Streetwise Professor

The North-Wallis-Weingast book that expands their argument on the natural state, Violence and Social Orders, is now available.  One thing that caught my eye is their list of the “doorstep conditions” for a personalized, cartel-like natural state to transition to an “open order” free society.   The first such condition is the creation of an impersonal rule of law among the elites.  

Two news items make it abundantly clear that Russia hasn’t even made it past the front gate, let alone to the front door, let alone to knocking on it.  

The first is the battle between Mikhal Fridman’s Alpha Group (a key player in the BP-TNK holdup) and Norwegian telecom firm Telenor:

A Russian bailiff seized  Telenor ASA‘s 29.9 percent stake in  OAO VimpelCom, escalating a dispute between the biggest Nordic phone company and billionaire  Mikhail Fridman‘s Alfa Group.

The seizure is linked to a Siberian court decision from February that found Telenor liable for $1.7 billion in damages in a suit filed by Farimex Products Inc., Fornebu, Norway-based Telenor said in a statement today. The bailiff served its order to VimpelCom’s share registrar in Moscow.

The case is one of several court battles between Telenor and Alfa Group as they jockey for control of VimpelCom, Russia’s second-largest mobile company, and Ukraine’s ZAT Kyivstar GSM. Telenor said the move is a “retaliation” to a New York court decision yesterday that went against Alfa Group. The government of Norway, Telenor’s biggest shareholder, said the dispute is the “most pressing issue” in its relationship with Russia.

. . . .

Telenor said it found out about the seizure less than two hours after New York Federal Court Judge  Gerard E. Lynch  held Alfa Group companies Altimo, Alpren, Hardlake and Storm in  contempt  for a second time. Telenor said it hadn’t been formally notified about the seizure.

‘Another Escalation’

The measure “is yet another escalation of the attempts to steal our VimpelCom shares with the aid of Russian courts,”  Jan Edvard Thygesen, Telenor’s head of central and eastern Europe operations, said in a statement.

Reuters has more detail on the history of this dispute:

In the suit, tiny Vimpelcom shareholder Farimex said Telenor caused losses for Vimpelcom by delaying its purchase of Ukrainian mobile operator URS. A Siberian court in Omsk backed its claim and ruled Telenor should pay Vimpelcom compensation.

. . . .

British Virgin Islands-based Farimex owned 0.002 percent of Vimpelcom shares when it filed the suit in April 2008.

Telenor said its Vimpelcom board members opposed the 2005 URS purchase because URS was over-valued, had “no credible business plan” and because the deal lacked transparency.

“To date, the identity of the beneficial owners of the sellers of URS has not been disclosed,” Telenor said.

It said despite more than $600 million in investments by Vimpelcom in URS, the firm was still in the red at Dec. 31, 2008, and only had a 4 percent market share, according to information from telecoms market consultants AC&M.

. . . .

Telenor says Farimex is linked to Russian Alfa Group of billionaire Mikhail Fridman, with whom it has fought courtroom and boardroom battles in Vimpelcom and in co-owned Ukrainian mobile venture Kyivstar. Alfa denies any links to Farimex.

Chyorny rejected allegations that Farimex general director and owner Dmitry Fridman was Mikhail Fridman’s cousin.

“I have found no evidence confirming that these people are connected with each other in any way,” Chyorny said.

So, a Russian court has taken hostage Telenor’s stake in a company that is the target of one of the favored oligarchs in Russia, Mikhail Fridman.  This is to compel payment of a $1.7 billion dollar judgment levied by the court to penalize Telenor for its refusal to buy a money losing Ukrainian mobile operator with typically shady connections, in a lawsuit filed by another shady, opaque, offshore outfit with a plausible connection to Fridman. (Can you say “straw plaintiff”?  I knew you could.)  Note that the purchase of URS was only delayed, not stopped altogether.  Note further that the purchase price of the company was around $230 million, that Telenor has invested $600 million and seen only further losses and no business expansion (market share of URS is a paltry 4 percent of the Ukrainian market).  Just how do you get $1.7 billion in damages out of the delay of the purchase of a $200 million company that has lost money since it was eventually acquired?  (I guess Telenor should feel lucky.  Originally, a court in  Khanty-Mansiysk imposed a $2.8 billion judgment.  Wow.  The forum shopping opportunities across 11 time zones worth of corrupt and corruptable courts must be pretty amazing.)  

There’s more stuff on Reuters about a parallel battle between Telenor and Alfa:

KYIVSTAR CASE

Kyivstar — Ukraine’s largest mobile operator. Shareholders: Telenor (56.52 percent); Alfa company Storm (43.48 percent)

* On Wednesday the U.S. Federal Court for the Southern District of New York granted Telenor’s motion requesting that four Alfa Group companies be held in contempt of court for failing to obey U.S. arbitration court orders.

* Alfa Group’s telecoms arm Altimo said the rulings were “close to impossible” to fulfil, that its fines totalled $12 billion a year and accused Telenor of trying to gain control of its foreign assets.

