybacks, dividends

 

 

More that is Concealed:

Federal Reserve enters new territory with support for risky debt

Programme to support ‘junk’ bonds aims to soften blows from coronavirus and downgrades

.. The Federal Reserve has jolted credit markets by expanding the scope of its support measures, announcing plans to buy debt issued by riskier companies in a radical addition to its crisis-fighting toolkit.

Junk Bonds
Junk Bonds by Simon Cunningham

.. Under the programme, the central bank will buy corporate bonds that were rated triple B minus or above — the threshold for a company’s debt to be considered investment-grade — on March 22. That still includes bonds from recently downgraded companies such as Ford, known as “fallen angels” when they lose their coveted investment-grade ratings.

Read More: Financial Times (British)

 

Obscure Section of CARES Act Provides $195 billion for Wealthy

.. the $2.2 trillion CARES Act passed by Congress last month contains deep within its 800 pages two barely-noticeable tax clauses that only benefit rich Americans, perhaps including the president.

The new tax clauses will cost Americans about $195 billion over 10 years48

Super Yacht: The Rising Sun: Larry Elison & David Geffen
Yacht: The Rising Sun owned by David Geffen
photo by Scott Smith

.. The astronomical cost only became evident a day after CARES was signed into law, when the nonpartisan congressional Joint Committee on Taxation (JCT) published an analysis of the provisions. The committee’s latest findings show that four of five millionaires will pocket an average of $1.6 million more this year alone thanks to the stimulus bill. This of course dwarfs the $1,200 one-time checks average Americans will receive.

In total the tax clauses will cost taxpayers more than the funding allotted in the CARES Act to all hospitals throughout the US, and more than the relief provided to all state and local governments, according to the JCT analysis. Together, they are the costliest elements of the relief package.

Read More: Quartz

Echoes of 2008: They Mistook leverage for genius

Steve Eisman (of Michael Lewis’s book and Movie “The Big Short“)


Steve Eisman: Quantitative Easing was a failure: it didn’t get corporations to borrow and invest. Rather, they borrowed and bought up their own stock. They didn’t really invest in the economy.

In other words, they increased their profits by increasing their debt (leverage) ratio.

(the interview is from 2017)

 


Steve Eisman: Inequality was a cause of the 2008 Financial Crisis (10:17)

People “levered themselves” (ie took out loans that increased their debt-equity ratio)

 

Steve Eisman: They made money because they increased their leverage (debt ratio) and they mistook their leverage for genius (12:19)

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

(Most images created by others)

 

Footnotes


  1. You might wonder why this Federal Reserve chart looks different than upward sloping graphs you are used to.  The first reason is because this graph uses pre-tax figures that do not include the boost that corporate tax cuts gave to the stock market.  The other reason is that this graph is based upon total profits, rather than earnings per share.  In the rest of this article you will learn how corporate debt artificially inflated earnings per share .

  2. The fallout from of the prior 2008 financial crisis was not delt with.  The government bailed out the system and assumed the debt.  Most Americans’ wages had stagnated and healthcare and education expenses have gone up dramatically.  In order to compensate for week customer demand, companies had begun to borrow money and buy back their own stock.  Even with a deficit of $1 trillion/year, pre-coronavirus, the economy grew at a rate of 2.1% and was projected to fall to 1.6% in by 2024.

  3. Now with the coronavirus crisis, the federal reserve is buying some of that debt, as well as allowing corporations to issue additional debt at artificial prices.

  4. Leveraged” is just a fancy term used to indicate that a financial activity is amplified by borrowing.

  5. Pre-tax Corporate profits peaked in 2014 and have been roughly flat since 2012.  The perception of growth is mostly due to the additional debt (share buybacks) and the  2017 tax cuts (federal government debt).

  6. There are many variations of the Seven Dwarfs’ Names. I’m going with the 1937 Snow White and the Seven Dwarfs animated musical fantasy film produced by Walt Disney Productions

  7. The value of all the stock is equal to the value of all the company’s assets minus its liabilities.

    ( total stock shares = number of shares x share price)

  8. I picked round numbers for this. If you want to help me improve the numbers, see the excel doc in the footer and edit it.

  9. In Place of the Finances of the 7 Dwarfs Mining, Inc., I’ve inserted a Graph above referring to US Corporate Profits before Taxes, as reported by the St. Louis Federal Reserve. Read more about the chart and about “Financial Engineering” that turns this flat graph into a growing one.

  10. While the level of consumer debt was reduced, corporate and government debt went up.

  11. How different would rates have been if the government had not pushed for a late-cycle stimulus and not resisted advice to raise interest rates?

  12. Market Capitalization is the total value of all outstanding shares. Shareholders own what remains after everyone else has been paid (this includes employees, bondholders, vendors, etc)

  13. 7/6 = 1.67

  14. Equity” is the what the shareholders own after all the bills (including debt) have been paid. It is the value of assets minus liabilities. The additional debt they took on to buy out Grumpy’s share is a liability.

  15. Disney Fandom: “Aside from his coyness, Bashful also appears to be romantic. He adores the idea of true love, and when Snow White decides to share a story with the dwarfs, Bashful joyfully suggests a love story, which she obliges to.”

