2013

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The Great Pacification

Since the end of the Second World War, the major powers of the world have lived in relative peace. While there have been wars and conflicts  — Vietnam, Afghanistan (twice), Iraq (twice), the Congo, Rwanda, Israel and Palestine, the Iran-Iraq war, the Mexican and Colombian drug wars, the Lebanese civil war — these have been localised and at a much smaller scale than the violence that ripped the world apart during the Second World War. The recent downward trend is clear: Many thinkers believe that this trend of pacification is unstoppable. Steven Pinker, for example, claims:

Violence has been in decline for thousands of years, and today we may be living in the most peaceable era in the existence of our species. The decline, to be sure, has not been smooth. It has not brought violence down to zero, and it is not guaranteed to continue. But it is a persistent historical development, visible on scales from millennia to years, from the waging of wars to the spanking of children.

While the relative decline of violence and the growth of global commerce is a cause for celebration, those who want to proclaim that the dawn of the 21st Century is the dawn of a new long-lasting era of global peace may be overly optimistic. It is possible that we are on the edge of a precipice and that this era of relative peace is merely a calm before a new global storm. Militarism and the military-industrial complex never really went away — the military of the United States is deployed in more than 150 countries around the world. Weapons contractors are still gorging on multi-trillion dollar military spending. Let’s consider another Great Moderation — the moderation of the financial system previous to the bursting of the bubble in 2008.

One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility. Ben Bernanke (2004)

Bernanke attributed this outgrowth of macroeconomic stability to policy — that through macroeconomic engineering, governments had created a new era of financial and economic stability. Of course, Bernanke was wrong — in fact those tools of macroeconomic stabilisation were at that very moment inflating housing and securitisation bubbles, which burst in 2008 ushering in a new 1930s-style depression. It is more than possible that we are in a similar peace bubble that might soon burst. Pinker highlights some possible underlying causes for this decline in violent conflict:

The most obvious of these pacifying forces has been the state, with its monopoly on the legitimate use of force. A disinterested judiciary and police can defuse the temptation of exploitative attack, inhibit the impulse for revenge and circumvent the self-serving biases that make all parties to a dispute believe that they are on the side of the angels. We see evidence of the pacifying effects of government in the way that rates of killing declined following the expansion and consolidation of states in tribal societies and in medieval Europe. And we can watch the movie in reverse when violence erupts in zones of anarchy, such as the Wild West, failed states and neighborhoods controlled by mafias and street gangs, who can’t call 911 or file a lawsuit to resolve their disputes but have to administer their own rough justice.

Really? The state is the pacifying force? This is an astonishing claim. Sixty years ago, states across the world mobilised to engage in mass-killing the like of which the world had never seen — industrial slaughter of astonishing efficiency. The concentration of power in the state has at times led to more violence, not less. World War 2 left sixty million dead. Communist nations slaughtered almost 100 million in the pursuit of communism. Statism has a bloody history, and the power of the state to wage total destruction has only increased in the intervening years. Pinker continues:

Another pacifying force has been commerce, a game in which everybody can win. As technological progress allows the exchange of goods and ideas over longer distances and among larger groups of trading partners, other people become more valuable alive than dead. They switch from being targets of demonization and dehumanization to potential partners in reciprocal altruism. For example, though the relationship today between America and China is far from warm, we are unlikely to declare war on them or vice versa. Morality aside, they make too much of our stuff, and we owe them too much money. A third peacemaker has been cosmopolitanism—the expansion of people’s parochial little worlds through literacy, mobility, education, science, history, journalism and mass media. These forms of virtual reality can prompt people to take the perspective of people unlike themselves and to expand their circle of sympathy to embrace them.

Commerce has been an extremely effective incentive toward peace. But commerce may not be enough. Globalisation and mass commerce became a reality a century ago, just prior to the first global war. The world was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances, and a new culture of cosmopolitanism. Yet the world still went to war.

It is complacent to assume that interdependency will necessitate peace. The relationship between China and the United States today is superficially similar to that between Great Britain and Germany in 1914. Germany and China — the rising industrial behemoths, fiercely nationalistic and determined to establish themselves and their currencies on the world stage. Great Britain and the United States  — the overstretched global superpowers intent on retaining their primacy and reserve currency status even in spite of huge and growing debt and military overstretch.

In fact, a high degree of interdependency can breed resentment and hatred. Interconnected liabilities between nations can lead to war, as creditors seek their pound of flesh, and debtors seek to renege on their debts. Chinese officials have claimed to have felt that the United States is forcing them to support American deficits by buying treasuries.

