Streetwise Professor

Germany, under Angela Merkel, has pursued with monomaniacal fervor an agenda of “decarbonizing” the German economy. This has been driven by a monocausal view of what constitutes “green” policies, one that begins and ends with greenhouse gasses.

In pursuit of this objective, Germany has embarked on a hugely expensive endeavor–“Energiewende“–that looks to replace virtually all fossil-fuel generation with renewables, notably wind and solar. The foolishness of this campaign was evident from the onset (as I wrote about some years ago), but Merkel and the German ruling class ignored it: but now reality is rearing its ugly head.

Where to begin?

For one thing, for those who do not have a view of environmentalism that begins and ends with carbon, many in Germany are finding wind power in particular to be visual pollution, sonic pollution, a major threat to bird and insect life, and a threat to some of the few remaining forested parts of the country. As a result, expansion of windpower is facing increased opposition on environmental grounds.

Expansion of offshore wind is sharply limited by the need for vastly expanded transmission capacity (to bring power from the windy northern coast to the central and southern regions of the country that consume the power). This is expensive, and also faces substantial local opposition on environmental grounds.

In a truly amazing fit of stupidity, Germany decided to terminate a large and reliable–and carbon free–source of electricity when Merkel ordered the shutdown of the country’s nuclear plants post-Fukushima. Let’s see: a coastal nuclear plant is hit by a tsunami, so let’s close down all nuclear plants in a seismically stable country with no zero risk of a tsunami. Yeah, that makes sense.

Now Germany is planning to decommission all its coal plants, because global warming. It is not intending to replace them with gas-fueled ones, despite their lower carbon emissions. Because global warming.

So . . . no nukes, no coal, no gas to replace them, severe constraints on increased renewables output. Which leads to . . . looming shortages of power. Which means that Germany’s already incredibly expensive power will become even more expensive. Hardly great for German consumers, or German industry.

But no worries, Germany will just export less!

Germany is counting on its status as a net exporter of power to help it brace it for potential shortfalls as nuclear and coal power wind down in stages. It transmitted about 53 terawatt-hours of power to its European partners in the nine months through September, compared with 31 terrawatt-hours of imports, monitoring group AG Energiebilanzen reported Monday.

Screw the neighbors! How German of them! La plus ça change, plus c’est la même chose.

Er, that’s not very “European” of them, is it? “European partners.” Ha!

How any European can listen to Merkel’s lectures about “more Europe” without vomiting is beyond my comprehension.

It also demonstrates the failure to think through the effects of their actions. If the Germans export less, will those who currently import from them say: “Well OK then! We’ll just sit in the dark and freeze!”? As if. They will build generating capacity. And it won’t be largely renewable. Meaning that Germany closing coal plants will not lead to an equivalent reduction in the number of coal plants, but a displacement of those plants to other countries, or the building of gas plants outside Germany. So the amount of global emissions reduction will be a fraction of the amount of German emissions reduction.

The virtue signaling aspect of this is also absurd. For all of the contortions and coercion that Merkel will employ to reach her decarbonization goal, the reduction in CO2 emissions will be a drop in the bucket, given that China is opening a coal plant per week, and Chinese and Indian emissions already dwarf those of the US, let alone Germany. So the impact of this on CO2 emissions, and on temperature, will be de minimis.

Germany is a great example of the fallacy of composition. It has an incredibly intelligent and well-educated population. Arguably the most intelligent and well-educated population in the world. Yet, Germans collectively have a history of making the worst decisions of any nation on earth.

Perhaps this reflects their obsession with grand theories (as opposed to say, the more practically minded British and Americans). As a result, they tend to embark on grandiose missions that end in disaster. (Adam Smith’s remark about “the man of system” comes to mind. So does Adenauer’s remark about Prussians being Belgians with megalomania.)

In the past, tens of millions have died of German theories–most of them non-Germans. Not many will likely die of Energiewende, so in that way it is not comparable to the great debacles of German history. But it is a debacle nonetheless, and one with its roots in a grand theory, and which will produce virtually no environmental gain despite imposing a massive cost on Germans (and other Europeans who consume German electricity).

How very German.

The Sino-American “trade war” narrative is one of the most idiotic ones in recent memory, and given that it has to compete with things like “Russian collusion” that’s saying a lot. This narrative is appealing to superficial, lazy journalists, is tailor made for governments and companies looking to excuse poor results, and fits right in with the relentless anti-Trump media drumbeat.

Trade is just one weapon in a deeper geopolitical/geostrategic contest between the United States and China. This contest pits an established status quo power with an emergent, revanchist, revisionist one. These powers have fundamentally different visions for the operation of the global system.

The struggle is being waged in myriad dimensions, and often in a quite asymmetric way. One of China’s most deadly–literally–asymmetric weapons is fentanyl. And anyone who thinks that China’s shipping of massive quantities of this extremely dangerous drug to the US is not an intentional asymmetric warfare tactic is delusional.

Consider this story about the “rise and fall of an Eagle Scout’s Fentanyl Empire.” Consider this line in particular:

The case against Shamo detailed how white powder up to 100 times stronger than morphine was bought online from a laboratory in China and arrived in Utah via international mail (emphasis added).