  16. 7/5 = 1.40

  17. Investopedia.com: financial engineering is the use of mathematical techniques to solve financial problems. .. Although financial engineering has revolutionized the financial markets, it played a role in the 2008 financial crisis. As the number of defaults on subprime mortgage payments increased, more credit events were triggered. Credit Default Swap (CDS) issuers, that is banks, could not make the payments on these swaps since the defaults were happening almost at the same time.

  18. Disney Fandom: “However, in spite of spending most of his time nearly falling asleep, Sleepy is apparently the most observant and logical of the seven dwarfs, whether he knows it or not. He was the only dwarf to make the assumption that the Evil Queen may be attacking Snow White at the cottage when the forest animals frantically interrupted the dwarfs’ mine work.”

  19. This is a simplified version of the finances that doesn’t include interest or profit reinvestment. I was concerned that adding them at this point would take away from the broader point.

  20. 7/3 = 2.33

  21. Prior to the coronavirus, roughly half of all corporate debt was rated BBB , which is the minimum “investment grade” rating. A lot of this debt was purchased by the Fed as part of the bailout, including debt that was downgraded to “junk” status.

  22. “Junk” bonds are often referred to as “high yield” bonds. “High yield” sounds nicer and it accurately conveys that these bonds have a higher yield (or interest rate) as compensation for the extra risk the lender takes.

  23. I am deliberately using the British System as a way to distance the reader from drawing favorable or unfavorable inferences onto current American officials. This story is really about the dwarfs (and especially large corporate businesses) and the way they relied on debt to raise their share price.

  24. The Privy Council of the Forest Kingdom is a formal body of advisers to the Sovereign. Its membership mainly comprises senior politicians who are current or former members of either the House of Commons or the House of Lords.

  25. Provinces are like states in the American context. The head of a province is the Premier.

  26. Yes, I know in the British system the Queen would leave this governance to the prime minister but I figure an audience of Americans don’t understand the British system and this version is simpler to explain while taking the spotlight off of particular American politicians.

  27. In some parts of the kingdom the quarantine was applied multiple times to respond to re-occurrences.

  28. Equity” denotes how much their company is worth — how much remains for the shareholders after everyone else is paid.

  29. One might think the debt would be (4 x $1 million)= $4 million. But the actual cost of buying out each share increased as the share price increase: $1 million + $1.28 million + $1.67 million + $2.35 million + bonuses.

  30. For simplicity, I’m using a leverage ratio which uses marketcap/debt. A more common ratio is debt/equity.

  31. value of all shares, which is the share price multiplie by the number of shares

  32. Leverage = 7/2 = 3.5

    • I’m assuming a constant total profit of $7 million to simplify this example
    • I’m not including reinvesting profits or deducting interest paid on the debt

  33. See spreadsheet at the bottom of this page

  34. A debt bomb is a situation where a default on a large accumulation of debt can produce major negative consequences not only for the borrower but for many other market participants. That is to say, other people’s debts can harm you even if you were not over-indebted yourself.

  35. .There is more than one type of debt bomb. Banks can become debt bombs. Countries can become debt bombs due to public debt. This is a simplified example of a small business as a metaphor for an entire country.

  36. Low-interest rates make it easier to have more debt and to create “debt bombs”.

  37. 40% of Americans can not afford a $400 emergency. Why should companies invest in increased capacity when consumers’ wages have been stagnant for decades and therefore can’t afford to purchase more products and services?

  38. One can argue that share buybacks are a good way for established companies with limited opportunities to redirect money to shareholders, but does this also apply when companies don’t have the cash but decide to take on extra debt for this purpose?

  39. I’ve heard that leveraged stock buybacks can be thought of as “refinancing,” but refinancing only changes the interest rate of existing debt. These seem more like talking on additional debt for the purpose of converting equity to debt. The average homeowner can think of this like taking out a second or third mortgage on a house. You’re taking on more debt. If the debt doesn’t have a productive purpose it is likely to be problematic.

  40. Yes, profits per share increased because the number of shares decreased, but total profits were flat.

  41. My goal is to focus on the debt and the circumstances why it was incurred, rather than to focus on Trump (in the American context) or any particular politician, which is why I cast Queen Elizabeth II in the role of queen.

  42. In the Disney series, Dopey does not talk, which does make it a problem if you want to portray him as a “Financial Schemer”

  43. When I talk about large corporations, I’m not talking about small businesses of less than 1,000 employees. The 7 Dwarfs were used as an illustration to make the situation easier to understand, but I don’t mean to include small businesses in this analysis at all.

  44. Roughly half of all corporate debt is rated BBB, which is the minimum “investment grade” rating. A lot of this debt was purchased by the Fed as part of the bailout, including debt that was downgraded to “junk” status.

  45. It is possible that profits are not flat, that they have actually gone up but the unreported profits were siphoned off to tax havens.

  46. Another factor that contributed to corporate share price growth was tax cuts which were “paid for” with additional growth in the national debt.

  47. I don’t know how much money David Geffen will personally get from this bill. I use his yacht as a symbol of the wealth that isolates rich people from the typical citizen and curries favor with the politicians that write, vote for, and sign the bailout packages.

