Streetwise Professor

The vampiric Mario Draghi dropped a big report on how to fix the European economy. It is one of the most ridiculous things I have ever read.

It starts out with a sober summary of how screwed the European economy is, but doesn’t even attempt to diagnose why it is screwed. By failing to do so, it offers prescriptions that will screw it even more.

Draghi is blunt in his assessment at the poor relative performance of the EU economy vis a vis the US over past decades–which is doubly damning because it’s not as if the US economy has grown like gangbusters. This is (correctly) linked to low productivity growth. Draghi attributes this poor performance to underinvestment and a lack of innovation.

But these are mere symptoms. Draghi utterly fails to answer the essential questions. Such as: Why is there underinvestment? Why is innovation so clearly lacking in the EU? What is the underlying disease that is causing these symptoms?

Could it be a heavy tax burden? Huge government indebtedness? Suffocating regulation? Extremely generous welfare and retirement benefits? Climate policies that substantially increase energy costs? If not these, then what?

These questions are not even asked, let alone answered.

It is insane to offer prescriptions–which Draghi does at scale–without first diagnosing the problem. But that’s exactly what he does.

And what prescriptions they are. In brief, a massive increase in investment on the order of $900 billion per year; since the private sector is unlikely (according to Draghi) to stump up this amount, extensive government funding of it; and in addition to government funding, government direction of the investment through industrial policy.

All of which involves more begged questions. The most important of which is if an increase in investment has the huge payoffs that Draghi asserts, why won’t (and why hasn’t) the private sector gladly make (and made) it? And: why must the government direct these investments? Why doesn’t privae capital flow to where it can earn the high returns that Draghi claims exist?

Draghi recognizes that industrial policy historically has largely failed. But again, there’s a failure to ask why in a serious way. Instead, in an echo of “communism has failed everywhere because real communism has never been tried,” he advocates doing industrial policy better. Real industrial policy would involve, for example, targeting sectors, not companies.

But again: why has industrial policy almost always and everywhere been targeted at companies? Draghi doesn’t ask, so of course doesn’t answer. Public choice forces obviously turn industrial policy into rent seeking opportunities which are exploited by companies (which are economic agents) rather than “sectors” (which are not).

Draghi makes the right noises about reducing the regulatory burden in the EU. But seriously–how will a plan that if implemented grant more powers to the centralized EU bureaucracy that is responsible for the existing crushing regulatory structure in Europe magically reduce the regulatory burden? Indeed, industrial policy is all about intervening to produce outcomes that differ from those that the market would produce, and such interventions are inherently coercive, regulatory, and bureaucratic in nature.

“We’ll solve the problem of too many rules by adding more rules” never works out well.

Another illustration of the cluelessness of this plan. According to Draghi, the ~$900 B in annual investment is necessary to achieve both competitiveness and climate objectives. Er, competitiveness and climate goals are inherently antithetical. Again, Draghi fails to consider whether the climate goals, and the policies adopted to achieve them, are one of the main drags on European investment, productivity, and growth.

In essence, Draghi is plumping for Europe to adopt the Chinese economic model. Leverage out the wazoo to spur growth through massive centrally directed increases in investment.

(In the UK this is being referred to as “supply side economics,” presumably because the government will intervene heavily on the supply side through state investment. That is an utter perversion and inversion of the term, which originally meant reducing government tax and regulatory burdens so as to encourage greater supply of capital and labor inputs by private individuals and firms).

Apparently Not So Super Mario hasn’t realized that China is now well and truly shtuped and its vaunted model is predictably (and as predicted by me and a few others) proving unsustainable. Not to mention that Europe definitely cannot benefit from factors that allowed this unsustainable model to persist for as long as it did (notably a vast pool of low wage labor). Indeed, Europe has the same demographic problems that are undermining China’s future prospects.

In sum, by failing even to consider the underlying drivers of Europe’s economic malaise and advocating that Europe implement a model that is becoming more discredited with each passing day to fix it, Mario Draghi is dooming Europe to accelerated decline, rather than offering a roadmap to recovery.

Perhaps luckily for Europe Draghi’s plan was declared DOA by Germany. No country has shown enthusiasm for it. But it’s not as if they are brimming with bright ideas–Germany in particular.

Meaning that if you are discouraged by American economic prospects–cheer up! Could be worse! We could be Europe.

UMass-Amherst associate professor Isabella Weber is a darling of the Eurocrats (and presumably of Davos). Per her own telling, she is a superstar:

Her first book How China Escaped Shock Therapy: The Market Reform Debate is the winner of the Joan Robinson Prize, the International Studies Association Best Interdisciplinary Book Award and the Keynes Price and has been recommended on best book of 2021 lists by the Financial Times, Foreign Policy, Project Syndicate, ProMarket and Folha de S.Paulo among others. The book has been translated into five languages. Isabella has become a leading voice on policy responses to inflation and has advised policy makers in the United States and Germany on questions of price stabilization. For her public policy work she has been profiled in the New Yorker, recognized as one of TIME100 Next, Bloomberg’s 50 Ones to Watch, Germany’s 100 women of 2022 and Capital 40 under 40 and has been awarded the Kurt Rothschild Prize and the 2024 Hans-Matthöfer Prize. For her work on China’s market reforms she has won the International Convention of Asia Scholars’ Ground-breaking Subject Matter Accolade and the Warren Samuels Prize for Interdisciplinary Research in History of Economic Thought and Methodology. Isabella is an Open Society Foundations Ideas Fellow.

www.isabellaweber.com

She is also an idiot.

The evidence for this proposition is profuse: just look at any one of her opeds or articles. Rather than bore you with her corpus, I will just focus on one of her most recent retchings, on a subject that is clearly in one of my lanes–commodity storage, commodity prices, and speculation.

Weber and her co-authors Merle Schulken, Lena Bassermann, Lena Luig, Jan Urhahn (no changing names to protect the guilty on SWP!) recently released a “policy paper” called “Buffer Stocks Against Inflation.” (NB: “policy paper” is a tell for lack of rigor. The tell is quite accurate here). The Guardian shared Weber’s deep thoughts from the paper in a long article. (NB: another accurate tell).

