Is China’s economy headed for a crash?

In his assessment of the global economy’s performance 2013, legendary financier George Soros warned of dangers in the Chinese economy:

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35 percent of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in the U.S. in the years preceding the crash of 2008. [Project Syndicate]

That, as William Pesek notes, is a rather ominous conclusion. So is China due a crash?

Read More At TheWeek.com

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Why I Was Wrong About Inflation

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Back in 2007, I was much more interested in finance and trading than I was in macroeconomics. When the crisis — and the government’s macroeconomic response to the crisis — began in 2008 what was really needed to get a strong grasp of the situation was an understanding of macroeconomics, which I did not have as it was a topic I only really began studying in depth at that time. This led to some misconceptions, particularly about inflation. I mistakenly assumed — as did many at the time, and as do many today — that the huge expansion of the monetary base would lead to stronger inflation than the timid and low inflation we have seen in years since the programs began. While I strongly doubted the claims of individuals like Peter Schiff that hyperinflation might be nigh — as I understood that most historical hyperinflations occurred due to a collapse in production, not solely due to money printing — I thought a strong inflationary snapback was likely, Why? A mixture of real effects and expectations. If central banks are printing money at a higher rate, people will fear that money is becoming less scarce. If having more money in circulation does not begin to bid prices upward, producers will soon begin to raise prices to anticipate any such rise. Simply, I thought that central banks couldn’t print their way out of disaster without some iatrogenic side-effects. I assumed the oncoming pain was unavoidable, and that the onset of inflation was the price that would be paid. As Ludwig von Mises put it: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

So why did that not occur? After all, plenty of internet goldbugs — and very serious people following the advice of people like John Taylor, Eugene Fama, and Niall Ferguson — were talking about the potential for a strong inflationary shock. The gold price was soaring — hitting a peak above $1900 an ounce in September 2011 — as people anticipating inflation sought to buy insurance against it. Well, for a start it seems like the public did not really buy into the notion of an oncoming inflationary shock. Expected inflation as measured by the University of Michigan has remained very close to the post-1980 norm since the crisis:

MICH_Max_630_378

But above and beyond this, the real monetary effects were not the ones I first assumed them to be. The total money supply — most of which is generated not by the Fed but in the private sector through lending — has been stagnant, even while the Federal Reserve is expanding the monetary base. So while the financial sector is flush with cash and has bid the stock market up above its pre-recession nominal peak, other goods in other sectors just have not had enough of a bid behind them to send inflation strongly upward because other areas of the economy (for instance housing, consumer electronics and real wages) have continued to deflate in the context of continued deleveraging, accelerating offshoring driving down wages and the receding effects of the 2008 oil shock.

Yet even more importantly the supply of goods in the West — flowing as it does from East to West, from the factories of the Orient to the consumers of the West — has remained strong and stable. There has been no destabilising, chaotic Chinese crash or revolution, even though many wished there would be in the wake of the Arab spring. And for all the talk by the Chinese and Russians of bond vigilantism, starting a new global reserve currency and dumping the dollar, that has not happened either. And why would it? Certainly, the Asian bond-buyers might have suffered a few years of negative real interest rates. This might have pissed them off. But undermining the Western recoveries further (which have been quite pathetic thus far) when such a high proportion of their assets — dollars and treasuries and increasingly real assets like land and industrials — are related to the economic performance of the West would be to cut off their nose to spite their face, while simultaneously risking conflict with the American military, whose capabilities remain unmatched. The Chinese and Russian talk of de-Americanisation and a post-American world is all bluff and bluster, all sound and fury signifying very little. In the long run, America will have to accept a world where it is no longer the sole global superpower, but there is no incentive for America’s competitors to hasten that way with the kind of aggressive economic warfare that might cause an economic shock.

On the other hand, it is certainly true that much of the new money entering the system is sitting as excess reserves. Is that a symptom of the inflation simply being delayed? Until the middle of last year I thought so. Now I very strongly doubt it. The existence of excess reserves in the system is not a symptom of stored-up future inflation, but a symptom of the weakness of the transmission mechanism for quantitative easing. Simply, the system is in a depression. The banking system is infected with a deep paranoia, and would prefer to sit on risk-free cash instead of lending money to businesses. If the money was lent out, there would be an increased level of economic and business activity. Therefore there is no guarantee of any additional inflation as the money is loaned out.