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He Has 17,700 Bottles of Hand Sanitizer and Nowhere to Sell Them

On March 1, the day after the first coronavirus death in the United States was announced, brothers Matt and Noah Colvin set out in a silver S.U.V. to pick up some hand sanitizer. Driving around Chattanooga, Tenn., they hit a Dollar Tree, then a Walmart, a Staples and a Home Depot. At each store, they cleaned out the shelves.

Over the next three days, Noah Colvin took a 1,300-mile road trip across Tennessee and into Kentucky, filling a U-Haul truck with thousands of bottles of hand sanitizer and thousands of packs of antibacterial wipes, mostly from “little hole-in-the-wall dollar stores in the backwoods,” his brother said. “The major metro areas were cleaned out.”

Matt Colvin stayed home near Chattanooga, preparing for pallets of even more wipes and sanitizer he had ordered, and starting to list them on Amazon. Mr. Colvin said he had posted 300 bottles of hand sanitizer and immediately sold them all for between $8 and $70 each, multiples higher than what he had bought them for. To him, “it was crazy money.” To many others, it was profiteering from a pandemic.

Now, while millions of people across the country search in vain for hand sanitizer to protect themselves from the spread of the coronavirus, Mr. Colvin is sitting on 17,700 bottles of the stuff with little idea where to sell them.

“It’s been a huge amount of whiplash,” he said. “From being in a situation where what I’ve got coming and going could potentially put my family in a really good place financially to ‘What the heck am I going to do with all of this?’”

Mr. Colvin is one of probably thousands of sellers who have amassed stockpiles of hand sanitizer and crucial respirator masks that many hospitals are now rationing, according to interviews with eight Amazon sellers and posts in private Facebook and Telegram groups from dozens more. Amazon said it had recently removed hundreds of thousands of listings and suspended thousands of sellers’ accounts for price gouging related to the coronavirus.

Amazon, eBay, Walmart and other online-commerce platforms are trying to stop their sellers from making excessive profits from a public health crisis. While the companies aimed to discourage people from hoarding such products and jacking up their prices, many sellers had already cleared out their local stores and started selling the goods online.

Now both the physical and digital shelves are nearly empty.

Mikeala Kozlowski, a nurse in Dudley, Mass., has been searching for hand sanitizer since before she gave birth to her first child, Nora, on March 5. When she searched stores, which were sold out, she skipped getting gas to avoid handling the pump. And when she checked Amazon, she couldn’t find it for less than $50.

“You’re being selfish, hoarding resources for your own personal gain,” she said of the sellers.

Sites like Amazon and eBay have given rise to a growing industry of independent sellers who snatch up discounted or hard-to-find items in stores to post online and sell around the world.

These sellers call it retail arbitrage, a 21st-century career that has adults buying up everything from limited-run cereals to Fingerling Monkeys, a once hot toy. The bargain hunters look for anything they can sell at a sharp markup. In recent weeks, they found perhaps their biggest opportunity: a pandemic.

As they watched the list of Amazon’s most popular searches crowd with terms like “Purell,” “N95 mask” and “Clorox wipes,” sellers said, they did what they had learned to do: Suck up supply and sell it for what the market would bear.

Initially, the strategy worked. For several weeks, prices soared for some of the top results to searches for sanitizer, masks and wipes on Amazon, according to a New York Times analysis of historical prices from Jungle Scout, which tracks data for Amazon sellers. The data shows that both Amazon and third-party sellers like Mr. Colvin increased their prices, which then mostly dropped when Amazon took action against price gouging this month.

Average daily prices from Jan. 1 through March 7 for some of the most popular products returned in keyword searches on Amazon.com. | Source: Jungle Scout | By Ella Koeze

At the high prices, people still bought the products en masse, and Amazon took a cut of roughly 15 percent and eBay roughly 10 percent, depending on the price and the seller.

Then the companies, pressured by growing criticism from regulators and customers, cracked down. After the measures last week, Amazon went further on Wednesday, restricting sales of any coronavirus-related products from certain sellers.

“Price gouging is a clear violation of our policies, unethical, and in some areas, illegal,” Amazon said in a statement. “In addition to terminating these third party accounts, we welcome the opportunity to work directly with states attorneys general to prosecute bad actors.”

Mr. Colvin, 36, a former Air Force technical sergeant, said he started selling on Amazon in 2015, developing it into a six-figure career by selling Nike shoes and pet toys, and by following trends.

In early February, as headlines announced the coronavirus’s spread in China, Mr. Colvin spotted a chance to capitalize. A nearby liquidation firm was selling 2,000 “pandemic packs,” leftovers from a defunct company. Each came with 50 face masks, four small bottles of hand sanitizer and a thermometer. The price was $5 a pack. Mr. Colvin haggled it to $3.50 and bought them all.

Credit…Doug Strickland for The New York Times

He quickly sold all 2,000 of the 50-packs of masks on eBay, pricing them from $40 to $50 each, and sometimes higher. He declined to disclose his profit on the record but said it was substantial.

The success stoked his appetite. When he saw the panicked public starting to pounce on sanitizer and wipes, he and his brother set out to stock up.

Elsewhere in the country, other Amazon sellers were doing the same.