* Telenor was forced to deconsolidate Kyivstar in 2007 due to “insufficient control” over the company. Storm has not shown up to shareholder meetings for most of the past four years.

* Storm boycotted the Kyivstar meetings because of a Ukrainian court-ordered injunction, triggered by a case brought forward by EC Venture, the Swiss company that sold its interest in Kyivstar minority owner Storm in 2004 and later sued Storm.

* The U.S. court believes the EC Venture-Storm case was friendly collusive litigation, a claim rejected by Alfa Group which maintains it has no control over EC Venture.

* The court said Alfa companies failed to deposit Kyivstar shares with the U.S. court and it ordered Alfa to pay daily fines of $100,000 from March 12, with the daily fee doubling every 30 days until they are no longer in contempt.

* The court ordered Alfa companies to secure the dismissal of EC Venture litigation in Ukraine by March 23 and imposed escalating fines in similar amounts if they fail to comply.

* Finally, the U.S. court again ordered Storm to sell its Kyivstar shares by March 23, or sell its shares in Kyivstar competitors in excess of 5 percent — such as Turkcell (TCELL.IS) and Ukrainian High Technologies.  

Further annals of the glories of Russian corporate governance and jurisprudence.  

This is just another example of “corporate raiding” a la Russe.  No impersonalized rule of law here.  Another example of a powerful, connected person using the Russian courts to steal assets.

Not that exploitation of the legal system doesn’t happen in the US.  Believe me, it does.  But such egregious, over the top, use of the courts is routine in Russia in a way not seen here.  Just a particularly flagrant example of how far Russia is from the doorstep.

The other story relates to the use of violence to enforce contracts and solve business disputes among putatively “legitimate” enterprises in Russia:

Alexander Antonov, a little-known Russian businessman survived an assassination attempt after he was shot in the head by a gunman in Moscow on Wednesday morning. Though the news hardly caused a stir in Moscow- relegated to the third page of most newspapers – it’s a powerful reminder that despite attempts to stamp out corruption, the country is still struggling to throw off a shadowy past.

Contract killings are far more prolific than the number reported in the media suggest, says Carlo Gallo, of Control Risk Group in London, who advises companies considering investing in Russia.

“Contract killings may have decreased in frequency since the 1990s and the day of wild capitalism, but they are still occurring regularly in Russia, though they rarely make the headlines,” he told Forbes. “Victims tend to be journalists operating at a local level or local administrators involved in handing out permits, or land allocation.”

Russia’s problem with corruption is widely acknowledged. President Dmitry Medvedev himself has pledged to stamp out the problem. (See  “Russia’s $120 Billion Elephant: Corruption.”)  

However, the problem remains, and the troubles in the court system mean that the normal legal routes for solving business disputes or battles over planning permission are rarely effective.

“The low level of reliability of the court system means that business players look for other methods of resolving dispute, and this can include violent methods,” said Gallo.

“The killings will continue as long as the shadowy side of the economy prevails,” says Elena Panfilova, director of Transparency International in Moscow. “It’s not at all good for the business climate and business community.”

A loss of business confidence is something Russia simply can’t afford at this stage. The Russian economy has already been severely dented, with the war with Georgia and a high profile dispute with BP hurting the enthusiasm of foreign investors, while its financial market was battered when hedge funds and western institutional investors withdrew billions of dollars. On top of that falling demand for oil and metals and dented the profits of some of the countries biggest energy firms and miners, forcing them to cut production and sending unemployment soaring.

Contract killings rarely directly involve foreign investors, says Gallo. “Victims are overwhelmingly Russia,” he said. “However it does underscore the need for serious due diligence by foreign investors thinking of entering deals with local partners, if nothing else but to preserve the brand name.”

Due diligence.  Ya think?  Or, maybe a full psychiatric examination would be a more appropriate recommendation for anybody thinking of entering deals with the locals.

If you need further convincing, check out this site.  There, you’ll find:

Bribe solicitation in  Russia  was most frequently extortionate in nature (63%), involving requests to secure the timely delivery of a service to which the reporter was already entitled (e.g., clearing customs, having a telephone line installed); to avoid some outcome or consequence harmful to the reporter or their business; or to secure payment for services already rendered. Bribe demands for gaining a personal or business advantage were less common, accounting for only 16%.

    Nature of Bribe Demands in Russia

    35%      Timely delivery of a service to which reporter entitled
    22%      Avoid harm to self or business interests
    21%      Other
    6%       Receive payment for services rendered
    6%       Inappropriate favorable treatment
    5%       Winning new business
    5%       Exercising influence with or  over another official

 

 

Bribe demands in  Russia  were predominantly for cash and generally for relatively small amounts of  US$1,000  or less, with the most common amount demanded falling between  US$20 and US$100. More than half (56%) of individuals reporting bribe demands were solicited by the same source more than once, with the most common frequency being two to five times.

“The relatively low dollar amount of these demands and their extortionate nature mean that they are all too often simply dismissed as the ‘cost of doing business.’ However, given their recurrence, these demands become a significant, cumulative toll on – and risk for – both large and small businesses operating in  Russia,” said Wrage.