So I was wrong to worry that inflation could become an imminent problem. But I was wronger than this. The entire paradigm that I was basing these fears upon was flawed. Simply, I was ignoring real and present economic problems to worry about something that could theoretically become a problem in the future. Specifically, I was ignoring the real and present problem of involuntary unemployment to worry about non-existent inflation and non-existent Asian bond vigilantes. The involuntariness of unemployment is a very simple fact — there are not enough jobs for the number of jobseekers that exist, and there hasn’t been enough jobs since the crisis began. Currently there are just over three job seekers for every job. So unemployment and underemployment are not simply things that can be dismissed as a matter of workers becoming lazy, or preferring leisure to work. Mass unemployment has insidious and damaging social effects for individuals and communities — people who are out of work for a long time lose skills. For communities, crime rises, and health problems emerge. And there are 25 million Americans today who are either unemployed or underemployed as a practical matter it is not simply a case of sitting back and allowing the structure of production to adjust to the new economy. And worse, with unemployment high, spending and confidence remain depressed as the effects of high unemployment create a social malaise. This is a mass sickness — and in the past it has led to the rise of warmongering political figures like Hitler. So while it may be preferable for the private sector to be the leading job creator under ordinary conditions, while the private sector is engaging in heavy deleveraging this is impractical. Under such an eventuality the state is the only institution that can break the depressionary trend by creating paying jobs and fighting back against the depressionary tendency toward mass unemployment. Certainly, centralised bureaucracy can be a troublesome and distortionary thing. But there are many things — like mass unemployment and underemployment, and the social problems that that can bring — worse than centralised bureaucracy. And no — this kind of Keynesianism was not the problem in the 1970s.

By worrying over the potential for future inflation or future bond vigilantism due to monetary and fiscal stimulus, I was contributing to the problem of mass unemployment, first of all by not acknowledging the problem, and second by encouraging governments and individuals to worry about potential future problems instead of real-world problems today. As it happened, a tidal wave of evidence has washed these worries away. It is clear from the economic data that inflation is not a concern in a depressionary economy, just as Keynesian-Hicksians heuristics like IS/LM suggested.

Of course, if the depression ends of its own accord then inflation could become a problem again.  If the United States were to experience a strong unexpected spurt of growth sustained over a year or so, pushing unemployment significantly down and growth significantly up, inflation could rise appreciably. The Federal Reserve would have to quickly taper both its unconventional policies and probably begin to raise rates. Of course, that is rather unlikely in the present depressionary environment. But certainly, it is a small possibility. That would be the time for the Federal Reserve to start to worry about inflation. A strong negative energy shock — like the one experienced by the UK in 2010 and 2011 — could push inflation higher too, yet that would be a transitory factor in the context of the wider depressionary environment, and would most likely fall back of its own accord.

If the Fed was engaging in actual helicopter drops — the most direct transmission mechanism possible — there would likely be a stronger inflationary response than that which we have seen thus far. Yet ultimately, this might prove desirable. After all, if the private sectors of the entire Western world have a very large nominal debt load which they are struggling to deleverage, some stronger inflation would certainly begin to minimise that. Yes, that is redistribution from lender to borrower. No, creditors will not be happy about this. But in the end, creditors may find it easier to take an inflationary haircut than face twenty years of depressionary deleveraging as Japan has done. Although the West certainly does not have the same demographic troubles as Japan, such an outcome is possible unless people — governments, entrepreneurs, individuals, society — decide that unemployment and a lack of demand in the economy must be tackled, and do something about it. Then can we confidently expect to climb out of the lip of the deleveraging trap.

Syria & the Return of Liberal Interventionism

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I don’t know which side of the Syrian Civil War used chemical weapons most recently. Both sides have access to them, to different degrees, as the rebels have taken over a number of former Syrian army bases. There have been accusations that the rebels have used them in the past. Certainly, if Bashar al-Assad’s regime is to survive, the last thing he would do is try to bring the United States and Britain into the war, and the first thing that would do that is the use of chemical weapons. On the other hand, the first thing the rebels — who have been largely outgunned recently by the Syrian government — want is Libyan-style direct US and British assistance. Is it possible that the rebels hit a target with chemical weapons and blamed it on the Syrian government? I’d say it is possible — especially given the history of some rebel groups trying to kill foreign media with the same aim — but really there is no clear evidence for precisely who is responsible.