Chris Anderson, an Amazon seller in central Pennsylvania, said he and a friend had driven around Ohio, buying about 10,000 masks from stores. He used coupons to buy packs of 10 for around $15 each and resold them for $40 to $50. After Amazon’s cut and other costs, he estimates, he made a $25,000 profit.

Mr. Anderson is now holding 500 packs of antibacterial wipes after Amazon blocked him from selling them for $19 each, up from $16 weeks earlier. He bought the packs for $3 each.

Eric, a truck driver from Ohio who spoke on the condition that his surname not be published because he feared Amazon would retaliate, said he had also collected about 10,000 masks at stores. He bought each 10-pack for about $20 and sold most for roughly $80 each, though some he priced at $125.

“Even at $125 a box, they were selling almost instantly,” he said. “It was mind-blowing as far as what you could charge.” He estimates he made $35,000 to $40,000 in profit.

Now he has 1,000 more masks on order, but he’s not sure what to do with them. He said Amazon had been vague about what constituted price gouging, scaring away sellers who don’t want to risk losing their ability to sell on its site.

To regulators and many others, the sellers are sitting on a stockpile of medical supplies during a pandemic. The attorney general’s offices in California, Washington and New York are all investigating price gouging related to the coronavirus. California’s price-gouging law bars sellers from increasing prices by more than 10 percent after officials declare an emergency. New York’s law prohibits sellers from charging an “unconscionably excessive price” during emergencies.

An official at the Washington attorney general’s office said the agency believed it could apply the state’s consumer-protection law to sue platforms or sellers, even if they aren’t in Washington, as long as they were trying to sell to Washington residents.

Credit…Doug Strickland for The New York Times

Mr. Colvin does not believe he was price gouging. While he charged $20 on Amazon for two bottles of Purell that retail for $1 each, he said people forget that his price includes his labor, Amazon’s fees and about $10 in shipping. (Alcohol-based sanitizer is pricey to ship because officials consider it a hazardous material.)

Current price-gouging laws “are not built for today’s day and age,” Mr. Colvin said. “They’re built for Billy Bob’s gas station doubling the amount he charges for gas during a hurricane.”

He added, “Just because it cost me $2 in the store doesn’t mean it’s not going to cost me $16 to get it to your door.”

But what about the morality of hoarding products that can prevent the spread of the virus, just to turn a profit?

Mr. Colvin said he was simply fixing “inefficiencies in the marketplace.” Some areas of the country need these products more than others, and he’s helping send the supply toward the demand.

“There’s a crushing overwhelming demand in certain cities right now,” he said. “The Dollar General in the middle of nowhere outside of Lexington, Ky., doesn’t have that.”

He thought about it more. “I honestly feel like it’s a public service,” he added. “I’m being paid for my public service.”

As for his stockpile, Mr. Colvin said he would now probably try to sell it locally. “If I can make a slight profit, that’s fine,” he said. “But I’m not looking to be in a situation where I make the front page of the news for being that guy who hoarded 20,000 bottles of sanitizer that I’m selling for 20 times what they cost me.”

After The Times published this article on Saturday morning, Mr. Colvin said he was exploring ways to donate all the supplies.

American Paganism

It’s not what the Religious Right thinks it is.

Claims of moral decline are a perennial feature of conservative rhetoric. But in recent years, pro-Trump Christians have emphasized a new reason to be afraid. The United States, they say, is devolving into such wanton “paganism” that the country may not survive. The true America awaits rescue by the Christian faithful, and in such an existential struggle, nearly any means are justified—even reelecting a morally abhorrent president.

Examples of this rhetoric are not in short supply, among pundits and even in more scholarly work. In an essay praising Donald Trump’s “animal instinct” for “order” and “social cohesion,” Sohrab Ahmari opposed an America of “traditional Christianity” to one of “libertine ways and paganized ideology.” These are our only choices, he insisted. Between such incompatible enemies, there can be only “war and enmity,” so true believers should be ready to sacrifice civility in the battles ahead to reconquer the public squareRod Dreher has speculated that Trump, while unpalatable, could be a divine emissary holding back the horrors of Christian persecution, like the biblical figure of He Who Delays the Antichrist, an implicit nod to old pagan enemies. “If Christians like me vote for Trump in 2020,” Dreher warns, “it is only because of his role as katechon in restraining what is far worse.” Though in a calmer tone, Ross Douthat entertained similar ideas in his column “The Return of Paganism,” wondering if the pantheist tendencies in American civil religion could morph into a neo-paganism hostile to Christian faith.

Douthat cites a recent book by law professor Steven D. Smith, Pagans & Christians in the City: Culture Wars from the Tiber to the Potomac. According to Smith, what we know as “secularismis actually ancient paganism in modern guise. Since paganism is inherently anti-Christian, this means Christians should oppose both secular politics and secular universities at any cost. They are not fighting against a neutral arbiter, but against the wiles of pagan Rome redivivus, a strain of this-worldly sexualized spirituality nearly eradicated by Christianity, but now mutated and all the more lethal.