Who is to say that China might not view the prize of Japan, Taiwan and the Philippines as worthy of transforming their giant manufacturing base into a giant war machine and writing down their treasury bonds? Who is to say that the United States might not risk antagonising Russia and China and disrupting global trade by attacking Iran? There are plenty of other potential flash-points too — Afghanistan, Pakistan, Venezuela, Egypt, South Africa, Georgia, Syria and more. Commerce and cosmopolitanism may have provided incentives for peace, but the Great Pacification has been built upon a bedrock of nuclear warheads. Mutually assured destruction is by far the largest force that has kept the nuclear-armed nations at peace for the past sixty seven years.

Yet can it last? Would the United States really have launched a first-strike had the Soviet Union invaded Western Europe during the Cold War, for example? If so, the global economy and population would have been devastated. If not, mutually assured destruction would have lost credibility. Mutually assured destruction can only act as a check on expansionism if it is credible. So far, no nation has really tested this credibility. Nuclear-armed powers have already engaged in proxy wars, such as Vietnam. How far can the limits be pushed? Would the United States launch a first-strike on China if China were to invade and occupy Taiwan and Japan, for example? Would the United States try to launch a counter-invasion? Or would they back down? Similarly, would Russia and China launch a first-strike on the United States if the United States invades and occupies Iran?

Launching a first-strike is highly unlikely in all cases — mutually assured destruction will remain an effective deterrent to nuclear war. But perhaps not to conventional war and territorial expansionism. With the world mired in the greatest economic depression since the 1930s, it becomes increasingly likely that states — especially those with high unemployment, weak growth, incompetent leadership and angry, disaffected youth —  will (just as they did during the last global depression in the 1930s) turn to expansionism, nationalism, trade war and even physical war. Already, the brittle peace between China and Japan is rupturing, and the old war rhetoric is back. These are the kinds of demonstrations that the Communist Party are now sanctioning:

And already, America and Israel are moving to attack Iran, even in spite of warnings by Chinese and Pakistani officials that this could risk global disruption. Hopefully, the threat of mutually assured destruction and the promise of commerce will continue to be an effective deterrent, and prevent any kind of global war from breaking out. Hopefully, states can work out their differences peacefully. Hopefully nations can keep war profiteers and those who advocate crisis initiation in check. Nothing would be more wonderful than the continuing spread of peace. Yet we must be guarded against complacency. Sixty years of relative peace is not the end of history.

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Why is the Fed Not Printing Like Crazy?

I try to read all sides of the economics blogosphere, and try and grasp the ideas of even those who I would seem to radically disagree with.

One thing that the anti-Fed side of the economics blogosphere seems to not fully appreciate is the depth of disappointment with Ben Bernanke from the pro-Fed side. For every anti-Fed post bemoaning Bernanke’s money printing, there is a pro-Fed post bemoaning Bernanke for not printing enough. Bernanke, it seems, is tied to everybody’s whipping post.

And in fairness to the pro-Fed side, the data shows that the Fed is not printing anywhere near as much as its own self-imposed interpretation of its mandate demands. (Of course, I fundamentally disagree that price stability should be interpreted as consistent inflation, but that is an argument for another day).

Scott Sumner notes:

Recall that the Fed tries to keep inflation close to 2.0% and unemployment close to about 5.6% (the Fed’s current estimate of the natural rate.)  One implication of the dual mandate is that they should try to generate above 2% inflation during periods of high unemployment, and below 2% during periods of low unemployment.

In July 2008 unemployment rose above 5.6%, and it’s averaged nearly 9% over the past 46 months.  So the Fed’s mandate calls for slightly higher than 2% inflation during this 46 month slump.  Last month I reported that the headline CPI had risen 4.6% in the 45 months since July 2008.  Now we have the May data, and the headline CPI has gone up 4.3% in the 46 months since July 2008.  So the annual inflation rate over that nearly 4 year period has fallen from a bit over 1.2%, to 1.1%.

Raw data:

Note that downward slope in inflation into 2012?

That’s the Fed not doing QE3 when everyone (especially gold prices) expected them to, and when their own self-imposed interpretation of their mandate calls for them to inflate more. And nobody can say that the Fed is out of bullets; central banks are never out of bullets — there was a time when a central bank was limited to the number of zeroes it could fit on a banknote, but in the era of digital currency, even that limit has been removed.

Here’s the younger Bernanke’s views on the subject:

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take — namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment— in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done. Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening?

To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.

And here’s Paul Krugman pulling a Bernanke on Bernanke:

Bernanke was and is a fine economist. More than that, before joining the Fed, he wrote extensively, in academic studies of both the Great Depression and modern Japan, about the exact problems he would confront at the end of 2008. He argued forcefully for an aggressive response, castigating the Bank of Japan, the Fed’s counterpart, for its passivity. Presumably, the Fed under his leadership would be different.