And I don’t know which side of the Syrian Civil War shot at the UN inspectors who visited the chemical weapons attack site. It could conceivably have been the government, or the rebels, or a crazed individual. Again, the rebels have an incentive to inflame the situation to draw in the United States and Britain, but there is no clear evidence.

Yet it seems that the United States is ready to go to war to remove Assad from power. I don’t think this is a good idea.  In terms of a cost-benefit analysis, well, Syria has already experienced a massive and deadly civil war. Huge amounts of damage has been done to Syria’s infrastructure, economy and human population. Could a US-led intervention reduce future, greater damage? I have no idea; there is little scientific basis to make such a judgment. But going by the past examples of US occupations in Iraq and Afghanistan, I sincerely doubt it. Having US forces on the ground simply unifies and radicalises the opposition like al-Qaeda and deposed elements of the government. The US presence in Iraq and Afghanistan was correlated with more destruction and upheaval than under the prior regimes. While a ground-based or mostly air-based US intervention might bring the civil war to a swifter close, it might lead to greater turbulence and upheaval and terrorism after the war ends. And on the other hand, if things go wrong — like if Iran or Russia and even greater concentrations of radical Muslim fighters are also sucked into the conflict — the outcome could be far longer and deadlier than if the Syrian civil war ran its own course.

The best hope, in my view, remains that the international community devote the resources they might otherwise devote to bombing the Assad regime to helping the millions of refugees who have been displaced and harmed in the course of the war, and to brokering negotiations between the Syrian government and the rebels without preconditions. In these respects, the international community can be an undoubted help to the Syrian people.

But in reality, it seems that the old doctrines of so-called liberal intervention have returned, reborn in the rhetoric and policies of Barack Obama and David Cameron — two individuals who have both at times expressed scepticism toward notions of liberal interventionism in word, but not so much in deed. In my view, killing for peace is an impossible contradiction except in self-defense. While liberal interventionists like Samantha Power are right to believe that the West dramatically failed the people of Rwanda during the genocide, it was not sufficient military interventionism that was missing but sufficient humanitarian intervention. With 1.5 million refugees already displaced in the civil war — a figure that is sure to increase with US-led military intervention and regime change — Syria is shaping up to be a humanitarian disaster too.

Israel and Russia At Odds Over Syria

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Times of global economic disruption or depression have often historically been preludes to war. So too have been periods of geopolitical instability, where new economic powers are rising, and old ones falling. Back in 2008 the United States’ tenture as the sole global superpower appeared to be endangered, and we appeared to be on the cusp of a new multipolar world order.  And at the same time a new demand-side depression bearing some eerily similar characteristics to the Great Depression surfaced. So — even though we were sitting on the back of a huge trend of decreasing war and violence — I was to a small degree worried that this slump might be a prelude to another global conflict.

Luckily — with the exception of a few skirmishes in the middle east following the Arab spring — no such wide-scale global conflict has broken out. The forces of peace have kept the forces of war and chaos mostly at bay. No direct war between the great powers has broken out. Given the high level of trade interdependency and global economic integration that now exists — factors which play a great role in discouraging conflict — that is very good news. Avoiding a new global conflict should be a top priority for policymakers, corporations, and individuals worldwide.

Hopefully, then, the latest friction in the middle east — this time between Israel and Russia — will amount to nothing:

 Israel’s defense chief said Tuesday a Russian plan to supply sophisticated anti-aircraft missiles to Syriawas a “threat” and signaled that Israel is prepared to use force to stop the delivery.

The warning by Defense Minister Moshe Yaalon ratcheted up tensions with Moscow over the planned sale of S-300 air-defense missiles to Syria. Earlier in the day, a top Russian official said his government remained committed to the deal.

Israel has been lobbying Moscow to halt the sale, fearing the missiles would upset the balance of power in the region and could slip into the hands of hostile groups, including the Lebanese militia Hezbollah, a close ally of the Syrian regime.

Israel has carried out several airstrikes in Syria in recent months that are believed to have destroyed weapons shipments bound for Hezbollah. Israel has not confirmed carrying out the attacks.

The delivery of the Russian missiles to Syria could limit the Israeli air force’s ability to act. It is not clear whether Israeli warplanes entered Syrian airspace in these attacks.