Smith is only the most recent Christian author to invoke the specter of paganism. R. R. Reno, the editor of First Things, wrote Resurrecting the Idea of a Christian Society on the eve of the 2016 election, apparently anticipating a Clinton victory. The book’s title alludes to T. S. Eliot’s 1938 essay on “The Idea of a Christian Society,” in which Eliot condemns the rise of “modern paganism.” Reno told his readers to view 2016 in light of 1938. “Would the West seek a Christian future or a pagan one?” he asked. “We face a similar decision today. Will we seek to live in accord with the idea of a Christian society, or will we accept the tutelage of a pagan society?” Yuval Levin called Reno’s book a “call to arms against a postmodern paganism.”

This charge of looming paganism exerts a twofold political function. First, it

  1. rationalizes Trumpism, casting our situation as a state of emergency that threatens the survival of U.S. Christians.
  2. Second, the sacrilege of pagan religion prevents Trump’s supporters from indulging in political moderation by making that seem like a form of apostasy. It’s probably not a coincidence that “paganism” is on the rise just as Christian conservatives decide whether to support the current administration in an election year. It is challenging to explain how Trump’s policies are Christian. It is far easier to label his opponents as pagans, and thus align the president with Christianity by default. But there are fundamental problems with the conservative narrative of a resurgent paganism.

In the first place, the term “paganism” only works in this maneuver because it is vague and perspectival. It always has been, ever since Christians invented it. Ancient Christians stuck the name on those who continued the traditional rites of Greco-Roman religion rather than adopt the true faith. Indeed the largely urban Christians meant it as a mild pejorative for the rural country bumpkins, the pagani, who lived far from imperial centers and persisted in their benighted worship of the old gods. In our terms, the first “pagans” lived in flyover country and clung to their traditional religion. 

Since “pagan” has come to mean “un-Christian,” every invocation of “pagan” brings with it an implicit understanding of “Christian.” The meaning of the former is parasitic on the latter. Misunderstanding the essence of paganism, therefore, also means misunderstanding the demands of Christianity, and vice versa.

More left-leaning Christians might well agree with Smith and Reno in one sense: there is indeed an ascendant paganism afoot in our country today. It threatens the social and moral fabric of American public life and contends directly against the voice of Christian truth. One can brook no compromise in resisting it. The difference comes in how that paganism is defined. The debate is not whether paganism is real, but where it lives, how it appears, and what it does. If conservatives have mistaken its location, they might be training their weapons in the wrong direction.

Much hangs, then, on accurately discerning the meaning of “modern paganism.” Let us consider three proposals: Steven Smith’s recent version, T. S. Eliot’s original version, and another timely version from First Things.

Christians were the most conspicuous defenders of divine immanence in the ancient world. It was pagans who derided Christians for violating the self-evident truths of divine transcendence.

Steven Smith suggests that secularism is not a neutral space, but conceals its own religious identity, which is essentially pagan. It venerates the sacred within the natural world, knows only the cycle of birth and death, and thus celebrates a libertine sexuality. As opposed to Abrahamic religions that affirm the “transcendent sacred,” paganisms old and new prefer the “immanent sacred.” Smith delves into the emergence of Christians in the Roman Empire and vividly evokes the oddity of Christianity in the ancient world, heeding the scholarship of Peter Brown, Jan Assmann, and Kyle Harper (but Edward Gibbon most of all). Smith then applies his ancient model to American constitutional law and finds it confirms conservative positions on religious freedom, public symbols, and sexual norms.

But there are serious problems with Smith’s argument. Since the 1970s, scholars of religion have largely retired the vague categories formerly used to organize speculation about comparative religions—sacred and secular, immanent and transcendent, holy and profane, this-worldly and other-worldly. Major religious traditions are massive and multifarious in the ways they sustain rituals, ethics, and beliefs. Their communities cut across languages, continents, empires, and epochs, teeming with exceptions and discontinuities. The blunt tools applied by Smith are simply not up to the task of uncovering the essence of one religion, let alone two or three, and they are certainly not able to trace the notoriously complicated history of the “secular.”

For the sake of argument, though, let us grant Smith his chosen terms, and even focus on his central claim, that Christianity can lead the way in challenging modern secularity, since it insists on the “transcendent sacred” in a way that secular paganism does not. Smith’s proposal rests upon a fundamental analogy: paganism is to Christianity as immanence is to transcendence. Christians pray to the God beyond the world; pagans encounter divinity inside the weft of nature.

Even a cursory knowledge of Christianity is enough to refute this analogy. It is true that Judaism teaches the absolute transcendence of the one God, as do Islamic theologians today, and as did Neoplatonist pagan philosophers in antiquity who sought a divine One beyond every thought, word, and image. By contrast, orthodox Christians claim that God arrived and now eternally resides within the fabric of nature, as the Creator enters into creation in the body of Jesus Christ. To cite Smith’s definition of “paganism,” it is Christianity, in fact, that “refers to a religious orientation that locates the sacred within this world.” The Christian belief in the Incarnation is nothing if not a belief in the “immanent sacred.”