Pay up “to avoid harm to self.”  Boy, that sounds enticing.

Three years ago I titled one of my first posts, about the legal risks of doing business in Russia, “A Fool and His Money.”  That still holds.  Legal nihilism is still the only rule of law in Russia.  As North et al argue, Russia will remain an economic and social backwater–and pariah–until that changes.

Brad DeLong’s remarks in the opening round of his debate with Luigi Zingales are amazingly persuasive.   In my case, he has succeeded in making me more adamant in my disbelief in Keynesianism.   Problem is, though, that DeLong was attempting to convince people that they should all be Keynesians.

Here’s the paragraph that clinched it for me:

Anyone who uses his or her eyes can determine that Say’s law is in general false. Recall 2003-06, when capital inflows from Asia, easy money provided by the Federal Reserve and promises that financial engineering would cheaply diversify risk spurred homebuilders to spend money building houses. The American unemployment rate fell from 6.0% to 4.8%. Recall 1996-2000, when the assembled investors of America discovered the internet and in response businesses spent money like water on computers and telephones. The American unemployment rate fell 5.6% to 4.3%. In general, spending works to spur the economy, and the government’s money when spent is as good as anybody else’s. [Emphasis mine.]

This is as succinct a statement that captures perfectly the reductionist, mechanical (or hydraulic) Keynesian mindset.   Economics boils down to aggregate demand, and all aggregate demand is all the same. And, what’s more, everything in the economy is interpreted in terms of its effect on aggregate demand.   Moreover, aggregate demand is something that can be manipulated like a mechanical or hydraulic system.   Indeed, it can be created ex nihilo by creating IOUs.

The glib equation of deficit (i.e., future tax) financed government expenditure with (a) a massive technological shock that transformed virtually every aspect of commerce (and life) for billions around the world, and (b) the epochal development of teeming nations in Asia which created substantial new wealth and vast new opportunities to trade (contemporaneously and across time), is bizarre. Just how, exactly, does borrowing today to pay for who-cares-what (and remember for the Keynesian its just the aggregate amount of spending that counts, not what you spend it on), and paying back the borrowing by imposing taxes in the future, compare to a massive technological shock?   To the economic liberation of hundreds of millions of people, and their economic integration with billions of others around the world?   These are clearly quite distinct economic phenomena.   But to DeLong and his fellows, they’re all the same: it’s just spending money, and everybody’s money is all the same.

Like I said a couple of days ago, when all you have is a hammer, everything looks like a nail.   Aggregate demand is the Keynesian’s hammer.   Or, to mix metaphors, Cracker Jack Keynesians force every economic phenomenon to fit the Procrustean bed of the aggregate demand concept.   (Actually, the metaphor is not that mixed, for Procrustes means “the one who hammers out.”)

I must correct myself.   This is not merely reductionist.   This is reductio ad absurdum.   It trivializes vastly complex economies and economic processes–and economics as a science.

So, I say Brad DeLong has performed an extremely important public service.   By equating completely distinct economic processes he makes abundantly (and painfully) clear the intellectual void at the heart of Keynesianism.

Last summer, I wrote a post on Russophobia.  One of the main themes of that essay is that the worship of state power was inimical to human freedom and human development:

This credo contrasts starkly with the political philosophy that has dominated Russian thought from the rise of the patrimonial state to the very present. Throughout Russian history, the individual residing in the territory ruled by Tsar, Commissar, or latterly, President has been more subject than citizen. The government did not serve the individual, the individual served the government. It was not a government of the people, by the people, and for the people; it was a people of the state, ruled by the state, to be used for the state’s ends. The role of the state was not to serve the people; it was the role of the people to serve the state.

Today Paul Goble discusses a recent article by Denis Dagrunsky that makes a closely related point:

In his commentary on Osovtsov’s article, Dragunsky argues that this “conversation [about the potential of Putin’s departure] is extraordinarily important – but not as a scenario but rather as a symptom” of where Russia is now, obsessively and almost “monarchically” concerned with Putin and his regime rather than with more fundamental difficulties that country faces now as in the past.  

There is an assumption behind Osovtsov’s analysis just as there was behind the actions of those who overthrew Nicholas II that the elimination of one man would be sufficient to “solve” Russia’s problems. But as subsequent events showed, the oppressive “paternalism” that had informed the tsars continued unabated or even worse under the Soviets.

“In place of the tsar came Lenin,” Dragunsky points out, and to extend the analogy, “if V.V. Putin suddenly were to leave his post and become a private person, just about nothing in the structure and functioning of the regime would change,” however much those who talk about his departure believe it would usher in the promised land.  

Why should Russians expect, he asks rhetorically, that “the departure of one man would mean such radical and invariably positive changes” – especially since even with his exit there would “remains hundreds if not thousands of people from his command who would continue to occupy key positions in the center and in the regions, in politics and in business?