Instead, while the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation.

It really makes no sense — except in terms of politics. I really believe that we have reached a point where the Fed is afraid to do its job, for fear of being accused of helping Obama.

I am fairly certain the answer to why Bernanke isn’t increasing inflation when his former self and former colleagues say he should be is actually nothing to do with domestic politics, and everything to do with international politics.

Most of the pro-Fed blogosphere seems to live in denial of the fact that America is massively in debt to external creditors — all of whom are frustrated at getting near-zero yields (they can’t just flip bonds to the Fed balance sheet like the hedge funds) — and their views matter, very simply because the reality of China and other creditors ceasing to buy debt would be untenable.

Why else would the Treasury have thrown a carrot by upgrading the Chinese government to primary dealer status (the first such deal in history), cutting Wall Street’s bond flippers out of the deal?

As John Huntsman (in his days as ambassador to China) reported in a cable back to Washington, China is keen to stop buying low-yield treasuries and start buying other assets, but the US is desperately pushing China back toward treasuries:

The Shanghai-based Shanghai Media Group (SMG) publication, China Business News:

“The United States provoked a trade war again by imposing high anti-dumping duties on Chinese-made gift boxes and packaging ribbon. China has become the biggest victim of the U.S.’s abusive implementation of trade remedy measures.

The United States no longer sits still; it frequently uses evil tricks to force China to buy U.S. bonds.

A crucial move for the U.S. is to shift its crisis to other countries – by coercing China to buy U.S. treasury bonds with foreign exchange reserves and doing everything possible to prevent China’s foreign reserve from buying gold.

Today when the United States is determined to beggar thy neighbor, shifting its crisis to China, the Chinese must be very clear what the key to victory is.  It is by no means to use new foreign exchange reserves to buy U.S. Treasury bonds.  The issues of Taiwan, Tibet, Xinjiang, trade and so on are all false tricks, while forcing China to buy U.S. bonds is the U.S.’s real intention.”

And that, in a nutshell, is why Bernanke is not printing nearly as much as Krugman wishes. In my view only a brutal 2008-style collapse can bring on the kind of printing — QE3, NGDP targeting and beyond — that the pro-Fed blogosphere wishes to see, because it is only under those circumstances that China and other creditors will happily support it.

To a heavily-indebted nation, creditors have big leverage on monetary policy.

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Propping Up The Gold Price?

Izabella Kaminska makes the point that central banks have turned net gold buyers:

Kaminska seems to believe that gold’s price is not just central-bank supported, but its trajectory is downward:

If not for the gold bar/coin frenzy and ETF demand (now substituted by official buying), one might speculate that the collapse in conventional demand (i.e. for industrial and jewelery purposes) may have led to a very different price path for gold post 2008.

Now that ETF demand is waning, however, marginal support for the gold price is actually being provided by the official sector more than ever.

Though, given the gold price reaction of late, clearly even this is not so effective so, either gold and coin buying has started to wane as well – and there is evidencethat this is the case – or it’s taking ever more buying (by official sources) to keep prices supported at the current level.

The recent plateauing of the gold price thus either suggest that today’s spot supply is increasingly catering to tomorrow’s demand expectations, or in the context of more gold being produced all the time, it is taking ever more buying by the official sector to keep prices from falling.

In other words, sans the intervention of central banks on a major level: case bearish.

The obvious thing, though — even if we take central bank buying out of the equation altogether — is that total demand for gold is still increasing. And the price of gold has increased faster than sales, illustrating that the market has struggled and continues to struggle to keep pace with underlying demand. 

And it’s not just demand for gold-denominated paper (i.e. ETFs or other such as-risky-as-anything-you’ll-get-from-MF Global assets) — it’s recently manifested as demand for hard physical gold:

It’s true that central banks are presently supporting the gold price — after years of selling off national wealth at pennies-on-the-dollar into a bear market and thus suppressing prices. Yet it’s not the Western central banks that are pushing demand for gold. It’s the BRICs. As PBOC official Zhang Jianhua noted:

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

And as I noted yesterday, BRICs have founded and legitimate fears of buying even deeper into an increasingly ponzified, over-leveraged, rehypothecated and interconnective paper financial system. The PBOC (and other American creditors) already faces the risk of the US Treasury inflating much of their holdings away; the entire point is to get out of such assets into something much harder to duplicate, and impossible to inflate away.

According to China’s State Council’s Xia Bing:

China must make fuller use of the non-financial assets in its foreign reserves, as well as speed up the diversification of investing channels to resist a possible long-term weakening of the dollar.