China is the most intrusive security state in the history of the planet. In particular, its surveillance and censorship of the Internet is beyond intense. Nothing happens on the Internet in China without the security establishment/Party knowing about it, and allowing it.

Further, China is the most ruthlessly repressive state in the world, and has absolutely no compunction about summarily executing those who cross it. They will even go one better, and sell the organs of those they execute. If it wanted to crack down on the fentanyl trade, it could do it. With extreme prejudice.

So if it is possible for an American to buy massive quantities of fentanyl online in China, it is because the Chinese government wants to sell massive quantities of fentanyl to Americans.

That is the real trade war that is going on. The trade in fentanyl is a deliberate tactic by China to kill Americans and weaken American society.

China is playing for keeps. Yet a large portion of the American establishment has been corrupted and co-opted by China, and/or is so blinded by Trump hatred that they turn a blind eye to this conduct, when they are not bewailing any attempt to confront China.

Yes, the opioid crisis–which should really be called the fentanyl crisis, because prescription opioids are not the big killer–reflects serious problems in American society. But it is necessary to recognize that China is exploiting those problems in a most cynical way. By all means attempt to address the demand issue, but do not ignore the supply issue. And in particular do not ignore the fact that the supply issue is only one aspect of a struggle between the United States and the worlds most repressive and most totalitarian power.

Hong Kong has been convulsed by anti-government protests for weeks. Protestors have numbered in the hundreds of thousands, and are facing increasing violence from Chinese authorities. The atmosphere is heavy with fears of a fierce crackdown by Beijing, along the lines of Tiananmen Square, a little more than 30 years ago.

Hong Kong protestors are literally wrapping themselves in American flags (redolent of the replica of the Statue of Liberty in Tiananmen). Some are even donning MAGA hats and pleading for the US to come to their aid.

But Americans’ responses to all this are decidedly muted, and many appear to be paying little attention to the truly historic events in Hong Kong. This has led many to wonder why. Tyler Cowen hypothesizes that Americans are too obsessed with their own inter-tribal political wars to pay attention:

Sadly, the most likely hypothesis is that Americans and many others around the world simply do not care so much anymore about international struggles for liberty. It is no longer the 18th or 19th century, when one democratic revolution provided the impetus for another, and such struggles were self-consciously viewed in international terms (a tradition that was also adopted by communism). The 1960s, which saw the spread of left-wing movements around the world, embodied that spirit. So did the anti-Communist movements of the 1980s, such as Solidarity, which overcame apparently insuperable odds to help liberate Poland and indeed many other parts of Eastern Europe.
In contrast, I hear no talk today about how the Hong Kong protesters might inspire broader movements for liberty.
Instead, Americans are preoccupied with fighting each other over political correctness, gun violence, Trump and the Democratic candidates for president. To be sure, those issues deserve plenty of attention. But they are soaking up far too much emotional energy, distracting attention from the all-important struggles for liberty around the world.
It’s 2019, and the land of the American Revolution, a country whose presidents gave stirring speeches about liberty and freedom in Berlin during the Cold War, remains in a complacent slumber. It really is time to Make America Great Again — if only we could remember what that means.

With all due respect to Tyler, I think the answer is far different: Americans are far more realistic than he is.

This realism is the bitter fruit of the idealism of the post-Cold War world, and in particular, attempts to advance liberty around the world.

Let’s look at the record. And a dismal record it is.

Start with the collapse of the Soviet Union, which led to a burst of euphoria and a belief that this would cause liberty to spread to the lands behind the Iron Curtain. The result was far more gloomy.

There were a few successes. The Czech Republic, Poland, Hungary. Not coincidentally, the successes and quasi-successes occurred in places that had been part of the Catholic and Protestant west. Outside of that, the states of the FSU and other Warsaw Pact states lapsed back into authoritarianism, usually after a spasm of chaos. (Ukraine went from authoritarianism to chaos to authoritarianism and then to a rather corrupt semi-chaos.)

In particular, the bright hopes for Russia faded rapidly, and after a decade of chaotic kleptocracy that country has settled into nearly two decades of authoritarian kleptocracy. Moreover, Americans (and westerners generally) soon wore out their welcome, in part because of their condescension in dealing with a reeling and demoralized yet proud society, in part because of their complicity in corruption (and yes, I’m looking at you, Harvard), and in part because their advice is firmly associated in Russian minds with the calamity of the 1998 economic collapse. Yes, you can quibble over whether that blame is justified, but that’s irrelevant: it is a reality.

Countries where Color Revolutions occurred (e.g., Georgia) also spurred western and American optimism and support. But hopes were soon dashed as these countries too slipped back into the mire, rather than emerging as beacons of liberty.

I could go on, but you get the point.

Let’s move forward a decade, to Afghanistan and Iraq. In both places, there was another burst of euphoria after brutal regimes were toppled. Remember purple fingers? They were a thing, once, what seems a lifetime ago.