In democratic countries, the call for replacing one president with another means, Dragunsky points out, that “we will hold elections and vote for a more acceptable person.” But those in Russia who shout “Down with Putin!” are in fact saying something with an entirely different meaning.

What they want, he suggests, is the dismissal of the prime minister “first” and only after that happens, the holding of “genuinely free elections [and] the reform of the entire state administration, the entire economy, politics and culture. And then we [Russians] shall begin to live.”  

But Dragunsky continues, the only possible guarantor of such transformations could be the Lord God. And in this way, he says, “political messianism before our eyes is being converted into the entirely ordinary kind,” a reflection of the difficulties the opposition has in thinking about Russia or the government as separate things.

“Let the Russia of the future be conceived however you like – imperial or national, federal or unitary, post-industrial or information, even nano-technology. But just not prime ministerial or presidential,” Dragunsky insists. “It is time at long last to think about the leadership separately from the society as a whole” and thus move beyond “messianic fantasies.”

Dragunsky’s point is important but perhaps in a way that he does not entirely recognize: the reality that many Russians have not yet made that distinction between the state and the country likely guarantees that future changes will involve the kind of radical discontinuities that the country has experienced rather than the more evolutionary change many have hoped for. [Emphasis mine.]

I think Goble’s last point is the essential one.  Partly for historical and ideological reasons, partly as the result of relentless propaganda, many Russophiles (and the Slavophiles) identify the state and the narod as an organic whole; and assert that the state is the embodiment of the Russian people (all the while, ironically, desiring to limit or deny altogether the ability of the people to influence let alone control the state’s actions.)  This failure to delineate separate spheres for the individual and the state, and the tendency to concede, and often celebrate, the interests of the individual to those of the state, is what I find so objectionable about Russian political life, thought, and history.  

It is also, I believe in agreement with Goble, one of the factors that makes Russia particularly prone to “radical discontinuities” (a euphemism for revolution, civil war, terror, and chaos).  The state’s arrogation of all powers tends to lead to situations in which its intrusions on the lives and property of its subjects become intolerable, and the lack of institutions that facilitate accommodation of the state to society’s demands, tends to make conflict more likely.  Indeed, the very mindset that the state is the people leads to inherent internal contradictions that tend to culminate in violence and repression.  In a system dominated by this mindset, any opposition is tantamount to treason.  In most times, this encourages sullen apathy.  But when strains become too acute, it can explode into near-anarchistic violence.  

I know that Emerson said that a foolish consistency is the hobgoblin of little minds.  But it is nonetheless true that blatant inconsistencies are frequently the best way to identify lazy thinking, or say-anything-to-get-what-I-want expediency.  To my eyes, the inconsistency of some stimulus advocates suggests that their arguments are faulty, and perhaps are being, ahem, adjusted, to rationalize their personal policy preferences.  

Some weeks ago Robert Barro argued that the “multiplier effects” of stimulus expenditures were likely to be very small–likely below one.  He based his argument on an empirical analysis of spending in WWII.  In response, prominent supporters of the stimulus package (including Krugman and DeLong) harrumphed that this was a bad comparison because (a) there are diminishing returns to stimulus spending, and (b) the WWII stimulus was far in excess of that contemplated by Obama.  (This was pre-budget, BTW.)  The stimulucrats argued that the bang-for-the-buck of government spending substantially smaller (as a fraction of the economy) than WWII spending would be far higher than Barro documents.  

Weeks have passed, and there is no evidence that the stimulus is having any effect.  If you really believe that “animal spirits” and confidence are important, or that people are at all forward looking, the mere passage of the stimulus should have sparked economic activity, or led to increases in variables that are responsive to changed expectations about future economic activity–like the stock market, or corporate bond spreads.  The market, we all know, is in the tank (even taking into account today’s rally).  Bond spreads are blowing out.  (The credit spreads on the big banks that are major derivative counterparties have reached record levels-surpassing the levels seen at the height of the post-Lehman panic.)  The markets, apparently, believe that the stimulus is anything but.

So what do Krugman and other stimulus advocates deduce from all of this?  That the stimulus was way too small.  We need to go large!  (I am sure you are shocked! Shocked!)  

But, pardoning my impertinence, if there are diminishing returns to the stimulus (the stick they used to beat back Barro), and the existing stimulus (plus the prospect for a further spending splurge as proposed in the budget) is having no demonstrable stimulative effect, wouldn’t that mean that a bigger “stimulus” wouldn’t have any demonstrable effect either?  

So, I guess we have the Goldilocks Theory of Macroeconomic Stimulus.  $800 Billion is TOO SMALL!  The 2009 equivalent of WWII spending is TOO BIG!  We have to find Mama Bear’s Stimulus, which is JUST RIGHT!

The logical basis for this theory escapes me at the moment.  The stench of expediency is palpable.  

Or maybe (to rub it in), they are proposing the stimulus equivalent of the Laffer Curve.

Some aphorisms come to mind:

• When all you have is a hammer, everything looks like a nail.
• Insanity is doing the same thing over and over and expecting to get a different result (H/T Einstein).
• When you are in a hole, stop digging.  
• A fanatic is somebody who never changes his mind, and never changes the subject (H/T Churchill).