No; I don’t think it’s particularly wise to announce to the world that you’re going to get elbow-deep into gold bullion either, but this isn’t just a bluff. China is importing hard-to-fathom quantities of gold:


Ultimately, the surge in demand for gold reflects one thing alone: distrust of the increasingly messy, interconnected, over-leveraged and fraudulent financial system. Whether it is China — fearful of dollar debasement — loading up on bullion, or retail investors in the United States or Europe — fearful of another MF Global (or PFG, or Lehman Brothers) — stacking Krugerrands in their basement, demand for gold reflects distrust in finance, distrust in the financial establishment, distrust in banks, distrust in regulators, distrust in government and distrust in the financial media. And it is that distrust — not (by any stretch of the imagination) central bank interventionism — that is the force moving demand for gold.

The distrust is not going anywhere because the system is still rotten. We all know — even Business Insider readers know deep down, I think — that there is something exceedingly rotten at the heart of the global financial system. We don’t know quite how rotten, how deep the rabbit hole goes, who will be implicated, or how fast. But with every LIBOR-rigging scandal (which the Fed, of course, was aware of), every raided segregated account, every devalued pension fund, every failed speculative “hedge”, every Facebook or Zynga pump-and-dump, we get closer to the truth.

There will be no bear market for physical gold until trust in the financial system and regulators is fixed, until markets trade fundamentals instead of the possibility of the NEW QE, until governments represent the interests of their people instead of the interests of tiny financial elites. 

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Is Marxism Coming Back?

It is true that as the financial and economic crises roll on, as more and more disasters accumulate, as more people are thrown into unemployment and suffering that more and more of us will question the fundamentals of our economic system. It is inevitable that many will be drawn to some of the criticisms of capitalism, including Marxism.

The Guardian today published a salutary overview of this revival:

In his introduction to a new edition of The Communist Manifesto, Professor Eric Hobsbawm suggests that Marx was right to argue that the “contradictions of a market system based on no other nexus between man and man than naked self-interest, than callous ‘cash payment’, a system of exploitation and of ‘endless accumulation’ can never be overcome: that at some point in a series of transformations and restructurings the development of this essentially destabilising system will lead to a state of affairs that can no longer be described as capitalism”.

That is post-capitalist society as dreamed of by Marxists. But what would it be like? “It is extremely unlikely that such a ‘post-capitalist society’ would respond to the traditional models of socialism and still less to the ‘really existing’ socialisms of the Soviet era,” argues Hobsbawm, adding that it will, however, necessarily involve a shift from private appropriation to social management on a global scale. “What forms it might take and how far it would embody the humanist values of Marx’s and Engels’s communism, would depend on the political action through which this change came about.”

Marxism is a strange thing; it provides a clean and straightforward narrative of history, one that irons out detail and complication. It provides a simplistic “us versus them” narrative of the present. And it provides a relatively utopian narrative of the future; that the working classes united will overthrow capitalism and establish a state run by and for the working classes.

Trouble is, history is vastly more complicated than the teleological narrative provided by dialectical materialism. The economic and social reality of the present is vastly more complicated than Marx’s linear and binary classifications. And the future that Marx predicted never came to fruit; his 19th Century ideas turned into a 20th Century reality of mass starvation, failed central planning experiments, and millions of deaths.

Certainly, the system we have today is unsustainable. The state-supported financial institutions, and the corporations that have grown up around them do not live because of their own genius, their own productivity or innovation. They exist on state largesse — money printing, subsidies, limited liability, favourable regulation, barriers to entry. Every blowup and scandal — from the LIBOR-rigging, to the London Whale, to the bungled trades that destroyed MF Global — illustrates the incompetence and failure that that dependency has allowed to flourish.

The chief problem that Marxists face is their misidentification of the present economic system as free market capitalism. How can we meaningfully call a system where the price of money is controlled by the state a free market? How can we meaningfully call a system where financial institutions are routinely bailed out a free market? How can we meaningfully call a system where upwards of 40% of GDP is spent by the state a free market? How can we call a system where the market trades the possibility of state intervention rather than underlying fundamentals a free market?

Today we do not have a market economy; we have a corporate economy.

As Saifedean Ammous and Edmund Phelps note:

The term “capitalism” used to mean an economic system in which capital was privately owned and traded; owners of capital got to judge how best to use it, and could draw on the foresight and creative ideas of entrepreneurs and innovative thinkers. This system of individual freedom and individual responsibility gave little scope for government to influence economic decision-making: success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise.

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

The system of corporatism we have today has far more akin with Marxism and “social management” than Marxists might like to admit. Both corporatism and Marxism are forms of central economic control; the only difference is that under Marxism, the allocation of capital is controlled by the state bureaucracy-technocracy, while under corporatism the allocation of capital is undertaken by the state apparatus in concert with large financial and corporate interests. The corporations accumulate power from the legal protections afforded to them by the state (limited liability, corporate subsidies, bailouts), and politicians can win re-election showered by corporate money.