The gravamen of the argument:

Weber’s new paper, published on Thursday, looks at how grain prices spiked in 2022 as Covid snagged supply chains and Russia invaded Ukraine. The price hikes helped to drive record profits for corporations while pushing inflation higher and increasing global hunger. In the paper, Weber and colleagues call for the creation of buffer stocks of grain that could be released during shortages or emergencies to ease price pressures.

The Guardian.

And what is the root of this volatility? Can you say speculation? I knew you could:

Speculation causes prices to swing wildly even though the prices are often detached from the physical reality of the commodity. While Russia’s 2022 Ukraine invasion led to temporary local threats of physical grain shortages, the global supply of grain always remained well above levels to meet demand in the medium term, the paper notes.

The Guardian

The need for a government-run storage system presumes that private storage is inadequate or inefficiently small. Of course Weber et al don’t even attempt to demonstrate this. And no, volatility–including extreme price movements like those following the invasion of Ukraine in 2022 is not sufficient to demonstrate inadequate storage.

Optimal storage is the solution to a dynamic optimization problem. This solution frequently involves “stockouts” when storage is drawn down to near zero. Prices tend to be highly volatile in such circumstances. Recent events in the cocoa market are a near textbook illustration of this. This is a characteristic of an efficient market, though it is all too often taken (by people such as Weber) as prima facie evidence of inefficiency. If you say that, you are betraying your ignorance.

These episodes can be avoided only by holding excessive stocks. This is wasteful because (a) storage is costly, and (b) it means that some resources that are produced are never consumed. Paying money to hold something you never use (and which was costly to produce) is obviously dumb.

Insofar as uncertainty is concerned, inventories are a form of economic shock absorber. Efficient, competitive storage depends on the amount of underlying economic uncertainty. In chapter 5 of my book on storage I show that higher fundamental uncertainty leads to greater storage. Indeed, this model shows that the kind of price movements Weber bewails actually reflect efficient storage decisions.

Specifically, the invasion of Ukraine clearly increased economic uncertainty. The rational response to this is to increase storage of commodities (including corn and wheat) affected by this uncertainty. The only way to increase storage is to reduce consumption. Therefore, the increase of uncertainty alone caused an increase in price over and above the effect of the invasion on output or trade. This creates the outsized price movements that give Weber and her ilk the vapors.

Weber also seems to overlook the fact that government stocks are substitutes for private stocks, and that increased government stockholding will result in decreased private storage. Meaning that government stocks are bigger than the amount by which such a policy increases stocks.

Government stockholding also injects a new form of uncertainty into the market. Private stockholders have to forecast what the government stock policy decisions will be. When will they accumulate stocks? When will they release them? Will the decision be driven by economics or politics? If the latter, political uncertainty is an important consideration. And it could have particularly detrimental impacts on private stockholding. The main benefit of holding stocks is the ability to sell them at a high price under tight supply and demand conditions. Release of excessive stocks by the government during such conditions seriously undermines the incentive for private entities to hold stocks.

There is actually rigorous economic analysis of public storage by actual economists, Brian Wright and Jeffrey C. Williams. They show that public storage can be efficiency enhancing if there is some other sort of “market failure.” Ironically, the market failure that Wright and Williams focused on was . . . government policy, namely price controls. Irony alert! Weber is a BIG booster of price controls.

Wright and Williams also show that the details of government policy and uncertainty about them plague such schemes. One important point that they make is that government storage policies are subject to time inconsistency problems (a la the important work of Kynland and Prescott in the ’70s) (also referred to as subgame imperfection). That is, a government may design an efficient policy but cannot commit to it. Under some circumstances the government will find it desirable (for it!) to deviate from the policy. Thus, the abstract existence of an optimal policy does not mean that it can be implemented in practice. Moreover, trying to figure out when time inconsistency is going to kick in is a source of uncertainty that feeds back to private decisions.

Weber’s writing betrays no contaminating exposure to economic analysis like Wright and Williams’.

In Wealth of Nations Adam Smith pointed out some of the irrationality of government policies regarding storage. In the laws he discussed, English governments thought that private traders were holding excessive stocks, and punished such “hoarders” and “engrossers.” Which obviously undermined the incentive to accumulate inventories in the first place.

Yes, these policies are different from the one that Weber advocates, but they illustrate how political forces lead to highly destructive interference in storage decisions.

Insofar as speculation is concerned, all I can say is: “Really? Not this shit again.” The title of an article wrote in Regulation 14 years ago summarizes Weber to a “T”: “No Theory? No Evidence? No Problem!”

Weber has no theory of how speculation distorts prices or causes excessive volatility. She has no evidence that it does. But no problem! She blames it anyways.

I guess she is proving her green credentials by recycling discredited ideas.

Ironically, Weber does not discuss a prominent example of her preferred policy–Chinese state reserves of commodities like corn, cotton, and pork. To say that his has been like most centrally-planned schemes–that is, an unmitigated cluster-F–would be an understatement. For example, and I hope you are sitting down for this, corn goes bad when you store it too long: in the past China ended up holding vast stocks of dodgy corn. I could go on.

You’d think that a policy paper would include analysis of the recommended policy in practice. In Weber’s case, you’d be wrong.

Looking at Weber’s corpus you will see that all of the disqualifying defects described above are rife. She is a sworn enemy of markets, but her analyses betray zero careful analysis of how markets actually work, or what causes their problems. She is a huge fan girl of government intervention, but never contemplates the possibility of government failure, being instead a slave to the Nirvana Fallacy.

Her latest work on storage is arguably a minor sin compared to some of her other transgressions against good economics. Most notably, she is a major advocate of comprehensive price controls as a means of controlling inflation.

One would not be wrong to call her Gosplan Girl.*

But of course this is why she is a rock star in Brussels. EU bureaucrats run the gamut from dirigistes to full on commies, and gobble up her garbage like it is going out of style.

Which, unfortunately, it is not. Which is why the EU is a stagnant economic wreck which will only get worse if it embraces the deep thoughts of Isabella Weber.

*Izabella Kaminska at The Blind Spot pointed out the Gosplan analogy to me.

The United States Navy is broken. The 2010s saw numerous operational SNAFUs, ship collisions and the like. Those have abated somewhat, the most recent being the collision of the Seawolf Class submarine USS Connecticut with an undersea mountain about 2.5 years ago. But serious long term structural problems are metastasizing. And these are much more difficult to address than reprioritizing seamanship.