Attacking Syrian bases and weaponry is one thing. Attacking Russian attempts to aid the Syrian government is quite another — and could very easily have dark consequences. Perhaps Russian interests in Syria — including their naval base there — are a lost cause. Perhaps Russian attempts to help the Syrian government are misguided. And perhaps Western attempts to aid the Syrian rebels — who  have some have affiliations with al-Qaeda and radical Islamism, and who have reportedly used chemical weapons — overthrow Assad are even more misguided and even more dangerous. Neither side can really claim the moral high ground in what is effectively a proxy war between the Russian-backed government and Western-backed rebels. Both sides have committed atrocities and killed civilians and journalists. All that has been achieved is massive disruption to millions of ordinary Syrians who have had to flee the country.

Ideally, a peace based around compromise, power-sharing  and democracy can be brokered by the UN Security Council to avoid any further escalation. But unfortunately, both the Russians and the West are continuing to provide material support to their favoured sides. That has been bad for the Syrian people, whose country lies ruined and abandoned and while they now populate refugee camps in Jordan, Lebanon, Turkey and Egypt. But it could even worse for the region and the world with further escalation.

Hopefully, there will be no escalation. Hopefully, the Syrian Civil War will wind down to a stalemate, peace terms will be brokered and the refugees will be able to go home. Hopefully the great powers who have so far allowed this proxy war to continue will realise that fighting a proxy war in Syria is a very dangerous thing. The likeliest outcome is that the forces of inertia, peace and economic development will triumph over the forces of chaos. But this is not assured so long as this dangerous proxy war goes on.

Chinese Treasury Contradictions…

One mistake I may have made in the two years I have been writing publicly is taking the rhetoric of the Chinese and Russian governments a little too seriously, particularly over their relationship with the United States and the dollar.

Back in 2011, both China and Russia made a lot of noise about dumping US debt, or at least investing a lot less in it. Vladimir Putin said:

They are living beyond their means and shifting a part of the weight of their problems to the world economy. They are living like parasites off the global economy and their monopoly of the dollar. If [in America] there is a systemic malfunction, this will affect everyone. Countries like Russia and China hold a significant part of their reserves in American securities. There should be other reserve currencies.

And China were vocally critical too:

China, the largest foreign investor in US government securities, joined Russia in criticising American policymakers for failing to ensure borrowing is reined in after a stopgap deal to raise the nation’s debt limit.

People’s Bank of China governor Zhou Xiaochuan said China‘s central bank would monitor US efforts to tackle its debt, and state-run Xinhua News Agency blasted what it called the “madcap” brinkmanship of American lawmakers.

But just this month — almost two years after China blasted America for failing to cut debt levels — China’s Treasury holdings hit a record level of  $1.223 trillion.  And Russian treasury holdings are $20 billion higher than they were in 2012. So all of those protestations, it seems, were a lot of hot air. While it is true that various growing industrial powers are setting up alternative reserve currency systems, China and Russia aren’t ready to dump the dollar system anytime soon.

Now, the Federal Reserve has to some degree further enticed China into buying treasuries by giving them direct access to the Treasury auctions, allowing them to cut out the Wall Street middlemen. Maybe if that hadn’t happened, Chinese Treasury ownership would be lower.

But ultimately, the present system is very favourable for the BRICs, who have been able to build up massive manufacturing and infrastructural bases as a means to satisfy American and Western demand. In that sense, the post-Bretton Woods globalisation has been as much a free lunch for the developing world as it has been for anyone else. And why would China and Russia want to rock the boat by engaging in things like mass Treasury dumpings, trade war or proxy wars? They are slowly and gradually gaining on the West, without having to engage in war or trade war. As I noted in 2011:

I believe that the current world order suits China very much — their manufacturing exporters (and resource importers) get the stability of the mega-importing Americans spending mega-dollars on a military budget that maintains global stability. Global instability would mean everyone would pay more for imports, due to heightened insurance costs and other overheads.

Of course, a panic in the Chinese mainland — maybe a financial crash, or the bursting of the Chinese property bubble — might result in China’s government doing something rash.

But until then it is unlikely we will see the Eurasian holders of Treasuries engaging in much liquidation anytime soon — however much their leaders complain about American fiscal and monetary policy. Actions speak louder than words.

Why Europe Is Still In Peril, In Two Charts

A lot of analysts, including myself, have given the European situation a rest since last year. There were certainly some signs that the ECB and IMF had slowed (if not stopped) the deterioration by providing liquidity backstops to the addled banking system. But perhaps that was just the calm before the storm.