Again, hopes that freedom would bloom were soon dashed, and both countries descended into horrific violence that vast amounts of American treasure and manpower were barely able to subdue. And again, especially in Iraq, the liberators were soon widely hated.

The lesson of Iraq is particularly instructive. The overthrown government was based on a party organization with a cell structure that was able to organize a fierce and bloody resistance against the Americans and their allies. The attitudes of the population meant far less than the determination and bloody-mindedness of a few hard, ruthless men.

Let’s move forward another decade, to the Arab Spring. The best outcome is probably Egypt, which went from an authoritarian government rooted in the military to a militant Muslim Brotherhood government and back to military authoritarianism. In other words, the best was a return to the status quo ante. The road back was not a happy one, and the country would have been better without the post-Spring detour into Islamism.

Elsewhere? Humanitarian catastrophes, like Libya and Syria, that make Game of Thrones and Mad Max look like frolics. Enough said.

Given this litany of gloomy failures, who can blame Americans for extreme reluctance to engage mentally or emotionally with what is transpiring in Hong Kong? They are only being realistic in concluding it is unlikely to end well, and that the US has little power to engineer a happy ending.

And what is the US supposed to do, exactly? The country is already employing myriad non-military instruments of national power in a strategic contest with China. Again, the “trade war” is not a war about trade: trade is a weapon in a far broader contest.

Military means are obviously out of the question. And let’s say that, by some miracle, the Chinese Communist Party collapses, and the US military, government agencies, and NGOs did indeed attempt to help secure the country. How would that work out? Badly, I’m sure.

The country is less culturally intelligible to Americans than Russia, or even the Middle East, and not just because of the language barrier, but because of vastly different worldviews. China is physically immense and has the largest population in the world. Chinese are extraordinarily nationalist, and it is not hyperbole to say that the Han in particular are racial supremacists. Years of CCP propaganda have instilled a deep hostility towards the US in particular, and many (and arguably a large majority of) Chinese blame the west and latterly the US of inflicting centuries of humiliation on China. A collapsed CCP would not disappear: it would almost certainly call on its revolutionary tradition and launch a fierce and bloody resistance. People in Hong Kong may be flying American flags now, but I guarantee that in a post-Communist China, there would be tremendous animosity towards Americans.

When you can’t do anything, the best thing to do is nothing. Some of the greatest fiascos in history have been the result of demands to do something, when nothing constructive could be done.

The American diffidence that Tyler Cowen laments reflects an intuitive grasp of that, where the intuition was formed by bitter experience.

I despise the CCP. It is, without a doubt, the greatest threat to liberty in the world today. It is murderous, and led by thugs. I completely understand the desire of those with at least some comprehension of a different kind of government, and a different way of life, to be rid of it. I am deeply touched by their admiration for American freedom–something that has become increasingly rare, and increasingly besieged, in America itself.

But there ain’t a damn thing I, or even the entire US, can do to make that happen.

Ironically, I guarantee any American involvement in a putative post-CCP China would only contribute to internecine political warfare in the US.

The situation is analogous to that in 1946, when George Kennan wrote the Long Telegram. Confronting (prudently) and containing China is the only realistic policy. After years of delusional policies that mirror imaged China, the Trump administration is finally moving in that direction, and has achieved considerable success in creating a consensus around that policy (the deranged Democratic presidential candidates and those corrupted by Chinese money excepted, both of whom are siding with China at present, because Bad Orange Man and moolah).

But even there we have to be realistic. For even after containment achieved its strategic objective, and the USSR collapsed, it did not result in a new birth of liberty east of the Niemen and the Dneiper. Nor should we expect that to happen on the Yangtze or the Yellow if containment consigns the CCP to the dustbin of history.

Donald Trump recently unleashed yet another tsunami of ridicule by suggesting that the US should buy Greenland, a Danish possession. There he goes again! The idiot! The fool! What a ridiculous idea!

Trump responded by pointing out that Greenland is a strategic place. And he’s right.

And you know who thinks it’s incredibly strategic?: Vladimir Putin, and the Russian defense establishment. Under Putin, Russia has poured extensive resources into an attempt to dominate the Arctic. It has been building bases in the region at a fevered pace, and is imposing restrictions on ships using the northern sea route. It is attempting to grab as much of the Arctic seabed as possible, because of the potential energy resources it contains. Putin himself has said the Arctic “the most important region that will provide for the future of Russia.” Putin wants to turn the Arctic into a Russian lake.

Further, the strategic importance of this region is greater, the more you believe in climate change, or the stronger you believe it will be. Considerable warming would turn the Arctic into one of the dominant shipping routes in the world.

So by expressing an interest in Greenland, Trump is making a move that poses a direct, and serious, threat to Russian interests. Replacing a geopolitical pipsqueak (Denmark) that has a seat at the table in all negotiations in the Arctic, and which cannot utilize Greenland for any military purpose, with Putin’s bugbear–the US–would be a real blow to him. In Soviet lingo, it would dramatically shift the correlation of forces in the Arctic. That’s a big deal. For Putin especially.