The Navy desperately needs to be recapitalized. Major ship classes are reaching retirement. These include Ticonderga Class cruisers, and Ohio Class SSBNs (nuclear missile submarines) and SSGNs (guided missile submarines). Ship numbers have plummeted, and most troubling, replacement ships have either proven to be failures (LCS), wildly expensive without a coherent mission (Zumwalt), or pathetically behind schedule.

The Ohio replacements–Columbia Class SSBNs–are the least pathetic, being only a year behind. (Allegedly. I predict that number will slip.) Ford Class carriers (CVN) are 2-3 years behind. Virginia Class SSNs (arguably the single-most important ship type) are 3 years behind. The reasonable replacement for the hapless LCS–Constellation Class frigates–is 3 years behind.

When I was at the Naval Academy, the only acceptable answer to the question “Why did you f-up?” was “no excuse, sir!” Now, the Navy is nothing but excuses. Covid (natch), “supply chain woes” (natch), retirement of experienced labor at shipyards (euphemistically called “greening of the labor force”). (Though now the Navy has apparently stopped making excuses. It’s decided to take the 5th instead–which is denying a problem rather than admitting it.)

Which all brings to mind another old Naval adage: PPPPPP, i.e., “Prior planning prevents piss-poor performance.” Covid excepted, the other supposed problems were predictable and observable, and should have been anticipated, recognized, and addressed before they mushroomed into full-blown disasters.

And it is essential to emphasize that “Covid” was not the problem: the problem was catastrophic government policies justified by Covid. And in these, the Navy–and the military generally–was an eager participant. It exacerbated the military’s other ongoing crisis (in recruiting and force retention) through its draconian vaccine policies. Moreover, it is clear that significant resources were diverted from doing with the Navy should do to managing idiotic Covid policies.

Case in point. When I went to my USNA class reunion in 2021, at the Superintendent’s Call the Supe spent a good portion of the time bragging about all the efforts necessary to keep the academy running during Covid (e.g., arranging for the handling of the massive increase in trash caused by having meals served in Mids’ rooms–truly a national defense priority!). That type of diversion of leadership time was no doubt the rule, rather than the exception.

(The other biggest subject of the Supe’s talk was related to DEI efforts–another subject, but also symptomatic of the diversion of the Navy/military resources and leadership time into non-mission-critical matters.)

Pace JFK, failure is not an orphan. The Navy’s failure has many fathers (and mothers, nowadays). Service leadership is at the head, of course. Civilian “leadership” at the Pentagon is also greatly culpable. The procurement process is utterly broken. Resources are diverted to chasing chimeras, the aforementioned DEI being one, but climate change being another. And Congress bears considerable blame, most notably for the non-budgeting process which has resulted in year after year of continuing resolutions that (rather than budgets) that make long-term planning and management and procurement extremely difficult. Congress is also largely responsible for prioritizing the chimeras.

The Navy and the Air Force are the most vital branches in any prospective conflict with China in the Pacific. The Navy’s complete dysfunction is therefore a grave national security issue. The most grave of all, in fact.

So what is to be done? The problems are so deep and so structurally embedded that easy fixes are off the table. Congress’ dysfunction is unlikely to change, absent some sort of miracle in November (but even there truth be told the Republicans bear considerable culpability for the existing problems). Similarly, a change of administration is a necessary but not sufficient condition: Trump’s record at appointing civilian Pentagon leadership was appalling, and the dysfunction continued and arguably accelerated on his watch. Given the inertia of the massive Pentagon bureaucracy and its hostility to Trump, moreover, it is doubtful whether he can clean the Augean Stables on the Potomac, even if he has the urge to try (also doubtful). The current flag ranks and those in line to succeed them are the products of a politicized military produced primarily by 8 years under Obama.

An Admiral Byng approach is tempting, but it will take more than one firing squad “pour encourager les autres.” Many more.

I wish I could offer solutions, or even suggestions. But in order to get those responsible (but apparently unaccountable, alas) focused on getting the ship back on course it is necessary to alert them to the looming iceberg ahead. So the best I can do is sound the crash alarm and hope that it is heeded before it is too late.

Something of a kerfuffle has broken out over the issue of China’s economic angst. On one side is Adam Posen, who in a Foreign Affairs article attributes China’s current predicament to the reluctance of private firms to invest, which he in turn attributes to their fears that an authoritarian regime like Xi’s will not respect their property rights and may expropriate them. On the other side, Adam Tooze (on Substack) and Michael Pettis (on X or Twitter or whatever it identifies as these days) claim no, China’s problems are the consequences of fundamental structural imbalances dating back years, and rooted in pre-Xi economic policies.

All of them are right in parts, and wrong in parts. I assert my post of the other day synthesizes the right parts 😉

It’s perhaps convenient to boil things down thus:

• What mess does China find itself in?
• How did it get into this mess?
• What prospects does it have to get out of this mess?

Pettis and Tooze (and others, including me and not just the other day) attribute China’s current mess as the result of huge imbalances (over-investment, underconsumption) and secular demographic problems compounded by a very weak social safety net.

It got into this mess as the result of a development model and associated policies that heavily favored fixed investment (especially in infrastructure and housing financed by debt) and exports, and punished private consumption. The policies involved are myriad, but they can be summarized as central planning without complete government ownership. That is, the direction of even private enterprise was substantially guided by government policies that caused prices to encourage the types of economic activity that the government favored. The hand of the state was very visible indeed in China–something which fanboyz such as Thomas Friedman and too many western CEOs to count waxed rhapsodic about. (To which I should add the incentives faced by government employees at all levels who were rewarded for meeting certain aggregate growth targets that were most easily achieved by borrowing to make fixed investments–high powered incentives can be dangerous, my friends.).

But that model is played out, and was in fact always unsustainable: what’s amazing to me is how long they sustained it. But as Herb Stein said, if something can’t go on forever, it will stop. And that model couldn’t go on forever. It’s stopping time is about now. Hence China’s current distress.

So how to get out? The hydraulic economists who rely primarily on accounting identities (for all my admiration for Pettis’ diagnosis of structural imbalances, he fits that description to a large degree), the answer is: Correct the imbalances! Shift China from an investment focus to a consumption focus!