The new Christian movement distinguished itself from Greek philosophy, Roman cults, and Jewish faith alike by affirming an extensive and peculiar list of divine incursions into immanence: the Incarnation of God in the body of Jesus; Anne’s immaculate conception of Mary; Mary’s virginal conception and vaginal birth of the Son of God, making her Theotokos; the real flesh of Jesus suffering on the cross, against the Gnostics (Tertullian); the real presence of Jesus in the Eucharistic bread and wine, also against the Gnostics; the Resurrection of the body after death; the bodily assumption of Mary; the martyrdom of the body as bloody birth into heaven (Perpetua) or as the grinding of flesh into bread (Ignatius of Antioch); the church birthed through the bleeding side wound of a dying Jesus; the church as maternal breast suckling the Christian with milk; the union of Christ and Christians as the exemplar of which sexual union is the image (Ephesians 5, Origen of Alexandria). Above all, the scandalous immanence that might have sounded pagan to Jesus’s disciples: “Unless you eat the flesh of the Son of Man and drink his blood, you do not have life within you” (John 6). The enemy of these traditional Christian teachings is not sacred immanence, but rather a gnosticism that dematerializes and disembodies the real presence of God within creation.

The radically immanent sacred of Christians scandalized the Romans. As Ramsay MacMullen observes, Christians worshipping a new transcendent deity would have passed unremarked. But the Christian belief that Jesus was neither prophet nor sage but a fleshly God would have been mocked by pagan intellectuals as a risible error. The late New Testament scholar Larry Hurtado writes: “In the philosophical traditions, an ultimate and radically transcendent deity was often postulated, but you did not typically engage that transcendent deity directly.… But there was a still more unusual and, in the eyes of pagan sophisticates, outlandish Christian notion: the one, true, august God who transcended all things and had no need of anything, nevertheless, had deigned to create this world and, a still more remarkable notion, also now actively sought the redemption and reconciliation of individuals.” For pagan intellectuals, Hurtado concludes, “all this was, quite simply, preposterous.”

For instance, in his work On the True Doctrine (178 CE), the pagan philosopher Celsus is ready to accept that God exists, creates all things, and transcends nature. But in shades of Sam Harris or Richard Dawkins, Celsus laughs away the claim that God was incarnated in Jesus, or that the body could be resurrected. “I mean, what sort of body is it that could return to its original nature or become the same as it was before it rotted away?” he mocks. “And of course they have no reply for this one, and as in most cases where there is no reply they take cover by saying ‘Nothing is impossible with God.’ A brilliant answer indeed! But the fact is, God cannot do what is contrary to nature.”

Christian philosophers saw the divide similarly. Tertullian admits that pagan philosophers might even discern that God exists by their own lights. But they always miss that God descended into a virgin and was made flesh in her womb. Augustine reports that he learned from the pagan philosopher Plotinus that the Logos was transcendent—but only Christians taught him how the Logos embraced the human body in all of its weakness and vulnerability, and its awful exposure to the whims of imperial violence.

To put it bluntly: paganism cannot simply mean divine immanence. On the contrary, Christians were the most conspicuous defenders of that principle in the ancient world. It was pagans who derided Christians for violating the self-evident truths of divine transcendence.

The resemblances between the modern paganism feared by T.S. Eliot in 1938 and conservative politics in 2020 are uncanny.

A better starting point for defining “paganism” is T. S. Eliot’s essay “The Idea of a Christian Society,” written in the dark days of 1938, where he proposes that the greatest enemy of modern Christianity is “modern paganism.” Reno and Smith alike summon Eliot as a sober authority in perilous times, but neither presents Eliot’s own account of the term in question. So how did Eliot define paganism? It’s important to stay as close as possible to his own words.

First, Eliot says paganism embraces an authoritarian politics that confuses religion and nationhood. The “distinguishing mark” of a Christian society, Eliot writes, is its productive “tension” between church and state, but pagan society seeks to “fuse” them. Pagan culture “de-Christianises” individuals gradually and unwittingly, as authoritarianism creeps in. Soon, he warns, one’s hymns are no longer to God alone, but also to the dear leader.

Second, Eliot says that modern paganism incites ecological destruction. The Christian lives in harmony with nature; the pagan destroys public resources for private profit. “Unregulated industrialism” and “the exhaustion of natural resources,” writes Eliot, lead to “the exploitation of the earth, on a vast scale.” In a formulation that strikingly anticipates Laudato si’, he puts it succinctly: “A wrong attitude towards nature implies, somewhere, a wrong attitude towards God.

Third, modern paganism imposes a puritanical public morality. It promotes, in Eliot’s words, “regimentation and conformity, without respect for the needs of the individual soul” and “the puritanism of a hygienic morality in the interest of efficiency.” According to Eliot, in fact, modern paganism will even attempt to elevate the status of Christian identity in society. But paganism embraces Christianity not because it’s true, but because it consolidates the nation and discourages dissent. He notes that authoritarians have always celebrated public morality. They want, in a way, more morality, even if their priorities are haphazardly formulated. Eliot warns that such a moralistic Christianity is not only a perversion of the faith: “It is not enthusiasm, but dogma, that differentiates a Christian from a pagan society.” Such versions of Christianity might even “engender nothing better than a disguised and peculiarly sanctimonious nationalism, accelerating our progress toward the paganism which we say we abhor.”

The resemblances between the modern paganism feared by Eliot in 1938 and conservative politics in 2020 are uncanny. The “paganism” that future Christians will need to identify and resist, he warned, will appear as

  • unrestrained capitalist greed; as
  • authoritarianism seeking to weaken democratic norms; as
  • callous environmental degradation; as a
  • superficial Christian moralism seeking to fuse church and state; and as a
  • petty “sanctimonious nationalism.” 