The fundamental choice that we face today is between economic freedom and central economic planning. The first offers individuals, nations and the world a complex, multi-dimensional allocation of resources, labour and capital undertaken as the sum of human preferences expressed voluntarily through the market mechanism. The second offers allocation of resources, labour and capital by the elite — bureaucrats, technocrats and special interests. The first is not without corruption and fallout, but its various imperfect incarnations have created boundless prosperity, productivity and growth. Incarnations of the second have led to the deaths by starvation of millions first in Soviet Russia, then in Maoist China.

Marxists like to pretend that the bureaucratic-technocratic allocation of capital, labour and resources is somehow more democratic, and somehow more attuned to the interests of society than the market. But what can be more democratic and expressive than a market system that allows each and every individual to allocate his or her capital, labour, resources and productivity based on his or her own internal preferences? And what can be less democratic than the organisation of society and the allocation of capital undertaken through the mechanisms of distant bureaucracy and forced planning? What is less democratic than telling the broad population that rather than living their lives according to their own will, their own traditions and their own economic interests that they should instead follow the inclinations and orders of a distant bureaucratic-technocratic elite?

I’m not sure that Marxists have ever understood capitalism; Das Kapital is a mammoth work concentrating on many facets of 19th Century industrial and economic development, but it tends to focus in on obscure minutiae without ever really considering the coherent whole. If Marxists had ever come close to grasping the broader mechanisms of capitalism — and if they truly cared about democracy — they would have been far less likely to promulgate a system based on dictatorial central planning.

Nonetheless, as the financial system and the financial oligarchy continue to blunder from crisis to crisis, more and more people will surely become entangled in the seductive narratives of Marxism. More and more people may come to blame markets and freedom for the problems of corporatism and statism. This is deeply ironic — the Marxist tendency toward central planning and control exerts a far greater influence on the policymakers of today than the Hayekian or Smithian tendency toward decentralisation and economic freedom.

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Whitewashing the Economic Establishment

Brad DeLong makes an odd claim:

So the big lesson is simple: trust those who work in the tradition of Walter Bagehot, Hyman Minsky, and Charles Kindleberger. That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers. Just as they got the recent past right, so they are the ones most likely to get the distribution of possible futures right.

Larry Summers? If we’re going to base our economic policy on trusting in Larry Summers, should we not reappoint Greenspan as Fed Chairman? Or — better yet — appoint Charles Ponzi as head of the SEC? Or a fox to guard the henhouse? Or a tax cheat as Treasury Secretary? Or a war criminal as a peace ambassador? (Yes — reality is more surreal than anything I could imagine).

The bigger point though, as Steve Keen and Randall Wray have alluded to, is that DeLong’s list is the left-wing of the neoclassical school of economics — all the same people who (to a greater or lesser extent) believed that we were in a Great Moderation, and that thanks to the wonders of modernity we had escaped the old world of depressions and mass unemployment. People to whom this depression — judging by their pre-2008 output — was something of a surprise.

Now the left-wing neoclassicists may have done less badly than the right-wing neoclassicists Fama, Cochrane and Greenspan, but that’s not saying much. Steve Keen pointed out:

People like Wynne Godley, Ann Pettifors, Randall Wray, Nouriel Roubini, Dean Baker, Peter Schiff and I had spent years warning that a huge crisis was coming, and had a variety of debt-based explanations as to why it was inevitable. By then, Godley, Wray and I and many other Post Keynesian economists had spent decades imbibing and developing the work of Hyman Minsky.

To my knowledge, of Delong’s motley crew, only Raghuram Rajan was in print with any warnings of an imminent crisis before it began.

DeLong is, in my view, trying to whitewash his contemporaries who did not see the crisis coming, and inaccurately trying to associate them with Hyman Minsky whose theory of debt deflation anticipated many dimensions of the crisis. Adding insult to injury, DeLong seems unwilling to credit those like Schiff and Keen (not to mention Ron Paul) who saw the housing bubble and the excessive debt mountain for what it was — a disaster waiting to happen.

The most disturbing thing about his thesis is that all of the left-neoclassicists he is trying to whitewash have not really been very right about the last four years at all, as DeLong freely admits:

But we – or at least I – have got significant components of the last four years wrong. Three things surprised me (and still do). The first is the failure of central banks to adopt a rule like nominal GDP targeting or its equivalent. Second, I expected wage inflation in the North Atlantic to fall even farther than it has – towards, even if not to, zero. Finally, the yield curve did not steepen sharply for the United States: federal funds rates at zero I expected, but 30-year US Treasury bonds at a nominal rate of 2.7% I did not.