The unbounded confidence in rather hazy Keynesian ideas also puts me in mind of die-hard adherents of climate modeling, who also appear to be (a) largely impervious to contrary evidence, (b) dead set on rationalizing, no matter how inconsistently, things that contradict their theories, and (c) extremely shrill in excoriating anyone who has the temerity to point out these contradictions.

As Kuhn noted, of such things, scientific revolutions are made.  And not a moment too soon.  To the Barricades!

Both the WSJ and NYT ran articles to the effect that Russia had decided not to extend additional bailouts to various oligarchs drowning in a sea of debt.  Some are interpreting this shift in policy as evidence that (a) Russian resources are dwindling, and the government needs to conserve them to bolster the real economy, and (b) the government is backing away from exploiting the crisis to re-nationalize “strategic” sectors of the Russian economy.

I do not believe that the evidence supports either conclusion.  I wrote some months ago that it would be foolish for the Russian government to, in essence, assume the obligations of the oligarchs to the Western banks.  The loans, even taking into account any haircut on the shares the oligarchs provided as collateral, reflect the values of the borrowers’ companies when they took out the loans.  These values are now far in excess of the current market values of the collateral.  Sure, if the government lent money to the oligarchs, who paid the banks, and took the shares in collateral, it would probably end up owning the companies.  But it would obtain this ownership by paying the old, higher values.  This would make the Western banks very happy.

But there is a far cheaper way for the government to achieve the same end.  Just let the oligarchs default on their debt to the Western banks.  I doubt, under current circumstances, the banks have much of a desire to hold the equity they would receive in this event.  The government could buy it back at current market value, far below the amount the oligarchs owe the banks.  Moreover, the government would be in a very strong negotiating position.  It could always threaten to nationalize the companies, a la Chavez, leaving the banks with zip.

So, by letting the oligarchs fail, the state–and those who control the state–can pick up control of their companies for a small fraction of what it would cost to bail out the oligarchs, and then seize the companies when the oligarchs almost inevitably would default.

My only question is: why didn’t Putin et al do this earlier, instead of giving Derispaska and others billions?  My earlier conjecture was that Putin and the siloviki were loath to allow prying Western eyes inside these companies even for a short period of time.  Maybe they are still reluctant to do that, but compared to the alternative (bailout and vastly overpay) this is a problem they are willing to deal with.  Indeed, they may have used the intervening period to sanitize records and clean up embarrassing trails, thereby minimizing this problem.

The WSJ interview with Arkady Dvorkovich provides a hint that nationalization is still on the table:

“The authorities don’t have any plans to take things away from people and nationalize them,” Mr. Dvorkovich says. “But that doesn’t mean that one shareholder can’t sell to another investor. It doesn’t mean that the state won’t wind up owning some assets that were held as collateral.”

The government needn’t take anything away from anybody under current circumstances.  It can let the Western banks do that for it, and then scoop up the assets for a pittance as compared to the cost of bailing out the oligarchs–and the Western banks.  This is a three-fer for the government: no oligarchic threat; a blow at the Western banks and the West; and the extension of control over Russia’s strategic industries.

This course would put the oligarchs in a situation where they would have far less to lose by openly opposing the government.  They still have resources at their disposal, and could conceivably make things more difficult for Putin.  Perhaps they would avoid outright rebellion, but they could help fund opponents in the regions, for instance.

Perhaps this is the real reason why Khodorkovsky and Lebed are on trial again.  They provide a living demonstration of the hell that Putin can dish out to those who dare buck the power vertical.  In the current environment, any “liberal” gesture towards the Yukos defendants could send a very dangerous message to the other oligarchs.  Therefore, despite all the yammering about how Medvedev needs to show leniency to Khodorkovsky in order to establish his independence, and his liberal bona fides, this is not going to happen.  Especially now.  The political situation is too explosive in Russia.  The oligarchs face financial extinction, and the only thing that can reasonably keep them from open resistance is the threat of legal extinction–or literal extinction.

In other words, Khodorkovsky is on trial pour encourager les autres.  To keep them from getting any funny ideas.  To ensure that they realize there are far worse things than going broke–like being broken.

There are other indications that fears of intra-elite conflict pervade the Kremlin and the White House.  Governors, including powerful, long serving ones, are being sacked.  The governor of Bashkorostan is supposedly on the way out–though he denies it (they’re always the last to know).  (H/T-R).  Medvedev just fired Orel Oblast’s venerable Yegor Stroyev, and he has been subjected to intense questioning on corruption charges.  He’s lucky (for now)–his son-in-law was recently died from 9mm lead poisoning.

Echoing Russian sources, the FT is rife with rumors about a panicky elite, and the prospect for brutal intra-elite infighting.  Clearly, the objective conditions for such infighting are in place.  The personalized, a-institutional, natural state nature of the Russian polity makes such conflict highly likely in periods of acute economic stress, especially when the rents that hold it together have all but disappeared.  The crackdowns–against Khodorkovsky, the governors, not to mention dissenters–provide tantalizing suggestions that such conflicts are taking place.  So does the public squabbling between Kudrin and his allies on the one hand, and made capos like Yakunin on the other.