Greenland is also a potential source of rare earths, currently a Chinese near-monopoly (and one of their most powerful “trade war” weapons), so US control would be antithetical to Chinese interests as well.

The irony is just too, too much. I guarantee that those who are ridiculing Trump most intensely also believe absolutely that he is Putin’s puppet, and are also fervent believers in the existential threat of anthropomorphic climate change. Yet they are so blinded by their prejudices and obsessions that they cannot see that the latest object of their ridicule proves how unhinged they are.

I am sure Putin does not think Trump’s gambit is the least bit amusing. But I am equally sure that he takes great solace in the fact that–yet again–he can rely upon a cavalcade of useful idiots who will act in his interest by attacking Trump all the while believing that they are actually fighting against Putin.

The US military has been raising concerns about Russian initiatives in the Arctic for some time. Trump apparently has been listening, and has come up with an out-of-the-box, color-outside-the-lines idea that of course appears ludicrous to the dreary, narrow, conventional minds that inhabit the media, political, and government establishments.

If this indicates that Trump is crazy, all I can say is that we need more crazy. And now.

The recent market tumult was precipitated by Trump’s announcement of new tariffs on China. But the effect of Trump’s action on the markets paled in comparison to the response to China’s retort: allowing the yuan to breach 7/USD. Today the market recovered some, because the yuan appreciated.

A couple of points. First of all, the yuan’s do-si-do demonstrates that it is a managed/controlled currency. Whether you call it a manipulated currency is a matter of semantics. It is not primarily moving in response to market forces, but instead to the dictates of the (laughably mis-named) People’s Bank of China, and hence to the whims of the CCP and Xi.

Second, and more importantly, although the move past 7 was clearly a threat by China to wage a currency war in response to Trump’s tariff gambits (and the market took it as such), this threat is not credible. It reminds me of this classic, but no doubt politically incorrect, scene from Blazing Saddles: “Drop it, or I’ll blow the yuan’s brains all over this town.”*

The threat is not credible, because like Cleavon Little’s cranium in Blazing Saddles, China would be hurt most if it carried through on the threat. Yes, a depreciating yuan would favor Chinese exports and offset (for a while, anyways) the effect of tariffs. But a weak yuan would wreak havoc on many Chinese firms that have borrowed in dollars. Given the dodgy state of the Chinese banking system, this could readily metastasize into a full-blown financial and/or currency crisis. It would also spark inflation and totally undermine the stated (but largely unrealized) goal of moving China towards a consumer-driven economy.

There are no doubt many (perhaps even a majority) in the US (and the West generally) who will be as stupid as the townspeople of Rock Ridge. I doubt Trump is one of them. Or if he is, I doubt he would lay down his guns: he’d be happy to see Xi pull the trigger. So I expect him to call the bluff.

One last thing. Framing the US-Chinese relationship in terms of “trade war” is stupidity befitting Governor Le Petomane. Trade is just one front in a far broader great power contest between a revisionist power and the status quo power. After decades of complacency, interrupted by spasms of romanticism, the US recognizes China as its primary strategic competitor and threat. The contest is being joined on many fronts, analogous to the Cold War. The main distinctions are that China is not nearly the same nuclear threat that the USSR was back in the day, but China is far more formidable economically than the USSR ever was. Hence there is an economic dimension to this competition that was largely lacking 1945-1991.

Trade is not the war. Trade is a weapon in a larger war.

*In fact, most of Blazing Saddles is beyond the pale today. There is no way it could be made in 2019. This is a sad testament on the utter inability of our alleged elite to see past the superficialities in order to grasp the true message of Brooks’ classic film. As a result, IDGAF if anyone gets the vapors over my reference to the most politically incorrect scene in a very politically incorrect–but brilliant–movie.

Someone (@jgibbons74) responding to one of my tweets regarding @AOC’s most recent demonstration of fatuity said that she reminded him of Madam Mao, Jiang Qing. This comparison is very apt. And it set off a series of connections in my mind. Jiang was the leader of the Gang of Four, the hard-core communists who were the driving force behind the insane and evil Cultural Revolution in China. AOC is part of a group of four hard core leftists who aspire at nothing less than a social and cultural revolution in the United States. (Fortunately, I can still use lower case letters.) They call themselves “The Squad,” but given their very real ambitions (about which they are quite explicit), and the historical antecedent in China, this appellation is far too benign and non-descriptive.

No. They really should be called The New Gang of Four.

And here’s the scary thing: I wouldn’t be surprised if they consider that a compliment.

This headline in Bloomberg made me chuckle and think of a famous malapropism from Mayor Daley I: “The policeman isn’t there to create disorder; the policeman is there to preserve disorder.”

The Russians (and the Chinese) are not in Venezuela to create (or spread) disorder, the Russians are in Venezuela to preserve disorder. Quite literally. Because they are there to preserve Maduro, and Maduro has created such chaos and misery that “disorder” seems far too mild a word to describe it. So adapting Mayor Daley’s words to the Russians in Venezuela, it wouldn’t be a malapropism–it would be descriptively accurate. An understatement, even.