In truth, things were still was probably just as perilous as ever up until yesterday when the ECB and IMF decided to start a banking panic by enforcing a haircut of up to 10% on bank depositors. That was literally the stupidest thing that anyone has done since the Euro crisis began, and while it may not lead to utter disaster, there is a significant chance that it will. Not only is it excruciatingly unjust (it’s theft!), it is also incredibly suicidal. Many, many Spaniards, Italians, Greeks and Portuguese will have looked at the Cyprus haircut in horror, and wondered “Am I next?” Some of those will withdraw their money from the bank and stuff it in a mattress or into tangible assets, furthering stressing the already-fragile and highly-leveraged European banking system. Even a 1% drop in European deposits would lead to over €100 billion of withdrawals.

The background to this is soaring European unemployment:

EuroUnemployment

The people running the European financial system and engineering the bailouts and austerity (ECB, EU, IMF, Germany) have ploughed on through with more and deeper austerity even as European countries (other, of course, than Germany) have run up to higher and higher unemployment levels. Spain and Greece are above 25%. Italy is above 10%, and Portugal above 15%. Hiking taxes and cutting spending is leading to more and more people in unemployment oblivion. That isn’t healthy. Let’s not forget what happened to Germany the last time when over 25% of its people found themselves unemployed:

Chart-German-Unemployment-and-Nazi-Links

If bank runs materialise across Europe next week, the unemployment situation is most likely to worsen even further. If that happens, expect more and more unemployed, underemployed and angry Europeans to start voting for increasingly radical political parties. This is suicidal. Europe needs to not only reverse the awful, stupid Cypriot haircut, but also to put fiscal consolidation on hold (it has, lest we forget, so far been counterproductive) and start worrying about unemployment levels.

Explaining The WTI-Brent Spread Divergence

Something totally bizarre has happened in the last three years. Oil in America has become much, much cheaper than oil in Europe. Oil in America is now almost $30 cheaper than oil in Europe.

This graph is the elephant in the room:

3 year brent spread

And this graph shows how truly historic a move this has been:

brent-WTI-spread

Why?

The ostensible reason for this is oversupply in America. That’s right — American oil companies have supposedly been producing much, much more than they can sell:

This is hilarious if prices weren`t so damn high, but despite a robust export market for finished products, crude oil is backing up all the way to Cushing, Oklahoma, and is only going to get worse in 2013.

Now that Enterprise Products Partners LLP has let the cat out of the bag that less than a month after expanding the Seaway pipeline capacity to 400,000 barrels per day, The Jones Creek terminal has storage capacity of 2.6 million barrels, and it is basically maxed out in available storage.

But there’s something fishy about this explanation. I don’t know for sure about the underlying causality — and it is not impossible that the oil companies are acting incompetently — but are we really supposed to believe that today’s oil conglomerates in America are so bad at managing their supply chain that they will oversupply the market to such an extent that oil sells at a 25% discount on the price in Europe? Even at an expanded capacity, is it really so hard for oil producers to shut down the pipeline, and clear inventories until the price rises so that they are at least not haemorrhaging such a huge chunk of potential profit on every barrel of oil they are selling? I mean, that’s what corporations do (or at least, what they’re supposed to do) — they manage the supply chain to maximise profit.

To me, this huge disparity seems like funny business. What could possibly be making US oil producers behave so ridiculously, massively non-competitively?

The answer could be government intervention. Let’s not forget that the National Resource Defence Preparedness Order gives the President and the Department of Homeland Security the authority to:

(c)  be prepared, in the event of a potential threat to the security of the United States, to take actions necessary to ensure the availability of adequate resources and production capability, including services and critical technology, for national defense requirements;

(d)  improve the efficiency and responsiveness of the domestic industrial base to support national defense requirements; and

(e)  foster cooperation between the defense and commercial sectors for research and development and for acquisition of materials, services, components, and equipment to enhance industrial base efficiency and responsiveness.

And the ability to:

(e)  The Secretary of each resource department, when necessary, shall make the finding required under section 101(b) of the Act, 50 U.S.C. App. 2071(b).  This finding shall be submitted for the President’s approval through the Assistant to the President and National Security Advisor and the Assistant to the President for Homeland Security and Counterterrorism.  Upon such approval, the Secretary of the resource department that made the finding may use the authority of section 101(a) of the Act, 50 U.S.C. App. 2071(a), to control the general distribution of any material (including applicable services) in the civilian market.