In other Russian economic news, inflation continues apace, running 2.4 percent in January and 1.7 percent in February.  (Interestingly, a time when China and other nations experienced deflation, and US inflation was relatively tame–for now.)  This is further evidence that, as I opined in an earlier piece, Russians are exchanging rubles for goods at a rapid pace, reflecting their pessimism about the future value of the currency.

As Dvorkovich mentions in his interview, Russia is suffering stagflation (as I pointed out to Michel a couple of weeks ago).  Stagflation is a severe policy challenge: fight inflation, and risk strangling the real economy; stimulate the economy, and fuel inflation.

Given these monthly figures, the government’s forecast of inflation for 2009 in the 14 percent range seem extremely optimistic.  The potential for a continued hemorrhaging deficit similarly makes such a rosy outcome–less than a percent higher inflation than in 2008–highly unlikely.  (Note that the government has announced another cut in the oil export tariff.  That’s less money coming into the government’s coffers.)

The stagflation problem is just another reason why I believe that Russia faces more acute policy dilemmas than virtually any other large nation.  This places tremendous strain on the political/governing structure.  Thus, expect to see more crackdowns, especially on regional governors who might be getting ideas about opposing the Kremlin/White House, and on any oligarch that gets the least bit uppity.

We now have an explanation for Obama’s shabby treatment of UK Prime Minister Gordon Brown: the President was le tired.  And overwhelmed by the workload.  Maybe he needs some of this so he can keep running like a Kenyan.  

One would think that this would spark some reconsideration of the drooling coverage of Obama’s physique and athletic prowess.  One would be wrong.  

Despite what one might infer from reading the press, Obama is in fact human, and human beings require proper sleep.  Fatigue is a deadly enemy of clear thinking.  Avoiding fatigue requires prudent pacing.  This is something that Obama clearly does not understand, with the hyperactive plan-of-the-day-we-need-to-strike-everything-while-the-iron-is-hot MO of the first six weeks of his administration.  He seriously risks the fate of the Hare in Aesop’s fable.  

This MO likely arises from two things.  The first is the arrogance (fed and enabled by get-a-room press coverage) that characterizes Obama and his minions.  The second is the sense that this is a historical moment to achieve long-dreamt-of goals of expanding government power.  With a shell-shocked populace, post-election euphoria, and an incompetent and disorganized opposition, the administration senses that America can be reshaped according to its crypto-socialist vision.  

One top of the fatigue excuse, somebody from the State Department slagged the UK, saying that it is just one of 190 nations, and deserves no special treatment.  Indeed, UK power is on the wane, but it still possesses sufficient importance as a financial center (especially in times of financial crisis), military resources, and diplomatic heft (e.g., a veto in the UN–just like Russia) to separate it from the rest.  Moreover, the country is an ally, a member of NATO.  Finally, loyalty should matter.

So now we see the contours of the Obama foreign policy, such as it is.  Insult our friends/allies (cf., considering selling the Poles and Czechs down the river on missile defense; leaving Iraq hanging).  Suck up to our adversaries/enemies (e.g., Iran, North Korea.)  Now that’s what I call Smart Power!

In other foreign policy follies, The Smartest Woman in the World stomped in it with both feet with the Reset Button fiasco in her meeting with Russian Foreign Minister Sergei Lavrov.  (The true story can now be told.  The button with the “Overcharge” label was supposed to have been delivered to the IRS but was misdirected to the State Department.)

Watching this video is cringe inducing on so many levels, even overlooking the wrong choice of word.  Even if the word had been right, the whole exercise would have been incredibly lame and inappropriate.  Cute-siness in such circumstances trivializes serious matters, and is extraordinarily grating.  (As is Hillary’s talking-to-the-kindergarten class tone and annoying cackle.)  And another thing.  Why is the Russian word, wrong as it may be, written in Latin characters, rather than Cyrillic?  I mean, that looks really retarded; if you want to convey to the Russians that you understand their language, (a) get the words right, and (b) write their language the way that they write their language.  

Doesn’t anybody in the State Department know Russian?  

So, to recap.  On the domestic front, in the midst of a financial crisis, the Treasury Department is effectively unstaffed.  And on the diplomatic front, amidst numerous foreign policy challenges, the State Department is fully staffed by monolingual, tin eared idiots.  

In other news of Miss Hillary, she joined the A Crisis is a Terrible Thing to Waste crowd:

U.S. Secretary of State Hillary Clinton told an audience on Friday “never waste a good crisis”, as she highlighted the opportunity of rebuilding economies in a greener, less energy intensive model.

. . . .

Clinton told young Europeans at the European Parliament that global economic turmoil provided a fresh opening. “Never waste a good crisis … Don’t waste it when it can have a very positive impact on climate change and energy security,” she said.