In the poignant final paragraph of his essay, Eliot confesses that the churning political surprises of the 1930s had left him shaken, not only because of the events themselves, but in the revelation of his own country’s moral poverty. In the face of Britain’s failure to mount an adequate response to modern pagan violence, Eliot felt a justified “humiliation” that demanded of him “personal contrition” along with “repentance, and amendment.” He felt “deeply implicated and responsible” and began to question his country’s frequent claims to moral authority. When Eliot enjoins his readers to fight against modern paganism, it is specifically because its brew of authoritarianism and capitalism were already beginning to charm Christian intellectuals who should know better. Eliot’s final sentences prick the conscience today:

We could not match conviction with conviction, we had no ideas with which we could either meet or oppose the ideas opposed to us. Was our society, which had always been so assured of its superiority and rectitude, so confident of its unexamined premises, assembled round anything more permanent than a congeries of banks, insurance companies and industries, and had it any beliefs more essential than a belief in compound interest and the maintenance of dividends? Such thoughts as these formed the starting point, and must remain the excuse, for saying what I have to say.

The paganism we should fear is not secularism, sacred immanence, or pantheist naturalism. It is power celebrating its violence, perceiving the world empty of everything save the contest of will.

But there was at least one other account of paganism in the pages of First Things as Trump campaigned for the presidency—this time from Matthew Schmitz, an editor at the magazine. Over the summer of 2016, Schmitz displayed an admirable prescience while Christian conservatives were still hesitating to endorse the eventual Republican nominee. The “faith taught by Christ,” he wrote, “is a religion of losers. To the weak and humble, it offers a stripped and humiliated Lord.… In Trump, it [Christian faith] has curdled into pagan disdain.”

Schmitz’s analyses from April and August of 2016 really must be considered at length, given where they were published. Take this representative passage:

At a campaign event in Iowa, Trump shocked the audience by saying that he had never asked God for forgiveness. All his other disturbing statements—his attacks on every vulnerable group—are made intelligible by this one…. Human frailty, dependency, and sinfulness cannot be acknowledged; they must be overcome. This opens up the possibility of great cruelty toward those who cannot wish themselves into being winners. A man who need not ask forgiveness need never forgive others. He does not realize his own weakness, and so he mocks and reviles every sign of weakness in his ­fellow men.

And here’s another:

In his contempt for losers, he [Trump] embodies one of the most unchristian ideals ever advanced in American politics. With a unique consistency and vehemence, he expresses his hatred of weakness. He ridicules the disabled, attacks women, and defends abortionists. This is the opposite of Christianity, which puts the weak first and exalts every loser…. Liberalism, much as I hate it, has preserved this Christian inheritance. The GOP before Trump, despite all its contempt for the 47 percent, was leavened by the influence of sincere Christians and so was never so sneering. Trump is an altogether more pagan figure.

By 2019, however, in the wake of the midterm battles over immigration and the mythic “caravan” of refugees at the southern border, Schmitz joined others to cheer on the “new nationalism” that Trump promoted at his rallies. Within a few months, Schmitz had decided that Christianity and liberalism could never be reconciled, since modern society—wait for it—had become paganized. “The Church,” he now saw, “is at odds with an increasingly pagan culture.”

If there was an ancient paganism of sacred immanence, it was soon outstripped by the more radical immanence of Christians in their claims of an Incarnation, a Resurrection, and above all the enduring food of the Eucharist. In every Mass the priest washes his hands in imitation of the pagan Pilate, but now as an act of humility and celebration. The  Catholic repeats as her own the words of the pagan centurion—Lord, I am not worthy—but now as an intimate prayer on the threshold of Communion. That version of paganism was overtaken and dissolved from within by the Christian sacralization of the body.

But there is another paganism that has survived into the present, and has emerged so vividly in contemporary politics that even First Things in 2016 could not miss it. This is not the paganism of immanence, but the paganism of cruelty and violence. It mocks the vulnerable, reviles the weak, and gains strength through hatred. We don’t have to look too far to discover the “postmodern paganism” threatening American Christianity today. 

Last summer the Trump administration argued in court that more than two thousand migrant and refugee children should be separated from their parents, concentrated in crude detention camps with minimal supervision, and locked in chilled rooms with the lights left on all night. The administration has yet to condemn the petty cruelty of some camp guards and instead has mused that such violence might be politically useful. Hundreds of children as young as two are deliberately denied diapers, soap, and toothbrushes for months at a time to punish their parents. Community donations of the same are turned away. Young women are denied tampons. Young children are denied inexpensive flu vaccines, and if they contract a terminal cancer, they are deported without medical care. Chickenpox and shingles are common. Federal contractors win upwards of $700 per day for each imprisoned child. Seven children have died in custody to date, and many more have been hospitalized. Doctors worry they cannot serve in the camps without violating the Hippocratic oath. The camps themselves were continued from the Obama administration, but the withdrawal of basic necessities is Trump’s innovation. What is this if not the very paganism conservatives decry?