My intuition is that it is possible that oil companies may have been advised (or ordered) under the NDRP (or under the 1950 Defense Production Act) to keep some slack in the supply chain in case of a war, or other national or global emergency. This would provide a capacity buffer in addition to the Strategic Petroleum Reserve.

If that’s the case, the question we need to ask is what does the US government know that other governments don’t? Is this just a prudent measure to reduce the danger of a resource or energy shock, or does the US government have some specific information of a specific threat?

The other possible explanation, of course, is ridiculous incompetence on the part of US oil producers. Which, I suppose, is almost believable in the wake of Deepwater Horizon…

America Loves Drone Strikes

This graph shows everything we need to know about the geopolitical reality of Predator Drones (coming soon to the skies of America to hunt down fugitives?).

The American public loves drone strikes:

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The American public does not approve of the extrajudicial killing of American citizens. But for everyone else, it’s open season.

But everyone else — most particularly and significantly, the countries in the Muslim world — largely hates and resents drone strikes.

And it is the Muslim world that produces the radicalised extremists who commit acts like 9/11, 7/7, the Madrid bombings, and the Bali bombings.  With this outpouring of contempt for America’s drone strikes, many analysts are coming to believe that Obama’s drone policy is now effectively a recruitment tool for al-Qaeda, the Taliban and similar groups:

2_Hands

Indeed, evidence is beginning to coalesce to suggest exactly this. PressTV recently noted:

The expanding drone war in Yemen, which often kills civilians, does in fact cause blowback and help al-Qaeda recruitment – as attested to by numerous Yemen experts, investigative reporting on the ground, polling, testimony from Yemen activists, and the actual fact that recent bungled terrorist attacks aimed at the U.S. have cited such drone attacks as motivating factors.

After another September drone strike that killed 13 civilians, a local Yemeni activist told CNN, “I would not be surprised if a hundred tribesmen joined the lines of al-Qaeda as a result of the latest drone mistake. This part of Yemen takes revenge very seriously.”

“Our entire village is angry at the government and the Americans,” a Yemeni villager named Mohammed told the Post. “If the Americans are responsible, I would have no choice but to sympathize with al-Qaeda because al-Qaeda is fighting America.”

Many in the U.S. intelligence community also believe the drone war is contributing to the al-Qaeda presence in Yemen. Robert Grenier, who headed the CIA’s counter-terrorism center and was previously a CIA station chief in Pakistan, told The Guardian in June that he is “very concerned about the creation of a larger terrorist safe haven in Yemen.”

“We have gone a long way down the road of creating a situation where we are creating more enemies than we are removing from the battlefield,” he said regarding drones in Yemen.

Iona Craig reports that civilian casualties from drone strikes “have emboldened al-Qaeda” and cites the reaction to the 2009 U.S. cruise missile attack on the village of al-Majala in Yemen that killed more than 40 civilians (including 21 children):

That one bombing radicalized the entire area,” Abdul Gh ani al-Iryani, a Yemeni political analyst, said. “All the men and boys from those families and tribes will have joined [al-Qaeda] to fight.

And al-Qaeda’s presence and support in Yemen has grown, not shrunk since the start of the targeted killing program:

Meanwhile Yemen Central Security Force commander Brig. Gen. Yahya Saleh, nephew of ousted president Ali Abdullah Saleh, told Abdul-Ahad that al-Qaeda has more followers, money, guns and territory then they did a year and a half ago.

All at a time when Yemen is facing a “catastrophic” food crisis, with at least 267,000 children facing life-threatening levels of malnutrition. Hunger has doubled since 2009, and the number of displaced civilians is about 500,000 and rising.

As U.S. drones drop bombs on south Yemen villages and AQAP provides displaced civilians with “free electricity, food and water,” tribes in the area are becoming increasingly sympathetic to AQAP.

Let’s be intellectually honest. If a country engages in a military program that carries out strikes that kill hundreds of civilians — many of whom having no connection whatever with terrorism or radicalism — that country is going to become increasingly hated. People in the countries targeted — those who may have lost friends, or family members — are going to plot revenge, and take revenge. That’s just how war works. It infuriates. It radicalises. It instils hatred.

The reality of Obama’s drone program is to create new generations of America-hating radicalised individuals, who may well go on to be the next Osama bin Laden, the next Ayman al-Zawahiri, the next Abu Musab al-Zarqawi. The reality for Obama’s drone program is that it is sowing the seeds for the next 9/11 — just as American intervention in the middle east sowed the seeds for the last, as Osama bin Laden readily admitted.