There is absolutely no logical connection between these issues whatsoever, except to the extent that the measures advanced to address climate change–cap and trade (effectively a tax) and massive tax financed subsidies to “green technologies”–will dramatically impede economic growth and thereby dramatically slow the resolution of the crisis.  (This is a price you might be willing to pay, depending on your view of the seriousness of climate change, but at least be honest about that price.)  

But, apropos the Kinsley definition of a gaffe, this comment is very revealing, especially in light of other comments in a similar vein, and actions consistent with this worldview.  This again lays bare the Neroism of this entire administration.  The reveling in economic destruction because it provides the political cover to achieve an agenda that could not be realized if advanced honestly on its own merits.

Today SWP reached a milestone–the 1000th comment.  Most of these have been posted since last summer.  

I’d just like to express my gratitude to all those who take some of their valuable time to visit here, but especially to those of you who take the time to share your thoughts and comments.  Your contribution has made SWP a very lively place, and I deeply appreciate it.

The news reports that as a wonderful parting gift, President Obama gave UK Prime Minister Brown a set of DVDs of notable American movies.  Just wondering if one of them was The Manchurian Candidate.

In my post-election post, I toyed with the Leninist concept “The Worse, the Better,” considering whether in the long run it would be better for Obama and the Congressional Democrats to indulge their wildest legislative whims, thereby sparking a popular backlash that would ultimately prevent them from doing too much harm. Well, they are indeed living out their wildest dreams, and much of “the Worse” is coming to pass, with no backlash in sight.  That possibility is what eventually led me to conclude that the Worse wouldn’t lead to the Better.  

Lenin’s name, and the worse-is-better strategy, are cropping up with some regularity on the right nowadays, but in a somewhat different way.  In the midst of the market carnage, Obama’s apparent insouciance over the banking crisis (note that two candidates for top Treasury jobs pulled out today), gargantuan spending plans, and massive increases in income taxes, capital gains taxes, and energy prices (via a carbon cap and trade plan), the right’s more excitable denizens are seriously suggesting that Obama is a Leninist bent on destroying the economy as a way of seizing control over the economy and the country.  (And it’s not just the right.  Crazed TV investment guru Jim Cramer, who is a pretty liberal guy, has called Obama the L-word.)  

Although I believe that Obama’s economic policies are extremely destructive, I do not believe that he is intentionally inflicting them on the country as part of a Machiavellian political strategy.  Instead, I view him as the Sorcerer’s Apprentice in Goethe’s poem (perhaps familiar to most from Disney’s Fantasia).  An individual who was given great power, and a tremendous desire to exercise it and unbounded confidence in his ability to do so, but in fact possessing little understanding of how to use it wisely.  The Sorcerer’s Apprentice wants to use his power for good, but ends up causing tremendous harm:

That old sorcerer has vanished  
And for once has gone away!  
Spirits called by him, now banished,  
My commands shall soon obey.  
Every step and saying  
That he used, I know,  
And with sprites obeying  
My arts I will show.

The Apprentice command the brooms to work as he desires, but they do not.  Eventually, only the return of the Master restores order, but only after the powers unleashed by the Apprentice had wreaked havoc.  

The Apprentice lacks humility.  He has an exaggerated sense of his own powers, and his ability to use them wisely.  

The sad irony of all this becomes clear when one remembers how Time Magazine described the theme of Obama’s inaugural address: “Humility, Gratitude, Sacrifice.”  The humility is definitely not in evidence.  The lack of humility is evident in actions, with one grandiose plan piling atop another, all against the backdrop of a plummeting stock market and a credit market on the brink of another implosion (note what has happened to credit spreads in recent days.)  The lack of humility is evident in words too: Obama told a group of journalists that he enjoyed being president, and that “And as it turns out I’m very good at it.”  Yeah, that screams humility.

We do have the sacrifice thing going on, though.  But at present it seems all pain, no gain.  The kind of sacrifice only a masochist could enjoy.  

So, rather than a humble president soberly and cautiously addressing our serious economic problems with a “first, do no harm” attitude, we have the Sorcerer’s Apprentice run amok.  (Foreign policy/defense is an issue for another day.)

And, if impromptu, non-telepromptered remarks are any indication, the lack of humility is not based on any objective evidence of superior knowledge or wisdom.  Obama’s disquisition on the stock market was extremely disquieting, to say the least:

On the other hand, what you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it. I think that consumer confidence — as they see the American Recovery and Reinvestment Act taking root, businesses are starting to see opportunities for investment and potential hiring, we are going to start creating jobs again.

The statement about the non-existent “profit and earnings ratios” has rightly drawn considerable ridicule.  But that’s not the worst of it.  The rest of the statement is completely disconnected from reality.  Stock prices are plummeting because (a) expectations of futures earnings are plummeting too, and (b) investors are demanding substantial risk premia.  These both reflect increasing pessimism, not optimism.  (Ditto measures like the VIX volatility index–the “fear guage”–and ballooning credit spreads.)  If the American Recovery and Reinvestment Act and the rest of the tax and spend binge were truly restoring confidence, restoring animal spirits, and convincing businesses that investment opportunities were dramatically improving, stock prices would be rising.  No. Two. Ways. About. It.  There’s the market’s view of reality, and there is Obama’s.  The two are completely incompatible.  