Well, how, exactly? And that’s where Posen’s critique of Xi-o-nomics–and mine–comes in. Achieving a new balance would require the CCP and the state to reduce their control over the economy. But the authoritarian Xi is hell-bent on increasing the Party’s–and his–control. For the reasons that Posen sets out, and many more besides, Xi’s kontrolle uber alles mentality is inimical to a fundamental structural shift in China’s economy, and especially a shift driven by private enterprise and private consumers, that is, a shift driven from below not from above. And below is the only place it can possibly come from.

So I would say that Pettis and Tooze prevail on the “how did China get into this mess?” issue, Posen on the “how does China get out of this mess (or not)?” issue, and all are largely in agreement in describing the just what the mess is.

The upshot of this synthesis is that China is shtupped. And the concern for those outside of China should be how a shtupped autocrat responds.

Evidence abounds that the Chinese economy is in the midst of a fundamental structural crisis. To which I respond: “It’s about time!”

I say this because I have written for over a decade that the Chinese development model is fundamentally flawed, and that signs of its distress have been emerging for years. My main surprise is that it has taken so long.

Signs abound of fundamental structural defects that cannot be addressed using the means that the CCP has used to extend and pretend for the past decade or so. The Chinese economy did not rebound robustly from the lockdown. Indeed, “flaccid” is a good descriptor of the economic performance in the last year. Despite reported growth estimates of 5 pct annually, it is virtually impossible to reconcile these official figures with more granular measures of economic performance (many of which are less subject to manipulation than top line growth numbers). For example, imports and exports have fallen–a troubling development for a trade-heavy economy.

Other indicators include widespread youth unemployment–especially among urban, educated young adults. A real estate collapse, with property development firms falling like dominoes and property turnover approaching zero. Accelerating debt-to-GDP ratios. Reduced marginal productivity of investment, as proxied by increasing debt per unit of GDP growth. Financial distress among local governments. This is another symptom of the real estate problem, as local revenues are significantly dependent on land sales. The local government troubles really represent a national fiscal crisis because local governments account for a disproportionate share of total government expenditure (and debt) in China. Banks are increasingly shaky due to a deterioration of the credit quality of their loan portfolios.

In the past China has responded to growth recessions with increased stimulus. But the government apparently increasingly realizes that the issues are structural, and that if anything increased stimulus will exacerbate rather than mitigate these problems.

Inside and outside China, there is a growing realization of the deep structural imbalances within China–something that has been obvious (and which I have written about for years) but which are now receiving attention. In particular, the investment intensity of Chinese economic activity, and the concomitant enervation of private consumption is the focus of most post-COVID analyses of the Chinese economy.

These diagnoses are fine as far as they go, but all too often those offering cures for the disease are slaves to economic aggregates and the hydraulic model of how economies work. Aggregate investment too high? Aggregate consumption too low? Well, just shut this valve and open that one and the economic shmoo will flow from investment to consumption. Problem solved! Easy peasy!

No, actually. The imbalances in the Chinese economy are the product of its very structure and most importantly its policy and political infrastructure. There are no valves to open or close, no dials to twiddle, that can alter these imbalances. Change would require a fundamental reordering of the entire Chinese system. Moreover, any fundamental adjustment in the allocation of resources would entail substantial adjustment costs, including the junking of much existing capital and widespread unemployment as people lose jobs in contracting sectors before they can find employment in new ones–not to mention that the human capital accumulated in the present structure is likely to be less than ideally suited for employment in the new consumer sector.

Low consumption and investment intensity are built into the existing system by design, and many of the problems that are metastasizing now are manifestations of this structure. The near absence of a social safety net encourages high savings and low consumption–a phenomenon that is deepened by the since discarded but still relevant One Child Policy that deprived the elderly of their traditional support, namely their children. Moreover, myriad policies have distorted relative prices to favor investment in infrastructure and state-owned enterprises (SOEs).

A salient example is “financial repression” which reduces returns to savings–and interest costs to borrowers, especially capital intensive industries, thereby channeling wealth to them. So what is a middle-aged Chinese person to do when he or she wants to save for old age, but can’t achieve high returns through traditional investments? Well, buy real estate for one–the massive overbuilding of apartments in China (illustrated by the many “ghost cities”) is emblematic of this malinvestment. The periodic proliferation of “wealth management” products offered by banks and other financial intermediaries desperate to secure funding for dodgy loan portfolios is another. I could go on.

These various policies are deeply embedded. They cannot be changed at a whim. And perhaps most crucially, they have created powerful political constituencies who are dependent upon their continuation: think of how many businesses (banks most notably) that would collapse during a fundamental rebalancing. And news flash: individual Chinese citizens/consumers are not a powerful political constituency.

Which brings us to the biggest bull in the China shop: supreme leader Xi Jinping. Xi is a devoted communist ideologue with a cult of personality. Basically Mao with a better haberdasher and hairline.

Xi’s overriding–not to say obsessive–ambition is extending, deepening, and strengthening the control of the CCP over every aspect of Chinese society. A fundamental reordering of the Chinese economy to correct the increasingly unsustainable structural imbalances would require massive decentralization, and a grant of considerable autonomy to Chinese individuals as consumers, investors, and entrepreneurs.

And that is an anathema to Xi.

Add to this Xi’s reading of the history of the Soviet Union. He–not wrongly–attributes the collapse of the USSR to Gorbachev’s attempt to loosen the grip of the state and the party over the economy. Xi is hell-bent on avoiding the same mistake. As a result he is consciously adopting an anti-Gorbachev strategy, and increasing centralization, and the power of the party over the economy. And since he has basically declared le Parti, c’est moi, increasing his power over the economy (not to mention virtually every other aspect of Chinese social life).

This foreshadows a fundamental conflict between economic and political realities. Xi’s political agenda will only exacerbate China’s current structural problems. His “solution” is a version-on-steroids of the source of the problems.

Unlike those who screech “OMG China’s slowdown will reduce world GDP growth,” in some respects (economic respects in particular) I don’t care much one way or the other: I don’t consume Chinese GDP growth (and especially not the official statistics on that growth), and the indirect effects on the US economy don’t trouble me that much.

The reason that I do care is the nexus between the Chinese economy and its foreign policy. I can see this cutting in at least a couple of ways.