The Importance of Free Immigration

Judge Andrew Napolitano has incensed critics of immigration with his defence of the idea of immigration as a natural right:

Since the freedom of speech, the development of personality, the right to worship or not to worship, the right to use technologically contemporary means for self-defense, the right to be left alone, and the right to own and use property all stem from our humanity, the government simply is without authority to regulate human behavior in these areas, no matter what powers it purports to give to itself and no matter what crises may occur. Among the rights in this category is the freedom of movement, which today is called the right to travel.

The right to travel is an individual personal human right, long recognized under the natural law as immune from governmental interference. Of course, governments have been interfering with this right for millennia. The Romans restricted the travel of Jews; Parliament restricted the travel of serfs; Congress restricted the travel of slaves; and starting in the late 19th century, the federal government has restricted the travel of non-Americans who want to come here and even the travel of those already here. All of these abominable restrictions of the right to travel are based not on any culpability of individuals, but rather on membership in the groups to which persons have belonged from birth.

Americans are not possessed of more natural rights than non-Americans; rather, we enjoy more opportunities to exercise those rights because the government is theoretically restrained by the Constitution, which explicitly recognizes the natural law. That recognition is articulated in the Ninth Amendment, which declares that the enumeration of certain rights in the Constitution shall not be used by the government as an excuse to deny or disparage other unnamed and unnamable rights retained by the people.

So, if I want to invite my cousins from Florence, Italy, to come here and live in my house and work on my farm in New Jersey, or if a multinational corporation wants the best engineers from India to work in its labs in Texas, or if my neighbor wants a friend of a friend from Mexico City to come here to work in his shop, we have the natural right to ask, they have the natural right to come here, and the government has no moral right to interfere with any of these freely made decisions.

I agree with Napolitano. Giving the state the power to restrict freedom of movement is a dangerous precedent, and a dangerous concentration of power. Powerful and well-connected groups and industries can use the largesse of the state to protect their own uncompetitive ventures by restricting immigration.

And why should the state have the power to determine who can and who cannot live where? Surely market forces are a better determinant of the need for workers and migration than a central planner setting migration targets based on their own dislocated criteria?

These are by no means the most significant arguments for the freedom of movement. Ludwig von Mises theorised:

vonMisesimmigration

This is a critical dynamic. If a government enacts laws that are undesirable, workers (if they can) will move to another jurisdiction with more desirable laws. Freedom of movement is the status quo today for capital — under the current global regulatory framework, the free flow of capital means that governments have to compete to attract capital from around the globe. Governments do not have to do the same thing for labour, as the flow of immigration is very restricted compared to the flow of capital. This disparity may well have contributed to the extant reality that around the world — but particularly in the United States — capital’s share of output is increasing, while labour’s share is shrinking. Freer immigration could change all that.

There are various misconceptions of immigration. Perhaps most prominent is the idea that immigrants cost natives jobs. But the evidence suggests that this is not true. Eduardo Porter notes:

For years, economists have been poring through job market statistics looking for evidence that immigrants undercut less-educated Americans in the labor market. The most recent empirical studies conclude that the impact is slight: they confirm earlier findings that immigration on the whole has not led to fewer jobs for American workers. More significantly, they suggest that immigrants have had, at most, a small negative impact on the wages of Americans who compete with them most directly, those with a high school degree or less.

Meanwhile, the research has found that immigrants – including the poor, uneducated ones coming from south of the border — have a big positive impact on the economy over the long run, bolstering the profitability of American firms, reducing the prices of some products and services by providing employers with a new labor source and creating more opportunities for investment and jobs. Giovanni Peri, an economist at the University of California at Davis, estimated that the wave of immigrants that entered the United States from 1990 to 2007 increased national income per worker by about $5,400 a year on average, in 2007 dollars. He also concluded that the wave had a small positive impact on the average wage of American workers, by lifting the overall economy. If immigrants hurt anyone, it was the previous cohort of immigrants, with whom they most directly compete in the labor market.

Recent estimates have concluded that a liberalisation of global immigration policies could lift global GDP significantly. More importantly, empirical studies have confirmed the reality that immigration eases the fiscal balance — helpful for developed countries with ageing populations and a shrinking tax base. A 2011 report by Madeleine Zavodny of the American Enterprise Institute found that immigrants on average pay much more tax than they consume in government services:

fiscalimpact

This means that one frequent objection to immigration — that immigrants overstretch government programs and infrastructure — is irrelevant. Working immigrants pay more than enough in taxes to fund their own costs — often many times over.