I know which of the two I believe.  

But not a touch of doubt. No questioning of whether, just perhaps, his preternatural confidence might be unjustified.   He simply dismisses the market as the economic equivalent of a tracking poll.  Trillions of dollars vaporized–no biggie!  Just something bobbing around.  Nothing to see here.  Just move on.  Trust me and my brilliant judgment!  Ignore the judgment of millions of individuals–investors, managers–with their money on the line.  What do they know, anyways?  

No wonder the name “Marie Antoinette” keeps popping into my mind.  

In the end, Obama’s intentions are of second order importance.  His actions are what matter.  The overweening, swaggering confidence (remember when Bush was excoriated for his swagger?) in the face of impending calamity following hard on the heels of actions that he assured us would stabilize and reverse the decline is extremely unsettling.  The hyperactive policy making–today’s task being merely the reshaping of the health care system–is extremely dangerous under current circumstances.

At least the Sorcerer’s Apprentice soon realized his folly, and attempted to reverse his spell.  He could not, but the Master returned in time to restore order.  We should be so lucky.  But I doubt it.

Jules Crittenden has a caustically funny take on the Obama Message to Garcia . . . I mean Medvedev.   This missive is being spun so many different ways that it’s difficult to figure out just what’s going on.   Obama’s new line is that it was just a re-statement of his publicly announced position.   So then why all the drama of a secret, hand-carried letter?   His people also claim that the letter made it clear that this was not a “best efforts” thing: i.e., the Russians just couldn’t say “well, we tried, but. . . ” and expect us to shut down the missile defense program when Iran proceeds full speed ahead with its nuclear program; instead, the missile defense system would be eliminated only if the Iranians stop.   Maybe: let’s see the letter so we can judge on our own.   The newest spin is that this was a fiendishly clever plot to put the Russians in an awkward spot, forcing them to utter an embarrassing Gromyko-esque “Nyet!” Well, they said “Nyet,” but don’t seem the least bit embarrassed about it.

Crittenden hits the nail on the head when he skewers this negotiating ploy.   After all, it’s the Russians who have been venting over the Czech and Polish bases for an ABM system.   The intensity of their rhetoric suggests that it’s really important to them.   So, if it’s such a big deal to them, let them make the first offer.   Don’t like the bases?   What are you going to offer us?  

In other words, Obama should have taken a lesson from Kyrgyzstan.

Moreover, this is the only way to determine the credibility of Russia’s opposition to the bases.   It is very possible that all the hyperventilating is just an act, intended to gull credulous Europeans, and latterly Americans, into being nice to the Russians, and unilaterally make concessions on this and a variety of issues in order to assuage hurt Russian pride.   That is, it is just another part of the tiresome narrative about how badly the West treats Russia, and that the Russians reasonably expect that if they make a big enough stink they’ll get this–and much more–in exchange for exactly nothing but words.   If those; Putin in particular seems to relish adding rhetorical insult to practical injury.   The specific idea floated by the Russians as their idea of a quid pro quo–the non-deployment of mobile Iskander missiles to Kaliningrad–is a joke because (a) the missiles aren’t even built yet, and are unlikely to be built for some time, and (b) whereas any decision not to deploy an ABM system is likely irreversible, but any Iskander decision is easily reversible because they are, er, mobile.

The palpable anxiousness to please and appease the Russians, and others (e.g., the Syrians) reflects a fundamental leftist trope: that all of America’s international disputes are at root the result of Bush’s cowboy foreign policy and brusqueness.   Well, the brusqueness didn’t help, but there are objective sources of disagreement between nations in general, and between the US and Russia in particular, that are persistent, and which are immune to sweet talk.   This view also reflects a sort of infantile narcissism and magical thinking that perceives the US as so uniquely powerful that everything that goes wrong must be our fault.   Not that we’re faultless, but it takes two to have a dispute.

A little more realism, and a little more poker savvy, would be welcome in dealing with Russia.  Russia has smacked Obama several times–on the day of his inauguration, with the threat regarding the Iskanders, with Kyrgyzstan, and with this letter.  How many cheeks is it necessary to turn?  How many hints do we need?  

I’m not suggesting anything overtly hostile.  Just studied indifference.  Which would drive Putin et al nuts, but which wouldn’t feed his agitprop machine.  And steely resolve in resisting Russian pressure in the “former Soviet space.”  A consistent message that “spheres of privileged influence” are so 19th century.  

It’s not as if Putin and Medvedev are going to be genuinely cooperative.  They perceive us as their primary adversary, and are obsessed with denying us victory even when this leads them to cut of their noses to spite their faces (e.g., Afghanistan, Iran).  Don’t get played.  Don’t be Charlie Brown.  Just let Putin and Medvedev and Lavrov stew in their own juices–and their own economic crisis and demographic decline.