On the one had, an economically hobbled and distracted China could turn inward and be more focused on foreign domestic issues than foreign adventurism and dreams of reordering the world to be subservient to Chinese domination and a desire to take revenge on centuries of alleged humiliation by foreigners.

On the other hand, intractable domestic problems can lead a personalist system–and China is clearly that now, in contrast to the more collectivist leadership of the post-Mao, pre-Xi era–to ramp up the foreign adventurism. This is particularly true when the personalist person is a seventy-something guy who wants to cement his place in history by, say, “liberating” Taiwan.

Prudence and an objective reading of Xi leads me to place greater weight on the latter possibility. Prudence, because it is the alternative that poses the greatest threat to the United States. Objective reading because of the Xi-as-anti-Gorbachev phenomenon discussed above. Gorbachev’s rapprochement to the United States was driven in large part by his recognition of the strategic and geopolitical ramifications of the USSR’s deep structural economic problems. A player of the Gorbachev Opposite Game–a fair characterization of Xi–would ramp up tension, rather than attempt to ameliorate it.

Xi is clearly ascendent in China now, but there are palimpsests that suggest discontent beneath the propaganda facade. What does an autocrat facing internal opposition do? He removes them. Note that the recently appointed Chinese foreign minister disappeared–and had much of the evidence of his existence erased: perhaps he’s exploring exciting new opportunities in organ donation! Further, commanders of the People Liberation Army’s strategic rocket forces were also recently replaced. Thus, these moves by Xi could be evidence of a dark star of opposition to Xi’s sun.

Intra-CCP politics were always highly factionalized. Xi has apparently triumphed over all of these factions. But short of Stalinist methods–which Xi has not employed–oppressed factions do not disappear, but take cover and can reemerge given the opportunity.

Alas, Chinese is the riddle, mystery, enigma on steroids–it puts even Russia in the shade in this regard. The United States, and the West generally, have very little insight on what is going on in China. Meaning that economic dislocation in a personalist system ruled by a Han exceptionalist, communism with Chinese characteristics autocrat creates extreme risks for the US and the rest of the non-Chinese world. But to compound the angst, the governing “elite” in the US and its allies is clearly not up to the challenge–and indeed may not even recognize its existence, and/or may be personally compromised in their ability to respond.

Meaning that economic tumult in the Middle Kingdom is fraught with risk for you and me. But China is where it is, and the tumult is inevitable.

There is considerable angst over the glacial pace of the Ukrainian counteroffensive. This angst is a product of unrealistic hopes and expectations derived from totally different circumstances.

The unrealistic expectations derived from the stunning success of the Ukrainians last year, around Kharkiv/Kharkov and Kherson. These successes were rooted in Russian errors. The Russians overextended themselves in their initial offensive in 2022, leaving open flanks and exhausted forces that made them extremely vulnerable to Ukrainian attacks. The Russian situation last summer was in many respects comparable to the Ukrainian situation in 2014, when they overextended themselves in pushing at separatist forces, leaving them open to a devastating attack by Russian forces.

(Both episodes remind me of a maxim my mother uttered during one of our many tours of Civil War battlefields (she was a saint to take me on so many): “Nobody ever won a battle, but some people sure lost one.”)

Circumstances are totally different now. The Russians had ample time to dig in extensively, and in particular, sow extensive minefields. It’s a totally different proposition attacking deep, heavily mined defenses than pouncing on the flanks of demoralized, exhausted troops in the open.

The Ukrainians, Zelensky in particular, have been damning the West vitriolically for failure to provide enough of, well, everything. Sorry, but “enough of everything” would really mean deployment of several American heavy divisions, and most importantly, a good chunk of the USAF. American doctrine for attacking prepared defenses involves an extended period of intense air attack to degrade them, followed by assaults by heavy divisions (i.e., divisions other than the 82nd and 101st, and 10th Mountain), supported by continued air attacks and massive artillery.

Not happening in Ukraine. Never was going to happen. Never will happen.

I am a Patton fan, but this quote from the movie is wildly incorrect:

Fixed fortifications, huh? Monuments to the stupidity of man. When mountain ranges and oceans could be overcome anything built by man can be overcome.

As Patton surely knew, history is replete of examples of the power of fixed fortifications. Ironically this statement was made about the fortifications at Metz, which stymied Patton for months. (And it is amusing that in the same film Patton gives a tour of the fortifications of Malta, and describes how the Knights of Malta used them to stop the Turks.)

Given these realities, the Ukrainians have adapted. They are gnawing through some of the minefields (at non-trivial cost), but are also executing WWI-like trench raids to attrit front line units and deep strikes with drones and Western-supplied weapons (notably HIMARS and StormShadow) to undermine Russian logistics.

This has some chance of succeeding–eventually. Chewing a wide enough gap may permit a breakout, with someplace like Tokmak playing the part of St. Lo. Russian reserves and operational mobility are likely inadequate to contain such a breakout–if it can be engineered. With “engineering” being the operative word, because making the gap that could be exploited is first and foremost a combat engineering task.

But nothing will happen quickly, if it happens at all.

In the meantime, both sides are acting like exhausted fighters in a no-holds brawl, with attacks on civilian and infrastructure targets being the equivalent of eye-gouging and ear-biting. The Russian attacks on Ukrainian grain-exporting capacity are the most prominent example of this.

(NB, especially to people like supposed commodities expert Javier Blas. The first thing that pops into the minds of most when attacks on Ukrainian grain-handling infrastructure is wheat. But Ukraine is a much bigger player in corn than wheat.)

And these attacks carry the risk of dramatically escalating the conflict. Today Russia extended its missile attacks westward from Odesa/Odessa to the banks of the Danube, and executed a strike that landed ~100 meters from Romanian territory. That is, Nato territory.

All this raises the question: what’s the point? And I don’t mean the point for Russia and Ukraine, or more particularly their governments. I mean for the interests of the United States.

A strong case can be made that the US has already achieved–courtesy of tens of thousands of Ukrainian lives and tens of billions of American dollars–about all of the conceivable strategic benefits of this war. Courtesy of Putin’s idiocy, Russian military capacity has been (a) dramatically reduced, and (b) shown to have been not that great in the first place. The threat to Europe posed by Russia (which (b) suggests was not that serious in the first place) has been neutered, at the cost of increasing the US’s vulnerability in a more vital theater–Asia. Good strategic thinking should not focus on making the rubble bounce, but should pocket gains in eastern Europe and focus on Asia.