Yet we are supposed to take seriously the widely proposed solution? Throw money at the problem, and assume that just by raising aggregate demand all the other problems will just go away?

As I wrote back in August 2011:

These troubles are non-monetary: military overspending, political and financial corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, systemic fragility, and so forth.

These problems won’t just go away — throwing money around may boost figures in the short term, but the underlying problems will remain.

I believe that the only real way out is to unleash the free market and the spirit of entrepreneurialism. And the only way to do that is to end corporate welfare, end the bailouts (let failed institutions fail), end American imperialism, and slash barriers to entry. Certainly, cleaning up the profligate financial sector would help too (perhaps mandatory gladiatorial sentences for financial crimes would help? No more paying £200 million for manipulating a $350 trillion market — fight a lion in the arena instead!), as would incentives to create the infrastructure people need, and move toward energy independence, green energy and reindustrialisation.

Then again, I suppose there is a silver lining to this cloud. The wronger the establishment are in the long run, the more people will look for new economic horizons.

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Does Syria Want a War?

We know for sure that Syria intentionally shot down a Turkish — and thus protected by NATO — warplane in its airspace. We also know that Syria is comfortable enough to admit it.

The AP reports:

Syria said Friday it shot down a Turkish military plane that entered Syrian air space, and Turkey vowed to “determinedly take necessary steps” in response.

It was the most clear and dramatic escalation in tensions between the two countries, which used to be allies before the Syrian revolt began in March 2011. Turkey has become one of the strongest critics of the Syrian regime’s brutal response to the country’s uprising.

Late Friday, Syria’s state-run news agency, SANA, said the military spotted an “unidentified aerial target” that was flying at a low altitude and at a high speed.

“The Syrian anti-air defenses counteracted with anti-aircraft artillery, hitting it directly,” SANA said. “The target turned out to be a Turkish military plane that entered Syrian airspace and was dealt with according to laws observed in such cases.”

It seems pretty clear that the Syrians know the consequences of their actions. NATO (including deluded US hawks who are happy to ignore the disastrous consequences of the drug war on the US border while talking up more intervention in the middle east) and the NATO-backed Syrian opposition has been looking for any excuse to get stuck into a new interventionist mission. We know that the NATO-backed opposition were prepared to try and get a British journalist killed in a false flag operation in order to trigger a Western intervention.

So why did Russia-armed Syria do it? And why (given the age of F-4 aircraft, it could easily have crashed of its own accord giving the Syrians a lot of plausible deniability) are they not at least denying that they shot it down?

Is it possible that the wider Eurasian anti-American coalition led by the Russians and the Chinese are confident that NATO will not intervene out of fear of triggering a wider war? After all the Russian naval base has been a great obstacle to NATO intervention. Libya didn’t have any Russian bases, and it took far less internal violence for NATO to intervene there.

Is it even possible that the Eurasians are trying to provoke NATO into another costly and damaging war? After all, the American Empire is much more indebted and militarily overstretched than it was before 9/11. Osama bin Laden’s goal of dragging the United States into the middle eastern quagmire, and thereby bankrupting America has been an unmitigated success. Could the Eurasians be trying to provoke a regional war in order to weaken NATO and draw attention away from their own weakened economic picture?

Or is this just a case of an overzealous Syrian military commander taking a potshot at an unidentified flying object and provoking a diplomatic crisis?

As someone who does not believe that war is in any way an economic stimulus and should be avoided beyond self-preservation, I hope that this crisis — and the wider Syrian situation — can be defused.

Those who want to see a big military-Keynesian stimulus may be hoping for an escalation…

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Skyscraper Index Indicates Next Global Crash in 2013

Most of us are at least passingly familiar with the theory: the completion of a new tallest skyscraper presages a market crash. Over-exuberant construction reflects over-exuberant markets, and over-confidence often spills over as the hyper-bullish slowly (and then quickly) realise that the good times are over.

Here’s the story so far:

And here’s the next chapter — earmarked for completion in January 2013:

Where else but China? As if that country didn’t already have enough empty buildings, enough empty office space, enough empty homes, and enough grey uninspired architecture. And it’s not like Changsha — the relatively-sparsely populated city where the thing is to be built — is running out of countryside to expand into.

Sky City One is planned to be prefabricated and built onsite, to a timeframe of just ninety days (that will instil confidence that the building won’t spontaneously collapse, right?) and at a much lower cost than the current titleholder (which of course presaged the 2008 crash, and bankrupted its builders) the Burj Khalifa.

“A milestone of life-style transforming” sounds about right (they have enough money to build a 200 storey building, but not enough to pay for good English translation?). The world will be a very different place after the next crash.

Not so good news for property speculators who are sure to dump money into what will soon be little better than a tax liability. But good news for Jim Chanos, and every other investor determined to short everything Chinese.