Yes, I understand that permitting foreign interference in the Western Hemisphere violates just short of 200 years of American policy, and this is not a precedent we want to set. But in comparison to say the French in Mexico in the 1860s, this is truly small beer.

And consider the fate of Maximillian et al. Not a precedent that the Russians or Chinese should want to emulate.

Venezuela is a disaster–the world’s largest tar baby (literally, in some respects, given the physical characteristics of Venezuelan crude oil). The Russians and Chinese are actually fools if they think that propping up this disastrous regime–which is on the verge of overseeing a record setting decline in economic output–will increase their odds of getting paid back the billions they lent. Every day that Maduro continues in power, and the catastrophe metastasizes, makes the prospects of recovering even a few kopecs all the more remote.

If recouping some of their debt is an objective, the Russians and Chinese would actually be far better off killing Maduro, overthrowing his thugs, and making a deal with the opposition. But Putin and Xi are doubling down on a regime that makes the phrase “failed state” seem like a compliment.

Putin also views an outpost in Venezuela as a military provocation to the US. Whatever. At over 5400 miles from Russia (and over 9000 miles from Shanghai), that outpost would be utterly unsustainable if push came to shove with the US. Russia has no ability to sustain it logistically over that distance–nor does China, really, even though its navy and sealift are not as decrepit as Russia’s.

Fools put bases in places they can’t support. Complete fools put bases in places that they can’t support AND which are located in places that are descending into a state that the creators of Mad Max would have found fantastical.

So let Putin add Venezuela to his collection of failed state allies. It will be an ulcer, not an asset.

There has been a steady chorus of wailing about how the US “retreat” from the Middle East (which is at present limited to an announced intention to draw down in Syria) is empowering Russia, and that Putin is exploiting the “vacuum” left by Trump.* This WSJ oped is representative of the genre. Which is to say it is incoherent to the point of idiocy.

For one thing, this piece, and the entire genre, mirrors one of Putin’s most glaring intellectual failings: zero sum thinking. If Russia gains, the US must lose, right?

Wrong. The US has global interests, and does not have unlimited means to pursue them. Strategic prioritization–most notably, focusing on China–and redeploying resources to focus on the new priorities is vital and beneficial and advances US interests. Perhaps Russia gains in some ways from this, but those gains do not come anywhere near erasing the benefits accruing to the US of downplaying peripheral theaters and focusing on more important ones. Further, any local gains Russia may achieve in, say, Syria are almost certainly to be more than offset by the disadvantages of competing with a United States that has its strategic priorities straight. Putin–and other American adversaries/enemies, notably Iran–have exploited US misadventures in the Middle East. Focusing efforts and husbanding resources makes the US stronger, not weaker, both absolutely and relative to would be competitors–including Russia.

I have yet to see anyone make a remotely plausible case of why an enduring US role in Syria makes any strategic sense. As I’ve said from the very day that Putin put troops there–if he wants the shithole, let him have it. It has no strategic importance to the US, especially in its utterly wrecked current condition. We have far more important issues to deal with, China foremost among them.

The WSJ piece also provides room for considerable doubt about Putin’s prospects. Specifically, it inadvertently demonstrates the inherent contradictions in Putin’s policy. The author, Angela Stent, spends much of the piece fretting about the warming relationship between Russia and Israel. She also frets about the cooperation between Iran and Russia. Well, those policies are utterly incompatible, given that Israel and Iran view each other as existential enemies. The rapprochement between Russia and Saudi Arabia is similarly incompatible with a strong cooperative relationship between Russia and Iran. Something has to give.

I also fail to see why having Russia and Israel on good terms is a bad thing, especially in light of the fact that the Soviet Union was Israel’s arch-enemy (except for a brief, historically miraculous moment in which Stalin thought supporting Israel–and arming it–advanced Soviet interests), and armed its enemies (including Syria) throughout the Cold War. This was a major reason why the US had to take substantial risks to defend Israel in the Cold War–and why some said this risk wasn’t worth it, and that the US should jettison its support for Israel. Indeed, Soviet support for Arab states waging war on Israel brought the USSR and the US to the nuclear brink in 1973. A Russia that values its relationship with Israel is more likely to put a brake on Israel’s enemies with whom it has influence (notably Iran and Syria). That reduces the likelihood of conflict in the Middle East, and reduces a source of friction between the US and Russia.

Tell me why this is a bad thing.

And don’t forget–it takes two to canoodle. Here Putin is canoodling with Benjamin Netanyahu, who is (a) extremely hawkish, and (b) recognizes that Israel’s security depends crucially on the US. If Netanyahu believes there are gains to trade to be realized from dealing with with Putin, it is likely that the US is a gainer too.

Having Russia on friendly terms with Israel enhances the Jewish state’s security, and thereby advances American interests. And if in the end Russia chooses Iran and Syria over Israel, the pearl clutching about a budding Russian friendship with Israel will look rather foolish, no?

The friendliness between Russia and KSA can be analyzed similarly. The contrast with the Cold War again deserves comment. The inflection point in US involvement in the Middle East generally, and KSA in particular–the Carter Doctrine–was a response to the perceived Soviet threat to seize the Arabian Peninsula. Although the military threat ebbed with the collapse of the USSR, a KSA with fewer enemies and threats requires less US protection.