So rather than acceding to Zelensky’s ever greater demands, the message to him should be: take half a loaf, and make a deal. For the sake of your people.

But that is not the attitude of America’s (and most of Europe’s) ruling class. They are monomaniacally focused not just on restoring pre-2014 borders, but crushing Putin and transforming the Russian state. As illustrated by this:

Vladimir Kara-Murza writes: There is only one outcome of this conflict that would be in the interests of the free world, of Ukraine and, ultimately, of the Russian people: resounding defeat for Putin, to be followed by political change in Russia and a Marshall Plan-type international assistance program both to rebuild Ukraine and to help post-Putin Russia build a functioning democracy so that it never again becomes a threat to its own people or its neighbors. That is the only way to make sure Europe can finally become whole, free and at peace — and stay that way.

Sounds great! How is that going to happen, exactly, Vlad baby? Especially the part about “build[ing] a functioning democracy so that it never again becomes a threat to its own people or its neighbors”?

This reminds me of a statement that I saw from China today, about how government policy makers promised to “optimize and adjust policies” in response to the real estate meltdown. Optimization is not a plan–it is an aspiration. Almost to a person the policy establishments in the US and Europe are hooked on a categorically, metaphysically unachievable aspiration and are willing to spend countless lives and dollars in the futile attempt to achieve it.

These people believe in fairy tales. Murderous fairy tales that cannot possibly come true.

In an ironic twist, a war in Europe (not Asia) is now “The wrong war, at the wrong place, at the wrong time, and with the wrong enemy.” (I’m not a big Omar Bradley fan, but he got that one right.) But our policy “elites”–of both parties–are hyper-focused on the wrong war. (Why that is is a story for another, and probably much longer post.)

War and geopolitics require cold-blooded calculations. The cold-blooded calculation for the United States is definitely not to dream of magically transforming a notoriously intractable and autocratic society into Switzerland with nukes. (The possession of nukes in itself making such a transformation wholly fantastical.) It is instead to push for an outcome that satisfies none of the combatants–and indeed infuriates them–and shift focus from eastward to westward. Don’t fight the last war. Prepare for the new one–in order to prevent it.

Saudi Arabia is fussed at the low level of oil prices. So true to form with those unsatisfied with price, they are rounding up the usual suspects. Or in this case, suspect–speculators!

I’m sure you never saw that coming, right?

As the world’s biggest oil producers gather here Sunday to decide on a production plan, the spotlight is on the cartel kingpin’s fixation on Wall Street short sellers. Abdulaziz has lashed out repeatedly this year against traders whose bets can cause prices to fall. Last week he warned them to “watch out,” which some analysts saw as an indication that the Organization of the Petroleum Exporting Countries and its allies may reduce output at their June 4 meeting. A production cut of up to 1 million barrels a day is on the table, delegates said Saturday. 

Claude Rains is beaming, somewhere.

I’m so old that I remember when oil prices were beginning their upward spiral in 2007-8 (peaking in early-July), in an attempt to deflect attention from OPEC and Saudi Arabia, one of Abdulaziz’s predecessors blamed the price rise on speculators too.

Is there anything they can’t do?

Not that I’m conceding that speculators systematically or routinely cause the price of anything to be “too high” or “too low,” but if you do think that they influence price, they should be Abdulaziz’s best buddies. After all, they are net long now and almost always are. (Cf. CFTC Commitment of Traders Reports.)

If the Saudis (and other OPEC+ members) have a beef with anybody, it is with their supposed ally, Russia. Russia had supposedly agreed to cut output in order to maintain prices, but strangely enough, there is no evidence of reductions in Russian supplies reaching the world market, even despite price caps on Russian oil and the fact that they are selling it at a steep discount to non-Russian oil. Perhaps Russia has really cut output, but (a) that doesn’t really boost the world oil price if Russian exports haven’t been cut, and (b) it would mean that Russian domestic consumption is down, which would contradict Moscow’s narrative that the economy is hunky-dory, and relatively unscathed by sanctions.

But I think that the more likely story is that Russia is playing Lucy and the football with OPEC.

Which would be a return to form: see my posts from years ago. And I mean years ago. Apparently Won’t Get Fooled Again isn’t on Abdulaziz’s play list.

The other culprit behind lower oil prices is China: its tepid recovery is weighing on all commodity prices–not just oil. A fact that Abdulaziz should be able to understand.

But it’s much easier to shoot the messenger, and that’s what speculators are now–and almost always are. Venting at them probably makes Abdulaziz feel better, but even if he were to get his way that wouldn’t change the fundamental situation a whit.

Bashing speculators is what people who don’t like the price do. And since there’s always someone who doesn’t like the price (consumers when it’s high, producers when it’s low) bashing speculators has been and will continue to be the longest running show in finance and markets.

The war in Ukraine has pointed out the fact that modern combatants consume massive amounts of munitions. This can only be a surprise to those with short memories, or the ignorant. Hell, Saddam had it figured out. He cached massive stores of shells. His problem was he didn’t have time to use them because the US went through his army like crap through a goose. Twice. But he left behind enough to keep American EODs working OT for months to blow it up . . . and to supply the explosives for numerous IEDs deployed by his “dead-enders” against the American forces occupying Iraq.

Awakened from their post-Cold War reveries by the shock of Russia’s invasion and Chinese truculence, American, European, and Asian politicians have recognized the desperate need to increase their munitions stocks, and to expand their surge capacity to produce in the event of war. That’s good: better late than never. But rather than make everything willy-nilly, to respond to this awareness it is imperative to prioritize munition types–and the weapons used to fire them. This requires an appraisal of strategic priorities and likelihoods.

Ukraine needs primarily artillery shells, 155mm mainly, and lots of them. That’s because it is engaged in a war of attrition on a relatively static front against an enemy that employs artillery en masse. But such ammunition should not be an American priority because such the United States will not fight such a war, short of a major strategic blunder.

The inability of Russia to defeat Ukraine means that the likelihood of a land conflict against that country is low. And regardless, if it does break out, the Europeans should be the one to fight it, and therefore should be looking to their own munition supplies.