The study also found that rather than taking up jobs, each immigrant worker generated jobs for the native population. The supply of work is not fixed. Each additional 100 H1-B workers were found to have generated 183 new jobs for the native population, and each 100 additional H2-B workers generated 464 new jobs for the native population.

But what about the countries that immigrants leave behind? Surely the countries left behind by thousands or millions of workers will fall into recession? Well, perhaps to some extent — although not so much in countries with higher birth rates or slack employment — but that’s the point. Countries that suffer a labour drain may have to reform their legal and political structure to attract workers. This alone would significantly boost competitiveness in the long run. And emigrants frequently send money back to their country of origin, and acquire new skills while working abroad that they can bring back home, in turn enriching their home country.

On the other hand, it might be unwise for countries to immediately switch from a restrictive policy to an open-door immigration policy. While freedom of movement is an essential economic freedom, a radical change in policy could prove destabilising, and cause significant cultural and social dislocation, friction or ghettoisation. Such a large change in policy should be undertaken slowly and cautiously — it would be unwise for governments to rush forward with policies that are unwanted and unpopular with the wider population.

But in the long run, though, the benefits of freedom of movement are clear, and will likely become clearer in the coming decades as more countries and blocs experiment with freer migration policies.

The Return of Mercantilism

Mercantilist trade policies have returned in a big, big way.

Dani Rodrik:

The liberal model views the state as necessarily predatory and the private sector as inherently rent-seeking. So it advocates a strict separation between the state and private business. Mercantilism, by contrast, offers a corporatist vision in which the state and private business are allies and cooperate in pursuit of common objectives, such as domestic economic growth or national power.

The mercantilist model can be derided as state capitalism or cronyism. But when it works, as it has so often in Asia, the model’s “government-business collaboration” or “pro-business state” quickly garners heavy praise. Lagging economies have not failed to notice that mercantilism can be their friend. Even in Britain, classical liberalism arrived only in the mid-nineteenth century – that is, after the country had become the world’s dominant industrial power.

A second difference between the two models lies in whether consumer or producer interests are privileged. For liberals, consumers are king. The ultimate objective of economic policy is to increase households’ consumption potential, which requires giving them unhindered access to the cheapest-possible goods and services.

Mercantilists, by contrast, emphasize the productive side of the economy. For them, a sound economy requires a sound production structure. And consumption needs to be underpinned by high employment at adequate wages.

These different models have predictable implications for international economic policies. The logic of the liberal approach is that the economic benefits of trade arise from imports: the cheaper the imports, the better, even if the result is a trade deficit. Mercantilists, however, view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports.

Today’s China is the leading bearer of the mercantilist torch, though Chinese leaders would never admit it  – too much opprobrium still attaches to the term.

I have three things to add.

First, states around the world including in the West, and especially America, have massively adopted corporatist domestic policies, even while spouting the rhetoric of free trade and economic liberalism publicly. One only has to look at the growth trend in American Federal spending to see that America has drifted further and further and further away from its free market rhetoric, and toward a centrally planned economy.

Second, the key difference between a free market economy, and a corporatist command economy is the misallocation of capital by the central planning process. While mercantile economies can be hugely productive, the historic tendency in the long run has been toward the command economies — which allocate capital based on the preferences of the central planner — being out-innovated and out-grown by the dynamic free market economies, which allocate capital based on the spending preferences of consumers in the wider economy.

Third, these two facts taken together mean that the inherent long-term advantage of the free market system — and by implication, of the United States over the BRICs — has to some degree been eradicated. This means that the competition is now over who can run the most successful corporatist-mercantilist system. The BRIC nations, particularly China, are committed to domestic production and employment, to domestic supply chains and domestic resource strength. America continues to largely ignore such factors, and allow its productive base to emigrate to other nations. And the production factor in which America still has some significant advantage — design, innovation, and inventions — has been eroded by the fact that the BRIC nations can easily appropriate American designs and innovations, because these designs are now being manufactured predominantly outside of America, and because of (American) communication technologies like the internet. This is the worst of both worlds for America. All of the disadvantages of mercantilism — the rent-seeking corporate-industrial complex, the misallocation of capital through central planning, the fragility of a centralised system — without the advantage of a strong domestic productive base.