Here it should be added that the main reason for KSA and Russia to cooperate now is oil. But this in many respects is a confession of weakness, not strength. The resurgence of US as a major oil producer has undercut the market power of the Saudis and Russia, and their cooperation is largely defensive, rather than offensive.

Those who are paying attention, moreover, realize that there is considerable disagreement within Russia about the desirability of cooperating with OPEC (which, in effect, means with KSA) on oil output. In particular, my old buddy Igor Sechin is lobbying hard against continued cooperation, claiming it is a strategic threat to Russia:

“The participants of the OPEC+ agreement have actually created a preferential advantage for the USA – that sees raising its own market share and the seizure of target markets as its primary task – which has become a strategic threat to Russia’s oil industry development,” the letter [from Sechin to Putin] seen by Reuters says.

“The key strategic challenge which the domestic oil industry is faced with today is the further decline in Russia’s market share, despite the availability of quality recoverable oil reserves, necessary infrastructure and personnel,” it said.

Here Sechin is actually expressing some economic reality. Given its market share, Russia’s–and Rosneft’s–demand elasticity is substantially greater than one, and restricting its output reduces its revenues/income. Russia/Rosneft would likely be better off with a lower price and higher output–which is precisely why for years it abstained from cooperating with OPEC.

This internal discontent among extremely powerful players–and Sechin is arguably the most powerful player in Russia after Putin–sharply limits the potential for enduring cooperation between Russia and the KSA. Again, the fears are vastly overblown.

In sum, freaking out over greater Russian diplomatic efforts in the Middle East is totally unjustified. Russia’s gains are not America’s losses–the world is not zero sum. There are inherent contradictions in Russian efforts that will inevitably force them to make choices that limit their influence. And some Russian initiatives could actually serve to reduce the likelihood of major conflicts that would harm US interests.

I can’t write about this subject without mentioning today’s remarks by the most annoying leader in the world today. And no, I don’t mean Putin–I mean Angela Merkel. At the annual security conference in Munich, Frau Merkel chastised the United States for its plans to draw down in Syria and Afghanistan:

German Chancellor Angela Merkel has warned that a hasty U.S. pullout from Syria runs the risk of strengthening the roles of Russia and Iran in the Middle East.
Speaking at the Munich Security Conference on February 16, Merkel questioned whether the planned U.S. withdrawal was “a good idea.”
“Will it once more strengthen the capacity of Iran and Russia to exert their influence?” she asked.
She also cautioned against a premature U.S. withdrawal of forces from Afghanistan, saying that NATO’s Resolute Support mission in that country was dependent on the U.S. military’s commitment.

Well, for starters, lady, if you are so convinced of the need for military engagement in Syria and Afghanistan, why don’t you order your pathetic military to pick up its broomsticks and take the lead in the fights there? Oh. I forgot. You are the leader of the biggest free rider in Nato, who constantly lectures everybody else about global responsibilities, but who never puts her money–or the lives of German soldiers (assuming they still have any) where her fat mouth is. Until you do, you can kindly STFU.

The outrageousness of Merkel’s bloviation is even more remarkable given that in the very same speech called Russia a “partner” and “made a robust defense of Germany’s foreign trade relations and ties with Russia during her speech.”

Why, some might call that collusion!

So which is it? Russian influence is something to be contested, or embraced?

Merkel has also been a robust defender of the nuclear deal with Iran, and critical of the Trump administration’s withdrawal from it. German has led efforts to circumvent US sanctions on Iran–which are intended precisely to limit Iranian influence. But then she tells us we have to garrison Syria to fight Iranian influence.

Square that circle for me.

Angela cannot go away soon enough. But alas, no doubt she will be replaced by someone equally annoying. Germany is not America’s friend. But it is probably too much to expect that those who are demented by Trump hatred will understand that, just as it is too much to expect that said demented people will recognize that some modest Russian diplomatic achievements in the Middle East do little harm to the US, and indeed, may actually redound to our benefit.

*The whole idea of a US “retreat” in the Middle East is so completely unmoored from reality that anyone who uses this term, or similar expressions, should be ignored and mocked. The US is still in Iraq. It has actually increased its involvement in the Persian Gulf, most notably in its confrontation in Iran. It supports the Saudi’s fiasco in Yemen. It periodically bombs Libya. Support for Israel is at unprecedented levels. Egypt’s military government is getting military and political assistance from the US. If this is retreat, I’d hate to see an advance. Reducing involvement in what is arguably the least important country in the region–Syria–when its whole reason for being there (the presence of ISIS as a territorial entity) is strategic rationality, not a retreat.

Chinese oil major Sinopec released disappointing earnings, driven primarily by a $688 million loss at its trading arm, Unipec. The explanation was as clear as mud:

“Sinopec discovered in its regular supervision that there were unusual financial data in the hedging business of Unipec,” it said in a statement. “Further investigations have indicated that the misjudgment about the global crude oil price trend and inappropriate hedging techniques applied for certain parts of hedging positions” resulted in the losses.