China is the United States’ main likely adversary in a major war. But it is highly unlikely that the US would be facing off against China in a major ground war. It would be beyond idiocy for the US to charge into China. It would also be idiocy for the US to deploy major ground forces to Taiwan in the event of an invasion, and risk getting trapped like, say, the British on Crete in 1941.

The most likely theater of a major ground war involving the US would be Korea. However, South Korea has proved to be the least free riding of any American ally, and has built up a credible military and a military industrial base to back it up. (Poland is also pretty much a non-free rider. Funny how countries on a front line take security threats more seriously, isn’t it?) I think South Korea can–and should–take care of itself, especially on the ground, with the US chipping in with air and sea support

Since a strategically sensible US would be unlikely to engage in a shell eating contest a la Ukraine, what should its munitions strategy focus on?

Again, China is the main potential adversary, the one that poses the greatest threat to the US, and the one which has the greatest capability. In the event war breaks out with China, what should US strategy be? That strategy should dictate procurement priorities.

I’ve never been all that fussed by China’s Anti-Access/Area Denial (“AA/AD”) strategy, precisely because it would be strategically insane–and unnecessary–for the US to attempt to contest the area that China wishes to deny access to, namely the South China Sea. In the event of war, the proper US strategy would be to flip the board and implement an AA/AD strategy against China. Specifically, to deny it access to the region beyond its AA/AD zone. That is, don’t try to get in–keep them from getting out. Turn the fortress they believe they’ve constructed into a prison.

This is a strategy akin to classic British sea power strategies, dating back to the 18th century, which relied on blockades against Continental enemies, first France, then Germany. In the wars against the French culminating in the Napoleonic Wars, the blockades were often “close.” In WWI, the blockade was “far.”*

A “far” blockade would work for the US against China because China faces some of the same vulnerabilities as Wilhelmine Germany, namely, a dependence on raw material imports, most notably an inability to feed itself, and sea lines of communication that are very vulnerable to being severed by myriad means.

China is acutely aware of its dependence on food imports, especially animal feed inputs. The “iron rice bowl” is a thing of the past: as China has developed, so has its consumption of mean protein, and its people’s expectation of it. Xi has prioritized making China self-sufficient in food–a sure tell that he realizes the vulnerability. But this will take a long time under the most ideal circumstances, and is unlikely to occur in any event, especially given how China has ravaged its soil and waters in the past decades, and the disaster that generally results when autocrats attempt to force increased agricultural production.

Imposing and maintaining a blockade of China will require primarily submarines, aircraft, and surface vessels armed with long range precision munitions. And also mines. Lots of mines. Mines are a relatively cheap, low casualty risk, highly leveraged way of blockade and area denial. A large fraction of Japanese merchant shipping was sunk by mines laid by subs and aircraft in WWII. The mining of Haiphong in Vietnam was probably more decisive than the Operation Linebacker bombing campaign. Mining the waters around Chinese ports would have a devastating impact.

PGMs will also be vital in deterring any attempt by the Chinese People’s Liberation Army Navy’s (a name that cracks me up) to break out of a US (and Japan, and Australia, etc.) cordon sanitaire around the South China Sea–or destroying it if it tries. They will also be the primary means by which the United States can strike long-range Chinese weapons that pose a threat to the ships of the US and its allies, and the land bases (on Guam, in Japan and in the Philippines) on which they will rely.

The networking of sensors and platforms, and the deployment of offensive weapons on virtually every US Navy platform, will serve to make a US judo move of denying access to an access denier very effective–if it is backed with adequate means. This will require lots of long range, precision munitions to work–so ramping up their production, stocks, and production capacity of such weapons should be the priority.

But although networking platforms and the employment of precision weapons greatly leverages US capabilities to implement this strategy, the fundamental fact is that the US has too few platforms. The USN is now at a mere 297 hulls, and the current Biden budget proposal will shrink that to 291. The Navy has not submitted a shipbuilding proposal, and the brass are pushing to decommission 11 ships. Navy construction capacity is woefully inadequate. The capacity to build the fleet’s backbone–Burke class destroyers–is limited to 2 per year. The DDG(X) is still a pipe dream. The first Constellation class frigate has just been laid down. Most importantly, production of Virginia class submarines (the most potent threat to China, as their absolute freak out over the AUKUS nuke sub deal shows) is limited to two per year, and US submarine construction capacity will be challenged by the necessity of also building new Columbia class SSBNs to replace the aging Ohios.

So it is not just ammunition–it is platforms to fire it from. And on that score the United States is at best treading water, and may actually be slipping under.

Yes. Ukraine is a wake-up call–although one that should have been unnecessary. But just because the Ukrainians are suffering a WWI-esque shell shortage does not mean that the United States should prioritize artillery ammunition to fight a major land war. Adapting capability to likely adversaries and strategies dictates a focus on long range sea- and air-launched anti-ship and land attack weapons, and crucially the means to employ them. Which means more hulls and more airframes.

These take a long time to build. The time is now to start producing the weapons, and to expanding the capacity to produce the things that can deploy them. Right now we are unduly dependent on hoping the Lord looks kindly on our praise (if we would even give it today), because there just isn’t enough of the right kind of ammunition to pass to fight the most likely and most dangerous conflicts.

*This strategy cuts against the US grain. It frequently takes a long time to implement and take effect. In WWI it took 4 years for the British blockade to bring German to the brink of starvation. In the Civil War, the blockade was also extremely important, but also took years to affect the military situation. The strangulation of Japan by US submarines and mines was also decisive, but took a good two years to have a real impact.

In WWII Churchill wanted to employ the classic British strategy against Germany. This drove the Americans (not to mention Stalin) nuts: they wanted to charge onto the Continent ASAP. Strategic patience is not an American virtue. But it will be a necessity if the US does get involved in a shooting war with China. In such a war, time would be on the US’s side, precisely because what has made China powerful has also made it vulnerable.

The embarrassment of this administration is ballooning, as if one could have thought that possible as bloated as it was already. Apparently in a belief that “Trump did it!” is kryptonite to any criticism, some anonymous DoD person told reporters that Chinese balloons had transited continental United States airspace on at least three occasions when the Donald the Dreaded was POTUS.