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Will Tsipras Blow Up Europe?

The world’s eyes are on the Greek election, and whether or not Greeks will elect New Democracy’s Samaras (widely-assumed to be pro-bailout, pro-status quo), or SYRIZA’s Tsipras (widely-assumed to be anti-bailout, anti-status quo).

The Eurocrats have very sternly warned Greece against voting against austerity. Merkel said:

It is extremely important for Greeks to elect lawmakers who would respect the terms of the bailout.

In recent days, opinion has swung back toward the status quo, with Intrade rating New Democracy’s chances of winning the largest number of seats at 65%, and SYRIZA at just 33%.

While I cannot rule out New Democracy winning, I think that I’d flip those odds. Greece widely reviles German-imposed austerity, but fears the consequences of leaving the Euro — 85% of Greeks want to stay in. A vote for New Democracy would reflect fear of Drachmatization. Meanwhile, a vote for SYRIZA would seem to reflect the idea that through brinkmanship and the threat of Euro collapse, Greece can negotiate their way to a much more favourable bailout position.

So why do I think SYRIZA are the likelier winner? The election is on a knife-edge, so I think the difference might be football.

Greece — against all odds — managed to bumble through the Euro 2012 group stage, beating Russia 1-0 and likely setting up a poetic quarter final against Germany. I think that that victory against Russia will fire enough Greeks to try their luck and assert themselves against austerity.

For Greece, this is an important election. Inside the euro, their heavily state-dependent economy will continue to suffer scathing austerity. Outside the euro, they can freely debase, and — as Nigel Farage has noted — enjoy the benefits of a cheaper currency like renewed tourism and more competitive industry. If Greeks want growth sooner rather than much later, they should choose life outside the euro (and by voting for Tsipras and trying tough negotiating tactics, they will be asking to be thrown out).

But for the rest of the world, and the rest of Europe, this is all meaningless. As Ron Paul has noted, when the banking institutions need the money, central banks — whether it’s the ECB, or the Fed, or the BoE, or a new global central superbank — will print and print and print. Whether Greece is in or out, when the time comes to save the financial system the central bankers will print. That is the nature of fiat money, as much as the chickenhawks at the ECB might pretend to have hard-money credentials.

Tsipras, though — as a young hard-leftist — would be a good scapegoat for throwing Greece out of the Eurozone (something that — in truth — the core seems to want).

The real consequence throughout Europe as austerity continues to bite into state-dependent, high-unemployment economies will be more political fragmentation and support for political extremes, as the increasingly outlandish and unpopular political and financial solutions pushed by Eurocrats — specifically more and deeper integration, and banker bailouts — continue to help special interests and ignore the wider populations.

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What Peak Oil?

Is peak oil imminent? Lots of people seem to think so.

The data (released by BP a company who have a vested interest in oil scarcity) don’t agree. Proved reserves keep increasing:

The oil in the ground will run out some day. But as the discovery of proven reserves continues to significantly outpace the rate of extraction, the claims that we’re facing immediate shortages looks trashy.

Some may try to cast doubt on these figures, saying that BP are counting inaccessible reserves, and that we must accept that while there are huge quantities of shale oil in the ground, the era of cheap and readily accessible oil is over. They might cite the idea that oil prices are much higher than they were ten years ago. Yet this is mostly a monetary phenomenon resulting from excessive money creation beyond the economy’s productive capacity. Priced in gold, oil is still very cheap — almost as cheap as it has ever been:

The argument that the vast majority of counted reserves are economically inaccessible is fundamentally flawed. In the long run there is only one equation that really matters in determining whether oil is extractable, and that is whether there is a net energy gain; whether energy-in exceeds energy-out. If there’s a net energy gain, it’s feasible. Certainly, we are moving toward a higher cost of energy extraction. Shale oil (for example) has a lower net energy gain than conventional oil, but still typically produces five times as much energy as is consumed in extraction.

But the Earth’s extractable hydrocarbons will eventually dry up, whether that’s in 500 years or 200 years. If we want humanity to have a long-term future on Earth, we need to move to renewables; solar, hydroelectric, thorium, synthetic hydrocarbons. And the market will ensure that, eventually — as the cost of renewable energy continues to fall, more and more of us will adopt it. I don’t buy the myth that markets are stupid — if humanity needs renewable energy (I believe we do) the market will see to it (I believe that is slowly happening). Markets are just the sum of human preferences.

According to the International Renewable Energy Institute:

Power from renewable energy sources is getting cheaper every year, according to a study released Wednesday, challenging long-standing myths that clean energy technology is too expensive to adopt. The costs associated with extracting power from solar panels has fallen as much as 60 percent in just the past few years.The price of  from other renewables, including wind, , concentrating solar power and biomass, was also falling.