This modern paganism ultimately means the nihilistic exercise of power for its own sake, especially power over weak and vulnerable bodies. In its purest form, it is expressed as conspicuous cruelty, both to render one’s power maximally visible and to increase that power by engendering fear. The cruelty is the point. This is the joyful paganism that Nietzsche sought to revive as the Wille zur Macht, retrieving from ancient Rome the glorious pleasure in cruelty that rewards the strong who exercise their strength. This is the reason Italian fascist Julius Evola hated Christianity for its compassion for the poor and weak.

We find this paganism exposed in the ancient world as well, in the Athenian mockery and massacre of the Melians in Thucydides’s History of the Peloponnesian War, in Thrasymachus’s authoritarian attacks on Socrates in Plato’s Republic, or in Augustine’s shrewd deconstruction of imperial power in The City of God against the Pagans. John Milbank calls this Nietzschean worldview an ontology of eternal violence opposed to an Augustinian counter-ontology of eternal peace. As Schmitz himself suggests, the perfect example of pagan disdain for vulnerability and conspicuous cruelty is the Roman practice of public crucifixion. Pagan is to Christian not as immanent is to transcendent, but as Rome is to the Crucified—a cruel empire to its tortured victims.

But modern paganism can also assume subtler forms, whenever the common good is reduced to ruthless economic competition, confirming Eliot’s fears that we have no values more essential than our “belief in compound interest and the maintenance of dividends.” The paganism we should fear is not secularism, sacred immanence, or pantheist naturalism. It is power celebrating its violence, perceiving the world empty of everything save the contest of wills, a nihilism ruled by the libido dominandi.

This paganism views moral responsibility as a fool’s errand for the weak, since all that matters is to dominate or be dominated. It sacralizes the emperor as an agent of God, scorns truth, despises the weak, and tortures the vulnerable. And it cloaks its nihilism, to cite Eliot once again, in “a disguised and peculiarly sanctimonious nationalism, accelerating our progress toward the paganism which we say we abhor.”

Senate Republicans Weigh Moves to Block Trump on Mexico Tariffs

Trump defends plan as needed to address migrants from Central America, says lawmakers would be making a mistake if they try to stop him

Democrats have roundly opposed Mr. Trump’s border stance and his plan to impose tariffs on Mexico. But his announcement triggered blowback from some Senate Republicans as well, who returned this week from a Memorial Day recess ready to consider their options to stop him.

Republican senators will meet behind closed doors Tuesday for a weekly lunch, where the subject is expected to be at the top of the agenda. A White House deputy counsel is expected to attend to discuss the matter.

“If [White House officials] continue down this path and they escalated the tariff, I suspect Congress is going to want to probably be heard from, for sure,” Senate Majority Whip John Thune (R., S.D.) said on Monday night. He said that Republicans were still in the process of studying the legal authority on which the administration would rely to impose the tariffs.

In comments at a press conference in London alongside U.K. Prime Minister Theresa May, Mr. Trump brushed off Republican senators’ concerns, calling any move to block him a mistake.

I don’t think they will do that—if they do, it’s foolish,” Mr. Trump said, when asked what he thought of potential Republican efforts to block his Mexico tariffs. On the state of the talks with Mexico, he said: “We are going to see if we can do something, but I think it’s more likely that the tariffs go on.”

One issue is whether the national emergency Mr. Trump declared earlier this year to divert funds to Mexico border-wall construction also gives him the power to impose tariffs. Some Republicans suspect he sees that declaration as providing the legal basis to impose ever-increasing tariffs as a mechanism to pressure Mexico to stem the flow of migrants. The White House hasn’t publicly cited its legal basis for the tariffs plan.

At a meeting with Senate Republican aides on Monday, one White House counsel indicated that the president intended to rely on a statute called the International Emergency Economic Powers Act to impose the tariffs, which is triggered by an emergency declaration. Some Senate GOP aides expect Mr. Trump to declare a new emergency or amend his existing declaration in order to put the tariffs into place.

Republican aides say such a move could prompt a vote to end the tariffs. The vote could be initiated in either the Senate or the House. It is unclear which chamber would vote first, although beginning with a Senate vote might provide political cover to House Republicans who are generally reluctant to challenge Mr. Trump.

A vote to terminate the tariffs is seen as the fastest route to block the president, since such a measure is protected against stalling tactics. Congress used a similar approach earlier this year when it voted to reject Mr. Trump’s national emergency declaration.

But Mr. Trump vetoed that measure, and Congress didn’t muster enough votes to override the veto, meaning the national emergency stayed in place.

Congress could also amend the International Emergency Economic Powers Act to make clear that it can’t be used to impose tariffs. The law is typically used to freeze assets and has never before been used in the way that the president contemplates, creating potential legal problems for the administration.

“This is certainly breaking new ground, and that creates both a legal problem potentially if there are court challenges, and it’s also clear from the way Republicans are responding that some of them just don’t like this idea,” said Chris Edelson, an American University government professor who wrote a book on emergency presidential power.

House Democratic leaders have been critical of Mr. Trump’s decision to impose tariffs, but said they were waiting to see how Senate Republicans respond.

“The problem that we confront in this country is that the president often conducts himself in an erratic fashion as it relates to economic policy, particularly in terms of his deployment of tariffs,” Rep. Hakeem Jeffries of New York, chairman of the House Democratic caucus, said Tuesday.