Virtually everyone in Trump’s national security upper echelons–including people who hate him, like Bolton and Esper–immediately called BS. They all said they were never informed of this. So what are the possibilities?

First, it never happened and this is just somebody making shit up to clean up after Joe. Always a real possibility.

Second, it did happen, and the balloons were detected in real time, but the DoD decided to withhold this information from the commander in chief. That would be a scandal of major proportions. And sad to say, it is believable.

Third, the administration’s elaboration: the previous balloons weren’t detected in real time, but they were uncovered after the fact by the intelligence agencies through some undisclosed means. Although all of these explanations are disturbing in their own way, this would be the worst. It would imply a gaping hole existed in US detection technology. Although the administration claims that THIS TIME they detected the balloon as soon as it passed over the Aleutians, and this suggests that the vulnerability has been addressed, we can’t be sure whether it’s just that NORAD got lucky this time.

There must be a public investigation, by Congress, to determine which of these explanations is the correct one.

With regards to the first explanation. Why did the WaPo rely on a single source for a story like this? Why won’t the Pentagon reveal who made the statement to the reporter? Note that the story–if it was true–would have involved the leak of highly classified information: a crime. If it wasn’t true, a “senior” official is spreading–wait for it–disinformation, supposedly the greatest threat to “our democracy.” Either alternative is unacceptable, and should result in the investigation, termination, and perhaps prosecution of the perpetrator. And he should be identified immediately while these steps are proceeding.

Letting the balloon traipse from Alaska to South Carolina (apparently on a tour of US nuclear facilities) is bad enough for the reasons discussed in my earlier post. But this clumsy attempt to exonerate Biden through whataboutism (“whatabout Trump!!!”) makes things even worse. It reveals the US military and Department of Defense to be incompetent, mendacious, or both.

Biden didn’t say anything either at a shout or a whisper about the balloon in his State of the Union address. He obviously wants this to go away. It can not be allowed to go away. It is a national security embarrassment of the first order, and Austin, Milley, the head of NORAD, and the head(s) of the intelligence agency or agencies that allegedly discovered previous violations of US airspace ex post facto must be hauled in front of Congress for a public grilling.

And then, perhaps, keel hauled.

The carnival of the Chinese balloon transcontinental transit is bringing musical flashbacks, such as this from 1983:

Or going even further back–deep into my childhood:

Groovy, baby.

Seriously though, I am of mixed minds regarding the decision–the Pentagon’s according to Biden–to defer destroying it until it had traversed the US from sea to shining sea. On the one hand, I can perhaps see that there is intelligence value in observing it. On the other, it makes the United States look pathetic before a strutting China.

On balance, I believe the latter consideration substantially outweighs the former. The lame excuse given for not puncturing it with extreme prejudice earlier–that its fall would endanger people on the ground–belies an intelligence collection motive: if that was the reason, just say so! At least that sounds more boss:

And what are the odds of someone on the ground being hurt in Alaska, the Yukon, or even eastern Montana FFS?

And was the benefit to us of the intelligence we collected on the balloon greater than the value of the intelligence the balloon collected on us?

And perceptions are reality. It’s not like this is a new super weapon. Pretty sure we had figured out everything it was doing and capable of doing during the time it was flying over thousands of miles of trackless waste–if we didn’t already know before it breached US airspace over the Aleutians. But the image of a spy balloon flying with impunity over the fruited plain does convey the image of a “pitiful, helpless giant” (to quote Nixon, reading what the just-retired Patrick Buchanan wrote). This is especially true given that there is a pitiful, helpless mental midget holding the position of Commander in Chief.

This reinforces the image of fecklessness that hangs around this administration like a bad smell. And fecklessness encourages recklessness. That is, we have to think about how Xi interprets this, and believe me, he’s not going to believe “we were protecting people on the ground” line for one second.

He may laugh, though.

But after he’s done laughing, he’ll incorporate what he surely perceives as an image of weakness and indecision into his calculus regarding Taiwan and other points of potential conflict.

This raises the question of motive. After all, China has supposedly reined in its “wolf warriors” and was trying to present a more conciliatory face to the US, and the world. Blinken was supposed to meet with the Chinese to help reset relations. (Nod was to remain in the White House.)

One possibility is that this was a test–would the US still proceed with a rapprochement despite a provocation (humiliation, in fact)?

Another possibility–never to be dismissed in one party (but many faction) states–is that elements in the CCP (including, perhaps, aforesaid wolf warriors) wanted to derail any rapprochement, and figured that creating an incident like this was the way to achieve that objective.

Given the opacity of the CCP/Chinese government, it’s hard to say. But under either scenario, the return message should have been: don’t fuck with us. Instead, we sent the message that we are eminently fuckable.

For their part, the Chinese lost their shit when an F-22 FINALLY took down Chairman Xi’s Amazing Flying Machine.* To which we should have replied: fuck you and the balloon you rode in on, commies. Instead, we gave a mealy mouthed, diplomatic reply.

We are in a very fraught period with China. We are trying to recover from “locust years” (as Churchill called them) of military distraction and decay and recover at least a semblance of our former naval and air dominance over China. China is ruled by a megalomaniac with ambitions to crown his achievements by retaking Taiwan. The last thing do do under those circumstances is to convey weakness. And regardless of the true justification for allowing the balloon to traipse over American unhindered, that’s exactly what happened.

The phrase “the balloon went up” means that the situation is very serious. It dates from WWI, when the appearance of a reconnaissance balloon was a harbinger of an artillery barrage incoming. Well, the balloon went up, and to my mind, was brought down far too late.

*The F-22 took down the balloon with an AIM-9X Sidewinder. A testament to how sensitive the heat seeking infrared sensor on that weapon has become. In early versions of Sidewinder it was necessary to get right on the tail of an adversary for the guidance system to be able to pick up the heat signature of the engine. To be able to take down a balloon, which has far less of a heat signature than a MiG’s exhaust, is pretty impressive.

The F-22 pilots used the call signs Frank1 and Frank2, apparently an homage to WWI “Balloon Buster” ace Frank Luke (whom Eddie Rickenbacker called the best pilot in WWI). There is some irony here, though, because it is clear that the current Pentagon leadership is shall we say slightly less aggressive than Lt. Luke.