So no. I’m not lying awake at night worrying about imminent peak oil. There’s plenty of extractable oil, and renewable energy will eventually supplement and replace it. But will politics get in the way of energy extraction? The United States has huge hydrocarbon reserves, yet regulation is preventing drilling and shipment, leaving America dependent on foreign oil. And the oil companies themselves are largely to blame — after Deepwater Horizon, should anyone be surprised that politicians and the public want to strangle the oil industry?

If there’s an imminent energy crisis, it will be man-made. It will come out of the United States’ dependency on foreign oil. Or out of an environmental catastrophe caused by mismanagement and graft (protected cartels like the energy industry always lead to mismanagement). Or out of excessive red tape. Or war.

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The National Attack Authorization Act?

We all know that the National Defense Authorization Act (NDAA) signed by President Obama on New Year’s Eve contained a now-struck-down provision to authorise the indefinite detention of American citizens on US soil.

But did you know that the NDAA also paves the way for war with Iran?

From Dennis Kucinich:

Section (6) rejects any United States policy that would rely on efforts to contain a nuclear weapons-capable Iran. Section (7) urges the President to reaffirm the unacceptability of an Iran with nuclear-weapons capability and opposition to any policy that would rely on containment as an option in response to Iranian enrichment.

This language represents a significant shift in U.S. policy and would guarantee that talks with Iran, currently scheduled for May 23, would fail. Current U.S. policy is that Iran cannot acquire nuclear weapons. Instead, H. Res. 568 draws the “redline” for military action at Iran achieving a nuclear weapons “capability,” a nebulous and undefined term that could include a civilian nuclear program. Indeed, it is likely that a negotiated deal to prevent a nuclear-armed Iran and to prevent war would provide for Iranian enrichment for peaceful purposes under the framework of the Non-Proliferation of Nuclear Weapons Treaty with strict safeguards and inspections. This language makes such a negotiated solution impossible.

At the same time, the language lowers the threshold for attacking Iran. Countries with nuclear weapons “capability” could include many other countries like Japan or Brazil. It is an unrealistic threshold.

The Former Chief of Staff of Secretary of State Colin Powell has stated that this resolution “reads like the same sheet of music that got us into the Iraq war.”

The notion of a “nuclear weapons capability” seems like a dangerously low standard. Let us not forget that Mossad, the CIA and the IAEA agree that Iran does not have a bomb, is not building one and has no plans to build one.

But the bill clearly spells out its intent:

SEC. 1222. UNITED STATES MILITARY PREPAREDNESS IN THE MIDDLE EAST.

Section 2 (A) pre-positioning sufficient supplies of aircraft, munitions, fuel, and other materials for both air- and sea-based missions at key forward locations in the Middle East and Indian Ocean;

(B) maintaining sufficient naval assets in the region necessary to signal United States resolve and to bolster United States capabilities to launch a sustained sea and air campaign against a range of Iranian nuclear and military targets, to protect seaborne shipping, and to deny Iranian retaliation against United States interests in the region;

(D) conducting naval fleet exercises similar to the United States Fifth Fleet’s major exercise in the region in March 2007 to demonstrate ability to keep the Strait of Hormuz open and to counter the use of anti-ship missiles and swarming high-speed boats.

As Kucinich notes:

This is an authorization for the use of military force against Iran. It ignores the warnings of both current and former U.S. top military brass who have spoken in opposition to the use of military force against Iran, including former Secretary of Defense Robert Gates, and current Secretary of Defense Leon Panetta. A February 2012 poll demonstrated that less than 20% of the Israeli public supports an Israeli strike on Iran if approved by the United States. Congress must avoid the same mistakes it made in the Iraq war and reject any language that can be construed as authorizing war against Iran.

It seems like the framers of the bill are exceptionally keen on striking Iran as quickly as possible. Maybe they are receiving lots of money from defence contractors?

Unsurprisingly, the biggest Congressional recipient of donations from defence contractors was Howard “Buck” McKeon, the chairman of the armed services committee who also happens to be the sponsor of the NDAA:

The fact that Ron Paul is the number two recipient is a sign that not all defence contractors are keen to hit Iran. But some are.

Still, even though the bill hints very strongly toward it, it doesn’t mean that it is going to happen. Congressmen might be hungry for a war but the military — already overstretched — isn’t. Admiral Fallon was reportedly the force that kept Bush from hitting Iran, and it would not be surprising to see the Pentagon put up fierce opposition to a future war with Iran. It would be a long, expensive war, with the potential of massive negative side-effects, like dragging in other regional powers, disrupting global trade, and squeezing the US economy by spiking the oil price.