Er, the whole idea behind hedging is to make one indifferent to “global . . . price trend[s].” A hedger exchanges flat price risk–which, basically, is exposure to global trends–for basis risk–which is driven by variations in the difference between prices of related instruments that follow the same broad trends. Now it’s possible that someone running a big book could lose $688 million on a big move in the basis, but highly unlikely. Indeed, there have been no reports of extreme basis moves in crude lately that could explain such a loss. (There were some basis moves in some markets last year that were sufficiently pronounced to attract press attention but (a) even these did not result in any reports of high nine figure losses, and (b) nothing similar has been reported lately.)

The loss did correspond, however, with a large downward move in oil prices. Meaning that Unipec probably was long crude. Some back of the envelope scribbling suggests it was long to the tune of about 17 million barrels ($688 million loss at a time of an oil price decline of about $40/bbl.) Given that Unipec/Sinopec is almost certainly a structural short (since Sinopec is primarily a refiner), to lose that much it had to acquire a big enough long futures/swaps position to offset its natural short, and then buy a lot more.

One should always be careful in interpreting reports about losses on hedge positions, because they may be offset by gains elsewhere that are not explicitly recognized in the accounting statements. That said, as the Metalgesellschaft example cited in the article shows, for a badly constructed hedge, or a speculative position masquerading as a hedge, the derivatives losses may swamp the gains on the offsetting position. In the MG case, Merton Miller famously argued that the company’s losses on its futures were misleading because daily margining of futures crystalized those losses but the gains on the gasoline and heating oil sales contracts the futures were allegedly hedging were not marked-to-market and recognized and did not give rise to a cash inflow. I less famously–but more correctly ;-)–did the math and showed that the gains on the sales contracts were far smaller than the losses on the futures, and what’s more, that the “hedged” position was actually riskier than the unhedged exposure because it was actually a huge calendar spread play: the “hedge” was stacked on nearby futures, and the fixed price sales contracts had obligations extending out years. This position lost money when the market flipped from a backwardation to a contango.

Mert did not appreciate this when I pointed it out to him, and indeed, he threw me out of his office and pointedly ignored me from that point forward. This led to some amusing lunches at the Quandrangle Club at UC.

So perhaps the losses are overstated due to accounting treatment, but I think it’s likely that the loss is still likely a large one.

The Unipec president–Chen Bo–has been suspended. I guess Bo didn’t know hedging.

Bo wasn’t the only guy to get whacked. The company’s “Communist Party Secretary” did too. So Marxists don’t understand hedging either. Who knew?

The most recent shrieking emanating from DC and its various satrapies is the result of Trump’s decision to exit Syria and draw down forces in Afghanistan, with the clear implication that the US will leave there too in due course. The conventional wisdom is almost universally against him, and as usual, the conventional wisdom is flat wrong.

In evaluating any policy or operation, the first question to answer is: what is the objective? In Syria, is it a limited one–the defeat of the rump of ISIS? Or is it a more grandiose, geopolitical one–to control the outcome of the Syrian civil war and determine who rules there?

Trump has made it clear that his objective is limited and tactical. He has apparently decided that although ISIS has not been extirpated in Syria, it has been so attrited that its remaining enemies can contain it, or finish it off. And there is a Machiavellian aspect to that: why not let American adversaries, Russia and Iran, spend their blood and treasure dealing with the dead enders that remain? You wanted Syria, Vlad–have at it!

The conventional wisdom embraces the more grandiose objective. Perhaps this is purely self-aggrandizement, and lets them resume their college dorm games of Risk for real. Issues of motive aside, it is beyond cavil that those who want the US to remain in Syria, and indeed, to become more heavily involved there want to commit the country to being a player in a Game of Thrones that puts the fictional version to shame.

And that is why the conventional wisdom is wrong. For what does the survivor who sits on the throne rule over? A country that was a largely irrelevant shithole even before seven years of internecine warfare that utterly wrecked and largely depopulated a nation that was already pitifully poor and weak before the war began.

Congratulations Bashar! Congratulations Vladimir! Congratulations Ali! Behold the spoils of your victory! And indeed, spoiled is the right word for it.

And again, from a Machiavellian perspective, tell me why it isn’t smart for the US to let Russia and Iran plow resources into rebuilding a devastated nation? If they do so, these are resources they can’t use against the US elsewhere. Furthermore, even if Russia gains a presence in the country over the longer term, it is an isolated and completely unsupportable outpost that (a) could not provide a base for power projection in the event of a real great power struggle, and (b) could be cut off and destroyed in a trice by the US. Let the Russians put their very limited resources into a strategic dead end.

As for the Iranians, yes, their presence in Syria poses a challenge to Israel. But (a) I am highly confident that the Israelis can handle it, and (b) it’s far cheaper for the US to support their efforts to do so with material support for the Israeli military. And just as is the case for Russia, for Iran Syria would be utterly unsupportable in the event of a real confrontation between Iran and Israel.

The principle of economy of force–something that the policy “elite” in DC appears never to have heard of–applies here. One implication of the principle is that you should concentrate your resources in decisive sectors, and not fritter them away in peripheral ones. For the US, Syria is on the periphery of the periphery. In any geopolitical contest with Russia and Iran, our resources are far better deployed elsewhere.

What’s more, despite the obsession of the foreign policy elite with Russia and Iran, they are secondary challengers to the US. China is far more important, and poses a far more serious challenge. Throwing military resources into Syria is to waste them in a peripheral theater of a secondary conflict.

When I first read of Trump’s decision, I turned to a friend and said: “I wonder what this means for Afghanistan.” And indeed, hard on the heels of the Syria announcement the administration stated that it would draw down forces in Afghanistan, with the clear implication that US involvement there would wind down fairly quickly.

All of the considerations that make Syria a strategic backwater for the US apply with greater force in Afghanistan. The country has spent over 17 years, the lives and bodies of thousands of soldiers, sailors, and Marines, and trillions of dollars on a country that is the poster child for shitholes. Yes, it was the refuge of a particular terrorist threat 17+ years ago. And yes, if we leave it will likely continue to be the cockpit of vicious civil war. Just like it has for the past two plus millennia. It was barely tractable for Alexander, and the British and Russia found it utterly intractable in their 19th and 20th century wars there. We’ve arguably done better, but not much. And again: what’s “winning,” and since the demise of the Silk Road, what in Afghanistan has been worth winning?

The war in Afghanistan has proved a sisyphean task. Sisyphus didn’t have a choice: the gods condemned him to roll the rock up the hill, only to watch it roll down again. The US has been engaged in that futile task by choice, and Trump has evidently decided that he doesn’t want to be Sisyphus anymore. (My skepticism about US involvement in Afghanistan also dates to years ago–as indicated by this post from almost exactly 9 years ago.)

One of the administration’s most important, and largely ignored, decisions has been to reorient US efforts away from conflicts against terrorism in isolated, poor, and peripheral places towards recapitalizing the military for peer conflict against China and Russia. This is the right choice, and long, long overdue. (I wrote a post in 2007 that expressed concerns about prioritizing anti-terror over conventional warfare capability.)

Alas, God will not restore the years the locusts have eaten in the Hindu Kush or on the Euphrates. But sunk costs are sunk. Looking to the future, the right strategic choice is to continue the pivot away from peripheral conflicts to focus on central ones.

And these costs are not purely monetary. Last night, due to a travel nightmare, I ended up returning to Houston on a flight that landed at 0230. On the plane were a half dozen young Marines heading home for the holidays. There were also two men, in their late-20s or early-30s, with prosthetic legs. They almost certainly lost them to IEDs in some godforsaken corner of the Middle East or Central Asia. With Trump’s decision in mind, I thought: what is the point of turning more young men like the fit and hearty 19 or 20 year old Marines into mutilated 30 year olds in places like Afghanistan and Syria? I certainly can’t see one.

I’m not a peacenick or a pacifist, by any means. But I understand the horrible cost of war, and fervently believe that it should only be spend on good causes that advance American interests. I cannot say with any conviction that this is the case in Syria, or in Afghanistan, 17 years after 911. Indeed, I can say the opposite with very strong conviction.

At the risk of stooping to ad hominem argument, I would make one more point. Look at the “elite” who is damning Trump’s decision in Syria. What great accomplishment–let alone accomplishments plural–can they take responsibility for? The last 27 years–at least–of American foreign policy has been an unbroken litany of bipartisan failure. The people who scream the loudest now were the architects of these failures. Not only have they not been held accountable, they do not even have the grace or maturity to admit their failures. Instead, they choose to damn someone who refuses to double down on them.

The biggest downside of Trump’s decision is that it apparently caused Secretary of Defense Mattis to resign. I hold General Mattis in the highest esteem, and believe that if he could no longer serve the president in good conscience, he did the right thing by resigning. But if he decided that Syria and Afghanistan were (metaphorically) the hills to die on, for the reasons outlined above I respectfully but strongly disagree.

My major regret at Mattis’ departure is again completely different than the conventional wisdom spouting elite’s. They lament the loss of an opposition voice within the administration. I cringe for reasons closely related to my reason for supporting a major pivot in US policy: I think that Mattis was the best person to oversee the reorientation of the Pentagon from counterinsurgency to main force conflict. We desperately need to improve the procurement process. We desperately need to focus on improving the quality and number of high end systems, and raising the availability of those systems we have: the operational availability of aircraft and combat units is shockingly low, and Mattis has prioritized increasing them. He has made progress, and I fear that a change at the Pentagon will put this progress, and the prospect for further progress, at risk.

Listening with dismay at the cacophony of criticism from the same old, failed, and tired “elite” reminds me of Einstein’s (alleged) definition of insanity: doing the same thing over and over, and expecting different results. The “elite” is invested in the same thing, and changing the same thing is a not so implicit rebuke for their failures. Until they can explain–which I know they cannot–why doing the same thing has led to such wonderful outcomes in the past quarter century, they should STFU and let somebody else try something different.

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